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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, 2003
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)
     
New York   16-0968385
(State of incorporation)   (I.R.S. Employer Identification No.)
         
One M&T Plaza, Buffalo, New York     14203  
(Address of principal executive offices)     (Zip Code)  

Registrant’s telephone number, including area code: (716) 842-5445

Securities registered pursuant to Section 12(b) of the Act:

     
Common Stock, $.50 par value   New York Stock Exchange
(Title of each class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

8.234% Capital Securities of M&T Capital Trust I
(and the Guarantee of M&T Bank Corporation with respect thereto)
(Title of class)
8.234% Junior Subordinated Debentures of
M&T Bank Corporation
(Title of class)

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. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [  ]

Aggregate market value of the Common Stock, $0.50 par value, held by non-affiliates of the registrant, computed by reference to the closing price as of the close of business on June 30, 2003: $6,577,686,180.

Number of shares of the Common Stock, $0.50 par value, outstanding as of the close of business on February 18, 2004: 119,239,533 shares.

Documents Incorporated By Reference:

(1)   Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders of M&T Bank Corporation in Parts II and III.

 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Exhibit 3.5 Bylaws
Exhibit 4.18 Supplemental Indenture
Exhibit 4.24 Supplemental Indenture
Exhibit 4.25 Supplemental Indenture
Exhibit 4.28 Supplemental Indenture
Exhibit 4.34 Supplemental Indenture
Exhibit 4.40 Supplemental Indenture
Exhibit 4.48 Supplemental Indenture
Exhibit 10.3 Amendment #1 to Credit Agreement
Exhibit 14.1 Code of Ethics
Exhibit 23.1 Consent of Independent Auditors
Exhibit 23.2 Consent of Independent Auditors
Exhibit 31.1 CEO 302 Cert
Exhibit 31.2 CFO 302 Cert
Exhibit 32.1 CEO 906 Cert
Exhibit 32.2 CFO 906 Cert


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M&T BANK CORPORATION

FORM 10-K

For the year ended December 31, 2003

                 
CROSS-REFERENCE SHEET        Form
             10-K
PART I            Page
 
Item 1.       Business.     5  
 
               
Statistical disclosure pursuant to Guide 3        
 
               
I.   Distribution of assets, liabilities, and stockholders’ equity; interest rates and interest differential        
 
               
    A.   Average balance sheets     70-71  
 
               
  B.   Interest income/expense and resulting yield or rate        
      on average interest-earning assets        
      (including non-accrual loans) and interest-bearing liabilities     70-71  
 
               
  C.   Rate/volume variances     26  
 
               
II.   Investment portfolio        
 
               
    A.   Year-end balances     23  
 
               
  B.   Maturity schedule and weighted average yield     83  
 
               
  C.   Aggregate carrying value of securities that exceed ten percent of stockholders’ equity     105  
 
               
III.   Loan portfolio        
 
               
    A.   Year-end balances     23,107  
 
               
  B.   Maturities and sensitivities to changes in interest rates     82  
 
               
    C.   Risk elements        
      Nonaccrual, past due and renegotiated loans     78  
      Actual and pro forma interest on certain loans     108  
      Nonaccrual policy     97  
      Loan concentrations     49  
 
               
IV.   Summary of loan loss experience        
 
               
    A.   Analysis of the allowance for loan losses
    77  
      Factors influencing management’s judgment concerning        
      the adequacy of the allowance and provision     45-49,98  
 
               
  B.   Allocation of the allowance for loan losses     79  
 
               
V.   Deposits        
 
               
    A.   Average balances and rates     70-71  
 
               
  B.   Maturity schedule of domestic time deposits with balances of $100,000 or more     84  
 
               
VI.   Return on equity and assets     25,35,59  
 
               
VII.
  Short-term borrowings     114-115  

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M&T BANK CORPORATION

FORM 10-K

For the year ended December 31, 2003

                     
CROSS-REFERENCE SHEET--continued            Form
             10-K
PART I, continued            Page
 
Item     2.     Properties.     27,110  
 
                   
Item
    3.     Legal Proceedings.     27  
 
                   
Item
    4.     Submission of Matters to a Vote of Security Holders.     27  
 
                   
          Executive Officers of the Registrant.     28-30  
 
                   
PART II        
 
                   
Item     5.     Market for Registrant’s Common Equity, Related        
          Stockholder Matters and Issuer Purchases of        
          Equity Securities.     30-32  
 
                   
      A.     Principal market     30  
          Market prices     87  
 
                   
    B.     Approximate number of holders at year-end     23  
 
                   
    C.     Frequency and amount of dividends declared     24-25,87,89  
 
                   
    D.     Restrictions on dividends     17,145  
 
                   
    E.     Repurchases of common stock     31,58  
 
                   
Item     6.     Selected Financial Data.        
 
                   
      A.     Selected consolidated year-end balances     23  
 
                   
    B.     Consolidated earnings, etc.     24-25  
 
                   
Item     7.     Management’s Discussion and Analysis of        
          Financial Condition and Results of Operations.     32-89  
 
                   
Item     7A.     Quantitative and Qualitative Disclosures About        
          Market Risk.     54-57,85,90  
 
                   
Item     8.     Financial Statements and Supplementary Data.        
 
                   
      A.     Report of Independent Auditors     91  
 
                   
    B.     Consolidated Balance Sheet -        
          December 31, 2003 and 2002     92  
 
                   
    C.     Consolidated Statement of Income -        
          Years ended December 31, 2003, 2002 and 2001     93  
 
                   
    D.     Consolidated Statement of Cash Flows -        
          Years ended December 31, 2003, 2002 and 2001     94  
 
                   
    E.     Consolidated Statement of Changes in        
          Stockholders’ Equity — Years ended December 31, 2003, 2002 and 2001     95  

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M&T BANK CORPORATION

FORM 10-K

For the year ended December 31, 2003

             
CROSS-REFERENCE SHEET--continued           Form
            10-K
PART II, continued           Page
 
Item 8.   Financial Statements and Supplementary Data, continued        
 
           
    F.
  Notes to Financial Statements     96-149  
 
           
    G.
  Quarterly Trends     87  
 
           
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.     150  
 
           
Item 9A.   Controls and Procedures.     150  
 
           
PART III        
 
           
Item 10.   Directors and Executive Officers of the Registrant.     150  
 
           
Item 11.   Executive Compensation.     150  
 
           
Item 12.   Security Ownership of Certain Beneficial Owners        
  and Management and Related Stockholder Matters.     150  
 
           
Item 13.   Certain Relationships and Related Transactions.     151  
 
           
Item 14.   Principal Accountant Fees and Services.     151  
 
           
PART IV        
 
           
Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.     151  
 
           
SIGNATURES     152-154  
 
           
EXHIBIT INDEX     155-162  

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PART I

Item 1. Business.

M&T Bank Corporation (“Registrant” or “M&T”) is a New York business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”) and under Article III-A of the New York Banking Law (“Banking Law”). The principal executive offices of the Registrant are located at One M&T Plaza, Buffalo, New York 14203. The Registrant was incorporated in November 1969. The Registrant and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” As of December 31, 2003 the Company had consolidated total assets of $49.8 billion, deposits of $33.1 billion and stockholders’ equity of $5.7 billion. The Company had 12,426 full-time and 1,574 part-time employees as of December 31, 2003.

At December 31, 2003, the Registrant had two wholly owned bank subsidiaries: Manufacturers and Traders Trust Company (“M&T Bank”) and M&T Bank, National Association (“M&T Bank, N.A.”). The banks collectively offer a wide range of commercial banking, trust and investment services to their customers. At December 31, 2003, M&T Bank represented 99% of consolidated assets of the Company.

The Company from time to time considers acquiring banks, thrift institutions, branch offices or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. The Company has pursued acquisition opportunities in the past, continues to review different opportunities, including the possibility of major acquisitions, and intends to continue this practice.

Acquisition of Allfirst Financial Inc.

On April 1, 2003, M&T completed the acquisition of Allfirst Financial Inc. (“Allfirst”), a bank holding company headquartered in Baltimore, Maryland. Acquired assets on April 1, 2003 totaled $16 billion, including $10 billion of loans and leases, liabilities assumed aggregated $14 billion, including $11 billion of deposits, and $2 billion was added to stockholders’ equity. Allfirst had a strong banking presence in Maryland and central Pennsylvania. Allfirst and its subsidiaries served customers through a network of 269 full service offices and approximately 600 ATMs in the mid-Atlantic region of the United States. Prior to April 1, 2003, Allied Irish Banks, p.l.c. (“AIB”) controlled 100% of the voting power of Allfirst’s outstanding capital stock.

Allfirst’s primary subsidiary bank was Allfirst Bank, which operated in Maryland, Pennsylvania, Virginia, Delaware and the District of Columbia. Allfirst Bank’s bank and non-bank subsidiaries offered a variety of financial services, including trust and asset management, leasing, discount brokerage services, sales of mutual funds and annuities, investment advisory services, reinsurance, brokerage, mortgage banking and community development. One of the most notable Allfirst non-banking activities was its trust and asset management business with $15.7 billion in assets under management. Allied Investment Advisors, the main institutional advisory subsidiary of Allfirst, managed over $10 billion in assets from 175 institutions.

When the Allfirst acquisition was consummated, the combined company had over 700 branches in six states and the District of Columbia, and a leading deposit market share in the combined area of upstate New York, central Pennsylvania and Maryland.

Under the terms of the Agreement and Plan of Reorganization dated September 26, 2002 by and among AIB, Allfirst and M&T (the “Reorganization Agreement”), M&T combined with Allfirst through the acquisition of all of the issued and outstanding Allfirst stock in exchange for 26,700,000 shares of M&T common stock and $886,107,000 in cash paid to AIB. Immediately thereafter, Allfirst merged with and into M&T, with M&T being the surviving company. Allfirst Bank merged with and into M&T Bank, with M&T Bank being the surviving bank.

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As a result of the transaction, AIB owns approximately 22.5% of the issued and outstanding shares of M&T common stock. Further, there are several M&T corporate governance changes that have resulted from the transaction. While it maintains a significant ownership in M&T, AIB will have representation on the M&T board, the M&T Bank board and key M&T board committees and will have certain protections of its rights as a substantial M&T shareholder. In addition, AIB will have rights that will facilitate its ability to maintain its proportionate ownership position in M&T. M&T will also have representation on the AIB board while AIB remains a significant shareholder. The following is a description of the ongoing relationship between M&T and AIB that resulted from the Allfirst acquisition. The following description is qualified in its entirety by the terms of the Reorganization Agreement. The Reorganization Agreement was filed with the Securities Exchange Commission on October 3, 2002 as Exhibit 2 to the Current Report on Form 8-K of M&T dated September 26, 2002.

Board of Directors; Management

At December 31, 2003, AIB held approximately 22.5% of the issued and outstanding shares of M&T common stock. In defining their relationship after the acquisition, M&T and AIB negotiated certain agreements regarding share ownership and corporate governance issues such as board representation, with the number of AIB’s representatives on the M&T and M&T Bank boards of directors being dependent upon the amount of M&T common stock held by AIB. M&T has the right to one seat on the AIB board of directors until AIB no longer holds at least 15% of the outstanding shares of M&T common stock. Pursuant to the Reorganization Agreement, AIB has the right to name four members to serve on the Boards of Directors of M&T and M&T Bank, each of whom must be reasonably acceptable to M&T (collectively, the “AIB Designees”). Further, one of the AIB Designees will serve on each of the Executive Committee, Nomination, Compensation and Governance Committee, and Audit Committee (or any committee or committees performing comparable functions) of the M&T board of directors. In order to serve, the AIB Designees must meet the requisite independence and expertise requirements prescribed under applicable law or stock exchange rules. In addition, the Reorganization Agreement provides that the board of directors of M&T Bank will include four members designated by AIB, each of whom must be reasonably acceptable to M&T.

As long as AIB remains a significant shareholder of M&T, AIB will have representation on the boards of directors of both M&T and M&T Bank as follows:

  As long as AIB holds at least 15% of the outstanding shares of M&T common stock, AIB will be entitled to designate four persons on both the M&T and M&T Bank boards of directors and representation on the committees of the M&T board described above.
 
  If AIB holds at least 10%, but less than 15%, of the outstanding shares of M&T common stock, AIB will be entitled to designate at least two people on both the M&T and M&T Bank boards of directors.
 
  If AIB’s ownership interest in M&T is at least 5%, but less than 10%, of the outstanding shares of M&T common stock, AIB will be entitled to designate at least one person on both the M&T and M&T Bank boards of directors.
 
  As long as AIB holds at least 15% of the outstanding shares of M&T common stock, neither M&T’s board of directors nor M&T Bank’s board of directors will consist of more than twenty-eight directors without the consent of the AIB Designees.
 
  If AIB’s holdings of M&T common stock fall below 15%, but not lower than 12% of the outstanding shares of M&T common stock, AIB will continue to have the same rights that it would have had if it owned 15% of the outstanding shares of M&T common stock, as long as AIB restores its ownership percentage to 15%

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    within one year. Additionally, as described in more detail below, M&T has agreed to repurchase shares of M&T common stock in order to offset dilution to AIB’s ownership interests that may otherwise be caused by issuances of M&T common stock under M&T employee and director benefit or stock purchase plans. Dilution of AIB’s ownership position caused by such issuances will not be counted in determining whether the “Sunset Date” has occurred or whether any of AIB’s other rights under the Reorganization Agreement have terminated. The “Sunset Date” is the date on which AIB no longer holds at least 15% of the M&T common stock, calculated as described in this paragraph.

The AIB Designees at December 31, 2003 were Michael D. Buckley, Derek C. Hathaway, Gary Kennedy and Eugene J. Sheehy. Mr. Buckley serves as a member of the Executive Committee and the Nomination, Compensation and Governance Committee, and Mr. Hathaway serves as a member of the Audit Committee. Robert G. Wilmers joined the AIB board of directors.

Amendments to M&T’s Bylaws

Pursuant to the Reorganization Agreement, M&T has amended and restated its bylaws. The following is a description of the amended bylaws:

The amended bylaws provide that until the Sunset Date, the M&T board of directors may not take or make any recommendation to M&T’s shareholders regarding the following actions without the approval of the Executive Committee, including the approval of the AIB Designee serving on the committee:

  Any amendment of M&T’s Certificate of Incorporation or bylaws that would be inconsistent with the rights described herein or that would otherwise have an adverse effect on the board representation, committee representation or other rights of AIB contemplated by the Reorganization Agreement;
 
  Any activity not permissible for a U.S. bank holding company;
 
  The adoption of any shareholder rights plan or other measures having the purpose or effect of preventing or materially delaying completion of any transaction involving a change in control of M&T; and
 
  Any public announcement disclosing M&T’s desire or intention to take any of the foregoing actions.

The amended bylaws also provide that until the Sunset Date, the M&T board of directors may only take or make any recommendation to M&T’s shareholders regarding the following actions if the action has been approved by the Executive Committee (in the case of the first four items and sixth item below) or Nomination and Compensation Committee (in the case of the fifth item below) and the members of such committee not voting in favor of the action do not include the AIB Designee serving on such committee and at least one other member of the committee who is not an AIB Designee:

  Any reduction in M&T’s cash dividend policy such that the ratio of cash dividends to net income is less than 15%, or any extraordinary dividends or distributions to holders of M&T common stock;
 
  Any acquisition of any assets or businesses, (1) if the consideration is in M&T common stock, where the stock consideration paid by M&T exceeds 10% of the aggregate voting power of M&T common stock and (2) if the consideration is cash, M&T stock or other consideration, where the fair market value of the consideration paid by M&T exceeds 10% of the market capitalization of M&T, as determined under the Reorganization Agreement;

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  Any sale of any assets or businesses in which the value of the aggregate consideration to be received exceeds 10% of the market capitalization of M&T, as determined under the Reorganization Agreement;
 
  Any liquidation or dissolution of M&T;
 
  The appointment or election of the Chairman of the board of directors or the Chief Executive Officer of M&T; and
 
  Any public announcement disclosing M&T’s desire or intention to take any of the foregoing actions prior to obtaining the requisite committee approval.

The provisions of the bylaws described above may not be amended or repealed without the unanimous approval of the entire M&T board of directors or the approval of the holders of not less than 80% of the outstanding shares of M&T common stock. The provisions of the bylaws described above will automatically terminate when AIB holds less than 5% of the outstanding shares of M&T common stock.

Investment Parameters

The Reorganization Agreement provides that through the second anniversary of the Sunset Date, without prior written consent of the M&T board of directors, AIB will not, directly or indirectly, acquire or offer to acquire (except by way of stock dividends, offerings made available to M&T shareholders generally, or pursuant to compensation plans) more than 25% of the then outstanding shares of M&T common stock. Further, during this period, AIB and AIB’s subsidiaries have agreed not to participate in any proxy solicitation or to otherwise seek to influence any M&T shareholder with respect to the voting of any shares of M&T common stock for the approval of any shareholder proposals.

The Reorganization Agreement also provides that, during this period, AIB will not make any public announcement with respect to any proposal or offer by AIB or any AIB subsidiary with respect to certain transactions (such as mergers, business combinations, tender or exchange offers, the sale or purchase of securities or similar transactions) involving M&T or any of the M&T subsidiaries. The Reorganization Agreement also provides that, during this period, AIB may not subject any shares of M&T common stock to any voting trust or voting arrangement or agreement and will not execute any written consent as a shareholder with respect to the M&T common stock.

The Reorganization Agreement also provides that, during this period, AIB will not seek to control or influence the management, the board of directors of M&T or policies of M&T, including through communications with shareholders of M&T or otherwise, except through non-public communications with the directors of M&T, including the AIB Designees.

These restrictions on AIB will no longer apply if a third party commences or announces its intention to commence a tender offer or an exchange offer and, within a reasonable time, the M&T board of directors either does not recommend that shareholders not accept the offer or fails to adopt a shareholders rights plan, or if M&T or M&T Bank becomes subject to any regulatory capital directive or becomes an institution in “troubled” condition under applicable banking regulations. However, in the event the tender offer or exchange offer is not commenced or consummated in accordance with its terms, the restrictions on AIB described above will thereafter continue to apply.

Anti-Dilution Protections

M&T has agreed that until the Sunset Date, in the event M&T issues shares of M&T stock (other than certain issuances to employees pursuant to option and

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benefit plans), subject to applicable law and regulatory requirements, AIB will have the right to purchase at fair market value up to the number of shares of M&T common stock required to increase or maintain its equity interest in M&T to 22.5% of the then outstanding M&T common stock.

M&T has also agreed that until the Sunset Date, in connection with any issuance of M&T stock pursuant to employee option or benefit plans, M&T will as soon as reasonably practicable, taking into account applicable law, regulatory capital requirements, capital planning and risk management, take such necessary actions so that AIB’s proportionate ownership of M&T common stock is not reduced as a result of such issuances, including by funding such issuances through purchases of M&T common stock in the open market or by undertaking share repurchase programs.

Sale of M&T Common Stock; Right of First Refusal in Certain Circumstances

The M&T common stock issued to AIB in connection with the Allfirst acquisition was not registered under the Securities Act of 1933 (the “Securities Act”) and may only be disposed of by AIB pursuant to an effective registration statement or pursuant to an exemption from registration under the Securities Act and subject to the provisions of the Reorganization Agreement.

M&T and AIB have entered into a registration rights agreement that provides that upon AIB’s request, M&T will file a registration statement relating to all or a portion of AIB’s shares of M&T common stock providing for the sale of such shares by AIB from time to time on a continuous basis pursuant to Rule 415 under the Securities Act, provided that M&T need only effect one such “shelf registration” in any 12-month period. In addition, the registration rights agreement provides that AIB is entitled to demand registration under the Securities Act of all or part of its shares of M&T stock, provided that M&T is not obligated to effect two such “demand registrations” in any 12-month period. Any demand or shelf registration must cover no less than one million shares.

The registration rights agreement further provides that in the event M&T proposes to file a registration statement other than pursuant to a shelf registration or demand registration or Forms S-8 or S-4, for an offering and sale of shares by M&T in an underwritten offering or an offering and sale of shares on behalf of one or more selling shareholders, M&T must give AIB notice at least 15 days prior to the anticipated filing date, and AIB may request that all or a portion of its M&T common shares be included in the registration statement. M&T will honor the request, unless the managing underwriter advises M&T in writing that in its opinion the inclusion of all shares requested to be included by M&T, the other selling shareholders, if any, and AIB would materially and adversely affect the offering, in which case M&T may limit the number of shares included in the offering to a number that would not reasonably be expected to have such an effect. In such event, the number of shares to be included in the registration statement shall first include the number of shares requested to be included by M&T and then the shares requested by other selling shareholders, including AIB, on a pro rata basis according to the number of shares requested to be included in the registration statement by each shareholder.

As long as AIB holds 5% or more of the outstanding shares of M&T common stock, AIB will not dispose of any of its shares of M&T common stock except, subject to the terms and conditions of the Reorganization Agreement and applicable law, in a widely dispersed public distribution; a private placement in which no one party acquires the right to purchase more than 2% of the outstanding shares of M&T common stock; an assignment to a single party (such as a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on AIB’s behalf; pursuant to Rule 144 under the Securities Act; pursuant to a tender or exchange offer to M&T’s shareholders not opposed by M&T’s board of directors, or open market purchase programs made by M&T; with the consent of M&T, which consent will not be unreasonably withheld, to a

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controlled subsidiary of AIB; or pursuant to M&T’s right of first refusal as described below.

The Reorganization Agreement provides that until AIB no longer holds at least 5% of the outstanding shares of M&T common stock, if AIB wishes to sell or otherwise transfer any of its shares of M&T common stock other than as described in the preceding paragraph, AIB must first submit an offer notice to M&T identifying the proposed transferee and setting forth the proposed terms of the transaction, which shall be limited to sales for cash, cash equivalents or marketable securities. M&T will have the right, for 20 days following receipt of an offer notice from AIB, to purchase all (but not less than all) of the shares of M&T common stock that AIB wishes to sell, on the proposed terms specified in the offer notice. If M&T declines or fails to respond to the offer notice within 20 days, AIB may sell all or a portion of the M&T shares specified in the offer notice to the proposed transferee at a purchase price equal to or greater than the price specified in the offer notice, at any time during the three months following the date of the offer notice, or, if prior notification to or approval of the sale by the Federal Reserve Board or another regulatory agency is required, AIB shall pursue regulatory approval expeditiously and the sale may occur on the first date permitted under applicable law.

Certain Post-Closing Bank Regulatory Matters

The Board of Governors of the Federal Reserve System (“Federal Reserve Board”) deems AIB to be M&T’s bank holding company for purposes of the BHCA. In addition, the New York Banking Superintendent (“Banking Superintendent”) deems AIB to be M&T’s bank holding company for purposes of Article III-A of the Banking Law. Among other things, this means that, should M&T propose to make an acquisition or engage in a new type of activity that requires the submission of an application or notice to the Federal Reserve Board or the Banking Superintendent, AIB, as well as M&T, may also be required to file an application or notice. The Reorganization Agreement generally provides that AIB will make any applications, notices or filings that M&T determines to be necessary or desirable. The Reorganization Agreement also requires AIB not to take any action that would have a material adverse effect on M&T and to advise M&T prior to entering into any material transaction or activity. These provisions of the Reorganization Agreement would no longer apply if AIB ceased to be M&T’s bank holding company and also was not otherwise considered to control M&T for purposes of the BHCA.

Pursuant to the Reorganization Agreement, if, as a result of any administrative enforcement action under Section 8 of the Federal Deposit Insurance Act (the “FDI Act”), memorandum of understanding, written agreement, supervisory letter or any other action or determination of any regulatory agency relating to the status of AIB (but not relating to the conduct of M&T or any subsidiary of M&T), M&T or M&T Bank also becomes subject to such an action, memorandum, agreement or letter that relates to M&T or any M&T subsidiary, or experiences any fact, event or circumstance that affects M&T’s regulatory status or compliance, and that in either case would be reasonably likely to create a material burden on M&T or to cause any material adverse economic or operating consequences to M&T or an M&T subsidiary (a “Material Regulatory Event”), then M&T will notify AIB thereof in writing as promptly as practicable. Should AIB fail to cure the Material Regulatory Event within 90 days following the receipt of such notice, AIB will, as promptly as practicable but in no event later than 30 days from the end of the cure period, take any and all such actions (with the reasonable cooperation of M&T as requested by AIB) as may be necessary or advisable in order that it no longer has “control” of M&T for purposes of the BHCA, including, if necessary, by selling some or all of its shares of M&T common stock (subject to the right of first refusal provisions of the Reorganization Agreement) and divesting itself as required of its board and committee representation and governance rights as set forth in the Reorganization Agreement. If, at the end of such 30-day period, the Material Regulatory Event is continuing and AIB has not terminated its control of M&T, then M&T will have the right to repurchase, at fair market value, such

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amount of the M&T common stock owned by AIB as would result in AIB holding no less than 4.9% of the outstanding shares of M&T common stock, pursuant to the procedures detailed in the Reorganization Agreement.

As long as AIB is considered to “control” M&T for purposes of the BHCA or the federal Change in Bank Control Act, if AIB acquires any insured depository institution with total assets greater than 25% of the assets of M&T’s largest insured depository institution subsidiary, then within two years AIB must terminate its affiliation with the insured depository institution or take such steps as may be necessary so that none of M&T’s bank subsidiaries would be subject to “cross guarantee” liability for losses incurred if the institution AIB acquired potentially were to fail. This liability applies under the FDI Act to insured depository institutions that are commonly controlled. The actions AIB would take could include disposing of shares of M&T common stock and/or surrendering its representation or governance rights. Also, if such an insured depository institution that is controlled by AIB and of the size described in the first sentence of this paragraph that would be considered to be commonly controlled with M&T’s insured depository institution subsidiaries fails to meet applicable requirements to be “adequately capitalized” under applicable U.S. banking laws, then AIB will have to take the actions described in the previous sentence no later than 180 days after the date that the institution failed to meet those requirements, unless the institution is sooner returned to “adequately capitalized” status.

Other Acquisitions

     In addition to the acquisition of Allfirst, the Company has experienced significant growth through other recent acquisitions. The following table summarizes the loans, deposits and branches acquired in acquisition transactions over the five-year period ending December 31, 2003:

                         
                    Number of
    Loans   Deposits   branches
   
 
 
    (in millions)        
FNB Rochester Corp.
  $ 393       511       17  
The Chase Manhattan Bank branches
    44       634       29  
Keystone Financial, Inc.
    4,847       5,183       187  
Premier National Bancorp, Inc.
    994       1,389       34  
Allfirst Financial, Inc.
    10,265       10,936       269  

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 and the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. M&T acquired all of the issued and outstanding shares of the capital stock of M&T Bank in December 1969. The stock of M&T Bank represents a major asset of M&T. M&T Bank operates under a charter granted by the State of New York in 1892, and the continuity of its banking business is traced to the organization of the Manufacturers and Traders Bank in 1856. The principal executive offices of M&T Bank are located at One M&T Plaza, Buffalo, New York 14203. As of December 31, 2003, M&T Bank had 683 banking offices located throughout New York State, Pennsylvania, Maryland, Delaware, Virginia, West Virginia and the District of Columbia, plus a branch in George Town, Cayman Islands. As of December 31, 2003, M&T Bank had consolidated total assets of $49.2 billion, deposits of $32.9 billion and stockholder’s equity of $6.3 billion. The deposit liabilities of M&T Bank are insured by the FDIC through either its Bank Insurance Fund (“BIF”) or its Savings Association Insurance Fund (“SAIF”). Of M&T Bank’s $31.3 billion in assessable deposits at December 31, 2003, 89% were assessed as BIF-insured deposits 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

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markets. Lending is largely focused on consumers residing in New York State, Pennsylvania, Maryland, northern Virginia and Washington, D.C., and on small and medium-size businesses based in those areas. In addition, the Company conducts lending activities in other states through various subsidiaries. M&T Bank and certain of its subsidiaries also offer commercial mortgage loans secured by income producing properties or properties used by borrowers in a trade or business. Additional financial services are provided through other operating subsidiaries of the Company.

M&T Bank, N.A., a national banking association and a member of the Federal Reserve System and the FDIC, commenced operations on October 2, 1995. The deposit liabilities of M&T Bank, N.A. are insured by the FDIC through the BIF. The main office of M&T Bank, N.A. is located at 48 Main Street, Oakfield, New York 14125. M&T Bank, N.A. offers selected deposit and loan products on a nationwide basis, primarily through direct mail and telephone marketing techniques. M&T Bank, N.A. is also a licensed insurance agency, and offers insurance products primarily through the banking offices of M&T Bank. As of December 31, 2003, M&T Bank, N.A. had total assets of $473 million, deposits of $312 million and stockholder’s equity of $92 million.

M&T Life Insurance Company (“M&T Life Insurance”), a wholly owned subsidiary of M&T, was incorporated as an Arizona business corporation in January 1984. M&T Life Insurance is a captive credit reinsurer which reinsures credit life and accident and health insurance purchased by the Company’s consumer loan customers. As of December 31, 2003, M&T Life Insurance had assets of $39 million and stockholders’ equity of $26 million. M&T Life Insurance recorded revenues of $1.4 million during 2003. Headquarters of M&T Life Insurance are located at 101 North First Avenue, Phoenix, Arizona 85003.

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 14203. As of December 31, 2003, Highland Lease had assets of $428 million and stockholder’s equity of $31 million. Highland Lease recorded $38 million of revenue during 2003.

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 credit and leasing company offering consumer loans and commercial loans and leases. Its headquarters are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203, with offices in Delaware, Massachusetts and Pennsylvania. As of December 31, 2003, M&T Credit had assets of $3.9 billion and stockholder’s equity of $333 million. M&T Credit recorded $174 million of revenue during 2003.

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 $52 million and stockholder’s equity of $19 million as of December 31, 2003, and recorded approximately $437 thousand of revenue in 2003. The headquarters of M&T Financial are located at One M&T Plaza, Buffalo, New York 14203.

M&T Investment Company, Inc. (“M&T Investment Company”), a wholly owned subsidiary of M&T Bank, was incorporated as a New Jersey business corporation in December 1999. Operated as a New Jersey investment company, M&T Investment Company owns all of the outstanding common stock and 87.9% of the preferred stock of M&T Real Estate Trust. As of December 31, 2003, M&T Investment Company had assets and stockholder’s equity of approximately $10.9 billion. Excluding dividends from M&T Real Estate Trust, M&T Investment Company recorded $7.8 million of revenue in 2003. The headquarters of M&T Investment Company are located at One Maynard Drive, Park Ridge, New Jersey 07656.

M&T Mortgage Corporation (“M&T Mortgage”), a 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

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loan servicing to M&T Bank, M&T Bank, N.A. and others. M&T Mortgage operates throughout New York State, Maryland and Pennsylvania, and also maintains branch offices in Arizona, California, Colorado, Idaho, Nevada, New Jersey, Ohio, Oregon, Utah, Virginia and Washington. M&T Mortgage had assets of $1.6 billion and stockholder’s equity of $283 million as of December 31, 2003, and recorded approximately $229 million of revenue during 2003. Residential mortgage loans serviced by M&T Mortgage for non-affiliates totaled $13.6 billion at December 31, 2003. The headquarters of M&T Mortgage are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203.

M&T Mortgage Reinsurance Company, Inc. (“M&T Reinsurance”), a wholly owned subsidiary of M&T Bank, was incorporated as a Vermont business corporation in July 1999. M&T Reinsurance enters into reinsurance contracts with insurance companies who insure against the risk of a mortgage borrower’s payment default in connection with M&T Mortgage-related mortgage loans. M&T Reinsurance receives a share of the premium for those policies in exchange for accepting a portion of the insurer’s risk of borrower default. M&T Reinsurance had assets of approximately $10 million and stockholder’s equity of approximately $9 million as of December 31, 2003, and recorded approximately $2.4 million of revenue during 2003. M&T Reinsurance’s principal and registered office is at 148 College Street, Burlington, Vermont 05401.

M&T Real Estate Trust (“M&T Real Estate”) is a subsidiary of M&T Investment Company. M&T Real Estate, Inc., a New York business corporation incorporated in July 1995, was merged in July 2003 with and into Allfirst Mortgage Trust, a Maryland real estate investment trust which was a subsidiary of Allfirst formed in July 1999. Simultaneously with the merger, Allfirst Mortgage Trust was renamed M&T Real Estate. M&T Real Estate engages in commercial real estate lending and provides loan servicing to M&T Bank and others. As of December 31, 2003, M&T Real Estate had assets of $10.5 billion, common stockholders’ equity of $10.3 billion, and preferred stockholders’ equity, consisting of 9% fixed-rate preferred stock (par value $1,000), of $1.0 million. All of the outstanding common stock and 87.9% of the preferred stock of M&T Real Estate is owned by M&T Investment Company. The remaining 12.1% of M&T Real Estate’s preferred stock is owned by officers or former officers of the Company. M&T Real Estate recorded $302 million of revenue from April 1 through December 31, 2003 and prior to merging with Allfirst Mortgage Trust, M&T Real Estate, Inc. had $283 million of revenue in 2003. Commercial mortgage loans serviced for non-affiliates by M&T Real Estate totaled $3.8 billion at December 31, 2003. The headquarters of M&T Real Estate are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203.

M&T Realty Capital Corporation (“M&T Realty Capital”), a wholly owned subsidiary of M&T Bank, was originally incorporated as Allfirst Mortgage Corporation, a Maryland corporation in October 1973. Allfirst Mortgage Corporation was a wholly owned subsidiary of Allfirst. Its name was changed to M&T Realty Capital effective April 1, 2003. M&T Realty Capital engages in multi-family commercial real estate lending. As of December 31, 2003, M&T Realty Capital had assets of $56 million and stockholder’s equity of $35 million. M&T Realty Capital recorded revenues of $20 million from April 1 through December 31, 2003. The headquarters of M&T Realty Capital are located at 25 South Charles Street, Baltimore, Maryland 21202.

M&T Securities, Inc. (“M&T Securities”) is a wholly owned subsidiary of M&T Bank that was incorporated as a New York business corporation in November 1985. M&T Securities is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended, as an investment advisor under the Investment Advisors Act of 1940, as amended, and is licensed as a life insurance agent in each state where M&T Bank operates branch offices and in a number of other states. It provides securities brokerage, investment advisory and insurance services. As of December 31, 2003, M&T Securities had assets of $52 million and stockholder’s equity of $38 million. M&T Securities recorded $63 million of revenue during 2003. The headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New York 14203.

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Matthews, Bartlett & Dedecker, Inc. (“MBD”), a wholly owned insurance agency subsidiary of M&T Bank, was incorporated as a New York corporation in March 1955. MBD provides insurance agency services principally to the commercial market. As of December 31, 2003, MBD had assets of $17 million and stockholder’s equity of $7 million. MBD recorded revenues of $9 million during 2003. The headquarters of MBD are located at 334 Delaware Avenue, Buffalo, New York 14202.

M&T Auto Receivables I, LLC (“M&T Auto Receivables”), a wholly owned consolidated subsidiary of M&T Bank, was formed as a Delaware limited liability company in May 2002. M&T Auto Receivables is a special purpose entity whose activities are generally restricted to purchasing and owning automobile loans for the purpose of securing a revolving asset-backed structured borrowing with an unaffiliated conduit lender. M&T Auto Receivables had assets of $559 million and stockholder’s equity of $59 million as of December 31, 2003, and recorded approximately $34 million of revenue during 2003. M&T Auto Receivables’ registered office is at 1209 Orange Street, Wilmington, Delaware 19801.

MTB Investment Advisors, Inc. (“MTB Investment Advisors”), a wholly owned subsidiary of M&T Bank, was originally incorporated as Allied Investment Advisors, Inc., a Maryland corporation, on June 30, 1995. Allied Investment Advisors, Inc., was a wholly owned subsidiary of Allfirst Bank. Its name was changed to MTB Investment Advisors effective August 15, 2003. MTB Investment Advisors serves as investment advisor to the MTB Group of Funds, a family of proprietary mutual funds, and institutional clients. As of December 31, 2003, MTB Investment Advisors had assets of $39 million and stockholder’s equity of $30 million. MTB Investment Advisors recorded revenues of $20 million from April 1 through December 31, 2003. The headquarters of MTB Investment Advisors are located at 100 East Pratt Street, Baltimore, Maryland 21202.

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, 2003.

Segment Information, Principal Products/Services
and Foreign Operations

Information about the Registrant’s business segments is included in note 21 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” and is further discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Registrant’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. The Company’s international activities are discussed in note 16 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.”

The 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 of the Company

The banking industry is subject to extensive state and federal regulation and continues to undergo significant change. The following discussion summarizes

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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.

Financial Services Modernization

The Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach”) enables combinations among banks, securities firms and insurance companies. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking.

In order to engage in these new financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (“CRA”). M&T currently satisfies the qualifications for registering as a financial holding company, but has not elected to do so to date. For as long as AIB owns at least 15% of M&T’s outstanding common stock, M&T may not become a financial holding company without the approval of the Executive Committee of the M&T board of directors, which must also include the affirmative approval of the AIB Designee on such committee, as described above under the caption “Amendments to M&T’s Bylaws.”

The financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, which must be conducted in a financial holding company. In order for these financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and its sister-bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. M&T Bank and M&T Bank, N.A. currently satisfy the qualifications for engaging in financial activities through financial subsidiaries, but neither has elected to do so to date. Gramm-Leach also establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Rules developed by the federal financial institutions regulators under Gramm-Leach require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent the disclosure of certain personal information to nonaffiliated third parties. The foregoing discussion is qualified in its entirety by reference to the statutory provisions of Gramm-Leach and the implementing regulations which have been or will be adopted by various government agencies pursuant to Gramm-Leach.

Bank Holding Company Regulation

As a registered bank holding company, the Registrant and its nonbank subsidiaries are subject to supervision and regulation under the BHCA by the Federal Reserve Board and under the Banking Law by the Banking Superintendent. The Federal Reserve Board requires regular reports from the Registrant and is

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authorized by the BHCA to make regular examinations of the Registrant and its subsidiaries.

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. Consistent with this “source of strength” policy, the Federal Reserve Board takes the position that a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve also has the authority to terminate any activity of a bank holding company that constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution or to terminate its control of any bank or nonbank subsidiaries.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Interstate Banking Act”) generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and permits banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed.

The Banking Law authorizes interstate branching by merger or acquisition on a reciprocal basis, and permits the acquisition of a single branch without restriction, but does not provide for de novo interstate branching.

Bank holding companies and their subsidiary banks are also subject to the provisions of the CRA. Under the terms of the CRA, the Federal Reserve Board (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the communities served by that bank, including low- and moderate-income neighborhoods. Furthermore, such assessment is also required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of a federally-regulated

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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 bank subsidiaries are subject to supervision and regulation, and are examined regularly, by various bank regulatory agencies: M&T Bank by the Federal Reserve Board and the Banking Superintendent; and M&T Bank, N.A. by the Comptroller of the Currency (“OCC”). The Registrant and its direct non-banking subsidiaries are affiliates, within the meaning of the Federal Reserve Act, of the Registrant’s subsidiary banks and their subsidiaries. As a result, the Registrant’s subsidiary banks and their subsidiaries are subject to restrictions on loans or extensions of credit to, purchases of assets from, investments in, and transactions with the Registrant and its direct non-banking subsidiaries and on certain other transactions with them or involving their securities. Gramm-Leach places similar restrictions on the Registrant’s subsidiary banks making loans or extending credit to, purchasing assets from, investing in, or entering into transactions with, their financial subsidiaries.

Under the “cross-guarantee” provisions of the FDI Act, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by either the BIF or SAIF of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. Thus, any insured depository institution subsidiary of M&T could incur liability to the FDIC in the event of a default of another insured depository institution owned or controlled by M&T. The FDIC’s claim under the cross-guarantee provisions is superior to claims of stockholders of the insured depository institution or its holding company and to most claims arising out of obligations or liabilities owed to affiliates of the institution, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the BIF or SAIF or both.

Dividends from Bank Subsidiaries

M&T Bank and M&T Bank, N.A. are subject, under one or more of the banking laws, to restrictions on the amount and frequency (no more often than quarterly) of dividend declarations. Future dividend payments to the Registrant by its subsidiary banks will be dependent on a number of factors, including the earnings and financial condition of each such bank, and are subject to the limitations referred to in note 22 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data,” and to other statutory powers of bank regulatory agencies.

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.

Supervision and Regulation of M&T Bank’s Subsidiaries

M&T Bank has a number of subsidiaries. These subsidiaries are subject to the laws and regulations of both the federal government and the various states in which they conduct business. For example, M&T Securities is regulated by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and state securities regulators. M&T Mortgage also is subject to state regulation in the states in which it operates.

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Capital Adequacy

The Federal Reserve Board, the FDIC and the OCC have adopted risk-based capital adequacy guidelines for bank holding companies and banks under their supervision. Under these guidelines, the so-called “Tier 1 capital” and “Total capital” as a percentage of risk-weighted assets and certain off-balance sheet instruments must be at least 4% and 8%, respectively.

The Federal Reserve Board, the FDIC and the OCC have also imposed a leverage standard to supplement their risk-based ratios. This leverage standard focuses on a banking institution’s ratio of Tier 1 capital to average total assets, adjusted for goodwill and certain other items. Under these guidelines, banking institutions that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%. Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, along with those experiencing or anticipating significant growth are expected to maintain a Tier 1 capital to total adjusted average assets ratio equal to at least 4% to 5%. As reflected in the following table, the risk-based capital ratios and leverage ratios of the Registrant, M&T Bank and M&T Bank, N.A. as of December 31, 2003 exceeded the required capital ratios for classification as “well capitalized,” the highest classification under the regulatory capital guidelines.

Capital Components and Ratios at December 31, 2003
(dollars in millions)

                           
      Registrant           M&T Bank,
      (Consolidated)   M&T Bank   N.A.
     
 
 
Capital components
                       
 
Tier 1 capital
  $ 3,206     $ 3,117     $ 85  
 
Total capital
    4,917       4,779       89  
Risk-weighted assets
                       
 
and off-balance sheet instruments
  $ 43,896     $ 43,382     $ 320  
Risk-based capital ratio
                       
 
Tier 1 capital
    7.30 %     7.18 %     26.60 %
 
Total capital
    11.20 %     11.02 %     27.75 %
Leverage ratio
    6.98 %     6.87 %     18.17 %

The federal banking agencies, including the Federal Reserve Board and the OCC, maintain risk-based capital standards in order to ensure that those standards take adequate account of interest rate risk, concentration of credit risk, the risk of nontraditional activities and equity investments in nonfinancial companies, as well as reflect the actual performance and expected risk of loss on certain multifamily housing loans. Bank regulators periodically propose amendments to the risk-based capital guidelines and related regulatory framework, and consider changes to the risk-based capital standards that could significantly increase the amount of capital needed to meet the requirements for the capital tiers described below. While the Company’s management studies such proposals, the timing of adoption, ultimate form and effect of any such proposed amendments on the Company’s capital requirements and operations cannot be predicted.

In January 2001, the Basel Committee on Banking Supervision issued a proposal for a “New Capital Accord.” The New Capital Accord incorporates a three-part framework of minimum capital requirements, supervisory review of an institution’s capital adequacy and internal assessment process, and market discipline through effective disclosure to encourage safe and sound banking practices. The New Capital Accord is scheduled for implementation by the end of 2006.

The federal banking agencies are required to take “prompt corrective action” in respect of depository institutions and their bank holding companies that do

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not meet minimum capital requirements. FDICIA established five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier, or that of its bank holding company, depends upon where its capital levels are in relation to various relevant capital measures, including a risk-based capital measure and a leverage ratio capital measure, and certain other factors.

Under the implementing regulations adopted by the federal banking agencies, a bank holding company or bank is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” bank holding company or bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank holding company or bank is considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (B) “significantly undercapitalized” if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)“critically undercapitalized” if the bank has a ratio of tangible equity to total assets equal to or less than 2%. The Federal Reserve Board may reclassify a “well capitalized” bank holding company or bank as “adequately capitalized” or subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower capital category if it determines that the bank holding company or bank is in an unsafe or unsound condition or deems the bank holding company or bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency. M&T, M&T Bank and M&T Bank, N.A. currently meet the definition of “well capitalized” institutions.

“Undercapitalized” depository institutions, among other things, are subject to growth limitations, are prohibited, with certain exceptions, from making capital distributions, are limited in their ability to obtain funding from a Federal Reserve Bank and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan and provide appropriate assurances of performance. If a depository institution fails to submit an acceptable plan, including if the holding company refuses or is unable to make the guarantee described in the previous sentence, it is treated as if it is “significantly undercapitalized.” Failure to submit or implement an acceptable capital plan also is grounds for the appointment of a conservator or a receiver. “Significantly undercapitalized” depository institutions may be subject to a number of additional requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover, the parent holding company of a “significantly undercapitalized” depository institution may be ordered to divest itself of the institution or of nonbank subsidiaries of the holding company. “Critically undercapitalized” institutions, among other things, are prohibited from making any payments of principal and interest on subordinated debt, and are subject to the appointment of a receiver or conservator.

Each federal banking agency prescribes 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

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shares and other standards as they deem appropriate. The Federal Reserve Board and OCC have adopted such standards.

Depository institutions that are not “well capitalized” or “adequately capitalized” and have not received a waiver from the FDIC are prohibited from accepting or renewing brokered deposits. As of December 31, 2003, M&T Bank and M&T Bank, N.A. had approximately $889 million and $149 thousand of brokered deposits, respectively.

Although M&T has issued shares of common stock in connection with acquisitions or at other times, the Company has generally maintained capital ratios in excess of minimum regulatory guidelines largely through internal capital generation (i.e., net income less dividends paid). Historically, M&T’s dividend payout ratio and dividend yield, when compared with other bank holding companies, has been relatively low, thereby allowing for capital retention to support growth or to facilitate purchases of M&T’s common stock to be held as treasury stock. Management’s policy of reinvestment of earnings and repurchase of shares of common stock is intended to enhance M&T’s earnings per share prospects and thereby reward stockholders over time with capital gains in the form of increased stock price rather than high dividend income.

FDIC Deposit Insurance Assessments

As institutions with deposits insured by the BIF and the SAIF, M&T Bank and M&T Bank, N.A. are subject to FDIC deposit insurance assessments. Under current law the regular insurance assessments to be paid by BIF-insured and SAIF-insured institutions are specified in schedules issued by the FDIC that specify, at semiannual intervals, target reserve ratios designed to maintain the reserve ratios of each of those insurance funds at 1.25% of their estimated insured deposits. The FDIC is also authorized to impose one or more special assessments.

The FDIC has implemented a risk-based deposit premium assessment system under which each depository institution is placed in one of nine assessment categories based on the institution’s capital classification under the prompt corrective action provisions described above, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The adjusted assessment rates for both BIF-insured and SAIF-insured institutions under the current system range from .00% to .27% depending upon the assessment category into which the insured institution is placed. Neither of the Company’s bank subsidiaries paid regular insurance assessments to the FDIC in 2003. However, the FDIC retains the ability to increase regular BIF and SAIF assessments and to levy special additional assessments.

In addition to deposit insurance fund assessments, beginning in 1997 the FDIC assessed BIF-assessable and SAIF-assessable deposits to fund the repayment of debt obligations of the Financing Corporation (“FICO”). FICO is a government agency-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The current annualized rates established by the FDIC for both BIF-assessable and SAIF-assessable deposits are 1.54 basis points (hundredths of one percent).

Any significant increases in assessment rates or additional special assessments by the FDIC, could have an adverse impact on the results of operations and capital of M&T Bank or M&T Bank, N.A.

USA Patriot Act

The USA Patriot Act imposes additional obligations on U.S. financial institutions, including banks and broker dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

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Regulatory Impact of Allfirst Acquisition

As described above under the caption “Acquisition of Allfirst Financial Inc.,” AIB owns approximately 22.5% of the issued and outstanding shares of M&T common stock and has representation on the M&T and M&T Bank boards of directors. As a result, AIB has become M&T’s bank holding company under the BHCA and the Banking Law and AIB’s relationship with M&T is subject to the statutes and regulations governing bank holding companies described above. Among other things, AIB will have to join M&T in applications by M&T for acquisitions and new activities. The Reorganization Agreement requires AIB to join in such applications at M&T’s request, subject to certain limitations. In addition, because AIB is regulated by the Central Bank of Ireland (the “CBI”), the CBI may assert jurisdiction over M&T as a company controlled by AIB. Additional discussion of the regulatory implications of the Allfirst acquisition for M&T is set forth above under the caption “Certain Post-Closing Bank Regulatory Matters.”

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 firms and insurance companies. Furthermore, diversified financial services companies are able to offer a combination of these services to their customers on a nationwide basis. The Company’s operations are significantly impacted by state and federal regulations applicable to the banking industry. Moreover, the provisions of Gramm-Leach may increase competition among diversified financial services providers, and the Interstate Banking Act and the Banking Law may further ease entry into New York State by out-of-state banking institutions. As a result, the number of financial services providers and banking institutions with which the Company competes may grow in the future.

Other Legislative Initiatives

Proposals may be introduced in the United States Congress and in the New York State 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 providers of financial services. Moreover, other bills may be 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.

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Other Information

Through a link on the Investor Relations section M&T’s website of www.mandtbank.com, copies of M&T’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available, free of charge, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. Copies of such reports and other information are also available at no charge to any person who requests them or at www.sec.gov. Such requests may be directed to M&T Bank Corporation, Investor Relations Department, One M&T Plaza, 12th Floor, Buffalo, NY 14203-2399, (716) 842-5445.

Corporate Governance

M&T’s Corporate Governance Standards and the following corporate governance documents are also available on M&T’s website: Disclosure Policy; Executive Committee Charter; Nomination, Compensation and Governance Committee Charter; Audit Committee Charter; Financial Reporting and Disclosure Controls and Procedures Policy; Code of Ethics for CEO and Senior Financial Officers; Code of Business Conduct and Ethics; and Employee Complaint Procedures for Accounting and Auditing Matters. Copies of such governance documents are also available, free of charge, to any person who requests them. Such requests may be directed to M&T Bank Corporation, Investor Relations Department, One M&T Plaza, 12th Floor, Buffalo, NY 14203-2399, (716) 842-5445.

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.

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 1, Table 1

SELECTED CONSOLIDATED YEAR-END BALANCES

                                             
In thousands   2003   2002   2001   2000   1999

 
 
 
 
 
Money-market assets
                                       
 
Interest-bearing deposits at banks
  $ 13,194       7,856       4,341       3,102       1,092  
 
Federal funds sold and resell agreements
    22,288       320,359       41,086       17,261       643,555  
 
Trading account
    214,833       51,628       38,929       37,431       641,114  
 
 
   
     
     
     
     
 
   
Total money-market assets
    250,315       379,843       84,356       57,794       1,285,761  
Investment securities
                                       
 
U.S. Treasury and federal agencies
    3,398,547       1,209,180       1,448,397       1,984,347       737,586  
 
Obligations of states and political subdivisions
    249,193       256,023       306,768       249,425       79,189  
 
Other
    3,611,410       2,489,947       1,268,972       1,076,081       1,083,747  
 
 
   
     
     
     
     
 
   
Total investment securities
    7,259,150       3,955,150       3,024,137       3,309,853       1,900,522  
Loans and leases
                                       
 
Commercial, financial, leasing, etc.
    9,406,399       5,399,738       5,205,834       5,171,959       3,697,058  
 
Real estate - construction
    1,537,880       1,001,553       1,034,362       900,170       525,241  
 
Real estate - mortgage
    13,932,731       12,010,464       12,929,102       11,732,168       9,712,803  
 
Consumer
    11,160,588       7,525,187       6,226,170       5,166,017       3,637,759  
 
 
   
     
     
     
     
 
   
Total loans and leases
    36,037,598       25,936,942       25,395,468       22,970,314       17,572,861  
 
Unearned discount
    (265,163 )     (209,158 )     (207,708 )     (227,500 )     (166,090 )
 
Allowance for credit losses
    (614,058 )     (436,472 )     (425,008 )     (374,703 )     (316,165 )
 
 
   
     
     
     
     
 
   
Loans and leases, net
    35,158,377       25,291,312       24,762,752       22,368,111       17,090,606  
Goodwill
    2,904,081       1,097,553       1,097,553       1,000,837       540,561  
Core deposit and other intangible assets
    240,830       118,790       170,273       198,570       107,479  
Real estate and other assets owned
    19,629       17,380       16,387       13,619       10,000  
Total assets
    49,826,081       33,201,181       31,469,185       28,963,784       22,418,662  
 
 
   
     
     
     
     
 
Noninterest-bearing deposits
    8,411,296       4,072,085       3,704,004       3,344,913       2,260,432  
NOW accounts
    1,738,427       1,029,060       930,400       873,472       583,471  
Savings deposits
    14,118,521       9,156,678       7,980,065       6,105,689       5,198,681  
Time deposits
    6,637,249       6,246,384       8,188,036       9,664,088       7,088,345  
Deposits at foreign office
    2,209,451       1,160,716       777,895       244,511       242,691  
 
 
   
     
     
     
     
 
   
Total deposits
    33,114,944       21,664,923       21,580,400       20,232,673       15,373,620  
Short-term borrowings
    4,442,246       3,429,414       3,045,830       2,072,824       2,554,159  
Long-term borrowings
    5,535,425       4,497,374       3,461,769       3,414,516       1,775,133  
Total liabilities
    44,108,871       29,992,702       28,510,745       26,248,971       20,612,069  
 
 
   
     
     
     
     
 
Stockholders’ equity
    5,717,210       3,208,479       2,958,440       2,714,813       1,806,593  
 
 
   
     
     
     
     
 

STOCKHOLDERS, EMPLOYEES AND OFFICES

                                         
Number at year-end   2003   2002   2001   2000   1999

 
 
 
 
 
Stockholders
    11,258       11,587       12,565       11,936       4,991  
Employees
    14,000       9,197       9,291       8,736       6,569  
Offices
    735       493       513       488       310  
 
   
     
     
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 1, Table 2

CONSOLIDATED EARNINGS

                                           
In thousands   2003   2002   2001   2000   1999

 
 
 
 
 
Interest income
                                       
Loans and leases, including fees
  $ 1,897,701       1,670,412       1,892,507       1,579,701       1,323,262  
Money-market assets
                                       
 
Deposits at banks
    147       76       116       308       87  
 
Federal funds sold and resell agreements
    1,875       4,455       2,027       12,891       24,491  
 
Trading account
    592       202       348       1,009       3,153  
Investment securities
                                       
 
Fully taxable
    210,968       148,221       182,767       165,811       118,741  
 
Exempt from federal taxes
    15,282       18,733       24,120       13,064       8,897  
 
   
     
     
     
     
 
 
Total interest income
    2,126,565       1,842,099       2,101,885       1,772,784       1,478,631  
 
   
     
     
     
     
 
Interest expense
                                       
NOW accounts
    3,613       3,900       8,548       7,487       4,683  
Savings deposits
    102,190       107,281       134,454       132,225       121,888  
Time deposits
    159,700       237,001       453,940       445,666       367,889  
Deposits at foreign office
    14,991       8,460       11,264       14,915       12,016  
Short-term borrowings
    49,064       52,723       124,810       172,466       104,911  
Long-term borrowings
    198,252       185,149       210,581       145,838       107,847  
 
   
     
     
     
     
 
 
Total interest expense
    527,810       594,514       943,597       918,597       719,234  
 
   
     
     
     
     
 
Net interest income
    1,598,755       1,247,585       1,158,288       854,187       759,397  
Provision for credit losses
    131,000       122,000       103,500       38,000       44,500  
 
   
     
     
     
     
 
Net interest income after provision for credit losses
    1,467,755       1,125,585       1,054,788       816,187       714,897  
 
   
     
     
     
     
 
Other income
                                       
Mortgage banking revenues
    149,105       116,408       102,699       63,168       71,819  
Service charges on deposit accounts
    309,749       167,531       144,302       92,544       73,612  
Trust income
    114,620       60,030       64,395       45,165       40,751  
Brokerage services income
    51,184       43,261       39,349       32,795       27,140  
Trading account and foreign exchange gains
    15,989       2,860       4,462       2,351       315  
Gain (loss) on sales of bank investment securities
    2,487       (608 )     1,873       (3,078 )     1,575  
Other revenues from operations
    187,961       122,449       120,346       91,727       67,163  
 
   
     
     
     
     
 
 
Total other income
    831,095       511,931       477,426       324,672       282,375  
 
   
     
     
     
     
 
Other expense
                                       
Salaries and employee benefits
    740,324       496,990       467,194       353,312       302,544  
Equipment and net occupancy
    170,623       107,822       111,403       80,960       73,131  
Printing, postage and supplies
    36,985       25,378       25,512       20,138       17,510  
Amortization of goodwill
                61,820       35,760       31,737  
Amortization of core deposit and other intangible assets
    78,152       51,484       59,816       33,816       17,978  
Other costs of operations
    422,096       279,937       254,830       194,570       153,780  
 
   
     
     
     
     
 
 
Total other expense
    1,448,180       961,611       980,575       718,556       596,680  
 
   
     
     
     
     
 
Income before income taxes
    850,670       675,905       551,639       422,303       400,592  
Income taxes
    276,728       219,153       198,551       154,109       148,191  
 
   
     
     
     
     
 
Net income
  $ 573,942       456,752       353,088       268,194       252,401  
 
   
     
     
     
     
 
Dividends declared - Common
  $ 135,423       96,858       95,872       51,987       35,128  
 
   
     
     
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 1, Table 3

COMMON SHAREHOLDER DATA

                                             
        2003   2002   2001   2000   1999
       
 
 
 
 
Per share
                                       
 
Net income
                                       
   
Basic
  $ 5.08       4.94       3.69       3.33       3.24  
   
Diluted
    4.95       4.78       3.58       3.24       3.13  
 
Cash dividends declared
    1.20       1.05       1.00       .625       .45  
 
Stockholders’ equity at year-end
    47.55       34.82       31.54       29.09       23.36  
 
Tangible stockholders’ equity at year-end
    21.97       22.04       18.54       16.89       15.26  
 
Dividend payout ratio
    23.62 %     21.24 %     27.19 %     19.40 %     13.93 %
   
 
   
     
     
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 1, Table 4

CHANGES IN INTEREST INCOME AND EXPENSE*

                                                   
      2003 compared with 2002   2002 compared with 2001
     
 
              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
  $ 229,543       499,739       (270,196 )     (222,055 )     80,883       (302,938 )
Money-market assets
                                               
 
Deposits at banks
    71       91       (20 )     (40 )     45       (85 )
 
Federal funds sold and agreements to resell securities
    (2,580 )     (1,764 )     (816 )     2,428       3,859       (1,431 )
 
Trading account
    400       518       (118 )     (166 )     5       (171 )
Investment securities
                                               
 
U.S. Treasury and federal agencies
    24,797       60,881       (36,084 )     (32,496 )     (26,481 )     (6,015 )
 
Obligations of states and political subdivisions
    (2,001 )     (1,727 )     (274 )     (6,655 )     (3,668 )     (2,987 )
 
Other
    36,500       43,166       (6,666 )     (4,266 )     16,182       (20,448 )
 
   
                     
                 
 
Total interest income
  $ 286,730                       (263,250 )                
 
   
                     
                 
Interest expense
                                               
Interest-bearing deposits
                                               
 
NOW accounts
  $ (287 )     1,123       (1,410 )     (4,648 )     436       (5,084 )
 
Savings deposits
    (5,091 )     42,013       (47,104 )     (27,173 )     23,938       (51,111 )
 
Time deposits
    (77,301 )     (22,736 )     (54,565 )     (216,939 )     (67,856 )     (149,083 )
 
Deposits at foreign office
    6,531       9,725       (3,194 )     (2,804 )     5,623       (8,427 )
Short-term borrowings
    (3,659 )     16,850       (20,509 )     (72,087 )     (5,642 )     (66,445 )
Long-term borrowings
    13,103       69,234       (56,131 )     (25,432 )     33,228       (58,660 )
 
   
                     
                 
 
Total interest expense
  $ (66,704 )                     (349,083 )                
 
   
                     
                 

  *   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.

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Item 2. Properties.

Both M&T and M&T Bank maintain their executive offices at One M&T Plaza in Buffalo, New York. This twenty-one story headquarters building, containing approximately 278,000 rentable square feet of space, is owned in fee by M&T Bank and was completed in 1967. M&T, M&T Bank and their subsidiaries occupy approximately 73% of the building and the remainder is leased to non-affiliated tenants. At December 31, 2003, the cost of this property (including improvements subsequent to the initial construction), net of accumulated depreciation, was $7.0 million.

In September 1992, M&T Bank acquired an additional facility in Buffalo, New York with approximately 365,000 rentable square feet of space at a cost of approximately $12 million. Approximately 89% 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, 2003, the cost of this building (including improvements subsequent to acquisition), net of accumulated depreciation, was $12.8 million.

M&T Bank also owns and occupies two separate facilities in the Buffalo area which support certain back-office and operations functions of the Company. The total square footage of these facilities approximates 213,000 square feet and their combined cost (including improvements subsequent to acquisition), net of accumulated depreciation, was $16.1 million at December 31, 2003.

M&T Bank also owns a facility in Syracuse, New York with approximately 151,000 rentable square feet of space. Approximately 46% of this facility is occupied by M&T Bank, with the remainder leased to non-affiliated tenants. At December 31, 2003, the cost of this building, net of accumulated depreciation, was $6.3 million.

As a result of the April 1, 2003 Allfirst acquisition, M&T Bank acquired facilities in Harrisburg, Pennsylvania and Millsboro, Delaware with approximately 213,000 and 320,000 rentable square feet of space, respectively. M&T Bank occupies approximately 39% and 94% of these respective facilities, with the remainder leased to non-affiliated tenants. At December 31, 2003, the cost of these buildings, net of accumulated depreciation, was $13.4 million and $8.2 million, respectively.

No other properties owned by M&T Bank have more than 100,000 square feet of space. 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 684 domestic banking offices of the Registrant’s subsidiary banks at December 31, 2003, 295 are owned in fee and 389 are leased.

Item 3. Legal Proceedings.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability, if any, arising out of litigation pending against M&T or its subsidiaries will be material to M&T’s consolidated financial position, but at the present time is not in a position to determine whether such litigation will have a material adverse effect on M&T’s consolidated results of operations in any future reporting period.

Item 4. Submission of Matters to a Vote of Security Holders.

During the fourth quarter of 2003, no matters were submitted to a vote of M&T’s security holders.

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Executive Officers of the Registrant

Information concerning the Registrant’s executive officers is presented below as of February 17, 2004. The year the officer was first appointed to the indicated position with the Registrant or its subsidiaries is shown parenthetically. In the case of each corporation noted below, 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 69, is chairman of the board (2000), president (1988), chief executive officer (1983) and a director (1982) of the Registrant. From April 1998 until July 2000, he served as president and chief executive officer of the Registrant. He is chief executive officer (1983) and a director (1982) of M&T Bank, and served as chairman of the board of M&T Bank from March 1983 to July 2003 and as president of M&T Bank from March 1984 to June 1996. Mr. Wilmers is chairman of the board and a director of M&T Bank, N.A.(1995). He is a director of M&T Financial (1983).
 
   
Stephen J. Braunscheidel, age 47, is an executive vice president (2004) of the Registrant and M&T Bank, and is in charge of the Company’s Human Resources Division. Previously, he was a senior vice president in the M&T Investment Services Group, where he managed the Private Client Services and Employee Benefits departments. Mr. Braunscheidel has held a number of management positions with M&T Bank since 1978.
 
   
Emerson L. Brumback, age 52, is an executive vice president (1997) and a director (2003) of the Registrant and president and chief operating officer and a director (2003) of M&T Bank. Previously, he was an executive vice president of M&T Bank (1997) and was in charge of the Company’s Retail Banking Division. Mr. Brumback is chairman of the Directors Advisory Council (1999) of M&T Bank’s Jamestown Division. Mr. Brumback is chairman of the board (1999) and a director (1997) of Highland Lease and an executive vice president (1998) and a director of M&T Bank, N.A.(1997). He is chairman of the board (1999) and a director (1997) of M&T Credit and a director of M&T Mortgage (1997), M&T Reinsurance (1999) and M&T Securities (1997).
 
   
Steven M. Coen, age 55, is an executive vice president (2003) of the Registrant and M&T Bank. He is chief information officer and is in charge of Information Technology within M&T Bank. Mr. Coen served as senior vice president of M&T Bank in the Technology and Banking Operations Division from March 1993 to January 2003.
 
   
Atwood Collins, III, age 57, is an executive vice president of the Registrant (1997) and M&T Bank (1996), and is president and chief operating officer of M&T Bank’s Mid-Atlantic Division. Previously, he was president (2000) of the Hudson Valley Division of M&T Bank. Mr. Collins has held a number of executive management positions with M&T Bank and other bank subsidiaries of M&T since 1988. Mr. Collins is a director of M&T Real Estate (1995) and M&T Realty Capital (2003).
 
   
Mark J. Czarnecki, age 48, is an executive vice president of the Registrant (1999) and M&T Bank (1997) and is in charge of the M&T Investment Group, which is comprised of M&T Securities, the Insurance Services Division of M&T Bank, N.A., MBD and the Trust and Investment Services Division of M&T Bank. He is also in charge of the Company’s Retail Banking network which includes branches, automated teller machines, web-banking and telephone banking systems. Mr. Czarnecki is a director of M&T Securities (1999) and an executive vice president of M&T Bank, N.A. (1997). He is chairman of the board and a director of

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MBD (2000), M&T Life Insurance (2000) and MTB Investment Advisors (2003). Mr. Czarnecki has held a number of management positions with M&T Bank since 1977.
 
   
Brian E. Hickey, age 51, is an executive vice president of the Registrant (1997) and M&T Bank (1996). He is president and a member of the Directors Advisory Council (1994) of the Rochester Division of M&T Bank. Mr. Hickey is a director of M&T Financial (1996). Mr. Hickey is responsible for managing all of the non-retail segments in the Albany, Hudson Valley, Rochester, Syracuse and Southern Divisions of M&T Bank, and he also has responsibility for managing the Company’s middle market commercial banking, health care and government banking businesses.
 
   
Adam C. Kugler, age 46, is an executive vice president and treasurer (1997) of the Registrant and M&T Bank, and is in charge of the Company’s Treasury Division. Mr. Kugler is chairman of the board and a director of M&T Investment Company (1999), a director of M&T Financial (1997), M&T Securities (1997), and M&T Realty Capital (2003), and is an executive vice president, treasurer and a director of M&T Bank, N.A. (1997). He is president and a director of M&T Auto Receivables I, LLC (2002).
 
   
Kevin J. Pearson, age 42, is an executive vice president (2002) of the Registrant and M&T Bank. He is president of the New York City (2002) and Philadelphia (2000) Divisions of M&T Bank. Mr. Pearson is responsible for managing all of the non-retail segments in those respective Divisions of M&T Bank, as well as the Company’s commercial real estate business. He is a director of M&T Realty Capital (2003). Mr. Pearson served as senior vice president of the Registrant from 2000 to 2002, and held a number of management positions with the Company since 1989.
 
   
John L. Pett, age 55, is an executive vice president (1997) and chief credit officer (1995) of the Registrant and is an executive vice president and chief credit officer of M&T Bank (1996). Mr. Pett is a director of Highland Lease (1997) and M&T Credit (1997). He is an executive vice president (1998) and a director (1996) of M&T Bank, N.A. Mr. Pett served as senior vice president of the Registrant from 1991 to 1997.
 
   
Michael P. Pinto, age 48, is an executive vice president, chief financial officer (1997) and a director (2003) of the Registrant. He is a vice chairman, director (2003) and chief financial officer (1996) of M&T Bank, and is in charge of the Company’s Finance Division, Technology and Banking Operations Division, and its Corporate Services Group. Mr. Pinto also oversees the Company’s Treasury Division and General Counsel’s Office. Mr. Pinto is a director of M&T Financial (1996), M&T Mortgage (1996), M&T Real Estate (1996), M&T Investment Company (1999) and M&T Auto Receivables I, LLC (2002). He is an executive vice president and chief financial officer (1996) and a director (1998) of M&T Bank, N.A. Mr. Pinto served as senior vice president and controller of the Registrant from 1993 to 1997.
 
   
Robert E. Sadler, Jr., age 58, is an executive vice president (1990) and a director (1999) of the Registrant and chairman of the board (2003) and a director (1996) of M&T Bank. From June 1996 to July 2003, he served as president of M&T Bank. Mr. Sadler is president, chief executive officer and a director of M&T Bank, N.A.(1995); 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

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and a director of M&T Securities (1994); chairman of the board, president and a director of M&T Real Estate (1995); and a director (2000) of MBD.
 
   
Eugene J. Sheehy, age 49, is an executive vice president and a director (2003) of the Registrant and M&T Bank, and is the chairman and chief executive officer of M&T Bank’s Mid-Atlantic Division. He joined the Registrant and M&T Bank on April 1, 2003, the date of the Allfirst acquisition. Prior to that date, Mr. Sheehy served as chief executive officer of AIB’s USA Division from March 14, 2002 and chairman of the board of Allfirst from April 30, 2002. Mr. Sheehy also served as president and chief executive officer of Allfirst Bank from July 31, 2002 through April 1, 2003. Prior to March 14, 2002, Mr. Sheehy was the managing director of AIB Bank Republic of Ireland.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Registrant’s common stock is traded under the symbol MTB on the New York Stock Exchange. See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K for market prices of the Registrant’s common stock, approximate number of common stockholders at year-end, frequency and amounts of dividends on common stock and restrictions on the payment of dividends.

Equity Compensation Plan Information

The following table provides information as of December 31, 2003 with respect to shares of common stock that may be issued under M&T Bank Corporation’s existing equity compensation plans. M&T Bank Corporation’s existing equity compensation plans are the M&T Bank Corporation 1983 Stock Option Plan (the “1983 Stock Option Plan”), the M&T Bank Corporation 2001 Stock Option Plan (the “2001 Stock Option Plan”) and the M&T Bank Corporation Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”), each of which has been previously approved by stockholders, and the M&T Bank Corporation Directors’ Stock Plan (the “Directors’ Stock Plan”) and the M&T Bank Corporation Deferred Bonus Plan (the “Deferred Bonus Plan”), each of which did not require stockholder approval.

The table does not include information with respect to shares of common stock subject to outstanding options and rights assumed by M&T Bank Corporation in connection with mergers and acquisitions of the companies that originally granted those options and rights. Footnote (1) to the table sets forth the total number of shares of common stock issuable upon the exercise of such assumed options and rights as of December 31, 2003, and their weighted average exercise price.

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                      Number of securities
                      remaining available
      Number of securities           for future issuance
      to be issued upon   Weighted average   under equity
      exercise of   exercise price of   compensation plans
      outstanding   outstanding   (excluding securities
Plan category   options or rights   options or rights   reflected in column A)

 
 
 
      (A)   (B)   (C)
Equity compensation plans approved by security holders:
                       
 
1983 Stock Option Plan
    6,553,272     $ 45.33        
 
2001 Stock Option Plan
    3,598,140       77.76       6,191,128  
 
Employee Stock Purchase Plan
    114,647       76.45       802,870  
Equity compensation plans not approved by security holders:
                       
 
Directors’ Stock Plan
    1,684       98.30       49,173  
 
Deferred Bonus Plan
    81,092       53.57       14,080  
 
   
     
     
 
Total
    10,348,835     $ 57.02       7,057,251  
 
   
     
     
 

(1)  As of December 31, 2003, a total of 327,922 shares of Common Stock were issuable upon exercise of outstanding options or rights assumed by M&T Bank Corporation in connection with merger and acquisition transactions. The weighted average exercise price of those outstanding options or rights is $59.44 per share.

Equity compensation plans adopted without the approval of stockholders are described below:

Directors’ Stock Plan. M&T Bank Corporation maintains a plan for non-employee members of the Board of Directors of M&T Bank Corporation and the members of its Directors Advisory Council, and the non-employee members of the Board of Directors of M&T Bank and the members of its regional Directors Advisory Councils, which allows such directors, advisory directors and members of regional Directors Advisory Councils to receive all or a portion of their directorial compensation in shares of M&T common stock.

Deferred Bonus Plan. M&T Bank Corporation maintains a deferred bonus plan pursuant to which its eligible officers and those of its subsidiaries may elect to defer all or a portion of their current annual incentive compensation awards and allocate such awards to several investment options, including M&T common stock. Participants may elect the timing of distributions from the plan. Such distributions are payable in cash, with the exception of balances allocated to M&T common stock, which are distributable in the form of common stock.

In November 2001, M&T announced that it had been authorized by its Board of Directors to purchase up to 5,000,000 shares of its common stock. Through December 31, 2003, M&T had repurchased a total of 3,632,098 shares of common stock pursuant to such plan at an average cost of $78.49 per share. M&T resumed purchases of its common stock in January 2004 and completed the 5,000,000 repurchase plan in February 2004. The common stock was purchased pursuant to such plan at an average cost of $82.11 per share. There were no common stock repurchases in 2003.

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In February 2004, M&T announced that its Board of Directors had authorized the repurchase of up to 5,000,000 additional shares of its common stock. In addition, M&T announced that its Board of Directors had declared a quarterly cash dividend of $.40 per share on M&T Bank Corporation’s common stock, which represents an increase of 33% over the most recent quarterly dividend rate of $.30 per share. The dividend will be payable March 31, 2004 to stockholders of record at the close of business on February 27, 2004.

During the fourth quarter of 2003, M&T did not issue any shares of its common stock that were not registered under the Securities Act of 1933.

Item 6. Selected Financial Data.

See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Profile and Significant Developments

M&T Bank Corporation (“M&T”) is a bank holding company headquartered in Buffalo, New York with consolidated assets of $49.8 billion at December 31, 2003. The consolidated financial information presented herein reflects M&T and all of its subsidiaries, which are referred to collectively as “the Company.” M&T’s wholly owned bank subsidiaries are Manufacturers and Traders Trust Company (“M&T Bank”) and M&T Bank, National Association (“M&T Bank, N.A.”).

     M&T Bank, with total assets of $49.2 billion at December 31, 2003, is a New York-chartered commercial bank with 683 banking offices in New York State, Pennsylvania, Maryland, Delaware, Virginia, West Virginia and the District of Columbia, and an office in the Cayman Islands. M&T Bank and its subsidiaries offer a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in its markets. Lending is largely focused on consumers residing in New York State, Pennsylvania, Maryland, northern Virginia and Washington, D.C., and on small and medium size businesses based in those areas. Certain lending activities are also conducted in other states through various subsidiaries. M&T Bank’s subsidiaries include: M&T Credit Corporation, a consumer lending and commercial leasing and lending company; M&T Financial Corporation, a commercial leasing company; M&T Mortgage Corporation, a residential mortgage banking company; M&T Real Estate Trust, a commercial mortgage lender; M&T Realty Capital Corporation, a multi-family commercial mortgage lender; M&T Securities, Inc., a broker/dealer; MTB Investment Advisors, Inc., which serves as investment advisor to the MTB funds, a family of proprietary mutual funds, and other funds and institutional clients; Highland Lease Corporation, a consumer leasing company; and Matthews, Bartlett & Dedecker, Inc., an insurance agency.

     M&T Bank, N.A., with total assets of $473 million at December 31, 2003, is a national bank with an office in Oakfield, New York. M&T Bank, N.A. offers selected deposit and loan products on a nationwide basis, largely through telephone and direct mail marketing techniques. Insurance products are offered by M&T Bank, N.A. through banking offices of M&T Bank.

     On April 1, 2003, M&T completed the acquisition of Allfirst Financial Inc. (“Allfirst”), a bank holding company headquartered in Baltimore, Maryland, from Allied Irish Banks, p.l.c. (“AIB”), Dublin, Ireland. Allfirst Bank, Allfirst’s primary bank subsidiary, was merged into M&T Bank on that date. Allfirst Bank operated 269 banking offices in Maryland, Pennsylvania, Virginia and the District of Columbia at the date of acquisition. The acquisition of Allfirst represented a major geographic expansion by M&T and created a strong Mid-Atlantic banking franchise. AIB received 26,700,000 shares

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of M&T common stock and $886 million in cash in exchange for all outstanding Allfirst common shares. Immediately after the completion of the acquisition, AIB owned approximately 22.5% of the outstanding shares of M&T’s common stock. The results of operations acquired in the Allfirst transaction have been included in the Company’s financial results since April 1, 2003. Table 1 provides a summary of assets acquired and liabilities assumed by the Company on April 1, 2003 in connection with the Allfirst transaction.

     Merger-related expenses associated with the Allfirst acquisition incurred during the year ended December 31, 2003 totaled $60 million ($39 million after tax effect). Such expenses were for professional services and temporary help associated with the conversion of systems and/or integration of operations; initial marketing and promotion expenses designed to introduce M&T Bank to Allfirst’s customers; travel and relocation costs; and printing, supplies and other costs of commencing operations in new markets and offices. The Company does not expect to incur any significant additional merger-related expenses relating to the Allfirst transaction. In accordance with generally accepted accounting principles (“GAAP”), included in the determination of goodwill associated with the Allfirst merger were charges totaling $29 million, net of applicable income taxes ($48 million before tax effect), for severance costs for former Allfirst employees; investment banking and other professional fees; and termination of Allfirst contracts for various services. As of December 31, 2003, the remaining unpaid portion of merger-related expenses and charges included in the determination of goodwill were $1 million and $13 million, respectively. The resolution of Allfirst’s preacquisition contingencies in future periods could have an impact on the allocation of the purchase price and the amount of goodwill recorded as part of the acquisition, however, management does not presently expect that any such adjustments will be material to the Company’s consolidated balance sheet.

     In anticipation of the Allfirst acquisition, M&T Bank issued $400 million of subordinated notes on March 31, 2003 to fund a portion of the cash consideration paid to AIB and to maintain appropriate regulatory capital ratios. The subordinated notes are included in regulatory capital of M&T and M&T Bank. The notes pay interest semi-annually on April 1 and October 1. The interest rate is fixed at 3.85% through March 31, 2008, with a floating rate payable from April 1, 2008 through the maturity date based on the then applicable U.S. dollar three-month London Interbank Offered Rate (“LIBOR”) plus 1.50%. The notes will mature on April 1, 2013. Beginning on April 1, 2008, M&T Bank may, at its option and subject to prior regulatory approval, redeem some or all of the subordinated notes on any interest payment date at a redemption price equal to 100% of the redeemed principal, plus any accrued but unpaid interest.

     On February 9, 2001, M&T acquired Premier National Bancorp, Inc. (“Premier”), a bank holding company headquartered in Lagrangeville, New York. Premier National Bank, Premier’s bank subsidiary, was merged into M&T Bank on that date. Premier National Bank operated 34 banking offices in the mid-Hudson Valley region of New York State. As of the merger date, assets acquired totaled $1.8 billion, including $1.0 billion of loans and leases, and liabilities assumed were $1.5 billion, including approximately $1.4 billion of deposits. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the operations acquired from Premier have been included in M&T’s financial results subsequent to the acquisition date. Premier’s stockholders received $171 million in cash and 2,440,812 shares of M&T common stock in exchange for the Premier shares outstanding at the time of the acquisition. In connection with the acquisition, the Company recorded approximately $178 million of goodwill and $32 million of core deposit intangible. In 2001, the Company incurred expenses associated with systems conversions and other costs of integrating and conforming the acquired operations of Premier and of Keystone Financial Inc. (“Keystone”), which was acquired on October 6, 2000, with and into the operations of M&T Bank. Such merger-related expenses totaled approximately $8 million ($5 million after-tax) during the year ended December 31, 2001.

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Critical Accounting Estimates

The Company’s significant accounting policies are described in note 1 of Notes to Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Some of the more significant areas in which management of the Company applies critical assumptions and estimates include the following:

    Allowance for credit losses – The allowance for credit losses represents the amount which, in management’s judgment, will be adequate to absorb credit losses inherent in the loan and lease portfolio as of the balance sheet date. In estimating losses inherent in the loan and lease portfolio, assumptions and judgment are applied to measure expected future cash flows, collateral values and other factors used to determine the borrowers’ abilities to repay obligations. Historical loss trends are also considered, as are economic conditions, industry trends, portfolio trends and borrower-specific financial data. Changes in the circumstances considered when determining management’s estimates and assumptions could result in changes in those estimates and assumptions, which may result in adjustment of the allowance. A detailed discussion of facts and circumstances considered by management in assessing the adequacy of the allowance for credit losses is included herein under the heading “Provision for Credit Losses.”
 
    Valuation methodologies – Management of the Company applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as trading assets, most investment securities, and residential real estate loans held for sale and related commitments. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include capitalized servicing assets, goodwill, core deposit and other intangible assets, pension and other postretirement benefit obligations, value ascribed to stock-based compensation, estimated residual values of property associated with commercial and consumer leases, and certain derivative and other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, costs of servicing and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations. Specific discussion of assumptions and estimates utilized by management are discussed in detail in this Financial Review and in notes 1, 3, 4, 7, 8, 10, 11, 17, 18 and 19 of Notes to Financial Statements.
 
    Commitments, contingencies and off-balance sheet arrangements – Information regarding the Company’s commitments and contingencies, including guarantees and contingent liabilities arising from litigation, and their potential effects on the Company’s results of operations is included in note 20 of Notes to Financial Statements. In addition, the Company is routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the tax authorities determine that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. Information

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      regarding permanent and temporary income tax differences is presented in note 12 of Notes to Financial Statements. The recognition or de-recognition in the Company’s consolidated financial statements of assets and liabilities held in trusts or other so-called variable interest entities is subject to the interpretation and application of complex accounting pronouncements or interpretations that require management to estimate and assess the probability of financial outcomes in future periods. Information relating to the Company’s involvement in such entities and the accounting treatment afforded each such involvement is included in note 18 of Notes to Financial Statements.

Overview

The Company’s net income in 2003 totaled $574 million or $4.95 of diluted earnings per common share, up 26% and 4%, respectively, from $457 million or $4.78 per diluted share in 2002. Basic earnings per common share rose 3% to $5.08 in 2003 from $4.94 in 2002. The after-tax impact of merger-related expenses associated with the Allfirst acquisition was $39 million ($60 million pre-tax) or $.34 of diluted earnings per share and $.35 of basic earnings per share in 2003. There were no significant similar expenses in 2002. Net income in 2001 totaled $353 million, while diluted and basic earnings per share were $3.58 and $3.69, respectively. The after-tax impact of merger-related expenses associated with the Premier and Keystone acquisitions was $5 million ($8 million pre-tax) or $.05 of diluted and basic earnings per share in 2001.

     Net income represented a return on average assets in 2003 of 1.27%, compared with 1.43% in 2002 and 1.14% in 2001. The return on average common stockholders’ equity was 11.62% in 2003, 15.09% in 2002 and 11.87% in 2001. Excluding the impact of merger-related expenses, the rates of return on average assets and average common equity were 1.35% and 12.41%, respectively, in 2003 and 1.16% and 12.03%, respectively, in 2001.

     Effective January 1, 2003, the Company began recognizing expense for stock-based compensation using the fair value method of accounting described in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended. As a result, salaries and employee benefits expense in 2003 included $43 million of stock-based compensation. After tax effect, stock-based compensation lowered 2003’s net income by $32 million, or $.27 per diluted share. Using the retroactive restatement method described in SFAS No. 148, which amended SFAS No. 123, financial information for all prior periods presented in this annual report has been restated to reflect the impact of recognizing expense for stock-based compensation in those years as well. As a result, salaries and employee benefits expense in 2002 has been restated to include $41 million of stock-based compensation, resulting in a reduction of previously reported net income of $28 million. Diluted earnings per share noted herein for 2002 have been reduced by $.29 from the amount previously reported. For 2001, the impact of adopting SFAS No. 123 using the retroactive restatement method was to increase salaries and employee benefits expense by approximately $32 million, resulting in a reduction of previously reported net income of $25 million or $.24 of diluted earnings per share.

     Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revised accounting standards for all purchased intangible assets, but not the accounting for internally developed intangible assets. SFAS No. 142, as amended, requires that most goodwill not be amortized, but rather that it periodically be tested for impairment. Other intangible assets assumed to have been acquired but with finite lives, such as core deposit intangible assets, are required to be amortized over their assumed lives.

     In accordance with SFAS No. 142, effective January 1, 2002 the Company ceased amortization of goodwill associated with corporate acquisitions. Amortization of such goodwill in 2001, none of which was tax deductible, was

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$62 million ($.62 per diluted share). The after-tax impact of amortization of core deposit and other intangible assets for the years ended December 31, 2003, 2002 and 2001 was $48 million ($.41 per diluted share), $32 million ($.34 per diluted share) and $38 million ($.38 per diluted share), respectively. Pro forma net income, diluted earnings per share and basic earnings per share for 2001, computed as if SFAS No. 142 had been effective in 2001, were $415 million, $4.20 and $4.33, respectively, while pro forma annualized returns on average assets and average common stockholders’ equity in 2001 were 1.35% and 13.95%, respectively.

     Further information regarding the allocation of goodwill to the Company’s reportable segments and results of impairment tests of such goodwill is provided in note 8 of Notes to Financial Statements.

     Net interest income recorded on a taxable-equivalent basis increased 28% to $1.62 billion in 2003 from $1.26 billion in 2002, reflecting higher average earning assets, which increased 37% to $39.5 billion in 2003 from $28.9 billion in 2002. The higher levels of average earning assets in 2003 as compared with 2002 were largely the result of loans, leases and investment securities obtained in the Allfirst acquisition. Average loans and leases increased $8.5 billion, or 33%, to $34.0 billion in 2003 from $25.5 billion in 2002. Included in the 2003 average was the nine-month impact of the $10.3 billion of Allfirst-related loans and leases acquired on April 1, 2003. Partially offsetting the impact of the higher levels of average earning assets in 2003 was a narrowing of the Company’s net interest margin, or taxable-equivalent net interest income expressed as a percentage of average earning assets. Net interest margin declined 27 basis points (hundredths of one percent) to 4.09% in 2003 from 4.36% a year earlier, due largely to lower yielding portfolios of loans and investment securities acquired in the Allfirst transaction. A widening of the Company’s net interest margin and higher average earning assets, which rose $1.1 billion or 4% from $27.8 billion in 2001, were the most significant factors contributing to the increase in 2002’s taxable-equivalent net interest income from $1.18 billion in 2001. Net interest margin in 2002 was 13 basis points higher than 4.23% in 2001, due to the full-year impact of 2001’s declining rate environment and further changes in rates and spreads in 2002. The 4% rise in average earning assets from 2001 to 2002 was the result of growth in the consumer loan portfolio.

     The provision for credit losses was $131 million in 2003, $122 million in 2002 and $104 million in 2001. Net charge-offs totaled $97 million in 2003, compared with $108 million in 2002 and $75 million in 2001. Net charge-offs as a percentage of average loans and leases outstanding were .28%, .42% and .31% in 2003, 2002 and 2001, respectively. Net charge-offs of loans acquired from Allfirst were not significant during the final nine months of 2003. The provision in each year reflects the result of management’s analysis of the composition of the loan and lease portfolio and other factors, including concern regarding uncertainty about economic conditions, both nationally and in many of the markets served by the Company, and the impact of such conditions and prospects on the abilities of borrowers to repay loans.

     Noninterest income aggregated $831 million in 2003, 62% higher than $512 million in 2002 and up 74% from $477 million in 2001. Approximately $279 million of the increase from 2002 was attributable to revenues related to operations or market areas associated with the former Allfirst franchise. Higher mortgage banking revenues and service charges on deposit accounts also contributed to the improvement. Increased revenues from providing deposit account and mortgage banking services were significant contributors to the rise in noninterest income from 2001 to 2002.

     Noninterest expense in 2003 totaled $1.45 billion, 51% higher than $962 million in 2002 and up 48% from $981 million in 2001. Included in such amounts are expenses considered to be “nonoperating” in nature, consisting of amortization of core deposit and other intangible assets of $78 million, $51 million and $60 million in 2003, 2002 and 2001, respectively; amortization of goodwill of $62 million in 2001; and merger-related expenses of $60 million and $8 million in 2003 and 2001, respectively. There were no merger-related expenses in 2002. Exclusive of these nonoperating expenses, noninterest

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operating expenses aggregated $1.31 billion in 2003, compared with $910 million in 2002 and $851 million in 2001. Expenses related to operations formerly associated with Allfirst significantly contributed to the higher level of expenses in 2003 compared with 2002, along with higher expenses for salaries and benefits, professional services and amortization of capitalized residential mortgage servicing rights. Partially offsetting these higher expenses was a $30 million decrease in the provision for possible impairment of capitalized residential mortgage servicing rights, which was $2 million in 2003 and $32 million in 2002. The $32 million provision for the impairment of capitalized residential mortgage servicing rights and higher costs for salaries, including commissions and incentive compensation, were large contributors to the rise in noninterest operating expenses in 2002 as compared with 2001.

     The efficiency ratio expresses the relationship of operating expenses to revenues. The Company’s efficiency ratio, or noninterest operating expenses divided by the sum of taxable-equivalent net interest income and noninterest income (exclusive of gains and losses from sales of bank investment securities), was 53.6% in 2003, compared with 51.3% in 2002 and 51.5% in 2001. The higher ratio in 2003 reflects the impact of the acquired Allfirst operations that are now part of M&T.

Supplemental Reporting of Non-GAAP Results of Operations

M&T has accounted for substantially all of its business combinations using the purchase method of accounting. As a result, the Company had recorded intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.1 billion at December 31, 2003, $1.2 billion at December 31, 2002 and $1.3 billion at December 31, 2001. Included in such intangible assets was goodwill of $2.9 billion at December 31, 2003, up from $1.1 billion at December 31, 2002 and 2001 due to the Allfirst acquisition. Amortization of core deposit and other intangible assets, after tax effect, was $48 million, $32 million and $38 million during 2003, 2002 and 2001, respectively. The higher level of such amortization in 2003 as compared with 2002 and 2001 was due to the impact of core deposit and other intangible assets recorded as part of the acquisition of Allfirst.

     Since 1998 M&T has consistently provided supplemental reporting of its results on a “net operating” or “tangible” basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts, when calculating certain performance ratios) and expenses associated with merging acquired operations into the Company, because such expenses are considered by management to be “nonoperating” in nature. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results.

     Net operating income rose 35% to $661 million in 2003 from $489 million in 2002. Diluted net operating earnings per share in 2003 increased 11% to $5.70 from $5.12 in 2002. In 2001, net operating income totaled $457 million and diluted net operating earnings per share were $4.63.

     A reconciliation of net income and diluted earnings per share with net operating income and diluted net operating earnings per share is presented in table 3.

     Expressed as a rate of return on average tangible assets, net operating income was 1.55% in 2003 and 2001, compared with 1.59% in 2002. Net operating return on average tangible common equity was 28.49% in 2003, compared with 26.71% and 26.76% in 2002 and 2001, respectively. Including the effect of merger-related expenses, net operating return on average tangible assets for 2003 and 2001 was 1.46% and 1.53%, respectively, and net operating return on average tangible common equity was 26.80% and 26.48%, respectively.

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     A reconciliation of average assets and equity with average tangible assets and average tangible equity is presented in table 3.

Net Interest Income/Lending and Funding Activities

Taxable-equivalent net interest income rose 28% to $1.62 billion in 2003 from $1.26 billion in 2002. The improvement reflects a 37% increase in average earning assets to $39.5 billion in 2003 from $28.9 billion in 2002, partially offset by a narrowing of the Company’s net interest margin. The growth in average earning assets was largely attributable to higher average loans and leases outstanding, which totaled $34.0 billion in 2003, up 33% from 2002’s average of $25.5 billion.

     The most significant factor for the higher loan balances in 2003 was the nine-month impact of the $10.3 billion of loans obtained in the Allfirst acquisition on April 1, 2003. Such acquired loans were comprised of approximately $4.5 billion of commercial loans and leases (including $314 million of leveraged leases and $230 million of loans to foreign borrowers), $2.5 billion of commercial real estate loans, $383 million of residential real estate loans and $2.9 billion of consumer loans and leases.

     Average consumer loans and leases, excluding those acquired in the Allfirst transaction, grew 20% to $8.2 billion in 2003 from $6.8 billion in 2002. Increases in the outstanding average balances of automobile loans and leases of $1.0 billion and home equity lines of credit of $495 million were the leading contributors to that growth.

     Partially offsetting the growth noted above was a decline in the residential real estate loan portfolio, due largely to customer repayments of loans and the impact of two separate securitization transactions totaling $1.3 billion of such loans during 2003’s fourth quarter and the full-year impact of a similar $1.1 billion securitization in the fourth quarter of 2002. In connection with the first 2003 securitization transaction, the Company transferred approximately $838 million of one-to-four family residential mortgage loans to a qualified special purpose trust. The Company received $112 million in cash and retained approximately 87% of the resulting securities in exchange for the loans. The Company realized a gain of $1 million on the transaction which has been included in other revenues from operations. In 2003’s second securitization transaction, approximately $441 million of one-to-four family residential mortgage loans were converted to mortgage-backed securities issued by the Federal National Mortgage Association (“FNMA”). All of those mortgage-backed securities were retained by the Company and, accordingly, no gain or loss was recognized. In total, approximately $1.2 billion of mortgage-backed securities resulting from 2003’s securitization transactions were retained by the Company and included in the portfolio of investment securities classified as available for sale.

     Taxable-equivalent net interest income in 2002 was 7% higher than $1.18 billion in 2001, when average earning assets aggregated $27.8 billion. A 4% increase in average loans and leases from 2001 to 2002, coupled with a widening of the Company’s net interest margin, were the most significant factors for the higher level of taxable-equivalent net interest income in 2002 as compared with 2001.

     Average outstanding balances of consumer loans and leases rose $1.2 billion, or 21%, from 2001 to 2002. Such growth, predominantly in outstanding home equity lines of credit and automobile loans, more than offset declines in the commercial loan and lease and residential real estate loan portfolios. The lower average balances of commercial loans and leases were due in part to the sluggish economic conditions in the Company’s core markets. The residential real estate loan portfolio’s decline was due largely to customer repayments of loans and the impact of the November 2002 securitization of approximately $1.1 billion of such loans.

     Similar to one of the securitizations already discussed, in connection with

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the 2002 securitization transaction, the Company transferred approximately $1.1 billion of one-to-four family residential mortgage loans to a qualified special purpose trust. The Company received $140 million in cash and retained approximately 88% of the resulting securities in exchange for the loans. The Company realized a gain of $5 million on the transaction which has been included in other revenues from operations. In accordance with GAAP, the qualified special purpose trusts related to the 2003 and 2002 mortgage loan securitization transactions are not included in the Company’s consolidated financial statements. Management believes that the resulting mortgage-backed securities provide enhanced liquidity opportunities to the Company because the securities may be more readily pledged to secure borrowings or sold than the underlying loans could be. Additionally, under present regulatory risk-based capital rules, the Company is generally required to maintain higher levels of regulatory capital when directly investing in residential real estate loans than when investing in government-guaranteed or highly-rated, privately-placed mortgage-backed securities. Additional information about these transactions and the qualified special purpose trusts is included in note 18 of Notes to Financial Statements. Information about the Company’s regulatory capital requirements is included in note 22 of Notes to Financial Statements. Table 4 summarizes average loans and leases outstanding in 2003 and percentage changes in the major components of the portfolio over the past two years.

     Commercial loans and leases, excluding loans secured by real estate, totaled $9.2 billion at December 31, 2003, representing 26% of total loans and leases. Table 6 presents such commercial loans and leases as of December 31, 2003 by geographic area, size, and whether the loans are secured by collateral or unsecured. The Company provides financing for leases to commercial customers, primarily for equipment.

     As already mentioned, commercial loans and leases obtained in the Allfirst transaction totaled $4.5 billion on April 1, 2003, including $314 million of leveraged leases. Included in the Allfirst loan and lease portfolio were certain business lines in which the Company has not traditionally been active. An international maritime portfolio, which at April 1 and December 31, 2003 totaled $113 million and $71 million, respectively, was acquired. The Company does not expect to grow this specialized business. Other international loans attributable to Allfirst totaled $132 million and $145 million at April 1 and December 31, 2003, respectively. The Company participates in the insurance and guarantee programs of the Export-Import Bank of the United States. These programs provide U.S. government repayment coverage of 90%-100% on loans supporting foreign borrowers’ purchases of U.S. goods and services. The loans generally range from $500 thousand to $10 million. The outstanding balance of loans under this program at December 31, 2003 was $123 million. Commercial leases obtained on April 1, 2003 from Allfirst totaled $610 million, and consisted of general equipment leases with an emphasis on transportation equipment, including railcars, tractors, trailers and commercial aircraft. The Company does not expect to pursue growing the commercial aircraft component of the lease portfolio. The Company’s commercial aircraft lease portfolio totaled $99 million at December 31, 2003, including $70 million that was obtained from Allfirst. Of the $9.2 billion of commercial loans and leases outstanding at the 2003 year-end, approximately $7.2 billion, or 78%, were secured, while 46%, 26% and 12% were granted to businesses in New York State, Pennsylvania and Maryland, respectively.

     Loans secured by real estate, including outstanding balances of home equity loans and lines of credit which the Company classifies as consumer loans, represented approximately 58% of the loan and lease portfolio during 2003, compared with 63% in 2002 and 64% in 2001. At December 31, 2003, the Company held approximately $12.4 billion of commercial real estate loans, $3.1 billion of consumer real estate loans secured by one-to-four family residential properties and $5.0 billion of outstanding balances of home equity loans and lines of credit, compared with $9.7 billion, $3.2 billion and $2.7 billion, respectively, at December 31, 2002. As of April 1, 2003, loans obtained in the Allfirst acquisition that were secured by real estate aggregated $5.2 billion, including $2.5 billion of commercial real estate loans, $383 million

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of consumer real estate loans secured by one-to-four family residential properties and $2.3 billion of outstanding balances of home equity loans and lines of credit.

     A significant portion of commercial real estate loans originated by the Company are 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 other areas of New York State where the Company operates, including the Buffalo, Rochester, Syracuse, Albany, Hudson Valley and Southern Tier regions. Commercial real estate loans are also originated through the Company’s offices in Pennsylvania, Maryland, northern Virginia, Washington, D.C., Oregon and West Virginia. Commercial real estate loans obtained in the Allfirst transaction were geographically centered in Allfirst’s regional marketplace, with the majority of that portfolio secured by properties in Maryland, south central Pennsylvania, northern Virginia and Washington, D.C. Commercial real estate loans originated by the Company include fixed-rate instruments with monthly payments and a balloon payment of the remaining unpaid principal at maturity, in many cases five years after origination. For borrowers in good standing, the terms of such loans may be extended by the customer for an additional five years at the then current market rate of interest. The Company also originates fixed-rate commercial real estate loans with maturities of greater than five years, generally having original maturity terms of approximately ten years, and adjustable-rate commercial real estate loans, which represented approximately 45% of the commercial real estate loan portfolio as of December 31, 2003. Table 7 presents commercial real estate loans by geographic area, type of collateral and size of the loans outstanding at December 31, 2003. Of the $4.3 billion of commercial real estate loans in the New York City metropolitan area, approximately 37% were secured by multifamily residential properties, 24% by retail space and 10% by office space. The Company’s experience has been that office space and retail properties tend to demonstrate more volatile fluctuations in value through economic cycles and changing economic conditions than do multifamily residential properties. Approximately 49% of the aggregate dollar amount of New York City-area loans were for loans with outstanding balances of $5 million or less, while loans of more than $10 million made up approximately 32% of the total.

     Commercial real estate loans secured by properties located in other parts of New York State, Pennsylvania, Maryland and other areas tend to have a greater diversity of collateral types and include a significant amount of lending to customers who use the mortgaged property in their trade or business. Approximately 74% of the aggregate dollar amount of commercial real estate loans in New York State secured by properties located outside of the metropolitan New York City area were for loans with outstanding balances of $5 million or less. Of the outstanding balance of commercial real estate loans in Pennsylvania and Maryland, approximately 74% and 63%, respectively, were for loans with outstanding balances of $5 million or less.

     Commercial real estate loans secured by properties located outside of New York State, Pennsylvania, Maryland and areas of neighboring states considered to be part of the New York City metropolitan area, comprised 10% of total commercial real estate loans as of December 31, 2003.

     M&T Realty Capital Corporation, one of the Company’s commercial real estate lending subsidiaries, participates in the FNMA Delegated Underwriting and Servicing (“DUS”) program, pursuant to which commercial real estate loans are originated in accordance with terms and conditions specified by third-party investors and subsequently sold to such investors. The Company’s involvement with the FNMA DUS program resulted from the Allfirst acquisition. At December 31, 2003, $1 million of commercial real estate loans were held for sale.

     Commercial construction loans presented in table 7 totaled $940 million at December 31, 2003, or approximately 3% of total loans and leases.

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     Real estate loans secured by one-to-four family residential properties totaled $3.1 billion at December 31, 2003, including approximately 43% secured by properties located in New York State and 17% secured by properties located in Pennsylvania. As already discussed, residential real estate loans obtained in the Allfirst transaction totaled $383 million on April 1, 2003. At December 31, 2003, $723 million of residential real estate loans were held for sale, compared with $1.1 billion at December 31, 2002. Loans to finance the construction of or development projects related to one-to-four family residential properties totaled $597 million at December 31, 2003, or approximately 2% of total loans and leases. Included in such construction loans were loans to residential real estate developers aggregating $246 million.

     Consumer loans and leases represented approximately 30% of the average loan portfolio during 2003, up from 27% during 2002 and 23% during 2001. Automobile loans and leases and outstanding balances of home equity lines of credit represent the largest components of the consumer loan portfolio. Approximately 60% of home equity lines of credit outstanding at December 31, 2003 were secured by properties in New York State and 22% and 15% were secured by properties in Pennsylvania and Maryland, respectively. At December 31, 2003, 31% and 40% of the automobile loan and lease portfolio were to customers residing in New York State and Pennsylvania, respectively. Automobile loans and leases have generally been originated through dealers, however, all applications submitted through dealers are subject to the Company’s normal underwriting and loan approval procedures. Automobile loans and leases represented approximately 12% of the Company’s average loan portfolio during 2003, while no other consumer loan product represented more than 8%. The average outstanding balance of automobile leases was approximately $527 million in 2003, $556 million in 2002 and $587 million in 2001. During 2003 the Company decided to cease origination of automobile leases concentrating instead on its larger automobile loan origination business. Given the growth in the Company’s automobile loan portfolio, the decision to cease origination of new auto leases did not have a significant negative impact on the Company’s results of operations. At December 31, 2003 and 2002, outstanding automobile leases totaled $425 million and $527 million, respectively.

     Table 8 presents the composition of the Company’s loan and lease portfolio at December 31, 2003, including outstanding balances to businesses and consumers in New York State, Pennsylvania, Maryland and other states. Approximately 49% of total loans and leases at the 2003 year-end were to New York State customers, while 25% and 11% were to Pennsylvania and Maryland customers, respectively.

     Investment securities averaged $5.3 billion in 2003, compared with $3.1 billion in 2002 and $3.3 billion in 2001. The previously discussed retention of mortgage-backed securities related to the fourth quarter 2003 and 2002 securitizations of residential real estate loans of $1.2 billion and $1.1 billion, respectively, added approximately $817 million to average investment securities in 2003. Investment securities obtained in the Allfirst transaction totaled approximately $1.3 billion on April 1, 2003 and contributed approximately $887 million of 2003’s average balance of investment securities. The investment securities portfolio is largely comprised of residential and commercial mortgage-backed securities and collateralized mortgage obligations, debt securities issued by municipalities, debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions, 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 risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, or credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio following completion of a business combination. Average money-market assets, which are comprised of interest-earning deposits at banks, interest-earning trading account assets, federal funds sold and agreements to resell securities, totaled $216 million in 2003, compared with $291 million in 2002 and $80 million in 2001. The amounts of investment securities and money-market assets held by the

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Company are influenced by such factors as demand for loans, which generally yield more than investment securities and money-market assets, ongoing repayments, the level of deposits, and management of balance sheet size and resulting capital ratios.

     Core deposits represent the most significant source of funding for the Company and are comprised of noninterest-bearing deposits, interest-bearing transaction accounts, nonbrokered savings deposits and nonbrokered domestic time deposits under $100,000. The Company’s branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, N.A. are also included in core deposits. Average core deposits were $25.8 billion in 2003 and $17.6 billion in 2002 and 2001. Core deposits assumed in connection with the Allfirst acquisition totaled approximately $10.7 billion on April 1, 2003. Due to the low interest rate environment, the Company experienced a significant shift in the composition of core deposits throughout the past three years. Reflecting a change in customer saving trends, average core savings and noninterest-bearing deposits rose during that period, while average time deposits under $100,000 decreased, exclusive of the impact of core deposits obtained in the Allfirst acquisition. Average core deposits of M&T Bank, N.A. were $267 million in 2003, $342 million in 2002 and $521 million in 2001. Funding provided by core deposits represented 65% of average earning assets in 2003, compared with 61% in 2002 and 63% in 2001. Table 9 summarizes average core deposits in 2003 and percentage changes in the components of such deposits over the past two years.

     The Company also obtains funding through domestic time deposits of $100,000 or more, deposits originated through the Company’s offshore branch office, and brokered deposits. Domestic time deposits over $100,000, excluding brokered certificates of deposit, averaged $1.2 billion in 2003 and 2002, compared with $2.0 billion in 2001. Offshore branch deposits, primarily comprised of accounts with balances of $100,000 or more, averaged $1.4 billion in 2003, compared with $569 million and $327 million in 2002 and 2001, respectively. Brokered time deposits averaged $643 million in 2003, $1.9 billion in 2002 and $794 million in 2001, and totaled $827 million at December 31, 2003. The weighted-average remaining term to maturity of brokered time deposits at December 31, 2003 was 19 months. Certain of these brokered deposits have provisions that allow for early redemption. In connection with the Company’s management of interest rate risk, interest rate swaps have been entered into under which the Company receives a fixed rate of interest and pays a variable rate and that have notional amounts and terms substantially similar to the amounts and terms of $110 million of brokered time deposits. Beginning in 2002, the Company also had brokered money-market deposit accounts, which averaged $70 million in 2003 and $59 million in 2002. Offshore branch deposits and brokered deposits have been used as an alternative to short-term borrowings. Additional amounts of offshore branch deposits or brokered deposits may be solicited in the future depending on market conditions, including demand by customers and other investors for such deposits, and the cost of funds available from alternative sources at the time.

     The Company also uses borrowings from banks, securities dealers, the Federal Home Loan Bank of New York, Pittsburgh and Atlanta (together, the “FHLB”), and others as sources of funding. Short-term borrowings averaged $4.3 billion in 2003, $3.1 billion in 2002 and $3.3 billion in 2001. Amounts borrowed from the FHLB and included in short-term borrowings averaged $439 million in 2003, $904 million in 2002 and $814 million in 2001. Also included in short-term borrowings is a $500 million revolving asset-backed structured borrowing secured by automobile loans that were transferred to M&T Auto Receivables I, LLC, a special purpose subsidiary of M&T Bank formed in November 2002. The subsidiary, the loans and the borrowings are included in the consolidated financial statements of the Company. Additional information about M&T Auto Receivables I, LLC and the revolving borrowing agreement is included in note 18 of Notes to Financial Statements. The remaining short-term borrowings were predominately comprised of unsecured federal funds borrowings, which generally mature daily.

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     The average balance of long-term borrowings was $6.0 billion in 2003, $4.2 billion in 2002 and $3.5 billion in 2001. Included in average long-term borrowings were amounts borrowed from the FHLB of $3.9 billion in 2003, $3.0 billion in 2002 and $2.4 billion in 2001, and subordinated capital notes of $1.2 billion in 2003, $668 million in 2002 and $674 million in 2001. As previously noted, in anticipation of the Allfirst acquisition, M&T Bank issued $400 million of subordinated notes on March 31, 2003 to fund a portion of the cash consideration paid to AIB and to maintain appropriate regulatory capital ratios. Trust preferred securities associated with junior subordinated debentures of M&T included in average long-term borrowings totaled $595 million in 2003, compared with $318 million in 2002 and 2001. Subordinated capital notes and trust preferred securities associated with junior subordinated debentures obtained in the Allfirst acquisition on April 1, 2003 averaged $252 million and $277 million, respectively, in 2003. As described in notes 9 and 18 of Notes to Financial Statements, as of December 31, 2003 the Company applied new accounting provisions promulgated by the Financial Accounting Standards Board (“FASB”) and removed the trusts that had issued the trust preferred securities from its consolidated balance sheet. That change in financial statement presentation had no economic impact on the Company, no material or substantive impact on the Company’s financial statements as of and for the year ended December 31, 2003, and no impact on 2003’s average balances noted herein. Additional information regarding junior subordinated debentures, as well as information regarding contractual maturities of long-term borrowings, is provided in note 9 of Notes to Financial Statements. Certain interest rate swap agreements have been entered into by the Company as part of its management of interest rate risk relating to long-term borrowings. Further information on such interest rate swap agreements is provided in note 17 of Notes to Financial Statements.

     In addition to changes in the composition of the Company’s earning assets and interest-bearing liabilities, changes in interest rates and spreads can impact net interest income. Net interest spread, or the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, was 3.81% in 2003, down from 4.03% in 2002. The yield on earning assets during 2003 was 5.42%, down 100 basis points from 6.42% in 2002, while the rate paid on interest-bearing liabilities decreased 78 basis points to 1.61% from 2.39% in 2002. Lower yielding portfolios of loans and investment securities obtained in the Allfirst merger contributed to the reduced yields on earning assets in 2003 when compared with 2002 and were the leading cause for the lower year-over-year net interest spread. The decreases in interest rates earned and paid also reflect generally lower market interest rates in 2003 as compared with 2002, including the impact of reductions by the Federal Reserve of its benchmark overnight federal funds target rate of 50 basis points in November 2002 and 25 basis points in June 2003.

     The Federal Reserve also took numerous actions throughout 2001 to lower the level of interest rates by reducing its benchmark overnight federal funds target rate by 475 basis points. In general, the full-year impact of such actions combined with the 50 basis point reduction in November 2002 contributed to a greater decline in 2002’s short-term rates on deposits and borrowings as compared with the decline in yields on loans and other earning assets. As a result, the impact of changing interest rates had a positive effect on the Company’s net interest spread in 2002 as compared with 2001. The yield on the Company’s earning assets decreased 120 basis points in 2002 from 7.62% in 2001, while the rate paid on interest-bearing liabilities in 2002 was down 152 basis points from 3.91%. The impact of the more rapid repricing of interest-bearing liabilities than earning assets combined with the full-year impact of 2001’s interest rate reductions led to a 32 basis point increase in the Company’s net interest spread, from 3.71% in 2001 to 4.03% in 2002.

     Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders’ equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit and other intangible assets. Average net interest-free funds totaled $6.8 billion in 2003, $4.0 billion in 2002 and $3.7 billion in 2001. The higher level of average net interest-free funds in 2003 was due largely to the impact of the Allfirst

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acquisition, which provided, on average for 2003, noninterest-bearing deposits of $2.8 billion and stockholders’ equity of $1.5 billion, partially offset by goodwill and core deposit and other intangible assets of $1.5 billion and bank owned life insurance of $214 million. The increase in average net interest-free funds in 2002 as compared with 2001 was largely the result of higher levels of noninterest-bearing deposits and stockholders’ equity. Goodwill and core deposit and other intangible assets averaged $2.7 billion in 2003, $1.2 billion in 2002 and $1.3 billion in 2001. The cash surrender value of bank owned life insurance averaged $858 million in 2003, $604 million in 2002 and $573 million in 2001. Increases in the cash surrender value of bank owned life insurance are not included in interest income, but rather are recorded in “other revenues from operations.” The contribution of net interest-free funds to net interest margin was .28% in 2003, compared with .33% in 2002 and .52% in 2001. The decline in the contribution to net interest margin ascribed to net interest-free funds in 2003 and 2002 compared with 2001 resulted largely from the impact of lower interest rates on interest-bearing liabilities used to value such contribution, offset, in part, by higher balances of net interest-free funds. Reflecting the changes to the net interest spread and the contribution of interest-free funds as described herein, the Company’s net interest margin was 4.09% in 2003, compared with 4.36% in 2002 and 4.23% in 2001. As noted previously, lower yielding portfolios of loans and investment securities obtained in the Allfirst acquisition contributed to the lower net interest margin in 2003 as compared with 2002. Nevertheless, the net interest margin declined in each quarter of 2003. As a result, the net interest margin of 3.96% in 2003’s fourth quarter was the lowest quarterly net interest margin earned by the Company since the first quarter of 2000.

     The Company’s net interest income and net interest margin could be adversely impacted by future changes in market interest rates or spreads, as well as changes in the composition of the Company’s portfolios of earning assets and interest-bearing liabilities that result in reductions in spreads. Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under several interest rate scenarios. In managing interest rate risk, the Company utilizes interest rate swap agreements to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. Periodic settlement amounts arising from these agreements are generally reflected in either the yields earned on assets or, as appropriate, the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes as of December 31, 2003 was $685 million. In general, under the terms of these swap agreements, the Company receives payments based on the outstanding notional amount of the swaps at fixed rates of interest and makes payments at variable rates.

     As of December 31, 2003, all of the Company’s interest rate swap agreements entered into for risk management purposes had been designated as fair value hedges. In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the Company’s consolidated statement of income. In a cash flow hedge, unlike in a fair value hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in “other revenues from operations” immediately. The amounts of hedge ineffectiveness of both fair value and cash flow hedges recognized in 2003, 2002 and 2001 were not material to the Company’s results of operations. The estimated fair values of interest rate swap agreements designated as fair value hedges represented a loss of approximately $1 million at December 31, 2003, compared with a gain of $8 million at December 31, 2002. The fair values of such swap agreements were substantially offset by changes in the fair values of the hedged items. The estimated fair value of the

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interest rate swap agreements designated as cash flow hedges was a loss of approximately $1 million at December 31, 2002. Net of applicable income taxes, such loss was approximately $622 thousand and was included in “accumulated other comprehensive income, net” in the Company’s consolidated balance sheet as of December 31, 2002. The changes in the fair values of the interest rate swap agreements and the hedged items result from the effects of changing interest rates. The average notional amounts of interest rate swap agreements entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average rate paid or received on those swaps are presented in table 10.

Provision For Credit Losses

The Company maintains an allowance for credit losses that in management’s judgment is adequate to absorb losses inherent in the loan and lease portfolio. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. The provision for credit losses was $131 million in 2003, up from $122 million in 2002 and $104 million in 2001. Net loan charge-offs were $97 million in 2003, compared with $108 million and $75 million in 2002 and 2001, respectively. Net loan charge-offs as a percentage of average loans outstanding were .28% in 2003, compared with .42% in 2002 and      .31% in 2001. Net charge-offs in 2003 of loans acquired from Allfirst were not significant. A summary of loan charge-offs, provision and allowance for credit losses is presented in table 11.

     Nonperforming loans consist of nonaccrual and restructured loans and aggregated $240 million or .67% of loans and leases outstanding at December 31, 2003, compared with $215 million or .84% at December 31, 2002 and $190 million or .76% at December 31, 2001. The increase in the amount of loans classified as nonperforming at December 31, 2003 as compared with a year earlier reflects the inclusion of approximately $67 million of such loans obtained in the Allfirst acquisition. The higher level of nonperforming loans at December 31, 2002 compared with December 31, 2001 was largely the result of the inclusion at the 2002 year-end of three commercial loans totaling $49 million that were classified as nonperforming during 2002. Outstanding balances relating to those same three loans included in nonperforming loans at December 31, 2003 totaled $33 million, including a $17 million portion obtained in the acquisition of Allfirst. That $17 million is included in the $67 million of nonperforming loans noted above.

     Loans past due 90 days or more and accruing interest totaled $155 million or .43% of total loans and leases at December 31, 2003, compared with $154 million or .60% at December 31, 2002 and $147 million or .58% at December 31, 2001. Such loans at the recent year-end include $17 million of accruing loans past due 90 days or more obtained in the Allfirst transaction. Accruing loans past due 90 days or more also included $118 million, $123 million and $108 million at December 31, 2003, 2002 and 2001, respectively, of one-to-four family residential mortgage loans serviced by the Company and repurchased from the Government National Mortgage Association (“GNMA”). The outstanding principal balances of the repurchased loans are fully guaranteed by government agencies. The loans were repurchased to reduce servicing costs associated with them, including a requirement to advance principal and interest payments that had not been received from individual mortgagors. A summary of nonperforming assets and certain past due loan data is presented in table 12.

     Factors that influence the Company’s credit loss experience include overall economic conditions affecting businesses and consumers, in general, and, due to the size of the Company’s commercial real estate loan portfolio, real estate valuations, in particular. Commercial real estate valuations can be highly subjective, as they are based upon many assumptions. Such values can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates, and, in many cases, the results of operations of businesses and other occupants of the real property.

     Net charge-offs of commercial real estate loans in 2003 were $6 million,

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compared with $7 million in 2002 and $5 million in 2001. Nonperforming commercial real estate loans totaled $48 million at December 31, 2003, compared with $49 million and $39 million at December 31, 2002 and 2001, respectively. Commercial real estate loans obtained in the acquisition of Allfirst classified as nonperforming at December 31, 2003 were $4 million.

     Commercial loans and leases charged off during 2003 and 2001, net of recoveries, totaled $32 million, compared with $54 million in 2002. Included in 2002’s net charge-offs was the entire $17 million outstanding balance of two leases to a major airline company that filed for bankruptcy protection in the third quarter of that year. Nonperforming commercial loans and leases totaled $120 million at December 31, 2003, $102 million a year earlier and $85 million at December 31, 2001. Commercial loans and leases obtained in the acquisition of Allfirst classified as nonperforming at December 31, 2003 were $45 million.

     During 2003 and 2002, net charge-offs of residential real estate loans were $5 million, compared with $4 million in 2001. Residential real estate loans classified as nonperforming at December 31, 2003 totaled $51 million, compared with $37 million and $35 million at December 31, 2002 and 2001, respectively. Residential real estate loans past due 90 days or more and accruing interest totaled $141 million, $142 million and $135 million at December 31, 2003, 2002 and 2001, respectively. As already noted, a substantial portion of such amounts relate to loans repurchased from GNMA which are fully guaranteed by government agencies. Residential real estate loans obtained in the Allfirst acquisition classified as nonperforming and past due 90 days or more and accruing interest aggregated $13 million and $7 million, respectively, at December 31, 2003.

     Net charge-offs of consumer loans and leases were $54 million in 2003, representing .53% of average consumer loans and leases outstanding during the year, compared with $42 million or .62% in 2002 and $34 million or .61% in 2001. Indirect automobile loans and leases represented the most significant category of consumer loan charge-offs in each of the past three years. Net indirect automobile loan and lease charge-offs during 2003 were $32 million, compared with $21 million and $12 million in 2002 and 2001, respectively. Consumer loans and leases classified as nonperforming totaled $21 million or      .19% of outstanding consumer loans and leases at December 31, 2003, compared with $27 million or .37% at December 31, 2002 and $31 million or .51% at December 31, 2001. Consumer loans and leases past due 90 days or more and accruing interest totaled $3 million at December 31, 2003 and 2002, and $5 million at December 31, 2001. Consumer loans and leases obtained in the Allfirst transaction classified as nonperforming and past due 90 days or more and accruing interest totaled $5 million and $1 million, respectively, at December 31, 2003.

     The Company maintains an allowance for credit losses which it believes is adequate to absorb losses inherent in the loan and lease portfolio as of each respective balance sheet date. Management regularly assesses the adequacy of the allowance by performing ongoing evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the current financial condition of specific borrowers, the economic environment in which borrowers operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or indemnifications. Management evaluated the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet repayment obligations when quantifying the Company’s exposure to credit losses and assessing the adequacy of the Company’s allowance for such losses as of each reporting date. Factors also considered by management when performing its assessment, in addition to general economic conditions and the other factors described above, included, but were not limited to: (i) the concentration of commercial real estate loans in the Company’s loan portfolio, particularly the large concentration of loans secured by properties in New York State, in general, and in the New York City metropolitan area, in particular; (ii) the amount of commercial and industrial loans to businesses in areas of New York State outside of the New York City metropolitan area and in central Pennsylvania that have historically experienced less economic

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growth and vitality than the vast majority of other regions of the country; (iii) significant growth in loans to individual consumers, which historically have experienced higher net charge-offs as a percentage of loans outstanding than other loan types; and (iv) the large portfolios of loans obtained in the acquisition of Allfirst which management continues to evaluate in accordance with the Company’s policies and procedures for credit underwriting, loan classification, and measurement of exposure to loss. The level of the allowance for credit losses is adjusted based on the results of management’s analysis.

     Management cautiously and conservatively evaluated the allowance for credit losses as of December 31, 2003 in light of (i) the uncertain status of the overall economic recovery; (ii) the mixed economic indicators being proffered by government economists and others; and (iii) given the relative size of the acquired Allfirst loan portfolios, the status of management’s ongoing detailed credit reviews of such portfolios. Although there are signs that the national economy has improved and optimism about its future outlook is growing, concerns exist about stagnant job growth, which could cause consumer spending to slow; higher interest rates, which could adversely impact the housing market; continued stagnant population growth in the upstate New York and central Pennsylvania regions; and sluggish commercial loan demand.

     In ascertaining the adequacy of the allowance for credit losses, the Company estimates losses attributable to specific troubled credits and also estimates losses inherent in other loans and leases. The total allowance for credit losses, therefore, includes both specific and inherent base level loss components, as well as inherent unallocated loss components. The following paragraphs describe these components.

     The amount of specific loss components in the Company’s loan and lease portfolios is determined through a loan by loan analysis of all commercial and commercial real estate loans which are in nonaccrual status. Specific loss components are also established for certain classified commercial loans and leases and commercial real estate loans greater than $250,000 when it is determined that there is a differing risk of loss than otherwise prescribed under the inherent base level loss component calculation. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. Impaired loans, as defined in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended, are evaluated for specific loss components. Except for consumer loans and leases and residential real estate loans that are considered smaller balance homogeneous 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 or more. Loans less than 90 days delinquent are deemed to have a minimum delay in payment and are generally not considered to be impaired.

     The inherent base level loss components are generally determined by applying loss factors to specific loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. The Company utilizes a loan grading system which is applied to all commercial and commercial real estate credits. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also extensively monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards.

     Loan balances utilized in the inherent base level loss component computations exclude loans and leases for which specific allocations are maintained. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Items considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral value, financial condition, payment status, and other factors; levels of and

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trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; national and local economic conditions and trends; and observed trends and practices in the banking industry.

     The specific loss components and the inherent base level loss components together comprise the total base level or “allocated” allowance for credit losses. Such allocated portion of the allowance represents management’s assessment of near-term charge-offs and losses existing in specific larger balance loans that are reviewed in detail by management and pools of other loans that are not individually analyzed.

     The inherent unallocated portion of the allowance is intended to provide for probable losses that are not otherwise identifiable. The inherent unallocated allowance includes management’s subjective determination of amounts necessary for such things as economic uncertainties; customer, industry and geographic concentrations; and expansion into new products and market areas. The unallocated portion of the allowance is intended to provide for probable losses that are not otherwise identifiable resulting from (i) comparatively poorer economic conditions and an unfavorable business climate in many market regions served by the Company, specifically New York State and central Pennsylvania, that resulted in such regions not having experienced the same degree of economic growth in previous years as experienced by much of the rest of the country; (ii) portfolio concentrations regarding loan type, collateral type and geographic location, in particular the large concentration of commercial real estate loans secured by properties in the New York City metropolitan area and other areas of New York State; (iii) the effect of expansion into new markets, including market areas entered through acquisitions; (iv) the introduction of new loan and lease product types, including loans and leases to foreign and domestic borrowers obtained through acquisitions; (v) additional risk associated with growth in the Company’s portfolio of consumer loans in recent years, in particular automobile loans and leases, which generally have higher rates of loss than other types of collateralized loans; (vi) the possible use of imprecise estimates in determining the allocated portion of the allowance; and (vii) additional uncertainty resulting from acquired loan portfolios to be fully analyzed by the Company’s loan review department in order to become familiar with the underlying characteristics of the portfolios and specific borrowers.

     Commercial real estate valuations include many assumptions and, as a result, can be highly subjective. Commercial real estate values in the New York City metropolitan area can be significantly affected over relatively short periods of time by changes in business climate, economic conditions and interest rates, and, in many cases, the results of operations of businesses and other occupants of the real property. The tragic events of September 11, 2001 further dampened the economic outlook for the United States, which in 2001 and 2002 experienced its first significant downturn in many years. The economies of New York State, and New York City in particular, were specifically damaged by the events of September 11, 2001. Economic performance of the most significant market regions served by the Company during 2003 was mixed. Private sector job growth in the upstate New York market approximated the national average (which was a slight decline from 2002). The manufacturing-oriented metropolitan areas of Buffalo, Rochester and Syracuse continued to experience weakness, including announced corporate layoffs in those areas. In the Hudson-Valley region of New York State, private sector job growth was more than one full percentage point higher than the national average (1.4% compared with job loss of .2% nationally). Also better than the national average for private sector job growth were the Maryland, northern Virginia and southeastern Pennsylvania regions, whereas the Binghamton, New York and eastern Pennsylvania regions, largely manufacturing-oriented, lagged the national average. These mixed signals on private sector job growth, combined with concerns about higher interest rates, high levels of consumer indebtedness, lack of population growth in the upstate New York and central Pennsylvania regions and other factors, continue to indicate an environment of economic uncertainty, both in the markets the Company serves and for the national economy.

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     Table 13 presents a comparative allocation of the allowance for credit losses for each of the past five year-ends. Amounts were allocated to specific loan categories based on information available to management at the time of each year-end assessment and using the methodology described herein. Variations in the allocation of the allowance by loan category as a percentage of those loans reflect changes in management’s estimate of specific loss components and inherent base level loss components. As described in note 4 of Notes to Financial Statements, loans considered impaired pursuant to the requirements of SFAS No. 114 were $164 million at both December 31, 2003 and 2002. The allocated portion of the allowance for credit losses related to impaired loans was $26 million and $18 million at December 31, 2003 and 2002, respectively. The unallocated portion of the allowance for credit losses was equal to .29% and .19% of gross loans outstanding at December 31, 2003 and 2002, respectively. The increase in the unallocated allowance as a percentage of loans from the 2002 year-end to December 31, 2003 reflects the factors already described, including prolonged uncertainty about regional and national economic conditions and the status of management’s ongoing credit reviews of the loans obtained in the acquisition of Allfirst. As already noted, management continues to evaluate the loan portfolios obtained in the Allfirst transaction in accordance with the Company’s credit policies and procedures. The slight decrease in the unallocated portion of the allowance from December 31, 2001 to December 31, 2002 reflects the modest impact of improving economic conditions near 2002’s year-end. Given the Company’s high concentration of commercial loans and commercial real estate loans in New York State, including the upstate New York region, and central Pennsylvania, and considering the other factors already discussed herein, management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable. Nevertheless, the Company’s allowance is general in nature and is available to absorb losses from any loan or lease category.

     Management believes that the allowance for credit losses at December 31, 2003 was adequate to absorb credit losses inherent in the portfolio as of that date. The allowance for credit losses was $614 million or 1.72% of total loans and leases at December 31, 2003, compared with $436 million or 1.70% at December 31, 2002 and $425 million or 1.69% at December 31, 2001. On the April 1, 2003 acquisition date, Allfirst had an allowance for credit losses of $146 million, or 1.43% of Allfirst’s loans then outstanding. Immediately following the acquisition, the combined balance sheet of M&T and Allfirst included an allowance for credit losses of $591 million, or 1.62% of the $36.5 billion of then outstanding loans. The ratio of the allowance to nonperforming loans at the end of 2003, 2002 and 2001 was 256%, 203% and 223%, respectively. The level of the allowance reflects management’s evaluation of the loan and lease portfolio as of each respective date.

     Commercial real estate loans secured by multifamily properties in the New York City metropolitan area represented 4% of loans outstanding at December 31, 2003. The Company had no concentrations of credit extended to any specific industry that exceeded 10% of total loans at December 31, 2003. Outstanding loans to foreign borrowers were $218 million at December 31, 2003, or .6% of total loans and leases, of which $216 million were obtained in the Allfirst transaction.

     Assets acquired in settlement of defaulted loans totaled $20 million at December 31, 2003, compared with $17 million a year earlier and $16 million at the end of 2001.

Other Income

Other income grew 62% to $831 million in 2003 from $512 million in 2002. Approximately $279 million of the increase was attributable to revenues related to operations or market areas associated with the former Allfirst franchise. Higher mortgage banking revenues and service charges on deposit accounts also contributed to the improvement. Other income in 2002 was 7% higher than the $477 million earned in 2001. Growth in revenues from providing deposit account and mortgage banking services significantly contributed to that increase.

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     Mortgage banking revenues were $149 million in 2003, $116 million in 2002 and $103 million in 2001. Mortgage banking revenues are comprised of both residential and commercial mortgage banking activities. The Company’s involvement in commercial mortgage banking activities are largely comprised of the origination, sales and servicing of loans in conjunction with the FNMA DUS program, which, as noted earlier, were operations acquired in the Allfirst transaction.

     Residential mortgage banking revenues, which are comprised of gains from sales of residential mortgage loans and loan servicing rights, residential mortgage loan servicing fees, and other residential mortgage loan-related fees and income, rose 11% to $129 million in 2003 from $116 million in 2002. Mortgage banking revenues in 2002 were 13% higher than $103 million in 2001. The higher revenues in 2002 and 2003 were due to the impact of historically low levels of interest rates that produced a favorable environment for loan origination and refinancing activities by consumers. Residential mortgage loans originated for sale to other investors totaled approximately $5.9 billion in 2003, compared with $5.7 billion and $5.0 billion in 2002 and 2001, respectively. Realized gains from sales of residential mortgage loans and loan servicing rights and unrealized gains from recording residential mortgage loans held for sale, commitments to originate loans for sale and commitments to sell loans at fair market value aggregated $65 million in 2003, $54 million in 2002 and $50 million in 2001. Revenues from servicing residential mortgage loans for others were $54 million in 2003, up from $53 million in 2002 and $44 million in 2001. Included in such servicing revenues were amounts related to purchased servicing rights associated with small balance commercial mortgage loans totaling $5 million, $4 million and $1 million in 2003, 2002 and 2001, respectively. Residential mortgage loans serviced for others totaled $13.6 billion at December 31, 2003, $12.6 billion at December 31, 2002 and $11.0 billion at December 31, 2001, including the small balance commercial mortgage loans noted above of approximately $1.0 billion, $586 million and $222 million at December 31, 2003, 2002 and 2001, respectively. Capitalized residential mortgage servicing assets, net of a valuation allowance for possible impairment, totaled $129 million at December 31, 2003, $103 million a year earlier and $107 million at December 31, 2001. Included in capitalized residential mortgage servicing assets were $8 million at December 31, 2003, $6 million a year earlier and $2 million at December 31, 2001 of purchased servicing rights associated with the small balance commercial mortgage loans noted above. Additional information about the Company’s capitalized residential mortgage servicing assets is presented herein under the heading “Other Expense” and in note 7 of Notes to Financial Statements. Commitments to sell residential mortgage loans and commitments to originate residential mortgage loans for sale at pre-determined rates were $824 million and $459 million, respectively, at December 31, 2003, $1.5 billion and $825 million, respectively, at December 31, 2002 and $1.3 billion and $714 million, respectively, at December 31, 2001. Net unrealized gains on residential mortgage loans held for sale, commitments to sell loans, and commitments to originate loans for sale were $7 million, $15 million and $8 million at December 31, 2003, 2002, and 2001, respectively. Increases in such net unrealized gains in 2002 and 2001 added $7 million and $8 million, respectively, to mortgage banking revenues, while an $8 million decline in net unrealized gains reduced mortgage banking revenues in 2003.

     Commercial mortgage banking revenues were $20 million in 2003, including $13 million of revenues from loan origination and sales activities and $7 million of mortgage loan servicing revenues. Commercial mortgage banking revenues in 2003 were predominantly related to the business obtained in the Allfirst acquisition. Capitalized commercial mortgage servicing assets totaled $22 million at December 31, 2003. Commercial mortgage loans serviced for other investors totaled $3.8 billion at December 31, 2003 and included $825 million of loan balances for which investors had recourse to the Company if such balances are ultimately uncollectible. At December 31, 2003, commitments to sell commercial mortgage loans were $72 million, commitments to originate commercial mortgage loans for sale were $71 million and commercial mortgage loans held for sale were $1 million.

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     Service charges on deposit accounts rose 85% to $310 million in 2003 from $168 million in 2002. Fees for deposit services provided to customers in areas formerly served by Allfirst contributed $127 million to such revenue in 2003. The remaining increase was largely attributable to increased fees for check processing services on retail customer transaction accounts. Service charges in 2002 were up 16% from $144 million in 2001. Higher transactional deposit account balances, which generate higher levels of service charges than non- transactional accounts, contributed to the higher service charge income levels in 2002.

     Trust income includes fees for trust and custody services provided to personal, corporate and institutional customers, and investment management and advisory fees that are often based on a percentage of the market value of assets under management. Trust income rose 91% to $115 million in 2003 from $60 million in 2002, and included $55 million of revenues associated with the operations acquired in the Allfirst transaction. During 2003, increases in market values of equity securities were offset by lower managed balances of proprietary mutual funds. Reflecting general declines in market values of equity securities, trust income declined 7% in 2002 from $64 million in 2001. Total trust assets, which include assets under management and assets under administration, were $134.5 billion at December 31, 2003, compared with $42.8 billion at December 31, 2002. Trust assets under management totaled $24.4 billion and $8.5 billion at December 31, 2003 and 2002, respectively. Brokerage services income, which includes revenues from the sale of mutual funds and annuities and securities brokerage fees, totaled $51 million in 2003, an increase of 18% from $43 million in 2002. The improvement was the result of revenues from the former Allfirst regions. Higher revenues from sales of annuity products contributed to a 10% increase in brokerage services income in 2002 from $39 million in 2001.

     Trading account and foreign exchange activity resulted in gains of $16 million in 2003, $3 million in 2002 and $4 million in 2001. The increased gains in 2003 as compared with the prior years were due in part to higher volumes of trading assets and liabilities in 2003 and reflect fees and market value changes relating to interest rate swap agreements and foreign exchange contracts executed with customers formerly associated with Allfirst. Offsetting trading positions are entered into by the Company to minimize the risks involved with these transactions. Also contributing to the rise in such gains in 2003 were market value increases of $6 million in trading assets held in connection with deferred compensation plans. A largely offsetting expense resulting from corresponding increases in deferred compensation-related liabilities is included in other costs of operations. Trading account assets held in connection with deferred compensation plans were $39 million and $12 million at December 31, 2003 and 2002, respectively. The Company sold bank investment securities resulting in gains of $2 million in 2003 and 2001, compared with losses of $608 thousand in 2002.

     Other revenues from operations were $188 million in 2003, up from $122 million in 2002 and $120 million in 2001. Included in the 2003 total was approximately $58 million of revenues related to operations acquired from Allfirst. Also contributing to the year-over-year increase were higher revenues from merchant discount and credit card activities and letter of credit and other credit-related fees. The previously described $5 million gain on the sale of the 12% portion of the residential real estate loans that were securitized in November 2002 offset, in part, by lower benefits income from bank owned life insurance, contributed to the increase in other revenues from operations from 2001 to 2002.

     Other revenues from operations included $45 million ($12 million Allfirst-related), $33 million and $35 million in 2003, 2002 and 2001, respectively, of tax-exempt income earned from bank owned life insurance, which includes increases in cash surrender value of life insurance policies and benefits received. Revenues from merchant discount and credit card fees totaled $26 million in 2003 ($7 million Allfirst-related), and $13 million in 2002 and 2001. Letter of credit and other credit-related fees were $54 million ($24 million Allfirst-related), $26 million and $24 million in 2003, 2002 and 2001, respectively. Insurance-related sales commissions and other revenues totaled

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$18 million in 2003, compared with $15 million and $13 million in 2002 and 2001, respectively. ATM usage fees aggregated $19 million ($6 million Allfirst-related) in 2003, compared with $12 million in 2002 and $11 million in 2001.

Other Expense

Other expense totaled $1.45 billion in 2003, 51% higher than $962 million in 2002 and up 48% from $981 million in 2001. Included in the amounts noted above are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $78 million, $51 million and $60 million in 2003, 2002 and 2001, respectively; amortization of goodwill of $62 million in 2001; and merger-related expenses of $60 million and $8 million in 2003 and 2001, respectively. There were no merger-related expenses in 2002. Exclusive of those nonoperating expenses, noninterest operating expenses aggregated $1.31 billion in 2003, up 44% from $910 million in 2002. The April 1, 2003 acquisition of Allfirst was the predominant factor contributing to the higher expense level in 2003. However, since the acquired operations of Allfirst were integrated with the operations the Company previously had throughout the last nine months of 2003, the Company’s higher operating expenses cannot be precisely divided between or attributed directly to the acquired operations of Allfirst or to the Company as it existed prior to the transaction. Partially offsetting those higher expenses was a $30 million decline in charges for impairment of capitalized residential mortgage servicing rights. Such impairment charges were $2 million in 2003 and $32 million in 2002. Noninterest operating expenses in 2002 were 7% higher than $851 million in 2001. The $32 million provision for impairment of capitalized residential mortgage servicing rights and higher costs for salaries, including commissions and incentive compensation, largely contributed to the higher level of noninterest operating expenses in 2002 as compared with the preceding year. There was no provision for impairment of capitalized mortgage servicing rights in 2001. Table 3 provides a reconciliation of other expense to noninterest operating expense and a summary of merger-related expenses.

     Salaries and employee benefits expense was $740 million in 2003, an increase of 49% from $497 million in 2002. As already discussed, the Company began recognizing expense for stock-based compensation effective January 1, 2003. As a result, salaries and employee benefits expense in 2003 included $43 million of stock-based compensation. Using the retroactive restatement method prescribed by SFAS No. 148, salaries and employee benefits expense for 2002 and 2001 were restated to include $41 million and $32 million, respectively, of stock-based compensation. Expenses related to the acquired operations of Allfirst were the leading contributors to the rise in salaries and employee benefits from 2002 to 2003. Also contributing to the higher expense level in 2003 were higher pension costs. Salaries and employee benefits expense in 2002 was 6% higher than $467 million in 2001. That higher level of expense was largely the result of merit salary increases, higher commissions and incentive compensation costs, the $9 million increase in stock-based compensation referred to earlier, and higher pension costs. Pension benefit expense was $24 million in 2003, $6 million in 2002, and $2 million in 2001. Approximately $10 million of 2003’s expense was directly attributable to former Allfirst employees working for the Company.

     Investment returns on assets held by the Company’s qualified pension plans improved significantly in 2003 reflecting the overall improvement in the equity markets. However, largely as a result of a 50 basis point decline in the discount rate used to value pension plan obligations from 6.75% at December 31, 2002 to 6.25% at December 31, 2003, the accumulated benefit obligation of certain of the Company’s pension plans exceeded the fair value of the assets of such plans by approximately $46 million at December 31, 2003. The lower discount rate resulted from declines in market rates of return on high quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. The Company estimates that as of December 31, 2003, accumulated benefit obligations would increase by approximately $19 million for an incremental 25 basis point reduction in the assumed discount rate. According to the provisions of SFAS

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No. 87, “Employers’ Accounting for Pensions,” the Company was required to have a recorded pension liability that was at least equal to the $46 million noted above. As a result, as of December 31, 2003 the Company increased its previously recorded pension liability by $20 million with a corresponding reduction of other comprehensive income that, net of applicable deferred taxes, was approximately $12 million. The Company did not make any contributions to its qualified pension plans in 2003. In 2002, as a result of poor investment performance, the Company contributed $19 million to its qualified pension plans during that year’s fourth quarter. That was the first pension plan contribution made by the Company since 1995. As a result of such contribution, there was no excess of accumulated benefit obligation over the fair value of assets held by the Company’s qualified pension plans as of December 31, 2002. Information about the Company’s pension plans, including significant assumptions utilized in completing actuarial calculations for the plans, is included in note 11 of Notes to Financial Statements. Pension expense for 2004 is estimated to be approximately $35 million. The number of full-time equivalent employees was 13,305 at December 31, 2003, compared with 8,726 and 8,803 at December 31, 2002 and 2001, respectively.

     Excluding the nonoperating expense items previously noted, nonpersonnel operating expenses totaled $578 million in 2003, 40% higher than $413 million in 2002. Nonpersonnel operating expenses were $384 million in 2001. The impact of the Allfirst acquisition was the most significant contributor to the higher nonpersonnel operating expense level in 2003 as compared with 2002. Higher expenses for amortization of capitalized residential mortgage servicing rights and professional services also contributed to the increased expenses in 2003. Partially offsetting the higher expenses were lower charges for impairment of capitalized residential mortgage servicing rights, which totaled $2 million in 2003 and $32 million in 2002. The impairment charges resulted from changes in the estimated fair value of capitalized mortgage servicing rights that reflect the impact of changing interest rates on the expected rate of residential mortgage prepayments. The most significant factor contributing to the rise in nonpersonnel operating expenses in 2002 as compared with 2001 was the aforementioned $32 million provision for impairment of capitalized residential mortgage servicing rights. There was no such provision during the year ended December 31, 2001. Higher amortization of capitalized residential mortgage servicing rights also contributed to the higher expense levels in 2002 as compared with 2001. Such amortization charges were $48 million in 2003, $40 million in 2002, and $32 million in 2001.

Income Taxes

The provision for income taxes was $277 million in 2003, compared with $219 million in 2002 and $199 million in 2001. The effective tax rates were 32.5% in 2003, 32.4% in 2002 and 36.0% in 2001. The lower tax rates in 2003 and 2002 as compared with 2001 were the result of the Company ceasing to amortize non-deductible goodwill in connection with the implementation of SFAS No. 142 effective January 1, 2002. A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to pre-tax income is provided in note 12 of Notes to Financial Statements.

International Activities

The Company’s net investment in international assets was $229 million at December 31, 2003 and $6 million at December 31, 2002. The increase in such assets included $216 million of loans to foreign borrowers associated with business activities obtained in the acquisition of Allfirst. Offshore deposits totaled $2.2 billion at December 31, 2003 and $1.2 billion at December 31, 2002. The Company uses such deposits to facilitate customer demand and as an alternative to short-term borrowings when the costs of such deposits seem reasonable.

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Liquidity, Market Risk, and Interest Rate Sensitivity

As a financial intermediary the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Company’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, operating costs, and other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ.

     Core deposits have historically been the most significant funding source for the Company and 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. Core deposits financed 65% of the Company’s earning assets at December 31, 2003, compared with 60% and 62% at December 31, 2002 and 2001, respectively.

     The Company supplements funding provided through core deposits with various short-term and long-term wholesale borrowings, including federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, offshore branch deposits and borrowings from the FHLB and others. M&T Bank had short-term and long-term credit facilities with the FHLB aggregating $6.2 billion at December 31, 2003. Outstanding borrowings under these credit facilities totaled $3.1 billion and $4.2 billion at December 31, 2003 and 2002, respectively. Such borrowings are secured by loans and investment securities. M&T Bank and M&T Bank, N.A. had available lines of credit with the Federal Reserve Bank of New York at December 31, 2003 totaling approximately $2.2 billion. The amounts of these lines are dependent upon the balance of loans and securities pledged as collateral. There were no borrowings outstanding under these lines of credit at either December 31, 2003 or 2002.

     As previously noted, in anticipation of the Allfirst acquisition, M&T Bank issued $400 million of subordinated notes on March 31, 2003 to provide liquidity to fund a portion of the cash consideration paid to AIB and to maintain appropriate regulatory capital ratios. As an additional source of funding, in November 2002, the Company entered into a $500 million revolving asset-backed structured borrowing which is collateralized by approximately $559 million of automobile loans and related assets. The automobile loans and related assets have been transferred to a special purpose consolidated subsidiary of M&T Bank. As existing automobile loans of the subsidiary pay down, monthly proceeds, after payment of certain fees and debt service costs, are used by the subsidiary to obtain additional automobile loans from M&T Bank or another of its subsidiaries to replenish the collateral and maintain the existing borrowing base. Additional information about this borrowing is included in note 18 of Notes to Financial Statements.

     Informal and sometimes reciprocal sources of funding are available to the Company through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions. Short-term federal funds borrowings aggregated $3.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively. In general, these borrowings were unsecured and matured on the next business day.

     Should the Company experience a substantial deterioration in its financial condition or its debt ratings, or should the availability of short-term funding become restricted due to a disruption in the financial markets, the Company’s ability to obtain funding from these or other sources could be negatively impacted. The Company attempts to quantify such credit-event risk by modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade over various grading levels. The Company estimates such impact by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources

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and securitizable assets. Information about the credit ratings of M&T and M&T Bank is presented in table 14. Additional information regarding the terms and maturities of all of the Company’s short-term and long-term borrowings is provided in note 9 of Notes to Financial Statements. In addition to deposits and borrowings, other sources of liquidity include maturities of money-market assets and investment securities, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services.

     The Company serves in the capacity of remarketing agent for variable rate demand bonds (“VRDBs”), in a line of business obtained in the Allfirst acquisition. The VRDBs are enhanced by a direct-pay letter of credit provided by M&T Bank. Holders of the VRDBs generally have the right to sell the bonds to the remarketing agent with seven days notice, which could result in M&T Bank owning the VRDBs for some period of time until such instruments are remarketed. When this occurs, the VRDBs are classified as trading assets in the Company’s consolidated balance sheet. The value of VRDBs in the Company’s trading account totaled $22 million at December 31, 2003. As of December 31, 2003, the total amount of VRDBs outstanding backed by an M&T Bank letter of credit was $1.3 billion.

     The Company enters into contractual obligations in the normal course of business which require future cash payments. As of December 31, 2003, the contractual amounts and timing of those payments are summarized in table 15. The Company also has off-balance sheet commitments to customers that may impact liquidity, including commitments to extend credit, standby letters of credit, commercial letters of credit, financial guarantees and indemnification contracts, and commitments to sell real estate loans. Since many of these commitments or contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. Further discussion of these commitments is provided in note 20 of Notes to Financial Statements. Table 15 summarizes the Company’s other commitments as of December 31, 2003 and the timing of the expiration of such commitments.

     M&T’s primary source of funds to pay for operating expenses, shareholder dividends and treasury stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the two preceding years. For purposes of the test, at December 31, 2003 approximately $696 million was available for payment of dividends to M&T from banking subsidiaries without prior regulatory approval. These historic sources of cash flow have been augmented in the past by the issuance of trust preferred securities. Information regarding trust preferred securities and the related junior subordinated debentures is included in note 9 of Notes to Financial Statements. M&T also maintains a $30 million line of credit with an unaffiliated commercial bank, of which there were no borrowings outstanding at December 31, 2003. A similar $30 million line of credit was entirely available for borrowing at December 31, 2002.

     On an ongoing basis, management closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. Management does not anticipate engaging in any activities, either currently or in the long-term, for which adequate funding would not be available and would therefore result in a significant strain on liquidity at either M&T or its subsidiary banks.

     Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Company’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Company to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability

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of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and derivatives used to hedge interest rate risk. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities, and expected maturities of investment securities, loans and deposits. Management uses a “value of equity” model to supplement the modeling technique described above. Those supplemental analyses are based on discounted cash flows associated with on- and off-balance sheet financial instruments. Such analyses are modeled to reflect changes in interest rates and non-parallel shifts in the maturity curve of interest rates and provide management with a long-term interest rate risk metric. The Company has entered into interest rate swap agreements to help manage exposure to interest rate risk. At December 31, 2003, the aggregate notional amount of interest rate swap agreements entered into for interest rate risk management purposes was $685 million. Information about interest rate swap agreements entered into for interest rate risk management purposes is included herein under “Net Interest Income/Lending and Funding Activities” and in note 17 of Notes to Financial Statements.

     The Company’s Asset-Liability Committee, which includes members of senior management, monitors interest rate sensitivity with the aid of a computer model that considers the impact of ongoing lending and deposit-gathering activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and modifying or terminating existing interest rate swap agreements or other financial instruments used for risk management purposes.

     Table 19 as of December 31, 2003 and 2002 displays the estimated impact on net interest income from non-trading financial instruments resulting from parallel changes in interest rates across repricing categories during the first modeling year.

     Many assumptions were utilized by the Company to calculate the impact that changes in interest rates may have on net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. The Company also assumed gradual changes in rates during a twelve-month period, including incremental 100 and 200 basis point rate changes. In the event that a 100 or 200 basis point rate change cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude and frequency of changes in interest rates, market conditions, and interest rate differentials (spreads) between and within maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Company’s past or projected net interest income.

     In accordance with industry practice, table 20 presents cumulative totals of net assets (liabilities) repricing on a contractual basis within the specified time frames, as adjusted for the impact of interest rate swap agreements entered into for interest rate risk management purposes. Management believes that this measure does not appropriately depict interest

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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.

     The Company has historically engaged in trading activities to meet the financial needs of customers, to fund the Company’s obligations under certain deferred compensation plans and, to a limited extent, to profit from perceived market opportunities. Financial instruments utilized in trading activities have included forward and futures contracts related to foreign currencies and mortgage-backed securities, U.S. Treasury and other government securities, mortgage-backed securities, mutual funds and interest rate contracts, such as swap agreements. The Company generally mitigates the foreign currency and interest rate risk associated with trading activities by entering into offsetting trading positions. The amounts of gross and net trading positions as well as the type of trading activities conducted by the Company are subject to a well-defined series of potential loss exposure limits established by the Asset-Liability Committee. However, as with any non-government guaranteed financial instrument, the Company is exposed to credit risk associated with counterparties to the Company’s trading activities.

     The notional amounts of interest rate contracts entered into for trading purposes totaled $5.3 billion at December 31, 2003 and $1.3 billion at December 31, 2002. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes were $548 million and $290 million at December 31, 2003 and 2002, respectively. The notional amounts of these trading contracts are not recorded in the consolidated balance sheet. However, the fair values of all financial instruments used for trading activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities were $215 million and $139 million, respectively, at December 31, 2003 and $52 million and $36 million, respectively, at December 31, 2002. The higher amounts of trading account assets and liabilities at December 31, 2003 reflect the fair values of interest rate swap agreements and foreign exchange contracts executed with customers associated with Allfirst and the related offsetting trading positions. Included in trading account assets at December 31, 2003 and 2002 were $39 million and $12 million, respectively, relating to deferred compensation plans. Changes in the fair value of such assets are recorded as trading account and foreign exchange gains in the consolidated statement of income. Included in other liabilities in the consolidated balance sheet at December 31, 2003 and 2002 were $49 million and $23 million, respectively, of liabilities related to deferred compensation plans. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in other costs of operations in the consolidated statement of income.

     Given the Company’s policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading activities was not material. Additional information related to trading derivative contracts is included in note 17 of Notes to Financial Statements.

Capital

Stockholders’ equity at December 31, 2003 was $5.7 billion or 11.47% of total assets, compared with $3.2 billion or 9.66% at December 31, 2002 and $3.0 billion or 9.40% at December 31, 2001. On a per share basis, stockholders’ equity increased 37% to $47.55 at the 2003 year-end from $34.82 at December 31, 2002, and was 51% higher than $31.54 at December 31, 2001. Tangible equity per share, which excludes goodwill and core deposit and other intangible assets and applicable deferred tax balances, was $21.97 at December

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31, 2003, compared with $22.04 a year earlier and $18.54 at December 31, 2001. In the calculation of tangible equity per common share, stockholders’ equity is reduced by the carrying values of goodwill and core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of total stockholders’ equity and tangible equity as of December 31, 2003, 2002 and 2001 is presented in table 3. The ratio of average total stockholders’ equity to average total assets was 10.89%, 9.48% and 9.65% in 2003, 2002 and 2001, respectively.

     To complete the acquisition of Allfirst on April 1, 2003, M&T issued 26,700,000 shares of common stock to AIB resulting in an addition to stockholders’ equity of $2.0 billion. The value ascribed to the common shares issued to AIB was based on the market value of M&T common stock at the time the terms of the merger were agreed to and announced by M&T and AIB.

     M&T also issued shares of common stock in 2001 to complete the acquisition of Premier. On February 9, 2001, M&T issued 2,440,812 shares of common stock to former holders of Premier common stock and assumed employee stock options to purchase 224,734 shares of M&T common stock, resulting in an addition to stockholders’ equity of $176 million.

     Included in stockholders’ equity was accumulated other comprehensive income which reflects the net after-tax impact of unrealized gains or losses on investment securities classified as available for sale; unrealized fair value gains or losses associated with interest rate swap agreements designated as cash flow hedges; and minimum pension liability adjustments. Net unrealized gains on available-for-sale investment securities were $38 million, or $.32 per common share, at December 31, 2003, $55 million, or $.60 per common share, at December 31, 2002 and $23 million, or $.25 per common share, at December 31, 2001. Such unrealized gains are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available for sale. Net unrealized fair value losses associated with interest rate swap agreements designated as cash flow hedges, were $622 thousand and $298 thousand at December 31, 2002 and 2001, respectively, representing less than $.01 per share at those respective dates. There were no outstanding interest rate swap agreements designated as cash flow hedges at December 31, 2003. The minimum pension liability adjustment, net of applicable tax effect, reduced accumulated other comprehensive income by $12 million at December 31, 2003, or $.10 per share. There were no such adjustments at December 31, 2002 or 2001. Information about the funded status of the Company’s pension plans is included in note 11 of Notes to Financial Statements.

     Cash dividends paid in 2003 on M&T’s common stock were $135 million, compared with $97 million and $96 million in 2002 and 2001, respectively. M&T increased its quarterly dividend on common stock in the fourth quarter of 2002 to $.30 per share from $.25 per share. Dividends per common share totaled $1.20 in 2003, up from $1.05 in 2002 and $1.00 in 2001.

     M&T repurchased 3,007,585 shares of its common stock in 2002 and 4,396,303 shares in 2001, at a cost of $240 million and $324 million, respectively. In November 2001, M&T announced that it had been authorized by its Board of Directors to purchase up to 5,000,000 shares of its common stock. Through December 31, 2002, M&T had repurchased a total of 3,632,098 shares of common stock pursuant to such plan at an average cost of $78.49 per share. M&T discontinued purchases of its common stock during the third quarter of 2002, determining instead that it would use the Company’s internal generation of capital to support the acquisition of Allfirst. There were no common stock repurchases in 2003. However, M&T resumed purchases of its common stock in January 2004, and completed the 5,000,000 share repurchase plan in February 2004. The common stock was purchased pursuant to such plans at an average cost of $82.11 per share.

     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

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regulators have also implemented a minimum “leverage” ratio guideline of 3% of the quarterly average of total assets. Core capital includes the $686 million carrying value of trust preferred securities as described in note 9 of Notes to Financial Statements. As of December 31, 2003, total capital further included $1.2 billion of subordinated notes.

     The capital ratios of the Company and its banking subsidiaries as of December 31, 2003 and 2002 are presented in note 22 of Notes to Financial Statements.

     The Company generates significant amounts of regulatory capital. The rate of regulatory core capital generation, or net operating income (as previously defined) less the sum of dividends paid and the after-tax effect of merger-related expenses expressed as a percentage of regulatory “core capital” at the beginning of each year, was 23.35% in 2003, 19.78% in 2002 and 19.43% in 2001.

Fourth Quarter Results

The Company’s net income totaled $167 million during the final quarter of 2003, 41% higher than $119 million in the corresponding quarter of 2002. Diluted and basic earnings per share were $1.35 and $1.39, respectively, in 2003’s fourth quarter, compared with $1.25 and $1.29, respectively, in the year-earlier quarter. Expressed as an annualized rate of return on average assets, net income for the fourth quarter of 2003 was 1.35%, compared with 1.42% in 2002’s final quarter. The annualized rate of return on average common stockholders’ equity for the last three months of 2003 was 11.77%, compared with 15.00% in the similar 2002 period.

     Net operating income in the fourth quarter of 2003 increased 44% to $182 million from $126 million in the last quarter of 2002. Diluted net operating earnings per share rose 11% to $1.47 in the recently completed quarter from $1.32 in the year-earlier quarter. The annualized net operating returns on average tangible assets and average tangible common equity were 1.57% and 28.33%, respectively, in 2003’s final quarter, compared with 1.56% and 25.54%, respectively, in the similar 2002 quarter. Amortization of core deposit and other intangible assets, after tax effect, totaled $13 million ($.11 per diluted share) in the fourth quarter of 2003, compared with $7 million ($.07 per diluted share) in the corresponding quarter of 2002. Merger-related expenses incurred during the fourth quarter of 2003 totaled $2 million, after applicable tax effect, or $.01 per diluted share. There were no significant merger-related expenses incurred during the fourth quarter of 2002. Reconciliations of GAAP results with non-GAAP results for the quarterly periods of 2003 and 2002 are provided in table 22.

     Taxable-equivalent net interest income increased to $426 million in the recent quarter, 31% higher than $325 million in the fourth quarter of 2002. A 42% increase in average earning assets offset, in part, by a narrowing of the Company’s net interest margin, resulted in the improvement. Reflecting the impact of the Allfirst acquisition, average earning assets were $42.7 billion in 2003’s fourth quarter, up from $30.1 billion in the fourth quarter of 2002. Average loans and leases for the recently completed three-month period totaled $36.4 billion, an increase of 41% from $25.9 billion during the year-earlier quarter. Average loan balances in 2003 and 2002 reflect fourth quarter transactions in each year in which M&T converted residential real estate loans of $1.3 billion and $1.1 billion, respectively, into mortgage-backed securities. Those transactions are described in “Net Interest Income/Lending and Funding Activities” and in note 18 of Notes to Financial Statements. The yield on earning assets was 5.16% in the last three months of 2003, down 92 basis points from 6.08% in the corresponding 2002 period. The rate paid on interest-bearing liabilities was 1.48% in the fourth quarter of 2003, down 61 basis points from 2.09% in the like-period of 2002. The resulting net interest spread was 3.68% in 2003’s final quarter, compared with 3.99% in the year-earlier period. As a result, the Company’s net interest margin declined to 3.96% in the fourth quarter of 2003 from 4.28% in the similar quarter of 2002. The decreases in net interest spread and margin were

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due largely to the impact of yields on earning assets and rates paid on interest-bearing liabilities obtained in the Allfirst acquisition.

     The provision for credit losses was $28 million in the final quarter of 2003, compared with $33 million in the corresponding 2002 period. Net charge-offs totaled $32 million in the recent quarter, compared with $31 million in 2002’s final quarter. Net charge-offs as an annualized percentage of average loans and leases were .35% in the fourth quarter of 2003, compared with .48% in the year-earlier period.

     Other income rose 69% to $234 million in the final quarter of 2003 from $138 million in 2002’s fourth quarter. The increase was attributable to revenues related to operations or market areas associated with the former Allfirst franchise.

     Noninterest expense in the fourth quarter of 2003 aggregated $378 million, 51% higher than $251 million in the year-earlier period. Included in such amounts are expenses considered “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $21 million and $12 million in the final quarters of 2003 and 2002, respectively, and merger-related expenses of $3 million in 2003’s fourth quarter. Exclusive of these nonoperating expenses, noninterest operating expenses were $354 million in the recent quarter, 48% above the $239 million recorded in 2002’s fourth quarter. The increase in operating expenses was largely attributable to operations formerly related to Allfirst, partially offset by lower charges for the impairment of capitalized residential mortgage servicing rights. Operating expenses in the fourth quarter of 2003 reflect a $4 million reduction in total expenses resulting from a partial reversal of the valuation allowance for possible impairment of capitalized residential mortgage servicing rights, while a $13 million increase in the valuation allowance in 2002’s fourth quarter added to total expenses. During the fourth quarter of 2003 and 2002, the Company’s efficiency ratio was 53.9% and 51.7%, respectively. The higher ratio in the recently completed quarter reflects the impact of the acquired Allfirst operations. Table 22 includes a reconciliation of other expense to noninterest operating expense for each of the quarters of 2003 and 2002.

Segment Information

In accordance with the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.

     The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 21 of Notes to Financial Statements. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Financial information about the Company’s segments is presented in note 21 of Notes to Financial Statements.

     The Commercial Banking segment provides a wide range of credit products and banking services for middle-market and large commercial customers, largely within the markets the Company serves. Services provided by this segment include commercial lending and leasing, deposit products, and cash management services. Net income contributed by the Commercial Banking segment totaled $175

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million in 2003, up 95% from $90 million in 2002. The favorable performance from the prior year was predominately the result of the Allfirst acquisition, which contributed to increases in net interest income on loans of $52 million, service charges on deposit accounts of $36 million and credit-related fees of $18 million, partially offset by higher operating expenses of $37 million. The improvement was also aided by a decline in net charge-offs from 2002, largely the result of a $17 million loss in 2002 related to two commercial leases to a major airline company that filed for bankruptcy. Net charge-offs for the commercial banking segment were $23 million in 2003 and $48 million in 2002. Net income for this segment totaled $107 million in 2001. The decline in net income in 2002 as compared with 2001 was attributable to the $17 million charge-off described above and a $14 million decrease in net interest income, due to a 25 basis point narrowing of the segment’s net interest margin. Partially offsetting these decreases was a $4 million increase in deposit service charges. Net charge-offs in 2001 for the commercial banking segment were $28 million.

     The Commercial Real Estate segment provides credit and deposit services to its customers. Real estate securing loans in this segment is generally located in the New York City metropolitan area, upstate New York, Pennsylvania, Maryland, the District of Columbia, Delaware, Virginia, West Virginia and the northwestern portion of the United States. Commercial real estate loans may be secured by apartment/multifamily buildings; office, retail and industrial space; or other types of collateral. Activities of this segment also include the origination, sales and servicing of commercial real estate loans through the FNMA DUS program. The Commercial Real Estate segment’s net income was $119 million in 2003, up 29% from $92 million in 2002. The increase was due to higher net interest income of $38 million, largely the result of average loan balances acquired in the Allfirst transaction and a higher net interest margin on loans in the non-Allfirst regions, and commercial mortgage banking revenues of $20 million resulting largely from the Allfirst acquisition. Partially offsetting these revenue increases were higher salaries and benefits and other operating expenses that also resulted from the Allfirst acquisition. Net income in 2002 for the Commercial Real Estate segment was 7% higher than the $87 million earned in 2001. That increase was due largely to an $11 million increase in net interest income, the result of a 12 basis point widening of the net interest margin on loans and a 5% increase in average loan balances outstanding.

     The Discretionary Portfolio segment includes investment and trading securities, residential mortgage loans and other assets; short-term and long-term borrowed funds; brokered certificates of deposit and interest rate swap agreements related thereto; and offshore branch deposits. This segment also provides services to commercial customers and consumers that include foreign exchange, securities trading and municipal bond underwriting and sales. The Discretionary Portfolio segment recorded net income of $86 million in 2003, 34% higher than $64 million in 2002, primarily the result of higher net interest income from investment securities, including securities acquired in the Allfirst transaction. In 2001, this segment’s net income was $53 million. The 20% increase in net income from 2001 to 2002 was predominantly due to an $18 million increase in net interest income, largely the result of a 34 basis point rise in the net interest margin on investment securities.

     The Residential Mortgage Banking segment originates and services residential mortgage loans for consumers and sells substantially all of those loans in the secondary market to investors or to bank subsidiaries of M&T. In addition to the geographic regions served by or contiguous with the Company’s branch network, the Company maintains mortgage loan origination offices in several states in the western United States. The Company also periodically purchases the rights to service residential mortgage loans. Residential mortgage loans held for sale are included in this segment. The Residential Mortgage Banking segment earned $66 million in 2003, up 75% from the $38 million earned in 2002. The 2003 results include a $34 million increase in revenues from loan origination and sales activities, including gains from sales of loans to the Company’s Discretionary Portfolio segment, and a $12 million increase in net interest income, due largely to higher average

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balances of outstanding loans and deposits. Gains from sales of loans to the Company’s Discretionary Portfolio segment were $22 million and $9 million in 2003 and 2002, respectively. Also contributing to the segment’s improved net income was a decrease in the provision for impairment of capitalized mortgage loan servicing rights, which was $30 million lower than in 2002. Partially offsetting the revenue increases noted above were higher salaries and employee benefits and other operating expenses of $29 million, exclusive of the impact of changes in the provision for impairment of capitalized mortgage loan servicing rights already noted. The segment’s net income in 2002 was 12% lower than 2001’s total of $43 million. That decrease from 2001 was attributable to a $29 million increase in the provision for impairment of capitalized residential mortgage loan servicing rights and a $19 million increase in salaries, commissions and other operating expenses. Mitigating the impact of those higher expenses was a $27 million increase in net interest income, the result of a higher loan net interest margin and higher average loan balances outstanding; increased loan servicing revenues of $7 million, largely the result of purchased servicing rights; and a $6 million increase in revenues from loan origination and sales activities. During 2001, gains from sales of loans to the Company’s Discretionary Portfolio segment were $10 million.

     The Retail Banking segment offers a variety of services to consumers and small businesses through several delivery channels which include traditional and “in-store” banking offices, automated teller machines, telephone banking and internet banking. The Company has banking offices in New York State, Pennsylvania, Maryland, Virginia, the District of Columbia, West Virginia and Delaware. The Retail Banking segment also offers certain deposit and loan products on a nationwide basis through M&T Bank, N.A. Credit services offered by this segment include consumer installment loans, student loans, automobile loans (originated both directly and indirectly through dealers), home equity loans and lines of credit, and loans and leases to small businesses. The segment also offers to its customers deposit products, including demand, savings and time accounts; investment products, including mutual funds and annuities; and other services. Net income for the Retail Banking segment totaled $192 million in 2003, up 20% from $159 million in 2002. The favorable variance was largely the result of higher net interest income of $180 million and service charges on deposit accounts of $99 million, partially offset by higher operating expenses of $231 million, all largely attributable to the impact of the acquisition of Allfirst. In the non-Allfirst regions, a $62 million decrease in net interest income attributable to deposits, due to a 44 basis point decline in net interest margin, was partially offset by a $49 million increase in net interest income on loans, resulting from increases in indirect automobile loan and home equity line of credit balances outstanding of 51% and 27%, respectively. Earnings for this segment declined 19% in 2002 from $198 million in 2001. A $44 million reduction in net interest income was a significant contributor to such decline. A lower deposit net interest margin of 42 basis points, largely attributable to the impact of the year’s low interest rate environment, and a 6% decrease in retail deposit balances led to an $82 million decline in net interest income. Partially offsetting this decline was higher loan net interest income of $38 million, primarily the result of a 14% increase in average loan balances outstanding. Also contributing to the lower earnings in 2002 was a $15 million increase in the provision for credit losses and increased operating expenses of $23 million, offset, in part, by an $18 million increase in service charges on deposit accounts.

     The “All Other” category reflects other activities of the Company that are not directly attributable to the reported segments as determined in accordance with SFAS No. 131, such as the M&T Investment Group, which includes the Company’s trust, brokerage and insurance businesses. Also reflected in this category are the amortization of goodwill (in 2001) and core deposit and other intangible assets, merger-related expenses resulting from acquisitions, and the net impact of the Company’s allocation methodologies for internal funds transfer pricing and the provision for credit losses. The various components comprising the “All Other” category resulted in net losses of $64 million in 2003 and $134 million in 2001, and net income of $14 million in 2002. The net loss in

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2003 was largely the result of merger-related costs, core deposit intangible amortization, and, largely as a result of the Allfirst acquisition, higher operating expenses that under the Company’s cost allocation methodologies were not allocated to the Company’s reportable segments. Also contributing to the net loss were higher provisions for credit losses. The improvement in 2002 from 2001 was due to the Company’s allocation methodologies for internal funds transfer pricing, combined with the cessation of amortization of goodwill resulting from the January 1, 2002 adoption of SFAS No. 142.

Recent Accounting Developments

FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 were applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the provisions of FIN 45 as required, and such adoption did not have a material impact on the Company’s consolidated financial statements.

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” The FASB’s stated intent in issuing FIN 46 was to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires an enterprise to consolidate a variable interest entity (as defined in FIN 46) if that enterprise has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected returns if they occur, or both. In December 2003, the FASB issued a revised FIN 46 (“FIN 46R”) which attempts to clarify the guidance in the original interpretation. FIN 46 applies to variable interest entities created after January 31, 2003. FIN 46 also applies to all variable interest entities created prior to February 1, 2003 that are considered to be special-purpose entities (as defined in FIN 46R) as of December 31, 2003. FIN 46R must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 15, 2004. As described in note 18 of Notes to Financial Statements, implementation of the new accounting provisions related to investments in variable interest entities resulted in the removal of trusts that had issued trust preferred securities from the Company’s consolidated financial statements as of December 31, 2003. Accordingly, at December 31, 2003, the Company included the junior subordinated debentures payable to such trusts as long-term borrowings in its consolidated balance sheet. Prior to that date, the Company included the capital securities of the trusts in its consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. That change in financial statement presentation had no economic impact on the Company, had no material or substantive impact on the Company’s financial statements as of and for the year ended December 31, 2003, had no impact on 2003’s average balances noted herein, and resulted in the Company recognizing $30 million in other assets for its “investment” in the common securities of the trusts that had issued the trust preferred securities that will be concomitantly repaid to M&T by the respective trusts from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 9 of Notes to Financial Statements.

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     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and is effective for hedging relationships designated after June 30, 2003. Provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues that had been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective dates. All provisions of SFAS No. 149 should be applied prospectively, except for paragraphs 7(a) and 23(a), which relate to forward purchases or sales of “when-issued” securities or other securities that do not yet exist, which should be applied to both existing contracts and new contracts entered into after June 30, 2003. The provisions of SFAS No. 149 did not have a material impact on the Company’s consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The provisions of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

     In October 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” (“SFAS No. 132R”), an amendment of SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and a revision of SFAS No. 132. SFAS No. 132R revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS Nos. 87, 88 and 106. While retaining the disclosure requirements of SFAS No. 132, which it replaced, SFAS No. 132R requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The provisions of SFAS No. 132R are generally effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The disclosures for earlier periods should be restated, or if it is not practicable to obtain this information, the notes to the financial statements should include all available information and identify information that is not available. The Company has complied with the required provisions of SFAS No. 132R and included the appropriate information in note 11 of Notes to Financial Statements.

Forward-Looking Statements

This Financial Review and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

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     Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; credit losses; sources of liquidity; common shares outstanding; common stock price volatility; fair value of and number of stock options to be issued in future periods; legislation affecting the financial services industry as a whole, and/or M&T and its subsidiaries individually or collectively; regulatory supervision and oversight, including required capital levels; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes, including environmental regulations; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses; and material differences in the actual financial results of merger and acquisition activities compared to the Company’s expectations, including the full realization of anticipated cost savings and revenue enhancements. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, including interest rate and currency exchange rate fluctuations, and other Future Factors.

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 1

ALLFIRST FINANCIAL, INC. ACQUISITION

           
In thousands        

       
Assets
       
Investment securities
  $ 1,312,301  
Loans and leases, net of unearned discount
    10,265,123  
Allowance for credit losses
    (146,300 )
 
   
 
 
Loans and leases, net
    10,118,823  
 
   
 
Goodwill
    1,806,528  
Core deposit and other intangible assets
    199,265  
Other assets
    3,053,742  
 
   
 
 
Total assets
  $ 16,490,659  
 
   
 
Liabilities
       
Deposits
  $ 10,935,521  
Short-term borrowings
    1,610,782  
Long-term borrowings
    1,226,518  
Other liabilities
    723,882  
 
   
 
 
Total liabilities
  $ 14,496,703  
 
   
 

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 2

EARNINGS SUMMARY
Dollars in millions

                                                                                     
Increase (decrease)*                                                   Compound
2002 to 2003   2001 to 2002                                                   growth rate

 
                                                  5 years
Amount   %   Amount   %           2003   2002   2001   2000   1999   1998 to 2003

 
 
 
         
 
 
 
 
 
$ 286.8       15     $ (263.3 )     (12 )   Interest income**   $ 2,142.9       1,856.1       2,119.4       1,783.3       1,486.3       9 %
  (66.7 )     (11 )     (349.1 )     (37 )   Interest expense     527.8       594.5       943.6       918.6       719.2       (5 )
 
     
     
     
             
     
     
     
     
         
  353.5       28       85.8       7     Net interest income**     1,615.1       1,261.6       1,175.8       864.7       767.1       19  
  9.0       7       18.5       18     Less: provision for credit losses     131.0       122.0       103.5       38.0       44.5       25  
  3.1             (2.5 )         Gain (loss) on sales of bank investment securities     2.5       (0.6 )     1.9       (3.1 )     1.6        
  316.1       62       37.0       8     Other income     828.6       512.5       475.5       327.8       280.8       26  
                                Less:                                                
  243.3       49       29.8       6                Salaries and employee benefits     740.3       497.0       467.2       353.4       302.5       22  
  243.4       52       (48.8 )     (10 )              Other expense     708.0       464.6       513.4       365.2       294.1       18  
 
     
     
     
             
     
     
     
     
         
  177.0       26       120.8       21     Income before income taxes     866.9       689.9       569.1       432.8       408.4       22  
                                Less:                                                
  2.3       16       (3.5 )     (20 )              Taxable-equivalent adjustment**     16.3       14.0       17.5       10.5       7.8       18  
  57.6       26       20.6       10                Income taxes     276.7       219.1       198.5       154.1       148.2       19  
 
     
     
     
             
     
     
     
     
         
$ 117.1       26     $ 103.7       29     Net income   $ 573.9       456.8       353.1       268.2       252.4       24 %
 
     
     
     
             
     
     
     
     
         

*   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, which is related to interest received on qualified municipal securities, industrial revenue financings and preferred equity securities, is based on a composite income tax rate of approximately 36% for 2003, 39% for 2002, 37% for 2001, 40% for 2000, and 41% for 1999.

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 3

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

                           
      2003   2002   2001
     
 
 
Income statement data
                       
In thousands, except per share
                       
Net income
 
Net income
  $ 573,942       456,752       353,088  
Amortization of goodwill
                61,820  
 
   
     
     
 
 
Proforma net income
    573,942       456,752       414,908  
Amortization of core deposit and other intangible assets (1)
    47,826       32,491       37,525  
Merger-related expenses (1)
    39,163             4,844  
 
   
     
     
 
 
Net operating income
  $ 660,931       489,243       457,277  
 
   
     
     
 
Earnings per share
 
Diluted earnings per common share
  $ 4.95       4.78       3.58  
Amortization of goodwill
                .62  
 
   
     
     
 
 
Proforma diluted earnings per share
    4.95       4.78       4.20  
Amortization of core deposit and other intangible assets (1)
    .41       .34       .38  
Merger-related expenses (1)
    .34             .05  
 
   
     
     
 
 
Diluted net operating earnings per share
  $ 5.70       5.12       4.63  
 
   
     
     
 
Other expense
                       
Other expense
  $ 1,448,180       961,611       980,575  
Amortization of goodwill
                (61,820 )
Amortization of core deposit and other intangible assets
    (78,152 )     (51,484 )     (59,816 )
Merger-related expenses
    (60,387 )           (8,007 )
 
   
     
     
 
 
Noninterest operating expense
  $ 1,309,641       910,127       850,932  
 
   
     
     
 
Merger-related expenses
                       
Salaries and employee benefits
  $ 8,542             275  
Equipment and net occupancy
    2,126             309  
Printing, postage and supplies
    3,216             438  
Other costs of operations
    46,503             6,985  
 
   
     
     
 
 
Total
  $ 60,387             8,007  
 
   
     
     
 
Balance sheet data
                       
In millions
                       
Average assets
                       
Average assets
  $ 45,349       31,935       30,842  
Goodwill
    (2,456 )     (1,098 )     (1,126 )
Core deposit and other intangible assets
    (233 )     (143 )     (196 )
Deferred taxes
          46       56  
 
   
     
     
 
 
Average tangible assets
  $ 42,660       30,740       29,576  
 
   
     
     
 
Average equity
                       
Average equity
  $ 4,941       3,026       2,975  
Goodwill
    (2,456 )     (1,098 )     (1,126 )
Core deposit and other intangible assets
    (233 )     (143 )     (196 )
Deferred taxes
    68       46       56  
 
   
     
     
 
 
Average tangible equity
  $ 2,320       1,831       1,709  
 
   
     
     
 
At end of year
                       
Total assets
                       
Total assets
  $ 49,826       33,201       31,469  
Goodwill
    (2,904 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (241 )     (119 )     (170 )
Deferred taxes
          40       49  
 
   
     
     
 
 
Total tangible assets
  $ 46,681       32,024       30,250  
 
   
     
     
 
Total equity
                       
Total equity
  $ 5,717       3,208       2,958  
Goodwill
    (2,904 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (241 )     (119 )     (170 )
Deferred taxes
    70       40       49  
 
   
     
     
 
 
Total tangible equity
  $ 2,642       2,031       1,739  
 
   
     
     
 
(1) After any related tax effect.
                       

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 4

AVERAGE LOANS AND LEASES
(net of unearned discount)

                             
                Percent increase
                (decrease) from
               
Dollars in millions   2003   2002 to 2003   2001 to 2002

 
 
 
Commercial, financial, etc.
  $ 8,523       66 %     (2 )%
Real estate - commercial
    11,573       22       3  
Real estate - consumer
    3,777       (8 )     (6 )
Consumer
 
Automobile
    4,045       42       34  
 
Home equity lines
    2,825       57       42  
 
Home equity loans
    1,619       117       (15 )
 
Other
    1,609       17       5  
 
   
     
     
 
   
Total consumer
    10,098       49       21  
 
   
     
     
 
 
Total
  $ 33,971       33 %     4 %
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 5

AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES

                                                                               
          2003   2002   2001
         
 
 
          Average           Average   Average           Average   Average           Average
Average balance in millions; interest in thousands   balance   Interest   rate   balance   Interest   rate   balance   Interest   rate

 
 
 
 
 
 
 
 
 
Assets
                                                                       
Earning assets
                                                                       
Loans and leases, net of unearned discount*
                                                                       
 
Commercial, financial, etc.
  $ 8,523     $ 358,629       4.21 %     5,146     261,867       5.09 %     5,271       372,234       7.06 %
 
Real estate - commercial
    11,573       706,022       6.10       9,498       661,382       6.96       9,224       732,162       7.94  
 
Real estate - consumer
    3,777       232,454       6.15       4,087       285,055       6.98       4,354       328,979       7.55  
 
Consumer
    10,098       607,909       6.02       6,776       467,167       6.89       5,581       464,151       8.32  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total loans and leases, net
    33,971       1,905,014       5.61       25,507       1,675,471       6.57       24,430       1,897,526       7.77  
 
 
   
     
     
     
     
     
     
     
     
 
Money-market assets
                                                                       
 
Interest-bearing deposits at banks
    14       147       1.03       6       76       1.32       4       116       3.10  
 
Federal funds sold and agreements to resell securities
    147       1,875       1.28       272       4,455       1.63       63       2,027       3.22  
 
Trading account
    55       647       1.18       13       247       1.86       13       413       3.16  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total money-market assets
    216       2,669       1.24       291       4,778       1.64       80       2,556       3.20  
 
 
   
     
     
     
     
     
     
     
     
 
Investment securities**
                                                                       
 
U.S. Treasury and federal agencies
    2,599       106,209       4.09       1,292       81,412       6.30       1,709       113,908       6.67  
 
Obligations of states and political subdivisions
    251       15,827       6.30       279       17,828       6.40       332       24,483       7.37  
 
Other
    2,494       113,159       4.54       1,552       76,659       4.94       1,267       80,925       6.39  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total investment securities
    5,344       235,195       4.40       3,123       175,899       5.63       3,308       219,316       6.63  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total earning assets
    39,531       2,142,878       5.42       28,921       1,856,148       6.42       27,818       2,119,398       7.62  
 
 
   
     
     
     
     
     
     
     
     
 
Allowance for credit losses
    (574 )                     (438 )                     (409 )                
Cash and due from banks
    1,542                       732                       706                  
Other assets
    4,850                       2,720                       2,727                  
 
   
                     
                     
                 
     
Total assets
  $ 45,349                       31,935                       30,842                  
 
   
                     
                     
                 
Liabilities and stockholders’ equity
                                                                       
Interest-bearing liabilities
                                                                       
Interest-bearing deposits
                                                                       
 
NOW accounts
  $ 1,021       3,613       .35       761       3,900       .51       722       8,548       1.18  
 
Savings deposits
    13,278       102,190       .77       8,899       107,281       1.21       7,378       134,454       1.82  
 
Time deposits
    6,638       159,700       2.41       7,398       237,001       3.20       8,906       453,940       5.10  
 
Deposits at foreign office
    1,445       14,991       1.04       569       8,460       1.49       327       11,264       3.44  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total interest-bearing deposits
    22,382       280,494       1.25       17,627       356,642       2.02       17,333       608,206       3.51  
 
 
   
     
     
     
     
     
     
     
     
 
Short-term borrowings
    4,331       49,064       1.13       3,125       52,723       1.69       3,280       124,810       3.81  
Long-term borrowings
    6,018       198,252       3.29       4,162       185,149       4.45       3,538       210,581       5.95  
 
 
   
     
     
     
     
     
     
     
     
 
     
Total interest-bearing liabilities
    32,731       527,810       1.61       24,914       594,514       2.39       24,151       943,597       3.91  
 
 
   
     
     
     
     
     
     
     
     
 
Noninterest-bearing deposits
    6,801                       3,618                       3,327                  
Other liabilities
    876                       377                       389                  
 
   
                     
                     
                 
     
Total liabilities
    40,408                       28,909                       27,867                  
 
   
                     
                     
                 
Stockholders’ equity
    4,941                       3,026                       2,975                  
 
   
                     
                     
                 
     
Total liabilities and stockholders’ equity
  $ 45,349                       31,935                       30,842                  
 
   
                     
                     
                 
Net interest spread
                    3.81                       4.03                       3.71  
Contribution of interest-free funds
                    .28                       .33                       .52  
 
           
     
             
     
             
     
 
Net interest income/margin on earning assets
          $ 1,615,068       4.09 %           1,261,634       4.36 %             1,175,801       4.23 %
 
           
     
             
     
             
     
 
     
*Includes nonaccrual loans.    
 
**Includes available for sale securities at amortized cost.   (continued)

-70-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 5 (continued)

AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES

                                                     
        2000   1999
       
 
        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.
  $ 4,129       365,951       8.86 %     3,331     $ 268,279       8.05 %
 
Real estate - commercial
    7,188       615,304       8.56       5,908       497,247       8.42  
 
Real estate - consumer
    3,266       249,224       7.63       3,805       276,619       7.27  
 
Consumer
    3,920       352,331       8.99       3,371       283,565       8.41  
 
 
   
     
     
     
     
     
 
   
Total loans and leases, net
    18,503       1,582,810       8.55       16,415       1,325,710       8.08  
 
 
   
     
     
     
     
     
 
Money-market assets
                                               
 
Interest-bearing deposits at banks
    6       308       5.41       2       87       3.78  
 
Federal funds sold and agreements to resell securities
    212       12,891       6.08       467       24,491       5.24  
 
Trading account
    21       1,069       5.08       48       3,221       6.71  
 
 
   
     
     
     
     
     
 
   
Total money-market assets
    239       14,268       5.97       517       27,799       5.37  
 
 
   
     
     
     
     
     
 
Investment securities**
                                               
 
U.S. Treasury and federal agencies
    1,603       105,104       6.56       920       53,108       5.77  
 
Obligations of states and political subdivisions
    122       8,890       7.27       74       4,660       6.28  
 
Other
    1,033       72,259       7.00       1,150       75,064       6.53  
 
 
   
     
     
     
     
     
 
   
Total investment securities
    2,758       186,253       6.75       2,144       132,832       6.20  
 
 
   
     
     
     
     
     
 
   
Total earning assets
    21,500       1,783,331       8.30       19,076       1,486,341       7.79  
 
 
   
     
     
     
     
     
 
Allowance for credit losses
    (333 )                     (312 )                
Cash and due from banks
    536                       464                  
Other assets
    1,967                       1,837                  
 
   
                     
                 
   
Total assets
  $ 23,670                       21,065                  
 
   
                     
                 
Liabilities and stockholders’ equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
                                               
 
NOW accounts
  $ 486       7,487       1.54       389       4,683       1.21  
 
Savings deposits
    5,507       132,225       2.40       5,163       121,888       2.36  
 
Time deposits
    7,674       445,666       5.81       7,074       367,889       5.20  
 
Deposits at foreign office
    250       14,915       5.95       254       12,016       4.73  
 
 
   
     
     
     
     
     
 
   
Total interest-bearing deposits
    13,917       600,293       4.31       12,880       506,476       3.93  
 
 
   
     
     
     
     
     
 
Short-term borrowings
    2,715       172,466       6.35       2,056       104,911       5.10  
Long-term borrowings
    2,086       145,838       6.99       1,748       107,847       6.17  
 
 
   
     
     
     
     
     
 
   
Total interest-bearing liabilities
    18,718       918,597       4.91       16,684       719,234       4.31  
 
 
   
     
     
     
     
     
 
Noninterest-bearing deposits
    2,425                       1,965                  
Other liabilities
    482                       672                  
 
   
                     
                 
   
Total liabilities
    21,625                       19,321                  
 
   
                     
                 
Stockholders’ equity
    2,045                       1,744                  
 
   
                     
                 
   
Total liabilities and stockholders’ equity
  $ 23,670                       21,065                  
 
   
                     
                 
Net interest spread
                    3.39                       3.48  
Contribution of interest-free funds
                    .63                       .54  
 
           
     
             
     
 
Net interest income/margin on earning assets
            864,734       4.02 %           $ 767,107       4.02 %
 
           
     
             
     
 

*Includes nonaccrual loans.

**Includes available for sale securities at amortized cost.

-71-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 6

COMMERCIAL LOANS AND LEASES, NET OF UNEARNED DISCOUNT
(EXCLUDING LOANS SECURED BY REAL ESTATE)
December 31, 2003

                                             
                Percent of dollars outstanding by loan size
Dollars in millions   Outstandings   $0-1   $1-5   $5-10   $10+

 
 
 
 
 
New York State
                                       
 
Secured
  $ 3,274.7       28 %     29 %     14 %     6 %
 
Unsecured
    880.5       8       5       3       4  
 
Leases
    115.2       2       1              
 
   
     
     
     
     
 
   
Total New York State
    4,270.4       38 %     35 %     17 %     10 %
 
   
     
     
     
     
 
Pennsylvania
                                       
 
Secured
    1,743.4       28 %     23 %     15 %     8 %
 
Unsecured
    558.0       8       9       4       2  
 
Leases
    62.4       1       1             1  
 
   
     
     
     
     
 
   
Total Pennsylvania
    2,363.8       37 %     33 %     19 %     11 %
 
   
     
     
     
     
 
Maryland
                                       
 
Secured
    767.6       31 %     20 %     7 %     12 %
 
Unsecured
    285.6       10       9       6       1  
 
Leases
    49.5       3             1        
 
   
     
     
     
     
 
   
Total Maryland
    1,102.7       44 %     29 %     14 %     13 %
 
   
     
     
     
     
 
Other
                                       
 
Secured
    698.4       11 %     21 %     13 %     2 %
 
Unsecured
    297.4       8       5       4       3  
 
Leases
    484.7       4       12       8       9  
 
   
     
     
     
     
 
   
Total other
    1,480.5       23 %     38 %     25 %     14 %
 
   
     
     
     
     
 
   
Total commercial loans and leases
  $ 9,217.4       36 %     34 %     19 %     11 %
 
   
     
     
     
     
 

-72-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 7

COMMERCIAL REAL ESTATE LOANS
(net of unearned discount)
December 31, 2003

                                             
                Percent of dollars outstanding by loan size
        Out-  
Dollars in millions   standings   $0-1   $1-5   $5-10   $10+

 
 
 
 
 
Metropolitan New York City
                                       
 
Apartments/Multifamily
  $ 1,567.8       5 %     17 %     7 %     8 %
 
Office
    436.6       1       3       1       5  
 
Retail
    1,037.0       2       10       5       7  
 
Construction
    93.1             1             1  
 
Industrial
    58.8       1       1              
 
Other
    1,076.3       1       7       6       11  
 
 
   
     
     
     
     
 
   
Total Metropolitan New York City
    4,269.6       10 %     39 %     19 %     32 %
 
 
   
     
     
     
     
 
Other New York State
                                       
 
Apartments/Multifamily
    294.0       3 %     5 %     1 %     %
 
Office
    1,021.4       9       14       6       3  
 
Retail
    328.6       4       4       1       1  
 
Construction
    230.8       1       2       2       2  
 
Industrial
    259.1       5       3       1        
 
Other
    1,059.5       12       12       5       4  
 
 
   
     
     
     
     
 
   
Total other New York State
    3,193.4       34 %     40 %     16 %     10 %
 
 
   
     
     
     
     
 
Pennsylvania
                                       
 
Apartments/Multifamily
    278.2       5 %     3 %     2 %     2 %
 
Office
    384.4       8       6       2        
 
Retail
    222.1       4       4       1        
 
Construction
    220.4       3       4       2       1  
 
Industrial
    279.7       4       5       1       2  
 
Other
    978.2       15       13       3       10  
 
 
   
     
     
     
     
 
   
Total Pennsylvania
    2,363.0       39 %     35 %     11 %     15 %
 
 
   
     
     
     
     
 
Maryland
                                       
 
Apartments/Multifamily
    33.6       1 %     1 %     %     %
 
Office
    358.2       11       7       1       7  
 
Retail
    151.6       3       3       1       4  
 
Construction
    305.5       2       8       6       7  
 
Industrial
    117.7       3       3       2       1  
 
Other
    370.8       10       11       6       2  
 
 
   
     
     
     
     
 
   
Total Maryland
    1,337.4       30 %     33 %     16 %     21 %
 
 
   
     
     
     
     
 
Other
                                       
 
Apartments/Multifamily
    224.9       2 %     8 %     3 %     6 %
 
Office
    173.5       2       3       2       7  
 
Retail
    250.4       1       5       5       9  
 
Construction
    89.9             3       2       2  
 
Industrial
    82.4       2       3             2  
 
Other
    386.6       4       11       8       10  
 
 
   
     
     
     
     
 
   
Total other
    1,207.7       11 %     33 %     20 %     36 %
 
 
   
     
     
     
     
 
   
Total commercial real estate loans
  $ 12,371.1       24 %     37 %     16 %     23 %
 
 
   
     
     
     
     
 

-73-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 8

LOANS AND LEASES, NET OF UNEARNED DISCOUNT
December 31, 2003

                                               
                  Percent of dollars outstanding
                  New York                        
Dollars in millions   Outstandings   State   Pennsylvania   Maryland   Other

 
 
 
 
 
Real estate
                                       
 
Residential
  $ 3,081.4       43 %     17 %     8 %     32 %
 
Commercial
    12,371.1       60 (a)     19       11       10  
 
 
   
     
     
     
     
 
   
Total real estate
    15,452.5       57 %     19 %     10 %     14 %
 
 
   
     
     
     
     
 
Commercial, financial, etc.
    8,505.6       49 %     27 %     12 %     12 %
Consumer
 
Secured or guaranteed
    10,401.1       40 %     33 %     12 %     15 %
 
Unsecured
    276.0       39       27       30       4  
 
 
   
     
     
     
     
 
   
Total consumer
    10,677.1       40 %     33 %     12 %     15 %
 
 
   
     
     
     
     
 
     
Total loans
    34,635.2       50 %     25 %     11 %     14 %
 
 
   
     
     
     
     
 
Leases
 
 
Commercial
    711.8       16 %     9 %     7 %     68 %
 
Consumer
    425.4       21       53       1       25  
 
 
   
     
     
     
     
 
   
Total leases
    1,137.2       18 %     25 %     5 %     52 %
 
 
   
     
     
     
     
 
   
Total loans and leases
  $ 35,772.4       49 %     25 %     11 %     15 %
 
 
   
     
     
     
     
 

(a)   Includes loans secured by properties located in neighboring states generally considered to be within commuting distance of New York City.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 9

AVERAGE CORE DEPOSITS

                           
              Percentage increase (decrease) from
Dollars in millions   2003   2002 to 2003   2001 to 2002

 
 
 
NOW accounts
  $ 1,021       34 %     5 %
Savings deposits
    13,208       49       20  
Time deposits under $100,000
    4,756       9       (29 )
Noninterest-bearing deposits
    6,801       88       9  
 
   
     
     
 
 
Total
  $ 25,786       47 %     %
 
   
     
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 10

INTEREST RATE SWAP AGREEMENTS

                                                   
      Year ended December 31
     
      2003   2002   2001
     
 
 
Dollars in thousands   Amount   Rate*   Amount   Rate*   Amount   Rate*

 
 
 
 
 
 
Increase (decrease) in:
                                               
 
Interest income
  $       %   $ (673 )     %   $ (360 )     %
 
Interest expense
    (17,327 )     (.05 )     (9,495 )     (.04 )     (7,080 )     (.03 )
 
 
   
     
     
     
     
     
 
 
Net interest income/margin
  $ 17,327       .05 %   $ 8,822       .03 %   $ 6,720       .03 %
 
 
   
     
     
     
     
     
 
Average notional amount**
  $ 688,603             $ 693,910             $ 522,730          
Rate received***
            6.06 %             3.48 %             5.75 %
Rate paid***
            3.55 %             2.21 %             4.47 %
 
           
             
             
 

*   Computed as a percentage of average earning assets or interest-bearing liabilities.
 
**   Excludes forward-starting interest rate swap agreements.
 
***   Weighted-average rate paid or received on interest rate swap agreements in effect during year.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 11

LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR CREDIT LOSSES

                                             
Dollars in thousands   2003   2002   2001   2000   1999

 
 
 
 
 
Allowance for credit losses beginning balance
  $ 436,472       425,008       374,703       316,165       306,347  
 
   
     
     
     
     
 
Charge-offs during year
                                       
 
Commercial, financial, agricultural, etc.
    44,782       57,401       35,555       6,943       19,246  
 
Real estate - construction
    2       88                    
 
Real estate - mortgage
    13,999       13,969       13,849       7,133       5,159  
 
Consumer
    68,737       53,124       44,750       28,855       35,250  
 
   
     
     
     
     
 
   
Total charge-offs
    127,520       124,582       94,154       42,931       59,655  
 
   
     
     
     
     
 
Recoveries during year
                                       
 
Commercial, financial, agricultural, etc.
    12,517       3,129       3,949       1,199       2,244  
 
Real estate - construction
    4                         406  
 
Real estate - mortgage
    3,436       2,333       4,027       3,551       3,180  
 
Consumer
    15,047       11,370       10,871       9,201       13,507  
 
   
     
     
     
     
 
   
Total recoveries
    31,004       16,832       18,847       13,951       19,337  
 
   
     
     
     
     
 
Net charge-offs
    96,516       107,750       75,307       28,980       40,318  
Provision for credit losses
    131,000       122,000       103,500       38,000       44,500  
Allowance for credit losses acquired during the year
    146,300             22,112       49,518       5,636  
Allowance related to loans sold or securitized
    (3,198 )     (2,786 )                  
 
   
     
     
     
     
 
Allowance for credit losses ending balance
  $ 614,058       436,472       425,008       374,703       316,165  
 
   
     
     
     
     
 
Net charge-offs as a percent of:
                                       
 
Provision for credit losses
    73.68 %     88.32 %     72.76 %     76.26 %     90.60 %
 
Average loans and leases, net of unearned discount
    .28 %     .42 %     .31 %     .16 %     .25 %
 
   
     
     
     
     
 
Allowance for credit losses as a percent of loans and leases, net of unearned discount, at year-end
    1.72 %     1.70 %     1.69 %     1.65 %     1.82 %
 
   
     
     
     
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 12

NONPERFORMING ASSETS AND PAST DUE LOAN DATA
Dollars in thousands

                                         
December 31   2003   2002   2001   2000   1999

 
 
 
 
 
Nonaccrual loans
  $ 232,983       207,038       180,344       100,951       61,816  
Renegotiated loans
    7,309       8,252       10,128       9,688       10,353  
 
   
     
     
     
     
 
Total nonperforming loans
    240,292       215,290       190,472       110,639       72,169  
Real estate and other assets owned
    19,629       17,380       16,387       13,619       10,000  
 
   
     
     
     
     
 
Total nonperforming assets
  $ 259,921       232,670       206,859       124,258       82,169  
 
   
     
     
     
     
 
Accruing loans past due 90 days or more *
  $ 154,759       153,803       146,899       141,843       31,017  
 
   
     
     
     
     
 
Government guaranteed loans included in totals above:
                                       
Nonperforming loans
  $ 19,355       11,885       10,196       8,625       5,239  
Accruing loans past due 90 days or more
    124,585       129,114       113,600       102,505       11,290  
 
   
     
     
     
     
 
Nonperforming loans to total loans and leases, net of unearned discount
    .67 %     .84 %     .76 %     .49 %     .41 %
Nonperforming assets to total net loans and leases and real estate and other assets owned
    .73 %     .90 %     .82 %     .55 %     .47 %
Accruing loans past due 90 days or more to total loans and leases, net of unearned discount
    .43 %     .60 %     .58 %     .62 %     .18 %
 
   
     
     
     
     
 

*   Predominately residential mortgage loans.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 13

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES TO LOAN CATEGORIES

Dollars in thousands

                                           
December 31   2003   2002   2001   2000   1999

 
 
 
 
 
Commercial, financial, agricultural, etc.
  $ 186,902       120,627       130,156       125,568       78,019  
Real estate
    170,493       152,758       139,848       122,218       91,967  
Consumer
    152,759       113,711       94,710       76,839       47,250  
Unallocated
    103,904       49,376       60,294       50,078       98,929  
 
   
     
     
     
     
 
 
Total
  $ 614,058       436,472       425,008       374,703       316,165  
 
   
     
     
     
     
 
As a percentage of gross loans and leases outstanding
                                       
 
   
     
     
     
     
 
Commercial, financial, agricultural, etc.
    1.99 %     2.23 %     2.50 %     2.43 %     2.11 %
Real estate
    1.10       1.17       1.00       .97       .90  
Consumer
    1.37       1.51       1.52       1.49       1.30  
 
   
     
     
     
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 14

DEBT RATINGS

             
        Standard &    
    Moody’s   Poor’s   Fitch
   
 
 
M&T Bank Corporation   A3   A-   A-
             
M&T Bank            
     Short-term deposits
     Long-term deposits
     Subordinated debt
  Prime -1
A2
A3
  A -1
A
A-
  F1
A
BBB+

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 15

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Dollars in thousands

                                             
        Payments due by period
       
        Less than   One to   Three to   Over        
December 31, 2003   one year   three years   five years   five years   Total

 
 
 
 
 
Payments due for contractual obligations
                                       
 
Time deposits
  $ 4,335,397       1,734,486       460,674       106,692       6,637,249  
 
Deposits at foreign office
    2,209,451                         2,209,451  
 
Federal funds purchased and agreements to repurchase securities
    3,832,182                         3,832,182  
 
Other short-term borrowings
    610,064                         610,064  
 
Long-term borrowings
    484,422       1,901,977       638,980       2,510,046       5,535,425  
 
Operating leases
    47,097       78,756       47,971       94,312       268,136  
 
Other
    9,562       19,843       17,674       63,473       110,552  
 
   
     
     
     
     
 
   
Total
  $ 11,528,175       3,735,062       1,165,299       2,774,523       19,203,059  
 
   
     
     
     
     
 
Other commitments
                                       
 
Commitments to extend credit
  $ 6,000,784       3,101,287       2,055,850       1,276,686       12,434,607  
 
Standby letters of credit
    1,197,636       924,812       725,279       208,884       3,056,611  
 
Commercial letters of credit
    35,292       34,085       10             69,387  
 
Financial guarantees and indemnification contracts
    3,560       162,404       97,596       798,131       1,061,691  
 
Commitments to sell real estate loans
    894,374       1,434                   895,808  
 
   
     
     
     
     
 
   
Total
  $ 8,131,646       4,224,022       2,878,735       2,283,701       17,518,104  
 
   
     
     
     
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 16

MATURITY DISTRIBUTION OF SELECTED LOANS*
In thousands

                                   
                      2005 -   After
December 31, 2003   Demand   2004   2008   2008

 
 
 
 
Commercial, financial, agricultural, etc.
  $ 1,414,802       3,475,143       2,886,103       689,912  
Real estate - construction
    176,299       737,430       452,125       165,505  
 
   
     
     
     
 
 
Total
  $ 1,591,101       4,212,573       3,338,228       855,417  
 
   
     
     
     
 
Floating or adjustable interest rates
                  $ 939,788       263,114  
Fixed or predetermined interest rates
                    2,398,440       592,303  
 
                   
     
 
 
Total
                  $ 3,338,228       855,417  
 
                   
     
 

*The data do not include nonaccrual loans.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 17

MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES
Dollars in thousands

                                             
        One year   One to   Five to   Over        
December 31, 2003   or less   five years   ten years   ten years   Total

 
 
 
 
 
Investment securities available for sale (a)
                                       
U.S. Treasury and federal agencies
                                       
 
Carrying value
  $ 120,119       58,855       113,734       1,330       294,038  
 
Yield
    1.43 %     3.33 %     4.02 %     4.84 %     2.83 %
Obligations of states and political subdivisions
                                       
 
Carrying value
    12,965       49,733       40,533       43,265       146,496  
 
Yield
    7.36 %     6.69 %     5.27 %     8.65 %     6.94 %
Mortgage-backed securities (b)
                                       
 
Government issued or guaranteed
                                       
   
Carrying value
    149,339       677,874       983,721       1,293,575       3,104,509  
   
Yield
    3.78 %     3.73 %     3.72 %     4.43 %     4.02 %
 
Privately issued
                                       
   
Carrying value
    69,553       851,672       281,858       1,345,152       2,548,235  
   
Yield
    4.90 %     3.86 %     5.22 %     5.02 %     4.65 %
Other debt securities
                                       
 
Carrying value
    32,673       45,200       558       242,417       320,848  
 
Yield
    7.72 %     5.35 %     6.68 %     3.65 %     4.31 %
Equity securities
                                       
 
Carrying value
                            448,811  
 
Yield
                            3.15 %
 
   
     
     
     
     
 
Total investment securities available for sale
                                       
 
Carrying value
  $ 384,649       1,683,334       1,420,404       2,925,739       6,862,937  
 
Yield
    3.70 %     3.91 %     4.08 %     4.70 %     4.22 %
 
   
     
     
     
     
 
Investment securities held to maturity
                                       
Obligations of states and political subdivisions
                                       
 
Carrying value
    78,204       8,179       8,178       8,136       102,697  
 
Yield
    2.00 %     6.46 %     7.74 %     10.72 %     3.50 %
Other debt securities
                                       
 
Carrying value
                606       1,569       2,175  
 
Yield
                8.40 %     5.33 %     6.19 %
 
   
     
     
     
     
 
Total investment securities held to maturity
                                       
 
Carrying value
  $ 78,204       8,179       8,784       9,705       104,872  
 
Yield
    2.00 %     6.46 %     7.79 %     9.85 %     3.56 %
 
   
     
     
     
     
 
Other investment securities
  $                         291,341  
 
   
     
     
     
     
 
Total investment securities
                                       
 
Carrying value
  $ 462,853       1,691,513       1,429,188       2,935,444       7,259,150  
 
Yield
    3.41 %     3.92 %     4.10 %     4.72 %     4.04 %
 
   
     
     
     
     
 

(a)   Investment securities available for sale are presented at estimated fair value. Yields on such securities are based on amortized cost.
 
(b)   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.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 18

MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE

           
In thousands   December 31, 2003

 
Under 3 months
  $ 544,803  
3 to 6 months
    159,057  
6 to 12 months
    672,895  
Over 12 months
    638,411  
 
   
 
 
Total
  $ 2,015,166  
 
   
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 19

SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES
Dollars in thousands

                 
    Calculated increase (decrease)
    in projected net interest income
    December 31
   
Changes in interest rates   2003   2002

 
 
+200 basis points
  $ (4,504 )     12,223  
+100 basis points
    (190 )     5,311  
-100 basis points
    (12,945 )     12,507  
-200 basis points
    (13,064 )     13,055  
 
   
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 20

CONTRACTUAL REPRICING DATA
Dollars in thousands by repricing date

                                           
      Three   Four to   One to                
      months   twelve   five   After five        
December 31, 2003   or less   months   years   years   Total

 
 
 
 
 
Loans and leases, net
  $ 16,457,193       3,035,933       10,572,580       5,706,729       35,772,435  
Money-market assets
    76,181       3,488       1,000       21,540       102,209  
Investment securities
    1,448,443       597,244       1,464,500       3,748,963       7,259,150  
 
   
     
     
     
     
 
 
Total earning assets
    17,981,817       3,636,665       12,038,080       9,477,232       43,133,794  
 
   
     
     
     
     
 
NOW accounts
    1,738,427                         1,738,427  
Savings deposits
    14,118,521                         14,118,521  
Time deposits
    2,321,955       2,234,133       1,974,468       106,693       6,637,249  
Deposits at foreign office
    2,209,451                         2,209,451  
 
   
     
     
     
     
 
 
Total interest-bearing deposits
    20,388,354       2,234,133       1,974,468       106,693       24,703,648  
 
   
     
     
     
     
 
Short-term borrowings
    4,442,246                         4,442,246  
Long-term borrowings
    2,011,511       182,036       839,141       2,502,737       5,535,425  
 
   
     
     
     
     
 
 
Total interest-bearing liabilities
    26,842,111       2,416,169       2,813,609       2,609,430       34,681,319  
 
   
     
     
     
     
 
Interest rate swaps
    (685,000 )           105,000       580,000        
 
   
     
     
     
     
 
Periodic gap
  $ (9,545,294 )     1,220,496       9,329,471       7,447,802          
Cumulative gap
    (9,545,294 )     (8,324,798 )     1,004,673       8,452,475          
Cumulative gap as a % of total earning assets
    (22.1 )%     (19.3 )%     2.3 %     19.6 %        

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 21

QUARTERLY TRENDS

                                   
      2003 Quarters
     
      Fourth   Third   Second   First
     
 
 
 
Earnings and dividends
                               
Amounts in thousands, except per share
                               
Interest income (taxable-equivalent basis)
  $ 554,673       568,319       580,704       439,182  
Interest expense
    129,173       133,539       145,506       119,592  
 
   
     
     
     
 
Net interest income
    425,500       434,780       435,198       319,590  
Less: provision for credit losses
    28,000       34,000       36,000       33,000  
Other income
    233,757       231,594       232,897       132,847  
Less: other expense
    378,355       396,400       431,147       242,278  
 
   
     
     
     
 
Income before income taxes
    252,902       235,974       200,948       177,159  
Applicable income taxes
    81,801       75,329       62,600       56,998  
Taxable-equivalent adjustment
    4,200       4,182       4,308       3,623  
 
   
     
     
     
 
Net income
  $ 166,901       156,463       134,040       116,538  
 
   
     
     
     
 
Per common share data
                               
 
Basic earnings
  $ 1.39       1.31       1.12       1.26  
 
Diluted earnings
    1.35       1.28       1.10       1.23  
 
Cash dividends
  $ .30       .30       .30       .30  
Average common shares outstanding
                               
 
Basic
    120,141       119,727       119,393       92,399  
 
Diluted
    123,328       122,593       122,366       95,062  
 
   
     
     
     
 
Performance ratios, annualized
                               
Return on
                               
 
Average assets
    1.35 %     1.24 %     1.10 %     1.43 %
 
Average common stockholders’ equity
    11.77 %     11.37 %     10.00 %     14.46 %
Net interest margin on average earning assets (taxable-equivalent basis)
    3.96 %     4.02 %     4.12 %     4.32 %
Nonperforming loans to total loans and leases, net of unearned discounts
    .67 %     .77 %     .86 %     .88 %
Efficiency ratio (a)
    57.18 %     56.60 %     59.59 %     52.37 %
 
   
     
     
     
 
Net operating (tangible) results (b)
                               
Net income (in thousands)
  $ 181,594       182,670       169,436       127,231  
Diluted net income per common share
    1.47       1.49       1.38       1.34  
Annualized return on
                               
 
Average tangible assets
    1.57 %     1.55 %     1.48 %     1.62 %
 
Average tangible common stockholders’ equity
    28.33 %     30.67 %     29.89 %     24.68 %
Efficiency ratio (a)
    53.93 %     53.22 %     56.20 %     49.81 %
 
   
     
     
     
 
Balance sheet data
                               
In millions, except per share
                               
Average balances
                               
 
Total assets (c)
  $ 49,123       50,024       49,010       33,061  
 
Total tangible assets (c)
    45,968       46,848       45,822       31,884  
 
Earning assets
    42,672       42,885       42,386       30,004  
 
Investment securities
    6,212       5,837       5,654       3,638  
 
Loans and leases, net of unearned discount
    36,361       36,953       36,632       25,789  
 
Deposits
    32,357       31,954       31,189       21,078  
 
Stockholders’ equity (c)
    5,625       5,461       5,377       3,267  
 
Tangible stockholders’ equity (c)
    2,543       2,363       2,274       2,090  
 
   
     
     
     
 
At end of quarter
                               
 
Total assets (c)
  $ 49,826       50,259       50,399       33,444  
 
Total tangible assets (c)
    46,681       47,093       47,211       32,271  
 
Earning assets
    43,134       43,257       43,038       30,396  
 
Investment securities
    7,259       5,957       5,946       4,146  
 
Loans and leases, net of unearned discount
    35,772       37,160       37,002       26,224  
 
Deposits
    33,115       32,414       32,539       21,924  
 
Stockholders’ equity (c)
    5,717       5,572       5,433       3,313  
 
Tangible stockholders’ equity (c)
    2,642       2,482       2,327       2,140  
 
Equity per common share
    47.55       46.49       45.46       35.81  
 
Tangible equity per common share
    21.97       20.71       19.47       23.13  
 
   
     
     
     
 
Market price per common share
                               
 
High
  $ 98.98       90.93       90.91       84.48  
 
Low
    87.50       83.65       79.00       74.71  
 
Closing
    98.30       87.30       84.22       78.58  
 
   
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                   
      2002 Quarters
     
      Fourth   Third   Second   First
     
 
 
 
Earnings and dividends
                               
Amounts in thousands, except per share
                               
Interest income (taxable-equivalent basis)
    461,515       464,801       465,046       464,786  
Interest expense
    136,358       146,080       151,949       160,127  
 
   
     
     
     
 
Net interest income
    325,157       318,721       313,097       304,659  
Less: provision for credit losses
    33,000       37,000       28,000       24,000  
Other income
    138,178       128,346       121,179       124,228  
Less: other expense
    251,089       243,971       233,267       233,284  
 
   
     
     
     
 
Income before income taxes
    179,246       166,096       173,009       171,603  
Applicable income taxes
    57,396       52,449       54,881       54,427  
Taxable-equivalent adjustment
    3,299       3,530       3,621       3,599  
 
   
     
     
     
 
Net income
    118,551       110,117       114,507       113,577  
 
   
     
     
     
 
Per common share data
                               
 
Basic earnings
    1.29       1.20       1.23       1.22  
 
Diluted earnings
    1.25       1.16       1.19       1.18  
 
Cash dividends
    .30       .25       .25       .25  
Average common shares outstanding
                               
 
Basic
    92,060       92,017       92,608       93,265  
 
Diluted
    94,950       94,942       95,917       96,300  
 
   
     
     
     
 
Performance ratios, annualized
                               
Return on
                               
 
Average assets
    1.42 %     1.37 %     1.47 %     1.47 %
 
Average common stockholders’ equity
    15.00 %     14.42 %     15.43 %     15.56 %
Net interest margin on average earning assets (taxable-equivalent basis)
    4.28 %     4.38 %     4.43 %     4.37 %
Nonperforming loans to total loans and leases, net of unearned discounts
    .84 %     .86 %     .66 %     .73 %
Efficiency ratio (a)
    54.20 %     54.49 %     53.69 %     54.41 %
 
   
     
     
     
 
Net operating (tangible) results (b)
                               
Net income (in thousands)
    125,760       118,073       123,040       122,370  
Diluted net income per common share
    1.32       1.24       1.28       1.27  
Annualized return on
                               
 
Average tangible assets
    1.56 %     1.52 %     1.64 %     1.65 %
 
Average tangible common stockholders’ equity
    25.54 %     25.46 %     27.75 %     28.41 %
Efficiency ratio (a)
    51.65 %     51.59 %     50.67 %     51.26 %
 
   
     
     
     
 
Balance sheet data
                               
In millions, except per share
                               
Average balances
                               
 
Total assets (c)
    33,174       31,908       31,349       31,290  
 
Total tangible assets (c)
    31,992       30,718       30,150       30,077  
 
Earning assets
    30,118       28,891       28,375       28,281  
 
Investment securities
    3,745       2,942       2,888       2,910  
 
Loans and leases, net of unearned discount
    25,864       25,828       25,214       25,109  
 
Deposits
    21,508       20,991       21,210       21,272  
 
Stockholders’ equity (c)
    3,135       3,030       2,978       2,960  
 
Tangible stockholders’ equity (c)
    1,953       1,840       1,779       1,747  
 
   
     
     
     
 
At end of quarter
                               
 
Total assets (c)
    33,201       34,173       31,708       31,317  
 
Total tangible assets (c)
    32,024       32,987       30,513       30,108  
 
Earning assets
    30,027       30,749       28,627       28,337  
 
Investment securities
    3,955       4,181       2,961       2,861  
 
Loans and leases, net of unearned discount
    25,728       26,309       25,604       25,138  
 
Deposits
    21,665       22,540       21,858       21,624  
 
Stockholders’ equity (c)
    3,208       3,083       3,000       2,968  
 
Tangible stockholders’ equity (c)
    2,031       1,897       1,805       1,759  
 
Equity per common share
    34.82       33.52       32.54       31.89  
 
Tangible equity per common share
    22.04       20.63       19.58       18.90  
 
   
     
     
     
 
Market price per common share
                               
 
High
    85.08       86.50       90.05       82.24  
 
Low
    67.70       70.09       79.80       71.19  
 
Closing
    79.35       78.81       85.76       80.37  
 
   
     
     
     
 

(a)   Excludes impact of merger-related expenses and net securities transactions.
 
(b)   Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Item 7, Table 22.
 
(c)   The difference between total assets and total tangible assets, and stockholders’ equity and tangible stockholders’ equity, represents goodwill, core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of such balances appears in Item 7, Table 22.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 22

RECONCILIATION OF QUARTERLY GAAP TO NON-GAAP MEASURES

                                   
      2003 Quarters
     
      Fourth   Third   Second   First
     
 
 
 
Income statement data
                               
In thousands, except per share
                               
Net income
                               
Net income
  $ 166,901       156,463       134,040       116,538  
Amortization of core deposit and other intangible assets (1)
    13,059       13,790       13,883       7,094  
Merger-related expenses (1)
    1,634       12,417       21,513       3,599  
 
   
     
     
     
 
 
Net operating income
  $ 181,594       182,670       169,436       127,231  
 
   
     
     
     
 
Earnings per share
                               
Diluted earnings per common share
  $ 1.35       1.28       1.10       1.23  
Amortization of core deposit and other intangible assets (1)
    .11       .11       .11       .07  
Merger-related expenses (1)
    .01       .10       .17       .04  
 
   
     
     
     
 
 
Diluted net operating earnings per share
  $ 1.47       1.49       1.38       1.34  
 
   
     
     
     
 
Other expense
                               
Other expense
  $ 378,355       396,400       431,147       242,278  
Amortization of core deposit and other intangible assets
    (21,345 )     (22,538 )     (22,671 )     (11,598 )
Merger-related expenses
    (2,533 )     (19,251 )     (33,158 )     (5,445 )
 
   
     
     
     
 
 
Noninterest operating expense
  $ 354,477       354,611       375,318       225,235  
 
   
     
     
     
 
Merger-related expenses
                               
Salaries and employee benefits
  $ 426       4,278       3,553       285  
Equipment and net occupancy
    472       758       800       96  
Printing, postage and supplies
    241       614       2,319       42  
Other costs of operations
    1,394       13,601       26,486       5,022  
 
   
     
     
     
 
 
Total
  $ 2,533       19,251       33,158       5,445  
 
   
     
     
     
 
Balance sheet data
                               
In millions
                               
Average assets
                               
Average assets
  $ 49,123       50,024       49,010       33,061  
Goodwill
    (2,904 )     (2,904 )     (2,893 )     (1,098 )
Core deposit and other intangible assets
    (251 )     (272 )     (295 )     (112 )
Deferred taxes
                      33  
 
   
     
     
     
 
 
Average tangible assets
  $ 45,968       46,848       45,822       31,884  
 
   
     
     
     
 
Average equity
                               
Average equity
  $ 5,625       5,461       5,377       3,267  
Goodwill
    (2,904 )     (2,904 )     (2,893 )     (1,098 )
Core deposit and other intangible assets
    (251 )     (272 )     (295 )     (112 )
Deferred taxes
    73       78       85       33  
 
   
     
     
     
 
 
Average tangible equity
  $ 2,543       2,363       2,274       2,090  
 
   
     
     
     
 
At end of quarter
                               
Total assets
                               
Total assets
  $ 49,826       50,259       50,399       33,444  
Goodwill
    (2,904 )     (2,904 )     (2,904 )     (1,098 )
Core deposit and other intangible assets
    (241 )     (262 )     (284 )     (107 )
Deferred taxes
                      32  
 
   
     
     
     
 
 
Total tangible assets
  $ 46,681       47,093       47,211       32,271  
 
   
     
     
     
 
Total equity
                               
Total equity
  $ 5,717       5,572       5,433       3,313  
Goodwill
    (2,904 )     (2,904 )     (2,904 )     (1,098 )
Core deposit and other intangible assets
    (241 )     (262 )     (284 )     (107 )
Deferred taxes
    70       76       82       32  
 
   
     
     
     
 
 
Total tangible equity
  $ 2,642       2,482       2,327       2,140  
 
   
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                   
      2002 Quarters
     
      Fourth   Third   Second   First
     
 
 
 
Income statement data
                               
In thousands, except per share
                               
Net income
                               
Net income
    118,551       110,117       114,507       113,577  
Amortization of core deposit and other intangible assets (1)
    7,209       7,956       8,533       8,793  
Merger-related expenses (1)
                       
 
   
     
     
     
 
 
Net operating income
    125,760       118,073       123,040       122,370  
 
   
     
     
     
 
Earnings per share
                               
Diluted earnings per common share
    1.25       1.16       1.19       1.18  
Amortization of core deposit and other intangible assets (1)
    .07       .08       .09       .09  
Merger-related expenses (1)
                       
 
   
     
     
     
 
 
Diluted net operating earnings per share
    1.32       1.24       1.28       1.27  
 
   
     
     
     
 
Other expense
                               
Other expense
    251,089       243,971       233,267       233,284  
Amortization of core deposit and other intangible assets
    (11,788 )     (13,011 )     (13,142 )     (13,543 )
Merger-related expenses
                       
 
   
     
     
     
 
 
Noninterest operating expense
    239,301       230,960       220,125       219,741  
 
   
     
     
     
 
Merger-related expenses
                               
Salaries and employee benefits
                       
Equipment and net occupancy
                       
Printing, postage and supplies
                       
Other costs of operations
                       
 
   
     
     
     
 
 
Total
                       
 
   
     
     
     
 
Balance sheet data
                               
In millions
                               
Average assets
                               
Average assets
    33,174       31,908       31,349       31,290  
Goodwill
    (1,098 )     (1,098 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (124 )     (137 )     (150 )     (163 )
Deferred taxes
    40       45       49       48  
 
   
     
     
     
 
 
Average tangible assets
    31,992       30,718       30,150       30,077  
 
   
     
     
     
 
Average equity
                               
Average equity
    3,135       3,030       2,978       2,960  
Goodwill
    (1,098 )     (1,098 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (124 )     (137 )     (150 )     (163 )
Deferred taxes
    40       45       49       48  
 
   
     
     
     
 
 
Average tangible equity
    1,953       1,840       1,779       1,747  
 
   
     
     
     
 
At end of quarter
                               
Total assets
                               
Total assets
    33,201       34,173       31,708       31,317  
Goodwill
    (1,098 )     (1,098 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (119 )     (131 )     (144 )     (157 )
Deferred taxes
    40       43       47       46  
 
   
     
     
     
 
 
Total tangible assets
    32,024       32,987       30,513       30,108  
 
   
     
     
     
 
Total equity
                               
Total equity
    3,208       3,083       3,000       2,968  
Goodwill
    (1,098 )     (1,098 )     (1,098 )     (1,098 )
Core deposit and other intangible assets
    (119 )     (131 )     (144 )     (157 )
Deferred taxes
    40       43       47       46  
 
   
     
     
     
 
 
Total tangible equity
    2,031       1,897       1,805       1,759  
 
   
     
     
     
 
 
(1) After any related tax effect
                               

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

Item 7, Table 23

FINANCIAL HIGHLIGHTS

                               
          2003   2002   Change
         
 
 
For the year
                       
Performance
Net income (thousands)
  $ 573,942       456,752       + 26 %
 
Return on
                       
   
Average assets
    1.27 %     1.43 %        
   
Average common equity
    11.62 %     15.09 %        
 
Net interest margin
    4.09 %     4.36 %        
 
Net charge-offs/average loans
    .28 %     .42 %        
 
Efficiency ratio (a)
    56.79 %     54.20 %        
 
   
     
     
 
Per common share data
Basic earnings
  $ 5.08       4.94       + 3 %
 
Diluted earnings
    4.95       4.78       + 4 %
 
Cash dividends
    1.20       1.05       + 14 %
 
   
     
     
 
Net operating (tangible) results (b)
Net operating income (thousands) (c)
  $ 660,931       489,243       + 35 %
 
Diluted net operating earnings per common share (c)
    5.70       5.12       + 11 %
 
Net operating return on
                       
   
Average tangible assets
    1.55 %     1.59 %        
   
Average tangible common equity
    28.49 %     26.71 %        
 
Efficiency ratio (a)
    53.59 %     51.30 %        
 
   
     
     
 
At December 31
                       
Balance sheet data (millions)
Loans and leases, net of unearned discount
  $ 35,772       25,728       + 39 %
 
Total assets
    49,826       33,201       + 50 %
 
Deposits
    33,115       21,665       + 53 %
 
Stockholders’ equity
    5,717       3,208       + 78 %
 
   
     
     
 
Loan quality
Allowance for credit losses/net loans
    1.72 %     1.70 %        
 
Nonperforming loans ratio
    .67 %     .84 %        
 
   
     
     
 
Capital
Tier 1 risk-based capital ratio
    7.30 %     8.02 %        
 
Total risk-based capital ratio
    11.20 %     11.20 %        
 
Leverage ratio
    6.98 %     7.05 %        
 
Common equity/total assets
    11.47 %     9.66 %        
 
Common equity (book value) per share
  $ 47.55       34.82       + 37 %
 
Tangible common equity per share
    21.97       22.04        
 
Market price per share
                       
     
Closing
    98.30       79.35       + 24 %
     
High
    98.98       90.05          
     
Low
    74.71       67.70          
 
   
     
     
 

(a)   Excludes impact of merger-related expenses and net securities transactions.
 
(b)   Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Item 7, Table 3.
 
(c)   Net operating income excludes the after-tax impact of merger-related expenses of $39 million or $.34 per diluted share in 2003.

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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk. Incorporated by reference to the discussion contained under the captions “Liquidity, Market Risk, and Interest Rate Sensitivity” and “Capital,” and Table 19.
     
Item 8.   Financial Statements and Supplementary Data. Financial Statements and Supplementary Data consist of the financial statements as indexed and presented below and Table 21 “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 Auditors
 
      Consolidated Balance Sheet - December 31, 2003 and 2002
 
      Consolidated Statement of Income - Years ended December 31, 2003, 2002 and 2001
 
      Consolidated Statement of Cash Flows - Years ended December 31, 2003, 2002 and 2001
 
      Consolidated Statement of Changes in Stockholders’ Equity — Years ended December 31, 2003, 2002 and 2001
 
      Notes to Financial Statements

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
M&T Bank Corporation:

We have audited the accompanying consolidated balance sheet of M&T Bank Corporation and subsidiaries (the “Company”) as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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 referred to above present fairly, in all material respects, the financial position of M&T Bank Corporation and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company changed the manner in which it accounts for stock-based compensation as of January 1, 2003. As discussed in Notes 1 and 8 to the financial statements, the Company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002.

/s/ PricewaterhouseCoopers LLP

Buffalo, New York
February 17, 2004

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

                       
          December 31
         
Dollars in thousands, except per share   2003   2002

 
 
Assets
Cash and due from banks
  $ 1,877,494       963,772  
 
Money-market assets
               
   
Interest-bearing deposits at banks
    13,194       7,856  
   
Federal funds sold and agreements to resell securities
    22,288       320,359  
   
Trading account
    214,833       51,628  
 
   
     
 
     
Total money-market assets
    250,315       379,843  
 
   
     
 
 
Investment securities
               
   
Available for sale (cost: $6,800,341 in 2003; $3,508,300 in 2002)
    6,862,937       3,599,135  
   
Held to maturity (market value: $108,053 in 2003; $87,893 in 2002)
    104,872       86,397  
   
Other (market value: $291,341 in 2003; $269,618 in 2002)
    291,341       269,618  
 
   
     
 
     
Total investment securities
    7,259,150       3,955,150  
 
   
     
 
 
Loans and leases
    36,037,598       25,936,942  
   
Unearned discount
    (265,163 )     (209,158 )
   
Allowance for credit losses
    (614,058 )     (436,472 )
 
   
     
 
     
Loans and leases, net
    35,158,377       25,291,312  
 
   
     
 
 
Premises and equipment
    398,971       238,986  
 
Goodwill
    2,904,081       1,097,553  
 
Core deposit and other intangible assets
    240,830       118,790  
 
Accrued interest and other assets
    1,736,863       1,155,775  
 
   
     
 
     
Total assets
  $ 49,826,081       33,201,181  
 
   
     
 
Liabilities
Noninterest-bearing deposits
  $ 8,411,296       4,072,085  
 
NOW accounts
    1,738,427       1,029,060  
 
Savings deposits
    14,118,521       9,156,678  
 
Time deposits
    6,637,249       6,246,384  
 
Deposits at foreign office
    2,209,451       1,160,716  
 
   
     
 
     
Total deposits
    33,114,944       21,664,923  
 
   
     
 
 
Federal funds purchased and agreements to repurchase securities
    3,832,182       2,067,834  
 
Other short-term borrowings
    610,064       1,361,580  
 
Accrued interest and other liabilities
    1,016,256       400,991  
 
Long-term borrowings
    5,535,425       4,497,374  
 
   
     
 
     
Total liabilities
    44,108,871       29,992,702  
 
   
     
 
Stockholders’ equity
Preferred stock, $1 par, 1,000,000 shares authorized, none outstanding
           
 
Common stock, $.50 par, 250,000,000 shares authorized, 120,106,490 shares issued in 2003;    97,139,347 shares issued in 2002
    60,053       48,570  
 
Common stock issuable, 124,303 shares in 2003; 126,670 shares in 2002
    6,326       6,190  
 
Additional paid-in capital
    2,888,963       1,192,998  
 
Retained earnings
    2,736,215       2,297,848  
 
Accumulated other comprehensive income, net
    25,653       54,772  
 
Treasury stock - common, at cost - none in 2003; 5,110,736 shares in 2002
          (391,899 )
 
   
     
 
     
Total stockholders’ equity
    5,717,210       3,208,479  
 
   
     
 
     
Total liabilities and stockholders’ equity
  $ 49,826,081       33,201,181  
 
   
     
 

See accompanying notes to financial statements.

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

                               
          Year ended December 31
         
In thousands, except per share   2003   2002   2001

 
 
 
Interest income
Loans and leases, including fees
  $ 1,897,701       1,670,412       1,892,507  
 
Money-market assets
                       
   
Deposits at banks
    147       76       116  
   
Federal funds sold and agreements to resell securities
    1,875       4,455       2,027  
   
Trading account
    592       202       348  
 
Investment securities
                       
   
Fully taxable
    210,968       148,221       182,767  
   
Exempt from federal taxes
    15,282       18,733       24,120  
 
   
     
     
 
     
Total interest income
    2,126,565       1,842,099       2,101,885  
 
   
     
     
 
Interest Expense
NOW accounts
    3,613       3,900       8,548  
 
Savings deposits
    102,190       107,281       134,454  
 
Time deposits
    159,700       237,001       453,940  
 
Deposits at foreign office
    14,991       8,460       11,264  
 
Short-term borrowings
    49,064       52,723       124,810  
 
Long-term borrowings
    198,252       185,149       210,581  
 
   
     
     
 
     
Total interest expense
    527,810       594,514       943,597  
 
   
     
     
 
 
Net interest income
    1,598,755       1,247,585       1,158,288  
 
Provision for credit losses
    131,000       122,000       103,500  
 
   
     
     
 
 
Net interest income after provision for credit losses
    1,467,755       1,125,585       1,054,788  
 
   
     
     
 
Other income
Mortgage banking revenues
    149,105       116,408       102,699  
 
Service charges on deposit accounts
    309,749       167,531       144,302  
 
Trust income
    114,620       60,030       64,395  
 
Brokerage services income
    51,184       43,261       39,349  
 
Trading account and foreign exchange gains
    15,989       2,860       4,462  
 
Gain (loss) on sales of bank investment securities
    2,487       (608 )     1,873  
 
Other revenues from operations
    187,961       122,449       120,346  
 
   
     
     
 
     
Total other income
    831,095       511,931       477,426  
 
   
     
     
 
Other expense
Salaries and employee benefits
    740,324       496,990       467,194  
 
Equipment and net occupancy
    170,623       107,822       111,403  
 
Printing, postage and supplies
    36,985       25,378       25,512  
 
Amortization of goodwill
                61,820  
 
Amortization of core deposit and other intangible assets
    78,152       51,484       59,816  
 
Other costs of operations
    422,096       279,937       254,830  
 
   
     
     
 
     
Total other expense
    1,448,180       961,611       980,575  
 
   
     
     
 
 
Income before income taxes
    850,670       675,905       551,639  
 
Income taxes
    276,728       219,153       198,551  
 
   
     
     
 
 
Net income
  $ 573,942       456,752       353,088  
 
   
     
     
 
 
Net income per common share
                       
   
Basic
  $ 5.08       4.94       3.69  
   
Diluted
    4.95       4.78       3.58  
 
   
     
     
 

See accompanying notes to financial statements.

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

                                 
            Year ended December 31
           
In thousands   2003   2002   2001

 
 
 
Cash flows from operating activities
Net income
  $ 573,942       456,752       353,088  
 
Adjustments to reconcile net income to net cash provided by operating activities
                       
   
Provision for credit losses
    131,000       122,000       103,500  
   
Depreciation and amortization of premises and equipment
    62,603       38,497       40,604  
   
Amortization of capitalized servicing rights
    50,907       39,806       31,704  
   
Amortization of goodwill
                61,820  
   
Amortization of core deposit and other intangible assets
    78,152       51,484       59,816  
   
Provision for deferred income taxes
    (60,906 )     (36,499 )     (28,895 )
   
Asset write-downs
    565       1,235       1,224  
   
Net gain on sales of assets
    (4,443 )     (7,514 )     (2,669 )
   
Net change in accrued interest receivable, payable
    (5,709 )     (33,470 )     (18,535 )
   
Net change in other accrued income and expense
    51,158       32,131       17,804  
   
Net change in loans held for sale
    356,754       (22,279 )     (468,237 )
   
Net change in trading account assets and liabilities
    2,121       (3,723 )     3,078  
 
   
     
     
 
   
Net cash provided by operating activities
    1,236,144       638,420       154,302  
 
   
     
     
 
Cash flows from investing activities
Proceeds from sales of investment securities
                       
   
Available for sale
    78,978       47,525       380,507  
   
Other
    180,325       55,546        
 
Proceeds from maturities of investment securities
                       
   
Available for sale
    2,467,366       2,117,278       889,858  
   
Held to maturity
    128,524       115,038       67,420  
 
Purchases of investment securities
                       
   
Available for sale
    (3,445,106 )     (2,073,617 )     (440,932 )
   
Held to maturity
    (140,664 )     (80,072 )     (87,563 )
   
Other
    (149,934 )     (85,719 )     (36,190 )
 
Additions to capitalized servicing rights
    (61,973 )     (68,187 )     (37,969 )
 
Net increase in loans and leases
    (1,427,209 )     (1,595,888 )     (1,068,942 )
 
Capital expenditures, net
    (31,631 )     (16,835 )     (23,738 )
 
Acquisitions, net of cash acquired:
                       
   
Banks and bank holding companies
    2,134,822       (2,650 )     (61,741 )
 
Other, net
    (12,025 )     4,367       (25,799 )
 
   
     
     
 
   
Net cash used by investing activities
    (278,527 )     (1,583,214 )     (445,089 )
 
   
     
     
 
Cash flows from financing activities
Net increase (decrease) in deposits
    537,552       88,109       (36,862 )
 
Net increase (decrease) in short-term borrowings
    (597,930 )     383,591       937,713  
 
Proceeds from long-term borrowings
    1,299,568       1,401,197       475,451  
 
Payments on long-term borrowings
    (1,498,842 )     (370,682 )     (458,614 )
 
Purchases of treasury stock
          (240,314 )     (323,744 )
 
Dividends paid - common
    (135,423 )     (96,858 )     (95,872 )
 
Other, net
    53,109       57,132       31,945  
 
   
     
     
 
   
Net cash provided (used) by financing activities
    (341,966 )     1,222,175       530,017  
 
   
     
     
 
 
Net increase in cash and cash equivalents
    615,651       277,381       239,230  
 
Cash and cash equivalents at beginning of year
    1,284,131       1,006,750       767,520  
 
Cash and cash equivalents at end of year
  $ 1,899,782       1,284,131       1,006,750  
 
   
     
     
 
Supplemental disclosure of cash flow information
Interest received during the year
  $ 2,151,057       1,850,213       2,144,338  
 
Interest paid during the year
    577,741       635,898       1,008,146  
 
Income taxes paid during the year
    329,827       250,332       189,562  
 
   
     
     
 
Supplemental schedule of noncash investing and financing activities
Real estate acquired in settlement of loans
  $ 17,794       17,038       18,415  
 
Acquisition of banks and bank holding companies
                       
   
Common stock issued
    1,993,956             169,270  
   
Fair value of
                       
       
Assets acquired (noncash)
    14,355,837             1,674,360  
       
Liabilities assumed
    14,496,703             1,461,449  
       
Stock options
                6,646  
 
Securitization of residential mortgage loans allocated to:
                       
   
Available for sale investment securities
    1,150,834       977,387        
   
Capitalized servicing rights
    17,279       7,212        
 
   
     
     
 

See accompanying notes to financial statements.

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

                                     
                        Common   Additional
        Preferred   Common   stock   paid-in
In thousands, except per share   stock   stock   issuable   capital

 
 
 
 
2001
                               
Balance - January 1, 2001, as previously reported
  $       46,622       4,077       914,575  
Retroactive restatement adjustment for stock-based compensation (see note 1)
                      68,954  
 
   
     
     
     
 
Balance - January 1, 2001, as restated
          46,622       4,077       983,529  
Comprehensive income:
                               
 
Net income
                       
 
Other comprehensive income, net of tax:
                               
   
Unrealized gains on investment securities, net of reclassification adjustment
                       
   
Unrealized losses on cash flow hedge, net of reclassification adjustment
                       
 
                               
Purchases of treasury stock
                       
Acquisition of Premier National Bancorp, Inc.:
                               
 
Common stock issued
          1,220             168,050  
 
Fair value of stock options
                      6,646  
Repayment of management stock ownership program receivable
                      112  
Stock-based compensation plans:
                               
 
Compensation expense
                      32,257  
 
Exercise of stock options
          722             3,959  
 
Directors’ stock plan
          2             225  
 
Deferred compensation plans, net, including dividend equivalents
          4       2,085       164  
Common stock cash dividends - $1.00 per share
                       
 
   
     
     
     
 
Balance - December 31, 2001
  $       48,570       6,162       1,194,942  
 
   
     
     
     
 
2002
                               
Balance - January 1, 2002, as previously reported
  $       48,570       6,162       1,096,340  
Retroactive restatement adjustment for stock-based compensation (see note 1)
                      98,602  
 
   
     
     
     
 
Balance - January 1, 2002, as restated
          48,570       6,162       1,194,942  
Comprehensive income:
                               
 
Net income
                       
 
Other comprehensive income, net of tax:
                               
   
Unrealized gains on investment securities, net of reclassification adjustment
                       
   
Unrealized losses on cash flow hedge, net of reclassification adjustment
                       
 
                               
Purchases of treasury stock
                       
Stock-based compensation plans:
                               
 
Stock option and purchase plans:
                               
   
Compensation expense
                      40,579  
   
Exercises
                      (42,259 )
 
Directors’ stock plan
                      35  
 
Deferred compensation plans, net, including dividend equivalents
                28       (299 )
Common stock cash dividends - $1.05 per share
                       
 
   
     
     
     
 
Balance - December 31, 2002
  $       48,570       6,190       1,192,998  
 
   
     
     
     
 
2003
                               
Balance - January 1, 2003, as previously reported
  $       48,570       6,190       1,058,389  
Retroactive restatement adjustment for stock-based compensation (see note 1)
                      134,609  
 
   
     
     
     
 
Balance - January 1, 2003, as restated
          48,570       6,190       1,192,998  
Comprehensive income:
                               
 
Net income
                       
 
Other comprehensive income, net of tax:
                               
   
Unrealized losses on investment securities, net of reclassification adjustment
                       
   
Unrealized gains on cash flow hedge, net of reclassification adjustment
                       
   
Minimum pension liability adjustment
                       
 
                               
Acquisition of Allfirst Financial Inc. - common stock issued
          10,969             1,617,034  
Repayment of management stock ownership program receivable
                      23  
Stock-based compensation plans:
                               
 
Stock option and purchase plans:
                               
   
Compensation expense
                      43,228  
   
Exercises
          509             35,045  
 
Directors’ stock plan
          4             726  
 
Deferred compensation plans, net, including dividend equivalents
          1       136       (91 )
Common stock cash dividends - $1.20 per share
                       
 
   
     
     
     
 
Balance - December 31, 2003
  $       60,053       6,326       2,888,963  
 
   
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                     
                Accumulated                
                other                
        Retained   comprehensive   Treasury        
In thousands, except per share   earnings   income, net   stock   Total

 
 
 
 
2001
                               
Balance - January 1, 2001, as previously reported
    1,735,643       (432 )           2,700,485  
Retroactive restatement adjustment for stock-based compensation (see note 1)
    (54,626 )                 14,328  
 
   
     
     
     
 
Balance - January 1, 2001, as restated
    1,681,017       (432 )           2,714,813  
Comprehensive income:
                               
 
Net income
    353,088                   353,088  
 
Other comprehensive income, net of tax:
                               
   
Unrealized gains on investment securities, net of reclassification adjustment
          23,549             23,549  
   
Unrealized losses on cash flow hedge, net of reclassification adjustment
          (298 )           (298 )
 
                           
 
 
                            376,339  
Purchases of treasury stock
                (323,744 )     (323,744 )
Acquisition of Premier National Bancorp, Inc.:
                               
 
Common stock issued
                      169,270  
 
Fair value of stock options
                      6,646  
Repayment of management stock ownership program receivable
                      112  
Stock-based compensation plans:
                               
 
Compensation expense
                      32,257  
 
Exercise of stock options
                70,794       75,475  
 
Directors’ stock plan
                415       642  
 
Deferred compensation plans, net, including dividend equivalents
    (146 )           395       2,502  
Common stock cash dividends - $1.00 per share
    (95,872 )                 (95,872 )
 
   
     
     
     
 
Balance - December 31, 2001
    1,938,087       22,819       (252,140 )     2,958,440  
 
   
     
     
     
 
2002
                               
Balance - January 1, 2002, as previously reported
    2,017,700       22,819       (252,140 )     2,939,451  
Retroactive restatement adjustment for stock-based compensation (see note 1)
    (79,613 )                 18,989  
 
   
     
     
     
 
Balance - January 1, 2002, as restated
    1,938,087       22,819       (252,140 )     2,958,440  
Comprehensive income:
                               
 
Net income
    456,752                   456,752  
 
Other comprehensive income, net of tax:
                               
   
Unrealized gains on investment securities, net of reclassification adjustment
          32,277             32,277  
   
Unrealized losses on cash flow hedge, net of reclassification adjustment
          (324 )           (324 )
 
                           
 
 
                            488,705  
Purchases of treasury stock
                (240,314 )     (240,314 )
Stock-based compensation plans:
                               
 
Stock option and purchase plans:
                               
   
Compensation expense
                      40,579  
   
Exercises
                98,854       56,595  
 
Directors’ stock plan
                994       1,029  
 
Deferred compensation plans, net, including dividend equivalents
    (133 )           707       303  
Common stock cash dividends - $1.05 per share
    (96,858 )                 (96,858 )
 
   
     
     
     
 
Balance - December 31, 2002
    2,297,848       54,772       (391,899 )     3,208,479  
 
   
     
     
     
 
2003
                               
Balance - January 1, 2003, as previously reported
    2,405,801       54,772       (391,899 )     3,181,823  
Retroactive restatement adjustment for stock-based compensation (see note 1)
    (107,953 )                 26,656  
 
   
     
     
     
 
Balance - January 1, 2003, as restated
    2,297,848       54,772       (391,899 )     3,208,479  
Comprehensive income:
                               
 
Net income
    573,942                   573,942  
 
Other comprehensive income, net of tax:
                               
   
Unrealized losses on investment securities, net of reclassification adjustment
          (17,283 )           (17,283 )
   
Unrealized gains on cash flow hedge, net of reclassification adjustment
          622             622  
   
Minimum pension liability adjustment
          (12,458 )           (12,458 )
 
                           
 
 
                            544,823  
Acquisition of Allfirst Financial Inc. - common stock issued
                365,953       1,993,956  
Repayment of management stock ownership program receivable
                      23  
Stock-based compensation plans:
                               
 
Stock option and purchase plans:
                               
   
Compensation expense
                      43,228  
   
Exercises
                25,288       60,842  
 
Directors’ stock plan
                175       905  
 
Deferred compensation plans, net, including dividend equivalents
    (152 )           483       377  
Common stock cash dividends - $1.20 per share
    (135,423 )                 (135,423 )
 
   
     
     
     
 
Balance - December 31, 2003
    2,736,215       25,653             5,717,210  
 
   
     
     
     
 

See accompanying notes to financial statements.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements

1. Significant accounting policies

M&T Bank Corporation (“M&T”) is a bank holding company headquartered in Buffalo, New York. Through subsidiaries, M&T provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking, asset management, insurance and other financial services. Banking activities are largely focused on consumers residing in New York State, Pennsylvania, Maryland and the District of Columbia and on small and medium-size businesses based in those areas. Banking services are also provided in Delaware, Virginia and West Virginia, while certain subsidiaries also conduct activities in other states.

     The accounting and reporting policies of M&T and subsidiaries (“the Company”) conform to generally accepted accounting principles and to general practices within the banking industry. 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 more significant accounting policies are as follows:

Consolidation

Except as described in note 18, the consolidated financial statements include M&T and all of its subsidiaries. All significant intercompany accounts and transactions of consolidated subsidiaries have been eliminated in consolidation. The financial statements of M&T included in note 24 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.

Securities purchased under agreements to resell and securities sold under agreements to repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at amounts equal to the cash or other consideration exchanged. It is generally the Company’s policy to take possession of collateral pledged to secure agreements to resell.

Trading account

Financial instruments used for trading purposes are stated at fair value. Realized gains and losses and unrealized changes in fair value of financial instruments utilized in trading activities are included in trading account and foreign exchange 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. Except for investment securities

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

1. Significant accounting policies, continued

Investment securities, continued

for which the Company has entered into a related fair value hedge, unrealized gains or losses on investment securities available for sale are reflected in accumulated other comprehensive income, net of applicable income taxes.

     Other securities are stated at cost and include stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York.

     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.

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 as a reduction of loans outstanding. Commitments to sell residential real estate loans are utilized by the Company to hedge the exposure to changes in fair value of residential real estate loans held for sale. Hedged residential real estate loans held for sale are recorded in the consolidated balance sheet at estimated fair market value. Valuation adjustments made on these loans are included in mortgage banking revenues.

     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 an insignificant 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.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

1. Significant accounting policies, continued

Allowance for credit losses

The allowance for credit losses represents the amount which, in management’s judgment, will be adequate to absorb credit losses inherent in the loan and lease portfolio as of the balance sheet date. The adequacy of the allowance is determined by management’s evaluation of the loan and lease portfolio 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, the level of delinquent loans and the value of any collateral.

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.

Sales and securitizations of financial assets

Transfers of financial assets for which the Company has surrendered control of the financial assets are accounted for as sales to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. Retained interests in a sale or securitization of financial assets are measured at the date of transfer by allocating the previous carrying amount between the assets transferred and any retained interests based on their relative estimated fair values. The fair values of retained debt securities are generally determined through reference to independent pricing information. The fair values of retained servicing rights and any other retained interests are determined based on the present value of expected future cash flows associated with those interests and by reference to market prices for similar assets.

Capitalized servicing rights

Servicing assets purchased or servicing liabilities assumed that are not recognized in connection with the sale or securitization of financial assets are initially measured at fair value. Capitalized servicing assets 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 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 servicing rights, the Company stratifies such assets based on predominant risk characteristics of underlying financial instruments 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 may include financial asset or loan type, note rate and term. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

1. Significant accounting policies, continued

Goodwill and core deposit and other intangible assets

Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. Similar to goodwill, other intangible assets, which include core deposit intangibles, also lack physical substance but, as required by Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” have had portions of the cost of an acquired entity assigned to such assets. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revised the accounting for purchased intangible assets and, in general, requires that goodwill no longer be amortized, but rather that it be tested for impairment at least annually at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as core deposit intangibles, are required to be amortized over their estimated lives. Prior to January 1, 2002, substantially all of the Company’s goodwill was amortized using the straight-line method over twenty years. Core deposit and other intangible assets are amortized using accelerated methods over estimated useful lives of five to ten years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of core deposit and other intangible assets may be impaired.

Derivative financial instruments

The Company accounts for derivative financial instruments in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security, or a foreign currency denominated forecasted transaction. Pursuant to SFAS No. 133, the accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity’s approach to managing risk.

     The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. For such agreements, amounts receivable or payable are recognized as accrued under the terms of the agreement and the net differential is recorded as an adjustment to interest income or expense of the related asset or liability. Interest rate swap agreements are designated as either fair value hedges or cash flow hedges. In a fair value hedge, the fair values of the interest rate swap agreements and changes in the fair values of the hedged items are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss being recognized in current earnings. The difference between changes in the fair values of interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the Company’s consolidated statement of income. In a cash flow hedge, the effective portion of the derivative’s

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

1. Significant accounting policies, continued

Derivative financial instruments, continued

unrealized gain or loss is initially recorded as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the unrealized gain or loss is reported in “other revenues from operations” immediately. Prior to the January 1, 2001 adoption of SFAS No. 133, interest rate swap agreements used to manage interest rate risk were not recorded at fair value in the consolidated balance sheet.

     The Company utilizes commitments to sell residential real estate loans to hedge the exposure to changes in the fair value of residential real estate loans held for sale. Hedged residential real estate loans held for sale, commitments to originate residential real estate loans to be held for sale, and commitments to sell residential real estate loans are generally recorded in the consolidated balance sheet at estimated fair market value. Prior to the January 1, 2001 adoption of SFAS No. 133, residential real estate loans held for sale and related commitments were carried at the lower of aggregate cost or fair market value.

     Derivative instruments, including financial futures commitments and interest rate swap agreements, that do not satisfy the hedge accounting requirements noted above are valued at fair value and are generally classified as trading account assets or liabilities with resultant changes in fair value being recognized in trading account and foreign exchange gains in the Company’s consolidated statement of income.

Stock-based compensation

Effective January 1, 2003, the Company began recognizing expense for stock-based compensation using the fair value method of accounting described in SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. Under SFAS No. 123, stock-based compensation expense is recognized over the vesting period of the stock-based grant based on the estimated grant date fair value of the stock-based compensation that is expected to vest. Information on the determination of the estimated value of stock options and stock purchase plan rights used to calculate stock-based compensation expense under the provisions of SFAS No. 123 is included in note 10.

     The Company has chosen the retroactive restatement method described in SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amended SFAS No. 123. As a result, financial information for all prior periods presented have been restated to reflect the expense that would have been recognized had the recognition provisions of SFAS No. 123 been applied to all stock-based compensation granted to employees after January 1, 1995. The use of the retroactive restatement method resulted in the restatement of previously reported balances of additional paid-in capital, retained earnings and deferred tax assets. As of December 31, 2000, previously reported additional paid-in capital was increased by $69 million, retained earnings were decreased by $55 million, and deferred tax assets were increased by $14 million. As of December 31, 2001, previously reported additional paid-in capital was increased by $99 million, retained earnings were decreased by $80 million, and deferred tax assets were increased by $19 million. As of December 31, 2002, previously reported additional paid-in capital was increased by $135 million, retained earnings were decreased by $108 million, and deferred tax assets were increased by $27 million.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

1. Significant accounting policies, continued

Stock-based compensation, continued

     Stock-based compensation expense is now included in salaries and employee benefits expense and totaled $43 million in 2003, $41 million in 2002, and $32 million in 2001. After tax effect, stock-based compensation lowered 2003’s net income by $32 million, diluted earnings per share by $.27, and basic earnings per share by $.28. The impact of the Company’s decision to recognize expense for stock-based compensation on previously reported net income, basic earnings per share and diluted earnings per share for 2002 and 2001 is as follows:

                   
      Year ended December 31
      2002   2001
     
 
      (in thousands, except per share)
Net income:
               
 
As previously reported
  $ 485,092       378,075  
 
Stock-based employee compensation expense determined under the fair value based method, net of applicable tax effects
    (28,340 )     (24,987 )
 
 
   
     
 
 
As restated
  $ 456,752       353,088  
 
 
   
     
 
Basic earnings per share:
               
 
As previously reported
  $ 5.25       3.95  
 
As restated
    4.94       3.69  
Diluted earnings per share:
               
 
As previously reported
    5.07       3.82  
 
As restated
    4.78       3.58  

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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates and laws.

Earnings per common share

Basic earnings per share exclude dilution and are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding and common shares issuable under deferred compensation arrangements during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Proceeds assumed to have been received on such exercise or conversion are assumed to be used to purchase shares of M&T common stock at the average market price during the period, as required by the “treasury stock method” of accounting.

Treasury stock

Repurchases of shares of M&T common stock are recorded at cost as a reduction of stockholders’ equity. Reissuances of shares of treasury stock are recorded at average cost.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

2. Acquisitions

On April 1, 2003, M&T completed the acquisition of Allfirst Financial Inc. (“Allfirst”), a bank holding company headquartered in Baltimore, Maryland, from Allied Irish Banks, p.l.c. (“AIB”), Dublin, Ireland. Allfirst was merged with and into M&T on that date. Allfirst Bank, Allfirst’s primary banking subsidiary, was merged into Manufacturers and Traders Trust Company (“M&T Bank”), a wholly owned subsidiary of M&T, on that date. Allfirst Bank operated 269 banking offices in Maryland, Pennsylvania, Virginia and the District of Columbia at the date of acquisition. The results of operations acquired in the Allfirst transaction have been included in the Company’s financial results since April 1, 2003. Acquired assets on April 1, 2003 totaled $16 billion, including $10 billion of loans and leases, liabilities assumed aggregated $14 billion, including $11 billion of deposits, and $2 billion was added to stockholders’ equity. AIB received 26,700,000 shares of M&T common stock valued at $2 billion (based on the market value of M&T common stock at the time the terms of the merger were agreed to and announced by M&T and AIB in September 2002) and $886 million in cash in exchange for all outstanding Allfirst common shares. See note 23 for further information on M&T’s relationship with AIB.

     The acquisition of Allfirst represented a major geographic expansion by M&T and created a strong Mid-Atlantic banking franchise. Following the acquisition, the Company offers a broad range of products and services through its banking offices in six states and the District of Columbia. Management expects that M&T will benefit from greater geographic diversity and the benefits of scale associated with a larger company. As part of the purchase price allocation at April 1, 2003, M&T recorded $1.8 billion of goodwill, $136 million of core deposit intangible and $64 million of other intangible assets. The weighted-average amortization periods for newly acquired core deposit intangible and other intangible assets were eight years and seven years, respectively. Information regarding the allocation of goodwill recorded as a result of the Allfirst acquisition to the Company’s reportable segments, as well as the carrying amounts and amortization of core deposit and other intangible assets, is provided in note 8.

     On February 9, 2001, M&T completed the acquisition of Premier National Bancorp, Inc. (“Premier”), a bank holding company headquartered in Lagrangeville, New York. Following the merger, Premier National Bank, Premier’s bank subsidiary, was merged into M&T Bank. Premier National Bank operated 34 banking offices in the mid-Hudson Valley region of New York State. After application of the election, allocation, and proration procedures contained in the merger agreement with Premier, M&T paid $171 million in cash and issued 2,440,812 shares of M&T common stock in exchange for the Premier shares outstanding at the time of acquisition. In addition, based on the merger agreement and the exchange ratio provided therein, M&T converted outstanding and unexercised stock options granted by Premier into options to purchase 224,734 shares of M&T common stock. The purchase price was approximately $347 million based on the cash paid to Premier shareholders, the fair value of M&T common stock exchanged, and the estimated fair value of Premier stock options converted into M&T stock options.

     Acquired assets, loans and deposits of Premier on February 9, 2001 totaled approximately $1.8 billion, $1.0 billion and $1.4 billion, respectively. The transaction was accounted for using the purchase method of accounting and, accordingly, operations acquired from Premier have been included in the Company’s financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $178 million of goodwill and $32 million of core deposit intangible. The core deposit intangible is being amortized over seven years using an accelerated

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

2. Acquisitions, continued

method. Through December 31, 2001, the goodwill was being amortized over twenty years using the straight-line method.

     The Company incurred merger expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company of approximately $60 million ($39 million net of applicable income taxes) during 2003 and approximately $8 million ($5 million net of applicable income taxes) during 2001. There were no significant similar expenses in 2002. Expenses related to systems conversions and other costs of integration are included in the consolidated statement of income for the years ended December 31, 2003 and 2001 as follows:

                 
    2003   2001
   
 
    (in thousands)
Salaries and employee benefits
  $ 8,542       275  
Equipment and net occupancy
    2,126       309  
Printing, postage and supplies
    3,216       438  
Other costs of operations
    46,503       6,985  
 
   
     
 
 
  $ 60,387       8,007  
 
   
     
 

     The expenses noted above consisted largely of professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; recruiting and other incentive compensation; initial marketing and promotion expenses designed to introduce the Company to customers of the acquired operations; travel and relocation costs; and printing, supplies and other costs of commencing operations in new markets and offices.

     Presented herein is certain unaudited pro forma information for 2003 as if Allfirst had been acquired on January 1, 2003 and for 2002 as if Allfirst had been acquired on January 1, 2002. These results combine the historical results of Allfirst 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 acquisition taken place on the indicated dates. In particular, expenses related to systems conversions and other costs of integration are included in 2003 when such costs were incurred and, additionally, the Company expects to achieve further operating cost savings as a result of the acquisition which are not reflected in the pro forma amounts presented. Further, pro forma net income amounts for the year ended December 31, 2002 include $12,714,000 of expenses related to the fraudulent foreign exchange trading activities announced by Allfirst on February 6, 2002.

                 
    Pro forma
    Year ended December 31
    2003   2002
   
 
    (in thousands, except per share)
Interest income
  $ 2,267,271       2,560,530  
Other income
    923,055       892,657  
Net income
    598,556       567,431  
Diluted earnings per common share
    4.89       4.64  

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M&T BANK 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, 2003
                               
Investment securities available for sale:
                               
U.S. Treasury and federal agencies
  $ 296,425       589       2,976       294,038  
Obligations of states and political subdivisions
    136,186       10,355       45       146,496  
Mortgage-backed securities:
                               
 
Government issued or guaranteed
    3,075,929       36,818       8,238       3,104,509  
 
Privately issued
    2,520,393       32,514       4,672       2,548,235  
Other debt securities
    312,508       15,011       6,671       320,848  
Equity securities
    458,900       5,292       15,381       448,811  
 
   
     
     
     
 
 
    6,800,341       100,579       37,983       6,862,937  
 
   
     
     
     
 
Investment securities held to maturity:
                               
Obligations of states and political subdivisions
    102,697       3,181             105,878  
Other debt securities
    2,175                   2,175  
 
   
     
     
     
 
 
    104,872       3,181             108,053  
 
   
     
     
     
 
Other securities
    291,341                   291,341  
 
   
     
     
     
 
Total
  $ 7,196,554       103,760       37,983       7,262,331  
 
   
     
     
     
 
December 31, 2002
                               
Investment securities available for sale:
                               
U.S. Treasury and federal agencies
  $ 178,522       4,441             182,963  
Obligations of states and political subdivisions
    160,399       12,430       30       172,799  
Mortgage-backed securities:
                               
 
Government issued or guaranteed
    981,143       45,128       54       1,026,217  
 
Privately issued
    1,606,737       41,467       1,662       1,646,542  
Other debt securities
    350,217       13,418       15,891       347,744  
Equity securities
    231,282       2,119       10,531       222,870  
 
   
     
     
     
 
 
    3,508,300       119,003       28,168       3,599,135  
 
   
     
     
     
 
Investment securities held to maturity:
                               
Obligations of states and political subdivisions
    83,224       1,496             84,720  
Other debt securities
    3,173                   3,173  
 
   
     
     
     
 
 
    86,397       1,496             87,893  
 
   
     
     
     
 
Other securities
    269,618                   269,618  
 
   
     
     
     
 
Total
  $ 3,864,315       120,499       28,168       3,956,646  
 
   
     
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

3. Investment securities, continued

     No investment in securities of a single non-U.S. Government or government agency issuer exceeded ten percent of stockholders’ equity at December 31, 2003.

     As of December 31, 2003, the latest available investment ratings of all privately issued mortgage-backed securities were A or better, with the exception of 9 securities with an aggregate amortized cost and estimated fair value of $43,685,000 and $43,921,000, respectively.

     The amortized cost and estimated fair value of collateralized mortgage obligations included in mortgage-backed securities were as follows:

                 
    December 31
    2003   2002
   
 
    (in thousands)
Amortized cost
  $ 4,545,040       1,830,371  
Estimated fair value
    4,568,193       1,873,079  
     
     
 

     Gross realized gains on the sale of investment securities were $2,487,000 in 2003, $245,000 in 2002 and $4,097,000 in 2001. Gross realized losses on the sale of investment securities were $853,000 in 2002 and $2,224,000 in 2001. There were no such losses in 2003.

     At December 31, 2003, 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
  $ 164,899       165,757  
Due after one year through five years
    149,091       153,788  
Due after five years through ten years
    154,641       154,825  
Due after ten years
    276,488       287,012  
 
   
     
 
 
    745,119       761,382  
Mortgage-backed securities available for sale
    5,596,322       5,652,744  
 
   
     
 
 
  $ 6,341,441       6,414,126  
 
   
     
 
Debt securities held to maturity:
               
Due in one year or less
  $ 78,204       78,182  
Due after one year through five years
    8,179       8,693  
Due after five years through ten years
    8,784       9,586  
Due after ten years
    9,705       11,592  
 
   
     
 
 
  $ 104,872       108,053  
 
   
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

3. Investment securities, continued

     A summary of investment securities that as of December 31, 2003 have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer follows:

                                   
      Less than 12 months   12 months or more
     
 
      Fair   Unrealized   Fair   Unrealized
      value   losses   value   losses
     
 
 
 
              (in thousands)        
U.S. Treasury and federal agencies
  $ 149,420       (2,976 )            
Obligations of states and political subdivisions
    449       (6 )     975       (39 )
Mortgage-backed securities:
                               
 
Government issued or guaranteed
    1,505,795       (8,233 )     1,295       (5 )
 
Privately issued
    477,137       (4,124 )     24,284       (548 )
Other debt securities
    19,848       (274 )     121,638       (6,397 )
Equity securities
                97,476       (15,381 )
 
   
     
     
     
 
Total
  $ 2,152,649       (15,613 )     245,668       (22,370 )
 
   
     
     
     
 

     Included in the $22,370,000 of unrealized losses on investment securities that have been in a continuous unrealized loss position for twelve months or more are $15,381,000 of unrealized losses on five different preferred stock issuances of government-sponsored entities with a cost basis of $112,857,000. The Company concluded that the impairment of such securities as of December 31, 2003 was largely attributable to a temporary widening of rate of return spreads associated with the securities required by market participants that resulted from the recent financial reporting issues disclosed by those government-sponsored entities. The investment ratings of the preferred stock issuances were AA- at December 31, 2003. Such ratings have not been lowered since the preferred stock was acquired by the Company. Furthermore, management believes that the underlying government-directed business models, and therefore the underlying economic performance associated with such business models, is unchanged. Also included in the $22,370,000 noted above are $6,392,000 of unrealized losses on thirteen different issuances of bank trust preferred securities with a cost basis of $127,887,000. Periodic distributions on each of those bank trust preferred securities varies based on changes in interest rates. The decline in fair value of the securities is largely due to a widening of interest spreads associated with the bank trust preferred securities required by market participants. The Company concluded that the impairment as of December 31, 2003 was temporary in nature because management believes that all contractual amounts owed to the Company in accordance with the terms of the bank trust preferred securities are collectible and each of the securities continues to be investment grade. The amortized cost basis of the trust preferred securities and their respective investment ratings were as follows: $84,069,000 were rated A-; $15,602,000 were rated BBB+; and $28,216,000 were rated BBB. No securities comprising the remainder of the impairments were individually significant and such impairments were generally considered to be a function of the current interest rate environment.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

3. Investment securities, continued

     At December 31, 2003, investment securities with a carrying value of $4,787,349,000, including $4,555,937,000 of investment securities available for sale, were pledged to secure demand notes issued to the U.S. Treasury, borrowings from various Federal Home Loan Banks (“FHLB”), repurchase agreements, governmental deposits and interest rate swap agreements.

     Investment securities pledged by the Company to secure obligations whereby the secured party is permitted by contract or custom to sell or repledge such collateral totaled $580,265,000 at December 31, 2003. The pledged securities are included in government issued or guaranteed mortgage-backed securities available for sale.

     At December 31, 2003, collateral accepted by the Company which by contract or custom can be sold or repledged consisted of investment securities with a fair value of $1,006,000 purchased under agreements to resell.

4. Loans and leases

Total gross loans and leases outstanding were comprised of the following:

                   
      December 31
      2003   2002
     
 
      (in thousands)
Loans
               
Commercial, financial, agricultural, etc.
  $ 8,566,604       5,222,184  
Real estate:
               
 
Residential
    2,470,438       2,711,133  
 
Commercial
    11,462,293       9,299,331  
 
Construction
    1,537,880       1,001,553  
Consumer
    10,689,330       6,922,530  
 
   
     
 
 
Total loans
    34,726,545       25,156,731  
 
   
     
 
Leases
               
Commercial
    839,795       177,554  
Consumer
    471,258       602,657  
 
   
     
 
 
Total leases
    1,311,053       780,211  
 
   
     
 
Total loans and leases
  $ 36,037,598       25,936,942  
 
   
     
 

     One-to-four family residential mortgage loans held for sale were $723 million at December 31, 2003 and $1.1 billion at December 31, 2002. One-to-four family residential mortgage loans serviced for others totaled approximately $13.6 billion and $12.6 billion at December 31, 2003 and 2002, respectively. As of December 31, 2003, approximately $17 million of one-to-four family residential mortgage loans serviced for others had been sold with recourse. Commercial mortgage loans serviced for others totaled approximately $3.8 billion and $644 million at December 31, 2003 and 2002, respectively. As of December 31, 2003 approximately $825 million of commercial mortgage balances serviced for others had been sold with recourse in conjunction with the Company’s participation in the Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) program, which was acquired as part of the Allfirst transaction. At December 31, 2003, the Company estimated that the recourse obligations described above were not material to the Company’s consolidated financial position. There have been no material losses incurred as a result of those recourse arrangements.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

4. Loans and leases, continued

     Nonperforming loans (loans on which interest was not being accrued or had been renegotiated at below-market interest rates) totaled $240,292,000 at December 31, 2003 and $215,290,000 at December 31, 2002. If nonaccrual and renegotiated loans had been accruing interest at their originally contracted terms, interest income on such loans would have amounted to $19,752,000 in 2003 and $17,555,000 in 2002. The actual amounts included in interest income during 2003 and 2002 on such loans were $5,312,000 and $6,483,000, respectively.

     The recorded investment in loans considered impaired was $164,183,000 and $164,497,000 at December 31, 2003 and 2002, respectively. The recorded investment in loans considered impaired for which there was a related valuation allowance for impairment included in the allowance for credit losses and the amount of such impairment allowance were $110,485,000 and $25,608,000, respectively, at December 31, 2003 and $110,064,000 and $17,626,000, respectively, at December 31, 2002. The recorded investment in loans considered impaired for which there was no related valuation allowance for impairment was $53,698,000 and $54,433,000 at December 31, 2003 and 2002, respectively. The average recorded investment in impaired loans during 2003, 2002 and 2001 was $215,882,000, $143,118,000 and $116,841,000, respectively. Interest income recognized on impaired loans totaled $5,664,000, $4,180,000 and $3,310,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

     Borrowings by directors and certain officers of M&T and its banking subsidiaries, and by associates of such persons, exclusive of loans aggregating less than $60,000, amounted to $198,188,000 and $153,054,000 at December 31, 2003 and 2002, respectively. During 2003, new borrowings by such persons amounted to $91,977,000 (including borrowings of new directors or officers that were outstanding at the time of their election) and repayments and other reductions were $46,843,000.

     At December 31, 2003, approximately $270 million of commercial mortgage loans and $1.1 billion of one-to-four family residential mortgage loans were pledged to secure outstanding borrowings.

     The Company’s loan and lease portfolio includes (i) commercial lease financing receivables consisting of direct financing and leveraged leases for machinery and equipment, railroad equipment, commercial trucks and trailers,

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

4. Loans and leases, continued

and commercial aircraft, and (ii) consumer leases for automobiles and light trucks. A summary of lease financing receivables follows:

                     
        December 31
        2003   2002
       
 
        (in thousands)
Commercial leases:
               
 
Direct financings:
               
 
Lease payments receivable
  $ 330,800       103,614  
 
Estimated residual value of leased assets
    121,402       29,796  
 
Unearned income
    (64,264 )     (18,669 )
 
 
   
     
 
   
Investment in direct financings
    387,938       114,741  
 
Leveraged leases:
               
 
Lease payments receivable
    173,999       23,340  
 
Estimated residual value of leased assets
    213,594       20,804  
 
Unearned income
    (63,741 )     (11,080 )
 
 
   
     
 
   
Investment in leveraged leases
    323,852       33,064  
 
 
   
     
 
   
Investment in commercial leases
    711,790       147,805  
Consumer automobile leases:
               
 
Lease payments receivable
    191,893       285,558  
 
Estimated residual value of leased assets
    279,365       317,099  
 
Unearned income
    (45,871 )     (75,807 )
 
 
   
     
 
   
Investment in consumer automobile leases
    425,387       526,850  
 
 
   
     
 
Total investment in leases
  $ 1,137,177       674,655  
 
 
   
     
 
Deferred taxes payable arising from leveraged leases
  $ 299,285       35,717  
 
 
   
     
 

     At December 31, 2003, the minimum future lease payments to be received from lease financings were as follows:

                           
      Commercial   Consumer   Total
     
 
 
Year ending December 31:
          (in thousands)        
 
2004
  $ 105,463       95,903       201,366  
 
2005
    91,199       56,659       147,858  
 
2006
    69,549       28,021       97,570  
 
2007
    48,653       10,422       59,075  
 
2008
    31,053       888       31,941  
 
Later years
    158,882             158,882  
 
 
   
     
     
 
 
  $ 504,799       191,893       696,692  
 
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

5. Allowance for credit losses

Changes in the allowance for credit losses were as follows:

                           
      Year ended December 31
      2003   2002   2001
     
 
 
              (in thousands)        
Beginning balance
  $ 436,472       425,008       374,703  
Provision for credit losses
    131,000       122,000       103,500  
Allowance obtained through acquisitions
    146,300             22,112  
Allowance related to loans sold or securitized
    (3,198 )     (2,786 )      
Net charge-offs
                       
 
Charge-offs
    (127,520 )     (124,582 )     (94,154 )
 
Recoveries
    31,004       16,832       18,847  
 
   
     
     
 
Net charge-offs
    (96,516 )     (107,750 )     (75,307 )
 
   
     
     
 
Ending balance
  $ 614,058       436,472       425,008  
 
   
     
     
 

6. Premises and equipment

The detail of premises and equipment was as follows:

                   
      December 31
      2003   2002
     
 
      (in thousands)
Land
  $ 57,811       30,961  
Buildings-owned
    227,915       170,301  
Buildings-capital leases
    1,784       2,904  
Leasehold improvements
    97,302       67,161  
Furniture and equipment-owned
    287,910       195,335  
Furniture and equipment-capital leases
    1,197       2,035  
 
   
     
 
 
    673,919       468,697  
Less: accumulated depreciation and amortization
               
 
Owned assets
    273,660       226,867  
 
Capital leases
    1,288       2,844  
 
   
     
 
 
    274,948       229,711  
 
   
     
 
Premises and equipment, net
  $ 398,971       238,986  
 
   
     
 

     Net lease expense for all operating leases totaled $51,511,000 in 2003, $31,202,000 in 2002 and $31,659,000 in 2001. Minimum lease payments under noncancelable operating leases are presented in note 20. Minimum lease payments required under capital leases are not material.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

7. Capitalized servicing assets

Changes in capitalized servicing assets were as follows:

                         
    Year ended December 31
    2003   2002   2001
   
 
 
    (in thousands)
Beginning balance
  $ 135,076       107,173       100,927  
Originations
    50,125       39,460       23,288  
Purchases
    34,243       21,037       14,720  
Assumed in loan securitizations (note 18)
    17,279       7,212        
Amortization
    (50,907 )     (39,806 )     (31,704 )
Sales
                (58 )
 
   
     
     
 
 
    185,816       135,076       107,173  
Valuation allowance
    (34,500 )     (32,500 )     (50 )
 
   
     
     
 
Ending balance, net
  $ 151,316       102,576       107,123  
 
   
     
     
 

     During 2003 and 2002, provisions for impairment of $2,000,000 and $32,450,000, respectively, were added to the valuation allowance because the carrying value of certain strata of capitalized servicing assets exceeded estimated fair value. There was no provision for impairment added to the allowance for the year ended December 31, 2001. The estimated fair value of capitalized servicing assets was approximately $161 million at December 31, 2003 and $115 million at December 31, 2002. In conjunction with the Allfirst acquisition, the Company obtained capitalized servicing assets of approximately $21 million, comprised primarily of commercial mortgage servicing rights. The fair value of capitalized residential mortgage loan servicing assets was estimated using discount rates ranging from 9.3% to 17.5% at December 31, 2003 and 8.6% to 16.2% at December 31, 2002, and contemporaneous prepayment assumptions. The weighted-average discount rate was 11.6% and 9.6% at December 31, 2003 and 2002, respectively. The estimated market value of capitalized servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. An 18% discount rate was used to estimate the fair value of capitalized commercial mortgage servicing rights at December 31, 2003 with no prepayment assumptions because, in general, the servicing agreements allow the Company to share in customer loan prepayment fees and thereby recover the remaining carrying value of the capitalized servicing rights associated with such loan. The Company’s ability to realize the carrying value of capitalized commercial mortgage servicing rights is more dependent on the borrowers’ abilities to repay the underlying loans than on prepayments or changes in interest rates. Capitalized servicing assets at December 31, 2003 included $129 million of capitalized residential mortgage loan servicing rights, net of the valuation allowance for impairment, and $22 million of capitalized commercial mortgage loan servicing rights. At December 31, 2002 and 2001, capitalized servicing assets consisted predominantly of capitalized residential mortgage loan servicing rights.

     The key economic assumptions used to determine the fair value of capitalized servicing rights at December 31, 2003 and the sensitivity of such value to changes in those assumptions are summarized in the table that follows. Those calculated sensitivities are hypothetical and actual changes in the fair value of capitalized servicing rights may differ significantly from the amounts presented herein. The effect of a variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption. In reality, changes in one factor may result in

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

7. Capitalized servicing assets, continued

changes in another which may magnify or counteract the sensitivities. The changes in assumptions are presumed to be instantaneous.

         
Weighted-average prepayment speeds - residential (constant prepayment rate)
    20.15 %
Impact on fair value of 10% adverse change
  $ (7,462,000 )
Impact on fair value of 20% adverse change
    (14,269,000 )
Weighted-average discount rate – residential and commercial
    12.58 %
Impact on fair value of 10% adverse change
  $ (4,893,000 )
Impact on fair value of 20% adverse change
    (9,455,000 )

8. Goodwill and other intangible assets

In accordance with SFAS No. 142, the Company ceased amortizing goodwill associated with corporate acquisitions effective January 1, 2002. As prescribed by SFAS No. 142, the following is a reconciliation of reported net income and earnings per share and net income and earnings per share adjusted to exclude the impact of amortization of goodwill for the year ended December 31, 2001:

           
      Year ended
      December 31
      2001
     
      (in thousands,
      except per share)
Net income:
       
 
As reported
  $ 353,088  
 
Amortization of goodwill
    61,820  
 
   
 
 
Adjusted net income
  $ 414,908  
 
   
 
Basic earnings per share:
       
 
As reported
  $ 3.69  
 
Amortization of goodwill
    .64  
 
   
 
 
Adjusted basic earnings per share
  $ 4.33  
 
   
 
Diluted earnings per share:
       
 
As reported
  $ 3.58  
 
Amortization of goodwill
    .62  
 
   
 
 
Adjusted diluted earnings per share
  $ 4.20  
 
   
 

     The Company continues to amortize core deposit and other intangible assets over the estimated life of each respective asset. Total amortizing intangible assets were comprised of the following:

                           
      Gross carrying   Accumulated   Net carrying
      amount   amortization   amount
     
 
 
              (in thousands)        
December 31, 2003
                       
 
Core deposit
  $ 385,725       202,616       183,109  
 
Other
    99,443       41,722       57,721  
 
 
   
     
     
 
 
Total
  $ 485,168       244,338       240,830  
 
 
   
     
     
 
December 31, 2002
                       
 
Core deposit
  $ 249,960       143,272       106,688  
 
Other
    35,016       22,914       12,102  
 
 
   
     
     
 
 
Total
  $ 284,976       166,186       118,790  
 
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

8. Goodwill and other intangible assets, continued

     Amortization of core deposit and other intangible assets was generally computed using accelerated methods over original amortization periods of five to ten years. The weighted-average original amortization period was approximately eight years. The remaining weighted average amortization period as of December 31, 2003 was approximately six years. Amortization expense for core deposit and other intangible assets was $78,152,000, $51,484,000 and $59,816,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Estimated amortization expense in future years for such intangible assets is as follows:

           
      (in thousands)
Year ending December 31:
       
 
2004
  $ 75,410  
 
2005
    56,684  
 
2006
    42,768  
 
2007
    29,311  
 
2008
    17,707  
 
Later years
    18,950  
 
   
 
 
  $ 240,830  
 
   
 

     Also in accordance with the provisions of SFAS No. 142, the Company completed a transitional goodwill impairment test as of January 1, 2002 and annual goodwill impairment tests as of October 1, 2002 and 2003. For purposes of testing for impairment, the Company assigned all recorded goodwill to the reporting units originally intended to benefit from past business combinations. Goodwill was generally assigned based on the implied fair value of the acquired goodwill applicable to the benefited reporting units at the time of each respective acquisition. The implied fair value of the goodwill was determined as the difference between the estimated incremental overall fair value of the reporting unit and the estimated fair value of the net assets assigned to the reporting unit as of each respective acquisition date. To test for goodwill impairment at each evaluation date, the Company compared the estimated fair value of each of its reporting units to their respective carrying amounts and certain other assets and liabilities assigned to the reporting unit, including goodwill and core deposit and other intangible assets. The methodologies used to estimate fair values of reporting units as of the acquisition dates and as of the evaluation dates were similar. For the Company’s core customer relationship business reporting units, fair value was estimated as the present value of the expected future cash flows of the reporting unit. The Company’s non-relationship business reporting units were individually analyzed and fair value was largely determined by comparisons to market transactions for similar businesses. Based on the results of the transitional and annual goodwill impairment tests, the Company concluded that the amount of recorded goodwill was not impaired at the respective testing dates.

     The resulting goodwill from the Allfirst acquisition is not tax deductible. A summary of goodwill assigned to each of the Company’s reportable segments as of December 31, 2003 and 2002 for purposes of testing for impairment is provided below:

                         
    December 31,   Allfirst   December 31,
    2002   acquisition   2003
   
 
 
            (in thousands)        
Commercial Banking
  $ 236,012       602,153       838,165  
Commercial Real Estate
    114,883       140,283       255,166  
Discretionary Portfolio
                 
Residential Mortgage Banking
                 
Retail Banking
    627,564       813,361       1,440,925  
All Other
    119,094       250,731       369,825  
 
   
     
     
 
Total
  $ 1,097,553       1,806,528       2,904,081  
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings

The amounts and interest rates of short-term borrowings were as follows:

                           
      Federal funds                
      purchased and   Other        
      repurchase   short-term        
      agreements   borrowings   Total
     
 
 
      (dollars in thousands)
At December 31, 2003
                       
 
Amount outstanding
  $ 3,832,182       610,064       4,442,246  
 
Weighted-average interest rate
    .92 %     1.25 %     .96 %
For the year ended December 31, 2003
                       
 
Highest amount at a month-end
  $ 4,301,977       1,322,839          
 
Daily-average amount outstanding
    3,337,582       993,235       4,330,817  
 
Weighted-average interest rate
    1.09 %     1.27 %     1.13 %
 
 
   
     
     
 
At December 31, 2002
                       
 
Amount outstanding
  $ 2,067,834       1,361,580       3,429,414  
 
Weighted-average interest rate
    1.24 %     1.26 %     1.24 %
 
 
   
     
     
 
For the year ended December 31, 2002
                       
 
Highest amount at a month-end
  $ 2,598,647       1,361,580          
 
Daily-average amount outstanding
    2,101,700       1,022,976       3,124,676  
 
Weighted-average interest rate
    1.69 %     1.69 %     1.69 %
 
 
   
     
     
 
At December 31, 2001
                       
 
Amount outstanding
  $ 2,133,558       912,272       3,045,830  
 
Weighted-average interest rate
    1.56 %     1.64 %     1.58 %
For the year ended December 31, 2001
                       
 
Highest amount at a month-end
  $ 3,191,427       1,144,408          
 
Daily-average amount outstanding
    2,389,004       890,778       3,279,782  
 
Weighted-average interest rate
    3.78 %     3.88 %     3.81 %
 
 
   
     
     
 

     In general, federal funds purchased and short-term repurchase agreements outstanding at December 31, 2003 matured within two days following year-end. Other short-term borrowings included borrowings from the U.S. Treasury and others having original maturities of one year or less. Other short-term borrowings at December 31, 2003 and 2002 included a $500 million revolving asset-backed structured borrowing with an unaffiliated conduit lender, which was entered into in November 2002. Further information related to the revolving asset-backed structured borrowing is provided in note 18. Other short-term borrowings at December 31, 2002 included $750 million of borrowings from the FHLB that matured in two days. There was no similar borrowing from the FHLB at December 31, 2003.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings, continued

     At December 31, 2003, the Company had lines of credit under formal agreements as follows:

                         
            M&T   M&T
    M&T   Bank   Bank, N.A.
   
 
 
            (in thousands)        
Outstanding borrowings
  $       3,137,979        
Unused
    30,000       5,345,281       149,789  
 
   
     
     
 

     M&T has a revolving credit agreement with an unaffiliated commercial bank whereby M&T may borrow up to $30 million at its discretion through December 10, 2004. At December 31, 2003, M&T Bank had borrowing facilities available with the FHLB whereby M&T Bank could borrow up to approximately $6.2 billion. Additionally, M&T Bank and M&T Bank, National Association (“M&T Bank, N.A.”), a wholly owned subsidiary of M&T, had available lines of credit with the Federal Reserve Bank of New York totaling approximately $2.2 billion, under which there were no borrowings outstanding at December 31, 2003 or 2002. M&T Bank and M&T Bank, N.A. are required to pledge loans or investment securities as collateral for these borrowing facilities.

     Long-term borrowings were as follows:

                   
      December 31
      2003   2002
     
 
      (in thousands)
Subordinated notes of M&T Bank:
               
 
7% due 2005
  $ 100,000       100,000  
 
8% due 2010
    499,595       504,811  
 
3.85% due 2013
    399,633        
Subordinated notes of M&T:
               
 
7.2% due 2007
    222,351        
 
6.875% due 2009
    108,951        
Senior medium term notes:
               
 
7.3% due 2004
    74,415       74,253  
 
6.5% due 2008
    28,028       27,582  
Advances from FHLB:
               
 
Variable rates
    2,000,000       2,415,000  
 
Fixed rates
    1,156,535       1,020,385  
Junior subordinated debentures associated with preferred capital securities of:
               
 
M&T Capital Trust I - 8.234%
    154,640        
 
M&T Capital Trust II - 8.277%
    103,093        
 
M&T Capital Trust III - 9.25%
    69,359        
 
First Maryland Capital I - Variable rate
    142,004        
 
First Maryland Capital II - Variable rate
    139,333        
 
Allfirst Asset Trust - Variable rate
    101,327        
Preferred capital securities:
               
 
M&T Capital Trust I - 8.234%
          150,000  
 
M&T Capital Trust II - 8.277%
          100,000  
 
M&T Capital Trust III - 9.25%
          67,828  
Other
    236,161       37,515  
 
   
     
 
 
  $ 5,535,425       4,497,374  
 
   
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings, continued

     The subordinated notes of M&T Bank are unsecured and are subordinate to the claims of depositors and other creditors of M&T Bank. The subordinated notes of M&T are unsecured and subordinate to the claims of general creditors of M&T. The senior medium term notes were issued in 1997 and 1998 by Keystone Financial Mid-Atlantic Funding Corp., now a wholly owned subsidiary of M&T that was acquired in 2000. The notes provide for semi-annual interest payments at fixed rates of interest and are guaranteed by M&T.

     Long-term variable rate advances from the FHLB had contractual interest rates that ranged from 1.10% to 1.22% at December 31, 2003 and from 1.38% to 1.80% at December 31, 2002. The weighted-average contractual interest rates were 1.15% and 1.49% at December 31, 2003 and 2002, respectively. Long-term fixed-rate advances from the FHLB had contractual interest rates ranging from 4.05% to 8.29% at December 31, 2003 and 2002. The weighted-average contractual interest rates payable were 5.38% and 5.52% at December 31, 2003 and 2002, respectively. Advances from the FHLB mature at various dates through 2029 and are secured by residential real estate loans, commercial real estate loans and investment securities.

     In 1997, M&T Capital Trust I (“Trust I”), M&T Capital Trust II (“Trust II”), and M&T Capital Trust III (“Trust III”) issued $310 million of fixed rate preferred capital securities. As a result of the Allfirst acquisition, M&T assumed responsibility for $300 million of similar preferred capital securities previously issued by special-purpose entities formed by Allfirst consisting of $150 million of floating rate preferred capital securities issued by First Maryland Capital I (“Trust IV”) in December 1996 and $150 million of floating rate preferred capital securities issued by First Maryland Capital II (“Trust V”) in January 1997. The distribution rates on the preferred capital securities of Trust IV and Trust V adjust quarterly based on changes in the three-month London Interbank Offered Rate (“LIBOR”) and were 2.15% and 2.01%, respectively, at December 31, 2003. Trust I, Trust II, Trust III, Trust IV and Trust V are referred to herein collectively as the “Trusts.”

     Other than the following payment terms (and the redemption terms described below), the preferred capital securities issued by the Trusts (“Capital Securities”) are substantially identical in all material respects:

                 
    Distribution   Distribution
Trust   rate   dates

 
 
Trust I
    8.234 %   February 1 and August 1
 
Trust II
    8.277 %   June 1 and December 1
 
Trust III
    9.25 %   February 1 and August 1
 
Trust IV
  LIBOR   January 15, April 15, July 15
 
  plus 1.00%      and October 15
 
Trust V
  LIBOR   February 1, May 1, August 1
 
  plus .85%      and November 1

     The common securities of each Trust (“Common Securities”) are wholly owned by M&T and are the only class of each Trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding Trust. Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in the M&T’s Tier 1 capital.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings, continued

     The proceeds from the issuances of the Capital Securities and Common Securities were used by the Trusts to purchase junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of M&T as follows:

             
    Capital   Common   Junior Subordinated
Trust   Securities   Securities   Debentures

 
 
 
Trust I   $150 million   $4.64 million   $154.64 million aggregate liquidation amount of 8.234% Junior Subordinated Debentures due February 1, 2027.
             
Trust II   $100 million   $3.09 million   $103.09 million aggregate liquidation amount of 8.277% Junior Subordinated Debentures due June 1, 2027.
             
Trust III   $60 million   $1.856 million   $61.856 million aggregate liquidation amount of 9.25% Junior Subordinated Debentures due February 1, 2027.
             
Trust IV   $150 million   $4.64 million   $154.64 million aggregate liquidation amount of Floating Rate Junior Subordinated Debentures due January 15, 2027.
             
Trust V   $150 million   $4.64 million   $154.64 million aggregate liquidation amount of Floating Rate Junior Subordinated Debentures due February 1, 2027.

     The Junior Subordinated Debentures represent the sole assets of each Trust and payments under the Junior Subordinated Debentures are the sole source of cash flow for each Trust. The financial statement carrying values of junior subordinated debentures associated with preferred capital securities at December 31, 2003 of Trust III, Trust IV, Trust V and of preferred capital securities at December 31, 2002 of Trust III include the unamortized portions of purchase accounting adjustments to reflect estimated fair value as of the date of M&T’s acquisition of the common securities of each respective trust. The interest rates payable on the Junior Subordinated Debentures of Trust IV and Trust V were 2.15% and 2.01%, respectively, at December 31, 2003.

     Holders of the Capital Securities receive preferential cumulative cash distributions on each distribution date at the stated distribution rate unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures for up to ten semi-annual periods (in the case of Trust I, Trust II and Trust III) or twenty quarterly periods (in the case of Trust IV and Trust V), in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. The agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings, continued

     The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events (“Events”) set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after the stated optional redemption dates (January 15, 2007 in the case of Trust IV, February 1, 2007 in the case of Trust I, Trust III and Trust V, and June 1, 2007 in the case of Trust II) contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part. The Junior Subordinated Debentures are redeemable prior to their stated maturity dates at M&T’s option (i) on or after the stated optional redemption dates, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory approval. The redemption price of the Capital Securities and the related Junior Subordinated Debentures upon early redemption will be expressed as a percentage of the liquidation amount plus accumulated but unpaid distributions. In the case of Trust I, such percentage adjusts annually and ranges from 104.117% at February 1, 2007 to 100.412% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. In the case of Trust II, such percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period ending May 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to June 1, 2007. In the case of Trust III, such percentage adjusts annually and ranges from 104.625% at February 1, 2007 to 100.463% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. In the case of Trust IV and Trust V, the redemption price upon early redemption will be equal to 100% of the principal amount to be redeemed plus any accrued but unpaid distributions to the redemption date.

     As a result of the Allfirst acquisition, M&T also assumed responsibility for $100 million of Floating Rate Non-Cumulative Subordinated Trust Enhanced Securities (“SKATES”) that were issued by Allfirst Preferred Capital Trust (“Allfirst Capital Trust”). Allfirst Capital Trust is a Delaware business trust that was formed in June 1999 for the exclusive purposes of (i) issuing the SKATES and common securities, (ii) purchasing Asset Preferred Securities issued by Allfirst Preferred Asset Trust (“Allfirst Asset Trust”) and (iii) engaging in only those other activities necessary or incidental thereto. M&T holds 100% of the common securities of Allfirst Capital Trust. Allfirst Asset Trust is a Delaware business trust that was formed in June 1999 for the exclusive purposes of (i) issuing Asset Preferred Securities and common securities, (ii) investing the gross proceeds of the Asset Preferred Securities in junior subordinated debentures originally issued by Allfirst (and assumed by M&T as part of its acquisition of Allfirst on April 1, 2003) and other permitted investments and (iii) engaging in only those other activities necessary or incidental thereto. M&T holds 100% of the common securities of Allfirst Asset Trust and Allfirst Capital Trust holds 100% of the Asset Preferred Securities of Allfirst Asset Trust. M&T currently has outstanding $105.3 million aggregate liquidation amount Floating Rate Junior Subordinated Debentures due July 15, 2029 that were originally issued by Allfirst and are payable to Allfirst Asset Trust and that pay interest at a rate of 2.58% as of December 31, 2003.

     Distributions on the SKATES are non-cumulative. The distribution rate on the SKATES and on the Floating Rate Junior Subordinated Debentures is a rate per annum of three month LIBOR plus 1.50% reset quarterly two business days prior to the distribution dates of January 15, April 15, July 15, and October 15 in

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

9. Borrowings, continued

each year. Distributions on the SKATES will be paid if, as and when Allfirst Capital Trust has funds available for payment. The SKATES are subject to mandatory redemption if the Asset Preferred Securities of Allfirst Asset Trust are redeemed. Allfirst Asset Trust will redeem the Asset Preferred Securities if the junior subordinated debentures of M&T held by Allfirst Asset Trust are redeemed. M&T may redeem such junior subordinated debentures, in whole or in part, at any time on or after July 15, 2009, subject to regulatory approval. Allfirst Asset Trust will redeem the Asset Preferred Securities at par plus accrued and unpaid distributions from the last distribution payment date. M&T has guaranteed, on a subordinated basis, the payment in full of all distributions and other payments on the SKATES and on the Asset Preferred Securities to the extent that Allfirst Capital Trust and Allfirst Asset Trust, respectively, have funds legally available. Under the Federal Reserve Board’s current risk-based capital guidelines, the SKATES are includable in M&T’s Tier I Capital.

     As discussed in note 18, effective December 31, 2003 the Company applied new accounting provisions promulgated by the Financial Accounting Standards Board (“FASB”) and removed the Trusts and Allfirst Asset Trust from the Company’s consolidated balance sheet. Accordingly, at December 31, 2003, the Company included the Junior Subordinated Debentures payable to the Trusts and the Floating Rate Junior Subordinated Debentures payable to the Allfirst Asset Trust as long-term borrowings in its consolidated balance sheet. Prior to that date the Company included the preferred capital securities of the Trusts and the SKATES issued by Allfirst Capital Trust in its consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. That change in financial statement presentation had no economic impact on the Company, had no material or substantive impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2003, and resulted in the Company recognizing $30 million in other assets for its “investment” in the common securities of the trusts described herein that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described herein.

     Long-term borrowings at December 31, 2003 mature as follows:

         
Year ending December 31:   (in thousands)
2004
  $ 484,422  
2005
    1,386,249  
2006
    515,728  
2007
    234,243  
2008
    404,737  
Later years
    2,510,046  
 
   
 
 
  $ 5,535,425  
 
   
 

10. Stock-based compensation plans

Stock option plans

M&T had two stock option plans at December 31, 2003. The 1983 Stock Option Plan (“1983 Plan”) allowed the grant of stock options at prices which could not be less than the fair market value of the common stock on the date of grant. Except as described below, options granted under the 1983 Plan generally vest over four years and are exercisable over terms not exceeding ten years and one day from the date of grant. During 2001, the remaining shares available for grant under the 1983 Plan were awarded. In 1999, the Company granted options to substantially all employees who had not previously received awards under the 1983 Plan. The options granted under that award vested three years after the grant date and are exercisable for a period of seven years thereafter.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

10. Stock-based compensation plans, continued

Stock option plans, continued

     In April 2001, stockholders approved the 2001 Stock Option Plan (“2001 Plan”). Options granted under the 2001 Plan contain substantially similar terms as the 1983 Plan. Under the 2001 Plan, a maximum of 10,000,000 shares of stock may be issued upon the exercise of options granted.

     A summary of stock option activity follows:

                       
          Stock        
          options   Weighted-average
          outstanding   exercise price
         
 
2001
               
   
Beginning balance
    10,609,108     $ 35.34  
   
Granted
    2,047,904       65.95  
   
Acquired (note 2)
    224,734       45.47  
   
Exercised
    (2,706,931 )     26.63  
   
Cancelled
    (269,545 )     71.09  
 
   
     
 
     
At year-end
    9,905,270       43.30  
2002
               
   
Granted
    1,898,918       75.81  
   
Exercised
    (1,431,190 )     38.10  
   
Cancelled
    (167,183 )     60.64  
 
   
     
 
     
At year-end
    10,205,815       49.80  
2003
               
   
Granted
    1,787,701       80.33  
   
Exercised
    (1,499,687 )     35.57  
   
Cancelled
    (57,706 )     71.56  
 
   
     
 
     
At year-end
    10,436,123     $ 56.95  
 
   
     
 
Exercisable at:
               
 
December 31, 2003
    5,152,482     $ 42.92  
   
 
   
     
 
 
December 31, 2002
    4,976,171       36.57  
   
 
   
     
 
 
December 31, 2001
    4,368,555       30.98  
   
 
   
     
 

     At December 31, 2003 and 2002, respectively, there were 6,248,834 and 7,978,829 shares available for future grant.

     A summary of stock options at December 31, 2003 follows:

                                                   
              Outstanding   Exercisable
             
 
                      Weighted-average           Weighted-
              Number of  
  Number of   average
Range of   stock   Exercise   Life   stock   exercise
exercise price   options   price   (in years)   options   price

 
 
 
 
 
$
13.95 to
  $ 39.83       1,499,674     $ 21.49       1.8       1,495,994     $ 21.45  
 
40.19 to
    49.65       3,058,923       44.77       5.2       2,395,423       45.43  
 
50.00 to
    74.70       2,301,345       63.36       6.7       995,194       59.95  
 
75.80 to
    90.72       3,576,181       78.12       8.5       265,871       77.33  
 
           
     
     
     
     
 
 
            10,436,123     $ 56.95       6.2       5,152,482     $ 42.92  
 
           
     
     
     
     
 

     The Company used an option pricing model to estimate the grant date present value of stock options granted. The weighted-average estimated value per option was $22.62 in 2003, $22.97 in 2002 and $20.62 in 2001. The values were calculated using the following weighted-average assumptions: an option term of 6.5 years (representing the estimated period between grant date and exercise date based on historical data); a risk-free interest rate of 3.61%

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

10. Stock-based compensation plans, continued

Stock option plans, continued

in 2003, 4.74% in 2002 and 5.17% in 2001 (representing the yield on a U.S. Treasury security with a remaining term equal to the expected option term); expected volatility of 30% in 2003 and 29% in 2002 and 2001; and estimated dividend yields of 1.50% in 2003, 1.32% in 2002 and 1.52% in 2001 (representing the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date). Based on historical data and projected employee turnover rates, the Company reduced the estimated value per option by 10% to reflect an estimate of the probability of forfeiture prior to vesting.

Stock purchase plan

The Company began offering a stock purchase plan to employees in 2002. The stock purchase plan provides eligible employees of the Company with the right to purchase shares of M&T common stock through accumulated payroll deductions. Shares of M&T common stock will be issued at the end of an option period, typically one year or six months. In connection with the employee stock purchase plan, 1,000,000 shares of M&T common stock were authorized for issuance, of which 82,483 shares have been issued.

     Similar to the stock option plans, the Company used an option pricing model to estimate the grant date present value of purchase rights under the stock purchase plan. The estimated weighted-average value per right was $13.16 for 2003 and $12.47 for 2002, which were calculated using the following weighted-average assumptions: a term of six months to one year (representing the period between grant date and exercise date); a risk-free interest rate of 1.24% in 2003 and 1.62% in 2002 (representing the yield on a U.S. Treasury security with a like term); expected volatility of 26% in 2003 and 24% in 2002; and an estimated dividend yield of 1.41% in 2003 and 1.21% in 2002 (representing the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date).

Deferred bonus plan

The Company provides a deferred bonus plan pursuant to which eligible employees may elect to defer all or a portion of their current annual incentive compensation awards and allocate such awards to several investment options, including M&T common stock. Participants may elect the timing of distributions from the plan. Such distributions are payable in cash with the exception of balances allocated to M&T common stock which are distributable in the form of M&T common stock. Shares of M&T common stock distributable pursuant to the terms of the deferred bonus plan were 81,092 and 83,072 at December 31, 2003 and 2002, respectively. The obligation to issue shares is included in common stock issuable in the consolidated balance sheet. In connection with the deferred bonus plan, 150,000 shares of M&T common stock were authorized for issuance, of which 54,828 shares have been issued.

Directors’ stock plan

The Company maintains a compensation plan for non-employee members of the Company’s boards of directors and directors advisory councils that allows such members to receive all or a portion of their compensation in shares of M&T common stock. In connection with the directors’ stock plan, 100,000 shares of M&T common stock were authorized for issuance, of which 50,827 shares have been issued.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

10. Stock-based compensation plans, continued

Directors’ stock plan, continued

     Through an acquisition, the Company assumed an obligation to issue shares of M&T common stock related to a deferred directors compensation plan. Shares of common stock issuable under such plan were 43,211 and 43,598 at December 31, 2003 and 2002, respectively. The obligation to issue shares is included in common stock issuable in the consolidated balance sheet.

Management stock ownership program

Through an acquisition, M&T obtained loans that are secured by M&T common stock purchased by former executives of the acquired entity. At December 31, 2003 and 2002, the loan amounts owed M&T were less than the fair value of the financed stock purchased and totaled $4,578,000 and $4,601,000, respectively. Such loans are classified as a reduction of additional paid-in capital in the consolidated balance sheet. The amounts are due to M&T no later than October 5, 2010.

11. Pension plans and other postretirement benefits

The Company provides defined benefit pension and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. The Company uses a December 31 measurement date for all of its plans.

     Net periodic pension expense consisted of the following:

                         
    Year ended December 31
    2003   2002   2001
   
 
 
    (in thousands)
Service cost
  $ 24,530       12,776       11,371  
Interest cost on projected benefit obligation
    31,495       19,268       17,847  
Expected return on plan assets
    (34,426 )     (26,371 )     (27,215 )
Amortization of prior service cost
    35       27       11  
Recognized net actuarial loss
    2,349       58       45  
 
   
     
     
 
Net periodic pension expense
  $ 23,983       5,758       2,059  
 
   
     
     
 

     Net postretirement benefits expense consisted of the following:

                         
    Year ended December 31
    2003   2002   2001
   
 
 
    (in thousands)
Service cost
  $ 701       426       398  
Interest cost on projected benefit obligation
    4,129       1,958       1,832  
Expected return on plan assets
          (38 )     (52 )
Amortization of prior service cost
    170       170       170  
Recognized net actuarial loss
    371       200       83  
 
   
     
     
 
Net postretirement benefits expense
  $ 5,371       2,716       2,431  
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

11. Pension plans and other postretirement benefits, continued

     Data relating to the funding position of the plans were as follows:

                                   
      Pension   Postretirement
      benefits   benefits
     
 
      2003   2002   2003   2002
     
 
 
 
      (in thousands)
Change in benefit obligation:
                               
 
Benefit obligation at beginning of year
  $ 312,776       269,889       29,543       27,518  
 
Service cost
    24,530       12,776       701       426  
 
Interest cost
    31,495       19,268       4,129       1,958  
 
Plan participants’ contributions
                1,675       841  
 
Amendments
          190              
 
Actuarial loss
    31,155       23,677       3,640       2,410  
 
Business combinations
    230,610             47,408        
 
Benefits paid
    (24,155 )     (13,024 )     (8,231 )     (3,610 )
 
 
   
     
     
     
 
 
Benefit obligation at end of year
    606,411       312,776       78,865       29,543  
 
 
   
     
     
     
 
Change in plan assets:
                               
 
Fair value of plan assets at beginning of year
    254,419       273,080             1,006  
 
Actual return on plan assets
    95,788       (25,527 )           9  
 
Employer contributions
          19,050              
 
Plan participants’ contributions
                1,675       841  
 
Business combinations
    136,086                    
 
Benefits and other payments
    (21,699 )     (12,184 )     (1,675 )     (1,856 )
 
 
   
     
     
     
 
 
Fair value of plan assets at end of year
    464,594       254,419              
 
 
   
     
     
     
 
Funded status
    (141,817 )     (58,357 )     (78,865 )     (29,543 )
Unrecognized net actuarial loss
    80,388       112,945       10,501       7,232  
Unrecognized prior service cost
    560       595       1,440       1,610  
 
 
   
     
     
     
 
Prepaid (accrued) benefit cost
  $ (60,869 )     55,183       (66,924 )     (20,701 )
 
 
   
     
     
     
 
Amounts recognized in the consolidated balance sheet were:
                               
 
Prepaid benefit cost (asset)
  $ 4,503       75,552              
 
Accrued benefit cost (liability)
    (86,422 )     (20,369 )     (66,924 )     (20,701 )
 
Intangible asset
    627                    
 
Pre-tax charge to accumulated other comprehensive income
    20,423                    
 
 
   
     
     
     
 
 
  $ (60,869 )     55,183       (66,924 )     (20,701 )
 
 
   
     
     
     
 

     The Company has an unfunded supplemental pension plan for certain key executives. The projected benefit obligation and accumulated benefit obligation included in the preceding data related to such plan was $40,502,000 and $40,500,000, respectively, as of December 31, 2003 and $21,981,000 and $21,840,000, respectively, as of December 31, 2002.

     The accumulated benefit obligation for all defined benefit pension plans was $550,313,000 and $270,184,000 at December 31, 2003 and 2002, respectively.

     As of December 31, 2003, the accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $543,547,000 (including $40,500,000 related to the unfunded supplemental pension plan) and $457,125,000,

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

11. Pension plans and other postretirement benefits, continued

respectively. As of December 31, 2002, only the unfunded supplemental pension plan had an accumulated benefit obligation in excess of plan assets. The amount of such accumulated benefit obligation was $21,840,000. At December 31, 2003, the Company recorded a minimum pension liability adjustment of $20,423,000 that after applicable tax effect resulted in a reduction of accumulated other comprehensive income of $12,458,000. There was no minimum pension liability adjustment at December 31, 2002.

     The assumed weighted-average rates used to determine benefit obligations at December 31 were:

                                 
    Pension   Postretirement
    benefits   benefits
   
 
    2003   2002   2003   2002
   
 
 
 
Discount rate
    6.25 %     6.75 %     6.25 %     6.75 %
Rate of increase in future compensation levels
    4.92 %     4.96 %            

     The assumed weighted-average rates used to determine net benefit cost for the years ended December 31 were:

                                                 
    Pension   Postretirement
    benefits   benefits
   
 
    2003   2002   2001   2003   2002   2001
   
 
 
 
 
 
Discount rate
    6.75 %     7.25 %     7.50 %     6.75 %     7.25 %     7.50 %
Long-term rate of return on plan assets
    8.50 %     8.75 %     9.00 %           4.25 %     4.25 %
Rate of increase in future compensation levels
    4.96 %     4.94 %     5.00 %                  

     On April 1, 2003, pension and other benefit obligations were assumed as a result of the acquisition of Allfirst. Initial liabilities and net costs were determined using a 6.25% discount rate and other assumptions as noted above.

     Weighted-average pension plan asset allocations based on the fair value of such assets at December 31, 2003 and 2002, and target allocations for 2004, by asset category, are as follows:

                           
      December 31   Target allocation
      2003   2002   2004
     
 
 
Equity securities
    75 %     60 %     55-75 %
Debt securities
    19       29       25-40  
Other
    6       11       0-15  
 
   
     
         
 
Total
    100 %     100 %        
 
   
     
         

     The expected long-term rate of return assumption as of each measurement date was determined by taking into consideration asset allocations as of each such date, historical returns on the types of assets held and current economic factors. The Company’s investment policy for determining the asset allocation targets was developed based on the desire to maximize total return while placing a strong emphasis on preservation of capital. In general, it is hoped that, in the aggregate, changes in the fair value of plan assets will be less volatile than similar changes in appropriate market indices. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

11. Pension plans and other postretirement benefits, continued

     Pension plan assets included common stock of M&T with a fair value of $32,235,000 (7% of total plan assets) at December 31, 2003 and $26,021,000 (10% of total plan assets) at December 31, 2002.

     The Company makes contributions to its funded qualified pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plans. Subject to the impact of actual events and circumstances that may occur in 2004, the Company does not expect to make contributions to the funded qualified pension plans in 2004. The Company’s contributions to the funded qualified pension plans were $19,050,000 in 2002. There were no contributions to those plans in 2003. The Company regularly funds the payment of benefit obligations for the supplemental pension and postretirement benefit plans because such plans do not hold assets for investment. Payments made by the Company for supplemental pension benefits were $2,456,000 and $840,000 in 2003 and 2002, respectively. Payments made by the Company for postretirement benefits were $6,556,000 and $1,754,000 in 2003 and 2002, respectively.

     For measurement of postretirement benefits, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease gradually to 5% over 5 years and remain constant thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:

                           
              +1%   -1%
             
 
        (in thousands)
Increase (decrease) in:
                       
 
Service and interest cost
          $ 207       (184 )
 
Accumulated postretirement benefit obligation
            4,174       (3,714 )

     On December 8, 2003, the President of the United States signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act provides for drug benefits under a new Medicare Part D program and federal subsidies to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. On January 12, 2004, the FASB issued Staff Position No. FAS 106-1 that permits plan sponsors to make a one-time election to defer recognition of the Act in a sponsor’s postretirement benefit plan accounting until formal FASB guidance is provided. The Company’s postretirement benefit plan does provide prescription drug benefits. The Company has elected to defer the recognition of the provisions of the Act until the FASB has issued formal guidance. Accordingly, the accrued benefit liability and net postretirement benefits expense noted herein do not reflect the effects of the Act on the Company’s postretirement benefits plan. It is not possible to determine whether any guidance subsequently issued by the FASB will result in any changes to the postretirement benefit information presented herein.

     The Company has a retirement savings plan (“Savings Plan”) that is a defined contribution plan in which eligible employees of the Company may defer up to 15% of qualified compensation via contributions to the plan. The Company makes an employer matching contribution in an amount equal to 75% of an employee’s contribution, up to 4.5% of the employee’s qualified compensation. Employees’ accounts, including employee contributions, employer matching contributions and accumulated earnings thereon, are at all times fully vested and nonforfeitable. Employee benefits expense resulting from the Company’s contributions to the Savings Plan totaled $14,929,000, $10,724,000 and $10,103,000 in 2003, 2002 and 2001, respectively.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

12. Income taxes

     The components of income tax expense (benefit) were as follows:

                           
      Year ended December 31
      2003   2002   2001
     
 
 
      (in thousands)
Current
                       
 
Federal
  $ 317,023       248,392       218,021  
 
State and city
    20,611       7,260       9,425  
 
 
   
     
     
 
 
Total current
    337,634       255,652       227,446  
 
 
   
     
     
 
Deferred
                       
 
Federal
    (49,516 )     (30,572 )     (24,368 )
 
State and city
    (11,390 )     (5,927 )     (4,527 )
 
 
   
     
     
 
 
Total deferred
    (60,906 )     (36,499 )     (28,895 )
 
 
   
     
     
 
 
Total income taxes applicable to pre-tax income
  $ 276,728       219,153       198,551  
 
 
   
     
     
 

     The Company files a consolidated federal income tax return reflecting taxable income earned by all subsidiaries. In prior years, applicable federal tax law allowed certain financial institutions the option of deducting as bad debt expense for tax purposes amounts in excess of actual losses. In accordance with generally accepted accounting principles, such financial institutions were not required to provide deferred income taxes on such excess. Recapture of the excess tax bad debt reserve established under the previously allowed method will result in taxable income if M&T Bank fails to maintain bank status as defined in the Internal Revenue Code or charges are made to the reserve for other than bad debt losses. At December 31, 2003, M&T Bank’s tax bad debt reserve for which no federal income taxes have been provided was $74,021,000. No actions are planned that would cause this reserve to become wholly or partially taxable.

     The portion of income taxes attributable to gains or losses on sales of bank investment securities was an expense of $970,000 and $724,000 in 2003 and 2001, respectively, and a benefit of $221,000 in 2002. No alternative minimum tax expense was recognized in 2003, 2002 or 2001.

     Total income taxes differed from the amount computed by applying the statutory federal income tax rate to pre-tax income as follows:

                           
      Year ended December 31
      2003   2002   2001
     
 
 
              (in thousands)        
Income taxes at statutory rate
  $ 297,735       236,567       193,074  
Increase (decrease) in taxes:
                       
 
Tax-exempt income
    (24,332 )     (19,972 )     (22,566 )
 
State and city income taxes, net of federal income tax effect
    5,994       866       3,184  
 
Amortization of goodwill
                21,637  
 
Other
    (2,669 )     1,692       3,222  
 
   
     
     
 
 
  $ 276,728       219,153       198,551  
 
   
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

12. Income taxes, continued

     Deferred tax assets (liabilities) were comprised of the following at December 31:

                           
      2003   2002   2001
     
 
 
              (in thousands)        
Losses on loans and other assets
  $ 283,512       191,005       172,392  
Postretirement and other supplemental employee benefits
    44,157       19,105       13,000  
Incentive compensation plans
    28,871       14,650       14,873  
Depreciation and amortization
          11,286        
Interest on loans
    7,091       14,163       6,443  
Retirement benefits
    17,825              
Stock-based compensation
    33,535       26,656       18,995  
Other
    36,864       18,104       19,041  
 
   
     
     
 
 
Gross deferred tax assets
    451,855       294,969       244,744  
 
   
     
     
 
Leasing transactions
    (534,035 )     (181,476 )     (166,126 )
Capitalized servicing rights
    (20,390 )     (8,834 )     (21,657 )
Retirement benefits
          (28,798 )     (13,701 )
Depreciation and amortization
    (32,668 )           (652 )
Unrealized investment gains
    (24,485 )     (35,441 )     (12,558 )
Other
    (9,198 )     (12,911 )     (12,399 )
 
   
     
     
 
 
Gross deferred tax liabilities
    (620,776 )     (267,460 )     (227,093 )
 
   
     
     
 
Net deferred tax asset(liability)
  $ (168,921 )     27,509       17,651  
 
   
     
     
 

     The Company believes that it is more likely than not that the deferred tax assets will be realized through taxable earnings or alternative tax strategies.

     The income tax credits shown in the statement of income of M&T in note 24 arise principally from operating losses before dividends from subsidiaries.

13. Earnings per share

The computations of basic earnings per share follow:

                           
      Year ended December 31
      2003   2002   2001
     
 
 
      (in thousands, except per share)
Income available to common stockholders:
                       
 
Net income
  $ 573,942       456,752       353,088  
Weighted-average shares outstanding (including common stock issuable)
    113,010       92,483       95,732  
Basic earnings per share
  $ 5.08       4.94       3.69  

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

13. Earnings per share, continued

     The computations of diluted earnings per share follow:

                         
    Year ended December 31
    2003   2002   2001
   
 
 
    (in thousands, except per share)
Income available to common stockholders
  $ 573,942       456,752       353,088  
Weighted-average shares outstanding
    113,010       92,483       95,732  
Plus: incremental shares from assumed conversion of stock options
    2,922       3,039       2,929  
 
   
     
     
 
Adjusted weighted-average shares outstanding
    115,932       95,522       98,661  
Diluted earnings per share
  $ 4.95       4.78       3.58  

14. Comprehensive income

The following table displays the components of other comprehensive income:

                             
        Before-tax   Income        
        amount   taxes   Net
       
 
 
        (in thousands)
For the year ended December 31, 2003
                       
Unrealized losses on investment securities:
                       
 
Unrealized holding losses
  $ (25,752 )     9,986       (15,766 )
 
Less: reclassification adjustment for gains realized in net income
    2,487       (970 )     1,517  
 
 
   
     
     
 
   
 
    (28,239 )     10,956       (17,283 )
Unrealized gains on cash flow hedge
    1,019       (397 )     622  
Minimum pension liability adjustment
    (20,423 )     7,965       (12,458 )
 
 
   
     
     
 
 
Net unrealized losses
  $ (47,643 )     18,524       (29,119 )
 
 
   
     
     
 
For the year ended December 31, 2002
                       
Unrealized gains on investment securities:
                       
 
Unrealized holding gains
  $ 54,552       (22,662 )     31,890  
 
Less: reclassification adjustment for losses realized in net income
    (608 )     221       (387 )
 
 
   
     
     
 
   
 
    55,160       (22,883 )     32,277  
Unrealized losses on cash flow hedge
    (558 )     234       (324 )
 
 
   
     
     
 
 
Net unrealized gains
  $ 54,602       (22,649 )     31,953  
 
 
   
     
     
 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

14. Comprehensive income, continued

                           
      Before-tax   Income        
      amount   taxes   Net
     
 
 
      (in thousands)
For the year ended December 31, 2001
                       
Unrealized gains on investment securities:
                       
 
Unrealized holding gains
  $ 38,275       (13,577 )     24,698  
 
Less: reclassification adjustment for gains realized in net income
    1,873       (724 )     1,149  
 
 
   
     
     
 
 
    36,402       (12,853 )     23,549  
Unrealized losses on cash flow hedge
    (461 )     163       (298 )
 
 
   
     
     
 
 
Net unrealized gains
  $ 35,941       (12,690 )     23,251  
 
 
   
     
     
 

     Accumulated other comprehensive income, net consisted of unrealized gains (losses) as follows:

                                 
                    Minimum        
                    pension        
    Investment   Cash flow   liability        
    securities   hedges   adjustment   Total
   
 
 
 
            (in thousands)        
Balance at January 1, 2001
  $ (432 )                 (432 )
Net gain (loss) during 2001
    23,549       (298 )           23,251  
 
   
     
     
     
 
Balance at December 31, 2001
    23,117       (298 )           22,819  
Net gain (loss) during 2002
    32,277       (324 )           31,953  
 
   
     
     
     
 
Balance at December 31, 2002
    55,394       (622 )           54,772  
Net gain (loss) during 2003
    (17,283 )     622       (12,458 )     (29,119 )
 
   
     
     
     
 
Balance at December 31, 2003
  $ 38,111             (12,458 )     25,653  
 
   
     
     
     
 

15. Other income and other expense

The following items, which exceeded 1% of total interest income and other income in the respective period, were included in either other revenues from operations or other costs of operations in the consolidated statement of income:

                           
      Year ended December 31
      2003   2002   2001
     
 
 
      (in thousands)
Other income:
                       
 
Bank owned life insurance
  $ 44,630       32,625       35,409  
Other expense:
                       
 
Professional services
    88,669       49,200       49,701  
 
Amortization of capitalized servicing rights
    50,907       39,806       31,704  
 
Advertising and promotion
    38,950                  
 
Provision for impairment of capitalized servicing rights
            32,450          

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Notes to Financial Statements, continued

16. International activities

The Company engages in certain international activities consisting largely of collecting Eurodollar deposits, engaging in foreign currency trading, providing credit to support the international activities of domestic companies and holding certain loans to foreign borrowers. Net assets identified with international activities amounted to $228,741,000 and $6,258,000 at December 31, 2003 and 2002, respectively. The increase in such assets included $215,580,000 of loans to foreign borrowers associated with business activities obtained in the acquisition of Allfirst. Deposits at M&T Bank’s offshore branch office were $2,209,451,000 and $1,160,716,000 at December 31, 2003 and 2002, respectively. The Company uses such deposits to facilitate customer demand and as an alternative to short-term borrowings when the costs of such deposits seem reasonable.

17. Derivative financial instruments

The Company adopted SFAS No. 133, as amended, as of January 1, 2001. The January 1, 2001 transition adjustment prescribed by SFAS No. 133 was not material to the Company’s consolidated financial position or its results of operations.

     As part of managing interest rate risk, the Company has entered into several interest rate swap agreements. The agreements modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain collateral provisions protecting the at-risk party. The Company considers the credit risk inherent in these contracts to be negligible.

     The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges as defined in SFAS No. 133. Fair value hedges are intended to protect against exposure to changes in the fair value of designated assets or liabilities. Cash flow hedges are intended to protect against the variability in cash flows of designated assets or liabilities.

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Notes to Financial Statements, continued

     17.     Derivative financial instruments, continued

     Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

                                         
                Weighted-average rate   Estimated
    Notional   Average  
  fair value-
    amount   maturity   Fixed   Variable   gain(loss)
   
 
 
 
 
    (in thousands)   (in years)                   (in thousands)
December 31, 2003
                                       
Fair value hedges:
                                       
Fixed rate time deposits (a)
  $ 110,000       6.2       3.52 %     1.04 %   $ (302 )
Fixed rate long-term borrowings (a)
    575,000       6.1       7.62 %     4.58 %     (545 )
 
   
     
     
     
     
 
 
  $ 685,000       6.1       6.96 %     4.01 %   $ (847 )
 
   
     
     
     
     
 
December 31, 2002
                                       
Fair value hedges:
                                       
Fixed rate time deposits (a)
  $ 270,000       2.5       2.99 %     1.42 %   $ 1,432  
Fixed rate long-term borrowings (a)
    125,000       1.7       5.38 %     1.64 %     6,658  
 
   
     
     
     
     
 
 
    395,000       2.2       3.75 %     1.49 %     8,090  
Cash flow hedge:
                                       
Variable rate long-term borrowings (b)
    100,000       .7       2.90 %     1.42 %     (1,019 )
 
   
     
     
     
     
 
 
  $ 495,000       1.9       3.58 %     1.48 %   $ 7,071  
 
   
     
     
     
     
 

(a)   Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.
 
(b)   Under the terms of these agreements, the Company receives settlement amounts at a variable rate and pays at a fixed rate.

     The estimated fair value of interest rate swap agreements represents the amount the Company would have expected to receive (pay) to terminate such contracts. The estimated fair value of such swap agreements at December 31, 2003 and 2002 included gross unrealized gains of $3,896,000 and $8,103,000, respectively, and gross unrealized losses of $4,743,000 and $1,032,000, respectively. At December 31, 2003 and 2002, the estimated fair values of interest rate swap agreements designated as fair value hedges were substantially offset by unrealized gains and losses resulting from changes in the fair values of the hedged items. The estimated fair value of interest rate swap agreements designated as cash flow hedges, net of applicable income taxes, was included in “accumulated other comprehensive income, net” in the Company’s consolidated balance sheet as of December 31, 2002.

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Notes to Financial Statements, continued

17. Derivative financial instruments, continued

     At December 31, 2003 the notional amount of interest rate swap agreements outstanding mature as follows:

           
Year ending December 31:   (in thousands)
 
2004
  $  
 
2005
    75,000  
 
2006
     
 
2007
    10,000  
 
2008
    20,000  
  Later years     580,000  
 
   
 
 
  $ 685,000  
 
 
   
 

     The net effect of interest rate swap agreements was to increase net interest income by $17,327,000 in 2003, $8,822,000 in 2002 and $6,720,000 in 2001. The average notional amount of interest rate swap agreements impacting net interest income which were entered into for interest rate risk management purposes were $688,603,000 in 2003, $693,910,000 in 2002 and $522,730,000 in 2001. The amount of hedge ineffectiveness of both fair value and cash flow hedges recognized in 2003, 2002 and 2001 was not material to the Company’s results of operations.

     The Company utilizes commitments to sell residential real estate loans to hedge the exposure to changes in the fair value of residential real estate loans held for sale. Such commitments have been designated as fair value hedges and, as a result, the commitments and the hedged loans are recorded at estimated fair value. The Company also utilizes commitments to sell residential real estate loans to offset the exposure to changes in the fair value of certain commitments to originate residential real estate loans for sale. As a result of these activities, at December 31, 2003 and 2002 net unrealized pre-tax gains related to loans held for sale, commitments to originate loans for sale, and commitments to sell loans were approximately $7 million and $15 million, respectively. Such unrealized gains are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold.

     Derivative financial instruments used for trading purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading purposes had notional values and estimated fair value gains of $5.3 billion and $9,977,000, respectively, at December 31, 2003 and notional values and estimated fair value gains of $1.3 billion and $1,096,000, respectively, at December 31, 2002. Foreign exchange and other option and futures contracts totaled approximately $548 million and $290 million at December 31, 2003 and 2002, respectively. Such contracts were valued at gains of $464,000 and $121,000 at December 31, 2003 and 2002, respectively. Trading account assets and liabilities are recorded in the consolidated balance sheet at estimated fair value. The following table includes information about the estimated fair value of derivative financial instruments used for trading purposes:

                   
      2003   2002
     
 
      (in thousands)
December 31:
               
 
Gross unrealized gains
  $ 148,106       36,051  
 
Gross unrealized losses
    137,665       34,834  
Year ended December 31:
               
 
Average gross unrealized gains
  $ 132,425       27,427  
 
Average gross unrealized losses
    123,871       26,325  
 
 
   
     
 

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Notes to Financial Statements, continued

17. Derivative financial instruments, continued

     Net gains realized from derivative financial instruments used for trading purposes were $6,620,000, $2,205,000 and $2,945,000 in 2003, 2002 and 2001, respectively.

18. Variable interest entities and asset securitizations

Variable interest entities

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” The FASB’s stated intent in issuing FIN 46 was to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires an enterprise to consolidate a variable interest entity (as defined in FIN 46) if that enterprise has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected returns if they occur, or both. In December 2003, the FASB issued a revised FIN 46 (“FIN 46R”), which attempts to clarify the guidance in the original interpretation. FIN 46 applies to variable interest entities created after January 31, 2003. FIN 46 also applies to all variable interest entities created prior to February 1, 2003 that are considered to be special-purpose entities (as defined in FIN 46R) as of December 31, 2003. FIN 46R must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 15, 2004. A description of variable interest entities in which the Company holds a significant variable interest and the impact of the new accounting provisions related to investments in variable interest entities is described below.

     M&T Auto Receivables I, LLC is a special purpose subsidiary of M&T Bank formed for the purpose of borrowing $500 million in a revolving asset-backed structured borrowing with an unaffiliated conduit lender. The revolving asset-backed structured borrowing is secured by automobile loans and other assets transferred to the special purpose subsidiary by M&T Bank or other of its subsidiaries that totaled $559 million and $560 million at December 31, 2003 and 2002, respectively. The activities of M&T Auto Receivables I, LLC are generally restricted to purchasing and owning automobile loans for the purpose of securing this revolving borrowing arrangement. Proceeds from payments on the automobile loans are required to be applied in priority order for fees, principal and interest on the borrowing, and funding the monthly replenishment of loans. Any remaining proceeds are available for distribution to M&T Bank. The secured borrowing is prepayable, in whole or in part, at any time and is non-recourse to M&T Bank and the Company. However, 80% of the borrowing can be put back to M&T Bank upon demand. The Company’s maximum incremental exposure to loss resulting from the structure of this borrowing arrangement is generally restricted to the amount that such borrowing is overcollateralized. Management currently estimates no material losses as a result of this borrowing arrangement. The assets and liabilities of M&T Auto Receivables I, LLC have been included in the Company’s consolidated financial statements since November 2002 when the revolving structured borrowing arrangement was entered into. Such accounting treatment did not change as a result of the new accounting provisions for variable interest entities described above.

     As part of the Allfirst transaction, M&T acquired a variable interest in a trust that holds AIB American Depositary Shares (“ADSs”) for the purpose of satisfying options to purchase such shares granted by Allfirst to certain employees. The trust purchased the AIB ADSs with the proceeds of a loan from

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Notes to Financial Statements, continued

18. Variable interest entities and asset securitizations, continued

Variable interest entities, continued

Allfirst. The loan to the trust was assumed by M&T on the acquisition date. Proceeds from option exercises and any dividends and other earnings on the trust assets are used to repay the loan plus interest. Option holders have no preferential right with respect to the trust assets and the trust assets are subject to the claims of M&T’s creditors. The trust has been included in the Company’s consolidated financial statements since April 1, 2003. As a result, 2,640,261 AIB ADSs with a carrying value of approximately $62 million were included in investment securities available for sale at December 31, 2003. Outstanding options granted to employees who have continued service with M&T totaled 2,443,333 at December 31, 2003. All outstanding options were fully vested and exercisable at December 31, 2003. The options expire at various dates through June 2012. M&T’s maximum exposure to loss is $62 million at December 31, 2003.

     Prior to December 31, 2003, the Company included the Trusts and Allfirst Capital Trust (see note 9) in its consolidated financial statements. As a result of implementing the new accounting provisions for variable interest entities, as of December 31, 2003 the Trusts and Allfirst Capital Trust were removed from the Company’s consolidated financial statements. As a result, at December 31, 2003, the Company included the Junior Subordinated Debentures payable to the Trusts and the Floating Rate Junior Subordinated Debentures payable to the Allfirst Asset Trust as long-term borrowings in its consolidated balance sheet. Prior to that date the Company included the preferred capital securities of the Trusts and the Allfirst Capital Trust in its consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. That change in financial statement presentation had no economic impact on the Company, had no material or substantive impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2003, and resulted in the Company recognizing $30 million in other assets for its “investment” in the common securities of the Trusts and Allfirst Asset Trust that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 9.

     The Company facilitates certain customer borrowing arrangements by providing credit support in the form of financial standby letters of credit. Some of those customer borrowing arrangements utilize special purpose trusts. In such cases, the trusts issue variable rate demand bonds and pass through the resulting proceeds to the sponsoring customer that formed the trust. The Company provides financial standby letters of credit to the trusts and may also serve as remarketing agent and/or trustee in the arrangements. The Company receives fees for each of those services, in addition to a structuring fee. The Company’s maximum exposure to loss at December 31, 2003 as a result of its involvement with these transactions is equal to the letter of credit amounts totaling $1.3 billion, which approximates the amount of variable rate demand bonds issued by the trusts. However, it is extremely unlikely that losses of such magnitude will ever occur. The trusts referred to in this paragraph are not included in the Company’s consolidated financial statements. Information about the Company’s obligations under financial standby letters of credit and other guarantees and indemnification contracts is presented in note 20.

     The Company is a limited partner in various low-income housing investment partnerships that collectively have approximately $250 million in total assets. Those partnerships generally construct or acquire properties to be used to provide housing to low-income individuals in accordance with government guidelines. Such investments provide certain tax credits and tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited

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Notes to Financial Statements, continued

18. Variable interest entities and asset securitizations, continued

Variable interest entities, continued

partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to a fifteen year recapture period should a partnership fail to comply with the respective government regulations. At December 31, 2003, the Company’s maximum exposure to loss of its investments in such partnerships was $74 million, including $39 million of unfunded commitments. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. In accordance with the new accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements.

Securitizations

In December 2003, the Company securitized approximately $441 million of one-to-four family residential mortgage loans in a guaranteed mortgage securitization with FNMA. The Company recognized no gain or loss on the transaction as it retained all of the resulting securities and allocated $6 million of the carrying value of the loans to capitalized servicing assets. All of the resulting securities were classified as investment securities available for sale. The Company expects no credit-related losses on the retained securities as a result of the guarantee by FNMA.

     In November 2003, the Company transferred approximately $838 million of one-to-four family residential mortgage loans to Manufacturers and Traders Trust Company Mortgage Trust 2003-1 (“M&T 2003 Trust”), a qualified special purpose trust, in a non-recourse securitization transaction. The Company received $112 million in cash and retained approximately 87% of the resulting securities in exchange for the loans. The Company realized a $1 million gain on the transaction and allocated $715 million and $11 million of the carrying value of the loans to the retained securities and to capitalized servicing assets, respectively. All of the retained securities were classified as investment securities available for sale.

     In November 2002, the Company transferred approximately $1.1 billion of one-to-four family residential mortgage loans to Manufacturers and Traders Trust Company Mortgage Trust 2002-1 (“M&T 2002 Trust”), a qualified special purpose trust, in a non-recourse securitization transaction similar to the transaction described in the previous paragraph. The Company received $140 million in cash and retained approximately 88% of the resulting securities in exchange for the loans. The Company realized a $5 million gain on the transaction and allocated $977 million and $7 million of the carrying value of the loans to the retained securities and to capitalized servicing assets, respectively. All of the retained securities were classified as investment securities available for sale.

     As qualified special purpose trusts, neither M&T 2003 Trust nor M&T 2002 Trust are included in the Company’s consolidated financial statements. Because the transactions were non-recourse, the Company’s maximum exposure to loss as a result of its association with the trusts is limited to realizing the carrying value of the retained securities and servicing rights. The combined outstanding principal amount of mortgage-backed securities issued by M&T 2003 Trust and M&T 2002 Trust at December 31, 2003 was $1.4 billion. The outstanding principal amount of mortgage-backed securities issued by M&T 2002 Trust at December 31, 2002 was $1.1 billion. The principal amount of such securities held by the Company was $1.2 billion and $937 million at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, loans of the trusts that were 30 or more days delinquent totaled $17 million and $11 million,

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Notes to Financial Statements, continued

18. Variable interest entities and asset securitizations, continued

Securitizations, continued

respectively. Credit losses, net of recoveries, for the trusts in 2003 and 2002 were insignificant. The Company did not repurchase any delinquent or foreclosed loans from the trusts in 2003 or 2002. Certain cash flows between the Company and the two trusts were as follows:

                 
    Year ended December 31
    2003   2002
   
 
    (in thousands)
Principal and interest payments on retained securities
  $ 508,304       47,055  
Servicing fees received
    2,531       355  

     A summary of the fair values of retained subordinated interests resulting from the Company’s residential mortgage loan securitization activities follows. Although the estimated fair values of the retained subordinated interests were obtained from independent pricing sources, the Company has modeled the sensitivity of such fair values to changes in certain assumptions as summarized in the table below. These calculated sensitivities are hypothetical and actual changes in the fair value may differ significantly from the amounts presented herein. The effect of a variation in a particular assumption on the fair values is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. The changes in assumptions are presumed to be instantaneous. The hypothetical effect of adverse changes on the Company’s retained capitalized servicing assets at December 31, 2003 is included in note 7.

                                     
                Weighted-   Weighted-   Annual
                average   average   expected
        Fair   prepayment   discount   credit
        value   speed   rate   defaults
       
 
 
 
                (dollars in thousands)        
Retained subordinated interests:
                               
 
As of securitization date
  $ 91,705       23.81 %     7.68 %     .09 %
 
As of December 31, 2003
    86,589       9.81 %     7.67 %     .08 %
 
   
                         
   
Impact on fair value of 10% adverse change
            (82 )     (3,441 )     (269 )
   
Impact on fair value of 20% adverse change
            (162 )     (6,668 )     (536 )
 
           
     
     
 

     The subordinated retained securities do not have pro rata participation in loan principal prepayments for the first seven years of the securitization. The assumed weighted-average discount rate is 168 basis points (hundredths of one percent) higher than the weighted-average coupon of the underlying mortgage loans at December 31, 2003.

19. Fair value of financial instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the estimated fair value of 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.

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Notes to Financial Statements, continued

19. Fair value of financial instruments, continued

     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 values of investments in readily marketable debt and equity securities were calculated based on quoted market prices at the respective year-end. In determining amounts to present for other financial instruments, the Company generally used calculations based upon discounted cash flows of the related financial instruments or assigned some other amount as required by SFAS No. 107. Additional information about the assumptions and calculations utilized is presented below.

     The carrying amounts and calculated estimates for financial instrument assets (liabilities) are presented in the following table.

                                   
      December 31, 2003   December 31, 2002
     
 
      Carrying   Calculated   Carrying   Calculated
      amount   estimate   amount   estimate
     
 
 
 
              (in thousands)        
Financial assets:
                               
 
Cash and due from banks
  $ 1,877,494       1,877,494       963,772       963,772  
 
Money-market assets
    250,315       250,315       379,843       379,843  
 
Investment securities
    7,259,150       7,262,331       3,955,150       3,956,646  
 
Commercial loans and leases
    9,217,371       9,199,975       5,322,590       5,316,894  
 
Commercial real estate loans
    12,371,064       12,515,272       9,727,743       9,853,932  
 
Residential real estate loans
    3,081,440       3,089,178       3,247,716       3,301,880  
 
Consumer loans and leases
    11,102,560       11,176,384       7,429,735       7,514,362  
 
Allowance for credit losses
    (614,058 )     (614,058 )     (436,472 )     (436,472 )
 
Accrued interest receivable
    178,809       178,809       143,126       143,126  
Financial liabilities:
                               
 
Noninterest-bearing deposits
  $ (8,411,296 )     (8,411,296 )     (4,072,085 )     (4,072,085 )
 
Savings deposits and NOW accounts
    (15,856,948 )     (15,856,948 )     (10,185,738 )     (10,185,738 )
 
Time deposits
    (6,637,249 )     (6,773,092 )     (6,246,384 )     (6,341,366 )
 
Deposits at foreign office
    (2,209,451 )     (2,209,451 )     (1,160,716 )     (1,160,716 )
 
Short-term borrowings
    (4,442,246 )     (4,442,246 )     (3,429,414 )     (3,429,414 )
 
Long-term borrowings
    (5,535,425 )     (5,732,682 )     (4,497,374 )     (4,692,771 )
 
Accrued interest payable
    (93,692 )     (93,692 )     (88,922 )     (88,922 )
 
Trading account liabilities
    (137,665 )     (137,665 )     (34,834 )     (34,834 )
Other financial instruments:
                               
 
Commitments to originate real estate loans for sale
  $ 4,868       4,868       10,075       10,075  
 
Commitments to sell real estate loans
    (8,427 )     (8,427 )     (15,139 )     (15,139 )
 
Other credit-related commitments
    (28,180 )     (28,180 )     (12,486 )     (12,486 )
 
Interest rate swap agreements used for interest rate risk management
    (847 )     (847 )     7,071       7,071  

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Notes to Financial Statements, continued

19. Fair value of financial instruments, continued

The following assumptions and methods or calculations were used in determining the disclosed value of financial instruments.

Cash and due from banks, money-market assets, short-term borrowings, accrued interest receivable, accrued interest payable and trading account liabilities

Due to the nature of cash and due from banks and the near maturity of money-market assets, short-term borrowings, accrued interest receivable, accrued interest payable and trading account liabilities, the Company estimated that the carrying amount of such instruments approximated estimated fair value.

Investment securities

Estimated fair values of investments in readily marketable debt and equity securities were based on quoted market prices. Investment securities that were not readily marketable were assigned amounts based on estimates provided by brokers, discounted calculations of projected cash flows or, in the case of other investment securities, which include capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, at an amount equal to the carrying amount.

Loans and leases

In general, discount rates used to calculate values 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. The allowance for credit losses represents the Company’s assessment of the overall level of credit losses inherent in the portfolio as of the respective year end and may not be indicative of the credit-related discount that a purchaser of the Company’s loans and leases would seek.

Deposits

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. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates for deposits with comparable remaining terms to maturity.

     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 deposit attrition which often occurs following an acquisition. Accordingly, estimating the fair value of deposits with any degree of certainty is not practical.

Long-term borrowings

The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms.

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Notes to Financial Statements, continued

19. Fair value of financial instruments, continued

Trading account assets and liabilities

Trading account assets and liabilities are carried in the consolidated balance sheet at estimated fair value which, in general, is based on quoted market prices. Trading account assets are included in money-market assets and totaled $214,833,000 and $51,628,000 at December 31, 2003 and 2002, respectively. Trading account liabilities are included in other liabilities and totaled $137,665,000 and $34,834,000 at December 31, 2003 and 2002, respectively.

Commitments to originate real estate loans for sale and commitments to sell real estate loans

As described in note 17, the Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated based on quoted market prices for commitments to sell real estate loans to certain government-sponsored entities and other parties.

Interest rate swap agreements used for interest rate risk management

The estimated fair value of interest rate swap agreements used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.

Other commitments and contingencies

As described in note 20, 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. Loan commitments often 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, which are included in other liabilities, are reasonable estimates of the fair value of these financial instruments.

     The Company does not believe that the estimated 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 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 disclosed fair value amounts were 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.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

20. Commitments and contingencies

In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the Company’s significant commitments. Certain of these commitments are not included in the Company’s consolidated balance sheet.

                   
      December 31
      2003   2002
     
 
      (in thousands)
Commitments to extend credit
               
 
Home equity lines of credit
  $ 3,747,663       2,056,259  
 
Commercial real estate loans to be sold
    70,747        
 
Other commercial real estate and construction
    730,485       549,100  
 
Residential real estate loans to be sold
    458,863       825,330  
 
Other residential real estate
    639,852       676,650  
 
Commercial and other
    6,786,997       2,250,516  
Standby letters of credit
    3,056,611       833,715  
Commercial letters of credit
    69,387       25,556  
Financial guarantees and indemnification contracts
    1,061,691       121,312  
Commitments to sell real estate loans
    895,808       1,453,966  

     Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and third party. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

     Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in loans sold with recourse are loans sold in conjunction with the Company’s involvement in the FNMA DUS program. Under this program, the Company’s maximum credit risk associated with loans sold with recourse is equal to one-third of each loan’s original principal balance which, at December 31, 2003, totaled $825 million.

     Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

20. Commitments and contingencies, continued

     The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives in accordance with SFAS No. 133 and along with commitments to originate real estate loans to be held for sale and hedged real estate loans held for sale are now generally recorded in the consolidated balance sheet at estimated fair market value. Additional information about such derivative financial instruments is included in note 17.

     The Company occupies certain banking offices and uses certain equipment under noncancellable operating lease agreements expiring at various dates over the next 45 years. Minimum lease payments under noncancellable operating leases are summarized in the following table:

         
Year ending December 31:   (in thousands)
2004
  $ 47,097  
2005
    44,329  
2006
    34,427  
2007
    26,210  
2008
    21,761  
Later years
    94,312  
 
   
 
 
  $ 268,136  
 
   
 

     The Company entered an agreement in 2003 with the Baltimore Ravens of the National Football League whereby the Company obtained the naming rights to a football stadium in Baltimore, Maryland for a fifteen year term. Under the agreement, the Company paid $3 million in 2003 and is obligated to pay $3 million in 2004, $5 million per year from 2005 through 2013, and $6 million per year from 2014 through 2017.

     M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability, if any, arising out of litigation pending against M&T or its subsidiaries will be material to the Company’s consolidated financial position, but at the present time is not in a position to determine whether such litigation will have a material adverse effect on the Company’s consolidated results of operations in any future reporting period.

21. Segment information

In accordance with the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” reportable segments have been determined based upon the Company’s internal profitability reporting system, which is organized by strategic business units. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.

     The financial information of the Company’s segments has been compiled utilizing the accounting policies described in note 1 with certain exceptions. The more significant of these exceptions are described herein. The Company allocates interest income or interest expense using a methodology that charges users of funds (assets) interest expense and credits providers of funds (liabilities) with income based on the maturity, prepayment and/or repricing characteristics of the assets and liabilities. The net effect of this allocation is recorded in the “All Other” category. A provision for credit losses is allocated to segments in an amount based largely on actual net

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

21. Segment information, continued

charge-offs incurred by the segment during the period plus or minus an amount necessary to adjust the segment’s allowance for credit losses due to changes in loan balances. In contrast, the level of the consolidated provision for credit losses is determined using the methodologies described in note 1 to assess the overall adequacy of the allowance for credit losses. Indirect fixed and variable expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expenses and bankwide expense accruals (including amortization of goodwill and core deposit and other intangible assets) are generally not allocated to segments. Income taxes are allocated to segments based on the Company’s marginal statutory tax rate adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk).

     The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Information about the Company’s segments is presented in the accompanying table.

     The Commercial Banking segment provides a wide range of credit products and banking services to middle-market and large commercial customers, largely within the markets the Company serves. Among the services provided by this segment are commercial lending and leasing, letters of credit, deposit products and cash management services. The Commercial Real Estate segment provides credit services which are secured by various types of multifamily residential and commercial real estate and deposit services to its customers. Activities of this segment also include the origination, sales and servicing of commercial real estate loans through the FNMA DUS program. The Discretionary Portfolio segment includes securities, residential mortgage loans and other assets; short-term and long-term borrowed funds; brokered certificates of deposit and interest rate swap agreements related thereto; and offshore branch deposits. This segment also provides services to commercial customers and consumers which include foreign exchange, securities trading and municipal bond underwriting and sales. The Residential Mortgage Banking segment originates and services residential mortgage loans for consumers and sells substantially all of those loans in the secondary market to investors or to bank subsidiaries of M&T. Residential mortgage loans held for sale are included in the Residential Mortgage Banking segment. The Retail Banking segment offers a variety of services to consumers and small businesses through several delivery channels that include traditional and “in-store” banking offices, automated teller machines, telephone banking and internet banking. The “All Other” category includes other operating activities of the Company that are not directly attributable to the reported segments as determined in accordance with SFAS No. 131, the difference between the provision for credit losses and the calculated provision allocated to the reportable segments, goodwill and core deposit and other intangible assets resulting from acquisitions of financial institutions, the net impact of the Company’s internal funds transfer pricing methodology, eliminations of transactions between reportable segments, certain nonrecurring transactions, the residual effects of unallocated support systems and general and administrative expenses, and the impact of interest rate risk management strategies. The

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

21.     Segment information, continued

                                                         
                            Residential                        
    Commercial   Commercial   Discretionary   Mortgage   Retail   All        
In thousands, except asset data   Banking (c)   Real Estate   Portfolio   Banking   Banking   Other (c)   Total

 
 
 
 
 
 
 
For the year ended December 31, 2003
                                                       
Net interest income (a)
  $ 307,432       212,396       97,065       97,715       779,711       104,436       1,598,755  
Noninterest income
    115,037       30,553       47,168       202,924       309,618       125,795       831,095  
 
   
     
     
     
     
     
     
 
 
    422,469       242,949       144,233       300,639       1,089,329       230,231       2,429,850  
Provision for credit losses
    18,661       974       1,731       967       81,509       27,158       131,000  
Amortization of goodwill
                                         
Amortization of core deposit and other intangible assets
                                  78,152       78,152  
Depreciation and other amortization
    392       2,998       5,495       44,088       24,938       35,599       113,510  
Other noninterest expense (b)
    107,118       33,649       20,686       147,601       659,382       288,082       1,256,518  
 
   
     
     
     
     
     
     
 
Income (loss) before taxes
    296,298       205,328       116,321       107,983       323,500       (198,760 )     850,670  
Income tax expense (benefit)
    121,763       86,444       29,851       41,817       131,826       (134,973 )     276,728  
 
   
     
     
     
     
     
     
 
Net income (loss)
  $ 174,535       118,884       86,470       66,166       191,674       (63,787 )     573,942  
 
   
     
     
     
     
     
     
 
Average total assets (in millions)
  $ 9,693       7,191       8,821       1,862       13,166       4,616       45,349  
 
   
     
     
     
     
     
     
 
Capital expenditures (in millions)
  $                   2       12       18       32  
 
   
     
     
     
     
     
     
 
For the year ended December 31, 2002
                                                       
Net interest income (a)
  $ 214,018       174,200       68,205       85,869       599,261       106,032       1,247,585  
Noninterest income
    50,506       7,262       38,293       168,047       189,564       58,259       511,931  
 
   
     
     
     
     
     
     
 
 
    264,524       181,462       106,498       253,916       788,825       164,291       1,759,516  
Provision for credit losses
    47,037       495       572       777       66,414       6,705       122,000  
Amortization of goodwill
                                         
Amortization of core deposit and other intangible assets
                                  51,484       51,484  
Depreciation and other amortization
    412       164       3,230       37,937       18,536       18,024       78,303  
Other noninterest expense
    64,065       20,930       17,872       154,211       435,119       139,627       831,824  
 
   
     
     
     
     
     
     
 
Income (loss) before taxes
    153,010       159,873       84,824       60,991       268,756       (51,549 )     675,905  
Income tax expense (benefit)
    63,420       67,541       20,476       23,244       109,590       (65,118 )     219,153  
 
   
     
     
     
     
     
     
 
Net income
  $ 89,590       92,332       64,348       37,747       159,166       13,569       456,752  
 
   
     
     
     
     
     
     
 
Average total assets (in millions)
  $ 6,315       6,234       7,072       1,618       9,059       1,637       31,935  
 
   
     
     
     
     
     
     
 
Capital expenditures (in millions)
  $                   1       12       4       17  
 
   
     
     
     
     
     
     
 

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

21.     Segment information, continued

                                                         
                            Residential                        
    Commercial   Commercial   Discretionary   Mortgage   Retail   All        
In thousands, except asset data   Banking (c)   Real Estate   Portfolio   Banking   Banking   Other (c)   Total

 
 
 
 
 
 
 
For the year ended December 31, 2001
                                                       
Net interest income (a)
  $ 227,832       163,678       50,230       59,161       642,979       14,408       1,158,288  
Noninterest income
    44,913       6,139       38,372       151,478       172,515       64,009       477,426  
 
   
     
     
     
     
     
     
 
 
    272,745       169,817       88,602       210,639       815,494       78,417       1,635,714  
Provision for credit losses
    29,902       (150 )     3,057       46       51,194       19,451       103,500  
Amortization of goodwill
                                  61,820       61,820  
Amortization of core deposit and other intangible assets
                                  59,816       59,816  
Depreciation and other amortization
    425       243       3,154       29,746       20,052       18,688       72,308  
Other noninterest expense (b)
    61,027       19,744       16,614       114,317       410,360       164,569       786,631  
 
   
     
     
     
     
     
     
 
Income (loss) before taxes
    181,391       149,980       65,777       66,530       333,888       (245,927 )     551,639  
Income tax expense (benefit)
    74,745       63,326       12,368       23,625       136,284       (111,797 )     198,551  
 
   
     
     
     
     
     
     
 
Net income (loss)
  $ 106,646       86,654       53,409       42,905       197,604       (134,130 )     353,088  
 
   
     
     
     
     
     
     
 
Average total assets (in millions)
  $ 6,371       5,961       7,359       1,361       8,015       1,775       30,842  
 
   
     
     
     
     
     
     
 
Capital expenditures (in millions)
  $                   2       6       16       24  
 
   
     
     
     
     
     
     
 

(a)  Net interest income is the difference between actual taxable-equivalent interest earned on assets and interest paid on liabilities by a segment and a funding charge (credit) based on the Company’s internal funds transfer pricing methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided (e.g. deposits). The taxable-equivalent adjustment aggregated $16,313,000 in 2003, $14,049,000 in 2002 and $17,513,000 in 2001 and is eliminated in “All Other” net interest income and income tax expense (benefit).

(b)  Including the impact in the “All Other” category of the merger-related expenses described in note 2.

(c)  During 2003, a strategic business unit which had previously been included in the “All Other” category was moved to the Commercial Banking segment for internal profitability reporting purposes. As a result, approximately $27 million of loans were transferred from the “All Other” category to the Commercial Banking segment. This strategic business unit contributed net losses of $12 million and $1 million in 2002 and 2001, respectively. Financial information for 2002 and 2001 has been reclassified to conform with current year presentation.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
, continued

21.     Segment information, continued

amount of intersegment activity eliminated in arriving at consolidated totals was included in the “All Other” category as follows:

                         
    Year ended December 31
    2003   2002   2001
   
 
 
    (in thousands)
Revenues
  $ (87,309 )     (70,229 )     (66,450 )
Expenses
    (18,307 )     (19,356 )     (20,578 )
Income taxes (benefit)
    (28,077 )     (20,700 )     (18,665 )
Net income (loss)
    (40,925 )     (30,173 )     (27,207 )

     The Company conducts substantially all of its operations in the United States. There are no transactions with a single customer that in the aggregate result in revenues that exceed ten percent of consolidated total revenues.

22.     Regulatory matters

Payment of dividends by M&T’s banking subsidiaries is restricted by various legal and regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the preceding two years. For purposes of this test, at December 31, 2003, approximately $695,873,000 was available for payment of dividends to M&T from banking subsidiaries without prior regulatory approval.

     Banking regulations prohibit extensions of credit by the subsidiary banks to M&T unless appropriately secured by assets. Securities of affiliates are not eligible as collateral for this purpose.

     The bank subsidiaries are required to maintain noninterest-earning reserves against certain deposit liabilities. During the maintenance periods that included December 31, 2003 and 2002, cash and due from banks included a daily average of $501,031,000 and $311,810,000, respectively, for such purpose.

     Federal regulators have adopted capital adequacy guidelines for bank holding companies and banks. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under the capital adequacy guidelines, the so-called “Tier 1 capital” and “Total capital” as a percentage of risk-weighted assets and certain off-balance sheet financial instruments must be at least 4% and 8%, respectively. In addition to these risk-based measures, regulators also require banking institutions that meet certain qualitative criteria to maintain a minimum “leverage” ratio of “Tier 1 capital” to average total assets, adjusted for goodwill and certain other items, of at least 3% to be considered adequately capitalized. As of December 31, 2003, M&T and each of its banking subsidiaries exceeded all applicable capital adequacy requirements. As of December 31, 2003 and 2002, the most recent notifications from federal regulators categorized each of M&T’s bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be considered well capitalized, a banking institution must maintain Tier 1 risk-based capital, total risk-based capital and leverage ratios of at least 6%, 10% and 5%, respectively. Management is unaware of any conditions or events since the latest notifications from federal regulators that have changed the capital adequacy category of M&T’s bank subsidiaries.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
, continued

22.     Regulatory matters, continued

     The capital ratios and amounts of the Company and its banking subsidiaries as of December 31, 2003 and 2002 are presented below:

                           
      M&T   M&T   M&T  
      (Consolidated)   Bank   Bank, N.A.
     
 
 
      (dollars in thousands)
December 31, 2003:
                       
Tier 1 capital
                       
 
Amount
  $ 3,205,649       3,116,834       85,209  
 
Ratio(a)
    7.30 %     7.18 %     26.60 %
 
Minimum required amount(b)
    1,755,845       1,735,288       12,814  
Total capital
                       
 
Amount
    4,916,825       4,779,265       88,896  
 
Ratio(a)
    11.20 %     11.02 %     27.75 %
 
Minimum required amount(b)
    3,511,689       3,470,575       25,627  
Leverage
                       
 
Amount
    3,205,649       3,116,834       85,209  
 
Ratio(c)
    6.98 %     6.87 %     18.17 %
 
Minimum required amount(b)
    1,378,201       1,360,134       14,065  
December 31, 2002:
                       
Tier 1 capital
                       
 
Amount
  $ 2,249,795       2,139,408       78,669  
 
Ratio(a)
    8.02 %     7.74 %     19.73 %
 
Minimum required amount(b)
    1,122,164       1,106,125       15,949  
Total capital
                       
 
Amount
    3,141,065       3,025,683       82,310  
 
Ratio(a)
    11.20 %     10.94 %     20.64 %
 
Minimum required amount(b)
    2,244,328       2,212,250       31,897  
Leverage
                       
 
Amount
    2,249,795       2,139,408       78,669  
 
Ratio(c)
    7.05 %     6.81 %     12.09 %
 
Minimum required amount(b)
    957,255       941,917       19,514  

(a)   The ratio of capital to risk-weighted assets, as defined by regulation.
 
(b)   Minimum amount of capital to be considered adequately capitalized, as defined by regulation.
 
(c)   The ratio of capital to average assets, as defined by regulation.

23.     Relationship of M&T and AIB

As a result of M&T’s acquisition of Allfirst (see note 2), AIB acquired approximately 22.5% of the issued and outstanding shares of M&T common stock on April 1, 2003. While AIB maintains a significant ownership in M&T, the Agreement and Plan of Reorganization by and among M&T, AIB and Allfirst (“Reorganization Agreement”) includes several provisions related to the corporate governance of M&T that provide AIB with representation on the M&T and M&T Bank boards of directors and key board committees and certain protections of its rights as a substantial M&T shareholder. In addition, AIB has rights that will facilitate its ability to maintain its proportionate ownership position in M&T.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
, continued

23.     Relationship of M&T and AIB, continued

     With respect to AIB’s right to have representation on the M&T and M&T Bank boards of directors and key board committees, for as long as AIB holds at least 15% of M&T’s outstanding common stock, AIB is entitled to designate four individuals, reasonably acceptable to M&T, on both the M&T and M&T Bank boards of directors. In addition, one of the AIB designees to the M&T board of directors will serve on each of the Executive, Nomination and Compensation, and Audit committees. Also, as long as AIB holds at least 15% of M&T’s outstanding common stock, neither the M&T nor the M&T Bank board of directors may consist of more than 28 directors without the consent of the M&T directors designated by AIB. AIB will continue to enjoy these rights if its holdings of M&T common stock drop below 15%, but not below 12%, so long as AIB restores its ownership percentage to 15% within one year. In the event that AIB holds at least 10%, but less than 15%, of M&T’s outstanding common stock, AIB will be entitled to designate at least two individuals on both the M&T and M&T Bank boards of directors and, in the event that AIB holds at least 5%, but less than 10%, of M&T’s outstanding common stock, AIB will be entitled to designate one individual on both the M&T and M&T Bank boards of directors. M&T also has the right to appoint one representative to the AIB board while AIB remains a significant shareholder.

     There are several other corporate governance provisions that serve to protect AIB’s rights as a substantial M&T shareholder and are embodied in M&T’s certificate of incorporation and bylaws, which were both amended in connection with the Allfirst acquisition to incorporate such provisions. These protections include an effective consent right in connection with certain actions by M&T, such as amending M&T’s certificate of incorporation or bylaws in a manner inconsistent with AIB’s rights, engaging in activities not permissible for a bank holding company or adopting any shareholder rights plan or other measures intended to prevent or delay any transaction involving a change in control of M&T. AIB has the right to limit, with the agreement of at least one non-AIB designee on the M&T board of directors, other actions by M&T, such as reducing M&T’s cash dividend policy such that the ratio of cash dividends to net income is less than 15%, acquisitions and dispositions of significant amounts of assets, and the appointment or election of the chairman of the board of directors or the chief executive officer of M&T. The protective provisions described above will cease to be applicable when AIB no longer owns at least 15% of M&T outstanding common stock, calculated as described in the Reorganization Agreement.

     M&T assumed from Allfirst two floating rate notes payable to AIB. A $100 million floating rate note payable to AIB was repaid by M&T on June 3, 2003. An additional $200 million floating rate note payable to AIB was repaid by M&T on September 30, 2003. Interest expense related to the notes discussed above aggregated $2 million 2003.

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

24.     Parent company financial statements

Condensed Balance Sheet

                     
        December 31
In thousands   2003   2002

 
 
Assets
               
Cash
               
 
In subsidiary bank
  $ 2,129       6,629  
 
Other
    1       1  
 
 
   
     
 
   
Total cash
    2,130       6,630  
Due from consolidated subsidiaries
               
 
Banks
               
   
Money-market assets
    59,639       78,989  
   
Note receivable
    200,000        
   
Current income tax receivable
    2,347       2,139  
   
Other
    439        
 
Other
          181  
 
 
   
     
 
   
Total due from consolidated subsidiaries
    262,425       81,309  
Investments in consolidated subsidiaries
               
 
Banks and bank holding company
    6,398,737       3,363,680  
 
Other
    32,603       7,734  
Investments in unconsolidated subsidiaries (note 18)
    30,228        
Other assets
    181,404       13,019  
 
 
   
     
 
   
Total assets
  $ 6,907,527       3,472,372  
 
 
   
     
 
Liabilities
               
Due to consolidated subsidiaries
               
 
Banks
  $ 384       1  
 
Other
    12,349       6,016  
 
 
   
     
 
   
Total due to consolidated subsidiaries
    12,733       6,017  
Accrued expenses and other liabilities
    52,430       143  
Long-term borrowings
    1,125,154       257,733  
 
 
   
     
 
   
Total liabilities
    1,190,317       263,893  
 
 
   
     
 
Stockholders’ equity
    5,717,210       3,208,479  
 
 
   
     
 
   
Total liabilities and stockholders’ equity
  $ 6,907,527       3,472,372  
 
 
   
     
 

Condensed Statement of Income

                             
        Year ended December 31
In thousands, except per share   2003   2002   2001

 
 
 
Income
                       
Dividends from bank and bank holding company subsidiaries
  $ 65,000       340,000       362,000  
Other income
    18,601       1,545       3,721  
 
   
     
     
 
   
Total income
    83,601       341,545       365,721  
 
   
     
     
 
Expense
                       
Interest on short-term borrowings
    25             75  
Interest on long-term borrowings
    51,971       21,516       21,516  
Other expense
    7,877       3,242       3,438  
 
   
     
     
 
   
Total expense
    59,873       24,758       25,029  
 
   
     
     
 
Income before income taxes and equity in undistributed income of subsidiaries
    23,728       316,787       340,692  
Income tax credits
    16,316       8,896       8,238  
 
   
     
     
 
Income before equity in undistributed income of subsidiaries
    40,044       325,683       348,930  
 
   
     
     
 
Equity in undistributed income of subsidiaries
                       
Net income of subsidiaries
    598,898       471,069       366,158  
Less: dividends received
    (65,000 )     (340,000 )     (362,000 )
 
   
     
     
 
Equity in undistributed income of subsidiaries
    533,898       131,069       4,158  
 
   
     
     
 
Net income
  $ 573,942       456,752       353,088  
 
   
     
     
 
Net income per common share
                       
 
Basic
  $ 5.08       4.94       3.69  
 
Diluted
    4.95       4.78       3.58  

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M&T BANK CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued

24.     Parent company financial statements, continued

Condensed Statement Of Cash Flows

                             
        Year ended December 31
In thousands   2003   2002   2001

 
 
 
Cash flows from operating activities
                       
Net income
  $ 573,942       456,752       353,088  
Adjustments to reconcile net income to net cash provided by operating activities
                       
   
Equity in undistributed income of subsidiaries
    (533,898 )     (131,069 )     (4,158 )
   
Provision for deferred income taxes
    3,524       (873 )     794  
   
Net change in accrued income and expense
    8,479       19,297       37,712  
 
   
     
     
 
   
Net cash provided by operating activities
    52,047       344,107       387,436  
 
   
     
     
 
Cash flows from investing activities
                       
Proceeds from sales of investment securities
    70,065              
Proceeds from maturities of investment securities
    14,434              
Purchases of investment securities
    (1,369 )           (399 )
Net decrease in loans to affiliates
    158,000              
Acquisitions, net of cash acquired
    163,046              
Other, net
    3,832       (17 )     15  
 
   
     
     
 
   
Net cash provided (used) by investing activities
    408,008       (17 )     (384 )
 
   
     
     
 
Cash flows from financing activities
                       
Net decrease in short-term borrowings
    (100,000 )            
Net decrease in long-term borrowings
    (300,000 )            
Purchases of treasury stock
          (240,314 )     (323,744 )
Dividends paid - common
    (135,423 )     (96,858 )     (95,872 )
Other, net
    51,518       46,145       49,154  
 
   
     
     
 
   
Net cash used by financing activities
    (483,905 )     (291,027 )     (370,462 )
 
   
     
     
 
Net increase in cash and cash equivalents
    (23,850 )     53,063       16,590  
Cash and cash equivalents at beginning of year
    85,619       32,556       15,966  
Cash and cash equivalents at end of year
  $ 61,769       85,619       32,556  
 
   
     
     
 
Supplemental disclosure of cash flow information
                       
Interest received during the year
  $ 14,401       2,079       1,727  
Interest paid during the year
    34,846       21,266       21,342  
Income taxes received during the year
    32,720       25,676       43,201  

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Item 9.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None.

Item 9A.   Controls and Procedures.
 
    (a) Evaluation of disclosure controls and procedures. Based upon their evaluation of the effectiveness of M&T’s disclosure controls and procedures (as defined in Exchange Act rules 13a-14(c) and 15d-14(c)), Robert G. Wilmers, Chairman of the Board, President and Chief Executive Officer, and Michael P. Pinto, Executive Vice President and Chief Financial Officer, believe that M&T’s disclosure controls and procedures were effective as of December 31, 2003.
 
    (b) Changes in internal controls. There were no significant changes in M&T’s internal controls or in other factors that could significantly affect these controls subsequent to December 31, 2003 through the date of this Annual Report on Form 10-K, including any corrective actions with regard to significant deficiencies and material weaknesses.

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 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.
 
    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 “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or about March 10, 2004.
 
    The other information required by Item 10 is incorporated by reference to the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.

Item 11.   Executive Compensation. Incorporated by reference to the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Incorporated by reference to the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.

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Item 13.   Certain Relationships and Related Transactions. Incorporated by reference to the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.

Item 14.   Principal Accountant Fees and Services. Incorporated by reference to the Registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2004.

PART IV

Item 15.   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.”
 
      Financial statement schedules are not required or are inapplicable, and therefore have been omitted.
 
  (b)   Reports on Form 8-K.
 
      M&T filed a Current Report on Form 8-K dated October 10, 2003, disclosing that it had announced its results of operations for the fiscal quarter ended September 30, 2003.
 
  (c)   Exhibits required by Item 601 of Regulation S-K.
 
      The exhibits listed on the Exhibit Index on pages 155 through 162 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.

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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 26th day of February, 2003.

         
    M&T BANK 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
Robert G. Wilmers
  Chairman of the Board, President and Chief Executive Officer   February 26, 2004
         
Principal Financial
Officer:
       
         
/s/ Michael P. Pinto
Michael P. Pinto
  Executive Vice President and Chief Financial Officer   February 26, 2004
         
Principal Accounting
Officer:
       
         
/s/ Michael R. Spychala
Michael R. Spychala
  Senior Vice President and Controller   February 26, 2004

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A majority of the board of directors:

     
/s/ William F. Allyn   February 26, 2004

   
William F. Allyn    
     
/s/ Brent D. Baird   February 26, 2004

   
Brent D. Baird    
     
/s/ Robert J. Bennett   February 26, 2004

   
Robert J. Bennett    
     
/s/ C. Angela Bontempo   February 26, 2004

   
C. Angela Bontempo    
     
/s/ Robert T. Brady   February 26, 2004

   
Robert T. Brady    
     
/s/ Emerson L. Brumback   February 26, 2004

   
Emerson L. Brumback    
     
/s/ Michael D. Buckley   February 26, 2004

   
Michael D. Buckley    
     
/s/ Patrick J. Callan   February 26, 2004

   
Patrick J. Callan    
     
/s/ R. Carlos Carballada   February 26, 2004

   
R. Carlos Carballada    
     
/s/ T. Jefferson Cunningham III   February 26, 2004

   
T. Jefferson Cunningham III    
     

   
Donald Devorris    
     
/s/ Richard E. Garman   February 26, 2004

   
Richard E. Garman    
     
/s/ James V. Glynn   February 26, 2004

   
James V. Glynn    
     
/s/ Derek C. Hathaway   February 26, 2004

   
Derek C. Hathaway    
     
/s/ Daniel R. Hawbaker   February 26, 2004

   
Daniel R. Hawbaker    

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/s/ Patrick W.E. Hodgson   February 26, 2004

   
Patrick W.E. Hodgson    
     
/s/ Gary Kennedy   February 26, 2004

   
Gary Kennedy    
     
/s/ Richard G. King   February 26, 2004

   
Richard G. King    
     
/s/ Reginald B. Newman, II   February 26, 2004

   
Reginald B. Newman, II    
     
/s/ Jorge G. Pereira   February 26, 2004

   
Jorge G. Pereira    
     
/s/ Michael P. Pinto   February 26, 2004

   
Michael P. Pinto    
     
/s/ Robert E. Sadler, Jr.   February 26, 2004

   
Robert E. Sadler, Jr.    
     
/s/ Eugene J. Sheehy   February 26, 2004

   
Eugene J. Sheehy    
     
/s/ Stephen G. Sheetz   February 26, 2004

   
Stephen G. Sheetz    
     
/s/ Herbert L. Washington   February 26, 2004

   
Herbert L. Washington    
     
/s/ Robert G. Wilmers   February 26, 2004

   
Robert G. Wilmers    

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EXHIBIT INDEX

     
2.1   Agreement and Plan of Reorganization, dated as of September 26, 2002, by and among M&T Bank Corporation, Allied Irish Banks, p.l.c. and Allfirst Financial Inc. Incorporated by reference to Exhibit No. 2 to the Form 8-K dated October 3, 2002 (File No. 1-9861).
     
3.1   Restated Certificate of Incorporation of M&T Bank Corporation dated May 29, 1998. Incorporated by reference to Exhibit No. 3.1 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861).
     
3.2   Certificate of Amendment of the Certificate of Incorporation of M&T Bank Corporation dated October 2, 2000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for the year ended December 31, 2000 (File No. 1-9861).
     
3.3   Certificate of Amendment to the Certificate of Incorporation of M&T Bank Corporation dated March 4, 2003, effective as of March 25, 2003. Incorporated by reference to Exhibit 3.3 to the Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9861).
     
3.4   Certificate of Amendment to the Certificate of Incorporation of M&T Bank Corporation dated March 28, 2003, effective as of April 1, 2003. Incorporated by reference to Exhibit 3.4 to the Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9861).
     
3.5   Amended and Restated Bylaws of M&T Bank Corporation effective as of October 21, 2003. Filed herewith.
     
4.1   Instruments defining the rights of security holders, including indentures. Incorporated by reference to Exhibit Nos. 3.1 through 3.3, 10.1 through 10.5, 10.12 through 10.15, and 10.17 through 10.26 hereof.
     
4.2   Amended and Restated Trust Agreement dated as of January 31, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit No. 4.1 to the Form 8-K dated January 31, 1997 (File No. 1-9861).
     
4.3   Amendment to Amended and Restated Trust Agreement dated as of January 31, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit 4.3 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.4   Junior Subordinated Indenture dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.2 to the Form 8-K dated January 31, 1997 (File No. 1-9861).
     
4.5   Supplemental Indenture dated December 23, 1999 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit 4.5 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.6   Guarantee Agreement dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.3 to the Form 8-K dated January 31, 1997 (File No. 1-9861).

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4.7   Amendment to Guarantee Agreement dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit 4.7 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.8   Amended and Restated Trust Agreement dated as of June 6, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit No. 4.1 to the Form 8-K dated June 6, 1997 (File No. 1-9861).
     
4.9   Amendment to Amended and Restated Trust Agreement dated as of June 6, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit 4.9 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.10   Junior Subordinated Indenture dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.2 to the Form 8-K dated June 6, 1997 (File No. 1-9861).
     
4.11   Supplemental Indenture dated December 23, 1999 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit 4.11 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.12   Guarantee Agreement dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.3 to the Form 8-K dated June 6, 1997 (File No. 1-9861).
     
4.13   Amendment to Guarantee Agreement dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit 4.13 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.14   Amended and Restated Declaration of Trust dated as of February 4, 1997 by and among Olympia Financial Corp., The Bank of New York, The Bank of New York (Delaware), and the administrative trustees named therein. Incorporated by reference to Exhibit 4.14 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.15   Amendment to Amended and Restated Declaration of Trust dated as of February 4, 1997 by and among Olympia Financial Corp., The Bank of New York, The Bank of New York (Delaware), and the administrative trustees named therein. Incorporated by reference to Exhibit 4.15 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.16   Indenture dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.16 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.17   Supplemental Indenture dated as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.17 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).

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4.18   Second Supplemental Indenture dated as of February 28, 2003 by and between M&T Bank Corporation (as successor by merger to Olympia Financial Corp.) and The Bank of New York. Filed herewith.
     
4.19   Common Securities Guarantee Agreement dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.18 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.20   Amendment to Common Securities Guarantee Agreement as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.19 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.21   Series A Capital Securities Guarantee Agreement dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.20 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.22   Amendment to Series A Capital Securities Guarantee Agreement dated as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Incorporated by reference to Exhibit 4.21 to the Form 10-K for the year ended December 31, 1999 (File No. 1-9861).
     
4.23   Senior Indenture dated as of May 1, 1997 by and among Keystone Financial Mid-Atlantic Funding Corp., Olympia Financial Corp. (as successor by merger to Keystone Financial, Inc.), and Bankers Trust Company. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 of Keystone Financial Mid-Atlantic Funding Corp. and Keystone Financial, Inc. dated April 17, 1997 (File No. 333-25393).
     
4.24   First Supplemental Indenture, dated as of October 6, 2000, by and between Olympia Financial Corp. and Bankers Trust Company. Filed herewith.
     
4.25   Second Supplemental Indenture, dated as of February 28, 2003, by and between M&T Bank Corporation (as successor by merger to Olympia Financial Corp.) and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company). Filed herewith.
     
4.26   Indenture, dated as of December 30, 1996, by and between First Maryland Bancorp and The Bank of New York. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.27   Supplemental Indenture No. 1, dated as of September 15, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and The Bank of New York. Incorporated by reference to Exhibit 4.2 to the Form 8-K of Allfirst Financial Inc. dated September 15, 1999 (File No. 2-50235).
     
4.28   Supplemental Indenture No. 2, dated as of April 1, 2003, by and between M&T Bank Corporation (successor by merger to Allfirst Financial Inc.) and The Bank of New York. Filed herewith.
     

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4.29   Amended and Restated Declaration of Trust, dated as of December 30, 1996, by and among First Maryland Bancorp, The Bank of New York, The Bank of New York (Delaware) and the Regular Trustees named therein. Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
 
4.30   Guarantee Agreement, dated as of December 30, 1996, by and between First Maryland Bancorp and The Bank of New York. Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.31   Registration Rights Agreement, dated as of December 30, 1996, by and among First Maryland Bancorp, First Maryland Capital I and the Initial Purchasers named therein. Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.32   Indenture, dated as of February 4, 1997, by and between First Maryland Bancorp and The Bank of New York. Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.33   Supplemental Indenture No. 1, dated as of September 15, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and The Bank of New York. Incorporated by reference to Exhibit 4.3 to the Form 8-K of Allfirst Financial Inc. dated September 15, 1999 (File No. 2-50235).
     
4.34   Supplemental Indenture No. 2, dated as of April 1, 2003, by and between M&T Bank Corporation (successor by merger to Allfirst Financial Inc.) and The Bank of New York. Filed herewith.
     
4.35   Amended and Restated Declaration of Trust, dated as of February 4, 1997, by and among First Maryland Bancorp, The Bank of New York, The Bank of New York (Delaware) and the Regular Trustees named therein. Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.36   Guarantee Agreement, dated as of February 4, 1997, by and between First Maryland Bancorp and The Bank of New York. Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     
4.37   Registration Rights Agreement, dated as of February 4, 1997, by and among First Maryland Bancorp, First Maryland Capital II and the Initial Purchasers named therein. Incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-4 of First Maryland Bancorp, First Maryland Capital I and First Maryland Capital II dated March 6, 1997 (File No. 333-22871).
     

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4.38   Indenture, dated as of July 13, 1999, by and between First Maryland Bancorp and The Bank of New York. Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
 
4.39   Supplemental Indenture No. 1, dated as of September 15, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and The Bank of New York. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     
4.40   Supplemental Indenture No. 2, dated as of April 1, 2003, by and between M&T Bank Corporation (successor by merger to Allfirst Financial Inc.) and The Bank of New York. Filed herewith.
     
4.41   Amended and Restated Declaration of Trust of Allfirst Preferred Capital Trust, dated as of July 13, 1999, by and among First Maryland Bancorp, The Bank of New York, The Bank of New York (Delaware) and the Administrators named therein. Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     
4.42   Amended and Restated Declaration of Trust of Allfirst Preferred Asset Trust, dated as of July 13, 1999, by and among First Maryland Bancorp, The Bank of New York, The Bank of New York (Delaware) and the Administrators named therein. Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     
4.43   Series B Capital Trust Guarantee Agreement, dated as of December 29, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and The Bank of New York. Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     
4.44   Series B Asset Trust Preferred Guarantee Agreement, dated as of December 29, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and The Bank of New York. Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     
4.45   Registration Rights Agreement, dated as of July 9, 1999, by and among First Maryland Bancorp, Allfirst Preferred Capital Trust, Allfirst Preferred Asset Trust and the initial purchaser named therein. Incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-4 of Allfirst Financial Inc., Allfirst Preferred Capital Trust and Allfirst Preferred Asset Trust dated October 5, 1999 (File No. 333-88484).
     

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4.46   Indenture, dated as of May 15, 1992, by and between First Maryland Bancorp and Bankers Trust Company. Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of First Maryland Bancorp (File No. 33-46277).
     
4.47   Supplemental Indenture No. 1, dated as of September 15, 1999, by and between Allfirst Financial Inc. (successor by merger to First Maryland Bancorp) and Bankers Trust Company. Incorporated by reference to Exhibit 4.1 to the Form 8-K of Allfirst Financial Inc. dated September 15, 1999 (File No. 2-50235).
     
4.48   Supplemental Indenture No. 2, dated as of April 1, 2003, by and between M&T Bank Corporation (successor by merger to Allfirst Financial Inc.) and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company). Filed herewith.
     
4.49   Registration Rights Agreement, dated April 1, 2003, between M&T Bank Corporation and Allied Irish Banks, p.l.c. Incorporated by reference to Exhibit 4.23 to the Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9861).
     
10.1   Credit Agreement, dated as of December 15, 2000, between M&T Bank Corporation and CitiBank, N.A. Incorporated by reference to Exhibit 10.1 to the Form 10-K for the year ended December 31, 2000 (File No. 1-9861).
     
10.2   Waiver, dated as of January 15, 2003, to Credit Agreement dated as of December 15, 2000, between M&T Bank Corporation and Citibank, N.A. Incorporated by reference to Exhibit 10.2 to the Form 10-K for the year ended December 31, 2002 (File No. 1-9861).
     
10.3   Amendment No. 1, dated December 9, 2003, to the Credit Agreement, dated as of December 15, 2000, between M&T Bank Corporation and Citibank, N.A. Filed herewith.
     
10.4   M&T Bank Corporation 1983 Stock Option Plan as last amended on April 20, 1999. Incorporated by reference to Exhibit 10.3 to the Form 10-Q for the quarter ended March 31, 1999 (File No. 1-9861). *
     
10.5   M&T Bank Corporation 2001 Stock Option Plan. Incorporated by reference to Appendix A to the Proxy Statement of M&T Bank Corporation dated March 6, 2001 (File No. 1-9861). *
     
10.6   M&T Bank Corporation Annual Executive Incentive Plan. Incorporated by reference to Exhibit No. 10.3 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
     
10.7   Supplemental Deferred Compensation Agreement between Manufacturers and Traders Trust Company and Robert E. Sadler, Jr. dated as of March 7, 1985. Incorporated by reference to Exhibit No. (10)(d)(A) to the Form 10-K for the year ended December 31, 1984 (File No. 0-4561). *
     
10.8   Supplemental Deferred Compensation Agreement between Manufacturers and Traders Trust Company and Brian E. Hickey dated as of July 21, 1994. Incorporated by reference to Exhibit No. 10.8 to the Form 10-K for the year ended December 31, 1995 (File No. 1-9861). *
     

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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). *
     
10.10   M&T Bank Corporation Supplemental Pension Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.7 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
     
10.11   M&T Bank Corporation Supplemental Retirement Savings Plan. Incorporated by reference to Exhibit No. 10.8 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
 
10.12   M&T Bank Corporation Deferred Bonus Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.9 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
     
10.13   M&T Bank Corporation Directors’ Stock Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.11 to the Form 10-K for the year ended December 31, 2002 (File No. 1-9861). *
     
10.14   Restated 1987 Stock Option and Appreciation Rights Plan of ONBANCorp, Inc. Incorporated by reference to Exhibit 10.11 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
     
10.15   1992 ONBANCorp Directors’ Stock Option Plan. Incorporated by reference to Exhibit 10.12 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). *
     
10.16   Consulting agreement, dated July 9, 2000, between M&T Bank Corporation and T. Jefferson Cunningham III. Incorporated by reference to Exhibit 10.15 to the Form 10-K for the year ended December 31, 2000 (File No. 1-9861). *
     
10.17   Keystone Financial, Inc. 1997 Stock Incentive Plan, as amended November 19, 1998. Incorporated by reference to Exhibit 10.16 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1998 (File No. 000-11460). *
     
10.18   Keystone Financial, Inc. 1992 Stock Incentive Plan. Incorporated by reference to Exhibit 10.10 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1997 (File No. 000-11460). *
     
10.19   Keystone Financial, Inc. 1988 Stock Incentive Plan. Incorporated by reference to Exhibit 10.2 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1998 (File No. 000-11460). *
     
10.20   Keystone Financial, Inc. 1995 Non-Employee Directors’ Stock Option Plan. Incorporated by reference to Exhibit B to the Proxy Statement of Keystone Financial, Inc. dated April 7, 1995 (File No. 000-11460). *
     
10.21   Keystone Financial, Inc. 1990 Non-Employee Directors’ Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.9 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1998 (File No. 000-11460). *
     

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10.22   Keystone Financial, Inc. 1992 Director Fee Plan. Incorporated by reference to Exhibit 10.11 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1999 (File No. 000-11460). *
     
10.23   Financial Trust Corp Non-Employee Director Stock Option Plan of 1994. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of Financial Trust Corp, dated March 26, 1996 (File No. 333-01989). *
     
10.24   Progressive Bank, Inc. 1993 Non-Qualified Stock Option Plan for Directors. Incorporated by reference to Exhibit 10.9 to the Progressive Bank, Inc. Form 10-K for the year ended December 31, 1993 (File No. 0-15025). *
 
10.25   Premier National Bancorp, Inc. 1995 Incentive Stock Plan (as amended and restated effective May 13, 1999). Incorporated by reference to Exhibit 10.4 to the Premier National Bancorp, Inc. Form 10-K for the year ended December 31, 1999 (File No. 1-13213). *
     
10.26   M&T Bank Corporation Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.28 to the Form 10-Q for the quarter ended September 30, 2002 (File No. 1-9861). *
     
11.1   Statement re: Computation of Earnings Per Common Share. Incorporated by reference to note 12 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.”
     
14.1   M&T Bank Corporation Code of Ethics for CEO and Senior Financial Officers. Filed herewith.
     
21.1   Subsidiaries of the Registrant. Incorporated by reference to the caption “Subsidiaries” contained in Part I, Item 1 hereof.
     
23.1   Consent of PricewaterhouseCoopers LLP re: Registration Statement Nos. 33-32044, 333-16077 and 333-84384. Filed herewith.
     
23.2   Consent of PricewaterhouseCoopers LLP re: Registration Statement Nos. 333-57330, 333-63660, 33-12207, 33-58500, 33-63917, 333-43171, 333-43175, 333-63985 and 333-97031. Filed herewith.
     
31.1   Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
     
31.2   Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
     
32.1   Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
     
32.2   Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
*     Management contract or compensatory plan or arrangement.

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