UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9861
FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One M & T Plaza
Buffalo, New York 14240
(Address of principal (Zip Code)
executive offices)
(716) 842-5445
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |x| No |_|
Number of shares of the registrant's Common Stock, $5 par value, outstanding as
of the close of business on October 23, 1997: 6,597,859 shares.
<PAGE>
FIRST EMPIRE STATE CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 1997
Table of Contents of Information Required in Report Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 3
Consolidated Statement of Income -
Three and nine months ended
September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1997 and 1996 5
Consolidated Statement of Changes in
Stockholders' Equity - Nine months ended
September 30, 1997 and 1996 6
Consolidated Summary of Changes in
Allowance for Possible Credit Losses -
Nine months ended September 30, 1997 and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information 22
Signatures 23
Exhibit Index 24
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Dollars in thousands, except per share 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Cash and due from banks $ 349,571 324,659
Money-market assets
Interest-bearing deposits at banks 796 47,325
Federal funds sold and agreements to resell securities 31,765 125,326
Trading account 43,805 37,317
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Total money-market assets 76,366 209,968
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Investment securities
Available for sale (cost: $1,584,796 at September 30,
1997; $1,400,976 at December 31,1996) 1,603,717 1,396,672
Held to maturity (market value: $90,754 at September 30,
1997; $119,316 at December 31,1996) 90,248 118,616
Other (market value: $58,280 at September 30,1997;
$56,410 at December 31,1996) 58,280 56,410
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Total investment securities 1,752,245 1,571,698
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Loans and leases 11,570,275 11,120,221
Unearned discount (299,127) (398,098)
Allowance for possible credit losses (272,308) (270,466)
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Loans and leases, net 10,998,840 10,451,657
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Premises and equipment 121,497 128,521
Accrued interest and other assets 376,614 257,412
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Total assets $ 13,675,133 12,943,915
- --------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits $ 1,358,352 1,352,929
NOW accounts 308,157 334,787
Savings deposits 3,351,844 3,280,788
Time deposits 5,949,017 5,352,749
Deposits at foreign office 237,594 193,236
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Total deposits 11,204,964 10,514,489
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Federal funds purchased and agreements
to repurchase securities 507,625 1,015,408
Other short-term borrowings 300,820 134,779
Accrued interest and other liabilities 252,279 195,578
Long-term borrowings 427,887 178,002
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Total liabilities 12,693,575 12,038,256
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $5 par, 15,000,000 shares
authorized, 8,097,472 shares issued 40,487 40,487
Additional paid-in-capital 101,531 96,597
Retained earnings 1,051,093 937,072
Unrealized investment gains (losses), net 11,244 (2,485)
Treasury stock - common, at cost -
1,523,377 shares at September 30, 1997;
1,411,286 shares at December 31, 1996 (222,797) (166,012)
--------------------------------------------------------------------------------------
Total stockholders' equity 981,558 905,659
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Total liabilities and stockholders' equity $ 13,675,133 12,943,915
=============================================================================================================
</TABLE>
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<PAGE>
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
Amounts in thousands, except per share 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income Loans and leases, including fees $ 240,254 221,785 705,055 652,033
Money-market assets
Deposits at banks 944 354 2,469 1,651
Federal funds sold and agreements
to resell securities 952 311 2,217 2,493
Trading account 382 216 1,013 721
Investment securities
Fully taxable 25,490 26,712 74,697 82,777
Exempt from federal taxes 1,679 707 3,957 1,790
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Total interest income 269,701 250,085 789,408 741,465
- --------------------------------------------------------------------------------------------------------------
Interest expense NOW accounts 803 2,768 2,558 8,183
Savings deposits 22,746 21,170 67,489 62,364
Time deposits 85,889 74,706 241,900 209,082
Deposits at foreign office 2,969 3,382 9,081 9,045
Short-term borrowings 8,801 12,311 32,731 47,657
Long-term borrowings 8,560 3,547 21,064 10,734
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Total interest expense 129,768 117,884 374,823 347,065
-------------------------------------------------------------------------------------------
Net interest income 139,933 132,201 414,585 394,400
Provision for possible credit losses 12,000 10,475 34,000 31,850
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Net interest income after provision
for possible credit losses 127,933 121,726 380,585 362,550
- --------------------------------------------------------------------------------------------------------------
Other income Mortgage banking revenues 12,748 11,289 36,995 32,955
Service charges on deposit accounts 10,865 10,176 31,976 30,209
Trust income 7,643 6,649 21,779 19,895
Merchant discount and other credit card fees 4,514 5,160 13,979 12,435
Trading account and foreign exchange gains 1,427 1,009 3,372 1,163
Gain (loss) on sales of bank investment
securities (47) (15) (280) 412
Other revenues from operations 13,032 10,625 32,267 25,538
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Total other income 50,182 44,893 140,088 122,607
- --------------------------------------------------------------------------------------------------------------
Other expense Salaries and employee benefits 56,270 52,517 165,390 153,778
Equipment and net occupancy 13,302 13,506 39,690 39,621
Printing, postage and supplies 3,334 3,719 10,157 11,401
Deposit insurance 471 7,779 1,440 9,337
Other costs of operations 31,329 30,137 94,383 87,759
-------------------------------------------------------------------------------------------
Total other expense 104,706 107,658 311,060 301,896
-------------------------------------------------------------------------------------------
Income before income taxes 73,409 58,961 209,613 183,261
Income taxes 27,518 23,090 79,672 72,578
-------------------------------------------------------------------------------------------
Net income $ 45,891 35,871 129,941 110,683
=============================================================================================================
Net income per common share
Primary $ 6.62 5.05 18.60 15.61
Fully diluted 6.57 5.05 18.50 15.36
Cash dividends per common share .80 .70 2.40 2.10
Average common shares outstanding
Primary 6,927 7,104 6,985 7,032
Fully diluted 6,982 7,106 7,024 7,205
</TABLE>
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<PAGE>
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
Dollars in thousands 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $ 129,941 110,683
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 34,000 31,850
Depreciation and amortization of premises
and equipment 15,679 15,304
Amortization of capitalized mortgage servicing rights 10,147 7,691
Provision for deferred income taxes (11,389) (45)
Asset write-downs 905 817
Net gain on sales of assets (1,232) (2,549)
Net change in accrued interest receivable, payable 17,869 12,977
Net change in other accrued income and expense 56,036 10,424
Net change in loans held for sale 23,077 (16,455)
Net change in trading account assets and liabilities 30,974 (538)
--------------------------------------------------------------------------------
Net cash provided by operating activities 306,007 170,159
- ------------------------------------------------------------------------------------------------------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale 217,221 151,781
Proceeds from maturities of investment securities
Available for sale 176,680 329,650
Held to maturity 67,561 78,729
Other -- 721
Purchases of investment securities
Available for sale (576,468) (502,527)
Held to maturity (39,201) (46,749)
Other (3,936) (2,776)
Net decrease in interest-bearing
deposits at banks 46,529 66,083
Additions to capitalized mortgage servicing rights (16,000) (11,934)
Net increase in loans and leases (604,303) (890,799)
Capital expenditures, net (7,517) (11,831)
Acquisitions, net of cash acquired 123,043 --
Purchases of bank owned life insurance (100,000) --
Other, net (3,460) (1,789)
--------------------------------------------------------------------------------
Net cash used by investing activities (719,851) (841,441)
- ------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in deposits 557,360 1,082,457
financing activities Net decrease in short-term borrowings (379,204) (268,431)
Proceeds from issuance of trust
preferred securities 250,000 --
Payments on long-term borrowings (120) (4,682)
Purchases of treasury stock (67,771) (64,115)
Dividends paid - common (15,920) (13,932)
Dividends paid - preferred -- (900)
Other, net 850 (1,031)
--------------------------------------------------------------------------------
Net cash provided by financing activities 345,195 729,366
--------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ (68,649) 58,084
Cash and cash equivalents at beginning of period 449,985 364,119
Cash and cash equivalents at end of period $ 381,336 422,203
============================================================================================================
Supplemental Interest received during the period $ 784,005 742,188
disclosure of cash Interest paid during the period 354,753 338,346
flow information Income taxes paid during the period 40,915 74,834
============================================================================================================
Supplemental schedule of
noncash investing and Real estate acquired in settlement of loans $ 6,522 7,247
financing activities Conversion of preferred stock to common stock -- 40,000
============================================================================================================
</TABLE>
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<PAGE>
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
======================================================================================================================
Unrealized
Additional investment
Preferred Common paid-in Retained gains (losses) Treasury
Dollars in thousands, except per share stock stock capital earnings net stock Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Balance - January 1, 1996 $ 40,000 40,487 98,657 805,486 (3,155) (135,222) $ 846,253
Net income -- -- -- 110,683 -- -- 110,683
Preferred stock cash dividends -- -- -- (900) -- -- (900)
Common stock cash dividends -
$2.10 per share -- -- -- (13,932) -- -- (13,932)
Exercise of stock options -- -- 2,987 -- -- 1,625 4,612
Purchases of treasury stock -- -- -- -- -- (64,115) (64,115)
Conversion of preferred stock into
506,930 shares of common stock (40,000) -- (6,534) -- -- 46,534 --
Unrealized losses on investment
securities available for sale, net -- -- -- -- (4,944) -- (4,944)
- ----------------------------------------------------------------------------------------------------------------------
Balance - September 30, 1996 $ -- 40,487 95,110 901,337 (8,099) (151,178) $ 877,657
- ----------------------------------------------------------------------------------------------------------------------
1997
Balance - January 1, 1997 $ -- 40,487 96,597 937,072 (2,485) (166,012) $ 905,659
Net income -- -- -- 129,941 -- -- 129,941
Common stock cash dividends -
$2.40 per share -- -- -- (15,920) -- -- (15,920)
Exercise of stock options -- -- 4,934 -- -- 10,986 15,920
Purchases of treasury stock -- -- -- -- -- (67,771) (67,771)
Unrealized gains on investment
securities available for sale, net -- -- -- -- 13,729 -- 13,729
- ----------------------------------------------------------------------------------------------------------------------
Balance - September 30,1997 $ -- 40,487 101,531 1,051,093 11,244 (222,797) $ 981,558
======================================================================================================================
</TABLE>
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES
(unaudited)
- --------------------------------------------------------------------------------
Nine months ended September 30
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
Beginning balance $ 270,466 262,344
Provision for possible credit losses 34,000 31,850
Net charge-offs
Charge-offs (44,332) (34,510)
Recoveries 12,174 10,779
- --------------------------------------------------------------------------------
Total net charge-offs (32,158) (23,731)
- --------------------------------------------------------------------------------
Ending balance $ 272,308 270,463
================================================================================
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
The consolidated financial statements of First Empire State Corporation and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth on pages 41 and 42 of the Company's 1996 Annual Report. In
the opinion of management, all adjustments necessary for a fair presentation
have been made and were all of a normal recurring nature.
2. Borrowings
In January 1997, First Empire Capital Trust I ("Trust I"), a Delaware business
trust organized by the Company on January 17, 1997, issued $150 million of
8.234% preferred capital securities. In June 1997, First Empire Capital Trust
II ("Trust II" and, together with Trust I, the "Trusts"), a Delaware business
trust organized by the Company on May 30, 1997, issued $100 million of 8.277%
preferred capital securities.
Other than the following payment terms (and the redemption terms described
below), the preferred capital securities issued by the Trusts ("Capital
Securities") are 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
The common securities of each Trust ("Common Securities") are wholly owned by
First Empire, and such securities are the only class of each Trust's securities
possessing general voting powers. The Capital Securities represent preferred
undivided interests in the assets of the corresponding Trust, and are classified
in the Company's consolidated balance sheet as long-term borrowings, with
accumulated distributions on such securities included in interest expense. Under
the Federal Reserve Board's current risk-based capital guidelines, the Capital
Securities are includable in First Empire's Tier 1 capital.
The proceeds from the issuances of the Capital Securities and Common Securities
were used by the Trusts to purchase the following amounts of junior subordinated
deferrable interest debentures ("Junior Subordinated Debentures") issued by
First Empire:
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.
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.
Holders of the Capital Securities receive preferential cumulative cash
distributions semi-annually on each distribution date at the stated distribution
rate unless First Empire exercises its right to extend the payment of interest
on the Junior Subordinated Debentures for up to ten semi-annual periods, in
which case payment of distributions on the Capital Securities will be deferred
for a
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<PAGE>
comparable period. During an extended interest period, First Empire 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 First
Empire of the payment of distributions on, the redemption of, and any
liquidation distribution with respect to the Capital Securities. The obligations
of First Empire under such guarantee and the Capital Securities are subordinate
and junior in right of payment to all senior indebtedness of First Empire.
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 (February 1, 2007 in the case of
Trust I and June 1, 2007 in the case of Trust II) contemporaneously with First
Empire's 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 First Empire'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 upon their 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.
3. Earnings per share
During the first quarter of 1997, Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," was issued. SFAS No. 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. SFAS No. 128
replaces the presentation of primary earnings per share required by Accounting
Principles Board Opinion No. 15, "Earnings per Share," with a presentation of
basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator in the basic earnings per share computation to the numerator and
denominator in the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects 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.
SFAS No. 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted, however, after the effective date all prior period earnings per share
data presented shall be restated to conform with the provisions of SFAS No. 128.
Pro forma amounts for basic and diluted earnings per share as if SFAS No. 128
was effective January 1, 1996 were $6.96 and $6.62, respectively, for the three
months ended September 30, 1997 and $5.34 and $5.05, respectively, for the three
months ended September 30, 1996. Pro forma amounts for basic and diluted
earnings per share for the nine months ended September 30, 1997 were $19.59 and
$18.60, respectively, and for the nine months ended September 30, 1996 were
$16.51 and $15.38, respectively.
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<PAGE>
4. Contingencies
Information regarding legal proceedings is included in Part II, Item I, ("Legal
Proceedings") of this Quarterly Report on Form 10-Q.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
First Empire State Corporation ("First Empire") earned $45.9 million or $6.57
per fully diluted common share in the third quarter of 1997, increases of 28%
and 30%, respectively, from the third quarter of 1996 when net income was $35.9
million or $5.05 per common share on a fully diluted basis. Net income was $42.8
million or $6.15 per fully diluted common share in the second quarter of 1997.
Primary earnings per share increased to $6.62 in the recent quarter from $5.05
in the year-earlier quarter and $6.17 in the second quarter of 1997. Results for
the third quarter of 1996 were impacted by a $7.0 million charge for a special
assessment by the Federal Deposit Insurance Corporation ("FDIC") to recapitalize
the Savings Association Insurance Fund ("SAIF"). Excluding the after-tax impact
of the one-time assessment, which reduced net income by $4.1 million, or $.58
per common share, both fully diluted and primary earnings per share in the third
quarter of 1996 would have been $5.63.
For the nine months ended September 30, 1997, net income was $129.9
million or $18.50 per fully diluted common share, up 17% and 20%, respectively,
from $110.7 million or $15.36 per share during the comparable 1996 period.
Primary earnings per share rose 19% to $18.60 for the first nine months of 1997
from $15.61 for the corresponding period in 1996.
The annualized rate of return on average assets for First Empire and its
consolidated subsidiaries ("the Company") in the third quarter of 1997 was
1.36%, up from 1.14% in the year-earlier quarter and 1.31% in 1997's second
quarter. The annualized return on average common stockholders' equity was 18.92%
in the recent quarter, up from 16.64% in the third quarter of 1996 and 18.55% in
the second quarter of 1997. During the first nine months of 1997, the annualized
rates of return on average assets and average common stockholders' equity were
1.32% and 18.58%, respectively, compared with 1.19% and 17.44%, respectively, in
the corresponding 1996 period.
In January and June of 1997, First Empire completed separate offerings of
trust preferred securities that raised a total of $250 million that qualifies as
Tier 1 or core capital for First Empire under the Federal Reserve Board's
risk-based capital guidelines. The trust preferred securities are classified as
long-term borrowings and accumulated distributions on the securities are
included in interest expense.
Taxable-equivalent Net Interest Income
Net interest income expressed on a taxable-equivalent basis was $141.5 million
in the third quarter of 1997, up $8.1 million or 6% from $133.5 million in the
year-earlier quarter and slightly higher than the $139.6 million earned in the
second quarter of 1997. Growth in average loans and leases was the most
significant factor contributing to the improvement in net interest income.
Average loans and leases increased $749 million, or 7%, to
$11.0 billion in the third quarter of 1997 from $10.3 billion in the
year-earlier quarter, lead by growth in the commercial real estate and
commercial loan portfolios. Continuing to reflect a decline in the rate of
growth that began last quarter, as compared with the five preceding quarterly
periods, average loans and leases in the recent quarter were $160 million, or
1%, higher than the second quarter of 1997. Compared with the second quarter of
1997, growth in the Company's residential and commercial real estate loan
portfolios during the recent quarter was partially offset by a slight decrease
in average commercial loans. The accompanying table summarizes quarterly changes
in the major components of the loan and lease portfolio.
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<PAGE>
AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions Percent increase
(decrease) from
3rd Qtr. 3rd Qtr. 2nd Qtr.
1997 1996 1997
------- -------- --------
Commercial, financial, etc. $ 2,226 10% (2)%
Real estate - commercial 4,223 11 3
Real estate - consumer 2,245 3 5
Consumer
Automobile 1,041 (1) (3)
Home equity 646 6 1
Credit cards 256 (7) 1
Other 365 14 7
------- --- ---
Total consumer 2,308 2 -
------- --- ---
Total $11,002 7% 1%
======= === ===
For the first nine months of 1997, taxable-equivalent net interest income
was $418.8 million, up 5% from $397.7 million in the corresponding 1996 period.
The leading factor contributing to this improvement was a 9% increase in average
loans and leases.
Average holdings of investment securities were $1.7 billion for the
quarters ended September 30, 1997 and June 30, 1997, down slightly from $1.8
billion in the third quarter of 1996. Money-market assets averaged $201 million
in 1997's third quarter, compared with $73 million in the year-earlier quarter
and $183 million in the second quarter of 1997. In general, the size of the
investment securities and money-market assets portfolios is influenced by such
factors as demand for loans, which generally yield more than investment
securities and money-market assets, ongoing repayments, the levels of deposits,
and management of balance sheet size and resulting capital ratios.
Average earning assets increased 7% to $13.0 billion in the third quarter
of 1997 from $12.1 billion in the third quarter of 1996. Average earning assets
were $12.7 billion in the second quarter of 1997 and aggregated $12.7 billion
and $12.0 billion for the nine months ended September 30, 1997 and 1996,
respectively.
Core deposits, which include noninterest-bearing deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000, represent a significant source of funding to the
Company. The Company's New York State branch network is the principal source of
core deposits, which generally carry lower interest rates than wholesale funds
of comparable maturities. Core deposits include certificates of deposit under
$100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T
Bank, N.A."), a commercial bank subsidiary of First Empire. Average core
deposits increased to $8.4 billion in the third quarter of 1997, up from $8.2
billion in the year-earlier quarter and $8.3 billion in the second quarter of
1997. Average core deposits of M&T Bank, N.A. were $453 million in the recently
completed quarter, compared with $348 million in the third quarter of 1996 and
$440 million in the second quarter of 1997. The accompanying table provides an
analysis of quarterly changes in the components of average core deposits. For
the nine months ended September 30, 1997 and 1996, core deposits averaged $8.3
billion and $7.9 billion, respectively.
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<PAGE>
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase
(decrease) from
3rd Qtr. 3rd Qtr. 2nd Qtr.
1997 1996 1997
------- -------- --------
NOW accounts $ 234 (71)% (9)%
Savings deposits 3,443 21 1
Time deposits less than $100,000 3,496 5 1
Noninterest-bearing deposits 1,251 5 6
------- --- ---
Total $8,424 3% 1%
======= === ===
The Company also obtains funding through domestic time deposits of
$100,000 or more, deposits originated through the Company's offshore branch
office, and brokered certificates of deposit. Brokered deposits averaged $1.5
billion during the third quarter of 1997 and totaled $1.6 billion at September
30, 1997, compared with an average balance of $1.2 billion during the comparable
1996 period and a total balance of $1.2 billion at September 30, 1996. Brokered
deposits averaged $1.3 billion in the second quarter of 1997. Such deposits are
used to reduce short-term borrowings and lengthen the average maturity of
interest-bearing liabilities. The weighted average remaining term to maturity of
brokered deposits at September 30, 1997 was 2.4 years. Additional amounts of
brokered deposits may be solicited in the future depending on market conditions
and the cost of funds available from alternative sources at the time.
The Company uses short-term borrowings from banks, securities dealers, the
Federal Home Loan Bank of New York ("FHLB") and others as supplemental sources
of funding. Short-term borrowings averaged $686 million in the recent quarter,
compared with $928 million in the third 1996 quarter and $789 million in the
second quarter of 1997. The previously discussed issuances of $250 million of
trust preferred securities also provided funding during 1997. These securities,
along with $175 million of subordinated notes issued in prior years by M&T Bank,
are included in long-term borrowings. Long-term borrowings averaged $428 million
and $188 million in the third quarter of 1997 and 1996, respectively, and $355
million in the second quarter of 1997.
Net interest income is impacted by changes in the composition of the
Company's earning assets and interest-bearing liabilities, as well as changes in
interest rates and spreads. Net interest spread, or the difference between the
taxable-equivalent yield on earning assets and the rate paid on interest-bearing
liabilities, was 3.64% in the third quarter of 1997, compared with 3.73% in the
year-earlier quarter. The rate paid on interest-bearing liabilities increased 15
basis points (hundredths of one percent) to 4.67% in the third quarter of 1997
from 4.52% in the third quarter of 1996 due to generally higher interest rates
and the effect of the previously discussed issuances of $250 million of trust
preferred securities. Such increase was partially offset by a 6 basis point
increase in the yield on earning assets to 8.31% in the third quarter of 1997
from 8.25% in the corresponding 1996 quarter. The net interest spread was 3.71%
in the second quarter of 1997 when the yield on earning assets was 8.35% and the
rate paid on interest-bearing liabilities was 4.64%.
Largely due to the changes in the net interest spread described above, the
Company's net interest margin, or taxable equivalent net interest income
expressed as an annualized percentage of average earning assets, was 4.34% in
1997's third quarter, compared with 4.38% in the comparable quarter of 1996 and
4.39% in the second 1997 quarter. During the first nine months of 1997 and 1996,
the net interest margin was 4.40% and 4.44%, respectively.
The contribution to net interest margin of interest-free funds was .70% in
the third quarter of 1997, up from .65% in the corresponding 1996 quarter.
Average interest-free funds, consisting largely of noninterest-bearing deposits
and stockholders' equity, totaled $1.9 billion in the third quarter of 1997, up
from $1.7 billion a year earlier. The 15 basis point increase in the rate paid
on interest-bearing liabilities used to value these funds was a
-12-
<PAGE>
factor in the improvement in the contribution of interest-free funds to net
interest margin. The contribution to net interest margin of interest-free funds
was .68% in the second quarter of 1997 when such funds averaged $1.9 billion.
Management assesses the potential impact of future changes in interest
rates and spreads by projecting net interest income under a number of different
interest rate scenarios. 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 the loan and deposit portfolios. Revenue
and expense arising from these agreements are reflected in either the yields
earned on loans or, as appropriate, rates paid on interest-bearing deposits. The
notional amount of interest rate swap agreements used as part of the Company's
management of interest rate risk in effect at September 30, 1997 and 1996 was
$3.0 billion and $2.5 billion, respectively. In general, under the terms of
these swaps, the Company receives payments based on the outstanding notional
amount of the swaps at fixed rates of interest and makes payments at variable
rates. However, under the terms of a $33 million swap, the Company pays a fixed
rate of interest and receives a variable rate. At September 30, 1997 the
weighted average rates to be received and paid under interest rate swap
agreements were 6.36% and 5.68%, respectively. The average notional amounts of
interest rate swaps and the related effect on net interest income and margin are
presented in the accompanying table.
INTEREST RATE SWAPS
Dollars in thousands
Three months ended September 30
--------------------------------------------------
1997 1996
----------------------- -----------------------
Amount Rate * Amount Rate *
----------- ------ ----------- ------
Increase (decrease) in:
Interest income $ (96) --% $ (210) (.01)%
Interest expense (3,830) (.13) (4,065) (.16)
------ ------
Net interest
income/margin $ 3,734 .12% $ 3,855 .13%
=========== === =========== ===
Average notional
amount ** $ 2,972,119 $ 2,500,199
=========== ===========
Nine months ended September 30
--------------------------------------------------
1997 1996
----------------------- -----------------------
Amount Rate * Amount Rate *
----------- ------ ----------- ------
Increase (decrease) in:
Interest income $ (48) --% $ 69 --%
Interest expense (10,455) (.13) (11,205) (.15)
------ ------
Net interest
income/margin $ 10,407 .11% $ 11,274 .13%
=========== === =========== ===
Average notional
amount ** $ 2,629,053 $ 2,382,589
=========== ===========
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
The Company estimates that as of September 30, 1997 it would have received
approximately $13.4 million if all interest rate swap agreements entered into
for interest rate risk management purposes had been terminated. This estimated
fair value of the interest rate swap portfolio results from the effects of
changing interest rates and should be considered in the context of the entire
balance sheet and the Company's overall interest rate risk profile. Changes in
the estimated fair value of interest rate swaps entered into for interest rate
risk management purposes are not recorded in the consolidated financial
statements.
-13-
<PAGE>
Giving consideration to interest rate swaps in place at September 30, 1997
and utilizing a computer model which aids management in assessing the potential
impact of future changes in interest rates and spreads, management estimates
that the projected amount of net interest income will be largely unaffected by
changes in interest rates in the next two years. However, additional interest
rate risk management actions may be necessary to counter any detrimental effect
which a sustained decrease in interest rates could have on net interest income
in later years.
As a financial intermediary, the Company is exposed to liquidity risk
whenever the maturities of financial instruments included in assets and
liabilities differ. Accordingly, a critical element in managing a financial
institution is ensuring that sufficient cash flow and liquid assets are
available to satisfy demands for loans and deposit withdrawals, to fund
operating expenses, and to be used for other corporate purposes. Deposits and
borrowings, maturities of money-market assets, repayments of loans and
investment securities, and cash generated from operations, such as fees
collected for services, provide the Company with other sources of liquidity.
Through membership in the FHLB, as well as other available borrowing facilities,
First Empire's banking subsidiaries have access to additional funding sources.
In addition to the proceeds passed through to First Empire from the issuance of
the $250 million of trust preferred securities noted earlier, First Empire
utilizes dividend payments from its banking subsidiaries, which are subject to
various regulatory limitations, to pay dividends, repurchase treasury stock, and
fund debt service and other operating expenses. First Empire also maintains a
$25 million line of credit with an unaffiliated commercial bank, all of which
was available for borrowing at September 30, 1997. Management does not
anticipate engaging in any activities, either currently or in the long-term,
which would cause a significant strain on liquidity at either First Empire or
its subsidiary banks. Furthermore, management closely monitors the Company's
liquidity position for compliance with internal policies and believes that
available sources of liquidity are adequate to meet anticipated funding needs.
Provision for Possible Credit Losses
The provision for possible credit losses in the third quarter of 1997 was $12.0
million, up from $10.5 million in the third quarter of 1996 and $11.0 million in
the second quarter of 1997. The purpose of the provision is to replenish or
build the Company's allowance for possible credit losses to a level necessary to
maintain an adequate reserve position. Net loan charge-offs totaled $11.6
million in the third quarter of 1997, compared with $10.0 million in the
year-earlier quarter and $12.6 million in 1997's second quarter. As an
annualized percentage of average loans and leases, net charge-offs were .42% in
the recent quarter, compared with .39% in the corresponding 1996 quarter and
.47% in the second quarter of 1997. Net charge-offs of consumer loans in the
third quarter of 1997 were $8.2 million, compared with $7.3 million in the third
quarter of 1996 and $9.7 million in 1997's second quarter. Net consumer loan
charge-offs as an annualized percentage of average consumer loans and leases
were 1.42% in the recent quarter, compared with 1.28% in the comparable 1996
quarter and 1.68% in 1997's second quarter.
Through September 30, the provision for possible credit losses was $34.0
million in 1997 and $31.9 million in 1996. Net charge-offs during the nine
months ended September 30, 1997 were $32.2 million, compared with $23.7 million
for the corresponding 1996 period, representing an annualized percentage of
average loans and leases of .40% and .32%, respectively. Net charge-offs of
consumer loans totaled $26.8 million and $18.9 million during the nine months
ended September 30, 1997 and 1996, respectively. The most significant factors
contributing to the increased level of consumer loan charge-offs in 1997
compared with 1996 were higher charge-offs of credit card balances and indirect
automobile loans.
Nonperforming loans were $85.8 million or .76% of total loans and leases
outstanding at September 30, 1997, compared with $96.5 million or .92% at
September 30, 1996 and $97.1 million or .88% at June 30, 1997. Included
-14-
<PAGE>
in such amounts are loans that are guaranteed by government agencies totaling
$17.9 million and $27.5 million at September 30, 1997 and 1996, respectively,
and $20.7 million at June 30, 1997. Nonperforming commercial real estate loans
totaled $24.9 million at September 30, 1997, $28.1 million at September 30, 1996
and $29.2 million at June 30, 1997. Nonperforming commercial real estate loans
include loans secured by properties located in the New York City metropolitan
area of $10.1 million at September 30, 1997, $10.9 million at September 30, 1996
and $11.9 million at June 30, 1997. Nonperforming consumer loans totaled $19.5
million at September 30, 1997, compared with $16.5 million at September 30, 1996
and $16.4 million at June 30, 1997. As a percentage of consumer loan balances
outstanding, nonperforming consumer loans were .84% at September 30, 1997,
compared with .70% at September 30, 1996 and .71% at June 30, 1997. Assets taken
in foreclosure of defaulted loans were $8.2 million at September 30, 1997, $8.5
million at September 30, 1996 and $9.7 million at June 30, 1997.
A comparative summary of nonperforming assets and certain credit quality
ratios is presented in the accompanying table.
NONPERFORMING ASSETS
Dollars in thousands
1997 Quarters 1996 Quarters
Third Second First Fourth Third
------- ------- ------- ------- -------
Nonaccrual loans $50,369 62,525 57,366 58,232 59,517
Loans past due
90 days or more 29,979 31,810 36,857 39,652 36,958
Renegotiated loans 5,413 2,741 2,741 -- --
------- ------- ------- ------- -------
Total nonperforming loans 85,761 97,076 96,964 97,884 96,475
------- ------- ------- ------- -------
Other real estate owned 8,239 9,698 8,694 8,523 8,467
------- ------- ------- ------- -------
Total nonperforming assets $94,000 106,774 105,658 106,407 104,942
======= ======= ======= ======= =======
Government guaranteed
nonperforming loans* $17,853 20,656 22,753 25,847 27,475
======= ======= ======= ======= =======
Nonperforming loans
to total loans and leases,
net of unearned discount .76% .88% .90% .91% .92%
Nonperforming assets
to total net loans and
other real estate owned .83% .97% .98% .99% 1.00%
======= ======= ======= ======= =======
* Included in total nonperforming loans.
The allowance for possible credit losses was $272.3 million, or 2.42% of
total loans and leases at September 30, 1997, compared with $270.5 million or
2.59% a year earlier, $270.5 million or 2.52% at December 31, 1996 and $271.9
million or 2.48% at June 30, 1997. The ratio of the allowance for possible
credit losses to nonperforming loans was 318% at the most recent quarter-end,
compared with 280% a year earlier, 276% at December 31, 1996 and 280% at June
30, 1997. In assessing the adequacy of the allowance for possible credit losses,
management performs an ongoing evaluation of the loan and lease portfolio,
including such factors as the differing economic risks associated with each loan
category, the current financial condition of specific borrowers, the economic
environment in which borrowers operate, the level of delinquent loans and the
value of any collateral. Based upon the results of such review, management
believes that the allowance for possible credit losses at September 30, 1997 was
adequate to absorb credit losses from existing loans and leases.
Other Income
Other income totaled $50.2 million in the third quarter of 1997, compared with
$44.9 million in the year-earlier quarter and $44.0 million in the
-15-
<PAGE>
second quarter of 1997. For the first nine months of 1997, other income was
$140.1 million, up 14% from $122.6 million in the comparable 1996 period.
Mortgage banking revenues were $12.7 million in the recent quarter,
compared with $11.3 million in the corresponding 1996 quarter and $12.2 million
in the second quarter of 1997. Residential mortgage loan servicing fees totaled
$6.2 million in the third quarter of 1997, up from $5.3 million in the
year-earlier quarter and equal to the second 1997 quarter. Gains from sales of
residential mortgage loans and loan servicing rights were $5.8 million in the
recently completed quarter, compared with $5.5 million in the third quarter of
last year and $5.4 million in 1997's second quarter. Residential mortgage loans
serviced for others totaled $6.5 billion and $5.7 billion at September 30, 1997
and 1996, respectively. Capitalized servicing assets were $48.8 million and
$44.5 million at September 30, 1997 and 1996, respectively.
Service charges on deposit accounts totaled $10.9 million in 1997's third
quarter, up from $10.2 million in the third quarter of 1996 and $10.7 million in
the second quarter of 1997. Trust income was $7.6 million in the third quarter
of 1997, compared with $6.6 million in the corresponding quarter of last year
and $7.2 million in the second quarter of 1997. Higher corporate trust revenues
contributed to the increase over the prior quarters. Merchant discount and
credit card fees were $4.5 million in the recent quarter, down from $5.2 million
in the year-earlier period, but up from $4.2 million in the second 1997 quarter.
The decrease from the year-earlier quarter reflects the March 28, 1997
termination of a co-branded credit card program that had been initiated in May
1996. Merchant discount and other credit card fees earned in connection with the
terminated program were $35 thousand and $1.6 million during the three and nine
month periods ended September 30, 1997, respectively, and $1.6 million and $2.3
million, respectively, for the comparable periods in 1996. Credit card balances
related to this program that remained outstanding at September 30, 1997 were
$4.4 million, compared with $53.7 million a year earlier. Trading account and
foreign exchange activity resulted in gains of $1.4 million in the third quarter
of 1997, compared with gains of $1.0 million and $596 thousand in the third
quarter of 1996 and the second quarter of 1997, respectively. Other revenue from
operations totaled $13.0 million in the recent quarter, up $2.4 million from
$10.6 million in the corresponding quarter of 1996, in part due to higher
revenues from the sale of mutual funds and annuities. Also during the recent
quarter, a gain of $2.3 million was realized by the Company from the sale of
venture capital investments, while in the year-earlier quarter, a $2.1 million
gain was realized from the sale of $39 million of deposits and selected assets
of a branch office of the Company. Other revenue from operations totaled $9.2
million in the second quarter of 1997.
For the first nine months of 1997, mortgage banking revenues increased 12%
to $37.0 million from $33.0 million in the corresponding 1996 period, primarily
due to higher servicing fees. Compared with the same period in 1996, service
charges on deposit accounts increased 6% to $32.0 million during the first nine
months of 1997, while trust income increased 9% to $21.8 million. Reflecting
previous expansion of the Company's co-branded credit card business, during the
first nine months of 1997 merchant discount and credit card fees increased 12%
to $14.0 million from $12.4 million in the similar period of 1996. Trading
account and foreign exchange activity resulted in gains of $3.4 million for the
initial nine months of 1997, compared with gains of $1.2 million during the
first nine months of 1996. Including a $2.2 million increase in fees earned from
the sales of mutual funds and annuities and the previously mentioned venture
capital gains of $2.3 million, other revenues from operations increased 26% to
$32.3 million in the first nine months of 1997 from $25.5 million in the
comparable 1996 period.
Other Expense
Other expense totaled $104.7 million in the third quarter of 1997, down 3% from
$107.7 million in the third quarter of 1996 but up 3% from $102.1 million in the
second quarter of 1997. The year-earlier quarter's results
-16-
<PAGE>
reflect the previously discussed $7.0 million charge for the special assessment
by the FDIC to recapitalize the Savings Association Insurance Fund. Through the
first nine months of 1997, other expense totaled $311.1 million or 3% higher
than $301.9 million in the comparable 1996 period.
Salaries and employee benefits expense was $56.3 million in the recent
quarter, 7% higher than the $52.5 million in the corresponding 1996 quarter and
5% above the $53.6 million in the second quarter of 1997. For the first nine
months of 1997, salaries and employee benefits expense increased 8% to $165.4
million from $153.8 million in the corresponding 1996 period. Factors
contributing to the higher expenses over the prior periods were higher costs
associated with incentive-based compensation arrangements, including stock
appreciation rights, as well as merit salary increases.
Nonpersonnel expense totaled $48.4 million in the third quarter of 1997,
little changed from the third quarter of 1996, after excluding the one-time FDIC
assessment, or the second quarter of 1997. Such expenses were $145.7 million
during the first nine months of 1997, a decrease of 2% from $148.1 million
during the corresponding 1996 period. Excluding the FDIC charge, nonpersonnel
expense for the nine months ended September 30, 1997 increased 3% from the
corresponding 1996 period. Contributing to the increase were higher amortization
expenses relating to capitalized servicing rights and credit card co-brand
rebate expenses. Rebate and other operating expenses based on card usage
directly attributable to the co-branded credit card program terminated in March
1997 were approximately $1 thousand and $2.3 million during the three and nine
month periods ended September 30, 1997, respectively, and $2.1 million and $3.1
million, respectively, for the comparable periods in 1996.
Capital
Stockholders' equity at September 30, 1997 was $982 million or 7.18% of total
assets, compared with $878 million or 6.85% of total assets a year earlier and
$906 million or 7.00% at December 31, 1996. On a per share basis, stockholders'
equity was $149.31 at September 30, 1997, up from $130.58 and $135.45 at
September 30 and December 31, 1996, respectively.
Stockholders' equity at September 30, 1997 reflected a gain of $11.2
million, or $1.71 per share, for the net after-tax impact of unrealized gains on
investment securities classified as available for sale, compared with unrealized
losses of $8.1 million or $1.20 per share at September 30, 1996 and $2.5 million
or $.37 per share at December 31, 1996. Such unrealized gains and losses
represent the difference, net of applicable income tax effect, between the
amortized cost and estimated fair value of investment securities classified as
available for sale. The market valuation of investment securities should be
considered in the context of the entire balance sheet of the Company. With the
exception of investment securities classified as available for sale, trading
account assets and liabilities, and residential mortgage loans held for sale,
the carrying values of financial instruments in the balance sheet are generally
not adjusted for appreciation or depreciation in market value resulting from
changes in interest rates.
Federal regulators generally require banking institutions to maintain
"core capital" and "total capital" ratios of at least 4% and 8%, respectively,
of risk-adjusted total assets. In addition to the risk-based measures, Federal
bank regulators have also implemented a minimum "leverage" ratio guideline of 3%
of the quarterly average of total assets. Under regulatory guidelines,
unrealized gains or losses on investment securities classified as available for
sale are not recognized in determining regulatory capital. As previously noted,
core capital includes the $250 million of trust preferred securities issued in
1997. Total capital further includes $175 million of subordinated notes issued
by M&T Bank in prior years. The capital ratios of the Company and its banking
subsidiaries, M&T Bank and M&T Bank, N.A., as of September 30, 1997 are
presented in the accompanying table.
-17-
<PAGE>
REGULATORY CAPITAL RATIOS
September 30, 1997
First Empire M&T M&T
(Consolidated) Bank Bank, N.A.
-------------- ----- ----------
Core capital 10.63% 8.70% 13.69%
Total capital 13.44% 11.56% 14.94%
Leverage 8.97% 7.47% 7.35%
The Company has historically maintained capital ratios in excess of
minimum regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income less
dividends paid expressed as an annualized percentage of average total
stockholders' equity, was 16.75% and 16.30% during the three and nine month
periods ended September 30, 1997, respectively, compared with 14.46% and 15.00%
during the comparable periods of 1996.
In February 1997, First Empire announced a plan to repurchase and hold as
treasury stock up to 303,317 shares of its common stock for reissuance upon the
exercise of outstanding stock options. As of September 30, 1997, First Empire
had repurchased 178,011 common shares pursuant to the plan at an average cost of
$331.78 per share. Including a prior repurchase plan completed in February 1997,
First Empire repurchased 207,073 common shares during the first nine months of
1997 at a total cost of $67.8 million.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this quarterly 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. Words such as "anticipates," "believes," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. 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. First Empire undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Future Factors include changes in interest rates, spreads on earning
assets and interest-bearing liabilities, and interest rate sensitivity; credit
losses; sources of liquidity; 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; and financial resources in the amounts, at the times and on the terms
required to support the Company's future businesses. 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 conditions, including
interest rate and currency exchange rate fluctuations, and other Future Factors.
-18-
<PAGE>
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
QUARTERLY TRENDS
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
======================================================================================================================
Taxable-equivalent basis Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings and dividends
Amounts in thousands, except per share
Interest income $271,305 265,301 257,029 257,196 251,336 248,673 244,714
Interest expense 129,768 125,734 119,321 119,343 117,884 114,996 114,185
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 141,537 139,567 137,708 137,853 133,452 133,677 130,529
Less: provision for possible credit losses 12,000 11,000 11,000 11,475 10,475 11,700 9,675
Other income 50,182 43,983 45,923 47,641 44,893 41,463 36,251
Less: other expense 104,706 102,070 104,284 107,082 107,658 97,921 96,317
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 75,013 70,480 68,347 66,937 60,212 65,519 60,788
Applicable income taxes 27,518 26,329 25,825 25,288 23,090 25,790 23,698
Taxable-equivalent adjustment 1,604 1,360 1,263 1,229 1,251 1,070 937
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 45,891 42,791 41,259 40,420 35,871 38,659 36,153
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends on preferred stock $ -- -- -- -- -- -- 900
Per common share data
Net income
Primary 6.62 6.17 5.81 5.70 5.05 5.36 5.20
Fully diluted 6.57 6.15 5.80 5.68 5.05 5.36 4.96
Net income, excluding securities transactions
Primary 6.63 6.19 5.81 5.73 5.05 5.36 5.17
Fully diluted 6.58 6.17 5.80 5.71 5.05 5.36 4.93
Cash dividends $ .80 .80 .80 .70 .70 .70 .70
Average common shares outstanding
Primary 6,927 6,928 7,100 7,098 7,104 7,212 6,778
Fully diluted 6,982 6,950 7,114 7,121 7,106 7,216 7,295
======================================================================================================================
Balance sheet data
Dollars in millions, except per share
Average balances
Total assets $ 13,424 13,148 12,866 12,728 12,556 12,486 12,141
Earning assets 12,950 12,740 12,464 12,308 12,124 12,044 11,695
Investment securities 1,747 1,715 1,611 1,659 1,798 1,939 1,830
Loans and leases, net of unearned discount 11,002 10,842 10,715 10,527 10,253 9,997 9,672
Deposits 11,170 10,914 10,454 10,609 10,459 10,069 9,496
Stockholders' equity 962 925 917 891 857 855 849
- ----------------------------------------------------------------------------------------------------------------------
At end of quarter
Total assets $ 13,675 13,441 13,122 12,944 12,821 12,542 12,671
Earning assets 13,100 12,903 12,621 12,504 12,282 12,015 12,129
Investment securities 1,752 1,708 1,693 1,572 1,753 1,817 2,108
Loans and leases, net of unearned discount 11,271 10,980 10,803 10,722 10,437 10,129 9,912
Deposits 11,205 11,186 10,533 10,514 10,554 10,193 9,719
Stockholders' equity 982 951 912 906 878 861 847
Equity per common share 149.31 143.64 137.33 135.45 130.58 126.70 123.76
======================================================================================================================
Performance ratios,annualized
Return on
Average assets 1.36 % 1.31 % 1.30 % 1.26 % 1.14 % 1.25 % 1.20 %
Average common stockholders' equity 18.92 % 18.55 % 18.24 % 18.05 % 16.64 % 18.18 % 17.50 %
Net interest margin on average earning assets 4.34 % 4.39 % 4.48 % 4.46 % 4.38 % 4.46 % 4.49 %
Nonperforming assets to total assets,
at end of quarter .69 % .79 % .81 % .82 % .82 % .75 % .71 %
======================================================================================================================
Market price per common share
High $ 415 343 1/2 336 289 5/8 258 247 247 3/4
Low 335 303 281 250 239 232 209
Closing 415 337 320 288 249 241 246
======================================================================================================================
</TABLE>
-19-
<PAGE>
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
<TABLE>
<CAPTION>
1997 Third quarter 1997 Second quarter
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc $ 2,226 $ 47,527 8.47% 2,260 47,680 8.46%
Real estate 6,468 139,184 8.61 6,265 134,710 8.60
Consumer 2,308 54,025 9.28 2,317 53,347 9.23
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 11,002 240,736 8.68 10,842 235,737 8.72
- -----------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 63 944 5.91 54 816 6.01
Federal funds sold and agreements
to resell securities 69 952 5.47 64 860 5.40
Trading account 69 414 2.39 65 443 2.74
- -----------------------------------------------------------------------------------------------------------------------------------
Total money-market assets 201 2,310 4.56 183 2,119 4.64
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,132 17,959 6.29 1,192 19,002 6.39
Obligations of states and political subdivisions 45 755 6.61 44 728 6.59
Other 570 9,545 6.64 479 7,715 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,747 28,259 6.42 1,715 27,445 6.42
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 12,950 271,305 8.31 12,740 265,301 8.35
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (273) (272)
Cash and due from banks 303 307
Other assets 444 373
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 13,424 13,148
===================================================================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 234 803 1.36 259 835 1.30
Savings deposits 3,443 22,746 2.62 3,406 22,495 2.65
Time deposits 6,021 85,889 5.66 5,852 82,254 5.64
Deposits at foreign office 221 2,969 5.32 216 2,873 5.33
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,919 112,407 4.50 9,733 108,457 4.47
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 686 8,801 5.09 789 10,230 5.20
Long-term borrowings 428 8,560 7.94 355 7,047 7.93
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,033 129,768 4.67 10,877 125,734 4.64
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,251 1,181
Other liabilities 178 165
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,462 12,223
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 962 925
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,424 13,148
===================================================================================================================================
Net interest spread 3.64 3.71
Contribution of interest-free funds .70 .68
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 141,537 4.34% 139,567 4.39%
===================================================================================================================================
<CAPTION>
1997 First quarter
Average Average
Average balance in millions; interest in thousands balance Interest rate
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc 2,187 44,623 8.27%
Real estate 6,139 131,135 8.54
Consumer 2,389 54,311 9.22
- --------------------------------------------------------------------------------------
Total loans and leases, net 10,715 230,069 8.71
- --------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 48 709 6.01
Federal funds sold and agreements
to resell securities 32 405 5.22
Trading account 58 255 1.78
- --------------------------------------------------------------------------------------
Total money-market assets 138 1,369 4.04
- --------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,064 16,679 6.36
Obligations of states and political subdivisions 41 677 6.66
Other 506 8,235 6.61
- --------------------------------------------------------------------------------------
Total investment securities 1,611 25,591 6.44
- --------------------------------------------------------------------------------------
Total earning assets 12,464 257,029 8.36
- --------------------------------------------------------------------------------------
Allowance for possible credit losses (272)
Cash and due from banks 298
Other assets 376
- --------------------------------------------------------------------------------------
Total assets 12,866
======================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts 281 920 1.33
Savings deposits 3,346 22,248 2.70
Time deposits 5,410 73,757 5.53
Deposits at foreign office 255 3,239 5.16
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 9,292 100,164 4.37
- --------------------------------------------------------------------------------------
Short-term borrowings 1,075 13,700 5.17
Long-term borrowings 278 5,457 7.96
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,645 119,321 4.55
- --------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,162
Other liabilities 142
- --------------------------------------------------------------------------------------
Total liabilities 11,949
- --------------------------------------------------------------------------------------
Stockholders' equity 917
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 12,866
======================================================================================
Net interest spread 3.81
Contribution of interest-free funds .67
- --------------------------------------------------------------------------------------
Net interest income/margin on earning assets 137,708 4.48%
======================================================================================
</TABLE>
*Includes nonaccrual loans. (continued)
**Includes available for sale securities at amortized cost.
-20-
<PAGE>
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
<TABLE>
<CAPTION>
1996 Fourth quarter 1996 Third quarter
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc $ 2,072 $ 42,480 8.16% 2,023 41,322 8.12%
Real estate 6,082 131,894 8.67 5,972 128,704 8.62
Consumer 2,373 55,118 9.24 2,258 52,268 9.21
- --------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 10,527 229,492 8.67 10,253 222,294 8.62
- --------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 50 762 6.03 24 354 5.98
Federal funds sold and agreements
to resell securities 37 492 5.32 23 311 5.46
Trading account 35 283 3.21 26 247 3.73
- --------------------------------------------------------------------------------------------------------------------------
Total money-market assets 122 1,537 5.01 73 912 5.00
- --------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,097 17,069 6.19 1,208 18,719 6.16
Obligations of states and political subdivisions 41 682 6.54 44 711 6.43
Other 521 8,416 6.43 546 8,700 6.34
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,659 26,167 6.27 1,798 28,130 6.23
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 12,308 257,196 8.31 12,124 251,336 8.25
- --------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (271) (271)
Cash and due from banks 325 345
Other assets 366 358
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,728 12,556
==========================================================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 327 1,247 1.52 794 2,768 1.39
Savings deposits 3,291 22,458 2.71 2,854 21,170 2.95
Time deposits 5,516 77,006 5.55 5,359 74,706 5.55
Deposits at foreign office 258 3,354 5.16 257 3,382 5.23
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,392 104,065 4.41 9,264 102,026 4.38
- --------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 881 11,785 5.32 928 12,311 5.28
Long-term borrowings 186 3,493 7.47 188 3,547 7.48
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,459 119,343 4.54 10,380 117,884 4.52
- --------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,217 1,195
Other liabilities 161 124
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,837 11,699
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 891 857
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 12,728 12,556
==========================================================================================================================
Net interest spread 3.77 3.73
Contribution of interest-free funds .69 .65
- --------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 137,853 4.46% 133,452 4.38%
==========================================================================================================================
</TABLE>
*Includes nonaccrual loans.
**Includes available for sale securities at amortized cost.
-21-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On August 29, 1997, M&T Bank, N.A. and Giant of Maryland, Inc. ("Giant")
settled the arbitration proceeding which was commenced to determine the rights
and liabilities of the parties to each other in connection with the termination
of their co-branded credit card agreement. The terms of the settlement had no
material impact on the Company's consolidated financial condition or results of
operations. Such arbitration and the prior litigation between M&T Bank, N.A. and
Giant were previously reported in First Empire's Quarterly Reports on Form 10-Q
for the fiscal quarters ended June 30, 1997 and March 31, 1997, in First
Empire's Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
and in First Empire's Current Report on Form 8-K dated January 9, 1997.
First Empire and its subsidiaries are subject in the normal course of
business to various other pending and threatened legal proceedings in which
claims for monetary damages are asserted. Management, after consultation with
legal counsel, does not anticipate that the aggregate ultimate liability, if
any, arising out of litigation pending against First Empire or its subsidiaries
will be material to the Company's consolidated financial condition, 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.
Item 2. Changes in Securities.
(Not applicable.)
Item 3. Defaults Upon Senior Securities.
(Not applicable.)
Item 4. Submission of Matters to a Vote of Security Holders.
(Not applicable.)
Item 5. Other Information. (None.)
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit
No.
- -------
11.1 Statement re: Computation of Earnings Per Common Share. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K.
First Empire did not file any Current Reports on Form 8-K during the
fiscal quarter ended September 30, 1997.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FIRST EMPIRE STATE CORPORATION
Date: October 27, 1997 By: /s/ Michael P. Pinto
---------------------------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
-23-
<PAGE>
EXHIBIT INDEX
Exhibit
No.
-------
11.1 Statement re: Computation of Earnings Per Common Share. Filed
herewith.
27.1 Financial Data Schedule. Filed herewith.
-24-
Exhibit No.11.1
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER COMMON SHARE
Amounts in thousands, except per share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary Average common shares outstanding 6,592 6,722 6,634 6,651
Common stock equivalents * 335 382 351 381
- ----------------------------------------------------------------------------------------------------------------
Primary common shares outstanding 6,927 7,104 6,985 7,032
- ----------------------------------------------------------------------------------------------------------------
Net income $45,891 35,871 129,941 110,683
Less: Cash dividends on preferred stock -- -- -- 900
- ----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $45,891 35,871 129,941 109,783
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share --primary $ 6.62 5.05 18.60 15.61
- ----------------------------------------------------------------------------------------------------------------
Fully diluted Average common shares outstanding 6,592 6,722 6,634 6,651
Common stock equivalents * 390 384 390 391
Assumed conversion of 9% convertible
preferred stock -- -- -- 163
- ----------------------------------------------------------------------------------------------------------------
Fully diluted average common shares
outstanding 6,982 7,106 7,024 7,205
- ----------------------------------------------------------------------------------------------------------------
Net income $45,891 35,871 129,941 110,683
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share - fully diluted $ 6.57 5.05 18.50 15.36
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents shares of First Empire's common stock issuable upon the assumed
exercise of outstanding stock options granted pursuant to the First Empire
State Corporation 1983 Stock Option Plan under the "treasury stock" method
of accounting.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 349,571
<INT-BEARING-DEPOSITS> 796
<FED-FUNDS-SOLD> 31,765
<TRADING-ASSETS> 43,805
<INVESTMENTS-HELD-FOR-SALE> 1,603,717
<INVESTMENTS-CARRYING> 148,528
<INVESTMENTS-MARKET> 149,034
<LOANS> 11,570,275
<ALLOWANCE> 272,308
<TOTAL-ASSETS> 13,675,133
<DEPOSITS> 11,204,964
<SHORT-TERM> 808,445
<LIABILITIES-OTHER> 252,279
<LONG-TERM> 427,887
0
0
<COMMON> 40,487
<OTHER-SE> 941,071
<TOTAL-LIABILITIES-AND-EQUITY> 13,675,133
<INTEREST-LOAN> 705,055
<INTEREST-INVEST> 78,654
<INTEREST-OTHER> 5,699
<INTEREST-TOTAL> 789,408
<INTEREST-DEPOSIT> 321,028
<INTEREST-EXPENSE> 374,823
<INTEREST-INCOME-NET> 414,585
<LOAN-LOSSES> 34,000
<SECURITIES-GAINS> (280)
<EXPENSE-OTHER> 311,060
<INCOME-PRETAX> 209,613
<INCOME-PRE-EXTRAORDINARY> 129,941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,941
<EPS-PRIMARY> 18.60
<EPS-DILUTED> 18.50
<YIELD-ACTUAL> 4.40
<LOANS-NON> 50,369
<LOANS-PAST> 29,979
<LOANS-TROUBLED> 5,413
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 270,466
<CHARGE-OFFS> 44,332
<RECOVERIES> 12,174
<ALLOWANCE-CLOSE> 272,308
<ALLOWANCE-DOMESTIC> 168,337
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 103,971
</TABLE>
