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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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9861
FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State of incorporation) (I.R.S. Employer Identification No.)
One M&T Plaza, Buffalo, New York 14240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716)842-5445
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
8.234% Capital Securities of First Empire Capital Trust I
(and the Guarantee of First Empire State Corporation with respect thereto)
(Title of class)
8.234% Junior Subordinated Debentures of
First Empire State 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. /X/
Aggregate market value of the Common Stock, $5 par value, held by non-affiliates
of the registrant, computed by reference to the closing price as of the close of
business on March 3, 1997: $1,539,636,841.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 3, 1997: 6,690,722 shares.
Documents Incorporated By Reference:
(1) Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
of First Empire State Corporation in Part III.
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FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Form
10-K
PART I Page
<S> <C>
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 43-44
B. Interest income/expense and resulting yield or rate
on average interest-earning assets (including non-
accrual loans) and interest-bearing liabilities 43-44
C. Rate/volume variances 19
II. Investment portfolio
A. Year-end balances 16
B. Maturity schedule and weighted average yield 51
C. Aggregate carrying value of securities that exceed ten
percent of stockholders' equity 65
III. Loan portfolio
A. Year-end balances 16,67
B. Maturities and sensitivities to changes in interest rates 49
C. Risk elements
Nonaccrual, past-due and renegotiated loans 48
Actual and pro forma interest on certain loans 67
Nonaccrual policy 60
Loan concentrations 29
IV. Summary of loan loss experience
A. Charge-offs and recoveries 46
Factors influencing management's judgment concerning
the adequacy of the allowance and provision 60
B. Allocation of allowance for loan losses 47
V. Deposits
A. Average balances and rates 43-44
B. Maturity schedule of domestic time deposits with
balances of $100,000 or more 50
VI. Return on equity and assets, etc. 18,24,33
</TABLE>
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FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART I, continued
Item 1. Business, continued
VII. Short-term borrowings 70-71
Item 2. Properties 20,68-69
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Executive Officers of the Registrant 21-22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
A. Principal market 23
Market prices 37-38
B. Approximate number of holders at year-end 16
C. Frequency and amount of dividends declared 38
D. Restrictions on dividends 10,85
Item 6. Selected Financial Data
A. Selected consolidated year-end balances 16
B. Consolidated earnings, etc. 17-18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23-52
Item 8. Financial Statements and Supplementary Data
A. Report of Independent Accountants 54
B. Consolidated Balance Sheet -
December 31, 1996 and 1995 55
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FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART II, continued
Item 8, continued
C. Consolidated Statement of Income -
Years ended December 31, 1996, 1995 and 1994 56
D. Consolidated Statement of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 57
E. Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31,
1996, 1995 and 1994 58
F. Notes to Financial Statements 59-88
G. Quarterly Trends 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 89
PART III
Item 10. Directors and Executive Officers of the
Registrant 89
Item 11. Executive Compensation 89
Item 12. Security Ownership of Certain Beneficial
Owners and Management 89
Item 13. Certain Relationships and Related Transactions 89
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 90
Signatures 91-93
Exhibit Index 94-95
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PART I
Item 1. Business.
---------
First Empire State Corporation ("Registrant" or "First Empire") is a New York
business corporation which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHCA") and under Article III-A
of the New York Banking Law ("Banking Law"). The principal executive offices
of the Registrant are located at One M&T Plaza, Buffalo, New York 14240. The
Registrant was incorporated in November 1969. The Registrant and its direct
and indirect subsidiaries are collectively referred to herein as the
"Company". As of December 31, 1996, the Company had consolidated total
assets of $12.9 billion, deposits of $10.5 billion and stockholders' equity
of $906 million. The Company had 4,407 full-time and 773 part-time employees
as of December 31, 1996.
At December 31, 1996, the Registrant had three wholly owned bank
subsidiaries: Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association
("M&T Bank, N.A."). Collectively, the banks offer a wide range of commercial
banking, trust and investment services to their customers. The Registrant
currently is in the process of merging M&T Bank and East New York, and it is
anticipated that the merger will be completed during the first half of 1997.
At December 31, M&T Bank represented 86% of consolidated assets of the
Company and, after giving effect to the merger of M&T Bank and East New York,
would represent 97% of the consolidated total assets of the Company.
The Company from time to time considers acquiring banks, thrift institutions,
branch offices or other businesses within markets currently served or in other
nearby markets. The Company has pursued acquisition opportunities in the past,
currently continues to actively review different opportunities, including the
possibility of major acquisitions, and intends to continue this practice.
Subsidiaries
------------
M&T Bank is a banking corporation which is incorporated under the laws of the
State of New York. M&T Bank is a member of the Federal Reserve System, the
FDIC and the Federal Home Loan Bank System. First Empire acquired all of the
issued and outstanding shares of the capital stock of M&T Bank in December
1969. The stock of M&T Bank represents a major asset of First Empire. M&T
Bank operates under a charter granted by the State of New York in 1892, and
the continuity of its banking business is traced to the organization of the
Manufacturers and Traders Bank in 1856. The principal executive offices of
M&T Bank are located at One M&T Plaza, Buffalo, New York 14240. As of
December 31, 1996, M&T Bank had 161 banking offices located throughout New
York State plus a branch in Nassau, The Bahamas. As of December 31, 1996,
M&T Bank had consolidated total assets of $11.1 billion, deposits of $8.3
billion and stockholder's equity of $687 million. The deposit liabilities of
M&T Bank are insured by the FDIC through either its Bank Insurance Fund
("BIF") or its Savings Association Insurance Fund ("SAIF"). Of M&T Bank's
$8.2 billion in assessable deposits at December 31, 1996, 86% were assessed
as BIF-insured and the remainder as SAIF-insured deposits. As a commercial
bank, M&T Bank offers a broad range of financial services to a diverse base
of consumers, businesses, professional clients, governmental entities and
financial institutions located in its markets. Lending is largely focused on
consumers residing in New York State and on New York-based small and
medium-size businesses, however certain of M&T Bank's subsidiaries conduct
lending activities in markets outside of New York State. M&T Bank also
provides other financial services through its operating subsidiaries.
East New York was acquired by First Empire in December 1987. East New York,
originally organized in 1868, is a New York-chartered capital stock savings
bank and a member of the FDIC and of the Federal Home Loan Bank System. The
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deposit liabilities of East New York are insured by the FDIC through the BIF.
The stock of East New York represents a major asset of First Empire. The
principal executive offices of East New York are located at 2644 Atlantic
Avenue, Brooklyn, New York 11207. Its banking business is conducted from 14
banking offices located in New York City and Nassau County, Long Island. As
of December 31, 1996, East New York had consolidated total assets of $2.0
billion, deposits of $1.8 billion and stockholder's equity of $149 million.
East New York takes deposits from, and offers other banking services to, a
diverse base of customers located in its markets. East New York concentrates
on marketing on behalf of the Company commercial mortgage loans that are
secured by income producing properties that are primarily located throughout
the metropolitan New York City area, especially apartment buildings and
cooperative apartments.
M&T Bank, N.A., a national bank and a member of the Federal Reserve System
and the FDIC, commenced operations on October 2, 1995. The deposit
liabilities of M&T Bank, N.A. are insured by the FDIC through the BIF. The
main office of M&T Bank, N.A. is located at 54 Main Street, Oakfield, New
York 14125. M&T Bank, N.A. offers selected deposit and loan products on a
nationwide basis, primarily through direct mail and telephone marketing
techniques. As of December 31, 1996, M&T Bank, N.A. had total assets of $510
million, deposits of $468 million and stockholder's equity of $34 million.
M&T Capital Corporation ("M&T Capital"), a wholly owned subsidiary of M&T
Bank, was incorporated as a New York business corporation in January 1968.
M&T Capital is a federally-licensed small business investment company
operating under the provisions of the Small Business Investment Act of 1958,
as amended ("SBIA"). M&T Capital provides equity capital and long-term
credit to "small-business concerns", as defined by the SBIA. M&T Capital had
assets of $5 million and stockholder's equity of $4 million as of December
31, 1996, and recorded approximately $1.8 million of revenues in 1996. The
headquarters of M&T Capital are located at One M&T Plaza, Buffalo, New York
14240.
M&T Credit Corporation ("M&T Credit"), a wholly owned subsidiary of M&T Bank,
was incorporated as a New York business corporation in April 1994. M&T
Credit is a consumer credit company with headquarters at One M&T Plaza,
Buffalo, New York 14240, and offices in Pennsylvania. As of December 31,
1996, M&T Credit had assets of $289 million and stockholder's equity of $0.8
million. M&T Credit recorded $17.1 million of revenues during 1996.
M&T Mortgage, the wholly owned mortgage banking subsidiary of M&T Bank, was
incorporated as a New York business corporation in November 1991. M&T
Mortgage's principal activities are comprised of the origination of
residential mortgage loans and providing residential mortgage loan servicing
to M&T Bank, East New York, M&T, N.A. and others. M&T Mortgage operates
throughout New York State, and also maintains branch offices in Arizona,
Colorado, Massachusetts, Ohio, Oregon, Utah and Washington. M&T Mortgage had
assets of $334 million and stockholder's equity of $88 million as of December
31, 1996, and recorded approximately $73.6 million of revenues during 1996.
Residential mortgage loans serviced by M&T Mortgage for non-affiliates
totaled $5.8 billion at December 31, 1996. The headquarters of M&T Mortgage
are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203.
M&T Financial Corporation ("M&T Financial"), a New York business corporation,
is a wholly owned subsidiary of M&T Bank which specializes in
capital-equipment leasing. M&T Financial was formed in October 1985, had
assets of $81 million and stockholder's equity of $16 million as of December
31, 1996, and recorded approximately $0.7 million of revenues in 1996. The
headquarters of M&T Financial are located at One M&T Plaza, Buffalo, New York
14240.
M&T Real Estate, Inc.("M&T Real Estate"), is a subsidiary of M&T Bank which
was incorporated as a New York business corporation in August 1995. M&T Bank
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owns all of the outstanding common and 87.3% of the preferred stock of M&T
Real Estate. The remaining 12.7% of M&T Real Estate's preferred stock is
owned by officers or former officers of the Company. M&T Real Estate engages
in commercial real estate lending and servicing activities. As of December
31, 1996, M&T Real Estate had assets and stockholder's equity of $3.5
billion. M&T Real Estate recorded $299 million of revenues in 1996. The
headquarters of M&T Real Estate are located at M&T Center, One Fountain
Plaza, Buffalo, New York 14203.
M&T Securities, Inc. ("M&T Securities") is a wholly owned subsidiary of M&T
Bank which was incorporated as a New York business corporation in November
1985. M&T Securities is registered as a broker/dealer under the Securities
Exchange Act of 1934, as amended, and as an investment advisor under the
Investment Advisors Act of 1940, as amended, and is licensed as an insurance
agent under the New York State Insurance Law. It provides securities
brokerage and investment advisory services. As of December 31, 1996, M&T
Securities had assets of $6 million and stockholder's equity of $.3 million.
M&T Securities recorded $15 million of revenues during 1996. The
headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New
York 14240.
Highland Lease Corporation ("Highland Lease"), a wholly owned subsidiary of
M&T Bank, was incorporated as a New York business corporation in October
1994. Highland Lease is a consumer leasing company with headquarters at One
M&T Plaza, Buffalo, New York 14240. As of December 31, 1996, Highland Lease
had assets of $147 million and stockholder's equity of $8 million. Highland
Lease recorded $10 million of revenues during 1996.
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, 1996.
Lines of Business, Principal Services, Industry Segments
--------------------------------------------------------
and Foreign Operations
----------------------
Commercial and retail banking, with activities incidental thereto, represents
the sole significant line and/or segment of business of the Company. The
Company's international activities are discussed in note 15 of Notes to
Financial Statements filed herewith in Part II, Item 8, "Financial Statements
and Supplementary Data". The only activities that, as a class, contributed
10% or more of the sum of consolidated interest income and other income in
each of the last three years were lending and investment securities
transactions. The amount of income from such sources during those years is
set forth on the Company's Consolidated Statement of Income filed herewith in
Part II, Item 8, "Financial Statements and Supplementary Data".
Supervision and Regulation
--------------------------
The banking industry is subject to extensive state and federal regulation and
continues to undergo significant change. In 1991, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA
substantially amended the Federal Deposit Insurance Act ("FDI Act") and
certain other statutes. Since FDICIA's enactment, the federal bank
regulatory agencies have adopted regulations to implement its statutory
provisions.
The following discussion summarizes certain aspects of the banking laws and
regulations that affect the Company. Proposals to change the laws and
regulations governing the banking industry are frequently raised in Congress,
in state legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have
on the Company are impossible to determine with any certainty. A change in
applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a
material impact on the business, operations and earnings of the Company. To
the extent that the following information describes statutory or regulatory
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provisions, it is qualified entirely by reference to the particular statutory
or regulatory provision.
Bank Holding Company Regulation
-------------------------------
As a registered bank holding company, the Registrant and its nonbank
subsidiaries are subject to supervision and regulation under the BHCA by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board")
and the New York State Banking Superintendent ("Banking Superintendent").
The Federal Reserve Board requires regular reports from the Registrant and is
authorized by the BHCA to make regular examinations of the Registrant and its
subsidiaries.
Under the BHCA, the Registrant may not acquire direct or indirect ownership
or control of more than 5% of the voting shares of any company, including a
bank, without the prior approval of the Federal Reserve Board, except as
specifically authorized under the BHCA. The Registrant is also subject to
regulation under the Banking Law with respect to certain acquisitions of
domestic banks. Under the BHCA, the Registrant, subject to the approval of
the Federal Reserve Board, may acquire shares of non-banking corporations the
activities of which are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
The Federal Reserve Board has enforcement powers over bank holding companies
and their non-banking subsidiaries, among other things, to interdict
activities that represent unsafe or unsound practices or constitute
violations of law, rule, regulation, administrative orders or written
agreements with a federal bank regulator. These powers may be exercised
through the issuance of cease-and-desist orders, civil money penalties or
other actions.
Under the Federal Reserve Board's statement of policy with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit all available resources to support such institutions in circumstances
where it might not do so absent such policy. Although this "source of
strength" policy has been challenged in litigation, the Federal Reserve Board
continues to take the position that it has authority to enforce it. For a
discussion of circumstances under which a bank holding company may be
required to guarantee the capital levels or performance of its subsidiary
banks, see Capital Adequacy, below. The Federal Reserve also has the
authority to terminate any activity of a bank holding company that
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution or to terminate its control of any bank or
nonbank subsidiaries.
On September 29, 1994, the Riegle-Neal Interstate Banking Efficiency Act of
1994 (the "Interstate Banking Act") was enacted into law. Generally, the
Interstate Banking Act permits bank holding companies to acquire banks in any
state as of September 29, 1995, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits, prior to June 1, 1997, a bank to merge
with an out-of-state bank and convert any offices into branches of the
resulting bank if the home states of both banks expressly permit interstate
bank mergers; permits, beginning June 1, 1997, a bank to merge with an
out-of-state bank and convert any offices into branches of the resulting bank
if both states have not opted out of interstate branching; permits a bank to
acquire branches from an out-of-state bank, beginning June 1, 1997, if the
law of the state where the branches are located permits the interstate branch
acquisition; and permits banks to establish and operate de novo interstate
branches whenever the host state opts-in to de novo branching. Bank holding
companies and banks seeking to engage in transactions authorized by the
Interstate Banking Act must be adequately capitalized and managed.
On January 29, 1996, New York State enacted into law an interstate branching
law which enables New York to "opt-in" early to interstate branching by
merger and acquisition, as permitted under the Interstate Banking Act. The
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law adopted in New York (the "New York Interstate Branching Law") provides
for the immediate opt-in of branching by merger or acquisition on a
reciprocal basis until June 1, 1997, and is thereafter unrestricted. The New
York Interstate Branching Law permits the acquisition of a single branch on a
reciprocal basis until June 1, 1997, and thereafter without restriction, but
does not provide for de novo interstate branching.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the
terms of the CRA, the Federal Reserve Board (or other appropriate bank
regulatory agency) is required, in connection with its examination of a bank,
to assess such bank's record in meeting the credit needs of the community
served by that bank, including low- and moderate-income neighborhoods.
Furthermore, such assessment is also required of any bank that has applied,
among other things, to merge or consolidate with or acquire the assets or
assume the liabilities of a federally-regulated financial institution, or to
open or relocate a branch office. In the case of a bank holding company
applying for approval to acquire a bank or bank holding company, the Federal
Reserve Board will assess the record of each subsidiary bank of the applicant
bank holding company in considering the application. The Banking Law
contains provisions similar to the CRA which are applicable to New
York-chartered banks.
Supervision and Regulation of Bank Subsidiaries
-----------------------------------------------
The Registrant's banking subsidiaries are subject to regulation, and are
examined regularly, by various bank regulatory agencies: M&T Bank by the
Federal Reserve Board and the Banking Superintendent; East New York by the
FDIC and the Banking Superintendent; and M&T Bank, N.A. by the Comptroller of
the Currency. The Registrant and its direct non-banking subsidiaries are
affiliates, within the meaning of the Federal Reserve Act, of the
Registrant's subsidiary banks and their subsidiaries. As a result, the
Registrant's subsidiary banks and their subsidiaries are subject to
restrictions on loans or extensions of credit to, purchases of assets from,
investments in, and transactions with the Registrant and its direct
non-banking subsidiaries and on certain other transactions with them or
involving their securities.
Under the "cross-guarantee" provisions of the FDI Act, insured depository
institutions under common control are required to reimburse the FDIC for any
loss suffered by either the BIF or SAIF of the FDIC as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. Thus, any insured depository institution
subsidiary of First Empire could incur liability to the FDIC in the event of
a default of another insured depository institution owned or controlled by
First Empire. The FDIC's claim under the cross-guarantee provisions is
superior to claims of stockholders of the insured depository institution or
its holding company and to most claims arising out of obligations or
liabilities owed to affiliates of the institution, but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The FDIC may decline to enforce the cross-guarantee provisions
if it determines that a waiver is in the best interest of the BIF or SAIF or
both.
Dividends from Bank Subsidiaries
--------------------------------
M&T Bank, East New York and M&T Bank, N.A. are subject, under one or more of the
banking laws, to restrictions on the amount and frequency (no more often than
quarterly) of dividend declarations. Future dividend payments to the Registrant
by its subsidiary banks will be dependent on a number of factors, including the
earnings and financial condition of each such bank, and are
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subject to the limitations referred to in note 19 of Notes to Financial
Statements filed herewith in Part II, Item 8, "Financial Statements and
Supplementary Data," and to other statutory powers of bank regulatory
agencies.
Under FDICIA, an insured depository institution is prohibited from making any
capital distribution to its owner, including any dividend, if, after making
such distribution, the depository institution fails to meet the required
minimum level for any relevant capital measure, including the risk-based
capital adequacy and leverage standards discussed below.
Capital Adequacy
----------------
The Federal Reserve Board, the FDIC and the Office of the Comptroller of the
Currency ("OCC") have adopted risk-based capital adequacy guidelines for bank
holding companies and banks under their supervision. Under the guidelines
the so-called "Tier 1 capital" and "Total capital" as a percentage of
risk-weighted assets and certain off-balance sheet instruments must be at
least 4% and 8%, respectively.
The Federal Reserve Board, 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, East New York and M&T Bank, N.A.
as of December 31, 1996 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, 1996
(dollars in millions)
Registrant M&T Bank
(Consolidated) M&T Bank East New York N.A.
------------- -------- ------------- --------
Capital Components
Tier 1 capital $ 889 $ 673 $ 149 $ 34
Total capital 1,198 966 164 37
Risk-weighted assets
and off-balance sheet
instruments $10,590 $9,301 $1,192 $222
Risk-based Capital Ratio
Tier 1 capital 8.40% 7.24% 12.50% 15.23%
Total capital 11.32 10.39 13.76 16.49
Leverage Ratio 6.99 6.22 7.47 6.59
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FDICIA required each federal banking agency, including the Federal Reserve
Board, to revise its risk-based capital standards within 18 months of the
enactment of the statute into law on December 19, 1991 in order to ensure
that those standards take adequate account of interest rate risk,
concentration of credit risk and the risk of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on certain
multifamily housing loans.
On December 29, 1993, the Federal Reserve Board amended the risk-based
capital guidelines, effective December 31, 1993, lowering from 100 percent to
50 percent the risk weight assigned to certain multifamily housing loans.
On December 7, 1994, the Federal Reserve Board adopted a final rule,
effective December 31, 1994, providing that institutions regulated by the
Federal Reserve Board could net for risk-based capital purposes the positive
and negative market values of interest and exchange rate contracts subject to
a qualifying, legally enforceable, bilateral netting contract to calculate
one current exposure for that netting contract.
On December 8, 1994, the Federal Reserve Board amended its risk-based capital
guidelines effective December 31, 1994, directing institutions to generally
not include in regulatory capital the "net unrealized holding gains (losses)
on securities available for sale", determined pursuant to the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," when preparing financial
statements in accordance with generally accepted accounting principles. Net
unrealized losses on marketable equity securities (i.e., equity securities
with readily determinable fair values), however, continue to be deducted from
Tier 1 capital. This rule has the general effect of valuing available for
sale securities at amortized cost (i.e., based on historical cost), rather
than at fair value (i.e., generally at market value), for purposes of
calculating the risk-based and leverage ratios.
On December 15, 1994, the Federal Reserve Board issued a final rule,
effective January 17, 1995, addressing concentration of credit risk and risks
of nontraditional activities. Accordingly, risk-based capital guidelines
were amended to explicitly cite concentrations of credit risk and an
institution's ability to monitor and control them as important factors in
assessing an institution's overall capital adequacy. Institutions identified
through the examination process as having significant exposure to
concentration of credit risk or as not adequately managing concentration risk
will be required to hold capital in excess of the regulatory minimums. The
risk-based capital guidelines were further amended to explicitly cite the
risks arising from nontraditional activities and management's ability to
monitor and control these risks as important factors to consider in assessing
an institution's overall capital adequacy. The rule requires that as banking
institutions begin to engage in, or significantly expand their participation
in, a nontraditional activity, the risks of that activity be promptly
analyzed and the activity given appropriate capital treatment by the agencies.
On December 22, 1994, the Federal Reserve Board revised its capital adequacy
guidelines, effective April 1, 1995, to establish a limitation on the amount
of certain deferred tax assets that may be included in (that is, not deducted
from) Tier 1 capital for purpose of risk-based capital and leverage ratios.
Under the revised guidelines, deferred tax assets that can only be realized
if an institution earns taxable income in the future are limited for
regulatory capital purposes to the amount that the institution expects to
realize, based on projections of taxable income, within one year of each
quarter-end report date or 10 percent of Tier 1 capital, whichever is less.
On August 2, 1995, the federal banking agencies issued final rules under which
exposure to interest rate risk will be measured as the effect that a change in
interest rates would have on the net economic value of a bank. This economic
perspective considers the effect that changing interest rates may have on the
value of a bank's assets, liabilities and off-balance sheet positions. Exposure
estimates collected through a new proposed supervisory measurement process, a
bank's historical financial performance, and it's earnings exposure to interest
11
<PAGE>
rate movements will be quantitative factors used by examiners to determine
the adequacy of a bank's capital for interest rate risk. Examiners will also
consider qualitative factors, including the adequacy of a bank's internal
interest rate risk management. As a result, the final supervisory judgement
on a bank's capital adequacy may differ significantly from conclusions that
might be drawn solely from the level of the bank's risk-based capital ratio.
Bank regulators periodically propose amendments to the risk-based capital
guidelines and related regulatory framework. While the Company's management
studies such proposals, the timing of adoption, ultimate form and effect of
such proposed amendments on the Company's capital requirements and operations
cannot be predicted.
FDICIA requires the federal banking agencies to take "prompt corrective
action" in respect of depository institutions and their bank holding
companies that do not meet minimum capital requirements. FDICIA established
five capital tiers: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". A depository institution's capital tier, or that of its
bank holding company, depends upon where its capital levels are in relation
to various relevant capital measures, including a risk-based capital measure
and a leverage ratio capital measure, and certain other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and
(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 CAMEL 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 CAMEL rating of 1); (B)
"significantly undercapitalized" if the bank has (i) a total risk-based
capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of
less than 3% or (iii) a leverage ratio of less than 3% and (C)"critically
undercapitalized" if the bank has a ratio of tangible equity to total assets
equal to or less than 2%. The Federal Reserve Board may reclassify a "well
capitalized" bank 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. First
Empire, M&T Bank, East New York and M&T Bank, N.A. currently meet the
definition of "well capitalized" institutions.
"Undercapitalized" depository institutions, among other things, are subject
to growth limitations, are prohibited, with certain exceptions, from making
capital distributions, are limited in their ability to obtain funding from a
Federal Reserve Bank and are required to submit a capital restoration plan.
The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such capital restoration plan
and provide appropriate assurances of performance. If a depository
institution fails to submit an acceptable plan, including if the holding
company refuses or is unable to make the guarantee described in the previous
sentence, it is treated as if it is "significantly undercapitalized". Failure
to submit or implement an acceptable capital plan also is grounds for the
appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and
12
<PAGE>
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. Moreover, the parent holding
company of a significantly undercapitalized depository institution may be
ordered to divest itself of the institution or of nonbank subsidiaries of the
holding company. "Critically undercapitalized" institutions, among other
things, are prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
FDICIA directs, among other things, that each federal banking agency
prescribe standards for depository institutions and depository institution
holding companies relating to internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, a maximum ratio of classified
assets to capital, minimum earnings sufficient to absorb losses, a minimum
ratio of market value to book value for publicly traded shares and other
standards as they deem appropriate. The Federal Reserve Board adopted such
standards in 1993.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, limitations
on the amount of capitalized mortgage servicing rights and purchased credit
card relationships includable in Tier 1 capital, and the requirement that a
depository institution give prior notice to customers and regulatory
authorities before closing any branch. FDICIA also contains a prohibition on
the acceptance or renewal of brokered deposits by depository institutions
that are not "well capitalized" or are "adequately capitalized" and have not
received a waiver from the FDIC.
FDIC Deposit Insurance Assessments
----------------------------------
As institutions with deposits insured by the BIF and the SAIF, M&T Bank, East
New York and M&T Bank, N.A. are subject to FDIC deposit insurance
assessments. Under current law the regular insurance assessments to be paid
by BIF-insured and SAIF-insured institutions are specified in schedules
issued by the FDIC that specify, at semiannual intervals, target reserve
ratios designed to maintain the reserve ratios of each of those insurance
funds at 1.25% of their estimated insured deposits. The FDIC is also
authorized to impose one or more special assessments.
The FDIC has implemented a risk-based deposit premium assessment system under
which each depository institution is placed in one of nine assessment
categories based on the institution's capital classification under the prompt
corrective action provisions described above, and whether such institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. The adjusted assessment rates for both BIF-insured and
SAIF-insured institutions under the current system range from .00% to .31%
depending upon the assessment category into which the insured institution is
placed. None of the Company's banking subsidiaries paid regular insurance
assessments to the FDIC in 1996. However, the FDIC retains the ability to
increase regular BIF and SAIF assessments and to levy special additional
assessments.
On September 30, 1996, President Clinton signed into law legislation that
required the FDIC to impose a one-time special assessment to recapitalize the
SAIF and increase its reserve ratio to 1.25% of estimated insured deposits.
As a result, for the quarter ended September 30, 1996, the Company recorded a
pre-tax charge of $7.0 million for this assessment that was related to the
SAIF-insured deposits of M&T Bank.
In addition to deposit insurance fund assessments, in 1997 the FDIC will
assess 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. Under the September 1996 legislation,
the FDIC is required to
13
<PAGE>
set FICO assessments for BIF-assessable deposits at one-fifth the amount for
SAIF-assessable deposits. The current annualized rates established by the FDIC
for BIF-assessable and SAIF-assessable deposits are 1.30 basis points and 6.48
basis points, respectively.
Any significant increases in assessment rates or additional special
assessments by the FDIC could have an adverse impact on the results of
operations and capital of M&T Bank, East New York or M&T Bank, N.A.
Governmental Policies
---------------------
The earnings of the Company are significantly affected by the monetary and
fiscal policies of governmental authorities, including the Federal Reserve
Board. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives are open-market operations in U.S.
Government securities and Federal funds, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member
bank deposits. These instruments of monetary policy are used in varying
combinations to influence the overall level of bank loans, investments and
deposits, and the interest rates charged on loans and paid for deposits. The
Federal Reserve Board frequently uses these instruments of monetary policy,
especially its open-market operations and the discount rate, to influence the
level of interest rates and to affect the strength of the economy, the level
of inflation or the price of the dollar in foreign exchange markets. The
monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of banking institutions in the past and are expected
to continue to do so in the future. It is not possible to predict the nature
of future changes in monetary and fiscal policies, or the effect which they
may have on the Company's business and earnings.
Competition
-----------
The Company competes in offering commercial and personal financial services
with other banking institutions and with firms in a number of other
industries, such as thrift institutions, credit unions, personal loan
companies, sales finance companies, leasing companies, securities brokers and
dealers, insurance companies and retail merchandising organizations.
Furthermore, diversified financial services companies are able to offer a
combination of these services to their customers on a nationwide basis.
Compared to less extensively regulated financial services companies, the
Company's operations are significantly impacted by state and federal
regulations applicable to the banking industry. Moreover, the provisions of
the Interstate Banking Act and the New York State Interstate Branching Law
may further ease entry into New York State by out-of-state banking
institutions. As a result, the number of banking organizations with which
the Registrant's subsidiary banks compete may grow in the future.
Other Legislative Initiatives
-----------------------------
From time to time, various proposals are introduced in the United States
Congress and in the New York Legislature and before various bank regulatory
authorities which would alter the powers of, and restrictions on, different
types of banking organizations and which would restructure part or all of the
existing regulatory framework for banks, bank holding companies and other
financial institutions.
Moreover, a number of other bills have been introduced in Congress which
would further regulate, deregulate or restructure the financial services
industry. It is not possible to predict whether these or any other proposals
will be enacted into law or, even if enacted, the effect which they may have
on the Company's business and earnings.
14
<PAGE>
Statistical Disclosure Pursuant to Guide 3
------------------------------------------
See cross-reference sheet for disclosures incorporated elsewhere in this Annual
Report on Form 10-K. Additional information is included in the following
tables.
15
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 1
SELECTED CONSOLIDATED YEAR-END BALANCES
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- -------------------------------------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Money-market assets
Interest-bearing deposits at banks......... $ 47,325 125,500 143 55,044 110,041
Federal funds sold and resell agreements... 125,326 1,000 3,080 329,429 312,461
Trading account............................ 37,317 9,709 5,438 9,815 53,515
------------ ------------ ------------ ------------ ----------
Total money-market assets................. 209,968 136,209 8,661 394,288 476,017
------------ ------------ ------------ ------------ ----------
Investment securities
U.S. Treasury and federal agencies......... 1,023,038 1,087,005 999,407 1,387,395 916,621
Obligations of states and political
subdivisions.............................. 41,445 35,250 55,787 49,230 53,789
Other...................................... 507,215 647,040 735,846 992,527 750,154
------------ ------------ ------------ ------------ ----------
Total investment securities............... 1,571,698 1,769,295 1,791,040 2,429,152 1,720,564
Loans and leases
Commercial, financial, leasing, etc........ 2,206,282 2,013,937 1,680,415 1,510,205 1,478,555
Real estate--construction.................. 90,563 77,604 53,535 51,384 35,831
Real estate--mortgage...................... 6,199,931 5,648,590 5,046,937 4,540,177 4,422,730
Consumer................................... 2,623,445 2,133,592 1,666,230 1,337,293 1,211,401
------------ ------------ ------------ ------------ ----------
Total loans and leases.................... 11,120,221 9,873,723 8,447,117 7,439,059 7,148,517
Unearned discount.......................... (398,098) (317,874) (229,824) (177,960) (164,713)
Allowance for possible credit losses....... (270,466) (262,344) (243,332) (195,878) (151,690)
------------ ------------ ------------ ------------ ----------
Loans and leases, net..................... 10,451,657 9,293,505 7,973,961 7,065,221 6,832,114
Other real estate owned..................... 8,523 7,295 10,065 12,222 16,694
Total assets................................ 12,943,915 11,955,902 10,528,644 10,364,958 9,587,931
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
Demand deposits............................. 1,352,929 1,184,359 1,087,102 1,052,258 1,078,690
NOW accounts................................ 334,787 768,559 748,199 764,690 770,618
Savings deposits............................ 3,280,788 2,765,301 3,098,438 3,364,983 3,573,717
Time deposits............................... 5,352,749 4,596,053 3,106,723 1,982,272 2,536,309
Deposits at foreign office.................. 193,236 155,303 202,611 189,058 117,776
------------ ------------ ------------ ------------ ----------
Total deposits............................ 10,514,489 9,469,575 8,243,073 7,353,261 8,077,110
Short-term borrowings....................... 1,150,187 1,273,206 1,364,850 2,101,667 692,691
Long-term borrowings........................ 178,002 192,791 96,187 75,590 75,685
Total liabilities........................... 12,038,256 11,109,649 9,807,648 9,640,964 8,961,136
------------ ------------ ------------ ------------ ----------
Stockholders' equity........................ 905,659 846,253 720,996 723,994 626,795
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS, EMPLOYEES AND OFFICES
NUMBER AT YEAR-END 1996 1995 1994 1993 1992
- --------------------------------------------------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Stockholders............................................. 3,654 3,787 3,981 3,985 4,157
Employees................................................ 5,180 4,889 4,505 4,400 4,275
Banking offices.......................................... 202 181 168 145 151
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
16
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 2
CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ---------------------------------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest income
Loans and leases, including fees.......................... $ 881,002 794,181 633,077 608,473 602,932
Money-market assets
Deposits at banks........................................ 2,413 8,181 2,212 6,740 1,083
Federal funds sold and resell agreements................. 2,985 3,007 4,751 20,403 18,100
Trading account.......................................... 980 1,234 361 1,242 2,927
Investment securities
Fully taxable............................................ 107,415 118,791 104,185 101,187 125,529
Exempt from federal taxes................................ 2,637 2,760 2,760 2,584 5,906
---------- ------- ------- ------- -------
Total interest income................................... 997,432 928,154 747,346 740,629 756,477
---------- ------- ------- ------- -------
Interest expense
NOW accounts.............................................. 9,430 11,902 11,286 13,113 16,544
Savings deposits.......................................... 84,822 87,612 84,804 90,392 110,142
Time deposits............................................. 286,088 239,882 97,067 98,508 153,588
Deposits at foreign office................................ 12,399 6,952 5,894 3,243 4,348
Short-term borrowings..................................... 59,442 84,225 73,868 58,459 38,386
Long-term borrowings...................................... 14,227 11,157 6,287 6,158 590
---------- --------- --------- --------- ---------
Total interest expense.................................. 466,408 441,730 279,206 269,873 323,598
---------- --------- --------- --------- ---------
Net interest income....................................... 531,024 486,424 468,140 470,756 432,879
Provision for possible credit losses...................... 43,325 40,350 60,536 79,958 84,989
---------- --------- --------- --------- ---------
Net interest income after provision for possible credit
losses.................................................. 487,699 446,074 407,604 390,798 347,890
---------- --------- --------- --------- ---------
Other income
Mortgage banking revenues................................. 44,484 37,142 16,002 12,776 10,943
Service charges on deposit accounts....................... 40,659 38,290 35,016 32,291 28,372
Trust income.............................................. 27,672 25,477 22,574 23,865 16,905
Merchant discount and other credit card fees.............. 18,266 10,675 8,705 7,932 6,728
Trading account and foreign exchange gains................ 2,421 2,783 738 3,518 5,391
Gain (loss) on sales of bank investment securities........ (37) 4,479 128 870 28,050
Gain on sales of venture capital investments.............. 3,175 2,619 802 2,896 3,230
Other revenues from operations............................ 33,608 28,073 39,774 26,396 26,607
---------- --------- --------- --------- ---------
Total other income...................................... 170,248 149,538 123,739 110,544 126,226
---------- --------- --------- --------- ---------
Other expense
Salaries and employee benefits............................ 208,342 188,222 161,221 154,340 130,751
Equipment and net occupancy............................... 51,346 50,526 49,132 47,823 41,659
Printing, postage and supplies............................ 15,167 14,442 13,516 13,021 13,111
Deposit insurance......................................... 9,337 14,675 16,442 17,684 17,783
Other costs of operations................................. 124,786 106,574 96,551 94,951 108,034
---------- --------- --------- --------- ---------
Total other expense..................................... 408,978 374,439 336,862 327,819 311,338
---------- --------- --------- --------- ---------
Income before income taxes................................ 248,969 221,173 194,481 173,523 162,778
Income taxes.............................................. 97,866 90,137 77,186 71,531 64,841
---------- --------- --------- --------- ---------
Net income................................................ $ 151,103 131,036 117,295 101,992 97,937
---------- --------- --------- --------- ---------
Dividends declared
Common................................................... $ 18,617 16,224 14,743 13,054 10,780
Preferred................................................ 900 3,600 3,600 3,600 3,600
---------- --------- --------- --------- ---------
</TABLE>
17
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 3
COMMON SHAREHOLDER DATA
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ---------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per Share
Net income............................................... $ 21.31 18.79 16.35 13.87 13.41
Cash dividends declared.................................. 2.80 2.50 2.20 1.90 1.60
Stockholders' equity at year-end......................... 135.45 125.33 103.02 99.43 85.79
Dividend payout ratio..................................... 12.39% 12.73% 12.97% 13.27% 11.43%
-------- ------ ------ --------- -----
</TABLE>
18
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 4
CHANGES IN INTEREST INCOME AND EXPENSE*
<TABLE>
<CAPTION>
1996 COMPARED WITH 1995 1995 COMPARED WITH 1994
----------------------------- -------------------------------
RESULTING FROM RESULTING FROM
CHANGES IN: CHANGES IN:
TOTAL -------------------- TOTAL --------------------
INCREASE (DECREASE) IN THOUSANDS CHANGE VOLUME RATE CHANGE VOLUME RATE
- --------------------------------------------------------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans and leases, including fees......................... $ 86,509 110,121 (23,612) $161,336 127,303 34,033
Money-market assets
Deposits at banks....................................... (5,768) (4,669) (1,099) 5,969 4,005 1,964
Federal funds sold and agreements to resell securities.. (22) 409 (431) (1,744) (3,335) 1,591
Trading account......................................... (239) 107 (346) 840 952 (112)
Investment securities
U.S. Treasury and federal agencies...................... (225) (2,555) 2,330 17,563 3,841 13,722
Obligations of states and political subdivisions........ (742) (584) (158) 348 (227) 575
Other................................................... (10,390) (11,194) 804 (2,945) (6,562) 3,617
--------- --------
Total interest income.................................. $ 69,123 $181,367
--------- --------
Interest expense
Interest-bearing deposits
NOW accounts............................................ $ (2,472) (1,523) (949) $ 616 237 379
Savings deposits........................................ (2,790) 1,016 (3,806) 2,808 (9,704) 12,512
Time deposits........................................... 46,206 57,335 (11,129) 142,815 105,852 36,963
Deposits at foreign office.............................. 5,447 5,500 (53) 1,058 (953) 2,011
Short-term borrowings.................................... (24,783) (15,953) (8,830) 10,357 (16,495) 26,852
Long-term borrowings..................................... 3,070 3,262 (192) 4,870 5,272 (402)
-------- --------
Total interest expense................................. $ 24,678 $162,524
-------- --------
</TABLE>
- ------------------------
* Interest income data are on a taxable-equivalent basis. The apportionment of
changes resulting from the combined effect of both volume and rate was based
on the separately determined volume and rate changes.
19
<PAGE>
Item 2. Properties.
-----------
Both First Empire and M&T Bank maintain their executive offices at One M&T
Plaza in Buffalo, New York. This twenty-one story headquarters building,
containing approximately 276,000 rentable square feet of space, is owned in
fee by M&T Bank, and was completed in 1967 at a cost of approximately $17
million. First Empire, M&T Bank and their subsidiaries occupy approximately
73% of the building and the remainder is leased to non-affiliated tenants.
At December 31, 1996, the cost of this property, net of accumulated
depreciation, was $9.7 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 84% 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, 1996, the cost of this
building, including improvements made subsequent to acquisition and net of
accumulated depreciation, was $15.8 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 223,000 square feet
and their combined cost, net of accumulated depreciation, was $12.5 million.
The cost, net of accumulated depreciation and amortization, of the Company's
premises and equipment is detailed in note 6 of Notes to Financial Statements
filed herewith in Part II, Item 8, "Financial Statements and Supplementary
Data". Of the 175 domestic banking offices of the Registrant's subsidiary
banks, 56 are owned in fee and 119 are leased.
Item 3. Legal Proceedings.
-----------------
M&T Bank, N.A., is party to a co-branded credit card agreement with Giant of
Maryland, Inc. ("Giant"). In October 1996, M&T Bank, N.A. notified Giant of
its intent to terminate the agreement under its termination provisions. In
December 1996, Giant filed a complaint against M&T Bank, N.A. in the United
States District Court for the District of Maryland alleging that M&T Bank,
N.A. breached the agreement by attempting to terminate and that M&T Bank,
N.A. negligently misrepresented certain information provided to Giant. The
complaint sought interlocutory and permanent injunctive relief, specific
performance for the five-year term of the agreement, and damages for breach
of contract and negligent misrepresentation in the amount of $40 million.
Subsequent to filing of the complaint, Giant withdrew its request for
injunctive relief, agreed to dismiss the litigation, and consented to
arbitration of the claims of M&T Bank, N.A. and Giant against each other.
Management believes that M&T Bank, N.A. has meritorious defenses to Giant's
claims and is vigorously defending against them.
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 First Empire'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 First Empire's
consolidated results of operations in any future reporting period.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
----------------------------------------------------
20
<PAGE>
Executive Officers of the Registrant
------------------------------------
Information concerning the Registrant's executive officers is presented below
as of March 3, 1997. Shown parenthetically is the year since which the
officer has held the indicated position with the Registrant or its
subsidiaries. In the case of each such corporation, officers' terms run
until the first meeting of the board of directors after such corporation's
annual meeting, and until their successors are elected and qualified.
Robert G. Wilmers, age 62, is chairman of the board (1994),
president (1988), chief executive officer (1983) and a
director (1982) of the Registrant. He is chairman of the
board, chief executive officer (1983) and a director (1982)
of M&T Bank, and served as president of M&T Bank from March
1984 to June 1996. Mr. Wilmers is a director of East New
York (1988) and M&T Financial (1985). He is chairman of the
board and a director of M&T Bank, N.A.(1995).
Atwood Collins, III, age 50, is president, chief executive
officer and a director (1995) of East New York. Previously,
Mr. Collins served as executive vice president and chief
operating officer of East New York (1988). Mr. Collins is
an executive vice president of the Registrant (1997) and of
M&T Bank (1996). He is a director of M&T Real Estate
(1995). Mr. Collins held a number of management positions
with Morgan Guaranty Trust Company of New York from 1972 to
1988, including the position of senior vice president and
manager of treasury operations which he held immediately
prior to joining East New York.
Mark J. Czarnecki, age 41, is an executive vice president of M&T Bank
(1997) and is in charge of M&T Bank's Trust and Investment
Services Division. Mr. Czarnecki is president of M&T Securities,
Inc. (1996). Mr. Czarnecki has held a number of management
positions with M&T Bank since 1977, most recently as senior vice
president of the private client services group of the Trust and
Investment Services Division (1994) and prior thereto as an
administrative vice president and regional manager for the Retail
Banking Division.
Brian E. Hickey, age 44, is president (1994) of the Rochester
Division of M&T Bank and is an executive vice president of
the Registrant (1997) and of M&T Bank (1996). In addition
to managing all of M&T Bank's business segments in the
Rochester market, Mr. Hickey has responsibility for managing
the Company's Western New York Commercial Banking Division.
Before joining M&T Bank, Mr. Hickey served as regional
president, Rochester/Southern Region of Marine Midland Bank,
which he joined as a regional executive in 1989. Mr. Hickey
is a director of M&T Financial (1996).
James L. Hoffman, age 57, is president (1992) of the Hudson
Valley Division of M&T Bank, and is an executive vice
president of the Registrant (1997) and of M&T Bank (1996).
Mr. Hoffman served as chairman of the board, president,
chief executive officer and a director (1983) of The First
National Bank of Highland, which had been a wholly owned
subsidiary of the Registrant prior to its merger with and
into M&T Bank on February 29, 1992. He served as an
executive vice president of M&T Bank from 1974 to 1984.
21
<PAGE>
Barbara L. Laughlin, age 52, is an executive vice president of
the Registrant (1993) and of M&T Bank (1990), and is in
charge of the Company's Technology and Banking Operations
Division. Ms. Laughlin is an executive vice president and a
director of M&T Bank, N.A.(1995). Ms. Laughlin was
executive vice president of retail banking and technology at
The Seamen's Bank for Savings from June 1986 to April 1990
before joining M&T Bank.
John L. Pett, age 49, is an executive vice president (1997) and
chief credit officer (1995) of the Registrant and is an
executive vice president and chief credit officer of
M&T Bank (1996). Mr. Pett is chairman of the board and
a director of Highland Lease(1997) and M&T Credit
(1997). He is a director of M&T Bank, N.A. (1996).
Mr. Pett served as senior vice president of the
Registrant from 1991 to 1997.
Michael P. Pinto, age 41, is an executive vice president and
chief financial officer of the Registrant (1997) and M&T
Bank (1996), and is in charge of the Company's Finance
Division. Mr. Pinto is a director of M&T Capital (1996),
M&T Financial (1996), M&T Mortgage (1996) and M&T Real
Estate (1996). He is an executive vice president and chief
financial officer of M&T Bank, N.A. (1996). Mr. Pinto
served as senior vice president and controller of the
Registrant from 1993 to 1997.
William C. Rappolt, age 51, is an executive vice president and
treasurer of the Registrant (1993) and M&T Bank (1984), and
executive vice president of East New York (1994). Mr.
Rappolt is in charge of the Company's Treasury Division.
Mr. Rappolt is a director of M&T Financial (1985), M&T
Securities (1985), and is an executive vice president and a
director of M&T Bank, N.A.(1995).
Robert E. Sadler, Jr., age 51, is an executive vice president of
the Registrant (1990), president and a director of M&T Bank
(1996), and executive vice president of East New York
(1996), and is in charge of the Company's Commercial Banking
Division. Mr. Sadler is chairman of the board (1987) and a
director of M&T Capital (1983); chairman of the board (1989)
and a director of M&T Financial (1985); chairman of the
board and a director of M&T Mortgage (1991); chairman of the
board and a director of M&T Securities (1994); president,
chief executive officer and a director of M&T Bank,
N.A.(1995); and chairman of the board, president and a
director of M&T Real Estate (1995).
Harry R. Stainrook, age 60, is an executive vice president of the
Registrant (1993) and of M&T Bank (1985), and was in charge
of M&T Bank's Trust and Investment Services Division from
1985 until February 1997. Mr. Stainrook is a director of
M&T Securities (1994), and is an executive vice president of
M&T Bank, N.A. (1996). Mr. Stainrook has announced his
retirement from the Registrant and all of its subsidiaries,
effective March 31, 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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The Registrant's common stock is traded under the symbol FES on the
American Stock Exchange. See cross-reference sheet for disclosures
incorporated elsewhere in this Annual Report on Form 10-K for market
prices of the Registrant's common stock, approximate number of common
stockholders at year-end, frequency and amounts of dividends on common
stock and restrictions on the payment of dividends.
Item 6. Selected Financial Data. See cross-reference sheet for disclosures
-----------------------
incorporated elsewhere in this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations.
---------------------
Corporate Profile and Significant Developments
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York with consolidated assets of $12.9 billion at
December 31, 1996. First Empire and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company." First Empire's banking
subsidiaries are Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association ("M&T
Bank, N.A."), all of which are wholly owned. M&T Bank, with total assets of
$11.1 billion at December 31, 1996, is a New York-chartered commercial bank with
161 offices throughout New York State and an office in Nassau, The Bahamas.
East New York, with $2.0 billion in assets at December 31, 1996, is a New
York-chartered savings bank with 14 offices in metropolitan New York City. M&T
Bank, N.A., with $510 million in assets at December 31, 1996, is a national bank
with an office in Oakfield, New York.
M&T Bank's subsidiaries include M&T Mortgage Corporation, a
residential mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T
Real Estate, Inc., a commercial mortgage lender; M&T Financial Corporation, a
commercial leasing company; M&T Capital Corporation, a venture capital company;
M&T Credit Corporation, a consumer credit company; and Highland Lease
Corporation, a consumer leasing company.
On March 29, 1996, National Indemnity Company, a subsidiary of
Berkshire Hathaway Inc., the holder of all outstanding shares of First Empire's
9% convertible preferred stock, converted such shares into 506,930 shares of
First Empire common stock. The 40,000 shares of preferred stock had been issued
on March 15, 1991 for $40 million and were converted into shares of common stock
at a contractual price of $78.90625 per share. As of December 31, 1996, common
shares outstanding totaled 6,686,186, up from 6,433,166 and 6,610,503 at
December 31, 1995 and 1994, respectively.
In December 1996, First Empire announced plans to merge East New York
with and into M&T Bank. The merger is subject to regulatory approvals and is
expected to be completed in the second quarter of 1997. Following the merger,
East New York's business activities will operate as the New York City Division
of M&T Bank.
During 1996 M&T Bank opened 20 branches in supermarkets, bringing the
total number of supermarket branches opened in 1996 and 1995 to 27. Supermarket
banking provides convenient access for customers to the banking services of M&T
Bank.
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Overview
Net income in 1996 was $151.1 million or $21.31 per common share, increases of
15% and 13%, respectively, from $131.0 million or $18.79 per common share in
1995. Fully diluted earnings per common share rose 18% to $20.97 in 1996 from
$17.78 in 1995. In 1994, net income was $117.3 million while primary and fully
diluted earnings per common share were $16.35 and $15.71, respectively. The
1995 results include $4.5 million of gains from sales of investment securities.
The impact from sales of securities in 1996 and 1994 was negligible. Excluding
the after-tax impact of gains from sales of investment securities, net income
for 1995 was $128.4 million, representing primary and fully diluted earnings per
share of $18.41 and $17.43, respectively.
The Company achieved a return on average assets in 1996 of 1.21%, compared
with 1.14% in 1995 and 1.17% in 1994. The return on average common
stockholders' equity was 17.60% in 1996, 17.16% in 1995 and 16.64% in 1994.
Excluding the effects of the 1995 securities gains, the return on average assets
in 1995 was 1.12% and the return on average common stockholders' equity was
16.81%.
Taxable-equivalent net interest income increased 9% in 1996 to $536 million
from $491 million in 1995. The chief factor contributing to improved net
interest income was 14% growth in average loans, which resulted in a 9% increase
in average earning assets from 1995 to 1996. A 15% increase in average earning
assets, primarily loans, in 1995 was also the most significant factor for the
rise in that year's net interest income from $472 million in 1994. Average
earning assets totaled $12.0 billion in 1996, up from $11.1 billion in 1995 and
$9.7 billion in 1994. Net interest margin, or taxable-equivalent net interest
income expressed as a percentage of average earning assets, in 1996 was 4.45%,
little changed from 4.43% in 1995, but down 44 basis points (hundredths of one
percent) from 4.89% in 1994.
The provision for possible credit losses was $43.3 million in 1996,
compared with $40.4 million in 1995 and $60.5 million in 1994. Net charge-offs
in 1996 were $35.2 million, compared with $21.3 million in 1995 and $16.6
million in 1994. The increase from prior years reflects a higher level of
consumer loan charge-offs.
In December 1994, First Empire transferred appreciated investment
securities with a fair value of $15.7 million to an affiliated, tax-exempt
charitable foundation. As a result of the transfer, in 1994 the Company
recognized charitable contributions expense and tax-exempt other income of $13.8
million and $10.4 million, respectively, resulting in an after-tax increase in
1994 net income of $2.4 million.
Noninterest income for 1996 totaled $170 million, 17% above the $145
million in 1995 (excluding gains from sales of investment securities) and 50%
above the $113 million in 1994 (excluding $10.4 million related to the December
1994 transfer of securities to the affiliated foundation). Higher revenues
associated with mortgage banking and credit card activities were significant
factors contributing to the growth of noninterest income. Noninterest expense
was $409 million in 1996, up 9% from $374 million in 1995 and 27% from $323
million in 1994 (excluding $13.8 million related to the December 1994 transfer
of investment securities). Expenses associated with expansion of businesses
providing mortgage banking services, indirect automobile loans, credit cards and
the sale of mutual funds and annuities, as well as the impact of acquisitions
completed in 1995 and 1994, contributed to the rise in noninterest expense.
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Net Interest Income/Lending and Funding Activities
Growth in average earning assets, which rose $966 million or 9% to $12.0 billion
in 1996, was the primary factor contributing to a corresponding 9% increase in
taxable-equivalent net interest income to $536 million in 1996 from $491 million
in 1995. Taxable-equivalent net interest income and average earning assets in
1994 were $472 million and $9.7 billion, respectively. The growth in average
earning assets in 1996 and 1995 was predominately attributable to increased
demand for loans offered by the Company, including the effects of expansion of
the Company's businesses which provide residential mortgage loans, indirect
automobile loans and credit cards. The accompanying table summarizes average
loans and leases outstanding in 1996 and percentage changes in the major
components of the loan and lease portfolio over the past two years.
Loans secured by real estate, excluding $610 million of outstanding home
equity loans and lines of credit which are classified as consumer loans,
represented approximately 58% of the loan and lease portfolio during 1996, down
from 60% in 1995 and 61% in 1994. At December 31, 1996, the Company held
approximately $4.0 billion of commercial real estate loans and $2.2 billion of
consumer real estate loans.
Commercial real estate loans originated by the Company are predominately
secured by properties in the New York City metropolitan area, including areas in
neighboring states generally considered to be within commuting distance of New
York City, and Western New York, which includes Buffalo, Niagara Falls,
Rochester and surrounding areas. Commercial real estate loans are also
originated in the Hudson Valley and Southern Tier regions of New York State.
Most commercial real estate loans originated by the Company are fixed-rate
instruments with monthly payments and a balloon payment of the remaining
principal at maturity, usually five years after loan origination. For borrowers
in good standing, the customer may extend the terms of the loan agreement for an
additional five years at the then-current market rate of interest. The
accompanying table presents commercial real estate loans at December 31, 1996 by
geographic area, type of collateral and size of the loans outstanding. Of the
$2.1 billion of commercial real estate loans in the New York City metropolitan
area, approximately 60% were secured by multi-family residential properties, 13%
by office space and 15% by retail space. The Company's experience has been that
office space and retail properties tend to demonstrate more volatile
fluctuations in value through economic cycles and changing economic conditions
than do multi-family residential properties. Approximately 52% of the aggregate
dollar amount of New York City area loans were for $3 million or less, while
loans of more than $10 million were approximately 13% of the total. Commercial
real estate loans secured by properties elsewhere in New York State, mostly in
Western New York, tend to have a greater diversity of collateral types and
include a significant amount of lending to customers who use the mortgaged
property in their trade or business. Approximately 70% of the aggregate dollar
amount of loans in this segment of the portfolio were for $3 million or less.
Commercial real estate loans secured by properties located outside of New York
State and outside of areas of neighboring states considered to be part of the
New York City metropolitan area comprised less than 5% of total commercial real
estate loans.
The Company normally refrains from commercial construction lending, except
when the borrower has obtained a commitment for permanent financing upon project
completion. As a result, the portfolio of commercial construction loans for
which the Company has not committed to provide permanent financing totaled only
$51 million, or .5% of total loans and leases at December 31, 1996.
The Company's portfolio of real estate loans secured by one-to-four family
residential properties totaled $2.0 billion at December 31, 1996, approximately
70% of which were secured by properties located in New York
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State. In addition, the Company's mortgage banking subsidiary, M&T Mortgage
Corporation, had $194 million of residential real estate loans held for sale at
December 31, 1996.
Consumer loans and leases represented approximately 22% of the loan
portfolio during 1996, compared with 20% in 1995 and 19% in 1994. Beginning in
1994 and, to a greater extent, continuing in 1995 and 1996, the Company began
to market automobile loans and leases and credit cards in areas outside of New
York State. At December 31, 1996, 28% of the automobile loan portfolio was to
borrowers outside of New York State, primarily in Pennsylvania. Automobile
loans and leases are generally originated through dealers, however, all
applications submitted by dealers are subject to the Company's normal
underwriting and loan approval procedures. During 1996, automobile loans and
leases represented approximately 10% of the Company's average loan portfolio,
while no other consumer loan product represented more than 6%. Credit card
accounts are marketed through mail campaigns and co-branding initiatives. Such
initiatives involve developing relationships with retailers and other
enterprises and issuing co-branded credit cards that provide cardholders the
ability to earn rebates on purchases made with the cards. The Company bears the
cost of these rebates. At December 31, 1996, 46% of outstanding credit card
balances were with customers outside of New York State.
The Company's portfolio of investment securities averaged $1.8 billion in
1996, $2.0 billion in 1995 and $2.1 billion in 1994. Factors influencing the
size of the investment securities portfolio include demand for loans, which
generally yield more than investment securities, ongoing repayments, the level
of deposits, and management of balance sheet size and resulting capital ratios.
The investment securities portfolio is largely comprised of adjustable-rate
mortgage-backed securities, collateralized mortgage obligations, and
shorter-term U.S. Treasury notes. When purchasing investment securities, the
Company considers its overall interest-rate risk profile as well as the adequacy
of expected returns relative to prepayment and other risks assumed. As a result
of changes in interest rates, actual or anticipated prepayments, or credit risk
associated with a particular security, the Company occasionally sells investment
securities. Realized gains or losses from sales of investment securities were
negligible in 1996 and 1994, but during 1995, the Company realized a pre-tax
gain of approximately $4.5 million from sales of approximately $445 million of
investment securities. Furthermore, to enhance flexibility in managing the
investment securities portfolio, and as allowed by the Financial Accounting
Standards Board ("FASB"), in December 1995 the Company transferred approximately
$220 million of U.S. Treasury notes from "held-to-maturity" to "available for
sale" classification. No gain or loss was realized at the time of such
transfer.
Money-market assets, which are comprised of interest-bearing deposits at
banks, trading account assets, Federal funds sold and agreements to resell
securities, averaged $124 million in 1996, compared with $186 million in 1995
and $166 million in 1994. The decline in money market assets from 1995 and 1994
resulted largely from increased demand for loans.
Core deposits represent a significant source of funding to the Company and
generally carry lower interest rates than wholesale funds of comparable
maturities. Such deposits include noninterest-bearing demand deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000. The principal source of core deposits for the
Company is its New York State branch network. Certificates of deposit under
$100,000 generated on a nationwide basis by M&T Bank, N.A. are also included in
core deposits. In 1996, average core deposits rose to $8.0 billion from $7.4
billion in 1995. Core deposits averaged $6.8 billion in 1994. Average core
deposits of M&T Bank, N.A., which began operations in the
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fourth quarter of 1995, were $261 million in 1996 and $3 million in 1995.
Funding provided by core deposits totaled 66% of average earning assets in 1996,
compared with 67% in 1995 and 70% in 1994. An analysis of changes in the
components of core deposits is presented in the accompanying table.
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. Domestic time deposits over $100,000,
excluding brokered certificates of deposit, averaged $892 million in 1996
compared with $625 million in 1995 and $357 million in 1994. Offshore deposits,
comprised primarily of accounts with balances of $100,000 or more, averaged $239
million in 1996, compared with $133 million and $156 million in 1995 and 1994,
respectively. Brokered deposits averaged $1.1 billion in 1996, $874 million in
1995, and $45 million in 1994, and totaled $1.1 billion at December 31, 1996.
Brokered 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 as of December 31, 1996 was 1.5
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.
In addition to deposits, the Company uses short-term borrowings from banks,
securities dealers, the Federal Home Loan Bank of New York ("FHLB") and others
as sources of funding. Short-term borrowings averaged $1.1 billion in 1996,
$1.4 billion in 1995 and $1.8 billion in 1994. In general, short-term
borrowings have been used to fund the Company's discretionary investments in
money-market assets and investment securities, and, if necessary, to replace
deposit outflows. Additionally, M&T Bank has issued $175 million of
subordinated capital notes, of which $75 million mature in 2002 and $100 million
mature in 2005. Although issued primarily to enhance regulatory capital ratios,
such notes also provided funding to the Company.
Net interest income is impacted by changes in the composition of the
Company's earning assets and interest-bearing liabilities, as described herein,
as well as changes in interest rates and spreads. Net interest spread, or the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities, was 3.80% in 1996, compared with 3.77% in 1995.
A greater proportion of loans, which typically yield more than money-market
assets and investment securities, in the composition of the earning asset
portfolio somewhat mitigated a general decrease in market interest rates in 1996
compared with 1995. As a result, the yield on earning assets decreased
slightly to 8.32% in 1996 from 8.42% in 1995. Similarly, the cost of
interest-bearing liabilities also declined, to 4.52% in 1996 from 4.65% in 1995.
The net interest spread, yield on earning assets and rate paid on
interest-bearing liabilities in 1994 were 4.37%, 7.77% and 3.40%, respectively.
In 1995, the increase in net interest income resulting from growth in average
earning assets was partially offset by the narrowing of the net interest spread.
Rising market interest rates throughout much of 1995 and 1994 had the effect of
increasing the cost of the Company's interest-bearing liabilities more than the
yield on earning assets. Largely due to the changes in the net interest spread
described herein, the Company's net interest margin was 4.45% in 1996, compared
with 4.43% in 1995 and 4.89% in 1994.
The contribution to net interest margin of interest-free funds, consisting
largely of noninterest-bearing demand deposits and stockholders' equity, was
.65% in 1996, .66% in 1995 and .52% in 1994. The improvement from 1994 resulted
largely from increases in the average rate paid on interest-bearing liabilities
used to value these funds, supplemented by increases in average interest-free
funds. Average interest-free funds were $1.7 billion in 1996, $1.6 billion in
1995 and $1.5 billion in 1994.
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Changing interest rates and spreads affect the Company's net interest
income and net interest margin. Management believes that future changes in
market interest rates or the composition of the Company's portfolios of earning
assets and interest-bearing liabilities that result in reductions in spreads
could adversely impact the Company's net interest margin and net interest
income. Management assesses the potential impact of future changes in interest
rates and spreads by projecting net interest income under a number of different
interest rate scenarios. As part of the management of interest rate risk, the
Company utilizes interest rate swap agreements to modify the repricing
characteristics of certain portions of the loan and deposit portfolios. Revenue
and expense arising from these agreements are reflected in either the yields
earned on loans or, as appropriate, the rates paid on interest-bearing deposits.
The notional amount of interest rate swaps entered into for interest rate risk
management purposes as of December 31, 1996 was approximately $2.4 billion. In
general, under the terms of these swaps, the Company receives payments based on
the outstanding notional amount of the swaps at a fixed rate of interest and
makes payments at a variable rate. However, under terms of a $34 million swap,
the Company pays a fixed rate of interest and receives a variable rate. The
effect of interest rate swaps on the Company's net interest income and margin as
well as average notional amounts and rates are presented in the accompanying
table.
The Company estimates that as of December 31, 1996 it would have received
approximately $5.5 million if all interest rate swap agreements entered into for
interest rate risk management purposes were terminated. This estimated fair
value of the interest rate swap portfolio results from the effects of changing
interest rates and should be considered in the context of the entire balance
sheet and the Company's overall interest rate risk profile. Changes in the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes are not reflected in the consolidated financial statements.
Additional information about interest rate swaps is included in note 16 of Notes
to Financial Statements.
During 1996, the FASB issued a Proposed Statement of Financial Accounting
Standards that would significantly change generally accepted accounting for
interest rate swaps, other derivative financial instruments and hedging
activities. While it is not possible to predict the ultimate outcome of the
FASB deliberations regarding the proposal, it is possible that changes in
generally accepted accounting principles for these types of transactions and
activities could have a material impact on the Company's consolidated balance
sheet and consolidated statement of income in future years.
Provision for Possible Credit Losses
The provision for possible credit losses was $43.3 million in 1996, compared
with $40.4 million in 1995 and $60.5 million in 1994. Net charge-offs in 1996
were $35.2 million, compared with $21.3 million in 1995 and $16.6 million in
1994. Net charge-offs as a percentage of average loans outstanding were .35% in
1996, .24% in 1995 and .22% in 1994. Nonaccrual loans totaled $58.2 million or
.54% of loans outstanding at December 31, 1996, compared with $75.2 million or
.79% a year earlier and $62.8 million or .76% at December 31, 1994. Loans past
due ninety days or more and accruing interest totaled $39.7 million at December
31, 1996, up from $17.8 million a year earlier and $11.8 million at December 31,
1994. The increase in such past due loans from 1995 to 1996 resulted primarily
from the inclusion at December 31, 1996 of $16.3 million of one-to-four family
residential mortgage loans serviced by the Company and repurchased during 1996
from the Government National Mortgage Association. These loans are covered by
guarantees of government agencies. The costs associated with servicing these
loans were reduced as a result of the repurchases. The total of all
nonperforming loan categories was $97.9 million or .91% of loans outstanding at
December 31,
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1996, compared with $93.1 million or .97% a year earlier and $77.5 million
or .94% at December 31, 1994. The allowance for possible credit losses was
$270.5 million or 2.52% of net loans and leases at the end of 1996, compared
with $262.3 million or 2.75% at December 31, 1995 and $243.3 million or 2.96%
at December 31, 1994. The ratio of the allowance to nonperforming loans was
276%, 282% and 314% at year-end 1996, 1995 and 1994, respectively.
Management regularly assesses the adequacy of the allowance for possible
credit losses and records a provision to replenish or build the allowance to a
level necessary to maintain an adequate reserve position. In making such
assessment, 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 December
31, 1996 was adequate to absorb credit losses from existing loans and leases.
A comparative allocation of the allowance for possible credit losses for
each of the past five year-ends is presented in the accompanying table. Amounts
were allocated to specific loan categories based upon management's
classification of loans under the Company's internal loan grading system and
estimates of potential charge-offs inherent in each category. However, as the
total reserve is available to absorb losses from any loan category, amounts
assigned do not necessarily indicate future losses within these categories. The
unallocated portion of the reserve represents management's assessment of the
overall level of credit risk inherent in the loan and lease portfolio over a
longer time frame.
The Company's credit loss experience is influenced by many factors,
including overall economic conditions, in general, and, due to the size of the
Company's commercial real estate loan portfolio, real estate valuations, in
particular. Nonperforming commercial real estate loans totaled $27.1 million,
$42.3 million and $47.5 million at December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, $10.3 million of nonperforming commercial
real estate loans were secured by properties located in the New York City
metropolitan area, compared with $16.8 million and $27.1 million at December 31,
1995 and 1994, respectively. Net charge-offs of commercial real estate loans
were $1.5 million in 1996, $6.6 million in 1995 and $12.8 million in 1994.
Included in these totals are net charge-offs of commercial real estate loans
secured by properties in the New York City metropolitan area of $.6 million,
$3.2 million and $11.1 million in 1996, 1995 and 1994, respectively.
Net charge-offs of consumer loans in 1996 were $28.5 million, or 1.30% of
average consumer loans outstanding, compared with $11.3 million or .65% in 1995
and $5.6 million or .40% in 1994. Higher charge-offs of credit card balances
and indirect automobile loans were the most significant factors contributing to
the increased level of consumer loan charge-offs in 1996 and 1995. Net credit
card and indirect automobile loan charge-offs in 1996 were $15.9 million and
$9.6 million, respectively, compared with $6.1 million and $3.1 million,
respectively, in 1995. In 1994, net credit card and indirect automobile loan
charge-offs totaled $3.1 million and $1.5 million, respectively. Nonperforming
consumer loans totaled $17.6 million or .73% of outstanding consumer loans at
December 31, 1996, compared with $13.7 million or .70% at December 31, 1995 and
$8.4 million or .54% at December 31, 1994.
Commercial real estate loans secured by multi-family properties in the New
York City metropolitan area were 12% of loans outstanding at December 31, 1996.
The Company, however, had no concentrations of credit extended to any specific
industry that exceeded 10% of total loans outstanding at December 31, 1996.
Furthermore, the Company had no exposure to less developed countries and only $2
million of foreign loans in total.
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Assets taken in foreclosure of defaulted loans totaled $8.5 million at
December 31, 1996, compared with $7.3 million and $10.1 million at the end of
1995 and 1994, respectively.
Other Income
Excluding the effect from sales of bank investment securities, other income
increased 17% to $170 million in 1996 from $145 million in 1995 and 50% from
$113 million (excluding the previously noted $10.4 million of tax-exempt income
resulting from the transfer of appreciated investment securities to an
affiliated, tax-exempt charitable foundation) in 1994.
Mortgage banking revenues, which consist of residential mortgage loan
servicing fee income, gains from sales of residential mortgage loans and loan
servicing rights, and other residential mortgage loan-related fees, increased to
$44.5 million in 1996 from $37.1 million in 1995 and $16.0 million in 1994.
Revenues from servicing residential mortgage loans for others were $20.9 million
in 1996, $19.3 million in 1995 and $13.6 million in 1994. Gains from sales of
residential mortgage loans and loan servicing rights increased to $21.6 million
in 1996, compared with $16.4 million and $1.4 million in 1995 and 1994,
respectively. The $21.1 million improvement in mortgage banking revenue in 1995
from 1994 was attributable to growth in the Company's residential mortgage
servicing business, as well as the January 1, 1995 adoption of Statement of
Financial Accounting Standards ("SFAS") No. 122 "Accounting for Mortgage
Servicing Rights." The effect of implementing SFAS No. 122 was to increase 1995
mortgage banking revenue and noninterest expense by $10.0 million and $1.8
million, respectively. The Company originates residential mortgage loans in New
York State, as well as in Arizona, Colorado, Massachusetts, Ohio, Oregon, Utah
and Washington. Residential mortgage loans serviced for others totaled $5.8
billion, $5.7 billion and $4.0 billion at December 31, 1996, 1995 and 1994,
respectively. Capitalized mortgage servicing rights and excess servicing
receivables were $37.8 million and $6.5 million, respectively, at December 31,
1996, compared with $34.5 million and $6.9 million, respectively, at December
31, 1995 and $10.0 million and $7.6 million, respectively, at December 31,
1994.
Service charges on deposit accounts increased 6% to $40.7 million in 1996
from $38.3 million in 1995, and 16% from $35.0 million in 1994. Trust income of
$27.7 million increased 9% from $25.5 million in 1995, and 23% from $22.6
million in 1994. Merchant discount and other credit card fees in 1996 totaled
$18.3 million, compared with $10.7 million in 1995 and $8.7 million in 1994.
Expansion of the Company's credit card business was the primary factor in the
improvement. Trading account and foreign exchange activity resulted in gains of
$2.4 million in 1996, $2.8 million in 1995 and $.7 million in 1994. Other
revenues from operations totaled $36.8 million in 1996, compared with $30.7
million in 1995 and $30.2 million in 1994 (excluding the $10.4 million of
tax-exempt income related to the 1994 transfer of securities to the affiliated
foundation). Such amounts include revenues from the sales of mutual funds and
annuities of $13.0 million, $9.4 million and $6.2 million in 1996, 1995 and
1994, respectively.
Other Expense
Other expense totaled $409 million in 1996, compared with $374 million in 1995
and $337 million in 1994.
Salaries and employee benefits expenses were $208 million in 1996, an
increase of $20 million or 11% from $188 million in 1995. Factors contributing
to the higher personnel expenses were merit salary increases, costs associated
with the opening of 27 supermarket banking locations in 1996 and the second half
of 1995, and the expansion of subsidiaries providing residential mortgage
banking services, indirect automobile loans and sales of
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<PAGE>
mutual funds and annuities. Personnel costs in 1995 increased $27 million or
17% from $161 million in 1994. Such increase was due largely to
acquisitions, expansion of the residential mortgage banking and securities
businesses, and incentive-based compensation arrangements. The number of
full-time equivalent employees was 4,832 at December 31, 1996, up from 4,546
and 4,149 at December 31, 1995 and 1994, respectively.
Nonpersonnel expenses for 1996 totaled $201 million, up 8% from $186
million in 1995. The increase was largely caused by higher expenses associated
with the expansion of businesses providing mortgage banking services, indirect
automobile loans, credit cards and the sale of mutual funds and annuities,
partially offset by lower deposit insurance expense.
During 1995, the assessment to the Company from the Federal Deposit
Insurance Corporation ("FDIC") for deposit insurance provided by the Bank
Insurance Fund ("BIF") was reduced and effective January 1, 1996 was
substantially eliminated. Changes in the federal deposit insurance laws were
enacted in 1996 that required the FDIC to impose a one-time special assessment
to recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC on
SAIF members. Although First Empire's bank subsidiaries are BIF-insured
institutions, the Company has approximately $1.1 billion of deposits obtained in
so-called "Oakar" acquisitions for which deposit insurance premiums are paid to
the SAIF. Included in nonpersonnel expense in 1996 is a $7.0 million charge for
the special assessment to recapitalize the SAIF. Following the
recapitalization, the FDIC established the SAIF's 1997 assessment rates, which
are currently the same as the rates established for BIF members. In addition to
deposit insurance fund assessments, in 1997 the FDIC will assess BIF- 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. Under the law, the FDIC is required to set FICO assessments for
BIF-assessable deposits at one-fifth the amount for SAIF-assessable deposits.
The annualized rates established by the FDIC for the first half of 1997 for BIF-
and SAIF-assessable deposits are 1.30 basis points and 6.48 basis points,
respectively.
As previously noted, during 1994 the Company incurred $13.8 million of
charitable contributions expense related to the transfer of securities to a
charitable foundation affiliated with the Company. Excluding the impact of such
contributions expense, which is included in 1994's other costs of operations,
nonpersonnel expenses in 1995 increased $24.3 million from 1994. Higher
mortgage banking-related expenses and expenses associated with operating
entities acquired in late-1994 and 1995 contributed to the increase.
Additionally, in February 1995, the Company wrote off $2.3 million of
non-marketable securities of Nationar, a bank that provided services to
financial institutions, which was seized by banking regulators.
Income Taxes
The provision for income taxes in 1996 was $97.9 million, up from $90.1 million
in 1995 and $77.2 million in 1994. The effective tax rates were 39% in 1996,
41% in 1995, 40% in 1994. 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 13 of Notes to Financial Statements.
International Activities
The Company's investment in international assets was $55 million and $87 million
at December 31, 1996 and 1995, respectively. Total offshore deposits
-31-
<PAGE>
were $193 million and $155 million at December 31, 1996 and 1995, respectively.
Liquidity and Interest Rate Sensitivity
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. The Company's core deposits have
historically provided a significant source of funds. Such deposits are
generated from a large base of consumer, corporate and institutional customers,
which over the past several years has become more geographically diverse as a
result of acquisitions and expansion of the Company's businesses. Nevertheless,
in recent years the Company has faced increased competition in offering services
and products from a large array of financial market participants, including
banks, thrifts, mutual funds, securities dealers and others. As a result, and
consistent with banking industry experience in general, the Company has
experienced a reduction in the percentage of average earning assets funded by
core deposits. Core deposits financed 65% of the Company's earning assets at
December 31, 1996, compared with 67% and 71% at December 31, 1995 and 1994,
respectively.
The Company supplements funding from core deposits with various wholesale
borrowings, such as Federal funds purchased and securities sold under agreements
to repurchase, and brokered certificates of deposit. Additionally, M&T Bank
and East New York have credit facilities with the FHLB aggregating $942 million,
with any borrowings secured by loans and investment securities. Borrowings
outstanding under such credit facilities totaled $2 million at December 31, 1996
and $17 million at December 31, 1995. Although informal and sometimes
reciprocal, sources of funding are also available to the Company through various
arrangements for unsecured short-term borrowings from a wide group of banks and
other financial institutions. In addition to deposits and borrowings, other
sources of liquidity include maturities of money-market assets, repayments of
loans and investment securities, and cash generated from operations, such as
fees collected for services.
First Empire's source of funds to pay for operating expenses, dividends
and treasury stock repurchases has largely been the receipt of dividends from
its banking subsidiaries, which are subject to various regulatory limitations.
First Empire also maintains a $25 million line of credit with an unaffiliated
commercial bank, all of which was available for borrowing at December 31, 1996.
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.
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 of net interest income under various interest rate scenarios
using projected balances for earning assets, interest-bearing liabilities and
off-balance sheet financial instruments. Management's philosophy toward
positioning the Company for interest rate movements is to attempt to limit such
variability. Management supplements the modeling technique described above with
analyses of market values of on- and off-balance sheet financial instruments.
As part of managing interest rate risk, the Company has entered into interest
rate swap agreements having an aggregate notional amount of approximately $2.4
billion at December 31, 1996.
-32-
<PAGE>
Information about interest rate swaps entered into for interest rate risk
management purposes is included herein under "Net Interest Income/Lending and
Funding Activities" and in note 16 of Notes to Financial Statements.
In accordance with industry practice, the accompanying table 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 this measure does not appropriately depict interest rate
risk since changes in interest rates do not necessarily affect all categories of
earning assets and interest-bearing liabilities equally nor, as assumed in the
table, on the contractual maturity or repricing date. Furthermore, this static
presentation of interest rate risk fails to consider the effect of ongoing
lending and deposit gathering activities, projected changes in balance sheet
composition or any subsequent interest rate risk management activities the
Company is likely to implement.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity with the aid of a computer
model which considers the impact of ongoing lending and deposit gathering
activities, as well as statistically derived interrelationships in the magnitude
and timing of the repricing of financial instruments, including the effect of
changing interest rates on expected prepayments and maturities. When deemed
prudent, management has taken action, 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 entering into or
modifying existing interest rate swap agreements. Giving consideration to
interest rate swaps in place at December 31, 1996 and utilizing the model
described above, management's assessment is that the variability of net
interest income in the next two years may be largely unaffected by changes in
interest rates, but that additional interest rate risk management actions may be
necessary to counter any detrimental effect which a sustained decrease in
interest rates would likely have on net interest income in later years.
Capital
Total stockholders' equity at December 31, 1996 was $906 million or 7.00% of
total assets, compared with $846 million or 7.08% at December 31, 1995 and $721
million or 6.85% at December 31, 1994. On a per share basis, common
stockholders' equity was $135.45 at December 31, 1996, an increase of 8% from
$125.33 at December 31, 1995 and 31% from $103.02 at December 31, 1994. The
ratio of average total stockholders' equity to average total assets was 6.92%,
6.81% and 7.21% in 1996, 1995 and 1994, respectively.
Stockholders' equity at December 31, 1996 was reduced by $2.5 million, or
$.37 per common share, for the net after-tax impact of unrealized losses on
investment securities classified as available for sale, compared with a
reduction of $3.2 million, or $.49 per common share, at December 31, 1995. Such
unrealized losses represent the amount by which amortized cost exceeded the fair
value of investment securities classified as available for sale, net of
applicable income taxes. The market valuation of investment securities should
be considered in the context of the entire balance sheet of the Company. With
the exception of investment securities classified as available for sale, trading
account assets and liabilities, and 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.
Cash dividends on common stock of $18.6 million were paid in 1996, compared
with $16.2 million in 1995 and $14.7 million in 1994. The quarterly
-33-
<PAGE>
common stock dividend rate remained at $.70 per share throughout 1996. In
total, dividends per common share increased to $2.80 in 1996 from $2.50 in
1995 and $2.20 in 1994. Dividends of $.9 million were paid to the preferred
stockholder in 1996, compared with $3.6 million in 1995 and 1994. As
previously noted, on March 29, 1996, all shares of First Empire's 9%
convertible preferred stock were converted by the holder of such stock into
506,930 shares of First Empire common stock at a contractual conversion price
of $78.90625 per share.
In November 1995, First Empire announced a plan to repurchase and hold as
treasury stock up to 380,582 shares of common stock for reissuance upon the
possible future exercise of outstanding stock options. As of December 31, 1996,
First Empire had repurchased 351,520 common shares pursuant to such plan at an
average cost of $239.09 per share. The number of shares repurchased under this
plan and another repurchase plan that was completed in 1995 were 336,220 in
1996, 223,530 in 1995 and 298,700 in 1994.
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. Regulatory capital,
however, does include subordinated notes issued by First Empire or its
subsidiaries. The capital ratios of the Company and its banking subsidiaries,
M&T Bank, East New York and M&T Bank, N.A., as of December 31, 1996 are
presented in note 19 of Notes to Financial Statements.
On January 31, 1997, First Empire completed an offering of trust preferred
securities that raised $150 million of capital. The 30-year offering of 8.234%
fixed-rate cumulative trust preferred securities was sold through First Empire
Capital Trust I ("the Trust"), a Delaware business trust that was formed by
First Empire to facilitate the transaction. The preferred securities provide
investors with call protection for ten years. The Trust was formed solely to
issue the trust preferred securities and advance the proceeds to First Empire by
purchasing First Empire's junior subordinated debt. The proceeds of the trust
preferred securities qualify as Tier 1 or core capital for First Empire under
the Federal Reserve Board's risk-based capital guidelines. Payments on the
junior subordinated debt of First Empire, which are in turn passed through the
Trust to the holders of the preferred securities, will be serviced through
existing liquidity and cash flow sources of First Empire. Under current federal
tax law, First Empire will be permitted to deduct interest payments on the
junior subordinated debt in computing taxable income.
The Company has historically maintained capital ratios well in excess of
minimum regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income (excluding
the after-tax effects of gains from sales of investment securities) less
dividends paid expressed as a percentage of average total stockholders' equity,
was 15.25% in 1996, 13.88% in 1995 and 13.67% in 1994.
Fourth Quarter Results
First Empire earned $40.4 million or $5.70 per common share in the fourth
quarter of 1996, increases of 10% and 8%, respectively, from the fourth quarter
of 1995 when net income was $36.8 million or $5.29 per common share. On a
fully-diluted basis, net income per common share was $5.68 in 1996's final
quarter, up 13% from $5.03 in the year-earlier quarter. Taxable-equivalent net
interest income increased to $137.9 million in the fourth quarter of 1996, up
$11.9 million from $126.0 million in the fourth quarter of 1995. Growth in
average loans outstanding was the primary factor
-34-
<PAGE>
contributing to the improvement in net interest income. Average loans for
the fourth quarter of 1996 totaled $10.5 billion, a 12% increase from the
$9.4 billion average during the fourth quarter of 1995. In total, earning
assets averaged $12.3 billion in the final quarter of 1996, up 7% from $11.5
billion in the corresponding 1995 quarter. The yield on earning assets
decreased to 8.31% in the final 1996 quarter from 8.41% in the year-earlier
period, while the rate paid on interest-bearing liabilities decreased to
4.54% from 4.74%. The resulting net interest spread was 3.77% in the recent
quarter, compared with 3.67% in the fourth quarter of 1995. Similarly, net
interest margin increased, to 4.46% in the fourth quarter of 1996 from 4.36%
in the year-earlier quarter.
The provision for possible credit losses was $11.5 million in the final
1996 quarter, compared with $12.0 million in the fourth quarter of 1995. Net
charge-offs totaled $11.5 million in 1996's fourth quarter, up from $8.8 million
in the year-earlier quarter, largely due to higher net charge-offs of consumer
loans, which increased to $9.5 million in the final 1996 quarter from $4.1
million in the fourth quarter of 1995. Net charge-offs as an annualized
percentage of average loans and leases were .43% in the recent quarter, up from
.37% in the corresponding 1995 quarter. Excluding the effects of investment
securities transactions, other income rose 6% to $48.1 million in the fourth
quarter of 1996 from $45.3 million in the year-earlier quarter. Higher revenues
associated with credit card activities and the sales of mutual funds and
annuities contributed to this increase. Other expense was $107.1 million in the
fourth quarter of 1996, compared with $97.0 million in the fourth quarter of
1995. Expansion of businesses providing credit cards, indirect automobile loans
and the sale of mutual funds and annuities were factors contributing to the rise
in expenses over the comparable prior-year period.
Recently Issued Accounting Standards Not Yet Adopted
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. SFAS
No. 125 provides standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. Under the
financial-components approach of SFAS No. 125, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished.
SFAS No. 125 provides implementation guidance for accounting for a broad
range of financial transactions including securitizations, transfers of partial
interests, servicing of financial assets, securities lending transactions,
repurchase agreements including "dollar rolls," wash sales, loan syndications
and participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, transfers of sales-type
and direct financing lease receivables and extinguishments of liabilities. As
originally issued, SFAS No. 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1995. SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," was issued in December 1996 and defers for one year the
effective date for certain provisions of SFAS No. 125 specifically relating to
repurchase agreement, dollar roll, securities lending, and similar transactions.
All provisions of SFAS No. 125, as amended by SFAS No. 127, are to be applied
prospectively, and earlier or retroactive application is not permitted. The
Company will adopt the provisions of SFAS No. 125 that were not deferred by SFAS
No. 127 in the first quarter of 1997. When
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<PAGE>
adopted, SFAS No. 125 is not expected to have an adverse impact on the Company's
results of operations.
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. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "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.
-36-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE 1996 1995 CHANGE
- --------------------------------------------------------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
For the year
Net income................................................................. $ 151,103 131,036 + 15%
Per common share
Net income
Primary.................................................................. $ 21.31 18.79 + 13
Fully diluted............................................................ 20.97 17.78 + 18
Cash dividends............................................................ 2.80 2.50 + 12
Average common shares outstanding
Primary................................................................... 7,048 6,781 + 4
Fully diluted............................................................. 7,206 7,368 -2
Return on
Average total assets...................................................... 1.21% 1.14%
Average common stockholders' equity....................................... 17.60% 17.16%
Market price per common share
Closing................................................................... $ 288.00 218.00 + 32
High...................................................................... 289.63 218.00
Low....................................................................... 209.00 136.50
----------- ---------- -----
At December 31
Loans and leases, net of unearned discount................................. $10,722,123 9,555,849 + 12%
Total assets............................................................... 12,943,915 11,955,902 + 8
Total deposits............................................................. 10,514,489 9,469,575 + 11
Total stockholders' equity................................................. 905,659 846,253 + 7
Stockholders' equity per common share...................................... $ 135.45 125.33 + 8
----------- ---------- -----
----------- ---------- -----
</TABLE>
37
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 2
QUARTERLY TRENDS
<TABLE>
<CAPTION>
1996 QUARTERS 1995 QUARTERS
------------------------------------------- ------------------------------------------
TAXABLE-EQUIVALENT BASIS FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- ------------------------ ---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings and dividends
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Interest income...................... $ 257,196 251,336 248,673 244,714 242,704 241,374 232,468 216,250
Interest expense...................... 119,343 117,884 114,996 114,185 116,726 116,329 112,096 96,579
---------- --------- --------- --------- --------- --------- --------- ---------
Net interest income................... 137,853 133,452 133,677 130,529 125,978 125,045 120,372 119,671
Less: provision for possible
credit losses....................... 11,475 10,475 11,700 9,675 12,025 11,310 8,515 8,500
Other income.......................... 47,641 44,893 41,463 36,251 44,850 44,398 33,888 26,402
Less: other expense................... 107,082 107,658 97,921 96,317 97,044 97,632 90,269 89,494
---------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 66,937 60,212 65,519 60,788 61,759 60,501 55,476 48,079
Applicable income taxes............... 25,288 23,090 25,790 23,698 23,949 23,694 22,747 19,747
Taxable-equivalent adjustment........ 1,229 1,251 1,070 937 1,023 1,180 1,275 1,164
---------- --------- --------- --------- --------- --------- --------- ---------
Net income............................ $ 40,420 35,871 38,659 36,153 36,787 35,627 31,454 27,168
---------- --------- --------- --------- --------- --------- --------- ---------
Cash dividends on preferred stock..... $ -- -- -- 900 900 900 900 900
Per common share data
Net income Primary.................. $ 5.70 5.05 5.36 5.20 5.29 5.14 4.51 3.85
Fully diluted....................... 5.68 5.05 5.36 4.96 5.03 4.89 4.31 3.68
Net income, excluding securities
transactions
Primary............................. 5.73 5.05 5.36 5.17 5.33 4.71 4.52 3.85
Fully diluted....................... 5.71 5.05 5.36 4.93 5.06 4.50 4.31 3.68
Cash dividends....................... .70 .70 .70 .70 .70 .60 .60 .60
Average common shares outstanding
Primary.............................. 7,098 7,104 7,212 6,778 6,774 6,763 6,768 6,820
Fully
diluted............................. 7,121 7,106 7,216 7,295 7,310 7,291 7,293 7,384
---------- --------- --------- --------- --------- --------- --------- ---------
Balance sheet data
DOLLARS IN MILLIONS, EXCEPT PER SHARE
Average balances
Total assets......................... $ 12,728 12,556 12,486 12,141 11,898 11,848 11,506 10,681
Earning assets....................... 12,308 12,124 12,044 11,695 11,454 11,404 11,108 10,330
Investment securities................ 1,659 1,798 1,939 1,830 1,898 2,179 2,137 1,925
Loans and leases, net of unearned
discount............................ 10,527 10,253 9,997 9,672 9,384 9,038 8,682 8,311
Deposits............................. 10,609 10,459 10,069 9,496 9,423 9,011 8,945 8,698
Stockholders' equity................. 891 857 855 849 825 801 766 737
---------- --------- --------- --------- --------- --------- --------- ---------
At end of quarter
Total assets......................... $ 12,944 12,821 12,542 12,671 11,956 11,754 11,630 11,277
Earning assets...................... 12,504 12,282 12,015 12,129 11,461 11,321 11,201 10,727
Investment securities................ 1,572 1,753 1,817 2,108 1,769 1,954 2,159 2,045
Loans and leases, net of unearned
discount............................ 10,722 10,437 10,129 9,912 9,556 9,222 8,881 8,559
Deposits............................. 10,514 10,554 10,193 9,719 9,470 9,170 8,866 9,044
Stockholders' equity................. 906 878 861 847 846 809 794 751
Equity per common share.............. $ 135.45 130.58 126.70 123.76 125.33 119.53 116.05 108.64
---------- --------- --------- --------- --------- --------- --------- ---------
PERFORMANCE RATIOS, ANNUALIZED
Return on
Average assets....................... 1.26% 1.14% 1.25% 1.20% 1.23% 1.19% 1.10% 1.03%
Average common stockholders' equity.. 18.05% 16.64% 18.18% 17.50% 18.14% 18.10% 16.87% 15.29%
Net interest margin on average
earning assets...................... 4.46% 4.38% 4.46% 4.49% 4.36% 4.35% 4.35% 4.70%
Nonperforming assets to total assets,
at end of quarter................... .82% .82% .75% .71% .84% .72% .72% .79%
---------- --------- --------- --------- --------- --------- --------- ---------
Market price per common share
High................................. $ 289 5/8 258 247 247 3/4 218 194 1/2 172 1/2 171
Low.................................. 250 239 232 209 190 1/2 170 159 136 1/2
Closing.............................. 288 249 241 246 218 190 171 1/2 171
---------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
-38-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 3
EARNINGS SUMMARY
Dollars in millions
<TABLE>
<CAPTION>
INCREASE (DECREASE)*
- --------------------------------------- COMPOUND
1995 TO 1996 1994 TO 1995 GROWTH RATE
- ----------------- -------------------- 5 YEARS
AMOUNT % AMOUNT % 1996 1995 1994 1993 1992 1991 TO 1996
- ------ --------- --------- --------- ----------------------- -------- --------- --------- --------- --------- ------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
$69.1 7 $181.4 24 Interest income** $1,001.9 932.8 751.4 744.7 762.2 5%
24.7 6 162.5 58 Interest expense 466.4 441.7 279.2 269.9 323.6 1
- ----- ---- ------ ----- ----------------------- -------- ----- ----- ----- ----- ---
44.4 9 18.8 4 Net interest income** 535.5 491.1 472.2 474.8 438.6 10
Less: provision for possible
3.0 7 (20.2) (33) credit losses 43.3 40.4 60.5 80.0 85.0 (7)
Gain on sales of bank
(4.5) -- 4.4 -- investment securities -- 4.5 .1 .9 28.1 --
25.2 17 21.4 17 Other income 170.3 145.1 123.6 109.7 98.2 17
Less:
20.1 11 27.0 17 Salaries and employee 208.3 188.2 161.2 154.3 130.8 15
benefits
14.4 8 10.6 6 Other expense 200.7 186.3 175.6 173.5 180.6 10
- ----- ---- ------ ----- ----------------------- -------- ----- ------ ----- ------ ----
27.6 12 27.3 14 Income before income 253.5 225.8 198.6 177.6 168.5 15
taxes
Less:
(.2) (3) .6 14 Taxable-equivalent 4.5 4.7 4.1 4.1 5.8 (12)
adjustment**
7.7 9 13.0 17 Income taxes 97.9 90.1 77.2 71.5 64.8 16
- ----- --- ----- ----- ----------------------- ------ ----- ----- ----- ----- ----
$20.1 15 $13.7 12 Net income $151.1 131.0 117.3 102.0 97.9 18%
- ----- --- ----- ----- ----------------------- ------ ----- ----- ----- ----- ----
- ----- --- ----- ----- ----------------------- ------ ----- ----- ----- ----- ----
</TABLE>
* Changes were calculated from unrounded amounts.
** Interest income data are on a taxable-equivalent basis. The
taxable-equivalent adjustment represents additional income taxes that
would be due if all interest income were subject to income taxes. This
adjustment is primarily to interest received on qualified municipal
securities and industrial revenue financings and is based on a composite
income tax rate of approximately 42% for 1996, 1995 and 1993, 43% for
1994, and 41% for 1992.
-39-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 4
INTEREST RATE SWAPS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------
1996 1995 1994
-------------------------- ----------------------- ------------------------
DOLLARS IN THOUSANDS AMOUNT RATE* AMOUNT RATE* AMOUNT RATE*
- ---------------------------------------------------- ------------ ------------ ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income..................................... $ (34) --% $ (5,831) (.05)% $ 10,463 .10%
Interest expense.................................... (15,488) (.15) (6,715) (.07) (2,018) (.03)
------------ ------------ ------------ --------- ----------- ---
Net interest income/margin.......................... $ 15,454 .13% $ 884 .01% $ 12,481 .13%
------------ ------------ ------------ --------- ----------- ---
Average notional amount**........................... $ 2,410,547 $ 2,536,329 $ 1,627,454
Fixed rate received***.............................. 6.66% 6.17% 5.72%
Variable rate paid***............................... 6.02% 6.14% 4.93%
------------ ---------- -----
------------ ---------- -----
</TABLE>
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
*** Weighted-average rate paid or received on interest rate swaps in effect
during year.
-40-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
TABLE 5
AVERAGE LOANS AND LEASES
(NET OF UNEARNED DISCOUNT)
<TABLE>
<CAPTION>
PERCENT INCREASE FROM
------------------------------------
DOLLARS IN MILLIONS 1996 1995 TO 1996 1994 TO 1995
- --------------------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Commercial, financial, etc................................................. $ 2,031 13% 21%
Real estate--commercial.................................................... 3,770 8 12
Real estate--consumer...................................................... 2,123 17 26
Consumer
Automobile............................................................... 1,012 41 66
Home equity.............................................................. 610 4 1
Credit cards............................................................. 258 47 28
Other.................................................................... 310 13 19
--------- ---- ----
Total consumer......................................................... 2,190 25 27
--------- ---- ----
Total...................................................................... $ 10,114 14% 19%
--------- ---- ----
--------- ---- ----
</TABLE>
-41-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 6
COMMERCIAL REAL ESTATE LOANS
(net of unearned discount)
December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF DOLLARS OUTSTANDING BY
LOAN SIZE
OUT- -------------------------------------------
DOLLARS IN MILLIONS STANDINGS $0-1 $1-3 $3-10 $10+
- ----------------------------------------------------------------------- --------- --- --- ----- -----
<S> <C> <C> <C> <C> <C>
Metropolitan New York City
Apartments/Multifamily................................................ $ 1,272.5 14% 19% 18% 9%
Office................................................................ 269.7 1 2 8 2
Retail................................................................ 316.3 2 7 5 1
Construction.......................................................... 6.6 -- -- -- --
Industrial............................................................ 98.2 1 1 2 --
Other................................................................. 172.7 2 3 2 1
--------- -- -- -- ---
Total Metropolitan New York City..................................... $ 2,136.0 20% 32% 35% 13%
--------- --- --- --- ---
Other New York State
Apartments/Multifamily................................................ $337.7 7% 7% 6% --%
Office................................................................ 441.6 8 8 8 3
Retail................................................................ 225.8 6 5 4 --
Construction.......................................................... 44.8 1 1 -- --
Industrial............................................................ 150.5 5 2 1 --
Other................................................................. 450.6 11 9 6 2
--------- --- --- --- ---
Total other New York State........................................... $1,651.0 38% 32% 25% 5%
--------- --- --- --- ---
Other
Apartments/Multifamily................................................ $43.7 4% 17% 5% --%
Office................................................................ 4.0 -- -- 2 --
Retail................................................................ 43.7 1 8 16 --
Industrial............................................................ 19.2 2 3 7 --
Other................................................................. 58.6 6 11 11 7
--------- --- ---- ---- ---
Total other........................................................ $169.2 13% 39% 41% 7%
--------- --- ---- ---- ---
Total commercial real estate loans................................. $3,956.2 27% 32% 31% 10%
--------- --- ---- ---- ---
--------- --- ---- ---- ---
</TABLE>
-42-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 7
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES
<TABLE>
<CAPTION>
AVERAGE BALANCE 1996 1995 1994
IN MILLIONS; --------------------------------- ------------------------------ ---------------------------------
INTEREST IN AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
THOUSANDS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------- ---------- ---------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets
Loans and leases, net of
unearned discount*
Commercial, financial, etc.. $ 2,031 $ 166,022 8.17% 1,804 155,750 8.63% 1,487 116,479 7.84%
Real estate................. 5,893 512,269 8.69 5,301 471,714 8.90 4,562 390,681 8.56
Consumer.................... 2,190 204,831 9.35 1,752 169,149 9.65 1,378 128,117 9.30
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total loans and leases,
net....................... 10,114 883,122 8.73 8,857 796,613 8.99 7,427 635,277 8.55
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Money-market assets
Interest-bearing deposits at
banks...................... 38 2,413 6.30 110 8,181 7.44 48 2,212 4.58
Federal funds
sold and agreements to
resell securities.......... 55 2,985 5.45 48 3,007 6.29 109 4,751 4.35
Trading account............. 31 1,100 3.62 28 1,339 4.78 9 499 5.92
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total money- market
assets.................... 124 6,498 5.26 186 12,527 6.75 166 7,462 4.50
---------- ---------- --------- --------- --------- --------- --------- --------- -----
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Investment securities**
U.S. Treasury and
federal agencies........... 1,200 74,023 6.17 1,242 74,248 5.98 1,167 56,685 4.86
Obligations of states and
political subdivisions..... 41 2,678 6.57 50 3,420 6.90 53 3,072 5.77
Other....................... 565 35,598 6.30 743 45,988 6.19 852 48,933 5.74
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total investment
securities............... 1,806 112,299 6.22 2,035 123,656 6.08 2,072 108,690 5.24
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total earning assets....... 12,044 1,001,919 8.32 11,078 932,796 8.42 9,665 751,429 7.77
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Allowance for possible
credit losses.............. (269) (254) (223)
Cash and due from banks...... 334 326 307
Other assets................. 370 335 276
---------- -------- --------
Total assets............... $ 12,479 11,485 10,025
---------- --------- --------
---------- --------- --------
Liabilities and stockholders'
equity
Interest-bearing
liabilities
Interest-bearing deposits
NOW accounts............... $ 659 9,430 1.43 761 11,902 1.56 746 11,286 1.51
Savings deposits........... 2,956 84,822 2.87 2,922 87,612 3.00 3,274 84,804 2.59
Time deposits.............. 5,137 286,088 5.57 4,112 239,882 5.83 2,179 97,067 4.45
Deposits at foreign
office.................... 239 12,399 5.19 133 6,952 5.23 156 5,894 3.79
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total interest-bearing
deposits................... 8,991 392,739 4.37 7,928 346,348 4.37 6,355 199,051 3.13
---------- ---------- --------- --------- --------- --------- --------- --------- -----
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Short-term borrowings........ 1,133 59,442 5.25 1,423 84,225 5.92 1,772 73,868 4.17
Long-term borrowings......... 189 14,227 7.51 146 11,157 7.64 77 6,287 8.13
---------- ---------- --------- --------- --------- --------- --------- --------- -----
Total interest-
bearing liabilities........ 10,313 466,408 4.52 9,497 441,730 4.65 8,204 279,206 3.40
---------- ---------- --------- --------- --------- --------- --------- --------- --------
Demand deposits.............. 1,169 1,093 1011
Other liabilities............ 134 112 87
---------- --------- ---------
Total liabilities.......... 11,616 10,702 9,302
---------- --------- ---------
Stockholders' equity......... 863 783 723
---------- --------- ---------
Total liabilities and
stockholders' equity...... $ 12,479 11,485 10,025
---------- --------- ---------
---------- --------- ---------
Net interest spread.......... 3.80 3.77 4.37
Contribution of
interest-free funds........ .65 .66 .52
---------- ---------- --------- --------- --------- --------
Net interest income/ margin
on earning assets.......... $ 535,511 4.45% 491,066 4.43% 472,223 4.89%
---------- ---------- --------- --------- --------- --------
---------- ---------- --------- --------- --------- --------
</TABLE>
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
-43-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 7 (continued)
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES
<TABLE>
<CAPTION>
1993 1992
----------------------------------- -------------------------------
AVERAGE BALANCE IN MILLIONS; INTEREST IN AVERAGE AVERAGE AVERAGE AVERAGE
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.................... $ 1,420 $ 112,568 7.93% 1,237 103,786 8.39%
Real estate.................................... 4,387 379,832 8.66 4,225 392,384 9.29
Consumer....................................... 1,175 118,461 10.08 1,109 109,284 9.85
---------- ---------- ----- --------- --------- ---------
Total loans and leases, net................... 6,982 610,861 8.75 6,571 605,454 9.21
---------- ---------- ----- --------- --------- ---------
Money-market assets
Interest-bearing deposits at banks............. 189 6,740 3.56 29 1,083 3.76
Federal funds sold and agreements to resell
securities.................................... 610 20,403 3.35 510 18,100 3.55
Trading account................................ 27 1,434 5.32 55 3,096 5.62
---------- ---------- ----- --------- --------- ---------
Total money-market assets..................... 826 28,577 3.46 594 22,279 3.75
---------- ---------- ----- --------- --------- ---------
Investment securities**
U.S. Treasury and federal agencies............. 1,300 62,420 4.80 1,204 81,940 6.81
Obligations of states and political
subdivisions.................................. 41 2,600 6.40 103 8,122 7.85
Other.......................................... 832 40,251 4.84 686 44,414 6.48
---------- ---------- ----- --------- --------- ---------
Total investment securities................... 2,173 105,271 4.84 1,993 134,476 6.75
---------- ---------- ----- --------- --------- ---------
Total earning assets.......................... 9,981 744,709 7.46 9,158 762,209 8.32
---------- ---------- ----- --------- --------- ---------
Allowance for possible credit losses............ (174) (130)
Cash and due from banks......................... 304 273
Other assets.................................... 279 253
---------- ---------
Total assets.................................. $ 10,390 9,554
---------- ---------
---------- ---------
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts................................... $ 747 13,113 1.75 666 16,544 2.48
Savings deposits............................... 3,500 90,392 2.58 3,338 110,142 3.30
Time deposits.................................. 2,249 98,508 4.38 2,773 153,588 5.54
Deposits at foreign office..................... 120 3,243 2.71 130 4,348 3.35
---------- ---------- ----- --------- --------- ---------
Total interest-bearing deposits............... 6,616 205,256 3.10 6,907 284,622 4.12
---------- ---------- ----- --------- --------- ---------
Short-term borrowings........................... 1,922 58,459 3.04 1,121 38,386 3.42
Long-term borrowings............................ 76 6,158 8.14 7 590 8.32
---------- ---------- ----- --------- --------- ---------
Total interest-bearing liabilities............ 8,614 269,873 3.13 8,035 323,598 4.03
---------- ---------- ----- --------- --------- ---------
Demand deposits................................. 976 789
Other liabilities............................... 130 147
---------- ----------
Total liabilities............................. 9,720 8,971
---------- ----------
Stockholders' equity............................ 670 583
---------- ----------
Total liabilities and stockholders' equity.... $ 10,390 9,554
---------- ---------
---------- ---------
Net interest spread............................. 4.33 4.29
Contribution of interest-free funds............. .43 .50
---------- ---------- --------- ---------
Net interest income/margin on earning assets.... $ 474,836 4.76% 438,611 4.79%
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
-44-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 8
AVERAGE CORE DEPOSITS
<TABLE>
<CAPTION>
PERCENT INCREASE (DECREASE) FROM
--------------------------------
DOLLARS IN MILLIONS 1996 1995 TO 1996 1994 TO 1995
- ---------------------------------------------------------------------------- --------- --------------- ---------------
<S> <C> <C> <C>
NOW accounts................................................................ $ 659 (13)% 2%
Savings deposits............................................................ 2,956 1 (11)
Time deposits under $100,000................................................ 3,194 22 47
Demand deposits............................................................. 1,169 7 8
--------- ---- ------
Total................................................................... $ 7,978 8% 9%
--------- ---- ------
--------- ---- ------
</TABLE>
-45-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 9
LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ---------------------------------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for possible credit losses beginning balance.... $ 262,344 243,332 195,878 151,690 100,265
---------- --------- --------- --------- ---------
Charge-offs during year
Commercial, financial, agricultural, etc................ 6,120 5,475 5,505 14,118 15,966
Real estate--construction............................... -- -- -- 150 400
Real estate--mortgage................................... 7,389 10,750 17,957 22,686 27,530
Consumer................................................ 36,037 14,982 8,981 9,135 7,488
---------- --------- --------- --------- ---------
Total charge-offs................................... 49,546 31,207 32,443 46,089 51,384
---------- --------- --------- --------- ---------
Recoveries during year
Commercial, financial, agricultural, etc................ 3,671 3,967 7,877 5,403 2,095
Real estate--construction............................... 50 87 13 -- --
Real estate--mortgage................................... 3,049 2,137 4,515 1,772 445
Consumer................................................ 7,573 3,678 3,418 3,144 2,531
---------- --------- --------- --------- ---------
Total recoveries.................................... 14,343 9,869 15,823 10,319 5,071
---------- --------- --------- --------- ---------
Net charge-offs........................................... 35,203 21,338 16,620 35,770 46,313
Provision for possible credit losses...................... 43,325 40,350 60,536 79,958 84,989
Allowance for possible credit losses acquired during the
year.................................................... -- -- 3,538 -- 12,749
---------- --------- --------- --------- ---------
Allowance for possible credit losses ending balance....... $ 270,466 262,344 243,332 195,878 151,690
---------- --------- --------- --------- ---------
Net charge-offs as a percent of:
Provision for possible credit losses.................... 81.25% 52.88% 27.45% 44.74% 54.49%
Average loans and leases, net of unearned discount....... .35% .24% .22% .51% .70%
---------- --------- --------- --------- ---------
Allowance for possible credit losses as a percent of loans
and leases, net of unearned discount, at year-end....... 2.52% 2.75% 2.96% 2.70% 2.17%
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
-46-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 10
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES TO LOAN CATEGORIES
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, agricultural, etc............................ $ 39,556 36,793 44,092 42,820 18,100
Real estate--mortgage............................................... 73,879 75,894 72,285 78,823 19,740
Consumer............................................................ 34,224 23,385 17,532 13,630 6,700
Unallocated......................................................... 122,807 126,272 109,423 60,605 107,150
---------- --------- --------- --------- ---------
Total......................................................... $ 270,466 262,344 243,332 195,878 151,690
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
AS A PERCENTAGE OF GROSS LOANS AND LEASES OUTSTANDING
Commercial, financial, agricultural, etc............................ 1.79% 1.83% 2.62% 2.84% 1.22%
Real estate--mortgage............................................... 1.19 1.34 1.43 1.74 .45
Consumer............................................................ 1.30 1.10 1.05 1.02 .55
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
-47-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 11
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
Nonaccrual loans....................................................... $ 58,232 75,224 62,787 68,936 96,057
Loans past due 90 days or more......................................... 39,652 17,842 11,754 11,122 17,536
Renegotiated loans..................................................... -- -- 2,994 2,195 --
--------- --------- --------- --------- ---------
Total nonperforming loans.............................................. 97,884 93,066 77,535 82,253 113,593
Other real estate owned................................................ 8,523 7,295 10,065 12,222 16,694
--------- --------- --------- --------- ---------
Total nonperforming assets............................................. $ 106,407 100,361 87,600 94,475 130,287
--------- --------- --------- --------- ---------
Government guaranteed nonperforming loans*............................. $ 25,847 7,779 7,883 9,089 7,289
--------- --------- --------- --------- ---------
Nonperforming loans to total loans and leases, net of unearned
discount............................................................. .91% .97% .94% 1.13% 1.63%
Nonperforming assets to total net loans and leases and other real
estate owned......................................................... .99% 1.05% 1.06% 1.30% 1.86%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* Included in total nonperforming loans.
-48-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 12
MATURITY DISTRIBUTION OF LOANS*
December 31, 1996
<TABLE>
<CAPTION>
1998 - AFTER
DOLLARS IN THOUSANDS DEMAND 1997 2001 2001
- ------------------------------------------------------------------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial, financial, agricultural, etc........................... $ 1,322,193 244,636 415,216 127,263
Real estate--construction.......................................... 17,826 56,746 15,926 --
------------ --------- --------- ---------
Total............................................................ $ 1,340,019 301,382 431,142 127,263
------------ --------- --------- ---------
------------ --------- --------- ---------
Floating or adjustable interest rates.............................. $ 380,493 77,148
Fixed or predetermined interest rates.............................. 50,649 50,115
--------- ---------
Total............................................................ $ 431,142 127,263
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* The data do not include nonaccrual loans.
-49-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 13
MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1996
- ---------------------------------------------------------------- -----------------
<S> <C>
Under 3 months.................................................. $ 916,706
3 to 6 months................................................... 320,614
6 to 12 months.................................................. 292,755
Over 12 months.................................................. 617,478
-----------------
Total......................................................... $ 2,147,553
-----------------
-----------------
</TABLE>
-50-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 14
MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
ONE YEAR ONE TO FIVE FIVE TO OVER TEN
DOLLARS IN THOUSANDS OR LESS YEARS TEN YEARS YEARS TOTAL
- ---------------------------------------------------------------- ---------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1996
INVESTMENT SECURITIES AVAILABLE FOR SALE*
U.S. Treasury and federal agencies
Carrying value................................................ $ 2,504 456,950 -- -- $ 459,454
Yield......................................................... 7.89% 6.20% -- -- 6.21%
Mortgage-backed securities**
Government issued or guaranteed
Carrying value.............................................. 24,828 65,605 58,705 337,770 486,908
Yield....................................................... 5.83% 6.14% 6.43% 6.29% 6.26%
Privately issued
Carrying value................................................ 24,817 144,477 90,634 138,085 398,013
Yield......................................................... 6.08% 6.23% 6.22% 6.63% 6.36%
Other debt securities
Carrying value................................................ 325 1,007 -- -- 1,332
Yield......................................................... 8.67% 8.46% -- -- 8.51%
Equity securities
Carrying value................................................ -- -- -- -- 50,965
Yield......................................................... -- -- -- -- 7.40%
---------- ----------- --------- --------- ------------
Total investment securities available for sale
Carrying value................................................ $ 52,474 668,039 149,339 475,855 $ 1,396,672
Yield......................................................... 6.05% 6.20% 6.30% 6.39% 6.31%
---------- ----------- --------- --------- ------------
---------- ----------- --------- --------- ------------
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury and federal agencies
Carrying value................................................ $ 18,709 57,967 -- -- $ 76,676
Yield......................................................... 6.40% 6.39% -- -- 6.39%
Obligations of states and political subdivisions
Carrying value................................................ 37,240 2,848 1,277 80 41,445
Yield......................................................... 6.14% 9.47% 9.63% 10.83% 6.49%
Other debt securities
Carrying value................................................ -- 495 -- -- 495
Yield......................................................... -- 7.37% -- -- 7.37%
---------- ----------- --------- --------- ------------
Total investment securities held to maturity
Carrying value................................................ $ 55,949 61,310 1,277 80 $ 118,616
Yield......................................................... 6.23% 6.54% 9.63% 10.83% 6.43%
---------- ----------- --------- --------- ------------
---------- ----------- --------- --------- ------------
OTHER INVESTMENT SECURITIES..................................... $ -- -- -- -- $ 56,410
---------- ----------- --------- --------- ------------
Total investment securities
Carrying value................................................ $ 108,423 729,349 150,616 475,935 $ 1,571,698
Yield......................................................... 6.14% 6.23% 6.33% 6.39% 6.09%
---------- ----------- --------- --------- ------------
---------- ----------- --------- --------- ------------
</TABLE>
* Investment securities available for sale are presented at estimated fair
value. Yields on such securities are based on amortized cost.
** Maturities are reflected based upon contractual payments due. Actual
maturities are expected to be significantly shorter as a result of loan
repayments in the underlying mortgage pools.
-51-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Table 15
INTEREST RATE SENSITIVITY
DOLLARS IN THOUSANDS BY REPRICING DATE
<TABLE>
<CAPTION>
THREE MONTHS FOUR TO ONE TO AFTER FIVE
DECEMBER 31, 1996 OR LESS TWELVE MONTHS FIVE YEARS YEARS TOTAL
- --------------------------------------------------- ------------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Loans and leases, net.............................. $ 4,496,727 1,470,989 3,670,504 1,083,903 10,722,123
Money-market assets................................ 164,568 45,000 400 -- 209,968
Investment securities.............................. 130,792 422,166 753,450 265,290 1,571,698
------------- ------------- ---------- ---------- ------------
Total earning assets......................... 4,792,087 1,938,155 4,424,354 1,349,193 12,503,789
------------- ------------- ---------- ---------- ------------
NOW accounts....................................... 334,787 -- -- -- 334,787
Savings deposits................................... 3,280,788 -- -- -- 3,280,788
Time deposits...................................... 1,669,720 2,085,054 1,589,410 8,565 5,352,749
Deposits at foreign office......................... 193,236 -- -- -- 193,236
------------- ------------- ---------- ---------- ------------
Total interest-bearing deposits.............. 5,478,531 2,085,054 1,589,410 8,565 9,161,560
------------- ------------- ---------- ---------- ------------
Short-term borrowings.............................. 1,150,187 -- -- -- 1,150,187
Long-term borrowings............................... 32 141 1,253 176,576 178,002
------------- ------------- ---------- ---------- ------------
Total interest-bearing liabilities........... 6,628,750 2,085,195 1,590,663 185,141 10,489,749
------------- ------------- ---------- ---------- ------------
Interest rate swaps................................ (2,032,495) 345,960 1,576,223 110,312 --
------------- ------------- ---------- ---------- ------------
Periodic gap....................................... $ (3,869,158) 198,920 4,409,914 1,274,364
Cumulative gap..................................... (3,869,158) (3,670,238) 739,676 2,014,040
Cumulative gap as a % of total earning assets...... (30.9% (29.4)% 5.9% 16.1%
------------- ------------ ---------- ---------- ------------
------------- ------------ ---------- ---------- ------------
</TABLE>
-52-
<PAGE>
Item 8. Financial Statements and Supplementary Data. Financial Statements and
Supplementary Data consist of the financial statements as indexed and
presented below and table 2 "Quarterly Trends" presented in Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Index to Financial Statements and Financial Statement Schedules
Report of Independent Accountants
Consolidated Balance Sheet -
December 31, 1996 and 1995
Consolidated Statement of Income -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31,
1996, 1995 and 1994
Notes to Financial Statements
-53-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
First Empire State Corporation:
We have audited the accompanying consolidated balance sheet of First Empire
State Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of First Empire State
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 122 in 1995, which
changed its method of accounting for mortgage servicing rights.
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
January 9, 1997
-54-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1996 1995
- ------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Assets
Cash and due from banks........................................................ $ 324,659 363,119
Money-market assets
Interest-bearing deposits at banks........................................... 47,325 125,500
Federal funds sold and agreements to resell securities....................... 125,326 1,000
Trading account.............................................................. 37,317 9,709
------------- ------------
Total money-market assets................................................ 209,968 136,209
------------- ------------
Investment securities
Available for sale (cost: $1,400,976 in 1996; $1,537,393 in 1995)............ 1,396,672 1,531,893
Held to maturity (market value: $119,316 in 1996; $187,476 in 1995).......... 118,616 185,834
Other (market value: $56,410 in 1996; $51,568 in 1995)........................ 56,410 51,568
------------- ------------
Total investment securities.............................................. 1,571,698 1,769,295
------------- ------------
Loans and leases............................................................... 11,120,221 9,873,723
Unearned discount............................................................. (398,098) (317,874)
Allowance for possible credit losses.......................................... (270,466) (262,344)
------------- ------------
Loans and leases, net....................................................... 10,451,657 9,293,505
------------- ------------
Premises and equipment......................................................... 128,521 128,516
Accrued interest and other assets.............................................. 257,412 265,258
------------- ------------
Total assets............................................................. $ 12,943,915 11,955,902
------------- ------------
------------- ------------
Liabilities
Noninterest-bearing deposits................................................... $ 1,352,929 1,184,359
NOW accounts................................................................... 334,787 768,559
Savings deposits............................................................... 3,280,788 2,765,301
Time deposits.................................................................. 5,352,749 4,596,053
Deposits at foreign office..................................................... 193,236 155,303
------------- ------------
Total deposits........................................................... 10,514,489 9,469,575
------------- ------------
Federal funds purchased and agreements to repurchase securities................ 1,015,408 1,213,372
Other short-term borrowings.................................................... 134,779 59,834
Accrued interest and other liabilities......................................... 195,578 174,077
Long-term borrowings........................................................... 178,002 192,791
------------- ------------
Total liabilities........................................................ 12,038,256 11,109,649
------------- ------------
Stockholders' Equity
Preferred stock, $1 par, 1,000,000 shares authorized, 40,000 shares outstanding
in 1995, stated at aggregate liquidation value............................... -- 40,000
Common stock, $5 par, 15,000,000 shares authorized, 8,097,472 shares issued.... 40,487 40,487
Additional paid-in capital..................................................... 96,597 98,657
Retained earnings.............................................................. 937,072 805,486
Unrealized investment losses, net.............................................. (2,485) (3,155)
Treasury stock--common, at cost -1,411,286 shares in 1996;1,664,306 shares in
1995......................................................................... (166,012) (135,222)
------------- ------------
Total stockholders' equity............................................... 905,659 846,253
------------- ------------
Total liabilities and stockholders' equity............................... $ 12,943,915 11,955,902
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
-55-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994
- -------------------------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Interest income
Loans and leases, including fees.............................................. $ 881,002 794,181 633,077
Money-market assets
Deposits at banks........................................................... 2,413 8,181 2,212
Federal funds sold and agreements to resell securities...................... 2,985 3,007 4,751
Trading account............................................................. 980 1,234 361
Investment securities
Fully taxable............................................................... 107,415 118,791 104,185
Exempt from federal taxes................................................... 2,637 2,760 2,760
---------- --------- ---------
Total interest income..................................................... 997,432 928,154 747,346
---------- --------- ---------
Interest expense
NOW accounts.................................................................. 9,430 11,902 11,286
Savings deposits.............................................................. 84,822 87,612 84,804
Time deposits................................................................. 286,088 239,882 97,067
Deposits at foreign office.................................................... 12,399 6,952 5,894
Short-term borrowings......................................................... 59,442 84,225 73,868
Long-term borrowings.......................................................... 14,227 11,157 6,287
---------- --------- ---------
Total interest expense.................................................... 466,408 441,730 279,206
---------- --------- ---------
Net interest income........................................................... 531,024 486,424 468,140
Provision for possible credit losses.......................................... 43,325 40,350 60,536
---------- --------- ---------
Net interest income after provision for possible credit losses................ 487,699 446,074 407,604
---------- --------- ---------
Other income
Mortgage banking revenues..................................................... 44,484 37,142 16,002
Service charges on deposit accounts........................................... 40,659 38,290 35,016
Trust income.................................................................. 27,672 25,477 22,574
Merchant discount and other credit card fees.................................. 18,266 10,675 8,705
Trading account and foreign exchange gains.................................... 2,421 2,783 738
Gain (loss) on sales of bank investment securities............................ (37) 4,479 128
Other revenues from operations................................................ 36,783 30,692 40,576
---------- --------- ---------
Total other income........................................................ 170,248 149,538 123,739
---------- --------- ---------
Other expense
Salaries and employee benefits................................................ 208,342 188,222 161,221
Equipment and net occupancy................................................... 51,346 50,526 49,132
Printing, postage and supplies................................................ 15,167 14,442 13,516
Deposit insurance............................................................. 9,337 14,675 16,442
Other costs of operations..................................................... 124,786 106,574 96,551
---------- --------- ---------
Total other expense....................................................... 408,978 374,439 336,862
---------- --------- ---------
Income before income taxes.................................................... 248,969 221,173 194,481
Income taxes.................................................................. 97,866 90,137 77,186
---------- --------- ---------
Net income.................................................................... $ 151,103 131,036 117,295
---------- --------- ---------
---------- --------- ---------
Net income per common share
Primary....................................................................... $ 21.31 18.79 16.35
Fully diluted................................................................. 20.97 17.78 15.71
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
-56-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- -------------------------------------------------------------------------- ------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................................ $ 151,103 131,036 117,295
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for possible credit losses.................................... 43,325 40,350 60,536
Depreciation and amortization of premises and equipment................. 19,457 18,530 17,625
Amortization of capitalized mortgage servicing rights................... 10,509 7,251 3,503
Provision for deferred income taxes..................................... (3,901) (7,360) (2,866)
Asset write-downs....................................................... 1,043 3,852 3,184
Net gain on sales of assets............................................. (1,539) (12,121) (4,744)
Net change in accrued interest receivable, payable...................... 1,248 4,381 8,084
Net change in other accrued income and expense.......................... 30,100 61,205 (39,654)
Net change in loans held for sale....................................... (8,662) (136,303) 169,883
Net change in trading account assets and liabilities.................... (8,508) (2,288) 4,377
------------ ----------- ----------
Net cash provided by operating activities............................... 234,175 108,533 337,223
------------ ----------- ----------
Cash flows from investing activities
Proceeds from sales of investment securities
Available for sale...................................................... 275,627 448,532 52,824
Held to maturity........................................................ -- 990 --
Other................................................................... -- -- 7,446
Proceeds from maturities of investment securities
Available for sale...................................................... 390,563 244,862 562,498
Held to maturity........................................................ 125,480 115,986 55,283
Other................................................................... 721 -- --
Purchases of investment securities
Available for sale...................................................... (532,106) (418,507) (17,143)
Held to maturity........................................................ (58,274) (295,582) (59,704)
Other................................................................... (2,776) (3,408) (20,292)
Net (increase) decrease in interest-bearing deposits at banks............. 78,175 (125,357) 54,901
Net increase in loans and leases.......................................... (1,189,033) (1,189,108) (778,201)
Capital expenditures, net................................................. (20,333) (17,520) (6,876)
Acquisitions, net of cash acquired........................................ -- 52,298 102,721
Other, net................................................................ 4,432 4,078 23,185
------------ ----------- ----------
Net cash used by investing activities.................................... (927,524) (1,182,736) (23,358)
------------ ----------- ----------
Cash flows from financing activities
Net increase in deposits.................................................. 1,042,108 1,139,555 413,865
Net decrease in short-term borrowings..................................... (145,281) (124,644) (807,826)
Proceeds from issuance of subordinated debt............................... -- 100,000 --
Payments on long-term borrowings.......................................... (14,900) (3,529) (116)
Purchases of treasury stock............................................... (80,810) (37,374) (43,964)
Dividends paid--common.................................................... (18,617) (16,224) (14,743)
Dividends paid--preferred................................................. (900) (3,600) (3,600)
Other, net................................................................ (2,385) 3,277 (1,841)
------------ ----------- ----------
Net cash provided (used) by financing activities......................... 779,215 1,057,461 (458,225)
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents...................... $ 85,866 (16,742) (144,360)
Cash and cash equivalents at beginning of year............................ 364,119 380,861 525,221
Cash and cash equivalents at end of year.................................. $ 449,985 364,119 380,861
------------ ----------- ----------
------------ ----------- ----------
Supplemental disclosure of cash flow information
Interest received during the year......................................... $ 985,287 909,005 743,184
Interest paid during the year............................................. 459,963 408,221 270,802
Income taxes paid during the year......................................... 83,929 68,237 110,162
------------ ----------- ----------
Supplemental schedule of noncash investing and financing activities
Real estate acquired in settlement of loans............................... $ 8,214 7,372 9,936
Conversion of preferred stock to common stock............................. 40,000 -- --
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
See accompanying notes to financial statements.
-57-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
DOLLARS IN THOUSANDS, PREFERRED COMMON PAID-IN RETAINED INVESTMENT GAINS TREASURY
EXCEPT PER SHARE STOCK STOCK CAPITAL EARNINGS (LOSSES), NET STOCK TOTAL
- ---------------------------- ---------- ----------- ------------- --------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
Balance--January 1, 1994 $40,000 40,487 97,787 595,322 9,148 (58,750) $ 723,994
Net income................ -- -- -- 117,295 -- -- 117,295
Preferred stock cash
dividends............... -- -- -- (3,600) -- -- (3,600)
Common stock cash
dividends--$2.20 per
share................... -- -- -- (14,743) -- -- (14,743)
Exercise of stock
options................. -- -- 227 -- -- 1,490 1,717
Purchases of treasury
stock................... -- -- -- -- -- (43,964) (43,964)
Unrealized losses on
investment securities
available for sale,
net..................... -- -- -- -- (59,703) -- (59,703)
------- -------- ------ --------- ------- ---------- ----------
Balance--December 31,
1994.................... $40,000 40,487 98,014 694,274 (50,555) (101,224) $ 720,996
------- -------- ------ --------- ------- ---------- ----------
1995
Net income................ -- -- -- 131,036 -- -- 131,036
Preferred stock cash
dividends............... -- -- -- (3,600) -- -- (3,600)
Common stock cash
dividends--$2.50 per
share................... -- -- -- (16,224) -- -- (16,224)
Exercise of stock
options................. -- -- 643 -- -- 3,376 4,019
Purchases of treasury
stock................... -- -- -- -- -- (37,374) (37,374)
Unrealized gains on
investment securities
available for sale,
net..................... -- -- -- -- 47,400 -- 47,400
------- -------- ------ --------- ------- ---------- ----------
Balance--December 31,
1995.................... $40,000 40,487 98,657 805,486 (3,155) (135,222) $ 846,253
------- -------- ------ --------- ------- ---------- ----------
1996
Net income................ -- -- -- 151,103 -- -- 151,103
Preferred stock cash
dividends............... -- -- -- (900) -- -- (900)
Common stock cash
dividends--$2.80 per
share................... -- -- -- (18,617) -- -- (18,617)
Exercise of stock
options................. -- -- 4,474 -- -- 3,486 7,960
Purchases of treasury
stock................... -- -- -- -- -- (80,810) (80,810)
Conversion of preferred
stock into 506,930
shares of common
stock................... (40,000) -- (6,534) -- -- 46,534 --
Unrealized gains on
investment securities
available for sale,
net..................... -- -- -- -- 670 -- 670
---------- ----------- ------ --------- ------- ---------- ----------
Balance--December 31,
1996.................... $ -- 40,487 96,597 937,072 (2,485) (166,012) $ 905,659
---------- ----------- ------ --------- ------- ---------- ----------
---------- ----------- ------ --------- ------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
-58-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
1. Significant accounting policies
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York. Through subsidiaries, First Empire
provides individuals, corporations and institutions with commercial and
retail banking services, including loans and deposits, trust, mortgage
banking, asset management and other financial services. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounting and
reporting policies of First Empire State Corporation and subsidiaries ("the
Company") conform to generally accepted accounting principles and to general
practices within the banking industry. The more significant accounting
policies are as follows:
Consolidation
The consolidated financial statements include First Empire and all of its
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The financial statements of First Empire
included in note 20 report investments in subsidiaries under the equity
method.
Consolidated Statement of Cash Flows
For purposes of this statement, cash and due from banks, Federal funds sold
and agreements to resell securities are considered cash and cash equivalents.
Trading account
Financial instruments used for trading purposes are stated at fair value.
Realized gains and losses and unrealized changes in fair value are included
in trading account 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. Unrealized gains or
losses related to investment securities available for sale are reflected in
stockholders' equity, net of applicable income taxes.
Other securities include stock of the Federal Reserve Bank of New York
and the Federal Home Loan Bank of New York and are stated at cost.
Amortization of premiums and accretion of discounts for investment
securities available for sale and held to maturity are included in interest
income. The cost basis of individual securities is written down to estimated
fair value through a charge to earnings when declines in value below
amortized cost are considered to be other than temporary. Realized gains and
losses on the sales of investment securities are determined using the
specific identification method.
-59-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
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. Loans held for sale are
carried at the lower of aggregate cost or fair market value. Valuation
adjustments made on these loans are included in mortgage banking revenues.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended. Except for consumer and residential
mortgage loans that are considered smaller balance homogenous loans and are
evaluated collectively, the Company considers a loan to be impaired when,
based on current information and events, it is probable that the Company will
be unable to collect all amounts according to the contractual terms of the
loan agreement or the loan is delinquent 90 days. Impaired loans are
classified as either nonaccrual or as loans renegotiated at below market
rates. Loans less than 90 days delinquent are deemed to have a minimum delay
in payment and are generally not considered impaired. Impairment of a loan
is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of collateral if the loan is collateral
dependent. Interest received on impaired loans placed on nonaccrual status
is applied to reduce the carrying value of the loan or, if principal is
considered fully collectible, recognized as interest income.
Allowance for possible credit losses
The allowance for possible credit losses represents the amount which, in
management's judgment, will be adequate to absorb credit losses from existing
loans and leases. The adequacy of the allowance is determined by
management's evaluation of the loan 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, any delinquency in payments, 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.
Capitalized mortgage servicing rights
In the second quarter of 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights," retroactive to January 1, 1995. As a result,
the Company recognizes as separate assets rights to service mortgage loans
for others, whether those servicing rights are originated or purchased.
Prior to the adoption of SFAS No. 122, only purchased mortgage servicing
-60-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
rights were recorded as assets. Retroactive application of the provisions of
SFAS No. 122 to prior years is not permitted.
The total cost of mortgage loans sold with servicing rights retained is
allocated to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Mortgage
servicing rights purchased separately from loans are recorded at cost.
Capitalized mortgage servicing rights are included in other assets and
amortized in proportion to and over the period of estimated net servicing
income.
To estimate the fair value of mortgage servicing rights, the Company
considers market prices for similar assets and the present value of expected
future cash flows associated with the servicing rights calculated using
assumptions that market participants would use in estimating future servicing
income and expense. Such assumptions include estimates of the cost of
servicing loans, loan default rates, an appropriate discount rate, and
prepayment speeds. For purposes of evaluating and measuring impairment of
capitalized mortgage servicing rights, the Company stratifies such rights
based on predominant risk characteristics of underlying loans that are
expected to have the most impact on projected prepayments, cost of servicing
and other factors affecting future cash flows associated with the servicing
rights. Such factors include loan type, note rate and term. The amount of
impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed estimated fair value. Impairment is
recognized through a valuation allowance.
Stock-based compensation
Compensation expense is not recognized for stock option awards to employees
under the Company's stock option plan since the exercise price of options is
equal to the market price of the underlying stock at the date of grant.
Compensation expense for stock appreciation rights issued separately from
stock options is recognized based upon changes in the quoted market value of
First Empire's common stock. The pro forma effects of stock-based
compensation arrangements are based on the estimated grant date fair value of
stock options that are expected to vest calculated pursuant to the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." Pro forma
compensation expense, net of applicable income tax effect, is recognized over
the vesting period, which is generally four years.
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. Investment tax credits related to leveraged leasing property are
amortized into income tax expense over the life of the lease agreement.
Financial futures
Outstanding financial futures contracts represent future commitments and are
not included in the Consolidated Balance Sheet. Futures contracts used in
securities trading operations are marked to market and the resulting gains or
losses are recognized in trading account and foreign exchange gains. On
occasion the Company uses interest rate futures contracts as part of its
-61-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
management of interest rate risk. Gains and losses on futures contracts
designated as hedges are amortized as an adjustment to interest income or
expense over the life of the item hedged.
Interest rate swap agreements
For interest rate swap agreements used to manage interest rate risk arising
from financial assets and liabilities, amounts receivable or payable are
recognized as accrued under the terms of the agreement and the net interest
differential, including any amortization of premiums paid or accretion of
discounts received, is recorded as an adjustment to interest income or
expense of the related asset or liability. To qualify for such accounting
treatment, an interest rate swap must (i) be designated as having been
entered into for interest rate risk management purposes and linked to a
specific financial instrument or pool of similar financial instruments in the
Company's Consolidated Balance Sheet and (ii) have interest rate and
repricing characteristics that have a sufficient degree of correlation with
the corresponding characteristics of the designated on-balance sheet
financial instrument. Gains or losses resulting from early termination of
interest rate swap agreements used to manage interest rate risk are amortized
over the shorter of the remaining term or estimated life of the agreement or
the on-balance sheet financial instrument to which the swap had been linked.
Agreements and commitments that do not satisfy the requirements noted above,
including those entered into for trading purposes, are marked to market with
resulting gains or losses recorded in trading account and foreign exchange
gains.
Earnings per common share
Earnings per common share data are computed on the basis of the weighted
average number of shares outstanding during the year, plus shares issuable
upon the assumed exercise of outstanding common stock options. Proceeds
assumed to have been received on such exercise are treated as if applied
toward the repurchase of outstanding common shares in the open market during
the year, as required under the "treasury stock" method of accounting.
2. Acquisitions
On March 6, 1995, the Company's mortgage banking subsidiary, M&T Mortgage
Corporation, acquired Statewide Funding Corporation ("Statewide"), a
privately-owned mortgage banking company based near Albany, New York, in a
cash transaction. As of the acquisition date, Statewide serviced residential
mortgage loans owned by other investors having an outstanding principal
balance of approximately $1.0 billion. On October 2, 1995, in another cash
transaction, M&T Mortgage Corporation acquired the mortgage servicing rights
and origination franchise of Exchange Mortgage Corporation ("Exchange"), a
mortgage banking company based in Huntington Station, New York. As of the
acquisition date, Exchange serviced residential mortgage loans owned by other
investors having an outstanding principal balance of approximately $370
million. The combined purchase price of the Statewide and Exchange
transactions was approximately $25 million.
In separate cash transactions, on July 21, 1995, Manufacturers and
Traders Trust Company ("M&T Bank"), a wholly owned subsidiary of First
Empire, acquired four banking offices from The Chase Manhattan Bank, N.A.,
including approximately $84 million of deposits, and on December 10, 1994
purchased approximately $146 million of deposits from Chemical Bank, along
-62-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
2. Acquisitions, continued
with seven banking offices. Ten of the banking offices obtained in these
transactions were in the Hudson Valley region of New York State and one
office was in Western New York.
On December 1, 1994, First Empire acquired Ithaca Bancorp, Inc. ("Ithaca
Bancorp"), Ithaca, New York, in exchange for cash consideration of $19 per
common share, or approximately $44.2 million. Simultaneously with the
acquisition, Ithaca Bancorp's savings bank subsidiary, Citizens Savings Bank,
F.S.B., was merged into M&T Bank bringing twelve banking offices in New
York's Southern Tier into M&T Bank's branch network. As of December 1, 1994,
assets acquired totaled $470 million, including $369 million of loans; at
that date, liabilities assumed totaled $425 million, including $330 million
of deposits.
These acquisitions have been accounted for as purchase transactions and,
accordingly, the operating results of the acquired entities have been
included in the Company's results of operations since the respective
acquisition dates. The excess of the cost of the acquired entities over the
fair value of identifiable assets acquired less liabilities assumed was
recorded as goodwill and amounted to approximately $11 million and $24
million for acquisitions completed in 1995 and 1994, respectively. Such
goodwill is being amortized on a straight-line basis over five years.
The aggregate amount of goodwill included in other assets was
$18,923,000 and $28,234,000 at December 31, 1996 and 1995, respectively.
Amortization of goodwill was $6,292,000 in 1996, $6,294,000 in 1995 and
$358,000 in 1994. During 1996, recognition of income tax credits and
resolution of other preacquisition contingencies associated with acquired
entities resulted in a reduction of previously recorded goodwill of
$3,019,000.
Presented below is certain pro forma information as if Statewide,
Exchange and Ithaca had been acquired on January 1, 1994. These results
combine the historical results of the acquired businesses into the Company's
Consolidated Statement of Income and, while certain adjustments were made for
the estimated impact of purchase accounting adjustments and other
acquisition-related activity, they are not necessarily indicative of what
would have occurred had the acquisitions taken place at that time.
Pro forma
Year ended December 31
1995 1994
-------- -------
(in thousands,
except per share)
Interest income $929,382 782,259
Other income 156,306 149,852
Net income 129,442 112,738
Earnings per common share $ 18.56 15.70
-------- -------
-------- -------
-63-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities
The amortized cost and estimated fair value of investment securities were as
follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ----------- ----------- ----------
(in thousands)
December 31, 1996
Investment securities
available for sale:
U.S. Treasury and federal
agencies $ 458,570 1,751 867 459,454
Mortgage-backed securities
Government issued
or guaranteed 494,515 3,801 11,408 486,908
Privately issued 400,216 758 2,961 398,013
Other debt securities 1,311 21 - 1,332
Equity securities 46,364 4,625 24 50,965
---------- ------- ------ --------
1,400,976 10,956 15,260 1,396,672
---------- ------- ------ ---------
Investment securities
held to maturity:
U.S. Treasury and
federal agencies 76,676 429 - 77,105
Obligations of states and
political subdivisions 41,445 302 31 41,716
Other debt securities 495 - - 495
---------- ------- ------ ---------
118,616 731 31 119,316
---------- ------- ------ ---------
Other securities 56,410 - - 56,410
---------- ------- ------ ---------
Total $1,576,002 11,687 15,291 1,572,398
---------- ------- ------ ---------
---------- ------- ------ ---------
64
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities, continued
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ----------- ---------- -----------
(in thousands)
December 31, 1995
Investment securities
available for sale:
U.S. Treasury and federal
agencies $ 235,986 3,983 488 239,481
Mortgage-backed securities
Government issued
or guaranteed 705,523 3,505 11,504 697,524
Privately issued 580,275 806 4,962 576,119
Other debt securities 3,454 76 - 3,530
Equity securities 12,155 3,084 - 15,239
---------- ------- ------ ----------
1,537,393 11,454 16,954 1,531,893
---------- ------- ------ ----------
Investment securities
held to maturity:
U.S. Treasury and
federal agencies 150,000 1,199 - 151,199
Obligations of states and
political subdivisions 35,250 446 3 35,693
Other debt securities 584 - - 584
---------- ------- ------ ----------
185,834 1,645 3 187,476
---------- ------- ------ ----------
Other securities 51,568 - - 51,568
----------- ------- ------ ----------
Total $1,774,795 13,099 16,957 1,770,937
----------- ------- ------ ----------
----------- ------- ------ ----------
No investment in securities of a single non-U.S. Government or
government a gency issuer exceeded ten percent of stockholders' equity at
December 31, 1996.
As permitted by the Financial Accounting Standards Board, in December
1995 the Company reclassified U.S. Treasury securities with an amortized cost
and estimated fair value at that time of $220,185,000 and $223,309,000,
respectively, from held to maturity to available for sale to enhance
flexibility in managing the investment securities portfolio.
As of December 31, 1996, the latest available investment ratings of all
privately issued mortgage-backed securities were AA or better.
Investment securities issued by U.S. Treasury and federal agencies and
classified as held to maturity at December 31, 1996 and 1995 consisted of
structured notes issued by the Federal Home Loan Banks.
65
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities, continued
The amortized cost and estimated fair value of collateralized mortgage
obligations included in mortgage-backed securities were as follows:
December 31
1996 1995
---- ----
(in thousands)
Amortized cost $406,498 673,476
Estimated fair value 396,808 662,785
-------- -------
-------- -------
Gross realized gains on the sale of investment securities available for
sale were $820,000 in 1996, $5,113,000 in 1995 and $128,000 in 1994. Gross
realized losses on the sale of investment securities available for sale were
$857,000 in 1996 and $624,000 in 1995. There were no such losses in 1994.
During 1995, the Company sold a municipal bond with an amortized cost of
$1,000,000 that had been classified as held to maturity. Such bond was sold
for an insignificant loss immediately following the downgrading of the
municipality's credit rating by several rating agencies.
At December 31, 1996, 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 $ 2,782 2,829
Due after one year through five years 457,099 457,957
Due after five years through ten years - -
Due after ten years - -
---------- ---------
459,881 460,786
Mortgage-backed securities available
for sale 894,731 884,921
---------- ---------
$1,354,612 1,345,707
---------- ---------
---------- ---------
Debt securities held to maturity:
Due in one year or less $ 55,949 56,014
Due after one year through five years 61,310 61,844
Due after five years through ten years 1,277 1,367
Due after ten years 80 91
---------- ---------
$ 118,616 119,316
---------- ---------
---------- ---------
At December 31, 1996, investment securities with a carrying value of
$973,930,000, including $880,682,000 of investment securities available for
sale, were pledged to secure demand notes issued to the U.S. Treasury,
borrowings from the Federal Home Loan Bank of New York, repurchase agreements,
governmental deposits and interest rate swap agreements.
66
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
4. Loans and leases
Total gross loans and leases outstanding were comprised of the following:
December 31
1996 1995
---- ----
(in thousands)
Loans
Commercial, financial,
agricultural, etc. $ 2,122,903 1,928,969
Real estate:
Residential 2,267,174 2,061,342
Commercial 3,932,757 3,587,248
Construction 90,563 77,604
Consumer 2,465,856 2,017,099
------------ ----------
Total loans 10,879,253 9,672,262
------------ ----------
Leases
Commercial 83,379 84,968
Consumer 157,589 116,493
------------ ----------
Total leases 240,968 201,461
------------ ----------
Total loans and leases $11,120,221 9,873,723
------------ ----------
------------ ----------
One-to-four family residential mortgage loans held for sale were $193.6
million at December 31, 1996 and $185.0 million at December 31, 1995.
One-to-four family residential mortgage loans serviced for others totaled
approximately $5.8 billion and $5.7 billion at December 31, 1996 and 1995,
respectively. As of December 31, 1996, approximately $16.6 million of
one-to-four family residential mortgage loans serviced for others have been
sold with recourse. The total credit loss exposure resulting from loans sold
with recourse was considered negligible.
Included in the table above are nonperforming loans (loans on which interest
was not being accrued, or which were ninety days or more past due or had been
renegotiated at below-market interest rates) of $97,884,000 at December 31, 1996
and $93,066,000 at December 31, 1995. If nonaccrual and renegotiated loans had
been accruing interest at their originally contracted terms, interest income on
these loans would have amounted to $6,854,000 in 1996 and $9,931,000 in 1995.
The actual amount included in interest income during 1996 and 1995 on these
loans was $1,506,000 and $2,178,000, respectively.
The recorded investment in loans considered impaired under SFAS No. 114 was
$40,218,000 and $60,778,000 at December 31, 1996 and 1995, respectively. The
recorded investment in loans for which there was a related allowance for
possible credit losses determined in accordance with SFAS No. 114 and the amount
of such allowance were $35,608,000 and $4,652,000, respectively, at December 31,
1996 and $41,654,000 and $4,775,000, respectively, at December 31, 1995. The
recorded investment in loans for which there was no related SFAS No. 114
allowance for possible credit losses was $4,610,000 and $19,124,000 at December
31, 1996 and 1995, respectively. The average recorded investment in impaired
loans during 1996 and 1995 was $48,146,000 and $52,357,000, respectively.
Interest income recognized on impaired loans totaled $1,571,000 and $1,151,000
for the years ended December 31, 1996 and 1995, respectively.
67
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
4. Loans and leases, continued
Borrowings by directors and certain officers of First Empire and its banking
subsidiaries, and by associates of such persons, exclusive of loans aggregating
less than $60,000, amounted to $51,603,000 and $52,613,000 at
December 31, 1996 and 1995, respectively. During 1996, new borrowings by such
persons amounted to $7,661,000 (including borrowings of new directors or
officers that were outstanding at the time of their election) and repayments and
other reductions equaled $8,671,000.
At December 31, 1996, approximately $3 million of one-to-four family
residential mortgage loans were pledged to secure borrowings.
5. Allowance for possible credit losses
Changes in the allowance for possible credit losses were as follows:
1996 1995 1994
---- ---- ----
(in thousands)
Beginning balance $262,344 243,332 195,878
Provision for possible
credit losses 43,325 40,350 60,536
Allowance for possible
credit losses acquired - - 3,538
Net charge-offs
Charge-offs (49,546) (31,207) (32,443)
Recoveries 14,343 9,869 15,823
-------- ------- -------
Net charge-offs (35,203) (21,338) (16,620)
-------- ------- -------
Ending balance $270,466 262,344 243,332
-------- ------- -------
-------- ------- -------
6. Premises and equipment
The detail of premises and equipment was as follows:
December 31
1996 1995
---- ----
(in thousands)
Land $ 12,741 12,791
Buildings-owned 91,406 89,062
Buildings-capital leases 1,773 1,773
Leasehold improvements 29,349 29,098
Furniture and equipment-owned 128,317 114,007
Furniture and equipment-capital leases 429 429
------- -------
264,015 247,160
Less: accumulated depreciation
and amortization
Owned assets 133,695 116,954
Capital leases 1,799 1,690
------- -------
135,494 118,644
------- -------
Premises and equipment, net $128,521 128,516
------- -------
------- -------
68
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
6. Premises and equipment, continued
Net lease expense for all operating leases totaled $12,223,000 in 1996,
$13,091,000 in 1995 and $13,329,000 in 1994. The Company occupies certain
banking offices and uses certain equipment under noncancellable operating
lease agreements expiring at various dates over the next 21 years. Minimum
lease payments under noncancellable operating leases are summarized as
follows:
<TABLE>
Year ending December 31: (in thousands)
<S> <C>
1997 $ 6,812
1998 7,021
1999 7,490
2000 6,522
2001 4,934
Later years 39,114
-------
$ 71,893
-------
-------
</TABLE>
Payments required under capital leases are not material.
7. Capitalized mortgage servicing rights
Changes in capitalized mortgage servicing rights were as follows:
<TABLE>
Year ended December 31
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Beginning balance $ 35,588 10,048 8,472
Originations 11,060 12,515 -
Purchases 3,786 22,980 5,079
Amortization (10,509) (7,251) (3,503)
Sales (1,035) (2,704) -
Write-downs - - -
------- ------ ------
38,890 35,588 10,048
Valuation allowance (1,100) (1,100) -
------- ------ ------
Ending balance, net $ 37,790 34,488 10,048
------- ------ ------
------- ------ ------
</TABLE>
As a result of impairment of certain strata of capitalized mortgage
servicing rights, a valuation allowance totaling $1,100,000 was recorded
during 1995. There were no additions or reductions to the valuation allowance
recorded during 1996. The estimated fair value of capitalized mortgage
servicing was approximately $59 million at December 31, 1996 and $44 million
at December 31, 1995. Such amounts were estimated using discounted cash flows
that reflect current prepayment and discount rate assumptions as of each
year-end.
69
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
8. Borrowings
The amount and interest rate of short-term borrowings were as follows:
<TABLE>
Federal funds
purchased and
repurchase Other
agreements borrowings Total
------------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C>
At December 31, 1996
Amount outstanding $1,015,408 134,779 1,150,187
Weighted-average
interest rate 7.03% 3.89% 6.66%
For the year ended
December 31, 1996
Highest amount
at a month-end $1,550,880 337,168
Daily-average
amount outstanding 1,014,923 117,528 1,132,451
Weighted-average
interest rate 5.29% 4.90% 5.25%
----------- -------- ---------
----------- -------- ---------
At December 31, 1995
Amount outstanding $1,213,372 59,834 1,273,206
Weighted-average
interest rate 5.83% 5.32% 5.81%
For the year ended
December 31, 1995
Highest amount
at a month-end $1,944,924 524,359
Daily-average
amount outstanding 1,176,935 246,560 1,423,495
Weighted-average
interest rate 5.91% 5.95% 5.92%
----------- -------- ---------
----------- -------- ---------
At December 31, 1994
Amount outstanding $ 695,665 669,185 1,364,850
Weighted-average
interest rate 6.07% 6.02% 6.05%
For the year ended
December 31, 1994
Highest amount
at a month-end $1,829,630 1,038,502
Daily-average
amount outstanding 1,432,845 339,676 1,772,521
Weighted-average
interest rate 4.12% 4.38% 4.17%
----------- -------- ---------
----------- -------- ---------
</TABLE>
70
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
8. Borrowings, continued
In general, federal funds purchased and repurchase agreements outstanding
at December 31, 1996 mature within two days following year-end.
At December 31, 1996, First Empire, M&T Bank and The East New York Savings
Bank ("East New York"), a wholly owned subsidiary of First Empire, had lines of
credit under formal agreements as follows:
<TABLE>
First M&T East
Empire Bank New York
------ ---- --------
(in thousands)
<S> <C> <C> <C>
Outstanding borrowings $ - 2,370 -
Unused 25,000 644,958 294,310
------ ------- -------
------ ------- -------
</TABLE>
Long-term borrowings were as follows:
<TABLE>
December 31
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Subordinated notes of
M&T Bank:
8 1/8% due 2002 $ 75,000 75,000
7% due 2005 100,000 100,000
Advances from Federal Home
Loan Bank of New York 2,370 16,834
Other 632 957
------- -------
$178,002 192,791
------- -------
------- -------
</TABLE>
The subordinated notes of M&T Bank are unsecured and are subordinate to
the claims of depositors and other creditors of M&T Bank. Advances from the
Federal Home Loan Bank of New York had fixed rates of interest ranging from
7.72% to 8.45% and 4.74% to 8.60% at December 31, 1996 and 1995, respectively.
Such advances mature at various dates through 2006 and are secured by
residential mortgage loans.
Long-term borrowings at December 31, 1996 mature as follows:
<TABLE>
Year ending December 31: (in thousands)
<S> <C>
1997 $ 173
1998 511
1999 108
2000 318
2001 316
Later years 176,576
--------
$178,002
--------
--------
</TABLE>
71
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
9. Preferred stock
On March 29, 1996, the holder of all of the then outstanding shares of
First Empire's 9% convertible preferred stock converted such shares into
506,930 shares of First Empire common stock at a contractual conversion price
of $78.90625 per common share. The 40,000 shares of preferred stock, which
had been issued on March 15, 1991 for $40 million, were not considered common
stock equivalents for purposes of calculating primary earnings per common
share. Accordingly, preferred stock dividends were deducted from net income
in such calculations. Calculations of fully diluted earnings per common
share for periods prior to the conversion reflect the assumption that the
preferred stock had been converted to 506,930 shares of common stock at
issuance and that no preferred stock dividends were paid.
10. Disclosures about fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires 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. Disclosures related to fair value presented herein are as of
December 31, 1996 and 1995.
With the exception of marketable securities, certain off-balance sheet
financial instruments and one-to-four family residential mortgage loans
originated for sale, the Company's financial instruments are not readily
marketable and market prices do not exist. The Company, in attempting to
comply with the provisions of SFAS No. 107, has not attempted to market its
financial instruments to potential buyers, if any exist. Since negotiated
prices in illiquid markets depend greatly upon the then present motivations
of the buyer and seller, it is reasonable to assume that actual sales prices
could vary widely from any estimate of fair value made without the benefit of
negotiations. Additionally, changes in market interest rates can
dramatically impact the value of financial instruments in a short period of
time.
The estimated fair value of investments in readily marketable debt and
equity securities were based on quoted market prices at the respective
year-end. In arriving at estimated fair value of other financial
instruments, the Company generally used calculations based upon discounted
cash flows of the related financial instruments. In general, discount rates
used for loan products were based on the Company's pricing at the respective
year-end. A higher discount rate was assumed with respect to estimated cash
flows associated with nonaccrual loans.
As more fully described in note 3, the carrying value and estimated fair
value of investment securities were as follows:
Carrying Estimated
value fair value
-------- -----------
(in thousands)
December 31
1996 $1,571,698 1,572,398
1995 1,769,295 1,770,937
---------- ---------
---------- ---------
72
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
The following table presents the carrying value and calculated estimates
of fair value of loans and commitments related to loans originated for sale:
Carrying Calculated
value estimate
----------- ------------
(in thousands)
December 31, 1996
Commercial loans and leases $ 2,182,034 2,178,530
Commercial real estate loans 3,956,184 3,975,921
Residential real estate loans 2,185,749 2,182,508
Consumer loans and leases 2,398,156 2,424,384
----------- -----------
$10,722,123 10,761,343
----------- -----------
----------- -----------
December 31, 1995
Commercial loans and leases $ 1,992,325 1,989,483
Commercial real estate loans 3,599,202 3,615,964
Residential real estate loans 1,999,540 2,030,175
Consumer loans and leases 1,964,782 1,980,559
----------- -----------
$ 9,555,849 9,616,181
----------- -----------
----------- -----------
As described in note 17, in the normal course of business, various
commitments and contingent liabilities are outstanding, such as loan
commitments, credit guarantees and letters of credit. The Company's pricing
of such financial instruments is based largely on credit quality and
relationship, probability of funding and other requirements. Commitments
generally have fixed expiration dates and contain termination and other
clauses which provide for relief from funding in the event of significant
deterioration in the credit quality of the customer. The rates and terms of
the Company's loan commitments, credit guarantees and letters of credit are
competitive with other financial institutions operating in markets served by
the Company. The Company believes that the carrying amounts are reasonable
estimates of the fair value of these financial instruments. Such carrying
amounts, which are comprised principally of unamortized fee income and are
included in other liabilities, totaled $3,619,000 and $2,757,000 at December
31, 1996 and 1995, respectively.
SFAS No. 107 requires that the estimated fair value ascribed to
noninterest-bearing deposits, savings deposits and NOW accounts be
established at carrying value because of the customers' ability to withdraw
funds immediately. Additionally, time deposit accounts are required to be
revalued based upon prevailing market interest rates for similar maturity
instruments. The following summarizes the results of these calculations:
Carrying Calculated
value estimate
---------- -----------
(in thousands)
December 31, 1996
Noninterest-bearing deposits $1,352,929 1,352,929
Savings deposits and NOW accounts 3,615,575 3,615,575
Time deposits 5,352,749 5,367,028
Deposits at foreign office 193,236 193,236
---------- ---------
---------- ---------
December 31, 1995
Noninterest-bearing deposits $1,184,359 1,184,359
Savings deposits and NOW accounts 3,533,860 3,533,860
Time deposits 4,596,053 4,611,060
Deposits at foreign office 155,303 155,303
---------- ---------
---------- ---------
73
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
The Company believes that deposit accounts have a value greater than
that prescribed by SFAS No. 107. The Company feels, however, that the value
associated with these deposits is greatly influenced by characteristics of
the buyer, such as the ability to reduce the costs of servicing the deposits,
and the expected deposit attrition which is customary in acquisitions.
Accordingly, estimating the fair value of deposits with any degree of
certainty is not practical.
As more fully described in note 16, the Company had entered into
interest rate swap agreements for purposes of managing the Company's exposure
to changing interest rates. The estimated fair value of interest rate swap
agreements represents the amount the Company would have expected to receive
or pay to terminate such swaps. The following table includes information
about the estimated fair value of interest rate swaps entered into for
interest rate risk management purposes:
Gross Gross Estimated
Notional unrealized unrealized fair value -
amount gains losses gain (loss)
--------- ----------- ----------- -------------
(in thousands)
December 31
1996 $2,362,389 15,013 (9,489) 5,524
1995 2,378,358 38,682 (1,645) 37,037
---------- ------ -------- ------
---------- ------ -------- ------
As described in note 16, the Company also uses certain derivative
financial instruments as part of its trading activities. Interest rate swaps
entered into for trading purposes had notional values and estimated fair
value gains (losses) of $50 million and $(42,000), respectively, at December
31, 1996 and $50 million and $80,000, respectively, at December 31, 1995. The
Company also entered into foreign exchange and other option and futures
contracts totaling approximately $1.6 billion and $539 million at December
31, 1996 and 1995, respectively. Such contracts were valued at gains of
$1,561,000 and $2,603,000 at December 31, 1996 and 1995, respectively. All
trading account assets and liabilities are recorded in the Consolidated
Balance Sheet at estimated fair value.
Due to the near maturity of other money-market assets and short-term
borrowings, the Company estimates that the carrying value of such instruments
approximates estimated fair value. The carrying value and estimated fair
value of long-term borrowings were $178,002,000 and $180,793,000,
respectively, at December 31, 1996 and $192,791,000 and $202,746,000,
respectively, at December 31, 1995.
The Company does not believe that the estimated fair value information
presented herein is representative of the earnings power or value of the
Company. The preceding analysis, which is inherently limited in depicting
fair value, also does not consider any value associated with existing
customer relationships nor the ability of the Company to create value through
loan origination, deposit gathering or fee generating activities.
Many of the fair value estimates presented herein are based upon the use
of highly subjective information and assumptions and, accordingly, the
results may not be precise. Management believes that fair value estimates
may not be comparable between financial institutions due to the wide range of
permitted valuation techniques and numerous estimates which must be made.
74
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
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.
11. Stock option plan
The stock option plan allows the grant of stock options and stock appreciation
rights (either in tandem with options or independently) at prices which may not
be less than the fair market value of the common stock on the date of grant.
Awards granted under the stock option plan generally vest over four years and
are exercisable over terms not exceeding ten years and one day. When
exercisable, the stock appreciation rights issued in tandem with stock options
entitle grantees to receive cash, stock or a combination equal to the amount of
stock appreciation between the dates of grant and exercise. Stock appreciation
rights issued independently of stock options contain similar terms as the stock
options, although upon exercise the holder is only entitled to receive cash
instead of purchasing shares of First Empire's common stock. Of the stock
options outstanding at December 31, 1996, 683,609 were granted with limited
stock appreciation rights attached thereto. A summary of related activity
follows:
Weighted-average
exercise price
-----------------------
Cash-only
Stock appreciation Cash-only
options rights Stock appreciation
outstanding outstanding options rights
----------- ------------- -------- --------------
1994
Beginning balance 507,232 113,200 $ 80.22 $60.08
Granted 142,449 - 139.96 -
Exercised (33,944) (22,600) 47.58 59.70
Cancelled (4,500) - 131.24 -
------- -------- -------- --------
At year-end 611,237 90,600 95.58 60.17
1995
Granted 165,185 - 143.39 -
Exercised (47,175) (29,000) 66.57 60.69
Cancelled (9,250) - 133.82 -
------- -------- --------- ---------
At year-end 719,997 61,600 107.96 59.93
1996
Granted 173,246 - 211.42 -
Exercised (115,378) (6,650) 109.14 56.48
Cancelled (8,650) - 155.86 -
------- -------- --------- ---------
At year-end 769,215 54,950 130.54 60.34
------- -------- --------- ---------
------- -------- --------- ---------
Exercisable at:
December 31, 1996 352,571 54,950 86.17 60.34
------- -------- --------- ---------
------- -------- --------- ---------
December 31, 1995 315,612 61,600 71.02 59.93
------- -------- --------- ---------
------- -------- --------- ---------
December 31, 1994 274,392 68,800 57.70 61.25
------- -------- --------- ---------
------- -------- --------- ---------
At December 31, 1996 and 1995, respectively, there were 317,190 and 481,786
shares available for future grant. During 1995, the number of shares authorized
for issuance under the stock option plan was increased to 2,000,000 shares from
1,500,000.
75
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
11. Stock option plan, continued
A summary of stock options at December 31, 1996 follows:
Weighted average Weighted
Stock ---------------- Stock average
Range of options Exercise Life options exercise
exercise price outstanding price (in years) exercisable price
- ------------------ ----------- -------- --------- ----------- ---------
$ 36.00 to $ 65.25 174,436 $ 47.61 2.0 174,436 $ 47.61
105.13 to 151.00 425,682 132.77 6.8 177,235 123.57
175.00 to 259.13 169,097 210.50 9.1 900 193.61
------- ------- --- ------- -------
769,215 $130.54 6.2 352,571 $ 86.17
------- ------- --- ------- -------
------- ------- --- ------- -------
The Company used a binominal option pricing model to estimate the grant date
present value of stock options granted in 1996 and 1995. The estimated value
per option was $49.75 in 1996 and $44.36 in 1995. The values were calculated
using the following assumptions: an option term of 6.5 years (representing the
estimated period between grant date and exercise date based on historical data
since inception of the plan), a risk-free interest rate of 5.48% in 1996 and
7.70% in 1995 (representing the yield on a U.S. Treasury security with a
remaining term equal to the expected option term), expected volatility of 15% in
1996 and 16% in 1995, and estimated dividend yields of 1.28% in 1996 and 1.70%
in 1995 (representing the approximate annualized cash dividend rate paid with
respect to a share of common stock at or near the grant date). The Company also
deducted 10% to reflect an estimate of the probability of forfeiture prior to
vesting. The estimated forfeiture rate was based on historical data since
inception of the stock option plan.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for the stock option plan. Accordingly, no compensation expense
was recognized in 1996, 1995 and 1994 for stock option awards since the
exercise price of stock options granted under the stock option plan was not
less than the fair market value of the common stock at date of grant.
Compensation expense recognized for cash-only stock appreciation rights was
$3,974,000 in 1996, $6,002,000 in 1995 and $370,000 in 1994. Had
compensation expense for stock option awards granted in 1996 and 1995 been
determined consistent with SFAS No. 123, net income and earnings per share
would be reduced to the pro forma amounts indicated below:
Year ended December 31
1996 1995
------- -------
(in thousands,
except per share)
Net income:
As reported $151,103 131,036
Pro forma 146,394 128,776
Primary earnings per share:
As reported $21.31 18.79
Pro forma 20.76 18.54
Fully diluted earnings per share:
As reported $20.97 17.78
Pro forma 20.42 17.54
76
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
11. Stock option plan, continued
The pro forma effects presented above are in accordance with the
requirements of SFAS No. 123, however, such effects are not representative of
the effects to be reported in future years due to the fact that options vest
over several years and additional awards generally are made each year.
12. Pension plans and other postretirement benefits
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. Pension benefits accrue to
participants based on their level of compensation and number of years of
service. With respect to employees added as a result of acquisitions
completed in 1995 and 1994, service with the acquired entities was counted in
the pension formula for vesting, but not for benefit accrual purposes. The
Company contributes to the pension plan amounts sufficient to meet Internal
Revenue Code funding standards.
Net periodic pension cost consisted of the following:
1996 1995 1994
-------- ------- ------
(in thousands)
Service cost $ 4,298 3,304 4,148
Interest cost on projected benefit
obligation 6,491 6,026 5,823
Actual return on assets (16,865) (19,666) 1,487
Net amortization and deferral 7,886 11,390 (9,541)
-------- ------- ------
Net periodic pension cost $ 1,810 1,054 1,917
-------- ------- ------
-------- ------- ------
Data relating to the funding position of the pension plan were as
follows:
1996 1995
------- -------
(in thousands)
Vested accumulated benefit obligation $(71,915) (72,377)
Total accumulated benefit obligation (76,448) (74,635)
Projected benefit obligation (93,526) (91,222)
Plan assets at fair value 120,856 108,316
-------- --------
Plan assets in excess of projected
benefit obligation 27,330 17,094
Unrecognized net asset (1,202) (2,059)
Unrecognized past service cost (448) (493)
Unrecognized net gain (15,265) (2,317)
-------- ---------
Pension asset $ 10,415 12,225
-------- ---------
-------- ---------
Plan assets included common stock of First Empire with a fair value of
$8,096,000 and $6,128,000 at December 31, 1996 and 1995, respectively.
The assumed rates used in the actuarial computations were as follows:
1996 1995
---- ----
Discount rate 7.25% 7.00%
Rate of increase in future
compensation levels 5.00% 5.00%
Long-term rate of return on assets 9.00% 8.00%
---- ----
---- ----
77
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
12. Pension plans and other postretirement benefits, continued
In addition, the Company has an unfunded supplemental pension plan for
certain key executives. Net periodic pension cost was $253,000, $290,000 and
$341,000 in 1996, 1995 and 1994, respectively.
The Company also provides health care and life insurance benefits for
qualified retired employees who reached the age of 55 while working for the
Company. Substantially all salaried employees are covered in the plan.
Net postretirement benefit cost consisted of the following:
1996 1995 1994
------ ------ ------
(in thousands)
Service cost $ 147 94 136
Interest cost on projected benefit obligation 1,062 1,022 1,059
Actual return on assets (360) (547) (1)
Net amortization and deferral (50) 16 (452)
------ ----- ------
Net postretirement benefit cost $ 799 585 742
------ ----- ------
------ ----- ------
Data relating to the funding position of the plan were as follows:
1996 1995
------- -------
(in thousands)
Accumulated benefit obligation:
Retirees $13,038 12,732
Active employees
Fully eligible 1,043 1,261
Other 1,263 996
Plan assets at fair value (6,325) (7,046)
------- ------
Accumulated benefit obligation in
excess of plan assets 9,019 7,943
Unrecognized net loss (2,151) (2,009)
Unrecognized past service cost 2,243 2,447
------- ------
Accrued postretirement benefit cost $ 9,111 8,381
------- ------
The Company on occasion funds a portion of these postretirement benefit
obligations through contributions to a Voluntary Employee Benefit
Association trust account.
The assumed rates used in the actuarial computations were as follows:
1996 1995
---- ----
Discount rate 7.25% 7.00%
Long-term rate of return on assets 8.00% 8.00%
Medical inflation rate 11.00% 11.50%
----- -----
----- -----
The medical inflation rate was assumed to gradually reduce to 5% over
twelve years.
78
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
12. Pension plans and other postretirement benefits, continued
The Company's 1996 service cost, interest cost and accumulated benefit
obligation assuming a 1% increase in the medical inflation rate assumption are
as follows:
(in thousands)
Accumulated postretirement benefit obligation $16,367
Service cost 147
Interest cost 1,131
-------
-------
13. Income taxes
The components of income tax expense were as follows:
1996 1995 1994
-------- ------ ------
(in thousands)
Current
Federal $ 85,220 79,194 58,801
State and city 16,547 18,303 21,251
-------- ------ ------
Total current 101,767 97,497 80,052
-------- ------ ------
Deferred
Federal (3,155) (7,875) (3,424)
State and city (746) 515 558
-------- ------ ------
Total deferred (3,901) (7,360) (2,866)
-------- ------ ------
Total income taxes
applicable to pre-tax income $ 97,866 90,137 77,186
-------- ------ ------
-------- ------ ------
The Company files a consolidated federal income tax return
reflecting taxable income earned by all subsidiaries. Prior to 1996,
applicable federal tax law allowed qualified savings banks, such as East New
York, the option of deducting as bad debt expense for tax purposes, under the
reserve method, 8% of taxable income. Effective January 1, 1996, the reserve
method is no longer available and deductions for bad debts for federal income
tax purposes are now limited to actual losses. Failure to maintain bank
status as defined by the Internal Revenue Code or charges to the reserve
established by prior bad debt deductions for other than bad debt losses by
East New York (or its successor) would cause recapture of bad debt reserves,
subject to the applicable tax rates in effect at that time. At December 31,
1996 East New York's bad debt reserve for which no federal income taxes have
been provided was $46,717,000. No actions are planned which would cause this
reserve to become wholly or partially taxable.
The portion of income tax expense attributable to gains on sales of
bank investment securities was $1,872,000 in 1995 and $53,000 in 1994. The
effect on income tax expense from sales of bank investment securities was
insignificant in 1996. No alternative minimum tax expense was recognized in
1996, 1995 or 1994.
79
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
13. Income taxes, continued
Total income taxes differed from the amount computed by applying the
statutory federal income tax rate to pre-tax income as follows:
1996 1995 1994
------ ------ ------
(in thousands)
Income taxes at statutory rate $87,139 77,411 68,068
Increase (decrease) in taxes:
Tax-exempt income (2,000) (2,195) (5,758)
State and city income taxes,
net of federal income
tax effect 10,271 12,232 14,176
Other 2,456 2,689 700
------- ------ ------
$97,866 90,137 77,186
------- ------ ------
------- ------ ------
Deferred tax assets (liabilities) were comprised of the following at
December 31:
1996 1995 1994
------ ------ ------
(in thousands)
Interest on loans $ 5,603 5,335 6,513
Gain on sales of loans - - 1,041
Depreciation and amortization 7,900 5,943 4,367
Losses on loans and other assets 105,338 102,183 97,502
Postretirement and other
supplemental employee benefits 7,434 7,041 6,382
Incentive compensation plans 9,090 10,932 9,242
Unrealized investment losses 1,819 2,343 37,966
Other 10,060 6,990 7,781
------- ------- -------
Gross deferred tax assets 147,244 140,767 170,794
------- ------- -------
Retirement benefits (4,457) (5,194) (3,801)
Leasing transactions (81,300) (71,717) (69,469)
Restructured interest rate
swap agreements (8,564) (13,746) (16,950)
Capitalized servicing rights (7,597) (7,981) -
Other (46) (226) (5,159)
-------- ------- -------
Gross deferred tax liabilities (101,964) (98,864) (95,379)
-------- ------- -------
Net deferred asset $ 45,280 41,903 75,415
-------- ------- -------
-------- ------- -------
The Company believes that it is more likely than not that the net
deferred tax asset will be realized through taxable earnings or alternative
tax strategies.
The income tax credits shown in the Statement of Income of First Empire
in note 20 arise principally from operating losses before dividends from
subsidiaries.
80
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
14. Other income and other expense
The following items, which exceeded 1% of total revenues in the respective
period, were included in either other revenues from operations or other costs
of operations in the Consolidated Statement of Income:
1996 1995 1994
------ ------ ------
(in thousands)
Other income:
Mutual fund and annuity sales $13,000
Transfer of investment securities
to charitable foundation 10,439
Other expense:
Professional services
Data processing 9,819 6,893
Other 7,625 10,748
Advertising 11,933 11,067
Charitable contributions 15,652
------ ------- ------
------ ------- ------
15. International activities
The Company engages in certain international activities consisting primarily
of purchasing Eurodollar placements, collecting Eurodollar deposits and
engaging in a limited amount of foreign currency trading. Assets identified
with international activities amounted to $55,420,000 and $86,580,000 at
December 31, 1996 and 1995, respectively.
16. Derivative financial instruments
As part of managing interest rate risk, the Company has entered into several
interest rate swap agreements. The swaps modify the repricing
characteristics of certain portions of the Company's loan and deposit
portfolios. Under terms of most of the agreements the Company receives a
fixed rate of interest and pays a variable rate based on London Inter-Bank
Offered Rates ("LIBOR"). Interest rate swap agreements are generally entered
into with counterparties 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.
Information about interest rate swaps entered into for interest rate risk
management purposes summarized by type of financial instrument the swaps were
intended to modify follows:
81
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
16. Derivative financial instruments, continued
<TABLE>
<CAPTION>
Average Weighted-average rate Estimated
Notional expected --------------------- fair value-
amount maturity Fixed Variable gain(loss)
-------------- ---------- ------ --------- --------------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1996
Variable rate loans:
Amortizing $ 237,972 .9 5.91% 5.51% $ 54
Non-amortizing 909,576 2.2 5.78% 5.52% (4,777)
---------- ---- ---- ---- -------
1,147,548 1.9 5.81% 5.52% (4,723)
Fixed rate loans:
Amortizing(a) 33,841 10.2 7.17% 5.56% (1,226)
Fixed rate time deposits:
Non-amortizing 1,181,000 1.8 6.75% 5.39% 11,473
---------- ---- ---- ---- -------
$2,362,389 2.0 6.30% 5.45% $ 5,524
---------- ---- ---- ---- -------
---------- ---- ---- ---- -------
December 31, 1995
Variable rate loans:
Amortizing $ 365,782 1.1 5.93% 5.80% $ (287)
Non-amortizing 834,576 3.0 5.81% 5.89% 9,086
---------- ---- ---- ---- -------
1,200,358 2.4 5.85% 5.86% 8,799
Fixed rate time deposits:
Non-amortizing 1,178,000 1.4 6.55% 5.66% 28,238
---------- ---- ---- ---- -------
$2,378,358 1.9 6.19% 5.76% $37,037
---------- ---- ---- ---- -------
---------- ---- ---- ---- -------
</TABLE>
(a) Under the terms of this swap, the Company receives interest at a variable
rate and pays at a fixed rate. Under all other swap agreements, the
Company receives interest at a fixed rate and pays at a variable 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. Since these swaps have been entered into for interest rate risk
management purposes, the estimated market appreciation or depreciation should
be considered in the context of the entire balance sheet of the Company. The
estimated fair value of interest rate swaps entered into for interest rate
risk management purposes is not recognized in the consolidated financial
statements.
The notional amount of the amortizing swap linked to fixed rate loans
declines by the amount of scheduled principal payments of the loans. The
notional amounts of other amortizing swaps may, following an initial lock-out
period, vary depending on the level of interest rates or the repayment
behavior of mortgage-backed securities to which individual swaps are indexed.
The notional amount of a non-amortizing swap does not change during the term
of an agreement.
-82-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
16. Derivative financial instruments, continued
At December 31, 1996 the notional amount of interest rate swaps
outstanding was expected to mature as follows:
Amortizing Non-amortizing
---------- --------------
(in thousands)
Year ending December 31:
1997 $ 98,168 538,845
1998 141,436 324,731
1999 930 544,000
2000 1,016 435,000
2001 1,110 128,000
Later years 29,153 120,000
-------- ---------
$271,813 2,090,576
-------- ---------
-------- ---------
The net effect of interest rate swaps was to increase net interest
income by $15,454,000 in 1996, $884,000 in 1995 and $12,481,000 in 1994. The
average notional amount of interest rate swaps impacting net interest income
which were entered into for interest rate risk management purposes were
$2,410,547,000, $2,536,329,000 and $1,627,454,000 in 1996, 1995 and 1994,
respectively.
During 1995 and 1994, the Company restructured several interest rate
swap agreements with notional amounts of $260 million and $500 million,
respectively, from amortizing to non-amortizing. The purpose of the
restructurings was to enhance the effectiveness of the swaps in managing the
Company's exposure to changing interest rates in future years. Losses
resulting from the early termination of the amortizing swaps and equal
amounts of purchase discount received on the restructured non-amortizing
swaps were recognized as a result of these transactions and included in the
carrying amount of loans which the swaps modified. The deferred losses and
purchase discounts totaled $20.8 million and $25.4 million, respectively, at
December 31, 1996 and $32.9 million and $35.2 million, respectively, at
December 31, 1995. The deferred losses are being amortized and the purchase
discounts accreted to interest income over the remaining terms of the
original swaps and restructured swaps, respectively. Such amortization and
accretion were $12.1 million and $9.8 million, respectively, in 1996 and
$11.1 million and $8.8 million, respectively, in 1995. The restructuring
transactions did not have a significant effect on interest income in 1994.
The net increase (decrease) in interest income in future years from
amortization and accretion of balances resulting from interest rate swap
restructurings is as follows:
Year ending December 31: (in thousands)
1997 $(1,674)
1998 (104)
1999 5,960
2000 403
Derivative financial instruments used for trading purposes included
foreign exchange and other option contracts, foreign exchange forward and
spot contracts, interest rate swap agreements and financial futures. The
following
-83-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
16. Derivative financial instruments, continued
table includes information about the estimated fair value of derivative
financial instruments used for trading purposes:
1996 1995
------- -----
(in thousands)
December 31:
Gross unrealized gains $23,780 5,867
Gross unrealized losses 22,261 3,184
Year ended December 31:
Average gross unrealized gains $13,565 8,356
Average gross unrealized losses 10,983 7,374
------- -----
------- -----
Net gains (losses) arising from derivative financial instruments used
for trading purposes were $2,689,000, $1,375,000 and $(336,000) in 1996, 1995
and 1994, respectively.
17. Commitments and contingencies
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as commitments to extend credit guarantees
and "standby" letters of credit (approximately $171,420,000 and $185,667,000
at December 31, 1996 and 1995, respectively) which are not reflected in the
consolidated financial statements. No material losses are expected as a
result of these transactions. Additionally, the Company had outstanding loan
commitments of approximately $2.7 billion and $2.1 billion at December 31,
1996 and 1995, respectively. Because many loan commitments and almost all
credit guarantees and "standby" letters of credit expire without being funded
in whole or part, the contract amounts are not estimates of future cash
flows. Commitments to sell one-to-four family residential mortgage loans
totaled $251,110,000 at December 31, 1996 and $222,772,000 at December 31,
1995.
M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned
subsidiary of First Empire, is party to a co-branded credit card agreement
with Giant of Maryland, Inc. ("Giant"). In October 1996, M&T Bank, N.A.
notified Giant of its intent to terminate the agreement under its termination
provisions. In December 1996, Giant filed a complaint against M&T Bank, N.A.
alleging that M&T Bank, N.A. breached the agreement by attempting to
terminate and that M&T Bank, N.A. negligently misrepresented certain
information provided to Giant. The complaint sought injunctive relief,
specific performance for the five-year term of the agreement and damages of
$40 million. Subsequent to filing of the complaint, Giant withdrew its
request for injunctive relief, agreed to dismiss the litigation, and
consented to arbitration of the claims of M&T Bank, N.A. and Giant against
each other. Management believes that M&T Bank, N.A. has meritorious defenses
to Giant's claims and is vigorously defending against them.
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
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.
-84-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
18. Revolving credit agreement of First Empire
First Empire has a revolving credit agreement with an unaffiliated commercial
bank whereby First Empire may borrow up to $25,000,000 at its discretion
through November 24, 1998. The agreement provides for a facility fee
assessed on the entire amount of the commitment (whether or not utilized)
ranging from .08% to .187% depending on the credit rating of the subordinated
notes of M&T Bank. A usage fee equal to .10% per annum is assessed if the
balance of outstanding loans exceeds 50% of the commitment amount during any
quarter. Under the revolving credit agreement, First Empire may borrow at
either a variable rate based upon the higher of the Federal funds rate plus
1/2 of 1% or the lender's prime rate, or a fixed rate based upon a premium
over LIBOR ranging from .15% to .30% depending on the credit rating of the
subordinated notes of M&T Bank. At December 31, 1996 and 1995, there were no
outstanding balances under such agreement.
19. Regulatory matters
Payment of dividends by First Empire's banking subsidiaries is restricted
by various legal and regulatory limitations. Dividends from any banking
subsidiary to First Empire are limited by the amount of earnings of the
banking subsidiary in the current year and the preceding two years. For
purposes of this test, at December 31, 1996, approximately $136,685,000 was
available for payment of dividends to First Empire from banking subsidiaries
without prior regulatory approval.
Banking regulations prohibit extensions of credit by the subsidiary
banks to First Empire unless appropriately secured by assets. Securities of
affiliates are not eligible as collateral for this purpose.
The banking subsidiaries are required to maintain noninterest-earning
reserves against deposit liabilities. During the maintenance periods that
included December 31, 1996 and 1995, cash and due from banks included a daily
average of $128,398,000 and $174,028,000, 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, 1996, First Empire and each of its banking subsidiaries exceeded
all applicable capital adequacy requirements.
As of December 31, 1996 and 1995, the most recent notifications from
federal regulators categorized each of First Empire's banking 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. As of December 31, 1996, management is
unaware of any conditions or events since the latest notifications from
federal regulators that have changed the capital adequacy category of any of
First Empire's banking subsidiaries.
-85-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
19. Regulatory matters, continued
The capital ratios and amounts of the Company and its banking subsidiaries as
of December 31, 1996 and 1995 are presented below:
First Empire M&T East M&T
(Consolidated) Bank New York Bank,N.A.
-------------- ----- -------- ----------
(dollars in thousands)
As of December 31, 1996:
Tier 1 capital
Amount $889,221 673,294 149,025 33,754
Ratio(a) 8.40% 7.24% 12.50% 15.23%
Minimum required amount(b) 423,594 372,028 47,685 8,864
Total capital
Amount 1,198,299 966,069 164,078 36,542
Ratio(a) 11.32% 10.39% 13.76% 16.49%
Minimum required amount(b) 847,188 744,056 95,369 17,727
Leverage
Amount 889,221 673,294 149,025 33,754
Ratio(c) 6.99% 6.22% 7.47% 6.59%
Minimum required amount(b) 381,394 324,763 59,880 15,370
As of December 31, 1995:
Tier 1 capital
Amount $ 821,174 645,864 133,307 22,214
Ratio(a) 8.53% 7.70% 11.41% 9.46%
Minimum required amount(b) 384,965 335,691 46,717 9,388
Total capital Amount 1,118,229 927,252 148,040 25,256
Ratio(a) 11.62% 11.05% 12.68% 10.76%
Minimum required amount(b) 769,930 671,382 93,434 18,777
Leverage
Amount 821,174 645,864 133,307 22,214
Ratio(c) 6.91% 6.38% 7.33% 10.08%
Minimum required amount(b) 356,376 303,550 54,573 6,613
(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.
-86-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
20. Parent company financial statements
See other notes to financial statements.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
DOLLARS IN THOUSANDS 1996 1995
- ------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Assets
Cash
In subsidiary bank................................................................. $ 434 161
Other.............................................................................. 19 18
---------- ---------
Total cash..................................................................... 453 179
Due from subsidiaries
Money-market assets................................................................ 18,056 7,215
Current income tax receivable...................................................... 3,183 965
---------- ---------
Total due from subsidiaries.................................................... 21,239 8,180
Investments in subsidiaries
Banks.............................................................................. 870,423 828,157
Other.............................................................................. 109 6
Other assets......................................................................... 13,683 10,739
---------- ---------
Total assets................................................................... $ 905,907 847,261
---------- ---------
---------- ---------
Liabilities
Accrued expenses and other liabilities............................................... $ 248 1,008
---------- ---------
Stockholders' equity................................................................. 905,659 846,253
---------- ---------
$ 905,907 847,261
---------- ---------
---------- ---------
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994
- ------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiaries............................................... $ 116,038 88,358 59,300
Other income................................................................... 933 812 11,493
----------- --------- ---------
Total income............................................................. 116,971 89,170 70,793
----------- --------- ---------
----------- --------- ---------
EXPENSE
Interest on short-term borrowings.............................................. 242 556 3
Other expense.................................................................. 1,968 2,365 17,739
----------- --------- ---------
Total expense............................................................ 2,210 2,921 17,742
----------- --------- ---------
----------- --------- ---------
Income before income taxes and equity in undistributed income of
subsidiaries................................................................. 114,761 86,249 53,051
Income tax credits............................................................. 552 944 7,087
----------- --------- ---------
Income before equity in undistributed income of subsidiaries................... 115,313 87,193 60,138
----------- --------- ---------
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
Net Income
Bank subsidiaries............................................................ 151,724 132,201 116,457
Other subsidiaries........................................................... 104 -- --
Less: dividends received....................................................... (116,038) (88,358) (59,300)
----------- --------- ---------
Equity in undistributed income of subsidiaries................................. 35,790 43,843 57,157
----------- --------- ---------
Net income..................................................................... $ 151,103 131,036 117,295
----------- --------- ---------
----------- --------- ---------
Net income per common share.................................................... $ 21.31 18.79 16.35
</TABLE>
-87-
<PAGE>
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
20. Parent company financial statements, continued
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS 1996 1995 1994
- -------------------------------------------------------------------------------- ---------- --------- ---------
Cash flows from operating activities
Net income...................................................................... $ 151,103 131,036 117,295
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries.................................. (35,790) (43,843) (57,157)
Dividend-in-kind from subsidiary................................................ (1,538) (11,858) --
Provision for deferred income taxes............................................. (153) (221) (206)
Net gain on sales of assets..................................................... -- (179) (128)
Net change in accrued income and expense........................................ 530 7,616 (6,570)
Transfer of noncash assets to charitable foundation............................. -- -- 5,213
---------- --------- ----------
Net cash provided by operating activities....................................... 114,152 82,551 58,447
---------- --------- ---------
Cash flows from investing activities
---------- --------- ---------
Investment in subsidiary........................................................ (7,000) (20,248) --
Other, net..................................................................... (39) 871 (8,199)
---------- --------- ---------
Net cash used by investing activities........................................... (7,039) (19,377) (8,199)
---------- --------- ---------
Cash flows from financing activities
---------- --------- ---------
Net increase (decrease) in short-term borrowings................................ -- (3,000) 3,000
Purchases of treasury stock..................................................... (80,810) (37,374) (43,964)
Dividends paid--common.......................................................... (18,617) (16,224) (14,743)
Dividends paid--preferred....................................................... (900) (3,600) (3,600)
Other, net...................................................................... 4,329 2,968 1,049
---------- --------- ---------
Net cash used by financing activities........................................... (95,998) (57,230) (58,258)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ $ 11,115 5,944 (8,010)
Cash and cash equivalents at beginning of year.................................. 7,394 1,450 9,460
Cash and cash equivalents at end of year........................................ $ 18,509 7,394 1,450
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of cash flow
information
Interest received during the year............................................... $ 686 279 932
Interest paid during the year................................................... 242 558 1
Income taxes received during the year........................................... 507 7,393 510
</TABLE>
In connection with reorganizing certain lines of business in 1995, loans and
other assets aggregating $11,858,000 were transferred among First Empire's
banking subsidiaries. To accomplish such transfers, the loans and other assets
were distributed to First Empire in the form of dividends-in-kind. First Empire,
in turn, contributed those assets to other banking subsidiaries.
-88-
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure. None.
---------------------
PART III
Item 10. Directors and Executive Officers of the Registrant. The terms in
---------------------------------------------------
office of the following two directors of the Registrant will end on
April 15, 1997, and neither one of them is a nominee for reelection
to the Board of Directors at the 1997 Annual Meeting of Stockholders:
James A. Carrigg, age 63, has been a director since 1992, and is
chairman of the Executive Committee and a director of New York
State Electric & Gas Corporation. He served as the chairman of
the Directors Advisory Council of the Southern Division of M&T
Bank from July 1992 through December 1996. Mr. Carrigg is a
director of Security Mutual Life Insurance Company of New York.
Barber B. Conable, Jr., age 74, has been a director since 1991,
and retired as the president of The World Bank in September
1991, a position which he had held since 1986. He represented
the 30th District of New York in the U.S. House of
Representatives from 1965 to 1985, and served as a New York
State senator in 1963 and 1964. Mr. Conable is a director of
M&T Bank, and serves as chairman of the Directors Advisory
Council of its Rochester Division. He is a director of
American International Group, Inc.
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 1997 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission on or about March 13, 1997. 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 1997 Annual Meeting of
Stockholders.
Item 11. Executive Compensation. Incorporated by reference to the
-----------------------
Registrant's definitive Proxy Statement for its 1997 Annual Meeting
of Stockholders, which will be filed with the Securities and Exchange
Commission on or about March 13, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
Incorporated by reference to the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders, which will
be filed with the Securities and Exchange Commission on or about
March 13, 1997.
Item 13. Certain Relationships and Related Transactions. Incorporated by
-----------------------------------------------
reference to the Registrant's definitive Proxy Statement for its 1997
Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission on or about March 13, 1997.
-89-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
----------------------------------------------------------------
(a) Financial statements and financial statement schedules filed as
part of this Annual Report on Form 10-K. See Part II, Item 8.
"Financial Statements and Supplementary Data".
Financial statement schedules are not required or are inapplicable,
and therefore have been omitted.
(b) Reports on Form 8-K.
On January 2, 1997, the Registrant filed a Current Report on Form
8-K dated December 27, 1996, reporting on its December 27, 1996
public announcement of the intended merger of East New York with
and into M&T Bank.
(c) Exhibits required by Item 601 of Regulation S-K.
The exhibits listed on the Exhibit Index on pages 94 and 95 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.
-90-
<PAGE>
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
12th day of March, 1997.
FIRST EMPIRE STATE CORPORATION
By: /s/ Robert G. Wilmers
Robert G. Wilmers
Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Principal Executive
Officer:
/s/ Robert G. Wilmers Chairman of the Board,
Robert G. Wilmers President and
Chief Executive Officer 3/12/97
Principal Financial
and Accounting Officer:
/s/ Michael P. Pinto Executive Vice President
Michael P. Pinto and Chief Financial Officer 3/12/97
-91-
<PAGE>
A majority of the board of directors:
/s/ Brent D. Baird 3/12/97
Brent D. Baird
/s/ John H. Benisch 3/12/97
John H. Benisch
/s/ C. Angela Bontempo 3/12/97
C. Angela Bontempo
/s/ Robert T. Brady 3/12/97
Robert T. Brady
/s/ Patrick J. Callan 3/12/97
Patrick J. Callan
/s/ James A. Carrigg 3/12/97
James A. Carrigg
/s/ Barber B. Conable, Jr. 3/12/97
Barber B. Conable, Jr.
/s/ Richard E. Garman 3/12/97
Richard E. Garman
/s/ James V. Glynn 3/12/97
James V. Glynn
Roy M. Goodman
/s/ Patrick W.E. Hodgson 3/12/97
Patrick W.E. Hodgson
Samuel T. Hubbard, Jr.
/s/ Lambros J. Lambros 3/12/97
Lambros J. Lambros
/s/ Wilfred J. Larson 3/12/97
Wilfred J. Larson
/s/ Jorge G. Pereira 3/12/97
Jorge G. Pereira
/s/ Raymond D. Stevens, Jr. 3/12/97
Raymond D. Stevens, Jr.
-92-
<PAGE>
/s/ Herbert L. Washington 3/12/97
Herbert L. Washington
/s/ John L. Wehle, Jr. 3/12/97
John L. Wehle. Jr.
/s/ Robert G. Wilmers 3/12/97
Robert G. Wilmers
-93-
<PAGE>
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of First Empire State
Corporation dated April 19, 1989, filed by the Secretary of State
of New York on April 20, 1989. Incorporated by reference to
Exhibit No. 19 to the Form 10-Q for the quarter ended March 31,
1989 (File No. 1-9861).
3.2 Certificate of Amendment of the Certificate of Incorporation of
First Empire State Corporation dated March 13, 1991, filed by the
Secretary of State of New York on March 14, 1991. Incorporated by
reference to Exhibit No. 19 to the Form 10-Q for the quarter ended
March 31, 1991 (File No. 1-9861).
3.3 By-Laws of First Empire State Corporation as last amended on July
16, 1991. Incorporated by reference to Exhibit No. 3.2 to the
Form 10-K for the year ended December 31, 1991 (File No. 1-9861).
4.1 Instruments defining the rights of security holders, including
indentures. Incorporated by reference to Exhibit Nos. 3.1,
3.2, 3.3, 10.1 and 10.2 hereof.
4.2 Amended and Restated Trust Agreement dated as of January 31, 1997
by and among First Empire State 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 Junior Subordinated Indenture dated as of January 31, 1997 by and
between First Empire State 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).
4.4 Guarantee Agreement dated as of January 31, 1997 by and between
First Empire State Corporation and Bankers Trust Company.
Incorporated by reference to Exhibit No. 4.3 to Form 8-K dated
January 31, 1997 (File No. 1-9861).
10.1 Revolving Credit Agreement, dated as of November 24, 1995, between
First Empire State Corporation and The First National Bank of
Boston. Incorporated by reference to Exhibit No. 10.1 to the Form
10-K for the year ended December 31, 1995 (File No. 1-9861).
10.2 First Empire State Corporation 1983 Stock Option Plan as amended
and restated. Incorporated by reference to Exhibit No. 10 to the
Form 10-Q for the quarter ended March 31, 1995 (File No. 1-9861).
10.3 First Empire State Corporation Annual Executive Incentive Plan.
Incorporated by reference to Exhibit No. 10.4 to the Form 10-K for
the year ended December 31, 1992 (File No. 1 - 9861).
Supplemental Deferred Compensation Agreements between
Manufacturers and Traders Trust Company and:
10.4 Robert E. Sadler, Jr. dated as of March 7, 1985. Incorporated by
reference to Exhibit Nos. (10)(d) (A) and (B), respectively, to
the Form 10-K for the year ended December 31, 1984 (File No. 0-4561);
10.5 Harry R. Stainrook dated as of December 12, 1985. Incorporated by
reference to Exhibit No. (10)(e)(ii) to the Form 10-K for the year
ended December 31, 1985 (File No. 0-4561);
-94-
<PAGE>
10.6 William C. Rappolt dated as of March 7, 1985. Incorporated by
reference to Exhibit No. (10)(e)(iv) to the Form 10-K for the year
ended December 31, 1987 (File No. 1-9861);
10.7 Brian E. Hickey dated as of July 21, 1994. Incorporated by
reference to Exhibit No. 10.7 to the Form 10-K for the year ended
December 31, 1995 (File No. 1-9861).
10.8 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).
10.9 First Empire State Corporation Supplemental Pension Plan.
Incorporated by reference to Exhibit No. 10.12 to the Form 10-K
for the year ended December 31, 1994. (File No. 1-9861).
10.10 First Empire State Corporation Supplemental Retirement Savings
Plan. Incorporated by reference to Exhibit No. 10.13 to the Form
10-K for the year ended December 31, 1994. (File No. 1-9861).
10.11 First Empire State Corporation Nonqualified Deferred Bonus Plan.
Filed herewith.
11.1 Statement re: Computation of Earnings Per Common Share. 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 Price Waterhouse re: Registration Statement No.
33-32044 and 333-16077. Filed herewith.
23.2 Consent of Price Waterhouse re: Registration Statements Nos.
33-12207, 33-58500 and 33-63917. Filed herewith.
27.1 Article 9 Financial Data Schedule for the year ended December 31,
1996. Filed herewith.
99.1 First Empire State Corporation Retirement Savings Plan and Trust
Financial Statements and Additional Information for the years
ended December 31, 1996 and 1995. Filed herewith.
-95-
<PAGE>
Exhibit 10.11
FIRST EMPIRE STATE CORPORATION
NONQUALIFIED DEFERRED BONUS PLAN
--------------------------------
(Amended and Restated effective January 1, 1996)
ARTICLE I.
----------
INTENT
------
This First Empire State Corporation Deferred Bonus Plan was established,
effective January 1, 1984, for the benefit of certain employees of certain
affiliates of First Empire State Corporation. The Plan is intended to
qualify as a plan described in Section 201(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and is maintained
primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees.
ARTICLE II.
-----------
DEFINITIONS
-----------
When used in this Plan, the following terms shall have the following
meanings:
2.1 "Account" means the account maintained for a Participant pursuant to
-------
Article IV hereof.
2.2 "Beneficiary" means the person or persons designated by a Participant
-----------
pursuant to Article VI hereof to receive any benefit payable pursuant to
Section 5.1 hereof upon the Participant's death.
2.3 "Bank" means Manufacturers & Traders Trust Company and its successors
----
by merger, sale of assets or otherwise.
2.4 "Board" means the board of directors of the Bank.
-----
2.5 "Bonus" means an Eligible Employee's award under an Incentive Plan.
-----
2.6 "Deemed Earnings" means the income earned or loss incurred with
---------------
respect to a Participant's Deemed Investment Portfolio. The Deemed Earnings
with respect to each investment option in a Deemed Investment Portfolio shall
be determined on the basis of the total actual return on such investment option
in the First Empire State Retirement Savings Plan for the period in question.
2.7 "Deemed Investment Portfolio" means the hypothetical portfolio
---------------------------
designated by a Participant from among the investment options offered under
the First Empire State Retirement Savings Plan.
2.8 "Deferred Bonus Election" means an election made pursuant to Section
-----------------------
3.1(a) hereof.
2.9 "Deferred Bonus" means that portion of a Bonus the payment of which
--------------
is deferred by a Participant under this Plan.
2.10 "Deferred Bonus Agreement" means the written agreement entered into
------------------------
between a Participant and his Employer pursuant to which the Participant elects
to defer payment of a specified portion of his Bonus in accordance with the
terms of this Plan and such agreement.
1
<PAGE>
2.11 "Eligible Employee" means an individual who is an employee of an
-----------------
Employer, who is eligible to participate in an Incentive Plan and who is
designated by the Plan Administrator as eligible to participate in this Plan.
2.12 "Employer" means First Empire State Corporation and each of its
--------
affiliates any of whose employees are eligible to participate in an Incentive
Plan.
2.13 "Financial Hardship" means a financial hardship of a Participant.
------------------
2.14 "Incentive Plan" means the First Empire State Corporation Incentive
--------------
Plan and such other incentive plans of First Empire State Corporation or its
subsidiaries as the Plan Administrator may designate.
2.15 "Participant" means an Eligible Employee who has deferred a portion
-----------
of his Bonus pursuant to a Deferred Compensation Agreement and the terms of
this Plan.
2.16 "Plan" means this First Empire State Corporation Deferred Bonus Plan,
----
as set forth herein and amended from time to time.
2.17 "Plan Administrator" means such person or committee as may be
------------------
designated by the Board to serve as such under this Plan.
2.18 "Retirement" means the earliest of a Participant's (a) normal
----------
retirement, early retirement or disability retirement under the First Empire
State Corporation Retirement Plan, (b) death or (c) 65th birthday.
2.19 "Revaluation Date" means the last day of each calendar quarter and
----------------
such other dates as may be designated by the Plan Administrator.
ARTICLE III
-----------
DEFERRAL OF BONUS
-----------------
3.1 Deferred Bonus Elections.
------------------------
(a) An Eligible Employee, by executing a Deferred Bonus Agreement, may
elect to defer all or any portion of his Bonus.
(b) An Eligible Employee must make his Deferral Election for a Bonus
payable with respect to a calendar year on or before October 31 of that
calendar year.
3.2 Deferred Bonus Agreements.
-------------------------
(a) A Deferred Bonus Election pursuant to this Plan shall be made
pursuant to a written Deferred Bonus Agreement between the Eligible Employee
and his Employer.
(b) A Participant's Deferred Bonus Agreement shall specify whether
the Deferred Bonus thereunder (and Deemed Earnings thereon) shall be paid in a
single lump-sum payment or in annual installments payable over five, ten or 20
years.
(c) A Participant's Deferred Bonus Agreement shall specify whether
the Deferred Bonus thereunder (and Deemed Earnings thereon) shall be paid (or
shall commence to be paid) at (i) Retirement or (ii) on a date selected by the
Participant from among any one of the first 20 anniversaries of the date on
which the Deferred Bonus would have been paid absent the Deferred
Bonus Election.
2
<PAGE>
ARTICLE IV
----------
ACCOUNTS
--------
4.1 Maintenance of Accounts. The Plan Administrator shall establish a
-----------------------
bookkeeping account (an "Account") for each Participant. As of the first day of
the month in which a Deferred Bonus would have been paid to the Participant
absent a Deferred Bonus Election, the amount of such Deferred Bonus shall be
credited to such Participant's Account.
4.2 Deemed Earnings. As of each Revaluation Date, a Participant's
---------------
Account shall be adjusted for Deemed Earnings since
the preceding Revaluation Date. Where a Deferred Bonus is credited to an
Account other than on a Revaluation Date, Deemed Earnings on the amount of
such Deferred Bonus for the period from the date of such credit until the
next succeeding Revaluation Date shall be a pro rata portion of Deemed
Earnings on an equivalent amount for the period between the Revaluation Dates
immediately preceding and succeeding the date of such credit, calculated by
reference to the number of days in each period.
4.3 Deemed Investment Portfolio. In his Deferred Bonus Agreement, a
---------------------------
Participant shall designate a Deemed Investment Portfolio, and shall allocate
his Deferred Bonus among the investment options offered for inclusion in the
Deemed Investment Portfolio in integral multiples of 5 percent. A Participant
may change such allocation on a calendar quarterly basis by submitting a
written form to the Plan Administrator prior to the first day of such calendar
quarter.
4.4 Separate Accounting. Within a Participant's Account, the Plan
-------------------
Administrator shall account separately for each of the Participant's Deferred
Bonuses.
ARTICLE V
---------
PAYMENT OF BENEFITS
-------------------
5.1 General Rule. Except as provided in Section 5.2 hereof, a Participant
------------
(or, in the event of the Participant's death, his Beneficiary) shall receive
(or begin to receive) payment of the amount standing to the Participant's
Account as of the Revaluation Date or Dates next following the time or times
elected in the Participant's Deferred Bonus Agreement or Agreements and shall
receive such payment or payments in the form or forms elected in such Agreement
or Agreements.
5.2 Hardship Withdrawals. In the event of Financial Hardship, a
--------------------
Participant may request a distribution of all or a portion of the amount
standing to his Account. The determination of whether a Participant has
incurred a Financial Hardship shall be made by the Plan Administrator. The
Participant shall determine against which Deferred Bonus or Bonuses (and Deemed
Earnings thereon) a withdrawal pursuant to this Section 5.2 shall be charged.
5.3 Payment. The payment to a Participant with respect to a Deferred
-------
Bonus (and Deemed Earnings thereon) shall be made in cash by the Participant's
last Employer in the year with respect to which the Bonus deferred was payable;
provided, however, that if such Employer is owned directly or indirectly by a
bank, the payment shall be made by such bank.
5.4 Withholding. The Employers shall have the right to deduct from any
-----------
payment to be made pursuant to this Plan any Federal, state or local taxes
required by law to be withheld.
3
<PAGE>
ARTICLE VI
----------
BENEFICIARIES
-------------
Each Participant may designate from time to time any person or persons,
natural or otherwise, as his Beneficiary or Beneficiaries to whom benefits
under Section 5.1 are to be paid in the event of his death. Each Beneficiary
designation shall be made either in the Deferred Bonus Agreement or on a form
provided by the Plan Administrator and shall be effective only when filed
with the Plan Administrator during the Participant's lifetime. Each
Beneficiary designation filed with the Plan Administrator shall revoke all
Beneficiary designations previously made by the Participant. The revocation
of a Beneficiary designation shall not require the consent of any designated
Beneficiary. Payment to a Beneficiary shall be made in the form or forms
elected in the Participant's Deferred Bonus Agreement or Agreements, provided
that such payment shall be made in a lump sum if a request for such a lump
sum payment is made by the Beneficiary and approved by the Plan Administrator.
ARTICLE VII
-----------
ADMINISTRATION
--------------
7.1 General. The Plan Administrator shall be charged with the
-------
administration of this Plan. The Plan Administrator shall have all
such powers as may be necessary to discharge its duties relative to the
administration of this Plan, including by way of illustration and not
limitation, discretionary authority to interpret and construe this Plan, to
decide any dispute arising hereunder, to determine the right of any
individual with respect to participation herein, to determine the right of
any Participant with respect to benefits payable under this Plan and to
adopt, alter and repeal such administrative rules, regulations and practices
governing the operation of this Plan as it, in its sole discretion, may from
time to time deem advisable. The Plan Administrator shall not be liable to
any person for any action taken or omitted in connection with the
interpretation and administration of this Plan unless attributable to willful
misconduct or lack of good faith. The Plan Administrator shall be entitled
to rely conclusively upon all tables, valuations, certificates, opinions and
reports furnished by any actuary, accountant, controller, counsel or other
person employed or engaged by the Plan Administrator or an Employer with
respect to this Plan. The Plan Administrator, if an individual, or the
members thereof if the Plan Administrator is a Committee, shall not
participate in any action or determination regarding solely his or their own
benefits payable hereunder. Except as provided in Section 7.3 hereof,
decisions of the Plan Administrator made in good faith shall be final,
conclusive and binding upon all parties.
7.2 Claims Procedure. Whenever the Plan Administrator denies, in whole
----------------
or in part, a claim for benefits filed by any person (hereinafter referred to
as a "Claimant"), the Plan Administrator shall transmit a written notice setting
forth, in a manner calculated to be understood by the Claimant, a statement of
the specific reasons for the denial of the claim, references to the specific
provisions of this Plan on which the denial is based, a description of any
additional needed material or information and why such material or information
is necessary, and an explanation of the claims review procedure as set forth
herein. In addition, the written notice shall contain the date on which the
notice was sent and a statement advising the Claimant that, within 90 days of
the date on which such notice is received, he may obtain review of the Plan
Administrator's decision.
4
<PAGE>
7.3 Review Procedure. Within 90 days of the date on which the notice of
----------------
denial of claim is received by the Claimant, the Claimant or his authorized
representative may request that the claim denial be reviewed by filing with
the Plan Administrator a written request therefor, which request shall
contain the following information:
(a) the date on which the notice of denial of claim was received
by the Claimant;
(b) the date on which the Claimant's request was filed with the
Plan Administrator; provided, however, that the date on which the Claimant's
request for review was in fact filed with the Plan Administrator shall
control in the event that the date of the actual filing is later than the
date stated by the Claimant pursuant to this clause (b);
(c) the specific portions of the denial of his claim which the
Claimant requests the Plan Administrator to review;
(d) a statement by the Claimant setting forth the basis upon which
he believes the Plan Administrator should reverse its previous denial of his
claim for benefits and accept his claim as made; and
(e) any written material (included as exhibits) which the Claimant
desires the Plan Administrator to examine in its consideration of his
position as stated pursuant to clause (d).
Within 60 days of the date determined pursuant to clause (b) (or, if
special circumstances require an extension of time, within 120 days of such
date), the Plan Administrator shall conduct a full and fair review of the
decision denying the Claimant's claim for benefits and shall deliver, to the
Claimant in writing, its decision. Such written decision shall set forth, in
a manner calculated to be understood by the Claimant, a statement of the
specific reasons for the decision, including references to the specific
provisions of this Plan which were relied upon. The decision will be final
and binding on all persons concerned.
ARTICLE VIII
------------
AMENDMENT AND TERMINATION
-------------------------
8.1 Power to Amend or Terminate. The Employers expect to continue this
---------------------------
Plan indefinitely, but reserve and delegate to the Bank the right to amend or
terminate this Plan at any time, if, in the Bank's sole judgment, such amendment
or termination is necessary or desirable. Any such amendment or termination sh
all be made in writing by the Board or its designee, if applicable, and shall
be effective as of the date specified in such document. No amendment or
termination of this Plan shall directly or indirectly deprive any Participant
or Beneficiary of all or any portion of the amounts previously credited to the
Participant's Account. In the event of a termination of this Plan, the Bank
(or any transferee, purchaser or successor entity) may elect, in its
discretion, either to have the Employers make lump sum payments, at the time
of such termination, of the Account balances on such date to Participants and
Beneficiaries or to have the Employers make payments to such individuals at
such time or times as provided under the terms of this Plan.
8.2 Successor. This Plan shall not be automatically terminated by a
---------
transfer or sale of an Employer or by the merger or consolidation of an Employer
into or with any other corporation or other entity, but it shall be continued
with respect to such Employer or its successor after such sale, merger or
consolidation only if and to the extent that the transferee, purchaser or
successor entity agrees to continue this Plan. In the event this Plan is not
continued with respect to such Employer or its successor by the
5
<PAGE>
transferee, purchaser or successor entity, then it shall terminate with
respect to such Employer or its successor subject to the provisions of
Section 8.1 hereof.
ARTICLE IX
----------
MISCELLANEOUS
-------------
9.1 No Effect on Employment Rights. Nothing contained herein will confer
------------------------------
upon any Participant the right to be retained in the service of an Employer nor
limit the right of an Employer to discharge or otherwise deal with Participants
without regard to the existence of this Plan.
9.2 Plan Unfunded. Notwithstanding any provision herein to the contrary,
-------------
the benefits offered hereunder shall constitute nothing more than unfunded,
unsecured promises by each Employer to pay the amounts that such Employer is
obligated to pay under this Plan. No provision shall at any time be made with
respect to segregating any assets of any Employer for payment of any amounts
hereunder. No Participant, Beneficiary or any other person shall have any
interest in any particular assets of the Employers by reason of the right to
receive a benefit under this Plan, and any such Participant, Beneficiary or
other person shall have only the rights of a general unsecured creditor of
the Employer obligated to make payments to the Participant under this Plan.
Nothing contained in this Plan shall constitute a guaranty by the Employers or
any other entity or person that the assets of any Employer will be sufficient
to pay any amount hereunder. All expenses and fees incurred in the
administration of this Plan shall be paid by the Employers.
9.3 Binding on Employers, Employees and Their Successors. This Plan
----------------------------------------------------
shall be binding upon and inure to the benefit of the Employers, their
successors and assigns and each Participant and his heirs, executors,
administrators and legal representatives. In the event of the merger or
consolidation of an Employer with or into any other corporation, or in the
event substantially all of the assets of an Employer shall be transferred to
another corporation, the successor corporation resulting from the merger or
consolidation, or the transferee of such assets, as the case may be, shall, as
a condition to the consummation of the merger, consolidation or sale, assume
the obligations of such Employer hereunder as of the date of such merger,
consolidation or transfer and shall be substituted for such Employer hereunder.
9.4 Spendthrift Provisions. No amount payable under this Plan shall be
----------------------
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge prior to actual receipt thereof by the payee; and
any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber
or charge prior to such receipt shall be void; and the Employers shall not be
liable in any manner for or subject to the debts, contracts, liabilities, torts
or engagements of any person entitled to any benefit under this Plan.
9.5 Disclosure. Each Participant shall receive a copy of this Plan, and
----------
the Plan Administrator will make available for inspection by any Participant a
copy of the rules and regulations used by the Plan Administrator in
administering this Plan.
9.6 State Law. This Plan is established under and will be construed
---------
according to the laws of the State of New York to the extent that such laws
are not preempted by ERISA.
9.7 Incapacity of Recipient. In the event a Participant or Beneficiary
-----------------------
is declared incompetent and a guardian, conservator or other person legally
charged with the care of his person or of his estate is appointed, any amounts
to which such Participant or Beneficiary is entitled under this Plan shall be
6
<PAGE>
paid to such guardian, conservator or other person legally charged with the
care of his person or his estate. Except as provided herein, when the Plan
Administrator, in its sole discretion, determines that a Participant or
Beneficiary is unable to manage his financial affairs, the Plan Administrator
may direct the Employer, or Employers responsible for payment to make
payments to any person for the benefit of such Participant or Beneficiary.
9.8 Unclaimed Benefit. Each Participant shall keep the Plan
-----------------
Administrator informed of his current address. The Plan Administrator shall not
be obligated to search for the whereabouts of any person. If the location of a
Participant is not made known to the Plan Administrator within three years
after the date on which any payment of the Participant's benefit hereunder
may be made, payment may be made as though the Participant had died at the end
of the three-year period. If, within one additional year after such three-year
period has elapsed, or, within three years after the actual death of a
Participant, whichever occurs first, the Plan Administrator is unable to locate
the Beneficiary of the Participant, the Participant and his Beneficiary shall
forfeit all rights to any payments under this Plan.
9.9 Elections, Applications, Notices. Every direction, revocation or
--------------------------------
notice authorized or required hereunder shall be deemed delivered to the
Employers or the Plan Administrator as the case may be: (a) on the date it is
personally delivered to the Plan Administrator (with a copy to the Bank's
General Counsel) at the Bank's executive offices at Buffalo, New York or (b)
three business days after it is sent by registered or certified mail, postage
prepaid, addressed to the Plan Administrator (with a copy to the Bank's General
Counsel) at the offices indicated above, and shall be deemed delivered to a
Participant or Beneficiary: (a) on the date it is personally delivered to such
individual, or (b) three business days after it is sent by registered or
certified mail, postage prepaid, addressed to such individual at the last
address shown for him on the records of the Employers. Any notice required
hereunder may be waived by the person entitled thereto.
9.10 Severability. In the event any provision of this Plan shall be held
------------
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of this Plan. This Plan shall be construed
and enforced as if such illegal or invalid provision had never been contained
herein.
9.11 Headings. The headings of Sections of this Plan are for convenience
--------
of reference only and shall have no substantive effect on the provisions of
this Plan.
7
<PAGE>
Exhibit 11.1
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
<S> <C> <C> <C>
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994
-------- -------- -------
Primary
Average common shares outstanding...... 6,663 6,499 6,729
Common stock equivalents *............. 385 282 223
-------- -------- --------
Primary common shares outstanding.... 7,048 6,781 6,952
-------- -------- -------
Net income............................... $151,103 131,036 117,295
Less: Preferred stock dividends.......... 900 3,600 3,600
-------- -------- --------
Net income available to common
shareholders......................... 150,203 127,436 113,695
-------- -------- -------
Earnings per common share-- primary...... $21.31 18.79 16.35
-------- -------- -------
Fully diluted
Average common shares outstanding...... 6,663 6,499 6,729
Common stock equivalents *............. 421 362 228
Assumed conversion of convertible
preferred stock........................ 122 507 507
-------- -------- --------
Fully diluted average common shares
outstanding............................ 7,206 7,368 7,464
-------- ------- -------
Net income............................... $151,103 131,036 117,295
-------- ------- -------
Earnings per common share--fully
diluted................................ $20.97 17.78 15.71
-------- ------- -------
</TABLE>
- ------------------------
* Represents shares issuable upon the assumed exercise of outstanding common
stock options under the "treasury stock" method of accounting.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-32044 and 333-16077) of First Empire State
Corporation of our report dated January 9, 1997, appearing on page 54 of this
Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report dated March 7, 1997 appearing on page 3 of First
Empire State Corporation Retirement Savings Plan and Trust Financial
Statements and Additional Information for the years ended December 31, 1996
and 1995 filed herewith as Exhibit 99.1 of this Annual Report on Form 10-K.
We consent to the reference to us under the heading "Experts" in such
Registration Statements.
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
March 18, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-12207, 33-58500 and 33-63917) of First Empire
State Corporation of our report dated January 9, 1997 appearing on page 54 of
this Annual Report on Form 10-K. We also consent to the reference to us
under the heading "Experts" in Registration Statements (Nos. 33-12207 and
33-58500).
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
March 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 324,659
<INT-BEARING-DEPOSITS> 47,325
<FED-FUNDS-SOLD> 125,326
<TRADING-ASSETS> 37,317
<INVESTMENTS-HELD-FOR-SALE> 1,396,672
<INVESTMENTS-CARRYING> 175,026
<INVESTMENTS-MARKET> 175,726
<LOANS> 11,120,221
<ALLOWANCE> 270,466
<TOTAL-ASSETS> 12,943,915
<DEPOSITS> 10,514,489
<SHORT-TERM> 1,150,187
<LIABILITIES-OTHER> 195,578
<LONG-TERM> 178,002
0
0
<COMMON> 40,487
<OTHER-SE> 865,172
<TOTAL-LIABILITIES-AND-EQUITY> 12,943,915
<INTEREST-LOAN> 881,002
<INTEREST-INVEST> 110,052
<INTEREST-OTHER> 6,378
<INTEREST-TOTAL> 997,432
<INTEREST-DEPOSIT> 392,739
<INTEREST-EXPENSE> 466,408
<INTEREST-INCOME-NET> 531,024
<LOAN-LOSSES> 43,325
<SECURITIES-GAINS> (37)
<EXPENSE-OTHER> 408,978
<INCOME-PRETAX> 248,969
<INCOME-PRE-EXTRAORDINARY> 151,103
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,103
<EPS-PRIMARY> 21.31
<EPS-DILUTED> 20.97
<YIELD-ACTUAL> 4.45
<LOANS-NON> 58,232
<LOANS-PAST> 39,652
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 262,344
<CHARGE-OFFS> 49,546
<RECOVERIES> 14,343
<ALLOWANCE-CLOSE> 270,466
<ALLOWANCE-DOMESTIC> 147,659
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 122,807
</TABLE>
<PAGE>
Exhibit 99.1
FIRST EMPIRE STATE CORPORATION
RETIREMENT SAVINGS PLAN AND TRUST
Financial Statements and Additional Information
December 31, 1996 and 1995
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
INDEX PAGE
- ----- ----
Report of independent accountants................................ 3
Financial statements:
Statement of net assets available for plan benefits
as of December 31, 1996 and 1995............................. 4
Statement of changes in net assets available for
plan benefits for the years ended
December 31, 1996 and 1995................................... 5
Notes to financial statements.................................. 6
Exhibit I--Allocation of net assets available for plan
benefits to investment programs
as of December 31, 1996 and 1995............................. 11
Exhibit II--Allocation of changes in net assets
available for plan benefits to investment programs
for the years ended December 31, 1996 and 1995............... 13
Additional information:
Schedule I--Schedule of assets held for investment
at December 31, 1996........................................ 15
Schedule II--Schedule of transactions in excess of 5%
of fair value of plan assets for
the year ended December 31, 1996............................ 16
-2-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and Administrative Committee of the First Empire State
Corporation Retirement Savings Plan and Trust
We have audited the accompanying statement of net assets available for plan
benefits of the First Empire State Corporation Retirement Savings Plan and Trust
(the Plan) as of December 31, 1996 and 1995 and the related statement of changes
in net assets available for plan benefits for the years then ended. These
financial statements are the responsibility of the Plan's Administrative
Committee. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 the
Plan's Administrative Committee, 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 financial statements referred to in the first paragraph
of this report present fairly, in all material respects, the net assets
available for plan benefits of the First Empire State Corporation Retirement
Savings Plan and Trust at December 31, 1996 and 1995, and the changes in its net
assets available for plan benefits for the years then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
Schedules I and II is presented for purposes of additional analysis and is
not a required part of the basic financial statements but is additional
information required by ERISA. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
March 7, 1997
-3-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31
----------------------------
1996 1995
------------ ----------
ASSETS
Cash............................................... $ 5,914,067 416,238
Investments, at current value:
Short-term investments (cost: $37,490,680 in
1996 and $10,966,751 in 1995)................. 37,490,680 10,966,751
Common stock (cost: $27,304,900 in 1996 and
$36,061,617 in 1995).......................... 62,420,544 60,674,151
U.S. government and agency obligations
(cost: $2,865,307 in 1995).................... -- 3,039,237
Corporate bonds (cost: $2,734,371 in 1995)...... -- 2,882,910
Loans to participants (cost: $3,103,865 in
1996 and $2,648,774 in 1995).................. 3,103,865 2,648,774
------------ ----------
Total investments......................... 103,015,089 80,211,823
Receivables:
Due from broker.................................. 758,309 510,272
Employee contributions........................... 227,730 142,337
Employer contributions........................... 129,898 82,967
Interest and dividends........................... 31,363 131,674
------------ ----------
Total receivables.............................. 1,147,300 867,250
------------ ----------
Total assets................................... 110,076,456 81,495,311
LIABILITIES
Due to broker...................................... -- 602,999
------------ ----------
NET ASSETS AVAILABLE FOR PLAN BENEFITS............. $110,076,456 80,892,312
------------ ----------
------------ ----------
See accompanying notes to financial statements.
4
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
<S> <C> <C>
1996 1995
-------------- ------------
ADDITIONS TO NET ASSETS AVAILABLE FOR PLAN BENEFITS
Net investment income:
Interest.................................................... $ 1,276,752 1,218,874
Dividends................................................... 937,337 800,895
Net realized gain on sale of investments.................... 3,720,698 407,654
Net appreciation in current value of investments............ 14,335,054 17,934,774
-------------- ------------
Total net investment income............................. 20,269,841 20,362,197
Contributions:
Employee.................................................... 9,935,774 12,302,507
Employer.................................................... 4,723,965 4,085,991
-------------- ------------
Total contributions..................................... 14,659,739 16,388,498
-------------- ------------
34,929,580 36,750,695
DEDUCTIONS FROM NET ASSETS AVAILABLE FOR PLAN BENEFITS
Benefit payments to participants............................... (5,745,436) (6,441,865)
-------------- ------------
NET INCREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS......... 29,184,144 30,308,830
Net assets available for plan benefits at beginning of year.... 80,892,312 50,583,482
-------------- ------------
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT END OF YEAR.......... $ 110,076,456 80,892,312
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
Notes to Financial Statements
1. DESCRIPTION OF PLAN
GENERAL
The following description of the First Empire State Corporation Retirement
Savings Plan and Trust ("the Plan") is provided for general information purposes
and is qualified in its entirety by reference to the Plan. The Plan is subject
to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA").
ELIGIBILITY AND PARTICIPATION
The Plan is a defined contribution plan and exists for the benefit of
permanent employees of First Empire State Corporation and its subsidiaries ("the
Company"). Persons who are at least 21 years of age and have completed 12 months
of continuous service are eligible to participate in the Plan. Through December
31, 1996, eligible employees could elect to participate in the Plan effective
the first day of any January, April, July or October subsequent to meeting the
eligibility criteria.
ADMINISTRATION
The Plan is administered by a committee ("Administrative Committee") which
is appointed by the Board of Directors of Manufacturers and Traders Trust
Company ("M&T Bank"), a wholly owned subsidiary of First Empire State
Corporation ("First Empire"). The assets of the Plan are held by M&T Bank, as
Trustee. Watson Wyatt & Company, an actuarial and consulting firm, provides
recordkeeping services on an individual participant basis to the Plan.
The Board of Directors of M&T Bank has the right to terminate, amend or
modify the Plan at any time subject to the Plan provisions. Upon Plan
termination, participants would receive the assets allocated to their accounts.
CONTRIBUTIONS
Contributions to the Plan are made by participants through salary reduction
and by the Company through employer matching contributions. Effective October 1,
1995, participants may elect to reduce their compensation by a specified whole
percentage not to exceed 10%, subject to certain limitations under Section
401(k) and Section 415 of the Internal Revenue Code. Prior thereto the maximum
contribution by participants was limited to 8% of compensation. The Company
remits to the Plan on behalf of each participant the amount by which the
participant's compensation is reduced. In addition, the Company makes an
employer matching contribution in an amount equal to 75% of the participant's
contribution. Such matching contribution is limited to 4.5% of the participant's
compensation. Compensation is generally defined in the Plan to mean a
participant's base salary for the calendar year excluding any form of additional
compensation. Effective April 1, 1995 compensation was redefined to include 75%
of participants' sales commissions. Generally, total annual employee
contributions may not exceed the lesser of 25% of compensation, as defined in
the Internal Revenue Code, or $30,000, adjusted for inflation. An individual
participant's pre-tax contribution was limited to $9,500 in 1996 and $9,240 in
1995. Contributions above this limit were treated as post-tax contributions.
Participants' accounts, including all salary reduction contributions,
employer matching contributions and increments thereon are at all times fully
vested and nonforfeitable.
-6-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
Notes to Financial Statements, continued
INVESTMENT PROGRAMS
Through December 31, 1996, participants could invest their salary reduction
contributions in the common stock of First Empire ("First Empire stock fund"),
equity securities other than those of First Empire ("diversified equity fund"),
short-term fixed income securities other than those of First Empire
("money-market fund") or long-term fixed income securities other than those of
First Empire ("bond fund") in increments of 25%. A separate account is
maintained for each participant's interest in each fund. There were 3,383
participants in the First Empire stock fund, 2,922 in the diversified equity
fund, 1,403 in the money-market fund and 1,217 in the bond fund at December 31,
1996. A total of 3,887 employees of the Company were active participants in the
Plan at December 31, 1996. The allocation of net assets available for Plan
benefits to investment programs and allocation of changes in net assets
available for Plan benefits to investment programs are set forth in Exhibit I
and II, respectively.
Through December 31, 1996, participants could, in accordance with the rules
of the Plan, transfer existing balances among the available investment funds,
reduce or increase the percentage of salary reduction elected and/or redirect
their current salary reduction contributions into different funds effective the
first day of January, April, July and October. Contributions may be suspended at
any time.
EMPLOYER MATCHING CONTRIBUTIONS
Employer matching contributions have been invested in the above funds in the
same proportion as elected by the participants.
LOANS TO PARTICIPANTS
Upon written application to the Administrative Committee, participants
may borrow from their account an amount not to exceed the lesser of (1) 50%
of the participant's vested account balance as of the most recent valuation
date or (2) $50,000 reduced by the participant's highest outstanding loan
balance in the twelve months prior to the date of loan origination. The
minimum loan amount is $1,000. Loans bear interest at one percentage point
above prime as designated by M&T Bank and are repaid in equal installments
through after-tax payroll deductions for a period of up to five years.
WITHDRAWALS AND DISTRIBUTIONS
A participant undergoing financial hardship may make withdrawals from the
Plan while employed by the Company, subject to Plan limitations. Upon
termination of employment for any reason, participants are entitled to a
distribution of the full amount of individual account balances as of the
revaluation date immediately following such termination of service.
Unless the participant elects otherwise, distribution of the full amount of
the participant's account balance will be made no later than 60 days after the
close of the calendar year in which the last of the following occurs: (a) the
participant attains age 65; (b) the tenth anniversary of the year in which
participation began; or (c) the participant terminates service with the Company.
The participant may elect to defer distribution of either the minimum required
under Internal Revenue Code Section 401 (a)(9) or the entire balance, until no
later than April 1 of the calendar year following the year in which age 70-1/2
is attained.
-7-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
Notes to Financial Statements, continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accounts of the Plan are maintained on the accrual basis.
INVESTMENTS
Investments are reported on a current value basis. Other than short-term
investments, investments of the First Empire stock fund, diversified equity
fund, money-market fund and bond fund are traded on national securities
exchanges and are valued using the last reported sales price prior to the close
of the Plan year. Investments representing 5% or more of net assets available
for plan benefits at December 31, 1996 and 1995 consisted of the common stock of
First Empire and the Vision Group of Funds, Inc. Money Market Fund. Loans to
participants are valued by the Administrative Committee as no active market
exists for such loans. The current value of loans, which are fully secured by a
portion of the participant's vested benefits, approximates the outstanding
principal balance of the loans at both December 31, 1996 and 1995.
Investment income of the First Empire stock fund, diversified equity fund,
money-market fund and bond fund is allocated to participants based on their
proportionate share of the net assets of the respective investment fund.
Interest income on loans to participants is allocated to participants based on
their respective loan agreement.
BENEFIT PAYMENTS TO PARTICIPANTS
Benefit payments to participants are recorded when paid.
Net assets available for plan benefits and benefit payments to participants
reported on Internal Revenue Service Form 5500 differ from the amounts included
in the financial statements by amounts payable to participants who have elected
to make withdrawals from the Plan. Such amounts were $845,546 and $788,297 at
December 31, 1996 and 1995, respectively.
ADMINISTRATIVE EXPENSES
Expenses related to administration of the Plan are paid by the Company.
Brokerage commissions, transfer taxes and similar costs of acquiring or
selling securities are paid by the Plan. The Plan incurred brokerage
commissions in 1996 and 1995 totaling $89,236 and $32,108, respectively.
These amounts have been included in the statement of changes in net assets
available for plan benefits in net realized gain on sale of investments for
securities sold and net appreciation in current value of investments for
securities acquired during the year.
3. INCOME TAXES
The Internal Revenue Service issued a favorable determination letter in 1995
regarding the qualified and tax-exempt status of the Plan under Sections 401 and
501 of the Internal Revenue Code. Subsequent to receipt of the favorable
determination letter the Plan was amended. The Administrative Committee is of
the opinion that these amendments do not affect the qualified and tax-exempt
status of the Plan and, accordingly, no provision has been made for income
taxes.
-8-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
Notes to Financial Statements, continued
3. INCOME TAXES, CONTINUED
Participants are not subject to Federal or state income tax on employer
matching contributions and pre-tax participant salary reduction contributions
until such contributions are withdrawn or distributed. Participants are also not
subject to Federal or state income tax on the earnings and appreciation of the
assets of the Plan until such amounts are withdrawn or distributed.
4. PLAN AMENDMENTS
During 1995, the Plan was amended to add special eligibility and benefit
provisions for employees of certain entities acquired by the Company in 1994 and
1995 and to accept the transfer of assets associated with account balances of
such employees. Such asset transfers totaled $5,337,797, and have been included
in employee contributions for the year ended December 31, 1995.
Effective January 1, 1997, the plan was amended to enable participants to
direct employee contributions in 5% increments in any of six investment
options. The diversified equity fund, money-market fund and bond fund have
liquidated their long-term fixed income and equity investment securities at
December 31, 1996 in order to facilitate their transition to three new mutual
fund investment options; a growth and income equity fund, a money-market fund,
and a U.S. government securities fund, respectively. Two additional mutual
funds, a capital appreciation equity fund and an international stock fund,
will be offered to participants effective January 1, 1997.
Effective January 1, 1997, participants may elect to change their investment
options and allocations monthly. Additionally, newly eligible employees may
elect to participate in the Plan as of the first day of the month subsequent to
the month in which the employee becomes eligible.
5. RELATED PARTY TRANSACTIONS
During 1996, the Plan acquired in the open market, in 29 transactions,
28,398 shares of First Empire common stock at a cost of $6,929,874. The Plan
disposed of, in 22 transactions, 9,754 shares of First Empire common stock which
resulted in proceeds of $2,399,040 and realized gains of $370,164. At December
31, 1996, the Plan held 216,738 shares of First Empire common stock with a total
cost of $27,304,900 and a current value of $62,420,544.
During 1995, the Plan acquired in the open market, in 35 transactions,
26,360 shares of First Empire common stock at a cost of $4,694,547. The Plan
disposed of, in 18 transactions, 18,354 shares of First Empire common stock
which resulted in proceeds of $2,704,890 and realized gains of $247,266. At
December 31, 1995, the Plan held 198,094 shares of First Empire common stock
with a total cost of $21,556,170 and a current value of $43,184,492.
-9-
<PAGE>
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
Notes to Financial Statements, continued
6. NET REALIZED GAIN ON SALE OF INVESTMENTS
Net realized gain on sale of investments is comprised of the following:
<TABLE>
<CAPTION>
NET
REALIZED
TOTAL BASIS OF GAIN
PROCEEDS ASSETS SOLD (LOSS)
------------ ----------- ------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
First Empire common stock.................................... $ 2,399,040 2,028,876 $ 370,164
Other common stock........................................... 43,707,738 40,187,901 3,519,837
U.S. government and agency obligations....................... 7,767,988 7,900,005 (132,017)
Corporate bonds.............................................. 3,182,987 3,220,273 (37,286)
----------- ----------- ----------
$57,057,753 53,337,055 $3,720,698
----------- ----------- ----------
----------- ----------- ----------
For the year ended December 31, 1995:
First Empire common stock.................................... $ 2,704,890 2,457,624 $ 247,266
Other common stock........................................... 1,177,993 1,105,936 72,057
U.S. government and agency obligations....................... 1,298,388 1,294,697 3,691
Corporate bonds.............................................. 1,141,819 1,057,179 84,640
----------- ----------- ----------
$ 6,323,090 5,915,436 $ 407,654
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
In accordance with the requirements of ERISA, the basis of assets sold is
equal to either the current value at the beginning of the period, for securities
held as of that date, or cost, for securities acquired during the year.
7. NET APPRECIATION IN CURRENT VALUE OF INVESTMENTS
Net appreciation in current value of investments is comprised of the
following:
<TABLE>
<CAPTION>
CURRENT BASIS OF
VALUE AT ASSETS HELD
END OF AT END NET
PERIOD OF PERIOD APPRECIATION
------------- ------------ -------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
First Empire common stock............................................ $ 62,420,544 48,085,490 $ 14,335,054
-------------
-------------
For the year ended December 31, 1995:
First Empire common stock............................................ $ 43,184,492 28,088,891 $ 15,095,601
Other common stock................................................... 17,489,659 15,026,953 2,462,706
U.S. government and agency obligations............................... 3,039,237 2,819,712 219,525
Corporate bonds...................................................... 2,882,910 2,725,968 156,942
-------------
$ 17,934,774
-------------
-------------
</TABLE>
In accordance with the requirements of ERISA, the basis of assets held at
end of period is equal to either the current value at the beginning of the
period, for securities held as of that date, or cost, for securities acquired
during the year.
-10-
<PAGE>
EXHIBIT I
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
ALLOCATION OF NET ASSETS AVAILABLE FOR PLAN BENEFITS TO INVESTMENT PROGRAMS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FIRST EMPIRE DIVERSIFIED MONEY- BOND PARTICIPANT
STOCK FUND EQUITY FUND MARKET FUND FUND LOAN ACCOUNT TOTAL
------------- ------------ ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash................................ $ 1,802 31,483 46,773 5,834,009 -- $ 5,914,067
Investments, at current value
(cost:$27,737,652, $26,591,333,
$10,190,613, $275,982 and
$3,103,865):
Short-term investments.............. 432,752 26,591,333 10,190,613 275,982 -- 37,490,680
Common stock........................ 62,420,544 -- -- -- -- 62,420,544
U.S. government and agency
obligations....................... -- -- -- -- -- --
Corporate bonds..................... -- -- -- -- -- --
Loans to participants............... -- -- -- -- 3,103,865 3,103,865
------------- ------------ ------------ ---------- ------------ --------------
Total investments................... 62,853,296 26,591,333 10,190,613 275,982 3,103,865 103,015,089
Receivables:
Due from broker..................... 758,309 -- -- -- -- 758,309
Employee contributions.............. 126,512 73,315 15,061 12,842 -- 227,730
Employer contributions.............. 70,797 42,072 9,380 7,649 -- 129,898
Interest and dividends.............. -- 21,186 -- 10,177 -- 31,363
------------- ------------ ------------ ---------- ------------ --------------
Total receivables................... 955,618 136,573 24,441 30,668 -- 1,147,300
------------- ------------ ------------ ---------- ------------ --------------
Net assets available for plan
benefits.......................... $ 63,810,716 26,759,389 10,261,827 6,140,659 3,103,865 $ 110,076,456
------------- ------------ ------------ ---------- ------------ --------------
------------- ------------ ------------ ---------- ------------ --------------
</TABLE>
-11-
<PAGE>
EXHIBIT I
(continued)
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
ALLOCATION OF NET ASSETS AVAILABLE FOR PLAN BENEFITS TO INVESTMENT PROGRAMS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIRST EMPIRE DIVERSIFIED MONEY- BOND PARTICIPANT
STOCK FUND EQUITY FUND MARKET FUND FUND LOAN ACCOUNT TOTAL
- ------------------------------------- ------------- ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash................................. $ 139,803 171,515 49,807 55,113 -- $ 416,238
Investments, at current value
(cost:$21,835,971, $14,785,478,
$10,350,413, $5,656,184 and
$2,648,774):
Short-term investments............... 279,801 280,031 10,350,413 56,506 -- 10,966,751
Common stock......................... 43,184,492 17,489,659 -- -- -- 60,674,151
U.S. government and agency
obligations........................ -- -- -- 3,039,237 -- 3,039,237
Corporate bonds...................... -- -- -- 2,882,910 -- 2,882,910
Loans to participants................ -- -- -- -- 2,648,774 2,648,774
------------- ------------ ------------ ---------- ------------ -------------
Total investments.................... 43,464,293 17,769,690 10,350,413 5,978,653 2,648,774 80,211,823
Receivables:
Due from broker...................... -- 510,272 -- -- -- 510,272
Employee contributions............... 66,266 48,915 15,044 12,112 -- 142,337
Employer contributions............... 37,786 28,419 9,359 7,403 -- 82,967
Interest and dividends............... -- 19,590 -- 112,084 -- 131,674
------------- ------------ ------------ ---------- ------------ -------------
Total receivables.................... 104,052 607,196 24,403 131,599 -- 867,250
------------- ------------ ------------ ---------- ------------ -------------
Total assets......................... 43,708,148 18,548,401 10,424,623 6,165,365 2,648,774 81,495,311
Liabilities
Due to broker........................ 416,479 186,520 -- -- -- 602,999
------------- ------------ ------------ ---------- ------------ -------------
Net assets available for plan
benefits........................... $ 43,291,669 18,361,881 10,424,623 6,165,365 2,648,774 $ 80,892,312
------------- ------------ ------------ ---------- ------------ -------------
------------- ------------ ------------ ---------- ------------ -------------
</TABLE>
-12-
<PAGE>
EXHIBIT II
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
TO INVESTMENT PROGRAMS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIRST EMPIRE DIVERSIFIED MONEY- BOND PARTICIPANT
STOCK FUND EQUITY FUND MARKET FUND FUND LOAN ACCOUNT TOTAL
------------- ----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS
AVAILABLE FOR PLAN
BENEFITS
Net investment income:
Interest................. $ 6,032 79,065 538,656 395,337 257,662 $ 1,276,752
Dividends................ 589,308 348,029 -- -- -- 937,337
Net realized gain
(loss) on sale of
investments............. 370,164 3,519,837 -- (169,303) -- 3,720,698
Net appreciation
in current value of
investments............ 14,335,054 -- -- -- -- 14,335,054
----------- ----------- ---------- ---------- ----------- ------------
Total net
investment income..... 15,300,558 3,946,931 538,656 226,034 257,662 20,269,841
Contributions:
Employee................ 4,831,299 3,373,541 983,179 747,755 -- 9,935,774
Employer................ 2,259,225 1,642,226 453,274 369,240 -- 4,723,965
----------- ----------- ---------- ---------- ----------- ------------
Total contributions...... 7,090,524 5,015,767 1,436,453 1,116,995 -- 14,659,739
----------- ----------- ---------- ---------- ----------- ------------
22,391,082 8,962,698 1,975,109 1,343,029 257,662 34,929,580
DEDUCTIONS FROM NET
ASSETS AVAILABLE
FOR PLAN BENEFITS
Benefit payments
to participants........ (2,395,988) (1,654,459) (1,179,344) (515,645) -- (5,745,436)
INTERFUND TRANSFERS
Loans, net
of repayments.......... 224,748 (218,297) (341,014) (120,528) 455,091 --
Reallocation
of investments-
additions (deductions). 299,205 1,307,566 (617,547) (731,562) (257,662) --
----------- ----------- ---------- ---------- ----------- ------------
523,953 1,089,269 (958,561) (852,090) 197,429 --
----------- ----------- ---------- ---------- ----------- ------------
Net increase
in net assets
available for plan
benefits............... $20,519,047 8,397,508 (162,796) (24,706) 455,091 $ 29,184,144
----------- ----------- ---------- ---------- ----------- ------------
----------- ----------- ---------- ---------- ----------- ------------
</TABLE>
-13-
<PAGE>
EXHIBIT II
(continued)
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
TO INVESTMENT PROGRAMS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIRST EMPIRE DIVERSIFIED MONEY- BOND PARTICIPANT
STOCK FUND EQUITY FUND MARKET FUND FUND LOAN ACCOUNT TOTAL
------------- ----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS
AVAILABLE FOR PLAN
BENEFITS
Net investment income:
Interest.................. $ 8,597 85,633 598,516 348,862 177,266 $ 1,218,874
Dividends................. 472,705 328,190 -- -- -- 800,895
Net realized gain
on sale of
investments.............. 247,266 72,057 -- 88,331 -- 407,654
Net appreciation
in current
value of investments..... 15,095,601 2,462,706 -- 376,467 -- 17,934,774
----------- ----------- ---------- ---------- ----------- ------------
Total net
investment income........ 15,824,169 2,948,586 598,516 813,660 177,266 20,362,197
Contributions:
Employee.................. 4,057,000 3,804,600 2,811,267 1,447,587 182,053 12,302,507
Employer.................. 1,845,451 1,271,596 566,642 402,302 -- 4,085,991
----------- ----------- ---------- ---------- ----------- ------------
Total contributions........ 5,902,451 5,076,196 3,377,909 1,849,889 182,053 16,388,498
----------- ----------- ---------- ---------- ----------- ------------
21,726,620 8,024,782 3,976,425 2,663,549 359,319 36,750,695
DEDUCTIONS FROM NET
ASSETS AVAILABLE
FOR PLAN BENEFITS
Benefit payments
to participants.......... (3,327,544) (959,098) (1,700,477) (454,746) -- (6,441,865)
INTERFUND TRANSFERS
Loans, net
of repayments............ 114,927 (210,555) (405,607) (138,365) 639,600 --
Reallocation
of investments-
additions (deductions)... (1,165,319) 1,461,685 (179,150) 60,050 (177,266) --
----------- ----------- ---------- ---------- ----------- ------------
(1,050,392) 1,251,130 (584,757) (78,315) 462,334
----------- ----------- ---------- ---------- ----------- ------------
Net increase
in net assets
available for plan
benefits................ $17,348,684 8,316,814 1,691,191 2,130,488 821,653 $ 30,308,830
----------- ----------- ---------- ---------- ----------- ------------
----------- ----------- ---------- ---------- ----------- ------------
</TABLE>
-14-
<PAGE>
SCHEDULE I
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
SCHEDULE OF ASSETS HELD FOR INVESTMENT
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR CURRENT VALUE
PRINCIPAL TOTAL -------------------------
NAME AND TITLE OF ISSUE AMOUNT UNIT COST COST PER UNIT TOTAL
- ----------------------- ----------------------- -------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Vision Group of Funds,
Inc. Money Market
Fund................. 37,490,680 1.000 $37,490,680 $ 1.000 $ 37,490,680
COMMON STOCK
Financial:
First Empire State
Corporation*......... 216,738 125.981 27,304,900 288.000 62,420,544
LOANS TO PARTICIPANTS
7.00%-10.50%, fully
secured by vested
benefits, due 1997
through 2001......... $ 3,103,865 -- 3,103,865 -- 3,103,865
----------- ------------
Total investments...... $67,899,445 $103,015,089
----------- ------------
----------- ------------
</TABLE>
* See note 5 to the financial statements
-15-
<PAGE>
SCHEDULE II
FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST
SCHEDULE OF TRANSACTIONS IN EXCESS OF 5% OF FAIR VALUE OF PLAN ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PURCHASES SALES/DISTRIBUTIONS
--------------------------- -------------------------------------------------
NUMBER OF NUMBER OF
DESCRIPTION OF ASSET TRANSACTIONS COST TRANSACTIONS PROCEEDS BASIS GAIN
- ------------------------------------ ------------ ----------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments:
Vision Group of Funds, Inc.
Money Market Fund................. 398 $49,176,811 166 $22,652,882 22,652,882 $ --
Common stock:
First Empire State Corporation...... 29 6,929,874 22 2,399,040 2,028,876 370,164
</TABLE>
-16-
