10-K 1 1 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, 1994 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-9861 FIRST EMPIRE STATE CORPORATION (Exact name of registrant as specified in its charter) New York 16-0968385 (State of incorporation) (I.R.S. Employer Identification No.) One M&T Plaza, Buffalo, New York 14240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716)842-5445 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $5 par value American Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 6, 1995: $705,543,707. Number of shares of the Common Stock, $5 par value, outstanding as of the close of business on March 6, 1995: 6,584,881 shares. Documents Incorporated By Reference: (1) Portions of the Proxy Statement for the 1995 Annual Meeting of Stockholders of First Empire State Corporation in Part III. 2 FIRST EMPIRE STATE CORPORATION FORM 10-K For the fiscal year ended December 31, 1994 ------------------------------------------- CROSS-REFERENCE SHEET Form --------------------- 10-K PART I Page ------ ---- Item 1. Business 5 Statistical disclosure pursuant to Guide 3 I. Distribution of assets, liabilities, and stockholders' equity; interest rates and interest rate differential A. Average balance sheets 40-41 B. Interest income/expense and resulting yield or rate on average interest-earning assets (including non- accrual loans) and interest-bearing liabilities 40-41 C. Rate/volume variances 19 II. Investment portfolio A. Year-end balances 60-61 B. Maturity schedule and weighted average yield 48 III. Loan Portfolio A. Year-end balances 62 B. Maturities and sensitivities to changes in interest rates 46 C. Risk elements Nonaccrual, past-due and renegotiated loans 45 Actual and pro forma interest on certain loans 63 Nonaccrual policy 58 Foreign outstandings 28 IV. Summary of loan loss experience A. Charge-offs and recoveries 43 Factors influencing management's judgment concerning the adequacy of the allowance and provision 58 B. Allocation of allowance for loan losses 44 V. Deposits A. Average balances and rates 40-41 B. Maturity schedule of domestic time deposits with balances of $100,000 or more 47 VI. Return on equity and assets, etc. 18,23,32 3 FIRST EMPIRE STATE CORPORATION FORM 10-K For the fiscal year ended December 31, 1994 ------------------------------------------- CROSS-REFERENCE SHEET--continued Form -------------------------------- 10-K Page ---- PART I, continued ----------------- Item 1. Business, continued VII. Short-term borrowings 65 Item 2. Properties 20,64 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Executive Officers of the Registrant 20-21 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 22 A. Principal market 22 Market prices 34-35 B. Approximate number of holders at year end 16 C. Frequency and amount of dividends declared 35 D. Restrictions on dividends 10,76 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 22-50 Item 8. Financial Statements and Supplementary Data A. Report of Independent Accountants 52 B. Consolidated Balance Sheet - December 31, 1994 and 1993 53 4 FIRST EMPIRE STATE CORPORATION FORM 10-K For the fiscal year ended December 31, 1994 ------------------------------------------- CROSS-REFERENCE SHEET--continued Form -------------------------------- 10-K Page ---- PART II, continued -------- Item 8, continued C. Consolidated Statement of Income - Years ended December 31, 1994, 1993 and 1992 54 D. Consolidated Statement of Cash Flows - Years ended December 31, 1994, 1993 and 1992 55 E. Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1994, 1993 and 1992 56 F. Notes to Financial Statements 57-78 G. Quarterly Trends 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79 PART III -------- Item 10. Directors and Executive Officers of the Registrant 79 Item 11. Executive Compensation 79 Item 12. Security Ownership of Certain Beneficial Owners and Management 79 Item 13. Certain Relationships and Related Transactions 79 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 80 Signatures 81-83 Exhibit Index 84-85 5 PART I Item 1. Business. -------- First Empire State Corporation ("Registrant" or "Parent Company") 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, 1994, the Company had consolidated total assets of $10.5 billion, deposits of $8.2 billion and stockholders' equity of $721 million. The Company had 3,792 full-time and 713 part-time employees as of December 31, 1994. At December 31, 1994, the Registrant had two wholly owned bank subsidiaries conducting business primarily in the State of New York: Manufacturers and Traders Trust Company ("M&T Bank") and The East New York Savings Bank ("East New York"). Since the beginning of 1990, the Company has experienced significant growth through federally-assisted acquisitions of assets and liabilities of failed thrift institutions and through unassisted acquisition transactions involving commercial banks and thrift institutions. In January and September 1990, respectively, M&T Bank, in two federally-assisted transactions, purchased selected assets and assumed selected liabilities of Monroe Savings Bank, FSB, Rochester, New York, and Empire Federal Savings Bank of America, Buffalo, New York, two institutions that had been placed in receivership. In May 1991, M&T Bank and East New York similarly purchased certain assets and assumed certain liabilities of Goldome, a Buffalo, New York savings bank, from the Federal Deposit Insurance Corporation ("FDIC"), as receiver. In July 1992, Central Trust Company and Endicott Trust Company, two banks located in Rochester and Endicott, New York, respectively, were acquired and merged with and into M&T Bank. In December 1994, the Company acquired Ithaca Bancorp, Inc. ("Ithaca Bancorp"), Ithaca, New York, and simultaneously merged Ithaca Bancorp's savings bank subsidiary, Citizens Savings Bank, F.S.B., into M&T Bank. Also, in December 1994, the Company acquired from Chemical Bank selected assets and liabilities associated with seven banking offices in New York State's Hudson Valley region. The following table summarizes the loans and deposits acquired by the Company in these transactions at the time the transactions were consummated: Recent Acquisitions and Mergers ------------------------------- Loans Deposits ----- -------- (In billions of dollars) Monroe Savings Bank, FSB $0.4 $0.5 Empire Federal Savings Bank of America 0.5 1.2 Goldome 1.0 2.2 Central Trust Company 0.8 1.0 Endicott Trust Company 0.2 0.3 Ithaca Bancorp, Inc. 0.4 0.3 Hudson Valley banking offices (Chemical) - 0.1 On March 6, 1995, M&T Bank's mortgage banking subsidiary, M&T Mortgage Corporation ("M&T Mortgage"), acquired Statewide Funding Corporation ("Statewide"), a privately-owned mortgage banking company based near Albany, New York, which had a mortgage servicing portfolio of approximately $1.0 billion as of the acquisition date. Statewide was merged with and into M&T Mortgage on the same date. On February 9, 1995, M&T Bank entered into an agreement to acquire four banking offices from The Chase Manhattan Bank, N.A. Two of the branches are located in Dutchess County, one in Ulster County and one in Niagara County, New York. The branches held approximately $90 million in deposit liabilities as of February 9, 1995. 6 The Company from time to time considers acquiring additional banks, thrift institutions, branch offices or other businesses, generally within markets currently served or in other nearby markets. The Company has pursued such opportunities in the past, currently continues to actively review different opportunities, including the possibility of major acquisitions, and intends to continue this practice. Subsidiaries ------------ M&T Bank is a banking corporation which is incorporated under the laws of the State of New York. M&T Bank is a member of the Federal Reserve System, the FDIC and the Federal Home Loan Bank System. The Parent Company 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 the Parent Company. 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, 1994, M&T Bank had 141 banking offices located throughout New York State, including 118 in Western New York and in the Southern Tier of New York State, principally in Buffalo, Rochester, Ithaca and Binghampton, 20 banking offices in the Hudson Valley region and one in New York City, plus a branch in Nassau, The Bahamas and representative offices in Albany and Syracuse. As of December 31, 1994, M&T Bank had consolidated total assets of $8.8 billion, deposits of $7.0 billion and stockholder's equity of $583 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 $6.7 billion in assessable deposits at December 31, 1994, 82% were assessed as BIF-insured and the remainder as SAIF-insured deposits. As a commercial bank, M&T Bank offers a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in its markets. Lending is focused on consumers residing in New York State and on New York-based small and medium-size businesses. M&T Bank also provides other financial services through its operating subsidiaries. East New York was acquired by the Parent Company in December 1987. East New York, originally organized in 1868, is a New York-chartered capital stock savings bank and a member of the FDIC and of the Federal Home Loan Bank System. The deposit liabilities of East New York are insured by the FDIC through the BIF. The stock of East New York represents a major asset of the Parent Company. The principal executive offices of East New York are located at 2644 Atlantic Avenue, Brooklyn, New York 11207. Its banking business is conducted from 18 banking offices located in New York City and Nassau County, Long Island. As of December 31, 1994, East New York had consolidated total assets of $1.8 billion, deposits of $1.2 billion and stockholder's equity of $124 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 making commercial mortgage loans which 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 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 $13 million and stockholder's equity of $13 million as of December 31, 1994, and recorded approximately $1.5 million of revenues in 1994. The headquarters of M&T Capital are located at One M&T Plaza, Buffalo, New York. 7 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 and offices in Pennsylvania. As of December 31, 1994, M&T Credit had assets of $10 million and stockholder's equity of $0.9 million. Revenues from the date of formation through December 31, 1994 were not significant. M&T Mortgage, the 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 mortgage loan servicing to M&T Bank and others. M&T Mortgage maintains branch offices in Ohio, Pennsylvania, Oregon, Utah and Washington. M&T Mortgage had assets of $34 million and stockholder's equity of $24 million as of December 31, 1994, and recorded approximately $19.3 million of revenues during 1994. The headquarters of M&T Mortgage are located at M&T Center, One Fountain Plaza, Buffalo, New York. M&T Financial Corporation ("M&T Financial"), a New York business corporation, is a wholly owned subsidiary of M&T Bank which specializes in capital- equipment leasing. M&T Financial was formed in October 1985, had assets of $83 million and stockholder's equity of $14 million as of December 31, 1994, and recorded approximately $3.3 million of revenues in 1994. The headquarters of M&T Financial are located at 4925 Main Street, Amherst, New York. M&T Securities, Inc. ("M&T Securities"), is a wholly owned subsidiary of M&T Bank which was incorporated as a New York business corporation in November 1985. M&T Securities is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended, and provides securities brokerage and investment advisory services. As of December 31, 1994, M&T Securities had assets of $0.9 million and stockholder's equity of $0.5 million. M&T Securities recorded $1.4 million of revenues during 1994. The headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New York. 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. As of December 31, 1994, Highland Lease had assets of $9.8 million and stockholder's equity of $7.0 million. Revenues from the date of formation through December 31, 1994 were not significant. 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, 1994. 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 14 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". 8 Supervision and Regulation -------------------------- The banking industry is subject to extensive state and federal regulation and is undergoing 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 been adopting 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 the state legislature, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of the Company. To the extent that the following information describes statutory or regulatory provisions, it is qualified entirely by reference to the particular statutory or regulatory provision. Bank Holding Company Regulation ------------------------------- As a registered bank holding company, the Registrant and its nonbank subsidiaries are subject to supervision and regulation under the BHCA by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the New York State Banking Superintendent ("Banking Superintendent"). The Federal Reserve Board requires regular reports from the Registrant and is authorized by the BHCA to make regular examinations of the Registrant and its subsidiaries. Under the BHCA, the Registrant may not acquire direct or indirect ownership or control of more than 5% of the voting shares of any company, including a bank, without the prior approval of the Federal Reserve Board, except as specifically authorized under the BHCA. The Registrant is also subject to regulation under the Banking Law with respect to certain acquisitions of domestic banks. Under the BHCA, the Registrant, subject to the approval of the Federal Reserve Board, may acquire shares of nonbanking 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 nonbanking 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. 9 The BHCA currently includes a prohibition against interstate banking which can be overridden by any state which adopts a law that expressly permits out- of-state banking companies to form or acquire banks in such state. The Banking Law currently allows out-of-state banking companies to control New York banks if reciprocal rights are granted to New York banking companies, and also allows a form of reciprocal interstate branching. Most states currently permit New York banking companies to form or acquire banks located within their boundaries. On September 29, 1994, President Clinton signed into law the Riegle-Neal Interstate Banking Efficiency Act of 1994 (the "Interstate Banking Act"). Generally, the Interstate Banking Act permits, beginning September 29, 1995, bank holding companies to acquire banks in any state; 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. 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 and East New York by the FDIC and the Banking Superintendent. The Registrant and its direct nonbanking 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 nonbanking 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 10 subsidiary of the Parent Company could incur liability to the FDIC in the event of a default of another insured depository institution owned or controlled by the Parent Company. The FDIC's claim under the cross-guarantee provisions is superior to claims of stockholders of the insured depository institution or its holding company and to most claims arising out of obligations or liabilities owed to affiliates of the institution, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the BIF or SAIF or both. Dividends from Bank Subsidiaries -------------------------------- M&T Bank and East New York are subject, under one or more of the banking laws, to restrictions on the amount and frequency (no more often than quarterly) of dividend declarations. Future dividend payments to the Registrant by its subsidiary banks will be dependent on a number of factors, including the earnings and financial condition of each such bank, and are subject to the limitations referred to in note 17 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 and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks under their supervision. Under the guidelines the so-called "Tier 1 capital" and "Total capital" as a percentage of risk-weighted assets and certain off-balance sheet instruments must be at least 4% and 8%, respectively. The Federal Reserve Board and the FDIC have also imposed a leverage standard to supplement their risk-based ratios. This leverage standard focuses on a banking institution's ratio of Tier 1 capital to average total assets, adjusted for goodwill and certain other items. Under these guidelines, banking institutions that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total assets of at least 3%. Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, along with those experiencing or anticipating significant growth are expected to maintain a Tier 1 capital to total assets ratio equal to at least 4 to 5%. As reflected in the following table, the risk-based capital ratios and leverage ratios of the Registrant, M&T Bank and East New York as of December 31, 1994 exceeded the risk-based capital adequacy guidelines and the leverage standard. 11 Capital Components and Ratios at December 31, 1994 (dollars in millions) Registrant (Consolidated) M&T Bank East New York -------------- -------- ------------- Capital Components Tier 1 capital $ 748 $ 602 $ 131 Total capital 930 766 149 Risk-weighted assets and off-balance sheet instruments $8,398 $6,973 $1,429 Risk-based Capital Ratio Tier 1 capital 8.91% 8.64% 9.13% Total capital 11.07 10.98 10.40 Leverage Ratio 7.31 6.92 7.53 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. In September 1993, the federal banking agencies issued proposed rules whereby exposure to interest rate risk would be measured as the effect that a specified change in market interest rates would have on the net economic value of a bank. This economic perspective considers the effect that changing market interest rates may have on the value of a bank's assets, liabilities, and off-balance-sheet positions. The banking agencies propose to measure an institution's exposure using either a standardized, supervisory model or each bank's own internal model. In either case, the results could be used in one of two ways when assessing capital adequacy for interest rate risk. One approach would be to reduce an institution's risk-based capital ratios by an amount based on the level of measured risk. The other would be to use the measured exposure as only one of several factors in assessing the need for capital. 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 12 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. Bank regulators continue to propose amendments to the risk-based capital guidelines and related regulatory framework. While the Company's management studies such proposals, the timing of adoption, ultimate form and effect of such proposed amendments on the Company's capital requirements and operations cannot be predicted. FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier depends upon where its capital levels are in relation to various relevant capital measures, including a risk-based capital measure and a leverage ratio capital measure, and certain other factors. Under the implementing regulations adopted by the federal banking agencies, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL rating of 1). A bank is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk- based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMEL rating of 1); (B) 13 "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C) "critically undercapitalized" if the bank has a ratio of tangible equity to total assets equal to or less than 2%. The Federal Reserve Board may reclassify a "well capitalized" bank as "adequately capitalized" or subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower capital category if it determines that the bank is in an unsafe or unsound condition or deems the bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency. M&T Bank and East New York currently meet the definition of "well capitalized" institutions. "Undercapitalized" depository institutions, among other things, are subject to growth limitations, are prohibited, with certain exceptions, from making capital distributions, are limited in their ability to obtain funding from a Federal Reserve Bank and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan and provide appropriate assurances of performance. If a depository institution fails to submit an acceptable plan, including if the holding company refuses or is unable to make the guarantee described in the previous sentence, it is treated as if it is "significantly undercapitalized". Failure to submit or implement an acceptable capital plan also is grounds for the appointment of a conservator or a receiver. "Significantly undercapitalized" depository institutions may be subject to a number of additional requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover, the parent holding company of a significantly undercapitalized depository institution may be ordered to divest itself of the institution or of nonbank subsidiaries of the holding company. "Critically undercapitalized" institutions, among other things, are prohibited from making any payments of principal and interest on subordinated debt, and are subject to the appointment of a receiver or conservator. FDICIA directs, among other things, that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and other standards as they deem appropriate. The Federal Reserve Board 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 purchased mortgage servicing rights and purchased credit card relationships includable in Tier 1 capital, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. FDICIA also contains a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not "well capitalized" or are "adequately capitalized" and have not received a waiver from the FDIC. 14 FDIC Deposit Insurance Assessments ---------------------------------- As institutions insured by the BIF and the SAIF, M&T Bank and East New York are subject to FDIC deposit insurance assessments. Under current law the insurance assessment to be paid by BIF-insured institutions shall be specified in a schedule required to be issued by the FDIC that specifies, at semiannual intervals, target reserve ratios designed to increase the reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC may determine in accordance with the statute) no later than 2006. The FDIC is also authorized to impose one or more special assessments in any amounts deemed necessary to enable repayment of amounts borrowed by the FDIC from the Treasury Department. On September 15, 1992, the FDIC approved the implementation of a risk-based deposit premium assessment system under which each depository institution is placed in one of nine assessment categories based on the institution's capital classification under the prompt corrective action provisions described above, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The assessment rates under the system range from .23% to .31% depending upon the assessment category into which the insured institution is placed. The risk-based assessment system became effective January 1, 1993. In early 1995, the FDIC announced that it was considering a proposal to reduce the low end of the deposit assessment range that banks pay to the BIF to .04%. The final form, likelihood or timing of adoption and implementation of such proposal cannot be determined. Despite the announcement of this proposal, the FDIC retains the ability to increase BIF assessments and to levy special additional assessments. Moreover, the FDIC is not currently considering any reduction in SAIF assessments. With respect to deposit insurance assessments on SAIF-insured deposits at M&T Bank (which represent approximately 18% of its total assessed deposit liabilities), under current law such assessments must be the greater of .15% of M&T Bank's average assessment base (as defined) or such rate as the FDIC at its sole discretion determines to be appropriate to increase (or maintain) the reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC may determine in accordance with the statute) within a reasonable period of time. From January 1, 1994 through December 31, 1997 the assessment rate must not be less than .18% of the institution's average assessment base. The assessment rate may be higher if the FDIC, in its sole discretion, determines such higher rate to be appropriate. Effective January 1, 1993, the risk-based deposit premium assessment system described above was made applicable to SAIF-insured deposits. A significant increase in the assessment rate or a special additional assessment with respect to insured deposits could have an adverse impact on the results of operations and capital of M&T Bank or East New York. 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 15 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. As described in Bank Holding Company Regulation above, the Banking Law allows out-of-state banking companies to control New York banks if reciprocal rights are granted to New York banking companies. No such reciprocity is required of foreign banking companies. Most states permit New York banking companies to form or acquire banks located within their boundaries. Moreover, the provisions of the Interstate Banking Act may further ease entry into New York State by out-of-state banking institutions. As a result, the number of banking organizations with which the Registrant's subsidiary banks compete may grow in the future. Other Legislative Initiatives ----------------------------- From time to time, various proposals are introduced in the United States Congress and in the New York Legislature and before various bank regulatory authorities which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other financial institutions. Moreover, a number of other bills have been introduced in Congress which would further regulate, deregulate or restructure the financial services industry. It is not possible to predict whether these or any other proposals will be enacted into law or, even if enacted, the effect which they may have on the Company's business and earnings. Statistical Disclosure Pursuant to Guide 3 ------------------------------------------ See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K. Additional information is included in the following tables. 16
------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- Item 1, Table 1 SELECTED CONSOLIDATED YEAR-END BALANCES Dollars in thousands 1994 1993 1992 1991 1990 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Money-market assets Interest-bearing deposits at banks $ 143 55,044 110,041 - 403,373 Federal funds sold and resell agreements 3,080 329,429 312,461 67,351 65,532 Trading account 5,438 9,815 53,515 42,957 125,268 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total money-market assets 8,661 394,288 476,017 110,308 594,173 Investment securities U.S. Treasury and federal agencies 999,407 1,387,395 916,621 1,725,604 1,125,794 Obligations of states and political subdivisions 55,787 49,230 53,789 128,409 164,096 Other 735,846 992,527 750,154 731,973 133,327 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total investment securities 1,791,040 2,429,152 1,720,564 2,585,986 1,423,217 Loans and leases Commercial, financial, leasing, etc. 1,680,415 1,510,205 1,478,555 1,068,606 1,136,590 Real estate - construction 53,535 51,384 35,831 30,895 37,799 Real estate - mortgage 5,046,937 4,540,177 4,422,730 4,091,414 3,403,105 Consumer 1,666,230 1,337,293 1,211,401 1,015,722 924,575 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total loans and leases 8,447,117 7,439,059 7,148,517 6,206,637 5,502,069 Unearned discount (229,824) (177,960) (164,713) (160,083) (129,176) Allowance for possible credit losses (243,332) (195,878) (151,690) (100,265) (74,982) -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Loans and leases, net 7,973,961 7,065,221 6,832,114 5,946,289 5,297,911 Other real estate owned 10,065 12,222 16,694 10,354 5,655 Total assets 10,528,644 10,364,958 9,587,931 9,171,066 7,715,385 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Demand deposits 1,087,102 1,052,258 1,078,690 655,876 622,490 NOW accounts 748,199 764,690 770,618 683,732 482,029 Savings deposits 3,098,438 3,364,983 3,573,717 2,841,590 1,708,383 Time deposits 3,106,723 1,982,272 2,536,309 3,066,897 3,216,476 Deposits at foreign office 202,611 189,058 117,776 226,229 171,632 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total deposits 8,243,073 7,353,261 8,077,110 7,474,324 6,201,010 Short-term borrowings 1,364,850 2,101,667 692,691 1,022,430 971,817 Long-term borrowings and capital leases 96,187 75,590 75,685 9,477 3,205 Total liabilities 9,807,648 9,640,964 8,961,136 8,635,291 7,278,173 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Stockholders' equity 720,996 723,994 626,795 535,775 437,212 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- STOCKHOLDERS, EMPLOYEES AND OFFICES Number at year-end 1994 1993 1992 1991 1990 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Stockholders 3,981 3,985 4,157 4,346 4,579 Employees 4,505 4,400 4,275 3,338 2,928 Banking offices 168 145 151 115 114 -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
17
------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- Item 1, Table 2 CONSOLIDATED EARNINGS Dollars in thousands 1994 1993 1992 1991 1990 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Interest income Loans and leases, including fees $ 633,077 608,473 602,932 592,395 522,455 Money-market assets Deposits at banks 2,212 6,740 1,083 7,864 18,424 Federal funds sold and resell agreements 4,751 20,403 18,100 5,322 7,689 Trading account 361 1,242 2,927 15,716 5,151 Investment securities Fully taxable 104,185 101,187 125,529 138,808 95,398 Exempt from federal taxes 2,760 2,584 5,906 9,292 8,351 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total interest income 747,346 740,629 756,477 769,397 657,468 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Interest expense NOW accounts 11,286 13,113 16,544 27,418 24,190 Savings deposits 84,804 90,392 110,142 123,468 70,857 Time deposits 97,067 98,508 153,588 242,684 247,284 Deposits at foreign office 5,894 3,243 4,348 9,014 12,008 Short-term borrowings 73,868 58,459 38,386 36,972 72,088 Long-term borrowings and capital leases 6,287 6,158 590 659 501 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total interest expense 279,206 269,873 323,598 440,215 426,928 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Net interest income 468,140 470,756 432,879 329,182 230,540 Provision for possible credit losses 60,536 79,958 84,989 63,412 27,412 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for possible credit losses 407,604 390,798 347,890 265,770 203,128 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Other income Trust income 22,574 23,865 16,905 11,847 9,696 Service charges on deposit accounts 35,016 32,291 28,372 20,688 17,427 Merchant discount and other credit card fees 8,705 7,932 6,728 5,776 5,887 Trading account gains 700 2,702 1,684 5,015 284 Gain on sales of bank investment securities 128 870 28,050 450 4 Gain on sales of venture capital investments 802 2,896 3,230 2,064 727 Other revenues from operations 55,814 39,988 41,257 31,846 18,713 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total other income 123,739 110,544 126,226 77,686 52,738 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Other expense Salaries and employee benefits 161,221 154,340 130,751 103,201 85,884 Equipment and net occupancy 49,132 47,823 41,659 33,350 28,617 Printing, postage and supplies 13,516 13,021 13,111 10,727 7,603 Deposit insurance 16,442 17,684 17,783 15,222 6,680 Other costs of operations 96,551 94,951 108,034 66,161 42,349 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Total other expense 336,862 327,819 311,338 228,661 171,133 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Income before income taxes 194,481 173,523 162,778 114,795 84,733 Income taxes 77,186 71,531 64,841 47,601 30,791 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Net income $ 117,295 101,992 97,937 67,194 53,942 -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Dividends declared Common $ 14,743 13,054 10,780 9,344 8,275 Preferred 3,600 3,600 3,600 2,860 - -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
18
---------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------------- Item 1, Table 3 COMMON SHAREHOLDER DATA 1994 1993 1992 1991 1990 ------------------------------------------ ------ ------ ------ ------ ------ Per Share Net income $16.35 13.87 13.41 9.32 7.91 Cash dividends declared 2.20 1.90 1.60 1.40 1.25 Stockholders' equity at year-end 103.02 99.43 85.79 73.91 65.94 Dividend pay out ratio 12.97 % 13.27 % 11.43 % 14.52 % 15.34 % ------------------------------------------ ------ ------ ------ ------ ------
19
Item 1, Table 4 -------------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES -------------------------------------------------------------------------------------------------------------------------- CHANGES IN INTEREST INCOME AND EXPENSE* 1994 compared with 1993 1993 compared with 1992 ---------------------------- ----------------------------- Resulting from Resulting from Total changes in: Total changes in: Increase (decrease) in thousands change Volume Rate change Volume Rate ------------------------------------------------------- -------- ------- -------- -------- ------- -------- Interest income Loans and leases, including fees $ 24,416 38,266 (13,850) $ 5,407 36,814 (31,407) Money-market assets Deposits at banks (4,528) (6,055) 1,527 5,657 5,716 (59) Federal funds sold and agreements to resell securities (15,652) (20,432) 4,780 2,303 3,392 (1,089) Trading account (935) (1,083) 148 (1,662) (1,504) (158) Investment securities U.S. Treasury and federal agencies (5,735) (6,451) 716 (19,520) 6,139 (25,659) Obligations of states and political subdivisions 472 747 (275) (5,522) (4,232) (1,290) Other 8,682 972 7,710 (4,163) 8,384 (12,547) ------------------------------------------------------- -------- --------- Total interest income $ 6,720 $ (17,500) ------------------------------------------------------- -------- --------- Interest expense Interest-bearing deposits NOW accounts $ (1,827) (28) (1,799) $ (3,431) 1,849 (5,280) Savings deposits (5,588) (5,848) 260 (19,750) 5,124 (24,874) Time deposits (1,441) (3,099) 1,658 (55,080) (26,143) (28,937) Deposits at foreign office 2,651 1,146 1,505 (1,105) (321) (784) Short-term borrowings 15,409 (4,856) 20,265 20,073 24,774 (4,701) Long-term borrowings 129 135 (6) 5,568 5,581 (13) ------------------------------------------------------- -------- --------- Total interest expense $ 9,333 $ (53,725) ------------------------------------------------------- -------- --------- * 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.
20 Item 2. Properties. ---------- Both the Parent Company 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. The Parent Company, M&T Bank and their subsidiaries occupy approximately 69% of the building and the remainder is leased to non-affiliated tenants. At December 31, 1994, the cost of this property, net of accumulated depreciation, was $10.5 million. In September 1992, M&T Bank acquired an additional facility in Buffalo, New York with approximately 346,000 rentable square feet of space at a cost of approximately $12 million. Approximately 70% 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, 1994, the cost of this building, including improvements made subsequent to acquisition and net of accumulated depreciation, was $16.8 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 $13.0 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 159 domestic banking offices of the Registrant's subsidiary banks, 56 are owned in fee and 103 are leased. Item 3. Legal Proceedings. ----------------- A number of lawsuits were pending against the Registrant and its subsidiaries at December 31, 1994. In the opinion of management, the potential liabilities, if any, arising from such litigation will not have a materially adverse impact on the Company's consolidated financial condition. Moreover, management believes that the Company has substantial defenses in such litigation, but there can be no assurance that the potential liabilities, if any, arising from such litigation will not have a materially adverse impact on the Company's consolidated results of operations in the future. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable --------------------------------------------------- Executive Officers of the Registrant ------------------------------------ Information concerning the Registrant's executive officers is presented below as of March 6, 1995. 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 60, is chairman of the board (1994), president (1988), chief executive officer (1983) and a director (1982) of the Registrant. He is chairman of the board, president and chief executive officer (1983) and a director (1982) of M&T Bank. Mr. Wilmers is a director of East New York (1988) and M&T Financial (1985). William A. Buckingham, age 52, is an executive vice president (1990) of the Registrant and of M&T Bank and is in charge of its Retail Banking Division. Mr. Buckingham is a director of M&T Securities. Mr. Buckingham held a number of management positions with Manufacturers Hanover Trust Company from 1973 to 1990, including the position of 21 executive vice president of its branch banking division which he held immediately prior to joining the Registrant and M&T Bank. Atwood Collins, III, age 48, is the president, chief executive officer and a director (1995) of East New York. Previously, Mr. Collins served as executive vice president and chief operating officer of East New York (1988). Mr. Collins held a number of management positions with Morgan Guaranty Trust Company of New York from 1972 to 1988, including the position of senior vice president and manager of treasury operations which he held immediately prior to joining East New York. Brian E. Hickey, age 42, is president (1994) of the Rochester Division of M&T Bank and has responsibility for managing all of M&T Bank's business segments in the Rochester market. Before joining M&T Bank, Mr. Hickey served as regional president, Rochester/Southern Region of Marine Midland Bank, which he joined as a regional executive in 1989. James L. Hoffman, age 55, is president (1992) of the Hudson Valley Division of M&T Bank. Mr. Hoffman served as chairman of the board, president, chief executive officer and a director (1983) of The First National Bank of Highland, which had been a wholly owned subsidiary of the Registrant prior to its merger with and into M&T Bank on February 29, 1992. Mr. Hoffman is a director of M&T Financial (1986). He served as an executive vice president of M&T Bank from 1974 to 1984. Barbara L. Laughlin, age 50, is an executive vice president (1993) of the Registrant and of M&T Bank (1990), and is in charge of its Technology and Banking Operations Division. Ms. Laughlin was executive vice president of retail banking and technology at The Seamen's Bank for Savings from June 1986 to April 1990 before joining M&T Bank. William C. Rappolt, age 49, is an executive vice president and treasurer (1993) of the Registrant and M&T Bank (1984) and executive vice president of East New York (1994). Mr. Rappolt is in charge of its Treasury Division. Mr. Rappolt is a director of M&T Financial (1985), and M&T Securities (1985). Robert E. Sadler, Jr., age 49, is an executive vice president (1990) of the Registrant and of M&T Bank (1983), and is in charge of its Commercial Banking Division. Mr. Sadler is chairman of the board and a director of Highland Lease (1994); chairman of the board (1987) and a director of M&T Capital (1983); chairman of the board and a director of M&T Credit (1994); 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); and chairman of the board and a director of M&T Securities (1994). Harry R. Stainrook, age 58, is an executive vice president (1993) of the Registrant and of M&T Bank (1985), and is in charge of M&T Bank's Trust and Investment Services Division. Mr. Stainrook is a director of M&T Securities (1994). James L. Vardon, age 53, is an executive vice president and chief financial officer (1984) of the Registrant and of M&T Bank, and is in charge of its Finance Division. Mr. Vardon is a director of M&T Capital (1984) and M&T Financial (1985). 22 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Registrant's common stock is traded under the symbol 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 Registrant's common stock, approximate number of common stockholders at year-end, frequency and amounts of dividends on common stock and restrictions on the payment of dividends. Item 6. Selected Financial Data. See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. CORPORATE PROFILE AND SIGNIFICANT DEVELOPMENTS First Empire State Corporation ("First Empire") is a regional bank holding company headquartered in Buffalo, New York with consolidated assets of $10.5 billion at December 31, 1994. 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") and The East New York Savings Bank ("East New York"), both of which are wholly owned. M&T Bank, with $8.8 billion in assets at December 31, 1994, is a New York-chartered commercial bank with 118 offices throughout Western New York and New York's Southern Tier, 20 offices in New York's Hudson Valley region and offices in New York City, Albany, Syracuse and Nassau, The Bahamas. East New York, with $1.8 billion in assets at December 31, 1994, is a New York-chartered savings bank with 18 offices in the New York City metropolitan area. M&T Bank's subsidiaries include M&T Mortgage Corporation, a mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T Financial Corporation, an equipment leasing company; M&T Capital Corporation, a venture capital company; M&T Credit Corporation, a consumer credit company and Highland Lease Corporation, a consumer leasing company. On 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, and deposit liabilities assumed were $330 million. Additionally, on December 10, 1994, M&T Bank purchased approximately $146 million of deposits from Chemical Bank along with seven branch offices in the Hudson Valley region of New York State. On February 9, 1995, M&T Bank entered into a definitive agreement to acquire four branches and approximately $90 million in deposits from The Chase Manhattan Bank, N.A. Two of the branches are located in Dutchess County, one in Ulster County and one in Niagara County, New York. On July 1, 1992, First Empire acquired Central Trust Company of Rochester, New York ("Central Trust"), and Endicott Trust Company of Endicott, New York ("Endicott Trust"), and simultaneously merged them into M&T Bank. The acquisitions added approximately $1.4 billion in assets and $1.3 billion in deposits to the Company's consolidated balance sheet and added 38 banking 23 offices in Western New York and New York's Southern Tier to M&T Bank's branch network on the acquisition date. The Company has continued to expand its out-of-state network of residential mortgage origination offices operated by M&T Mortgage Corporation. In 1993, offices were opened in Pittsburgh, Pennsylvania and in Cincinnati and Columbus, Ohio. During 1994, offices were opened in three additional locations in Ohio, Cleveland, Dayton and the Akron-Canton area, and in two Pennsylvania locations, Harrisburg and Lancaster. On March 6, 1995, M&T Mortgage Corporation acquired Statewide Funding Corporation ("Statewide"), a privately-held mortgage banking company based near Albany, New York. Statewide has a mortgage servicing portfolio of approximately $1.0 billion and originated more than $400 million of mortgage loans in 1994. Statewide operates five retail offices in New York, one in Massachusetts and one in Vermont, and also a national wholesale lending program. OVERVIEW The Company's net income increased 15% to $117.3 million in 1994, from $102.0 million in 1993, while earnings per common share increased 18% to $16.35 from $13.87 in 1993. Fully diluted earnings per common share, which includes the assumed full conversion of outstanding preferred stock into common stock, was $15.71 in 1994 and $13.42 in 1993, an increase of 17%. Net income was $97.9 million or $13.41 per common share in 1992, while fully diluted earnings per common share was $12.98. The results of operations in 1992 include significant pre-tax securities gains of $28.1 million resulting from management's decision to adjust the Company's holdings of investment securities in response to declining interest rates and the expected decline in economic value of certain securities resulting from prepayment risk. Sales in 1992 were additionally intended to reduce the size of the Company's balance sheet, thereby strengthening capital ratios, in anticipation of the Central Trust and Endicott Trust acquisitions. The Company achieved a return on average assets of 1.17% in 1994, up from .98% in 1993 and 1.03% in 1992. The return on average common stockholders' equity was 16.64% in 1994, 15.61% in 1993 and 17.39% in 1992. Excluding the effects of securities gains, the return on average assets in 1992 was .86%, while the return on average common stockholders' equity was 14.43%. Net interest income, adjusted to a fully taxable-equivalent basis for tax-exempt interest income earned on certain loans and investments, decreased 1% in 1994 to $472.2 million, from $474.8 million in 1993. Taxable-equivalent net interest income was $438.6 million in 1992. A $316 million decline in average earning assets in 1994 from 1993 was the major factor in the lower taxable-equivalent net interest income. The net interest margin, or taxable-equivalent net interest income expressed as a percentage of average earning assets, improved 13 basis points in 1994 to 4.89% from 4.76% in 1993. The net interest margin was 4.79% in 1992. Net charge-offs in 1994 decreased to $16.6 million from $35.8 million in 1993 and $46.3 million in 1992. Nonperforming loans declined to $77.5 million at December 31, 1994 from $82.3 million a year earlier and $113.6 million at year-end 1992. Consistent with declines in the level of net charge-offs and nonperforming loans and generally improving economic conditions in market areas served by the Company, the provision for possible credit losses was decreased to $60.5 million in 1994, compared with $80.0 million in 1993 and $85.0 million in 1992. In December 1994, First Empire transferred appreciated investment securities with a fair value of $15.7 million to pre-fund an affiliated, 24 tax-exempt private foundation which will utilize these resources over the coming years for charitable purposes. As a result of the transfer, 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 net income of $2.4 million. Excluding gains on sales of bank investment securities and the effect of the 1994 transfer of securities to the affiliated foundation, noninterest income totaled $113.2 million in 1994, 3% above $109.7 million in 1993 and 15% above $98.2 million in 1992. Excluding $13.8 million of charitable contributions expense associated with the transfer of securities, noninterest expense totaled $323.1 million in 1994, down 1% from $327.8 million in 1993, but up 4% from $311.3 million in 1992. The December 1994 acquisitions have been accounted for as purchase transactions and, accordingly, the operating results of the acquired entities have been included in the consolidated results of operations of the Company since the respective acquisition dates. The operating results of the acquired entities did not have a significant impact on the Company's results of operations in 1994. The excess of the cost of the acquired entities over the fair value of identifiable assets acquired less liabilities assumed has been recorded as goodwill and amounted to approximately $24 million, which is being amortized on a straight-line basis over five years. NET INTEREST INCOME/LENDING AND FUNDING ACTIVITIES A $316 million decline in average earning assets to $9.7 billion in 1994 from $10.0 billion in 1993 was the major factor contributing to the decline in taxable-equivalent net interest income in 1994 to $472.2 million from $474.8 million in 1993. Taxable-equivalent net interest income and average earning assets in 1992 were $438.6 million and $9.2 billion, respectively. A wider net interest spread, or the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, and a larger benefit from interest-free funds resulted in an improvement in the net interest margin, or taxable-equivalent net interest income expressed as a percentage of average earning assets, to 4.89% in 1994, compared with 4.76% in 1993 and 4.79% in 1992. During 1994, the Company continued to benefit from a relatively wide net interest spread. The net interest spread was 4.37% in 1994, compared with 4.33% in 1993 and 4.29% in 1992. The improvement in net interest spread in 1994 over 1993 resulted from a favorable shift in the composition of the portfolio of earning assets reflecting a greater proportion of loans and reduced holdings of money-market assets and investment securities. The benefit obtained from increased holdings of loans, which typically yield more than money-market assets and investment securities, was partially offset by the rise in interest expense on short-term borrowings and deposits. The higher proportion of loans and reduced holdings of money-market assets and investment securities resulted in a 31 basis point (hundredth of one percent) increase in 1994 to 7.77% in the yield on earning assets, while the cost of interest-bearing liabilities increased 27 basis points to 3.40%. Rising interest rates had the effect of narrowing the difference between the yield on loans and leases and the rate paid on interest-bearing deposits by 23 basis points in 1994 from 1993. The increase in the net interest spread in 1993 from 1992 resulted from a widening of the spread between the yield on loans and leases and the rate paid on interest-bearing deposits, a then-favorable repercussion of the declining and relatively low interest rates in 1993. The contribution to net interest margin of interest-free funds rose to .52% in 1994 from .43% in 1993 and .50% in 1992. The improvement in 1994 from 1993 resulted largely from the 27 basis point increase to 3.40% in the rate paid on interest-bearing liabilities used to value these funds, aided by a 7% 25 increase in average interest-free funds. The 7 basis point reduction in the contribution of interest-free funds in 1993 from 1992 was due to the 90 basis point decline in the rate on interest-bearing liabilities from 4.03%, which more than offset a 22% increase in net interest-free balances. Average interest-free funds were $1.5 billion in 1994, $1.4 billion in 1993 and $1.1 billion in 1992. The Company has benefited from relatively wide net interest spreads in recent years. Despite significant increases in short-term interest rates throughout 1994, the spread between the prime rate and other money-market rates remained relatively wide in comparison to historic norms. However, rising interest rates in 1994 have resulted in sharp reductions in prepayments of residential mortgage loans, thereby extending the expected lives of such loans, of mortgage-related financial instruments, such as mortgage-backed securities and collateralized mortgage obligations ("CMOs"), and of interest rate swaps indexed to residential mortgage loans. Management believes that further changes in the interest rate environment or reductions in spreads could adversely impact the Company's net interest margin and net interest income. Although not necessarily indicative of a trend, the Company's net interest spread in the fourth quarter of 1994 of 4.15% was below that achieved in any other quarter of 1994. As part of an overall interest rate risk management program, the Company utilizes interest rate swap agreements to modify, in a cost and capital efficient manner, the repricing characteristics of certain portions of the loan and deposit portfolios. Revenue and expense arising from these agreements are reflected in either the yields earned on loans or, as appropriate, rates paid on interest-bearing deposits. The effect of interest rate swaps on the Company's net interest income and margin as well as average notional amounts and rates are presented in table 4. Average loans and leases grew to $7.4 billion in 1994 from $7.0 billion and $6.6 billion in 1993 and 1992, respectively. The acquisition of $369 million of loans of Ithaca Bancorp on December 1, 1994 did not substantially impact average loans and leases in 1994. Improved economic conditions in some market areas served by the Company contributed to increases in 1994 in the outstanding balance of consumer loans, primarily automobile loans, and multi-family commercial real estate loans. In 1993, when sluggish economic conditions in the areas served by the Company restrained loan demand, growth in average loans resulted from the full-year effect of the acquisitions of Central Trust and Endicott Trust on July 1, 1992. Table 5 summarizes by type, average loans and leases outstanding in 1994 and percentage changes in average loans and leases over the past two years. Loans secured by real estate, excluding home equity lines of credit which are classified as consumer loans, represented approximately 61% of the loan portfolio during 1994, down from 63% in 1993 and 64% in 1992. At December 31, 1994, the Company held approximately $3.4 billion of commercial real estate loans and $1.6 billion of consumer real estate loans. Commercial real estate loans are originated by the Company predominately in the New York City metropolitan area, including properties 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. Typical 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 terms of the loan agreement may be extended for an additional five years at the then-current market rate of interest. Table 6 presents commercial real estate loans at December 31, 1994 by geographic area, type of 26 collateral and size of the loans outstanding. Approximately 58% of the $1.8 billion of commercial real estate loans in the New York City metropolitan area were secured by multi-family residential properties, 23% by office space and 10% 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. Approximately 55% of the aggregate dollar amount of New York City area loans were for $3 million or less. Commercial real estate loans secured by properties elsewhere in New York State, mostly in Western New York, tend to have a greater diversity of collateral types and include a significant amount of lending to customers who use the mortgaged properties in their trades or businesses. The typical loan in this segment of the portfolio was $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 were largely obtained in acquisitions of other financial institutions. The Company normally refrains from construction lending, except when the borrower has obtained a commitment for permanent financing upon project completion. As a result, the commercial construction loan portfolio totaled only $43.8 million, or .5% of total loans at December 31, 1994. Of the $1.6 billion of real estate loans secured by one-to-four family residential properties at December 31, 1994, approximately 80% were for properties located in New York State. At the 1994 year-end, residential mortgage loans held for sale totaled $33.4 million. The Company originates residential mortgage loans in its banking offices in New York State, and through offices of M&T Mortgage Corporation, in Ohio and Pennsylvania. The Company's portfolio of investment securities averaged $2.1 billion in 1994, $2.2 billion in 1993 and $2.0 billion in 1992. Factors influencing the size of the investment securities portfolio include management of balance sheet size and resulting capital ratios; demand for loans, which typically generate higher yields than investment securities; repayments, which have slowed with rising interest rates; the level of deposits and interest rate risk management considerations. The investment securities portfolio is largely comprised of CMOs, other adjustable rate mortgage-backed securities and shorter-term U.S. Treasury notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile and the adequacy of expected returns relative to prepayment and other risks assumed. During December 1994, the Company sold approximately $57 million of investment securities obtained in the acquisition of Ithaca Bancorp. Such sale had no impact on the Company's net income. The average balance of money-market assets, which are comprised of interest-bearing deposits at banks, trading account assets, Federal funds sold and agreements to resell securities, declined to $166 million in 1994 from $826 million in 1993 and $594 million in 1992. The decline in 1994 from 1993 largely reflects increased demand for loans and the Company's decisions to reduce the size of the balance sheet in order to strengthen capital ratios in anticipation of the 1994 acquisitions and to limit the amount of short-term borrowings, which had been used to fund money-market assets. The increase in average money-market assets during 1993 from 1992 resulted from investment opportunities in various short-term instruments, the relative lack of alternative securities deemed attractive for longer-term investment and sluggish loan demand. Core deposits, which include noninterest-bearing demand deposits, interest-bearing transaction accounts, savings deposits and domestic time deposits under $100,000, represent a significant source of funding to the Company. Core deposits are commonly generated through the branch network at lower interest rates than wholesale funds of similar maturities. In 1994, average core deposits declined to $6.8 billion from $7.2 billion in 1993 and 1992. Funding provided by core deposits totaled 70% of average earning assets 27 in 1994, compared with 72% in 1993 and 79% in 1992. The December 1994 acquisitions of $442 million of core deposits did not have a significant effect on the average balance of such deposits for 1994. In response to generally lower interest rates, in recent years many depositors sought potentially higher returns by redeploying deposits, primarily time and savings deposits, out of the banking system into alternative investment vehicles, such as mutual funds. However, the Company has been successful in retaining many customer relationships associated with closed deposit accounts by offering alternative investments to customers through M&T Securities, Inc. and through an unaffiliated company renting space in the Company's branches. By mid-year 1995, M&T Securities, Inc. will assume responsibility for sales of mutual funds and other alternative investments from the unaffiliated company. An analysis of changes in the components of core deposits is presented in table 8. In addition to core deposits, the Company obtains funding through domestic time deposits of $100,000 or more, off-shore deposits originated through the Company's international office and, beginning in the fourth quarter of 1994, a brokered retail certificate of deposit program. Domestic time deposits over $100,000, excluding brokered retail certificates of deposit, averaged $357 million in 1994 compared with $294 million in 1993 and $326 million in 1992. Off-shore deposits, comprised primarily of accounts with balances of $100,000 or more, averaged $156 million in 1994 compared with $120 million and $130 million in 1993 and 1992, respectively. Brokered deposits averaged $45 million in 1994 and totaled $456 million at December 31, 1994. The brokered retail certificate of deposit program was initiated to solicit up to $900 million of deposits as an alternative to short-term borrowings and other wholesale funding sources. The weighted-average remaining term to maturity of brokered deposits at December 31, 1994 was 2.6 years. The Company also uses short-term borrowings from banks, securities dealers, the Federal Home Loan Bank of New York ("FHLB") and others as sources of funding. Short-term borrowings averaged $1.8 billion in 1994, $1.9 billion in 1993 and $1.1 billion in 1992. In general, short-term borrowings have been used to fund the Company's discretionary investments in money-market assets and investment securities, and to replace deposit outflows. PROVISION FOR POSSIBLE CREDIT LOSSES The purpose of the provision is to replenish and build the Company's allowance for possible credit losses to a level necessary to maintain an adequate reserve position. In assessing the adequacy of the allowance for possible credit losses, management performs an ongoing evaluation of the loan portfolio, 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, 1994 was adequate to absorb credit losses from existing loans, leases and credit commitments. The provision for possible credit losses was $60.5 million in 1994, a decrease of 24% from $80.0 million in 1993 and 29% from $85.0 million in 1992. Net charge-offs in 1994 decreased to $16.6 million from $35.8 million in 1993 and $46.3 million in 1992. Net charge-offs as a percentage of average loans outstanding were .22% in 1994, .51% in 1993 and .70% in 1992. At December 31, 1994, nonperforming loans totaled $77.5 million, a decline of $4.7 million from a year earlier and $36.1 million from December 31, 1992. The declines in the level of net charge-offs and nonperforming loans, and improved economic conditions in market areas served by the Company were major factors contributing to the lower provision for possible credit losses in 1994. The allowance for possible credit losses was $243.3 million or 2.96% of net loans and leases at December 31, 1994, up from $195.9 million or 2.70% at 28 December 31, 1993 and $151.7 million or 2.17% at December 31, 1992. The ratio of the allowance to nonperforming loans was 314%, 238% and 134% at year-end 1994, 1993 and 1992, respectively. A comparative allocation of the allowance for possible credit losses for each of the past five year-ends is presented in table 10. Amounts were allocated to specific loan categories based upon management's classification of loans under the Company's internal loan grading system and estimates of potential charge-offs inherent in each category. However, as the total reserve is available to absorb losses from any loan category, amounts assigned do not necessarily indicate future losses within these categories. The increase in the allocated portion of the reserve in 1994 and 1993 compared with prior years is not indicative of a deterioration of credit quality within the loan portfolio, but rather reflects certain revisions to the assumptions used to calculate the allocated portion of the allowance for possible credit losses. Nevertheless, the unallocated portion of the reserve represents management's assessment of the overall level of credit risk inherent in the loan portfolio over a longer time frame. The Company's credit loss experience is influenced by many factors, including general economic conditions. However, due to the size of the Company's commercial real estate loan portfolio, the Company's credit loss experience has been and will continue to be significantly affected by real estate valuations, in particular. Nonperforming commercial real estate loans totaled $47.5 million and $48.3 million at December 31, 1994 and 1993, respectively. At December 31, 1994, $27.1 million of nonperforming commercial real estate loans were secured by properties located in the New York City metropolitan area, compared with $29.7 million a year earlier. Net charge-offs of commercial real estate loans were $12.8 million in 1994, $19.2 million in 1993 and $26.0 million in 1992. Included in these totals are net charge-offs of commercial real estate loans secured by properties in the New York City metropolitan area of $11.1 million, $14.2 million and $21.8 million in 1994, 1993, and 1992, respectively. The Company has limited exposure to possible credit losses originating from concentrations of credit extended to any specific industry. No such concentration exceeded 10% of total loans outstanding at December 31, 1994. Furthermore, the Company had no exposure to less developed countries, and only $1.2 million of foreign loans in total. Repossessed assets taken in foreclosure of defaulted loans totaled $10.1 million at December 31, 1994, compared with $12.2 million and $16.7 million at the end of 1993 and 1992, respectively. OTHER INCOME Excluding gains on sales of bank investment securities and the effect of the previously noted transfer of securities to an affiliated foundation, other income totaled $113.2 million in 1994, an increase of 3% from $109.7 million in 1993 and 15% from $98.2 million in 1992. Service charges on deposit accounts increased 8% to $35.0 million in 1994 from $32.3 million in 1993. Merchant discount and other credit card fees in 1994 totaled $8.7 million compared with $7.9 million in 1993. Deposit service charges and merchant and credit card revenues were $28.4 million and $6.7 million, respectively, in 1992 when the mid-year acquisitions of Central Trust and Endicott Trust provided only six months of revenue. Trust income of $22.6 million declined 5% from $23.9 million in 1993, largely the result of lower securities clearing revenues. The increase in trust revenues in 1993 from $16.9 million in 1992 was primarily due to the Central Trust and Endicott Trust acquisitions and higher securities clearing revenues. Trading account gains declined to $.7 million in 1994, from $2.7 million in 1993 and $1.7 million in 1992. 29 Excluding the $10.4 million of tax-exempt income related to the transfer of securities to the affiliated foundation, other revenues from operations increased to $46.2 million in 1994, up from $42.9 million in 1993 and $44.5 million in 1992. The improvement in other revenues in 1994 over the prior two years resulted in part from growth in the Company's residential mortgage servicing business. Residential mortgage loans serviced for others totaled $4.0 billion at December 31, 1994, up from $2.9 billion and $2.2 billion at year-end 1993 and 1992, respectively. Revenues from servicing residential mortgage loans for others were $13.1 million, $10.4 million and $5.9 million in 1994, 1993 and 1992, respectively. Also favorably impacting the year-over-year comparisons were higher loan fees, such as prepayment fees, and asset management revenues, as well as the full-year impact in 1993 of revenues attributable to the mid-1992 acquisitions. The overall decline in other revenues from operations in 1993 from 1992 resulted from lower gains from the sales of out-of-state loans and leases obtained in acquisitions, which totaled $2.8 million in 1993 and $6.0 million in 1992. Additionally, other revenues in 1992 included $2.5 million of non-recurring earnings on options written to sell certain mortgage-backed securities. OTHER EXPENSES Other expenses totaled $336.9 million in 1994, compared with $327.8 million in 1993 and $311.3 million in 1992. As previously noted, other expenses in 1994 included $13.8 million of charitable contributions expense related to the transfer of investment securities to a private, tax-exempt charitable foundation affiliated with the Company. Such expense is included in other costs of operations. Excluding the $13.8 million of expense related to the transfer, other expense in 1994 decreased $4.7 million from 1993. Salaries and employee benefits expenses were $161.2 million in 1994, an increase of $6.9 million or 4% from $154.3 million in 1993. The rise was due largely to merit salary increases and higher pension and other benefits costs. Personnel costs were $130.8 million in 1992 when only six months of expense associated with the acquired franchises of Central Trust and Endicott Trust were incurred. Growth in the Company's residential mortgage lending and servicing business, as well as merit salary increases and higher pension and other benefits costs were additional factors contributing to the increase in 1993 from 1992. The number of full-time equivalent employees was 4,149 at December 31, 1994, including 185 employees from the December 1994 acquisitions. Full-time equivalent employees totaled 4,028 and 3,959 at December 31, 1993 and 1992, respectively. Excluding the $13.8 million of contributions expense noted above, nonpersonnel expenses totaled $161.9 million in 1994, $11.6 million or 7% lower than 1993 and $18.7 million or 10% below 1992. Expenses in 1994 for professional services and other real estate owned declined a combined $7.9 million from 1993. Write-downs in the carrying value of excess servicing receivables and purchased mortgage servicing rights associated with residential mortgage loans serviced for others were $.5 million in 1994, compared with $4.7 million in 1993 and $16.8 million in 1992. At December 31, 1994, excess servicing receivables and purchased mortgage servicing rights recorded as assets totaled $17.6 million. Nonpersonnel expense in 1992 included only six months of expenses associated with the Central Trust and Endicott Trust franchises. Also, expenses associated with the project, completed in 1993, to significantly upgrade the Company's major computer systems were approximately $1.0 million in 1993 and $9.2 million in 1992. INCOME TAXES The provision for income taxes in 1994 was $77.2 million, up from $71.5 million in 1993 and $64.8 million in 1992. The effective tax rates were 40% in 1994, 41% in 1993 and 40% in 1992. 30 As previously noted, in December 1994 First Empire transferred investment securities having a cost and market value of $5.2 million and $15.7 million, respectively, to an affiliated tax-exempt private foundation. The $10.4 million excess of market value over cost is not subject to federal or state income taxes and has been included in other revenues from operations in the consolidated statement of income. The effect of this permanent difference was to decrease income tax expense and the effective tax rate in 1994 by $4.3 million and 2%, respectively, from the amount computed by applying the statutory income tax rates to pre-tax income. On August 10, 1993, President Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law. As part of the legislation, effective January 1, 1993, the tax rate applied to corporate taxable income in excess of $10 million was increased 1% to 35%. Under generally accepted accounting principles, the effects of the higher tax rate (and other changes made by the legislation) are recognized in determining financial statement income and deferred tax assets and liabilities in the period that includes the date of enactment. Accordingly, the aggregate effect of the legislation was to increase income tax expense and the effective tax rate in 1993 by approximately $792 thousand and .46%, respectively, including a $698 thousand benefit related to years prior to 1993. INTERNATIONAL ACTIVITIES The Company's investment in international assets was $7 million and $62 million at December 31, 1994 and 1993, respectively. Total off-shore deposits were $203 million and $189 million at December 31, 1994 and 1993, respectively. LIQUIDITY AND INTEREST RATE SENSITIVITY As a financial intermediary, the Company creates liquidity risk whenever the maturities of financial instruments included in assets and liabilities differ. As a result, ensuring that sufficient cash flow and liquid assets are available to satisfy demands for loans, deposit withdrawals, operating expenses and other corporate purposes is a critical element in managing a banking institution. Core deposits have historically provided a large source of funds for the Company. 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. The Company competes with many financial market participants and alternative investment vehicles for deposits and, consistent with banking industry experience in general, has experienced a decline in the proportion of average earning assets funded by core deposits. The decline in average core deposits has been primarily in time and savings deposit accounts as many depositors have transferred funds out of the banking system into mutual funds and other alternative investments. Core deposits financed 71% of the Company's earning assets at December 31, 1994, compared with 68% at December 31, 1993 and 83% at December 31, 1992. The Company supplements funding from core deposits with various wholesale borrowings, such as Federal funds purchased and securities sold under agreements to repurchase, and the brokered retail certificate of deposit program previously discussed. Additionally, M&T Bank and East New York, have a combined credit facility with the FHLB aggregating $853 million, with any borrowings secured by commercial and residential mortgage loans and investment securities. Borrowings outstanding under such credit facility totaled $249 million at December 31, 1994. Funding is also available through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions which, while informal and sometimes reciprocal, aggregate to several times anticipated funding needs. Other sources of liquidity include maturities of money-market assets and repayments 31 of loans and investment securities. Cash flow generated from operations, such as fees collected for services, also contributes to liquidity. First Empire's ability to pay dividends, repurchase treasury stock and fund operating expenses is primarily dependent on the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. First Empire also maintains a line of credit with an unaffiliated commercial bank. Management does not currently anticipate engaging in any activities, in either the short- or long-term, which would cause a significant strain on the liquidity of either First Empire or its subsidiary banks. Furthermore, in the opinion of management, available sources of liquidity are more than adequate to meet anticipated funding needs. On average, the Company's earning assets reprice more quickly than its interest-bearing liabilities. As a result, the Company's net interest income is subject to the effects of changing interest rates and, in particular, would be negatively impacted in declining interest rate environments. The Company's interest rate risk management program is designed to protect against this risk by limiting the variability of net interest income under differing interest rate scenarios. As part of the interest rate risk management program, the Company has entered into interest rate swap agreements. Information about interest rate swaps entered into for interest rate risk management purposes is included in note 15 of Notes to Financial Statements. The estimated fair value of the interest rate swap portfolio presented in the Notes to Financial Statements 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. Such fair value is not recognized in the consolidated financial statements. The swaps modify the repricing characteristics of certain portions of the Company's loan and deposit portfolios. The carrying values of such loans and deposits are also not adjusted for appreciation or depreciation resulting from changes in interest rates. In accordance with industry practice, table 15 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. In management's opinion, the interest rate sensitivity analysis presented in the table does not accurately reflect the Company's actual sensitivity to changes in interest rates. Management monitors the Company's interest rate sensitivity with the aid of a computer model which considers statistically derived interrelationships in the magnitude and timing of the repricing of all financial instrument products, including the effect of changing interest rates on expected prepayments and maturities. Interest rate risk is measured by the variability of net interest income under a number of interest rate scenarios. Management's assessment is that a sustained increase in interest rates would likely have a detrimental effect on net interest income in the coming year. Management closely monitors the Company's exposure to changing interest rates and spreads and stands ready to take action, through the use of on- or off-balance sheet financial instruments, to mitigate such exposure when deemed prudent to do so. 32 CAPITAL Common stockholders' equity totaled $681.0 million at December 31, 1994, compared with $684.0 million and $586.8 million at the end of 1993 and 1992, respectively. On a per share basis, common stockholders' equity was $103.02 at December 31, 1994, an increase of 4% from $99.43 at December 31, 1993 and 20% from $85.79 at December 31, 1992. Total stockholders' equity at December 31, 1994 was $721.0 million or 6.85% of total assets, compared with $724.0 million or 6.99% at December 31, 1993 and $626.8 million or 6.54% at December 31, 1992. The ratio of average total stockholders' equity to average total assets was 7.21%, 6.45% and 6.10% in 1994, 1993 and 1992, respectively. Stockholders' equity at December 31, 1994 included a reduction of $50.6 million, or $7.65 per common share, for the net after-tax impact of unrealized losses on investment securities classified as available for sale pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which the Company adopted on December 31, 1993. Such unrealized losses represent the amount by which amortized cost exceeded the fair value of such investment securities, net of applicable income taxes. At December 31, 1993, stockholders' equity included $9.1 million, or $1.33 per common share, of net unrealized gains from securities classified as available for sale. The market valuation of investment securities should be considered in the context of the entire balance sheet of the Company. In general, the carrying value of other financial instruments in the balance sheet is not adjusted for appreciation or depreciation resulting from changes in interest rates. Federal regulators generally require banking institutions to maintain "core capital" and "total capital" ratios of at least 4% and 8%, respectively, of risk-adjusted total assets. In addition to the risk-based measures, Federal bank regulators have also implemented a minimum "leverage" ratio guideline of 3% of the quarterly average of total assets. Under regulatory guidelines, the unrealized gains or losses on investment securities available for sale pursuant to SFAS No. 115 are not recognized in determining regulatory capital. The capital ratios of the Company and its banking subsidiaries, M&T Bank and East New York, as of December 31, 1994 are presented in table 16. The Company has historically maintained capital ratios well in excess of minimum regulatory guidelines largely through a high rate of internal capital generation. The rate of internal capital generation, or net income (excluding the after-tax effects of gains from sales of investment securities) less dividends paid expressed as a percentage of average total stockholders' equity, rose to 13.67% in 1994 from 12.66% in 1993 and 11.59% in 1992. Cash dividends on common stock of $14.7 million were paid in 1994 compared with $13.1 million in 1993 and $10.8 million in 1992. In the third quarter of 1994, First Empire's quarterly common stock dividend rate was increased to $.60 per share from $.50. In total, dividends per common share increased to $2.20 in 1994 from $1.90 in 1993. Total dividends per common share were $1.60 in 1992. Dividends of $3.6 million were paid to the preferred stockholder in 1994, 1993 and 1992. In December 1993, First Empire announced a plan to repurchase and hold as treasury stock up to 506,930 shares of common stock for reissuance upon the possible future conversion of its 9% convertible preferred stock. Such preferred stock is convertible at any time into shares of First Empire's common stock at a conversion price of $78.90625 per share, subject to certain adjustments. First Empire has the right to redeem the preferred stock without premium on or after March 31, 1996. However, upon receipt of notification of such a planned redemption, the holder may convert the preferred stock into common shares. As of December 31, 1994, First Empire had repurchased 298,700 shares pursuant to such plan at an average cost of $147.18. In the fourth quarter the repurchase program was temporarily halted until after completion 33 of the December acquisitions. Repurchases have been resumed in the first quarter of 1995. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED In May 1993, the Financial Accounting Standards Board issued SFAS No. 114 "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 was amended in October 1994. As amended, SFAS No. 114 requires that creditors measure certain impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable value or the fair value of underlying collateral, if the loan is collateral-dependent. SFAS No. 114 applies to financial statements for fiscal years beginning after December 15, 1994. The Company will adopt SFAS No. 114 in the first quarter of 1995. When adopted, SFAS No. 114 is not expected to have an adverse impact on the Company's results of operations. 34
----------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------------- Table 1 FINANCIAL HIGHLIGHTS Amounts in thousands, except per share 1994 1993 Change ------------------------------------------ ----------- ---------- -------- For the year ------------------------------------------ Net income $117,295 101,992 + 15 % Per common share Net income Primary $16.35 13.87 + 18 Fully diluted 15.71 13.42 + 17 Cash dividends 2.20 1.90 + 16 Average common shares outstanding Primary 6,952 7,091 - 2 Fully diluted 7,464 7,601 - 2 Return on Average total assets 1.17 % .98 % Average common stockholders' equity 16.64 % 15.61 % Market price per common share Closing $136.00 140.75 - 3 High 165.00 159.00 Low 134.50 130.25 ------------------------------------------ ----------- ---------- -------- At December 31 ------------------------------------------ Loans and leases, net of unearned discount $ 8,217,293 7,261,099 + 13 % Total assets 10,528,644 10,364,958 + 2 Total deposits 8,243,073 7,353,261 + 12 Total stockholders' equity 720,996 723,994 - Stockholders' equity per common share $103.02 99.43 + 4 ------------------------------------------ ----------- ---------- --------
35
------------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------------- Table 2 QUARTERLY TRENDS 1994 Quarters 1993 Quarters ------------------------------------ ------------------------------------ Taxable-equivalent basis Fourth Third Second First Fourth Third Second First ----------------------------------------- ------- ------- -------- -------- ------ ------- ------- ------- Earnings and dividends Amounts in thousands, except per share ----------------------------------------- Interest income $ 201,543 190,555 181,171 178,160 185,550 185,069 189,417 184,673 Interest expense 83,287 72,393 64,277 59,249 66,761 66,014 69,062 68,036 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Net interest income 118,256 118,162 116,894 118,911 118,789 119,055 120,355 116,637 Less: provision for possible credit losses 12,850 13,802 14,022 19,862 21,713 19,715 20,215 18,315 Other income 38,651 27,261 29,378 28,449 28,702 27,484 27,491 26,867 Less: other expense 95,048 80,584 82,015 79,215 79,388 80,426 84,566 83,439 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 49,009 51,037 50,235 48,283 46,390 46,398 43,065 41,750 Applicable income taxes 16,034 20,934 20,553 19,665 18,848 19,358 16,874 16,451 Taxable-equivalent adjustment 1,087 1,005 1,001 990 909 1,188 1,006 977 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 31,888 29,098 28,681 27,628 26,633 25,852 25,185 24,322 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Cash dividends on preferred stock $900 900 900 900 900 900 900 900 Per common share data Net income Primary $4.53 4.09 3.96 3.77 3.62 3.52 3.42 3.31 Fully diluted 4.35 3.93 3.80 3.64 3.50 3.40 3.31 3.21 Cash dividends .60 .60 .50 .50 .50 .50 .50 .40 Average common shares outstanding Primary 6,817 6,899 7,014 7,083 7,097 7,097 7,102 7,069 Fully diluted 7,324 7,406 7,541 7,590 7,604 7,604 7,609 7,586 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Balance sheet data Dollars in millions, except per share ----------------------------------------- Average balances Total assets $ 10,200 9,959 9,886 10,056 10,775 10,348 10,483 9,951 Earning assets 9,869 9,620 9,515 9,665 10,371 9,947 10,070 9,527 Investment securities 1,923 1,992 2,097 2,293 2,521 2,384 2,063 1,713 Loans and leases, net of unearned discount 7,805 7,442 7,266 7,188 7,080 6,991 6,957 6,899 Deposits 7,703 7,250 7,220 7,287 7,352 7,516 7,649 7,856 Stockholders' equity 724 715 723 731 703 680 659 638 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- At end of quarter Total assets $ 10,529 10,301 10,336 10,412 10,365 10,930 10,457 10,423 Earning assets 10,017 9,888 9,840 10,023 10,085 10,462 10,059 9,895 Investment securities 1,791 1,889 1,985 2,153 2,429 2,523 2,526 1,726 Loans and leases, net of unearned discount 8,217 7,590 7,401 7,240 7,261 7,092 7,021 6,887 Deposits 8,243 7,362 7,276 7,329 7,353 7,538 7,591 7,788 Stockholders' equity 721 721 718 725 724 692 670 649 Equity per common share $103.02 102.73 100.63 100.19 99.43 94.88 91.67 88.68 ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Performance ratios, annualized ----------------------------------------- Return on Average assets 1.24 % 1.16 % 1.16 % 1.11 % .98 % .99 % .96 % .99 % Average common stockholders' equity 17.97 % 16.58 % 16.32 % 15.68 % 15.39 % 15.46 % 15.74 % 15.88 % Net interest margin on average earning assets 4.75 % 4.87 % 4.93 % 4.99 % 4.54 % 4.75 % 4.79 % 4.96 % Nonperforming assets to total assets, at end of quarter .83 % .91 % .90 % .95 % .91 % .92 % 1.01 % 1.21 % ----------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Market price per common share High $ 153 165 156 1/2 144 147 147 159 150 1/2 Low 134 1/2 146 136 3/4 135 132 1/4 136 1/8 133 1/8 130 1/4 Closing 136 151 1/2 156 1/2 139 1/4 140 3/4 140 3/4 137 149 3/4 ----------------------------------------- -------- ------- ------- ------- ------- ------- ------- -------
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------------------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------------------- Table 3 EARNINGS SUMMARY Dollars in millions Compound Increase (decrease)* growth rate** 1993 to 1994 1992 to 1993 5 years Amount % Amount % 1994 1993 1992 1991 1990 1989 to 1994 ------- ---- ------- ----- ----------------------------------- ----- ----- ----- ----- ----- ------------ $ 6.7 1 $ (17.5) (2) Interest income*** $ 751.4 744.7 762.2 777.9 666.4 5 % 9.3 3 (53.7) (17) Interest expense 279.2 269.9 323.6 440.2 426.9 (6) ------- ---- ------- ----- ----------------------------------- ----- ----- ----- ----- ----- ------------ (2.6) (1) 36.2 8 Net interest income*** 472.2 474.8 438.6 337.7 239.5 19 Less: provision for possible (19.4) (24) (5.0) (6) credit losses 60.5 80.0 85.0 63.4 27.4 32 Gain on sales of bank (.7) (85) (27.2) (97) investment securities .1 .9 28.1 .4 - - 13.9 13 11.5 12 Other income 123.6 109.7 98.2 77.2 52.7 21 Less: 6.9 4 23.6 18 Salaries and employee benefits 161.2 154.3 130.8 103.2 85.9 16 2.1 1 (7.1) (4) Other expense 175.6 173.5 180.6 125.4 85.2 20 ------- ---- ------- ----- ----------------------------------- ----- ----- ----- ----- ----- ------------ 21.0 12 9.1 5 Income before income taxes 198.6 177.6 168.5 123.3 93.7 18 Less: - - (1.7) (29) Taxable-equivalent adjustment*** 4.1 4.1 5.8 8.5 9.0 (15) 5.7 8 6.7 10 Income taxes 77.2 71.5 64.8 47.6 30.8 25 ------- ---- ------- ----- ----------------------------------- ----- ----- ----- ----- ----- ------------ $ 15.3 15 $ 4.1 4 Net income $ 117.3 102.0 97.9 67.2 53.9 18 % ------- ---- ------- ----- ----------------------------------- ----- ----- ----- ----- ----- ------------ * Changes were calculated from unrounded amounts. ** Before effect of 1989 change in accounting principle related to postretirement benefits. *** 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 43% for 1994, 42% for 1993 and 41% for all other periods.
37
--------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES --------------------------------------------------------------------------------------------------------------------- TABLE 4 INTEREST RATE SWAPS Year ended December 31 ---------------------------------------------------------------------------------------- 1994 1993 1992 ------------------------- ------------------------- ------------------------- Dollars in thousands Amount Rate* Amount Rate* Amount Rate* ---------------------------- ------------ -------- ----------- --------- ------------ -------- Increase (decrease) in: Interest income $ 10,463 .10 % $ 26,695 .27 % $ 17,428 .19 % Interest expense (2,018) (.03) (7,547) (.09) (2,635) (.03) ---------------------------- ----------- -------- ---------- --------- ---------- -------- Net interest income/margin $ 12,481 .13 % $ 34,242 .34 % $ 20,063 .22 % ---------------------------- ----------- -------- ---------- --------- ---------- -------- Average notional amount** $ 1,627,454 $ 1,213,886 $ 502,452 Fixed rate received*** 5.72 % 6.10 % 8.10 % Variable rate paid*** 4.93 % 3.32 % 4.08 % ---------------------------- -------- -------- -------- * 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.
38 ------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------- Table 5 AVERAGE LOANS AND LEASES (net of unearned discount) Percent increase (decrease) from Dollars in millions 1994 1993 to 1994 1992 to 1993 --------------------------------- ------ ------------ ------------ Commercial, financial, etc. $1,487 5 % 15 % Real estate - commercial 3,132 9 10 Real estate - consumer 1,430 (6) (7) Consumer 1,378 17 6 --------------------------------- ------ ------------ ------------ Total $7,427 6 % 6 % --------------------------------- ------ ------------ ------------ 39
------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------- Table 6 COMMERCIAL REAL ESTATE LOANS (net of unearned discount) December 31, 1994 Out- Percent of dollars outstanding by loan size Dollars in millions standings $0-1 $1-3 $3-10 $10+ --------------------------------------- ---------- ------- ------ ------ ----- Metropolitan New York City Apartments/ Multifamily $ 1,061.8 15 % 20 % 18 % 5 % Office 412.4 3 7 10 3 Retail 179.6 2 4 3 1 Construction 1.3 - - - - Industrial 48.3 - 1 1 - Other 127.9 1 2 3 1 --------------------------------------- --------- ------- ------ ------ ----- Total Metropolitan New York City $ 1,831.3 21 % 34 % 35 % 10 % --------------------------------------- --------- ------- ------ ------ ----- Other New York State Apartments/ Multifamily $ 278.8 8 % 7 % 4 % 1 % Office 342.6 8 6 8 3 Retail 225.4 7 5 4 - Construction 39.3 2 1 - - Industrial 146.9 6 3 1 - Other 358.7 12 9 5 - --------------------------------------- --------- ------- ------ ------ ----- Total other New York State $ 1,391.7 43 % 31 % 22 % 4 % --------------------------------------- --------- ------- ------ ------ ----- Other Apartments/ Multifamily $ 60.2 7 % 21 % 18 % - % Office 2.5 2 - - - Retail 23.9 3 9 7 - Construction 3.2 1 2 - - Industrial 12.1 2 1 6 - Other 27.7 2 7 3 9 --------------------------------------- --------- ------- ------ ------ ----- Total other $ 129.6 17 % 40 % 34 % 9 % --------------------------------------- --------- ------- ------ ------ ----- Total commercial real estate loans $ 3,352.6 30 % 33 % 30 % 7 % --------------------------------------- --------- ------- ------ ------ -----
40
----------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------------------------------------------- Table 7 AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES 1994 1993 --------------------------- --------------------------- Average Average Average Average Average balance in millions; interest in thousands balance Interest rate balance Interest rate -------------------------------------------------- ------- -------- ------- ------- -------- ------- Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 1,487 $ 116,479 7.84 % 1,420 112,568 7.93 % Real estate 4,562 390,681 8.56 4,387 379,832 8.66 Consumer 1,378 128,117 9.30 1,175 118,461 10.08 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total loans and leases, net 7,427 635,277 8.55 6,982 610,861 8.75 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Money-market assets Interest-bearing deposits at banks 48 2,212 4.58 189 6,740 3.56 Federal funds sold and agreements to resell securities 109 4,751 4.35 610 20,403 3.35 Trading account 9 499 5.92 27 1,434 5.32 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total money-market assets 166 7,462 4.50 826 28,577 3.46 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Investment securities U.S. Treasury and federal agencies 1,167 56,685 4.86 1,300 62,420 4.80 Obligations of states and political subdivisions 53 3,072 5.77 41 2,600 6.40 Other 852 48,933 5.74 832 40,251 4.84 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total investment securities 2,072 108,690 5.24 2,173 105,271 4.84 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total earning assets 9,665 751,429 7.77 9,981 744,709 7.46 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Allowance for possible credit losses (223) (174) Cash and due from banks 307 304 Other assets 276 279 -------------------------------------------------- ------- ------- Total assets $ 10,025 10,390 -------------------------------------------------- ------- ------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 746 11,286 1.51 747 13,113 1.75 Savings deposits 3,274 84,804 2.59 3,500 90,392 2.58 Time deposits 2,179 97,067 4.45 2,249 98,508 4.38 Deposits at foreign office 156 5,894 3.79 120 3,243 2.71 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total interest-bearing deposits 6,355 199,051 3.13 6,616 205,256 3.10 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Short-term borrowings 1,772 73,868 4.17 1,922 58,459 3.04 Obligations under capital leases 1 54 10.02 1 64 10.06 Other long-term borrowings 76 6,233 8.12 75 6,094 8.12 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total interest-bearing liabilities 8,204 279,206 3.40 8,614 269,873 3.13 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Demand deposits 1,011 976 Other liabilities 87 130 -------------------------------------------------- ------- ------- Total liabilities 9,302 9,720 -------------------------------------------------- ------- ------- Stockholders' equity 723 670 -------------------------------------------------- ------- ------- Total liabilities and stockholders' equity $ 10,025 10,390 -------------------------------------------------- ------- ------- Net interest spread 4.37 4.33 Contribution of interest-free funds .52 .43 -------------------------------------------------- -------- ----- ------- ----- Net interest income/margin on earning assets $ 472,223 4.89 % 474,836 4.76 % -------------------------------------------------- -------- ----- ------- ----- *Includes nonaccrual loans (continued)
40(continued)-41
----------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------------------------------------------- Table 7 (continued) AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES 1992 1991 --------------------------- --------------------------- Average Average Average Average Average balance in millions; interest in thousands balance Interest rate balance Interest rate -------------------------------------------------- ------- -------- ------- ------- -------- ------- Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 1,237 $ 103,786 8.39 % 1,067 101,717 9.53 % Real estate 4,225 392,384 9.29 3,910 389,748 9.97 Consumer 1,109 109,284 9.85 898 104,500 11.64 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total loans and leases, net 6,571 605,454 9.21 5,875 595,965 10.14 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Money-market assets Interest-bearing deposits at banks 29 1,083 3.76 109 7,864 7.19 Federal funds sold and agreements to resell securities 510 18,100 3.55 95 5,322 5.62 Trading account 55 3,096 5.62 192 15,873 8.27 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total money-market assets 594 22,279 3.75 396 29,059 7.34 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Investment securities U.S. Treasury and federal agencies 1,204 81,940 6.81 1,222 109,300 8.94 Obligations of states and political subdivisions 103 8,122 7.85 146 13,427 9.21 Other 686 44,414 6.48 357 30,194 8.47 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total investment securities 1,993 134,476 6.75 1,725 152,921 8.87 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total earning assets 9,158 762,209 8.32 7,996 777,945 9.73 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Allowance for possible credit losses (130) (91) Cash and due from banks 273 213 Other assets 253 227 -------------------------------------------------- ------- ------- Total assets $ 9,554 8,345 -------------------------------------------------- ------- ------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 666 16,544 2.48 576 27,418 4.76 Savings deposits 3,338 110,142 3.30 2,395 123,468 5.16 Time deposits 2,773 153,588 5.54 3,354 242,684 7.24 Deposits at foreign office 130 4,348 3.35 159 9,014 5.68 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total interest-bearing deposits 6,907 284,622 4.12 6,484 402,584 6.21 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Short-term borrowings 1,121 38,386 3.42 650 36,972 5.69 Obligations under capital leases 1 78 10.08 1 95 10.24 Other long-term borrowings 6 512 8.11 6 564 9.21 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Total interest-bearing liabilities 8,035 323,598 4.03 7,141 440,215 6.16 -------------------------------------------------- ------- ------- ------ ------- ------- ------ Demand deposits 789 563 Other liabilities 147 143 -------------------------------------------------- ------- ------- Total liabilities 8,971 7,847 -------------------------------------------------- ------- ------- Stockholders' equity 583 498 -------------------------------------------------- ------- ------- Total liabilities and stockholders' equity $ 9,554 8,345 -------------------------------------------------- ------- ------- Net interest spread 4.29 3.57 Contribution of interest-free funds .50 .65 -------------------------------------------------- -------- ----- ------- ----- Net interest income/margin on earning assets $ 438,611 4.79 % 337,730 4.22 % -------------------------------------------------- -------- ----- ------- ----- *Includes nonaccrual loans (continued)
41(continued)
----------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------------------------------------------- Table 7 (continued) AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES 1990 --------------------------- Average Average Average balance in millions; interest in thousands balance Interest rate -------------------------------------------------- ------- -------- ------- Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 1,014 $ 105,519 10.41 % Real estate 3,297 341,553 10.36 Consumer 635 79,835 12.58 -------------------------------------------------- ------- ------- ------ Total loans and leases, net 4,946 526,907 10.65 -------------------------------------------------- ------- ------- ------ Money-market assets Interest-bearing deposits at banks 215 18,424 8.54 Federal funds sold and agreements to resell securities 96 7,689 8.03 Trading account 64 5,334 8.37 -------------------------------------------------- ------- ------- ------ Total money-market assets 375 31,447 8.38 -------------------------------------------------- ------- ------- ------ Investment securities U.S. Treasury and federal agencies 947 87,233 9.22 Obligations of states and political subdivisions 121 11,893 9.81 Other 93 8,968 9.66 -------------------------------------------------- ------- ------- ------ Total investment securities 1,161 108,094 9.31 -------------------------------------------------- ------- ------- ------ Total earning assets 6,482 666,448 10.28 -------------------------------------------------- ------- ------- ------ Allowance for possible credit losses (66) Cash and due from banks 203 Other assets 172 -------------------------------------------------- ------- Total assets $ 6,791 -------------------------------------------------- ------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 445 24,190 5.44 Savings deposits 1,244 70,857 5.69 Time deposits 2,988 247,284 8.28 Deposits at foreign office 153 12,008 7.85 -------------------------------------------------- ------- ------- ------ Total interest-bearing deposits 4,830 354,339 7.34 -------------------------------------------------- ------- ------- ------ Short-term borrowings 896 72,088 8.04 Obligations under capital leases 1 107 10.21 Other long-term borrowings 7 394 6.04 -------------------------------------------------- ------- ------- ------ Total interest-bearing liabilities 5,734 426,928 7.45 -------------------------------------------------- ------- ------- ------ Demand deposits 529 Other liabilities 113 -------------------------------------------------- ------- Total liabilities 6,376 -------------------------------------------------- ------- Stockholders' equity 415 -------------------------------------------------- ------- Total liabilities and stockholders' equity $ 6,791 -------------------------------------------------- ------- Net interest spread 2.83 Contribution of interest-free funds .87 -------------------------------------------------- -------- ----- Net interest income/margin on earning assets $ 239,520 3.70 % -------------------------------------------------- -------- ----- *Includes nonaccrual loans
42
---------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------------------- Table 8 AVERAGE CORE DEPOSITS Percent increase (decrease) from ----------------------------- Dollars in millions 1994 1993 to 1994 1992 to 1993 ----------------------------- ----- ------------ ------------ NOW accounts $ 746 - % 12 % Savings deposits 3,274 (6) 5 Time deposits under $100,000 1,777 (9) (20) Demand deposits 1,011 4 24 ----------------------------- ----- ------------ ------------ Total $ 6,808 (5)% (1)% ----------------------------- ----- ------------ ------------
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------------------------------------------------------------------------------------------------------------ FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------ Table 9 LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES Dollars in thousands 1994 1993 1992 1991 1990 ---------------------------------------------------------- -------- -------- -------- -------- -------- Allowance for possible credit losses beginning balance $ 195,878 151,690 100,265 74,982 58,041 ---------------------------------------------------------- -------- -------- -------- -------- -------- Charge-offs during year Commercial, financial, agricultural, etc. 5,505 14,118 15,966 23,014 7,766 Real estate - construction - 150 400 - - Real estate - mortgage 17,957 22,686 27,530 18,447 2,872 Consumer 8,981 9,135 7,488 7,033 5,924 ---------------------------------------------------------- -------- -------- -------- -------- -------- Total charge-offs 32,443 46,089 51,384 48,494 16,562 ---------------------------------------------------------- -------- -------- -------- -------- -------- Recoveries during year Commercial, financial, agricultural, etc. 7,877 5,403 2,095 2,268 1,103 Real estate - construction 13 - - - - Real estate - mortgage 4,515 1,772 445 247 114 Consumer 3,418 3,144 2,531 1,850 1,874 ---------------------------------------------------------- -------- -------- -------- -------- -------- Total recoveries 15,823 10,319 5,071 4,365 3,091 ---------------------------------------------------------- -------- -------- -------- -------- -------- Net charge-offs 16,620 35,770 46,313 44,129 13,471 Provision for possible credit losses 60,536 79,958 84,989 63,412 27,412 Allowance for possible credit losses acquired during year 3,538 - 12,749 6,000 3,000 ---------------------------------------------------------- -------- -------- -------- -------- -------- Allowance for possible credit losses ending balance $ 243,332 195,878 151,690 100,265 74,982 ---------------------------------------------------------- -------- -------- -------- -------- -------- Net charge-offs as a percent of: Provision for possible credit losses 27.45 % 44.74 % 54.49 % 69.59 % 49.14 % Average loans and leases, net of unearned discount .22 % .51 % .70 % .75 % .27 % ---------------------------------------------------------- -------- -------- -------- -------- -------- Allowance for possible credit losses as a percent of loans and leases, net of unearned discount, at year-end 2.96 % 2.70 % 2.17 % 1.66 % 1.40 % ---------------------------------------------------------- -------- -------- -------- -------- --------
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--------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES --------------------------------------------------------------------------------------------- Table 10 ALLOCATION OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES TO LOAN CATEGORIES December 31 ------------------------------------------------- Dollars in thousands 1994 1993 1992 1991 1990 ----------------------------------------- -------- -------- -------- -------- -------- Commercial, financial, agricultural, etc. $ 44,092 42,820 18,100 5,100 5,077 Real estate - mortgage 72,285 78,823 19,740 15,293 3,200 Consumer 17,532 13,630 6,700 6,500 4,700 Unallocated 109,423 60,605 107,150 73,372 62,005 ----------------------------------------- -------- -------- -------- -------- -------- Total $ 243,332 195,878 151,690 100,265 74,982 ----------------------------------------- -------- -------- -------- -------- -------- As a percentage of gross loans and leases outstanding ----------------------------------------- -------- -------- -------- -------- -------- Commercial, financial, agricultural, etc. 2.62 % 2.84 % 1.22 % .48 % .45 % Real estate - mortgage 1.43 1.74 .45 .37 .09 Consumer 1.05 1.02 .55 .64 .51 ----------------------------------------- -------- -------- -------- -------- --------
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-------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES -------------------------------------------------------------------------------- Table 11 NONPERFORMING ASSETS December 31 ------------------------------------------------ Dollars in thousands 1994 1993 1992 1991 1990 ------------------------------ -------- ------- ------- ------- ------- Nonaccrual loans $ 62,787 68,936 96,057 74,267 43,521 Loans past due 90 days or more 11,754 11,122 17,536 15,422 8,740 Renegotiated loans 2,994 2,195 - - - ------------------------------ -------- ------- ------- ------- ------- Total nonperforming loans 77,535 82,253 113,593 89,689 52,261 ------------------------------ -------- ------- ------- ------- ------- Other real estate owned 10,065 12,222 16,694 10,354 5,655 ------------------------------ -------- ------- ------- ------- ------- Total nonperforming assets $ 87,600 94,475 130,287 100,043 57,916 ------------------------------ -------- ------- ------- ------- ------- Nonperforming loans to total loans and leases, net of unearned discount .94 % 1.13 % 1.63 % 1.48 % .97 % Nonperforming assets to total net loans and leases and other real estate owned 1.06 % 1.30 % 1.86 % 1.65 % 1.08 % ------------------------------ -------- ------- ------- ------- -------
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---------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------- Table 12 MATURITY DISTRIBUTION OF LOANS* December 31, 1994 After Dollars in thousands Demand 1995 1996-99 1999 ------------------------------------------- -------- ------- ------- ------- Commercial, financial, agricultural, etc. $ 954,714 136,539 358,659 128,254 Real estate - construction 5,854 31,860 15,036 - ------------------------------------------- -------- ------- ------- ------- Total $ 960,568 168,399 373,695 128,254 ------------------------------------------- -------- ------- ------- ------- Floating or adjustable interest rates $ 293,802 102,800 Fixed or predetermined interest rates 79,893 25,454 ------------------------------------------- ------- ------- Total $ 373,695 128,254 ------------------------------------------- ------- ------- *The data do not include nonaccrual loans.
47 ------------------------------------------------------------------------------ FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------ Table 13 MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE Dollars in thousands December 31, 1994 ------------------------- ------------------ Under 3 months $ 265,875 3 to 6 months 52,521 6 to 12 months 153,172 Over 12 months 437,103 ------------------------- ------------------ Total $ 908,671 ------------------------- ------------------ 48
----------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ----------------------------------------------------------------------------------------------------------- TABLE 14 MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES One year One to Five to Over Dollars in thousands or less five years ten years ten years Total ----------------------------------------- ---------- ----------- ---------- --------- ---------- December 31, 1994 ----------------------------------------- Investment securities available for sale U.S. Treasury and federal agencies Carrying value $ - 5,762 - - $ 5,762 Yield - 6.35 % - - 6.35 % Mortgage-backed securities* Government issued or guaranteed Carrying value 37,213 93,119 137,869 554,332 822,533 Yield 5.33 % 5.65 % 5.73 % 5.63 % 5.64 % Other Carrying value 14,036 121,702 179,375 350,096 665,209 Yield 5.97 % 5.84 % 5.80 % 6.00 % 5.92 % Other debt securities Carrying value 1,217 2,732 2,058 550 6,557 Yield 9.77 % 8.47 % 8.19 % 8.19 % 8.60 % Equity securities Carrying value - - - - 14,334 Yield - - - - - ----------------------------------------- ---------- ----------- ---------- --------- ---------- Total investment securities available for sale Carrying value $ 52,466 223,315 319,302 904,978 $ 1,514,395 Yield 5.60 % 5.81 % 5.79 % 5.77 % 5.72 % ----------------------------------------- ---------- ----------- ---------- --------- ---------- Investment securities held to maturity ----------------------------------------- U.S. Treasury and federal agencies Carrying value $ 51,080 120,032 - - $ 171,112 Yield 4.46 % 4.37 % - - 4.40 % Obligations of states and political subdivisions Carrying value 49,189 4,556 1,787 255 55,787 Yield 6.12 % 9.00 % 10.45 % 11.13 % 6.52 % Other debt securities Carrying value - 752 - - 752 Yield - 7.38 % - - 7.38 % ----------------------------------------- ---------- ----------- ---------- --------- ---------- Total investment securities held to maturity Carrying value $ 100,269 125,340 1,787 255 $ 227,651 Yield 5.27 % 4.56 % 10.45 % 11.13 % 4.93 % ----------------------------------------- ---------- ----------- ---------- --------- ---------- Other investment securities - - - - $ 48,994 ----------------------------------------- ---------- ----------- ---------- --------- ---------- Total investment securities Carrying value $ 152,735 348,655 321,089 905,233 $ 1,791,040 Yield 5.38 % 5.36 % 5.82 % 5.77% 5.46 % ----------------------------------------- ---------- ----------- ---------- --------- ---------- * Maturities are reflected based upon contractual payments due. Actual maturities are expected to be significantly shorter as a result of loan prepayments in the underlying mortgage pools.
49
--------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES --------------------------------------------------------------------------------- Table 15 INTEREST RATE SENSITIVITY 1994 1993 ------------------------ ------------------------ Amount in Percent of Amount in Percent of December 31 millions total assets millions total assets ------------------------- ---------- ------------ --------- ------------ Net assets (liabilities) rate sensitive within: Three months $ (1,702) (16.2)% (1,397) (13.5)% Six months (1,684) (16.0) (1,119) (10.8) Twelve months (1,393) (13.2) (740) (7.1) ------------------------- ---------- ------------ --------- ------------
50 ---------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------- Table 16 REGULATORY CAPITAL RATIOS First East Empire M&T New December 31, 1994 (Consolidated) Bank York ----------------------------- --------------- ------------ ------------- Core capital 8.91% 8.64% 9.13% Total capital 11.07% 10.98% 10.40% Leverage 7.31% 6.92% 7.53% ----------------------------- --------------- ------------ ------------- 51 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, 1994 and 1993 Consolidated Statement of Income - Years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Cash Flows - Years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1994, 1993 and 1992 Notes to Financial Statements 52 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, 1994 and 1993, 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, 1994. 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 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 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Price Waterhouse LLP Buffalo, New York January 10, 1995 53
--------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES --------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET December 31 -------------------------- Dollars in thousands, except per share 1994 1993 --------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 377,781 195,792 Money-market assets Interest-bearing deposits at banks 143 55,044 Federal funds sold and agreements to resell securities 3,080 329,429 Trading account 5,438 9,815 -------------------------------------------------------------------------------------------------- Total money-market assets 8,661 394,288 -------------------------------------------------------------------------------------------------- Investment securities Available for sale (cost: $1,602,916 in 1994; $2,158,262 in 1993) 1,514,395 2,174,067 Held to maturity (market value: $221,165 in 1994; $223,617 in 1993) 227,651 223,331 Other (market value: $48,994 in 1994; $31,754 in 1993) 48,994 31,754 -------------------------------------------------------------------------------------------------- Total investment securities 1,791,040 2,429,152 -------------------------------------------------------------------------------------------------- Loans and leases 8,447,117 7,439,059 Unearned discount (229,824) (177,960) Allowance for possible credit losses (243,332) (195,878) -------------------------------------------------------------------------------------------------- Loans and leases, net 7,973,961 7,065,221 -------------------------------------------------------------------------------------------------- Premises and equipment 127,274 134,874 Accrued interest and other assets 249,927 145,631 -------------------------------------------------------------------------------------------------- Total assets $ 10,528,644 10,364,958 -------------------------------------------------------------------------------------------------- Liabilities Noninterest-bearing deposits $ 1,087,102 1,052,258 NOW accounts 748,199 764,690 Savings deposits 3,098,438 3,364,983 Time deposits 3,106,723 1,982,272 Deposits at foreign office 202,611 189,058 -------------------------------------------------------------------------------------------------- Total deposits 8,243,073 7,353,261 -------------------------------------------------------------------------------------------------- Federal funds purchased and agreements to repurchase securities 695,665 1,381,335 Other short-term borrowings 669,185 720,332 Accrued interest and other liabilities 103,538 110,446 Long-term borrowings 95,701 75,000 Obligations under capital leases 486 590 -------------------------------------------------------------------------------------------------- Total liabilities 9,807,648 9,640,964 -------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized, 40,000 shares issued, stated at aggregate liquidation value 40,000 40,000 Common stock, $5 par, 15,000,000 shares authorized, 8,097,472 shares issued 40,487 40,487 Surplus 98,014 97,787 Undivided profits 694,274 595,322 Unrealized investment gains (losses), net (50,555) 9,148 Treasury stock - common, at cost - 1,486,969 shares in 1994; 1,218,347 shares in 1993 (101,224) (58,750) -------------------------------------------------------------------------------------------------- Total stockholders' equity 720,996 723,994 -------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 10,528,644 10,364,958 -------------------------------------------------------------------------------------------------- See accompanying notes to financial statements.
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---------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME Year ended December ------------------------------- Dollars in thousands, except per share 1994 1993 1992 ---------------------------------------------------------------------------------------------- Interest income Loans and leases, including fees $ 633,077 608,473 602,932 Money-market assets Deposits at banks 2,212 6,740 1,083 Federal funds sold and agreements to resell securities 4,751 20,403 18,100 Trading account 361 1,242 2,927 Investment securities Fully taxable 104,185 101,187 125,529 Exempt from federal taxes 2,760 2,584 5,906 ---------------------------------------------------------------------------------------------- Total interest income 747,346 740,629 756,477 ---------------------------------------------------------------------------------------------- Interest expense NOW accounts 11,286 13,113 16,544 Savings deposits 84,804 90,392 110,142 Time deposits 97,067 98,508 153,588 Deposits at foreign office 5,894 3,243 4,348 Short-term borrowings 73,868 58,459 38,386 Long-term borrowings and capital leases 6,287 6,158 590 ---------------------------------------------------------------------------------------------- Total interest expense 279,206 269,873 323,598 ---------------------------------------------------------------------------------------------- Net interest income 468,140 470,756 432,879 Provision for possible credit losses 60,536 79,958 84,989 ---------------------------------------------------------------------------------------------- Net interest income after provision for possible credit losses 407,604 390,798 347,890 ---------------------------------------------------------------------------------------------- Other income Trust income 22,574 23,865 16,905 Service charges on deposit accounts 35,016 32,291 28,372 Merchant discount and other credit card fees 8,705 7,932 6,728 Trading account gains 700 2,702 1,684 Gain on sales of bank investment securities 128 870 28,050 Other revenues from operations 56,616 42,884 44,487 ---------------------------------------------------------------------------------------------- Total other income 123,739 110,544 126,226 ---------------------------------------------------------------------------------------------- Other expense Salaries and employee benefits 161,221 154,340 130,751 Equipment and net occupancy 49,132 47,823 41,659 Printing, postage and supplies 13,516 13,021 13,111 Deposit insurance 16,442 17,684 17,783 Other costs of operations 96,551 94,951 108,034 ---------------------------------------------------------------------------------------------- Total other expense 336,862 327,819 311,338 ---------------------------------------------------------------------------------------------- Income before income taxes 194,481 173,523 162,778 Income taxes 77,186 71,531 64,841 ---------------------------------------------------------------------------------------------- Net income $ 117,295 101,992 97,937 ---------------------------------------------------------------------------------------------- Net income per common share Primary $16.35 13.87 13.41 Fully diluted 15.71 13.42 12.98 See accompanying notes to financial statements.
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---------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31 ----------------------------------- Dollars in thousands 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- Cash flows from Net income $ 117,295 101,992 97,937 operating activities Adjustments to reconcile net income to net cash provided by operating activities Provision for possible credit losses 60,536 79,958 84,989 Depreciation and amortization of premises and equipment 17,625 16,238 12,970 Provision for deferred income taxes (2,866) (23,700) (27,868) Asset write-downs 3,184 9,037 23,102 Net gain on sales of assets (4,744) (870) (34,813) Net change in accrued interest receivable, payable 8,084 (6,946) 11,392 Net change in other accrued income and expense (36,151) 35,807 14,477 Net change in loans held for sale 169,883 (70,462) (51,571) Net change in trading account assets 4,377 43,700 186,697 --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 337,223 184,754 317,312 --------------------------------------------------------------------------------------------------------------------- Cash flows from Proceeds from sales of investment securities investing activities Available for sale 52,824 - - Other 7,446 - 843,547 Proceeds from maturities of investment securities Available for sale 562,498 - - Held to maturity 55,283 - - Other - 1,298,887 992,545 Purchases of investment securities Available for sale (17,143) - - Held to maturity (59,704) - - Other (20,292) (2,011,405) (901,257) Net (increase) decrease in interest-bearing deposits at banks 54,901 54,997 (109,113) Proceeds from sales of loans and leases 7,601 - 103,461 Purchase of loans - - (264,324) Net (increase) decrease in loans and leases (778,201) (242,249) 257,248 Capital expenditures, net (6,876) (22,329) (32,335) Acquisitions, net of cash acquired 102,721 - 17,182 Other, net 15,584 28,842 (12,061) --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (23,358) (893,257) 894,893 --------------------------------------------------------------------------------------------------------------------- Cash flows from Net increase (decrease) in deposits 413,865 (722,480) (700,910) financing activities Net increase (decrease) in short-term borrowings (807,826) 1,408,976 (338,285) Proceeds from issuance of subordinated notes - - 75,000 Payments on long-term borrowings (116) (95) (1,595) Purchases of treasury stock (43,964) - - Dividends paid - common (14,743) (13,054) (10,780) Dividends paid - preferred (3,600) (3,600) (3,600) Other, net (1,841) (12,990) 8,413 --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (458,225) 656,757 (971,757) --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ (144,360) (51,746) 240,448 Cash and cash equivalents at beginning of year 525,221 576,967 336,519 Cash and cash equivalents at end of year $ 380,861 525,221 576,967 --------------------------------------------------------------------------------------------------------------------- Supplemental Interest received during the year $ 743,184 750,947 761,857 disclosure of cash Interest paid during the year 270,802 278,125 328,100 flow information Income taxes paid during the year 110,162 77,024 97,182 --------------------------------------------------------------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities Real estate acquired in settlement of loans $ 9,936 9,415 20,572 --------------------------------------------------------------------------------------------------------------------- See accompanying notes to financial statements.
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---------------------------------------------------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Unrealized investment gains Preferred Common Undivided (losses), Treasury Dollars in thousands, except per share stock stock Surplus profits net stock Total ---------------------------------------------------------------------------------------------------------------------- 1992 Balance - January 1, 1992 $40,000 40,487 95,287 426,427 - (66,426) $535,775 Net income - - - 97,937 - - 97,937 Preferred stock cash dividends - - - (3,600) - - (3,600) Common stock cash dividends - $ 1.60 per share - - - (10,780) - - (10,780) Exercise of stock options - - 1,529 - - 5,934 7,463 ---------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1992 $40,000 40,487 96,816 509,984 - (60,492) $626,795 ---------------------------------------------------------------------------------------------------------------------- 1993 Net income - - - 101,992 - - 101,992 Preferred stock cash dividends - - - (3,600) - - (3,600) Common stock cash dividends - $ 1.90 per share - - - (13,054) - - (13,054) Exercise of stock options - - 971 - - 1,742 2,713 Unrealized gains on investment securities available for sale, net - - - - 9,148 - 9,148 ---------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1993 $40,000 40,487 97,787 595,322 9,148 (58,750) $723,994 ---------------------------------------------------------------------------------------------------------------------- 1994 Net income - - - 117,295 - - 117,295 Preferred stock cash dividends - - - (3,600) - - (3,600) Common stock cash dividends - $ 2.20 per share - - - (14,743) - - (14,743) Exercise of stock options - - 227 - - 1,490 1,717 Purchases of treasury stock - - - - - (43,964) (43,964) Unrealized losses on investment securities available for sale, net - - - - (59,703) - (59,703) ---------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1994 $40,000 40,487 98,014 694,274 (50,555) (101,224) $720,996 ---------------------------------------------------------------------------------------------------------------------- See accompanying notes to financial statements.
57 FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES Notes to Financial Statements 1. Significant accounting policies 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 State Corporation ("Parent Company") and its subsidiaries, all of which are wholly owned. The financial statements of the Parent Company report investments in subsidiaries under the equity method, adjusted for the impact of significant intercompany transactions, all of which are eliminated in consolidation. Consolidated Statement of Cash Flows For purposes of this statement, cash and due from banks, Federal funds sold and agreements to resell securities are considered cash and cash equivalents. Trading account Financial instruments used for trading purposes are stated at fair value. Realized gains and losses and unrealized changes in fair value are included in trading account gains in the Consolidated Statement of Income. Investment securities Investments in debt securities are classified as held to maturity and stated at amortized cost when management has the positive intent and ability to hold such securities to maturity. Investments in other debt securities and equity securities having readily determinable fair values are classified as available for sale and stated at estimated fair value. Unrealized gains or losses related to investment securities available for sale are reflected in stockholders' equity, net of applicable income taxes. Other securities include stock of the Federal Reserve Bank of New York and Federal Home Loan Bank of New York and are stated at cost. Amortization of premiums and accretion of discounts for investment securities available for sale and held to maturity are included in interest income. The cost basis of individual securities is written down to estimated fair value through a charge to earnings when declines in value below amortized cost are considered to be other than temporary. Realized gains and losses on the sales of investment securities are determined using the specific identification method. On December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As required, the provisions of SFAS No. 115 were not applied to any prior periods. Prior to December 31, 1993 debt securities were carried at amortized cost when management had both the ability and intent to hold such securities to maturity. Periodic sales of these securities occurred principally as a result of reactive measures taken by management to changing business circumstances. When it became probable that a debt security would be sold, the security was classified as held for sale. Investment securities held for sale were reported at the lower of aggregate cost or fair market value. Adjustments to the carrying value of investment securities held for sale were included in gain on sales of bank investment securities in the Consolidated Statement of Income. Equity securities were stated at the lower of cost or fair market value. The 58 1. Significant accounting policies, continued carrying value of individual securities was written down to estimated fair value through a charge to earnings when declines in value were considered to be other than temporary. Loans Interest income on loans is accrued on a level yield method. Loans are placed on nonaccrual status and previously accrued interest thereon is charged against income when principal or interest is delinquent 90 days, unless management determines that the loan status clearly warrants other treatment. Loan fees and certain direct loan origination costs are deferred and recognized as an interest yield adjustment over the life of the loan. Net deferred fees have been included in unearned discount in the Consolidated Balance Sheet as a reduction of loans outstanding. Loans held for sale are carried at the lower of cost or fair market value. Valuation adjustments made on these loans are included in other revenues from operations in the Consolidated Statement of Income. Allowance for possible credit losses The allowance for possible credit losses represents the amount which, in management's judgment, will be adequate to absorb credit losses from existing loans, leases and credit commitments. The adequacy of the allowance is determined by management's evaluation of the loan portfolio 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. 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 On occasion the Company uses interest rate futures contracts as part of its management of interest rate risk. 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 gains. 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 59 1. Significant accounting policies, continued recognized as accrued under the terms of the agreement and the net interest differential, including any amortization of premiums paid or accretion of discounts received, is recorded as an adjustment to interest income or expense of the related asset or liability. Gains or losses resulting from early termination of interest rate swap agreements used to manage interest rate risk are amortized over the remaining term or estimated life of the agreement. Agreements and commitments entered into for trading purposes are marked to market with resulting gains or losses recorded in trading account gains. Earnings per common share Earnings per common share data are computed on the basis of the weighted average number of shares outstanding during the year, plus shares issuable upon the assumed exercise of outstanding common stock options. Proceeds assumed to have been received on such exercise are treated as if applied toward the repurchase of outstanding common shares in the open market during the year, as required under the "treasury stock" method of accounting. 2. Acquisitions On December 1, 1994, the Parent Company acquired Ithaca Bancorp, Inc. ("Ithaca Bancorp"), Ithaca, New York, in exchange for a 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 the Parent Company's commercial bank subsidiary, Manufacturers and Traders Trust Company ("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. On December 10, 1994, M&T Bank purchased, in a cash transaction, approximately $146 million of deposits from Chemical Bank, along with seven banking offices in the Hudson Valley region of New York State. 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 operating results of the acquired entities did not have a significant impact on the Company's results of operations in 1994. The excess of the cost of the acquired entities over the fair value of identifiable assets acquired less liabilities assumed has been recorded as goodwill and amounted to approximately $24 million, which is being amortized on a straight-line basis over five years. Presented below is certain proforma information as if Ithaca Bancorp had been acquired on January 1, 1993. These results combine the historical results of Ithaca Bancorp into the Company's Consolidated Statement of Income and, while certain adjustments were made for the estimated impact of purchase accounting adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place at that time. 60 2. Acquisitions, continued Proforma Year ended December 31 1994 1993 -------- ------- (in thousands, except per share) Interest income $775,879 771,715 Other income 126,353 114,237 Net income 116,608 101,205 Earnings per common share $16.26 13.76 ======= ======= On January 4, 1995, M&T Bank's mortgage banking subsidiary, M&T Mortgage Corporation, entered into a definitive agreement to acquire Statewide Funding Corporation ("Statewide"), a privately-owned mortgage banking company based near Albany, New York. Statewide has a mortgage servicing portfolio of approximately $1.0 billion and originated more than $400 million of mortgage loans in 1994. The acquisition is subject to regulatory approval and other customary conditions. It is currently anticipated that the transaction will be completed in the first quarter of 1995. The transaction will be accounted for under the purchase method of accounting. 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, 1994 Investment securities available for sale: U.S. Treasury and federal agencies $ 5,775 - 13 5,762 Mortgage-backed securities Government issued or guaranteed 869,031 403 46,901 822,533 Other 706,909 110 41,810 665,209 Other debt securities 6,537 20 - 6,557 Equity securities 14,664 1,532 1,862 14,334 --------- --------- --------- --------- 1,602,916 2,065 90,586 1,514,395 --------- --------- --------- --------- Investment securities held to maturity: U.S. Treasury and federal agencies 171,112 1 6,511 164,602 Obligations of states and political subdivisions 55,787 266 181 55,872 Other debt securities 752 - 61 691 --------- --------- --------- --------- 227,651 267 6,753 221,165 --------- --------- --------- --------- Other securities 48,994 - - 48,994 --------- --------- --------- --------- Total $1,879,561 2,332 97,339 1,784,554 ========= ========= ========= ========= 61 3. Investment securities, continued Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- (in thousands) December 31, 1993 Investment securities available for sale: Mortgage-backed securities Government issued or guaranteed $1,210,921 7,950 4,669 1,214,202 Other 896,362 3,670 4,130 895,902 Other debt securities 39,893 938 - 40,831 Equity securities 11,086 12,266 220 23,132 --------- --------- --------- --------- 2,158,262 24,824 9,019 2,174,067 --------- --------- --------- --------- Investment securities held to maturity: U.S. Treasury and federal agencies 173,193 83 405 172,871 Obligations of states and political subdivisions 49,230 701 51 49,880 Other debt securities 908 13 55 866 --------- --------- --------- --------- 223,331 797 511 223,617 --------- --------- --------- --------- Other securities 31,754 - - 31,754 --------- --------- --------- --------- Total $2,413,347 25,621 9,530 2,429,438 ========= ========= ========= ========= The amortized cost and estimated fair value of collateralized mortgage obligations included in mortgage-backed securities were as follows: December 31 1994 1993 -------- -------- (in thousands) Amortized cost $788,776 1,184,026 Estimated fair value 736,259 1,182,194 ======= ========= Gross realized gains on the sale of investment securities available for sale were $128,000 in 1994. Gains recognized in 1993 consisted of appreciation in market value of investment securities held for sale at December 31, 1992. Proceeds from the sales of debt securities were $843,315,000 in 1992. Gross gains and losses realized on sales in 1992 were $31,742,000 and $3,013,000, respectively. 62 3. Investment securities, continued At December 31, 1994, 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 $ 1,214 1,217 Due after one year through five years 8,500 8,494 Due after five years through ten years 2,051 2,058 Due after ten years 547 550 --------- --------- 12,312 12,319 Mortgage-backed securities available for sale 1,575,940 1,487,742 --------- --------- $1,588,252 1,500,061 ========= ========= Debt securities held to maturity: Due in one year or less $ 100,269 98,817 Due after one year through five years 125,340 120,187 Due after five years through ten years 1,787 1,890 Due after ten years 255 271 --------- --------- $ 227,651 221,165 ========= ========= At December 31, 1994, investment securities with a carrying value of $902,603,000, including $733,463,000 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. 4. Loans and leases Total gross loans and leases outstanding were comprised of the following: December 31 1994 1993 --------- -------- (in thousands) Loans Commercial, financial, agricultural, etc. $1,592,627 1,419,039 Real estate: Residential 1,707,840 1,536,579 Commercial 3,339,097 3,003,598 Construction 53,535 51,384 Consumer 1,666,230 1,337,293 --------- --------- Total loans 8,359,329 7,347,893 --------- --------- Leases-commercial 87,788 91,166 --------- --------- Total loans and leases $8,447,117 7,439,059 ========= ========= One-to-four family residential mortgage loans held for sale were $33.4 million and $203.3 million at December 31, 1994 and 1993, respectively. The Company typically retains the mortgage servicing rights related to one-to- four family residential mortgage loans sold. One-to-four family residential mortgage loans serviced for others totaled approximately $4.0 billion at December 31, 1994 and $2.9 billion at December 31, 1993. Approximately $18.4 million of one-to-four family residential mortgage loans have been sold with recourse. The total credit loss exposure resulting from loans sold with recourse was considered negligible as of December 31, 1994. 63 4. Loans and leases, continued 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 $77,535,000 at December 31, 1994 and $82,253,000 at December 31, 1993. If nonaccrual and renegotiated loans had been accruing interest at their originally contracted terms, interest income on these loans would have amounted to $9.6 million in 1994 and $10.2 million in 1993. The actual amount included in interest income during 1994 and 1993 on these loans was $1.6 million and $1.4 million, respectively. Borrowings by directors and officers of the Parent Company and its banking subsidiaries, and by associates of such persons, exclusive of loans aggregating less than $60,000, amounted to $129,736,000 and $61,179,000 at December 31, 1994 and 1993, respectively. During 1994, new borrowings by such persons amounted to $94,643,000 (including borrowings of new directors or officers that were outstanding at the time of their election) and repayments and other deductions equaled $26,086,000. At December 31, 1994, approximately $370 million of real estate loans, primarily commercial real estate loans, were pledged to secure borrowings. 5. Allowance for possible credit losses Changes in the allowance for possible credit losses were as follows: 1994 1993 1992 -------- -------- -------- (in thousands) Beginning balance $195,878 151,690 100,265 Provision for possible credit losses 60,536 79,958 84,989 Allowance for possible credit losses acquired 3,538 - 12,749 Net charge-offs Charge-offs (32,443) (46,089) (51,384) Recoveries 15,823 10,319 5,071 ------- ------- ------- Net charge-offs (16,620) (35,770) (46,313) ------- ------- ------- Ending balance $243,332 195,878 151,690 ======= ======= ======= 64 6. Premises and equipment The detail of premises and equipment was as follows: December 31 1994 1993 ------- ------- (in thousands) Land $ 12,730 15,151 Buildings owned 88,123 89,613 Buildings under capital leases 1,773 1,773 Leasehold improvements 33,404 30,185 Furniture and equipment owned 102,212 92,544 ------- ------- 238,242 229,266 Less: accumulated depreciation and amortization Owned assets 109,354 92,819 Capital leases 1,614 1,573 ------- ------- 110,968 94,392 ------- ------- Premises and equipment, net $127,274 134,874 ======= ======= Net lease expense for all operating leases totaled $13,329,000 in 1994, $12,051,000 in 1993 and $11,617,000 in 1992. The Company occupies certain banking offices and uses certain equipment under noncancellable operating lease agreements expiring at various dates over the next 22 years. Minimum lease payments under noncancellable operating leases are summarized as follows: Year ending December 31: (in thousands) 1995 $ 8,045 1996 6,812 1997 7,105 1998 6,390 1999 7,529 Later years 75,834 ------- $111,715 ======= Payments required under capital leases are not material. 65 7. Borrowings The amount and interest rate of short-term borrowings were as follows: Federal funds purchased and repurchase Other agreements borrowings Total ---------- ---------- ---------- (dollars in thousands) At December 31, 1994 Amount outstanding $ 695,665 669,185 1,364,850 Weighted-average interest rate 6.07% 6.02% 6.05% For the year ended December 31, 1994 Highest amount at a month-end $1,829,630 1,038,502 Daily-average amount outstanding 1,432,845 339,676 1,772,521 Weighted-average interest rate 4.12% 4.38% 4.17% ========= ========= ========= At December 31, 1993 Amount outstanding $1,381,335 720,332 2,101,667 Weighted-average interest rate 3.41% 2.97% 3.26% For the year ended December 31, 1993 Highest amount at a month-end $2,434,239 720,332 Daily-average amount outstanding 1,639,537 282,989 1,922,526 Weighted-average interest rate 3.06% 2.93% 3.04% ========= ========= ========= At December 31, 1992 Amount outstanding $ 329,161 363,530 692,691 Weighted-average interest rate 3.19% 2.49% 2.82% For the year ended December 31, 1992 Highest amount at a month-end $1,350,404 883,236 Daily-average amount outstanding 831,494 289,917 1,121,411 Weighted-average interest rate 3.45% 3.34% 3.42% ========= ========= ========= At December 31, 1994, the Parent Company, M&T Bank and The East New York Savings Bank ("East New York"), a wholly owned subsidiary of the Parent Company, had lines of credit under formal agreements as follows: Parent M&T East Company Bank New York ------- -------- -------- (in thousands) Outstanding borrowings $ 3,000 23,701 225,000 Unused 22,000 580,401 23,958 ====== ======= ======= 66 7. Borrowings, continued Long-term borrowings at December 31, 1994 and 1993 included $75 million of 8 1/8% subordinated notes issued by M&T Bank. Such notes mature on December 1, 2002 and are subordinate to the claims of depositors and other creditors of M&T Bank. At December 31, 1994 long-term borrowings also included $20,701,000 of notes payable to the Federal Home Loan Bank of New York with fixed and variable rates of interest ranging from 4.74% to 8.60%. Such notes are secured by residential mortgage loans. Long-term borrowings at December 31, 1994 mature as follows: Year ending December 31: (in thousands) 1995 $ - 1996 14,351 1997 3,991 1998 398 1999 - Later years 76,961 ------ $95,701 ====== 8. Preferred stock The 9% cumulative preferred stock is convertible at any time into shares of the Parent Company's common stock at an initial conversion price of $78.90625 per share. The conversion formula provides the holder with anti-dilution protections in the event the Parent Company issues additional common stock at a price which is less than the conversion price or in the event that there are other capital changes such as common stock dividends or stock splits. The Parent Company has the right, subject to regulatory approval, to redeem the preferred stock, in whole, but not in part, on or after March 31, 1996 at a price of $40,000,000 plus accrued and unpaid dividends. The Parent Company must provide at least 45 days notice to the preferred stockholder of its intention to redeem the shares, during which time the preferred stockholder may exercise the conversion privilege. The preferred stock is not considered to be a common stock equivalent. Preferred stock dividends are deducted from net income when calculating primary earnings per common share. The calculation of fully diluted earnings per common share assumes that the preferred stock was converted to 506,930 shares of common stock at issuance and that no preferred stock dividends were paid. 9. Disclosures about fair value of financial instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that financial institutions disclose the estimated "fair value" of their financial instruments. "Fair value" is generally defined as the price a willing buyer and a willing seller would exchange for a financial instrument in other than a distressed sale situation. Disclosures related to fair value presented herein are as of December 31, 1994 and 1993. 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 67 9. Disclosures about fair value of financial instruments, continued 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 the market prices quoted by the related exchanges at the respective year-end. The Company, in arriving at estimated fair value of other financial instruments, primarily used calculations based upon discounted cash flows of the related financial instruments. In general, discount rates used for loan products were based upon 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 1994 $1,791,040 1,784,554 1993 2,429,152 2,429,438 ========= ========= The following table presents the carrying value and calculated estimates of fair value related to loans and loan commitments: Carrying Calculated value estimate -------- ---------- (in thousands) December 31, 1994 Commercial loans and leases $1,659,532 1,650,138 Commercial real estate loans 3,352,600 3,261,013 Residential real estate loans 1,653,552 1,609,921 Consumer loans 1,551,609 1,554,609 --------- --------- $8,217,293 8,075,681 ========= ========= December 31, 1993 Commercial loans and leases $1,490,745 1,490,869 Commercial real estate loans 3,019,859 3,086,602 Residential real estate loans 1,526,104 1,550,504 Consumer loans 1,224,391 1,259,579 --------- --------- $7,261,099 7,387,554 ========= ========= 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 68 9. Disclosures about fair value of financial instruments, continued 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, 1994 Noninterest-bearing deposits $1,087,102 1,087,102 Savings deposits and NOW accounts 3,846,637 3,846,637 Time deposits 3,106,723 3,088,666 Deposits at foreign office 202,611 202,611 ========= ========= December 31, 1993 Noninterest-bearing deposits $1,052,258 1,052,258 Savings deposits and NOW accounts 4,129,673 4,129,673 Time deposits 1,982,272 2,016,376 Deposits at foreign office 189,058 189,058 ========= ========= The Company believes that deposit accounts clearly 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 15, 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 1994 $2,388,000 - (119,079) (119,079) 1993 $1,711,294 16,901 (1,330) 15,571 ========= ========== ========== ============ As described in note 15, the Company also uses certain derivative financial instruments as part of its trading activities. Interest rate swaps entered into for trading purposes had a notional value of $40 million and an estimated fair value of $3,000 at December 31, 1994. There were no interest rate swaps held for trading purposes at December 31, 1993. The Company also entered into foreign exchange and other option and futures contracts totaling $296 million and $467 million at December 31, 1994 and 1993, respectively. Such contracts were valued at a loss of $19,000 and $195,000 at December 31, 1994 and 1993, 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 $96,187,000 and $93,277,000, respectively, at December 31, 1994 and $75,590,000 and $83,607,000, respectively, at December 31, 1993. 69 9. Disclosures about fair value of financial instruments, continued 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 its 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. Further, since the fair value is estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different. 10. Stock option plan The stock option plan allows the grant of stock options and stock appreciation rights (either in tandem with options or independently) which are exercisable over terms not exceeding ten years and one day, and at prices which may not be less than the fair market value of the common stock on the date of grant. When exercisable, the stock appreciation rights issued in tandem with stock options entitle grantees to receive cash, stock or a combination equal to the amount of stock appreciation between the dates of grant and exercise. Stock appreciation rights issued independently of stock options contain similar terms as the stock options, although upon exercise the holder is only entitled to receive cash instead of purchasing shares of the Parent Company's common stock. Of the stock options outstanding at December 31, 1994, 514,946 were granted with limited stock appreciation rights attached thereto. A summary of related activity follows: Cash-only Stock appreciation options rights Exercise price per share outstanding outstanding Range Average ----------- ----------- -------------- --------- 1992 Beginning balance 459,983 139,500 $ 15.75- 70.00 $ 46.00 Granted 110,702 - 105.13-131.88 106.65 Exercised (137,288) (14,300) 15.75- 70.00 30.78 Cancelled (2,200) (4,000) 40.25-105.13 63.76 --------- -------- ------------- ------- At year-end 431,197 121,200 23.00-131.88 62.13 1993 Granted 119,725 - 133.88-141.50 134.00 Exercised (40,540) (5,800) 35.25-105.13 50.78 Cancelled (3,150) (2,200) 53.00-133.88 96.87 --------- -------- ------------- ------- At year-end 507,232 113,200 23.00-141.50 76.55 1994 Granted 142,449 - 139.50-150.50 139.96 Exercised (33,944) (22,600) 35.25- 70.00 52.43 Cancelled (4,500) - 105.13-139.50 131.24 --------- -------- ------------- ------- At year-end 611,237 90,600 23.00-150.50 91.01 ========= ======== ============= ======= Exercisable at December 31, 1994 274,392 68,800 $ 23.00-141.50 $ 58.41 ========= ======== ============= ======= 70 10. Stock option plan, continued At December 31, 1994 and 1993, respectively, there were 137,721 and 275,670 shares available for future grant. A total of 1,500,000 shares were authorized under the plan. 11. Pension plans and other postretirement benefits The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees. Pension benefits accrue to participants based on their level of compensation and number of years of service. With respect to employees added as a result of the acquisitions completed in 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 (benefit) consisted of the following: 1994 1993 1992 ---- ---- ---- (in thousands) Service cost $4,148 3,075 2,357 Interest cost on projected benefit obligation 5,823 4,904 4,569 Actual return on assets 1,487 (8,217) (6,022) Net amortization and deferral (9,541) 293 (1,601) ------ ------ ------ Net periodic pension cost (benefit) $1,917 55 (697) ===== ====== ====== Data relating to the funding position of the pension plan were as follows: 1994 1993 ------ ------ (in thousands) Vested accumulated benefit obligation $(60,307) (64,169) Total accumulated benefit obligation (62,351) (66,317) Projected benefit obligation (75,735) (81,943) Plan assets at fair value 88,215 93,601 ------- ------- Plan assets in excess of projected benefit obligation 12,480 11,658 Unrecognized net asset (2,917) (3,775) Unrecognized past service cost (538) - Unrecognized net (gain) loss (284) 2,775 ------ ------ Pension asset $ 8,741 10,658 ====== ====== The assumed rates used in the actuarial computations were as follows: 1994 1993 ---- ---- Discount rate 8.00% 7.00% Rate of increase in future compensation levels 5.00% 5.00% Long-term rate of return on assets 8.00% 8.25% ==== ==== In addition, the Company has an unfunded supplemental pension plan for certain key executives. Net periodic pension cost was $341,000, $159,000 and $151,200 in 1994, 1993 and 1992, 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. 71 11. Pension plans and other postretirement benefits, continued Net postretirement benefit cost consisted of the following: 1994 1993 1992 ---- ---- ---- (in thousands) Service cost $ 136 94 48 Interest cost on projected benefit obligation 1,059 1,094 1,057 Actual return on assets (1) (364) (394) Net amortization and deferral (452) (281) (592) ----- ----- ----- Net postretirement benefit cost $ 742 543 119 ===== ===== ===== Data relating to the funding position of the plan were as follows: 1994 1993 ------ ------ (in thousands) Accumulated benefit obligation: Retirees $12,611 15,196 Active employees Fully eligible 1,477 1,695 Other 800 1,180 Plan assets at fair value (7,580) (8,621) ------ ------ Accumulated benefit obligation in excess of plan assets 7,308 9,450 Unrecognized net loss (2,019) (5,637) Unrecognized past service cost 2,651 2,855 ------ ------ Accrued postretirement benefit cost $ 7,940 6,668 ====== ====== 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: 1994 1993 ---- ---- Discount rate 8.0% 7.0% Long-term rate of return on assets 8.0% 8.0% Medical inflation rate 14.0% 14.5% ==== ==== The medical inflation rate was assumed to gradually reduce to 5.5% over twenty years. The Company's 1994 service cost, interest cost and accumulated benefit obligation, assuming a 1% increase in the medical inflation rate assumption, are depicted as follows: (in thousands) Accumulated postretirement benefit obligation $15,994 Service cost 136 Interest cost 1,137 ====== 72 12. Income taxes The components of income tax expense were as follows: 1994 1993 1992 ------ ------ ------ (in thousands) Current Federal $58,801 69,744 65,672 State and city 21,251 25,487 27,037 ------ ------ ------ Total current 80,052 95,231 92,709 ------ ------ ------ Deferred Federal (3,424) (18,124) (19,919) State and city 558 (5,576) (7,949) ------ ------ ------ Total deferred (2,866) (23,700) (27,868) ------ ------ ------ Total income taxes applicable to pre-tax income $77,186 71,531 64,841 ====== ====== ====== The Company files a consolidated tax return which includes all subsidiaries. East New York may elect to compute its bad debt deduction for tax purposes as a percentage of taxable income. Applicable federal tax law allows qualified savings banks the option of deducting as bad debt expense 8% of their taxable income. However, failure to maintain savings bank status as defined by the Internal Revenue Code or charges to the reserve established by these deductions for other than bad debt losses would create taxable income, subject to the applicable tax rates in effect at that time. At December 31, 1994, East New York's bad debt reserve for federal tax purposes was $45,460,000. 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 $53,000 in 1994, $392,000 in 1993 and $12,016,000 in 1992. No alternative minimum tax expense was recognized in any year. Total income taxes differed from the amount computed by applying the statutory federal income tax rate to pre-tax income as follows: 1994 1993 1992 ------ ------ ------ (in thousands) Income taxes at statutory rate $68,068 60,733 55,345 Increase (decrease) in taxes: Tax-exempt income (5,758) (2,066) (3,138) State and city income taxes, net of federal income tax effect 14,176 12,942 12,598 Other 700 (78) 36 ------ ------ ------ $77,186 71,531 64,841 ====== ====== ====== 73 12. Income taxes, continued Deferred tax assets (liabilities) were comprised of the following at December 31: 1994 1993 1992 ------ ------ ------ (in thousands) Interest on loans $ 6,593 7,115 6,811 Gain on sales of loans - 2,207 2,571 Depreciation and amortization 4,652 3,477 2,897 Losses on loans and other assets 96,128 76,783 54,747 Postretirement and other supplemental employee benefits 6,382 5,969 5,311 Incentive compensation plans 9,242 9,247 7,282 Purchase accounting adjustments 3,649 - - Unrealized investment losses 37,966 - - Other 5,561 3,060 3,765 ------- ------- ------- Gross deferred tax assets 170,173 107,858 83,384 ------- ------- ------- Retirement benefits (3,801) (4,904) (4,552) Leasing transactions (69,469) (72,019) (71,597) Restructured interest rate swap agreements (16,950) - - Unrealized investment gains - (6,657) - Other ( 4,538) - - ------- ------- ------- Gross deferred tax liabilities (94,758) (83,580) (76,149) ------- ------- ------- Net deferred asset $ 75,415 24,278 7,235 ======= ======= ======= The income tax credits shown in the Statement of Income of the Parent Company arise principally from operating losses before dividends from subsidiaries. 13. 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: 1994 1993 1992 ------ ------ ------ (in thousands) Other income: Residential mortgage servicing fees $13,125 10,359 Transfer of investment securities to charitable foundation 10,439 Other expense: Professional services Data processing 14,343 Other 5,362 Advertising 11,067 9,069 Charitable contributions 15,652 Write-downs of mortgage servicing rights 16,800 ====== ===== ====== 14. 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. At December 31, 1994 and 1993, assets identified with international activities amounted to $7,172,000 and $62,419,000, respectively. 74 15. Derivative financial instruments As part of an overall interest rate risk management program, the Company has entered into several interest rate swap agreements. The swaps modify the repricing characteristics of certain portions of the Company's loan and deposit portfolios. In general, under terms of the agreements the Company receives a fixed rate of interest and pays a variable rate based on London Inter-Bank Offered Rates ("LIBOR"). Interest rate swap agreements are generally entered into with counterparties with substantial net worth and most contain collateral provisions protecting the at-risk party. The Company considers the credit risk inherent in these contracts to be negligible. Interest rate swaps entered into for interest rate risk management purposes were as follows: Average Weighted-average rate Estimated Notional expected Fixed Variable fair value- amount maturity (receive) (pay) gain(loss) -------- -------- --------- ----- ---------- (in thousands) (in years) (in thousands) December 31, 1994 ----------------- Current: Amortizing $1,000,000 2.46 5.84% 6.12% $ (57,332) Non-amortizing 1,388,000 2.99 6.11 6.03 (61,747) --------- -------- $2,388,000 2.77 5.99% 6.07% $(119,079) ========= ==== ==== ==== ======== December 31, 1993 ----------------- Current: Amortizing $ 836,294 1.89 5.88% 3.43% $ 10,690 Non-amortizing 400,000 2.09 5.24 3.41 5,375 --------- -------- $1,236,294 1.95 5.67% 3.42% $ 16,065 ========= ==== ==== ==== ======== Forward-starting: Amortizing $ 400,000 3.25 5.99% - $ (906) Non-amortizing 75,000 2.50 5.34 - 412 --------- -------- $ 475,000 3.13 5.89% - $ (494) ========= ==== ==== ==== ======== The notional amount of an amortizing swap may, following an initial lock-out period, vary depending on the level of interest rates or the repayment behavior of mortgage-backed securities to which the swap is indexed. The notional amount of a non-amortizing swap does not change during the term of an agreement. 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 net effect of interest rate swaps was to increase net interest income by $12,481,000, $34,242,000, and $20,063,000 during the years ended December 31, 1994, 1993, and 1992, respectively. The average notional amount 75 15. Derivative financial instruments, continued of interest rate swaps impacting net interest income which were entered into for interest rate risk management purposes were $1,627,454,000, $1,213,886,000 and $502,452,000 during the years ended December 31, 1994, 1993, and 1992, respectively. During December 1994, the Company restructured several interest rate swap agreements with a notional amount of $500 million from amortizing to non- amortizing. The purpose of the restructuring was to enhance the effectiveness of the swaps in managing the Company's exposure to changing interest rates in future years. The restructuring did not have a significant effect on net income in 1994. A deferred loss of $40.2 million on the amortizing swaps and a purchase discount of $40.2 million on the restructured non-amortizing swaps were recognized as a result of this transaction and were included in the carrying amount of loans which the swaps modified. The deferred loss will be amortized and the purchase discount accreted into interest income over the remaining terms of the original swaps and restructured swaps, respectively. The net increase (decrease) in interest income from amortization and accretion of such amounts in future years is as follows: Year ending December 31: (in thousands) 1995 $(1,946) 1996 (1,946) 1997 (1,946) 1998 (525) 1999 5,960 2000 403 ------ - ====== Derivative financial instruments used for trading purposes included foreign exchange and other option contracts, foreign exchange forward and spot contracts, interest rate swap agreements and financial futures. The following table includes information about the estimated fair value of derivative financial instruments used for trading purposes: 1994 1993 ---- ---- (in thousands) December 31: Gross unrealized gains $1,673 1,397 Gross unrealized losses 1,689 1,592 Year ended December 31: Average gross unrealized gains $1,842 3,005 Average gross unrealized losses 1,558 2,888 ===== ===== Net gains (losses) arising from derivative financial instruments used for trading purposes were $(336,000), $219,000 and $2,685,000 during the years ended December 31, 1994, 1993 and 1992, respectively. 76 16. 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 $150,219,000 and $152,604,000 at December 31, 1994 and 1993, 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 $1.6 billion and $1.4 billion at December 31, 1994, and 1993, 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 $74,614,000 at December 31, 1994 and $373,369,000 at December 31, 1993. In the opinion of management, the potential liabilities, if any, arising from all lawsuits pending against the Company at December 31, 1994 will not have a materially adverse impact on the Company's consolidated financial condition. Moreover, management believes that the Company has substantial defenses in such litigation, but that there can be no assurance that the potential liabilities, if any, arising from such litigation will not have a materially adverse impact on the Company's consolidated results of operations in the future. 17. Regulatory restrictions The payment of dividends by the banking subsidiaries is restricted by various legal and regulatory limitations. Dividends by any banking subsidiary to the Parent Company 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, 1994, approximately $200,351,000 and $11,804,000 was available for payment of dividends to the Parent Company from M&T Bank and East New York, respectively, without prior regulatory approval. Banking regulations prohibit extensions of credit by the subsidiary banks to the Parent Company 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, 1994 and 1993, cash and due from banks included a daily average of $158,342,000 and $159,742,000, respectively, for such purpose. 18. Parent Company revolving credit agreement The Parent Company has a revolving credit agreement with an unaffiliated commercial bank whereby the Parent Company may borrow up to $25,000,000 at its discretion through December 26, 1995. The agreement provides for a facility fee assessed on the entire amount of the commitment (whether or not utilized) ranging from 3/16 to 5/16 of 1% depending on the credit rating of the subordinated notes of M&T Bank. Various interest rate options exist, including a variable rate based upon the higher of the Federal funds rate plus 1/4 of 1%, or the lender's prime rate, or a fixed rate based upon LIBOR. Borrowings outstanding under the credit agreement at December 31, 1994 were $3.0 million at a rate of 6.50%. These borrowings were recorded as other short-term borrowings in the Consolidated Balance Sheet. 77 19. Parent Company financial statements See other notes to financial statements.
CONDENSED BALANCE SHEET ---------------------------------------------------------------------------------- December 31 Dollars in thousands 1994 1993 --------------------------------------------------------------------------------- Assets Cash In subsidiary bank $ 175 91 Other 18 18 --------------------------------------------------------------------------------- Total cash 193 109 Due from subsidiaries Money-market assets 1,257 9,351 Current income tax receivable 6,792 410 --------------------------------------------------------------------------------- Total due from subsidiaries 8,049 9,761 Investments in subsidiaries Banks 706,801 702,823 Other 6 6 Other assets 9,030 15,066 --------------------------------------------------------------------------------- Total assets $ 724,079 727,765 --------------------------------------------------------------------------------- Liabilities --------------------------------------------------------------------------------- Short-term borrowings $ 3,000 - Accrued expenses and other liabilities 83 3,771 --------------------------------------------------------------------------------- Total liabilities 3,083 3,771 --------------------------------------------------------------------------------- Stockholders' equity 720,996 723,994 --------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 724,079 727,765 ---------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME --------------------------------------------------------------------------------- Year ended December 31 Dollars in thousands, except per share 1994 1993 1992 --------------------------------------------------------------------------------- Income --------------------------------------------------------------------------------- Dividends from bank subsidiaries $ 59,300 23,000 21,000 Other income 11,493 665 421 --------------------------------------------------------------------------------- Total income 70,793 23,665 21,421 --------------------------------------------------------------------------------- Expense --------------------------------------------------------------------------------- Interest on short-term borrowings 3 29 565 Other expense 17,739 1,979 1,829 --------------------------------------------------------------------------------- Total expense 17,742 2,008 2,394 --------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries 53,051 21,657 19,027 Parent Company income tax credits 7,087 688 879 --------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 60,138 22,345 19,906 --------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries --------------------------------------------------------------------------------- Net income Bank subsidiaries 116,457 102,642 99,031 Other subsidiaries - 5 - Less: dividends received (59,300) (23,000) (21,000) --------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries 57,157 79,647 78,031 --------------------------------------------------------------------------------- Net income $ 117,295 101,992 97,937 --------------------------------------------------------------------------------- Net income per common share $16.35 13.87 13.41
78 19. Parent Company financial statements, continued
CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------------------------------------------------- Year ended December 31 Dollars in thousands 1994 1993 1992 ----------------------------------------------------------------------------------------- Cash flows from operating activities ----------------------------------------------------------------------------------------- Net income $ 117,295 101,992 97,937 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiaries (57,157) (79,647) (78,031) Provision for deferred income taxes (206) (82) (20) Net gain on sales of assets (128) - - Net change in accrued income and expense (6,570) 5,009 1,344 Transfer of noncash assets to charitable foundation 5,213 - - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 58,447 27,272 21,230 ----------------------------------------------------------------------------------------- Cash flows from investing activities ----------------------------------------------------------------------------------------- Other investments, net (8,199) (1,809) (6) ----------------------------------------------------------------------------------------- Net cash used by investing activities (8,199) (1,809) (6) ----------------------------------------------------------------------------------------- Cash flows from financing activities ----------------------------------------------------------------------------------------- Net increase (decrease) in short-term borrowings 3,000 (3,500) (8,500) Purchases of treasury stock (43,964) - - Dividends paid - common (14,743) (13,054) (10,780) Dividends paid - preferred (3,600) (3,600) (3,600) Other, net 1,049 1,788 3,172 ----------------------------------------------------------------------------------------- Net cash used by financing activities (58,258) (18,366) (19,708) ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ (8,010) 7,097 1,516 Cash and cash equivalents at beginning of year 9,460 2,363 847 Cash and cash equivalents at end of year $ 1,450 9,460 2,363 ----------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information ----------------------------------------------------------------------------------------- Interest received during the year $ 932 658 421 Interest paid during the year 1 46 600 Income taxes received during the year 510 5,462 2,399 -----------------------------------------------------------------------------------------
79 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III -------- Item 10. Directors and Executive Officers of the Registrant. The identification of the Registrant's directors is incorporated by reference to the caption "NOMINEES FOR DIRECTOR" contained in the Registrant's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders, which was filed with the Securities and Exchange Commission on March 16, 1995. The identification of the Registrant's executive officers is presented under the caption "Executive Officers of the Registrant" contained in Part I of this Annual Report on Form 10-K. Disclosure of compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, by the Registrant's directors and executive officers, and persons who are the beneficial owners of more than 10% of the Registrant's common stock, is incorporated by reference to the caption "STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS" contained in the Registrant's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders. Item 11. Executive Compensation. Incorporated by reference to the Registrant's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders, which was filed with the Securities and Exchange Commission on March 16, 1995. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders, which was filed with the Securities and Exchange Commission on March 16, 1995. Item 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders, was filed with the Securities and Exchange Commission on March 16, 1995. 80 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial statements and financial statement schedules filed as part of this Annual Report on Form 10-K. See Part II, Item 8. "Financial Statements and Supplementary Data". The financial statement schedules required by Rule 9-07 under Regulation S-X are omitted because the required information is not applicable. (b) Reports on Form 8-K. The Registrant filed a Current Report on Form 8-K dated December 14, 1994 with the Securities and Exchange Commission on December 14, 1994, reporting that on December 1, 1994, the Registrant consummated the acquisition of Ithaca Bancorp, Inc., Ithaca, New York, and the merger of its savings bank subsidiary, Citizens Savings Bank, F.S.B., into M&T Bank. The Current Report on Form 8- K further disclosed that M&T Bank consummated the acquisition of six banking offices in Orange County and one branch in Rockland County from Chemical Bank on December 10, 1994. (c) Exhibits required by Item 601 of Regulation S-K. The exhibits listed on the Exhibit Index on pages 84 and 85 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. 81 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 16th day of March, 1995. FIRST EMPIRE STATE CORPORATION By: /s/ Robert G. Wilmers -------------------------- Robert G. Wilmers Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Principal Executive Officer: /s/ Robert G. Wilmers Chairman of the Board, -------------------------- President and Robert G. Wilmers Chief Executive Officer 3/16/95 --------- Principal Financial and Accounting Officer: /s/ James L. Vardon Executive Vice President -------------------------- and Chief Financial Officer 3/16/95 James L. Vardon --------- 82 A majority of the board of directors: /s/ Brent D. Baird 3/16/95 ------------------------------------- ---------------- Brent D. Baird /s/ John H. Benisch 3/16/95 ------------------------------------- ---------------- John H. Benisch /s/ C. Angela Bontempo 3/16/95 ------------------------------------- ---------------- C. Angela Bontempo ------------------------------------- ---------------- Robert T. Brady /s/ Patrick J. Callan 3/16/95 ------------------------------------- ---------------- Patrick J. Callan /s/ David N. Campbell 3/16/95 ------------------------------------- ---------------- David N. Campbell /s/ James A. Carrigg 3/16/95 ------------------------------------- ---------------- James A. Carrigg /s/ Barber B. Conable, Jr. 3/16/95 ------------------------------------- ---------------- Barber B. Conable, Jr. /s/ Richard E. Garman 3/16/95 ------------------------------------- ---------------- Richard E. Garman /s/ James V. Glynn 3/16/95 ------------------------------------- ---------------- James V. Glynn ------------------------------------- ---------------- Roy M. Goodman /s/ Patrick W.E. Hodgson 3/16/95 ------------------------------------- ---------------- Patrick W.E. Hodgson ------------------------------------- ---------------- Samuel T. Hubbard, Jr. /s/ Lambros J. Lambros 3/16/95 ------------------------------------- ---------------- Lambros J. Lambros /s/ Wilfred J. Larson 3/16/95 ------------------------------------- ---------------- Wilfred J. Larson 83 /s/ Jorge G. Pereira 3/16/95 ------------------------------------- ---------------- Jorge G. Pereira /s/ William C. Shanley, III 3/16/95 ------------------------------------- ---------------- William C. Shanley, III /s/ Raymond D. Stevens, Jr. 3/16/95 ------------------------------------- ---------------- Raymond D. Stevens, Jr. /s/ Peter Tower 3/16/95 ------------------------------------- ---------------- Peter Tower /s/ Richard D. Trent 3/16/95 ------------------------------------- ---------------- Richard D. Trent /s/ John L. Wehle, Jr. 3/16/95 ------------------------------------- ---------------- John L. Wehle. Jr. /s/ Robert G. Wilmers 3/16/95 ------------------------------------- ---------------- Robert G. Wilmers 84 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation of First Empire State Corporation dated April 19, 1989, filed by the Secretary of State of New York on April 20, 1989. Incorporated by reference to Exhibit No. 19 to the Form 10-Q for the quarter ended March 31, 1989 (File No. 1-9861). 3.2 Certificate of Amendment of the Certificate of Incorporation of First Empire State Corporation dated March 13, 1991, filed by the Secretary of State of New York on March 14, 1991. Incorporated by reference to Exhibit No. 19 to the Form 10-Q for the quarter ended March 31, 1991 (File No. 1-9861). 3.3 By-Laws of First Empire State Corporation as last amended on July 16, 1991. Incorporated by reference to Exhibit No. 3.2 to the Form 10-K for the year ended December 31, 1991 (File No. 1-9861). 4 Instruments defining the rights of security holders, including indentures. Incorporated by reference to Exhibit Nos. 3.1, 3.2, 3.3, 10.1, 10.2 and 10.3 hereof. 10.1 Credit Agreement, dated as of December 30, 1993, between First Empire State Corporation and The Chase Manhattan Bank, N.A. Incorporated by reference to Exhibit No. 10.1 to the Form 10-K for the year ended December 31, 1993 (File No. 1-9861). 10.2 Amendment No. 1, dated as of December 27, 1994, to the Credit Agreement, dated as of December 30, 1993, between First Empire State Corporation and The Chase Manhattan Bank, N.A. Filed herewith. 10.3 First Empire State Corporation 1983 Stock Option Plan as amended. Incorporated by reference to Exhibit No. 10.3 to the Form 10-K for the year ended December 31, 1991 (File No. 1- 9861). 10.4 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: 10.5 Robert E. Sadler, Jr. and James L. Vardon, each dated as of March 7, 1985. Incorporated by reference to Exhibit Nos. (10)(d) (A) and (B), respectively, to the Form 10-K for the year ended December 31, 1984 (File No. 0-4561); 10.6 Harry R. Stainrook dated as of December 12, 1985. Incorporated by reference to Exhibit No. (10)(e)(ii) to the Form 10-K for the year ended December 31, 1985 (File No. 0-4561); 10.7 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); and 10.8 William A. Buckingham dated as of August 7, 1990. Incorporated by reference to Exhibit No. 10.8 to the Form 10-K for the year ended December 31, 1990 (File No. 1-9861). 85 10.9 Salary Continuation Agreement, dated as of April 16, 1987, between The East New York Savings Bank and Paul B. Murray. Incorporated by reference to Exhibit No. (10)(f) to the Form 10-K for the year ended December 31, 1987 (File No. 1-9861). 10.10 Employment Agreement, dated as of December 24, 1987, among First Empire State Corporation, The East New York Savings Bank and Paul B. Murray. Incorporated by reference to Exhibit No. (10)(g) to the Form 10-K for the year ended December 31, 1987 (File No. 1-9861). 10.11 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). 10.12 First Empire State Corporation Supplemental Pension Plan. Filed herewith. 10.13 First Empire State Corporation Supplemental Retirement Savings Plan. Filed herewith. 11 Statement re: Computation of Earnings Per Common Share. Filed herewith. 21 Subsidiaries of the Registrant. Incorporated by reference to the caption "Subsidiaries" contained in Part I, Item 1 hereof. 23.1 Consent of Price Waterhouse re: Registration Statement No. 33-32044. Filed herewith. 23.2 Consent of Price Waterhouse re: Registration Statements Nos. 33-12207 and 33-58500. Filed herewith. 27 Article 9 Financial Data Schedule for the year ended December 31, 1994. Filed herewith. 99.1 First Empire State Corporation Retirement Savings Plan and Trust Financial Statements and Additional Information for the years ended December 31, 1994 and 1993. Filed herewith. EX-10.2 2 1 Exhibit 10.2 AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of December 27, 1994 between FIRST EMPIRE STATE CORPORATION, a corporation duly organized and validly existing under the laws of the State of New York (the "Borrower"), and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), a national banking association (the "Bank"). The Borrower and the Bank are parties to a Credit Agreement dated as of December 30, 1993 (as heretofore modified, supplemented, amended and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Bank to the Borrower in an aggregate principal amount not exceeding $25,000,000. The Borrower and the Bank wish to amend the Credit Agreement in certain respects. Accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Effective upon the execution and delivery hereof by the Borrower and the Bank: (a) Section 1.01 of the Credit Agreement shall be amended by deleting the definition of "Termination Date" and inserting in place thereof the following definition: "Termination Date" means December 26, 1995; provided that if such date is not a Banking Day, the Termination Date shall be the next preceding Banking Day. (b) Section 1.02 of the Credit Agreement shall be amended to read in its entirety as follows: Section 1.02. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP or RAP, in the case of Sections 8.01 and 8.02, and all financial data required to be delivered hereunder shall be prepared in accordance with GAAP or RAP. (c) Section 2.11 of the Credit Agreement shall be amended by eliminating the "(a)" immediately following the section title, and by deleting clause (b) of Section 2.11 in its entirety. (d) Section 5.04 of the Credit Agreement shall be amended by eliminating the phrase beginning with "except" immediately following the word "Facility Documents" and replacing it with a period. (e) The list of Significant Subsidiaries furnished as Schedule I and referred to in Section 5.09 is replaced by a new Schedule I in the form annexed hereto. (f) Section 8.01 of the Credit Agreement shall be deleted and replaced with the following: Section 8.01. Minimum Tier 1 Capital. The Borrower shall maintain at all times Tier 1 Capital of not less than $560,000,000. Section 3. Representations and Warranties. The Borrower represents and warrants to the Bank that the representations and warranties set forth in Article 5 of the Credit Agreement as amended hereby are true and complete on the date hereof as if made on and as of the date hereof. 2 Section 4. Cross References. After the effective date hereof, each reference in any Facility Document to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby. Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in counterparts, which taken together shall constitute one and the same amendatory instrument. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed as of the day and year first written above. FIRST EMPIRE STATE CORPORATION By /s/ Gary S. Paul --------------------------- Gary S. Paul Senior Vice President THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By /s/ Susan F. Herzog --------------------------- Susan F. Herzog Vice President EX-10.12 3 1 Exhibit 10.12 FIRST EMPIRE STATE CORPORATION SUPPLEMENTAL PENSION PLAN ARTICLE I PURPOSE 1.1 The purpose of this First Empire State Corporation Supplemental Pension Plan (the "Supplemental Pension Plan") is to provide for the payment of supplemental retirement benefits to select management and highly compensated employees of certain affiliates of First Empire State Corporation (the "Employers"), whose benefits payable under the First Empire State Corporation Retirement Plan (the "Retirement Plan") are subject to certain benefit limitations imposed by Section 401(a)(17) of the Internal Revenue Code, as amended (the "Code"). The Employers intend and desire that this Supplemental Pension Plan, together with the other elements of the Employers' compensation programs, will attract, retain and motivate eligible employees. 2 ARTICLE II DEFINITIONS All terms used herein with initial capital letters which are defined in the Retirement Plan shall have the meanings assigned to them under the provisions of the Retirement Plan unless otherwise specified herein or as otherwise qualified by the context in which the term is used in this Supplemental Pension Plan. 2.1 For the purposes of this Supplemental Pension Plan, the following words and phrases shall have the meanings indicated unless a different meaning is clearly required by the context. Any terms used herein in the masculine shall be read and construed in the feminine where they would so apply, and any terms used in the singular shall be read and construed in the plural if appropriate. (a) "Committee" shall mean the Committee charged with the administration of this Supplemental Pension Plan under Article VI. (b) "Company" shall mean Manufacturers and Traders Trust Company or any successor by merger, purchase or otherwise. (c) "Compensation" shall mean the amount so defined in the Retirement Plan, plus any amounts deferred by a Participant under the First Empire State Corporation Supplemental Retirement Savings Plan. (d) "Compensation Limitation" shall mean, for any given year beginning on and after January 1, 1994, $150,000, as adjusted to and including such given year of determination in the manner provided under Code Section 401(a)(17). (e) "Employee" shall mean any common law employee of an Employer. (f) "Employer" shall mean any affiliate of First Empire State Corporation that participates in the Retirement Plan. (g) "Participant" shall mean an Employee who has become a Participant in accordance with Section 3.2. Participant shall also include a former Employee who had met the foregoing criteria as an Employee and who is, at the time of determination, receiving a benefit (or entitled to receive a benefit) from this Supplemental Pension Plan. (h) "Supplemental Pension Plan" shall mean this First Empire State Corporation Supplemental Pension Plan, as the same may be amended from time to time. (i) "Supplemental Pension Plan Benefit" shall mean, to the extent applicable to any given Participant, the benefit determined under the provisions of Section 4.1. 3 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Any Employee who is a member of a select group of management or highly compensated employees as designated by the Committee is eligible to participate in this Supplemental Pension Plan, provided, however, that any such Employee shall become a Participant hereunder only as provided under Section 3.2. 3.2 An Employee eligible to participate in this Supplemental Pension Plan under Section 3.1 shall become a Participant in this Supplemental Pension Plan as of the first day of the calendar year in which his benefit under the Retirement Plan is first affected by the Compensation Limitation. The determination of whether and at which time an Employee is affected by the Compensation Limitation and is eligible for participation herein shall be made by the Committee. Notwithstanding the foregoing, a Participant (or his surviving spouse or beneficiary) may become eligible for a Supplemental Pension Plan Benefit only in the event that: (a) such individual is entitled to receive a benefit under the Retirement Plan; and (b) payment of such Retirement Plan benefit is restricted by the application of Code Section 401(a)(17), as in effect on or after January 1, 1994. 4 ARTICLE IV CALCULATION OF SUPPLEMENTAL PENSION PLAN BENEFIT 4.1 The annual Supplemental Pension Plan Benefit to a Participant eligible therefor under Section 3.2 (or to his surviving spouse or beneficiary or beneficiaries), shall be the result obtained by subtracting (b) from (a), where: (a) equals the annual benefit which would have been payable to such Participant, or, on his behalf, to his surviving spouse or other beneficiary or beneficiaries under the Retirement Plan, if the provisions of the Retirement Plan were administered without regard to the annual limitation on Compensation set forth in Code Section 401(a)(17), but with Compensation capped at $235,840, and (b) equals the annual benefit which is payable to such Participant, or, on his behalf, to his surviving spouse or other beneficiary or beneficiaries under the Retirement Plan. The Supplemental Pension Plan Benefit payable under this Supplemental Pension Plan to, or on behalf of, a Participant shall be computed in accordance with the foregoing and with the objective that the Participant, his surviving spouse or other beneficiary or beneficiaries, should receive under the Supplemental Pension Plan and the Retirement Plan, the total amount which would otherwise have been payable to that recipient solely under the Retirement Plan as of the date payment is made, had the provisions of Code Section 401(a)(17) not been applicable thereto and using Compensation capped in the amount set forth above. 4.2 Notwithstanding any provision of this Supplemental Pension Plan to the contrary, the Supplemental Pension Plan Benefits provided under Article IV shall be determined and coordinated by the Committee so as to prevent any duplication of benefits under this Plan or any duplication of benefits under this Plan and benefits under any individual executive or supplemental agreement. 5 ARTICLE V COMMENCEMENT AND FORM OF SUPPLEMENTAL PENSION PLAN BENEFIT 5.1 Supplemental Pension Plan Benefits hereunder shall become payable to a Participant, surviving spouse or beneficiary as of the date upon which such Participant, spouse or beneficiary is to commence to receive benefit payments under the Retirement Plan. Such Supplemental Pension Plan Benefits shall be payable in the form elected under the Retirement Plan. The payment provided hereunder shall be the Actuarial Equivalent of the Participant's Supplemental Pension Plan Benefit determined under the form elected under the Retirement Plan. 5.2 A Participant's designation of form of payment under the Retirement Plan shall be subject to the Committee's power, to be exercised at the Committee's discretion, to direct that any Supplemental Pension Plan Benefits payable to a Participant, surviving spouse or beneficiary be paid in a form of a lump sum payment as determined by the Committee. 5.3 The Supplemental Pension Plan Benefit payable hereunder to, or on behalf of, a Participant shall be paid by the Employer who last employed the Participant. 6 ARTICLE VI ADMINISTRATION 6.1 The Committee shall be charged with the administration of this Supplemental Pension Plan. The members of the Committee shall be selected by the Company. The Committee shall have all such powers as may be necessary to discharge its duties relative to the administration of this Supplemental Pension Plan, including by way of illustration and not limitation, discretionary authority to interpret and construe this Supplemental Pension Plan, to decide any dispute arising hereunder, to determine the right of any Employee with respect to benefits payable hereunder and to adopt, alter and repeal such administrative rules, regulations and practices governing the operation of this Supplemental Pension Plan as it, in its sole discretion, may from time to time deem advisable. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Supplemental Pension Plan unless attributable to willful misconduct or lack of good faith. The Committee 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 Committee or the Company with respect to this Supplemental Pension Plan. Members of the Committee shall not participate in any action or determination regarding solely their own benefits payable hereunder. Except as provided in Section 6.3, decisions of the Committee made in good faith shall be final, conclusive and binding upon all parties. 6.2 Whenever the Committee denies, in whole or in part, a claim for benefits filed by any person (hereinafter referred to as a "Claimant"), the Committee will provide 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 Supplemental Pension Plan provisions on which the denial is based, a description of any additional needed material or information and why such is necessary, and an explanation of the claims review procedure as set forth herein. In addition, such notice shall contain the date on which it was sent and a statement advising the Claimant that, within 90 days of the date of receipt of such notice, he may obtain review of the Committee's decision. 6.3 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 Committee 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 Committee, provided, however, that the date on which the Claimant's request for review was in fact filed with the Committee 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); 7 (c) the specific portions of the denial of his claim which the Claimant requests the Committee to review; (d) a statement by the Claimant setting forth the basis upon which he believes the Committee 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 Committee 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 Committee 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 its decision, including references to the specific provisions of this Supplemental Pension Plan which were relied upon. The decision will be final and binding on all persons concerned. 8 ARTICLE VII AMENDMENT AND TERMINATION 7.1 The Employers expect to continue this Supplemental Pension Plan indefinitely, but reserve and delegate to the Company the right to amend or terminate this Supplemental Pension Plan at any time, if, in the Company's sole judgment, such amendment or termination is necessary or desirable. Any such amendment or termination shall be made in writing by the Board of Directors of the Company or its designee, if applicable, and shall be effective as of the date specified in such document. No amendment or termination of this Supplemental Pension Plan shall directly or indirectly deprive any Participant, surviving spouse or beneficiary of all or any portion of the Supplemental Pension Plan Benefits earned by the Participant as of the date of amendment or termination. In the event of a termination of this Supplemental Pension Plan, the Company (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, equal to the Actuarial Equivalents of the Supplemental Pension Plan Benefits, accrued as of the date of such termination, to Participants, surviving spouses and beneficiaries or to have the Employers pay such benefits to such individuals at such time or times as provided under the terms of this Supplemental Pension Plan. 7.2 This Supplemental Pension 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 this Supplemental Pension Plan 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 Supplemental Pension Plan. In the event this Supplemental Pension Plan is not continued with respect to such Employer or its successor by the transferee, purchaser or successor entity, then this Supplemental Pension Plan shall terminate with respect to such Employer or its successor subject to the provisions of Section 7.1. 9 ARTICLE VIII MISCELLANEOUS 8.1 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 Supplemental Pension Plan. 8.2 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 benefits determined hereunder that such Employer is obligated to pay under Section 5.3. No provision shall at any time be made with respect to segregating any assets of any Employer for payment of any benefits 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 Supplemental Pension Plan, and any such Participant, beneficiary or other person shall have only the rights of a general unsecured creditor of the Employer by whom the Participant was last employed with respect to any rights under this Supplemental Pension Plan. Nothing contained in this Supplemental Pension 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 benefit hereunder. All expenses and fees incurred in the administration of this Supplemental Pension Plan shall be paid by the Employers. 8.3 Binding on Employers, Employees and Their Successors. This Supplemental Pension 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 with respect to benefits accrued as of the date of such merger, consolidation or transfer and shall be substituted for such Employer hereunder. 8.4 Spendthrift Provisions. No benefit payable under this Supplemental Pension 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 Supplemental Pension Plan. 8.5 Disclosure. Each Participant shall receive a copy of this Supplemental Pension Plan, and the Committee will make available for inspection by any Participant a copy of the rules and regulations used by the Committee in administering this Supplemental Pension Plan. 10 8.6 State Law. This Supplemental Pension 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 the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. 8.7 Incapacity of Recipient. In the event a Participant, surviving spouse 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 benefits under this Supplemental Pension Plan to which such Participant, spouse or beneficiary is entitled shall be 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 Committee, in its sole discretion, determines that a Participant, surviving spouse or beneficiary is unable to manage his financial affairs, the Committee may direct the Employer responsible for payment to make distributions to any person for the benefit of such Participant, spouse or beneficiary. 8.8 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address. The Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee 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 Committee is unable to locate the spouse or any beneficiary of the Participant, the Participant and his surviving spouse or beneficiary shall forfeit all rights to any Supplemental Pension Plan Benefits. 8.9 Elections, Applications, Notices. Every direction, revocation or notice authorized or required hereunder shall be deemed delivered to the Employers or the Committee as the case may be: (a) on the date it is personally delivered to the Secretary of the Committee (with a copy to the Company's General Counsel) at the Company'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 Secretary of the Committee (with a copy to the Company's General Counsel) at the offices indicated above, and shall be deemed delivered to a Participant, surviving spouse 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. 8.10 Severability. In the event any provision of this Supplemental Pension Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of this Supplemental Pension Plan. This Supplemental Pension Plan shall be construed and enforced as if such illegal or invalid provision had never been contained herein. 8.11 Headings. The headings of Sections of this Supplemental Pension Plan are for convenience of reference only and shall have no substantive effect on the provisions of this Supplemental Pension Plan. EX-10.13 4 1 Exhibit 10.13 FIRST EMPIRE STATE CORPORATION SUPPLEMENTAL RETIREMENT SAVINGS PLAN ARTICLE I PURPOSE 1.1 The purpose of this First Empire State Corporation Supplemental Retirement Savings Plan (the "Supplemental Retirement Savings Plan") is to provide for the payment of supplemental benefits to select management and highly compensated employees of certain affiliates of First Empire State Corporation (the "Employers"), contributions on whose behalf under the First Empire State Corporation Retirement Savings Plan and Trust (the "RSP") are subject to certain limitations imposed by Section 401(a)(17) of the Internal Revenue Code, as amended (the "Code"). The Employers intend and desire that this Supplemental Retirement Savings Plan, together with the other elements of the Employers' compensation programs, will attract, retain and motivate eligible employees. 2 ARTICLE II DEFINITIONS All terms with initial capital letters which are used in the RSP shall have the meanings assigned to them under the provisions of the RSP unless otherwise specified herein or as otherwise qualified by the context in which the term is used herein. 2.1 For the purposes of this Supplemental Retirement Savings Plan, the following words and phrases shall have the meanings indicated unless a different meaning is clearly required by the context. Any terms used herein in the masculine shall be read and construed in the feminine where they would so apply, and any terms used in the singular shall be read and construed in the plural if appropriate. (a) "Committee" shall mean the Committee charged with the administration of this Supplemental Retirement Savings Plan under Article VII. (b) "Company" shall mean Manufacturers and Traders Trust Company or any successor by merger, purchase or otherwise. (c) "Compensation" shall mean the amount so defined in the RSP, calculated without regard to the limitation contained in Code Section 401(a)(17). (d) "Compensation Limitation" shall mean, for any given year beginning on and after January 1, 1994, $150,000, as adjusted to and including such given year of determination in the manner provided under Code Section 401(a)(17). (e) "Employee" shall mean any common law employee of an Employer. (f) "Employer" shall mean any affiliate of First Empire State Corporation that participates in the RSP. (g) "Participant" shall mean an Employee who has become a Participant in accordance with Section 3.2. Participant shall also include a former Employee who had met the foregoing criteria as an Employee and who, at the time of determination, has an Account under this Supplemental Retirement Savings Plan. (h) "Supplemental Retirement Savings Plan" shall mean this First Empire State Corporation Supplemental Retirement Savings Plan, as the same may be amended from time to time. (i) "Supplemental Retirement Savings Plan Account" or "Account" shall mean, to the extent applicable to any given Participant, the account maintained under the provisions of Section 4.1. 3 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Any Employee who is a member of a select group of management or highly compensated employees as designated by the Committee is eligible to participate in this Supplemental Retirement Savings Plan, provided, however, that any such Employee shall become a Participant hereunder only as provided under Section 3.2. 3.2 An Employee eligible to participate in this Supplemental Retirement Savings Plan under Section 3.1 shall become a Participant in this Supplemental Retirement Savings Plan at such time as the Committee first determines that contributions on his behalf under the RSP will be affected by the Compensation Limitation. The determination of whether and at which time an Employee is affected by the Compensation Limitation and eligible for participation herein shall be made by the Committee. Notwithstanding the foregoing, a Participant may become eligible to have amounts credited to his Supplemental Retirement Savings Plan Account for a year only in the event that: (a) such individual has elected to make Salary Reduction Contributions under the RSP for the year equal to at least six percent (6%) of his Compensation not in excess of the Compensation Limitation; and (b) his Compensation for the year is in excess of the Compensation Limitation. 3.3 Upon becoming a Participant under this Supplemental Retirement Savings Plan, he shall make an irrevocable election to receive his benefit under this Supplemental Retirement Savings Plan either in the form of a lump sum or in annual installments payable over 5, 10 or 15 years, and to begin to receive such benefit either: (a) at a specific age, or (b) at retirement under the First Empire State Corporation Retirement Plan, but not later than age 65 if the Participant terminates employment prior to eligibility for retirement under such plan. 4 ARTICLE IV CALCULATION OF CREDITS TO SUPPLEMENTAL RETIREMENT SAVINGS PLAN ACCOUNTS 4.1 There shall be credited to the Supplemental Retirement Savings Plan Account of a Participant eligible therefor under Section 3.2 the excess of (a) the amount which would have been contributed under Section 5.02 of the RSP on behalf of such Participant if the provisions of the RSP were administered without regard to the annual limitation on Compensation set forth in Code Section 401(a)(17), but with Compensation capped at $235,840, over (b) the amount actually contributed under Section 5.02 of the RSP on his behalf. The credit to the Supplemental Retirement Savings Plan Account under this Section 4.1 on behalf of a Participant shall be computed in accordance with the foregoing and with the objective that the Participant should have credited to his accounts under this Supplemental Retirement Savings Plan and the RSP the total amount that would otherwise have been contributed on his behalf under Section 5.02 of the RSP as of the date of such credit, had the provisions of Code Section 401(a)(17) not been applicable thereto, but with Compensation capped at the amount set forth above. 4.2 In addition to any amount credited to his Account under Section 4.1, a Participant may elect to defer under this Plan a percentage of that portion of his Compensation in excess of the Compensation Limitation, but not in excess of $235,840, equal to the percentage of his Compensation that he has elected to defer for the year under Section 5.01 of the RSP. Such election for a year must be made prior to the beginning of that year (except that the election for 1994 must be made prior to August 1, 1994, and the election for an individual who first becomes a Participant after the first day of a year must be made at the time he becomes a Participant) and shall be irrevocable. 4.3 Notwithstanding any provisions of this Supplemental Retirement Savings Plan to the contrary, the credits to the Supplemental Retirement Savings Plan Accounts provided under Article IV shall be determined and coordinated by the Committee so as to prevent any duplication of Supplemental Retirement Savings Plan and RSP benefits. 5 ARTICLE V INDIVIDUAL ACCOUNTS, INVESTMENTS AND VALUATIONS 5.1 The provisions of the RSP concerning the creation and maintenance of individual accounts and concerning investment elections by Participants shall apply equally under this Supplemental Retirement Savings Plan. 5.2 Participant investment elections under the RSP for Salary Reduction Contributions shall apply with respect to amounts credited to Accounts under Article IV, and such amounts shall be treated as invested initially in the Investment Funds available under the RSP in the same proportion as reflected in such elections under the RSP. Accounts will be valued at the same time as RSP accounts, except that stock of First Empire State Corporation will be stated in dollars instead of shares. 5.3 The deemed investment of amounts credited to a Participant's Account may be reallocated, at the Participant's election, among the available RSP Investment Funds on a quarterly basis. Such elections shall be independent of any reallocation election made under the RSP. 5.4 Accounts will be credited with the investment return reported by the Trust and Investment Services Division for the Investment Funds under the RSP in which the Accounts are treated as invested. 6 ARTICLE VI COMMENCEMENT AND FORM OF SUPPLEMENTAL RETIREMENT SAVINGS PLAN BENEFIT 6.1 Benefits hereunder shall become payable to a Participant as of the date and in the form he has specified under the provisions of Section 3.3. Participant elections may not be changed, except that, upon consideration of all facts in hardship situations, the Committee may approve the acceleration of payments to a Participant. 6.2 At the Committee's discretion, any benefits hereunder payable to a Participant or beneficiary (who shall be the Participant's beneficiary under the RSP) may be paid in a form of a lump sum payment as determined by the Committee. 6.3 In the event that a Participant is still employed by an Employer in the year he has elected to have payment of his benefits hereunder made or commence, payment of the amount in his Account as of the beginning of that year shall be made or commence (depending on his election under Section 3.3) in that year, and payment of amounts credited to his Account in that year and in subsequent years shall be made or commence (depending on his election under Section 3.3) in the January of the year following the year in which such amounts were credited to his Account. 6.4 Benefits payable hereunder to, or on behalf of, a Participant shall be paid by the Employer who last employed the Participant. 7 ARTICLE VII ADMINISTRATION 7.1 The Committee shall be charged with the administration of this Supplemental Retirement Savings Plan. The members of the Committee shall be selected by the Company. The Committee shall have all such powers as may be necessary to discharge its duties relative to the administration of this Supplemental Retirement Savings Plan, including by way of illustration and not limitation, discretionary authority to interpret and construe this Supplemental Retirement Savings Plan, to decide any dispute arising hereunder, to determine the right of any Employee with respect to participation herein, to determine the right of any Participant with respect to benefits payable under this Supplemental Retirement Savings Plan and to adopt, alter and repeal such administrative rules, regulations and practices governing the operation of this Supplemental Retirement Savings Plan as it, in its sole discretion, may from time to time deem advisable. No member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Supplemental Retirement Savings Plan unless attributable to willful misconduct or lack of good faith. The Committee 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 Committee or the Company with respect to this Supplemental Retirement Savings Plan. Members of the Committee shall not participate in any action or determination regarding solely their own benefits payable hereunder. Except as provided in Section 7.3, decisions of the Committee made in good faith shall be final, conclusive and binding upon all parties. 7.2 Whenever the Committee denies, in whole or in part, a claim for benefits filed by any person (hereinafter referred to as a "Claimant"), the Committee 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 Supplemental Retirement Savings 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 Committee's decision. 7.3 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 Committee 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 Committee; provided, however, that the date on which the Claimant's request for review was in fact filed with the Committee shall control in the event that the date of the 8 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 Committee to review; (d) a statement by the Claimant setting forth the basis upon which he believes the Committee 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 Committee 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 Committee 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 its decision, including references to the specific provisions of this Supplemental Retirement Savings Plan which were relied upon. The decision will be final and binding on all persons concerned. 9 ARTICLE VIII AMENDMENT AND TERMINATION 8.1 The Employers expect to continue this Supplemental Retirement Savings Plan indefinitely, but reserve and delegate to the Company the right to amend or terminate this Supplemental Retirement Savings Plan at any time, if, in the Company's sole judgment, such amendment or termination is necessary or desirable. Any such amendment or termination shall be made in writing by the Board of Directors of the Company or its designee, if applicable, and shall be effective as of the date specified in such document. No amendment or termination of this Supplemental Retirement Savings Plan shall directly or indirectly deprive any Participant, surviving spouse or beneficiary of all or any portion of the Supplemental Retirement Savings Plan benefits earned by the Participant as of the date of amendment or termination. In the event of a termination of this Supplemental Retirement Savings Plan, the Company (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, surviving spouses and beneficiaries or to have the Employers make payments to such individuals at such time or times as provided under the terms of this Supplemental Retirement Savings Plan. 8.2 This Supplemental Retirement Savings 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 Supplemental Retirement Savings Plan. In the event this Supplemental Retirement Savings Plan is not continued with respect to such Employer or its successor by the 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. 10 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 Supplemental Retirement Savings 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 benefits determined hereunder that such Employer is obligated to pay under Section 6.4. No provision shall at any time be made with respect to segregating any assets of any Employer for payment of any benefits 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 Supplemental Retirement Savings Plan, and any such Participant, beneficiary or other person shall have only the rights of a general unsecured creditor of the Employer by whom the Participant was last employed with respect to any rights under this Supplemental Retirement Savings Plan. Nothing contained in this Supplemental Retirement Savings 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 benefit hereunder. All expenses and fees incurred in the administration of this Supplemental Retirement Savings Plan shall be paid by the Employers. 9.3 Binding on Employers, Employees and Their Successors. This Supplemental Retirement Savings 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 accrued obligations of such Employer hereunder with respect to benefits accrued as of the date of such merger, consolidation or transfer and shall be substituted for such Employer hereunder. 9.4 Spendthrift Provisions. No benefit payable under this Supplemental Retirement Savings 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 Supplemental Retirement Savings Plan. 9.5 Disclosure. Each Participant shall receive a copy of this Supplemental Retirement Savings Plan, and the Committee will make 11 available for inspection by any Participant a copy of the rules and regulations used by the Committee in administering this Plan. 9.6 State Law. This Supplemental Retirement Savings 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 the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. 9.7 Incapacity of Recipient. In the event a Participant, surviving spouse 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 benefits under this Supplemental Retirement Savings Plan to which such Participant, spouse or beneficiary is entitled shall be 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 Committee, in its sole discretion, determines that a Participant, surviving spouse or beneficiary is unable to manage his financial affairs, the Committee may direct the Employer responsible for payment to make distributions to any person for the benefit of such Participant, spouse or beneficiary. 9.8 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address. The Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee 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 Committee is unable to locate the spouse or any beneficiary of the Participant, the Participant and his surviving spouse or beneficiary shall forfeit all rights to any Supplemental Retirement Savings Plan benefits. 9.9 Elections, Applications, Notices. Every direction, revocation or notice authorized or required hereunder shall be deemed delivered to the Employers or the Committee as the case may be: (a) on the date it is personally delivered to the Secretary of the Committee (with a copy to the Company's General Counsel) at the Company'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 Secretary of the Committee (with a copy to the Company's General Counsel) at the offices indicated above, and shall be deemed delivered to a Participant, surviving spouse 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 Supplemental Retirement Savings Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of this Supplemental Retirement Savings Plan. This Supplemental Retirement Savings Plan shall be construed and 12 enforced as if such illegal or invalid provision had never been contained herein. 9.11 Headings. The headings of Sections of this Supplemental Retirement Savings Plan are for convenience of reference only and shall have no substantive effect on the provisions of this Supplemental Retirement Savings Plan. EX-11 5 1 Exhibit 11 ---------------------------------------------------------------------------- FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES ---------------------------------------------------------------------------- COMPUTATION OF EARNINGS PER COMMON SHARE Year ended December 31 ------------------------ Amounts in thousands, except per share 1994 1993 1992 ---- ---- ---- Primary Average common shares outstanding 6,729 6,869 6,735 Common stock equivalents * 223 222 298 ----- ----- ----- Primary common shares outstanding 6,952 7,091 7,033 ===== ===== ===== Net income $ 117,295 101,992 97,937 Less: Preferred stock dividends 3,600 3,600 3,600 -------- ------- ------ Net income available to common shareholders 113,695 98,392 94,337 ======== ======= ====== Earnings per common share - primary $ 16.35 13.87 13.41 ======== ======= ====== Fully diluted Average common shares outstanding 6,729 6,869 6,735 Common stock equivalents * 228 225 302 Assumed conversion of convertible preferred stock 507 507 507 -------- ------- ------ Fully diluted average common shares outstanding 7,464 7,601 7,544 ======== ======= ======= Net income $ 117,295 101,992 97,937 ======== ======= ======= Earnings per common share - fully diluted $ 15.71 13.42 12.98 ======== ======= ======= * Represents shares issuable upon the assumed exercise of outstanding common stock options under the "treasury stock" method of accounting. EX-23.1 6 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-32044) of First Empire State Corporation of our report dated January 10, 1995 appearing on page 52 of this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 8, 1995 appearing on page 3 of the First Empire State Corporation Retirement Savings Plan and Trust Financial Statements and Additional Information for the years ended December 31, 1994 and 1993 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 Statement. /s/ PRICE WATERHOUSE LLP Buffalo, New York March 16, 1995 EX-23.2 7 1 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 and 33-58500) of First Empire State Corporation of our report dated January 10, 1995 appearing on page 52 of this Annual Report on Form 10-K. We also consent to the reference to us under the heading "Experts" in such Registration Statements. /s/ PRICE WATERHOUSE LLP Buffalo, New York March 16, 1995 EX-27 8 ARTICLE 9 FINANCIAL DATA SCHEDULE FOR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994
9 1,000 Dec-31-1994 Jan-01-1994 Dec-31-1994 12-MOS 377,781 143 3,080 5,438 1,514,395 276,645 270,159 8,447,117 243,332 10,528,644 8,243,073 1,364,850 103,538 95,701 40,487 0 40,000 640,509 10,528,644 633,077 106,945 7,324 747,346 199,051 279,206 468,140 60,536 128 336,862 194,481 117,295 0 0 117,295 16.35 15.71 4.89 62,787 11,754 2,994 0 195,878 32,443 15,823 243,332 133,909 0 109,423
EX-99.1 9 1 Exhibit 99.1 FIRST EMPIRE STATE CORPORATION RETIREMENT SAVINGS PLAN AND TRUST Financial Statements and Additional Information December 31, 1994 and 1993 2 INDEX ----- Page ---- Report of independent accountants 3 Financial statements: Statement of net assets available for plan benefits as of December 31, 1994 and 1993 4 Statement of changes in net assets available for plan benefits for the years ended December 31, 1994 and 1993 5 Notes to financial statements 6 Exhibit I - Allocation of net assets available for plan benefits to investment programs as of December 31, 1994 and 1993 12 Exhibit II - Allocation of changes in net assets available for plan benefits to investment programs for the years ended December 31, 1994 and 1993 14 Additional information: Schedule I - Schedule of assets held for investment at December 31, 1994 16 Schedule II - Schedule of transactions in excess of 5% of fair value of plan assets for the year ended December 31, 1994 22 3 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, 1994 and 1993 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 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 financial statements audited by us 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, 1994 and 1993, and the changes in its net assets available for plan benefits for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Plan changed its method of accounting for benefit payments in 1993. 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 8, 1995 4
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31 ----------- 1994 1993 Assets ---- ---- Cash $ 7,745 20,681 Investments, at current value: Short-term investments (cost: $10,272,904 and $9,369,804) 10,272,904 9,369,804 Common stock (cost: $27,071,735 and $20,093,839) 34,666,101 29,143,251 U.S. government and agency obligations (cost: $2,728,247 and $2,664,196) 2,676,365 2,790,214 Corporate bonds (cost: $1,421,332 and $1,083,088) 1,272,057 1,104,164 Loans to participants 1,827,121 1,515,189 ----------- ----------- Total investments 50,714,548 43,922,622 Receivables: Employee contributions 115,283 98,745 Employer contributions 74,746 64,173 Interest and dividends 73,587 60,805 ----------- ----------- Total receivables 263,616 223,723 ----------- ----------- Total assets 50,985,909 44,167,026 Liabilities Due to broker 402,427 212,814 ----------- ----------- Net assets available for plan benefits $50,583,482 43,954,212 =========== ===========
See accompanying notes to financial statements. 5
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Year ended December 31 ---------------------- 1994 1993 ---- ---- Additions to net assets available for plan benefits Net investment income (loss): Interest $ 757,426 563,168 Dividends 594,285 383,469 Net realized gain (loss) on sale of investments (172,473) 71,023 Net appreciation (depreciation) in current value of investments (1,378,257) 1,277,410 ----------- ---------- Total net investment income (loss) (199,019) 2,295,070 Contributions: Employee 5,867,384 6,445,933 Employer 3,503,858 3,133,797 ----------- ---------- Total contributions 9,371,242 9,579,730 ----------- ---------- 9,172,223 11,874,800 Deductions from net assets available for plan benefits Benefit payments to participants (2,542,953) (2,072,905) ---------- ---------- Net increase in net assets available for plan benefits before cumulative effect of change in method of accounting for benefit payments to participants 6,629,270 9,801,895 Cumulative effect on prior year of change in method of accounting for benefit payments to participants (note 2) - 527,103 ---------- ---------- Net increase in net assets available for plan benefits 6,629,270 10,328,998 Net assets available for plan benefits at beginning of year 43,954,212 33,625,214 ---------- ---------- Net assets available for plan benefits at end of year $50,583,482 43,954,212 ========== =========== See accompanying notes to financial statements.
6 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. Eligible employees may elect to participate 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. The 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 will receive the assets allocated to their accounts. Contributions Contributions to the Plan are made by the participants through salary reduction and by the Company through employer matching contributions. The participants may elect to reduce their compensation by a specified whole percentage not to exceed 8%, subject to certain limitations under Section 401(k) and Section 415 of the Internal Revenue Code. 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 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. 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 $9,240 in 1994 and $8,994 in 1993. 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. 7 Investment programs Participants may invest their salary reduction contributions in the common stock of First Empire State Corporation ("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 2,647 participants in the First Empire stock fund, 2,095 in the diversified equity fund, 1,433 in the money-market fund and 1,264 in the bond fund at December 31, 1994. A total of 3,015 employees of the Company were active participants in the Plan at December 31, 1994. 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. On January 1, April 1, July 1 and October 1 of each year, participants may, 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. Contributions may be suspended at any time. Employer matching contributions Employer matching contributions are 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 until no later than April 1 of the calendar year following the year in which age 70-1/2 is attained. 8 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. 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, 1994 and 1993 consisted of the common stock of First Empire State Corporation 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 loans, which are fully secured by a portion of the participant's vested benefits, were determined to have a current value which approximates the outstanding principal balance of the loans at both December 31, 1994 and 1993. 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 respective investment fund's net assets. Interest income on loans to participants is allocated to the participants based on their respective loan agreement. Benefit payments to participants Benefit payments to participants are recorded when paid. During 1993, the Plan changed its method of accounting for benefit payments to participants by no longer accruing for benefit payments payable to participants at the end of the period. This change was made to comply with reporting standards established by the American Institute of Certified Public Accountants as set forth in its Audit and Accounting Guide, "Audits of Employee Benefit Plans", revised as of May 1, 1993. The cumulative effect of such change was to increase the net increase in net assets available for plan benefits for the year ended December 31, 1993 by $527,103. 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 $680,492 and $603,796 at December 31, 1994 and 1993, 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 paid $18,639 and $15,999 for brokerage commissions in 1994 and 1993, respectively. These amounts have been included in the Statement of Changes in Net Assets Available for Plan Benefits in net realized gain or loss on sale of investments for securities sold and net appreciation or depreciation in fair market value of investments for securities acquired during the year. 9 3. Income taxes The Internal Revenue Service has issued a favorable determination letter in 1992 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 affect the qualified and tax-exempt status of the Plan. Accordingly, no provision has been made for income taxes. 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. The earnings and ap- preciation of the assets of the Plan are not subject to Federal or state income taxation until withdrawn or distributed. 4. Plan amendments Effective July 1, 1994, the Plan was amended to allow eligible part-time employees to participate in the Plan. The Plan was also amended, effective retroactive to January 1, 1993, as required by the Internal Revenue Code, to allow participants to make direct rollover of eligible rollover distributions to another qualified plan or individual retirement account. Effective, January 1, 1995, the Citizens Savings Bank Salary Investment Plan ("Citizens Plan") was merged into the Plan following the acquisition of Citizens Savings Bank, F.S.B. by M&T Bank in December 1994. The estimated fair value of the assets of the Citizens Plan as of January 1, 1995 was $2,765,990. Such assets were physically transferred to the Plan's Trustee in January 1995. In December 1994, M&T Bank acquired seven banking offices from Chemical Bank. Effective January 1, 1995, the Plan was amended to add special eligibility rules and accept the transfer of participant account balances from the Chemical Savings Incentive Plan for former Chemical Bank employees that became employees of M&T Bank. Assets with an estimated fair value of $609,667 at January 1, 1995 were transferred to the Plan's Trustee during January and February 1995. The Plan is expected to be amended effective April 1, 1995, to merge the Statewide Funding Corporation Profit Sharing Plan and Trust ("Statewide Plan") into the Plan. Statewide Funding Corporation was acquired by M&T Mortgage Corporation, a wholly-owned subsidiary of M&T Bank, in March 1995. 5. Related party transactions During 1994, the Plan acquired in the open market, in 27 transactions, 28,667 shares of First Empire common stock at a cost of $4,218,308. The Plan disposed of, in 16 transactions, 4,308 shares of First Empire common stock which resulted in proceeds of $636,446 and realized gains of $27,909. In addition, 190,088 shares of First Empire common stock with a total cost of $18,722,361 and a fair market value of $25,851,968 were held at December 31, 1994. During 1993, the Plan acquired in the open market, in 36 transactions, 36,408 shares of First Empire common stock at a cost of $5,146,869. The Plan disposed of, in 11 transactions, 2,809 shares of First Empire common stock which resulted in proceeds of $394,984 and realized gains of $14,825. In addition, 165,729 shares of First Empire common stock with a total cost of $14,913,922 and a fair market value of $23,326,357 were held at December 31, 1993. 10 6. Employer and employee contributions Employer and employee contributions are summarized as follows:
Employee Employer contributions contributions ------------- ------------- For the year ended December 31, 1994: M&T Bank $5,275,570 3,125,188 The East New York Savings Bank 474,250 309,520 M&T Mortgage Corporation 117,564 69,150 ---------- ---------- $5,867,384 3,503,858 ========== ========== For the year ended December 31, 1993: M&T Bank $5,798,161 2,820,953 The East New York Savings Bank 558,760 280,981 M&T Mortgage Corporation 89,012 31,863 ---------- ---------- $6,445,933 3,133,797 ========== ==========
The East New York Savings Bank is a wholly-owned subsidiary of First Empire. 7. Net realized gain (loss) on sale of investments Net realized gain (loss) on sale of investments is comprised of the following:
Net realized Total Basis of gain proceeds assets sold (loss) -------- ----------- --------- For the year ended December 31, 1994: First Empire common stock $ 636,446 608,537 $ 27,909 Other common stock 841,304 971,810 (130,506) U.S. government and agency obligations 2,950,220 3,014,217 (63,997) Corporate bonds 586,968 592,847 (5,879) ---------- --------- --------- $5,014,938 5,187,411 $(172,473) ========== ========= ========= For the year ended December 31, 1993: First Empire common stock $ 394,984 380,159 $ 14,825 Other common stock 982,585 944,198 38,387 U.S. government and agency obligations 1,214,840 1,198,029 16,811 Corporate bonds 258,198 257,198 1,000 ---------- --------- --------- $2,850,607 2,779,584 $ 71,023 ========== ========= =========
In accordance with the requirements of ERISA, the basis of assets sold is equal to either the fair market value at the beginning of the period, for securities held as of that date, or cost, for securities acquired during the year. 11 8. Net appreciation in current value of investments
Net appreciation in current value of investments is comprised of the following: Current Basis of value at assets held end of at end Net period of period appreciation ------ --------- ------------ For the year ended December 31, 1994: First Empire common stock $25,851,968 26,936,127 $(1,084,159) Other common stock 8,814,133 8,800,943 13,190 U.S. government and agency obligations 2,676,365 2,821,767 (145,402) Corporate bonds 1,272,057 1,433,943 (161,886) ----------- $(1,378,257) For the year ended ============ December 31, 1993: First Empire common stock $23,326,357 22,538,195 $ 788,162 Other common stock 5,816,894 5,381,390 435,504 U.S. government and agency obligations 2,790,214 2,755,523 34,691 Corporate bonds 1,104,164 1,085,111 19,053 ---------- $1,277,410 ========== In accordance with the requirements of ERISA, the basis of assets held at end of period is equal to either the fair market value at the beginning of the period, for securities held as of that date, or cost, for securities acquired during the year.
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EXHIBIT I ALLOCATION OF NET ASSETS AVAILABLE FOR PLAN BENEFITS TO INVESTMENT PROGRAMS DECEMBER 31, 1994 First Empire Diversified Money- Bond Participant stock fund equity fund market fund fund loan account Total ------------ ----------- ----------- ---- ------------ ----- Assets Cash $ 635 1,761 5,349 - - $ 7,745 Investments, at current value (cost: $19,011,941, $9,618,466, $8,700,528 and $4,163,283): Short-term investments 289,580 1,269,092 8,700,528 13,704 - 10,272,904 Common stock 25,851,968 8,814,133 - - - 34,666,101 U.S. government and agency obligations - - - 2,676,365 - 2,676,365 Corporate bonds - - - 1,272,057 - 1,272,057 Loans to participants - - - - 1,827,121 1,827,121 ----------- ---------- ---------- ---------- ---------- ----------- Total investments 26,141,548 10,083,225 8,700,528 3,962,126 1,827,121 50,714,548 Receivables: Employee contributions 54,185 33,035 16,579 11,484 - 115,283 Employer contributions 34,628 21,524 10,975 7,619 - 74,746 Interest and dividends - 19,939 - 53,648 - 73,587 ----------- ---------- ---------- ---------- ---------- ----------- Total receivables 88,813 74,498 27,554 72,751 - 263,616 ----------- ---------- ---------- ---------- ---------- ----------- Total assets 26,230,996 10,159,484 8,733,431 4,034,877 1,827,121 50,985,909 Liabilities Due to broker 288,011 114,416 - - - 402,427 ----------- ---------- ---------- ---------- ---------- ----------- Net assets available for plan benefits $ 25,942,985 10,045,068 8,733,431 4,034,877 1,827,121 $50,583,482 ============ ========== ========== ========== ========= ===========
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EXHIBIT I (CONTINUED) ALLOCATION OF NET ASSETS AVAILABLE FOR PLAN BENEFITS TO INVESTMENT PROGRAMS DECEMBER 31, 1993 First Empire Diversified Money- Bond Participant stock fund equity fund market fund fund loan account Total ------------ ----------- ----------- ---- ------------ ----- Assets Cash $ 317 - 20,271 93 - $ 20,681 Investments, at current value (cost: $15,189,628, $6,099,121, $8,129,981 and $3,792,197): Short-term investments 275,706 919,204 8,129,981 44,913 - 9,369,804 Common stock 23,326,357 5,816,894 - - - 29,143,251 U.S. government and agency obligations - - - 2,790,214 - 2,790,214 Corporate bonds - - - 1,104,164 - 1,104,164 Loans to participants - - - - 1,515,189 1,515,189 ----------- ---------- ---------- ---------- ---------- ----------- Total investments 23,602,063 6,736,098 8,129,981 3,939,291 1,515,189 43,922,622 Receivables: Employee contributions 50,566 22,805 13,607 11,767 - 98,745 Employer contributions 32,414 14,913 9,029 7,817 - 64,173 Interest and dividends - 8,386 - 52,419 - 60,805 ----------- ---------- ---------- ---------- ---------- ----------- Total receivables 82,980 46,104 22,636 72,003 - 223,723 ----------- ---------- ---------- ---------- ---------- ----------- Total assets 23,685,360 6,782,202 8,172,888 4,011,387 1,515,189 44,167,026 Liabilities Due to broker 212,814 - - - - 212,814 ----------- ---------- ---------- ---------- ---------- ----------- Net assets available for plan benefits $ 23,472,546 6,782,202 8,172,888 4,011,387 1,515,189 $43,954,212 ============ ========== ========== ========== ========= ===========
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EXHIBIT II ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS TO INVESTMENT PROGRAMS YEAR ENDED DECEMBER 31, 1994 First Empire Diversified Money- Bond Participant stock fund equity fund market fund fund loan account Total ------------ ----------- ----------- ---- ------------ ----- Additions to net assets available for plan benefits Net investment income (loss): Interest $ 4,842 54,079 327,280 249,906 121,319 $ 757,426 Dividends 390,346 203,939 - - - 594,285 Net realized gain (loss) on sale of investments 27,909 (130,506) - (69,876) - (172,473) Net appreciation (depreciation) in current value of investments (1,084,159) 13,190 - (307,288) - (1,378,257) ----------- ----------- ---------- ---------- --------- ----------- Total net investment income (loss) (661,062) 140,702 327,280 (127,258) 121,319 (199,019) Contributions: Employee 2,871,120 1,568,523 833,610 594,131 - 5,867,384 Employer 1,693,096 937,858 488,403 384,501 - 3,503,858 ----------- ----------- ---------- ---------- --------- ----------- Total contributions 4,564,216 2,506,381 1,322,013 978,632 - 9,371,242 ----------- ----------- ---------- ---------- --------- ----------- 3,903,154 2,647,083 1,649,293 851,374 121,319 9,172,223 Deductions from net assets available for plan benefits Benefit payments to participants (1,227,268) (439,535) (659,549) (216,601) - (2,542,953) Interfund transfers Loans, net of repayments 190,046 (125,915) (317,862) (58,201) 311,932 - Reallocation of investments - additions (deductions) (395,493) 1,181,233 (111,339) (553,082) (121,319) - ----------- ----------- ---------- ---------- --------- ----------- (205,447) 1,055,318 (429,201) (611,283) 190,613 - ----------- ----------- ---------- ---------- --------- ----------- Net increase in net assets available for plan benefits $2,470,439 3,262,866 560,543 23,490 311,932 $ 6,629,270 ========== ========== ========== ========== ========= ===========
15
EXHIBIT II (CONTINUED) ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS DECEMBER 31, 1993 First Empire Diversified Money- Bond Participant stock fund equity fund market fund fund loan account Total ------------ ----------- ----------- ---- ------------ ----- Additions to net assets available for plan benefits Net investment income: Interest $ 4,043 25,772 235,561 197,244 100,548 $ 563,168 Dividends 291,614 91,855 - - - 383,469 Net realized gain on sale of investments 14,825 38,387 - 17,811 - 71,023 Net appreciation in current value of investments 788,162 435,504 - 53,744 - 1,277,410 ----------- ----------- ---------- ---------- --------- ----------- Total net investment income 1,098,644 591,518 235,561 268,799 100,548 2,295,070 Contributions: Employee 3,125,379 1,343,886 1,071,032 905,636 - 6,445,933 Employer 1,670,919 555,572 537,205 370,101 - 3,133,797 ----------- ----------- ---------- ---------- --------- ----------- Total contributions 4,796,298 1,899,458 1,608,237 1,275,737 - 9,579,730 ----------- ----------- ---------- ---------- --------- ----------- 5,894,942 2,490,976 1,843,798 1,544,536 100,548 11,874,800 Deductions from net assets available for plan benefits Benefit payments to participants (916,554) (203,030) (691,947) (261,374) - (2,072,905) Interfund transfers Loans, net of repayments 140,738 (92,389) (291,299) (90,185) 333,135 - Reallocation of investments - additions (deductions) 517,927 383,531 (1,465,142) 664,232 (100,548) - ----------- ----------- ---------- ---------- --------- ----------- 658,665 291,142 (1,756,441) 574,047 232,587 - ----------- ----------- ---------- ---------- --------- ----------- Net increase (decrease) in net assets available for plan benefits before cumulative effect of change in method of accounting for bene- fit payments to participants 5,637,053 2,579,088 (604,590) 1,857,209 333,135 9,801,895 Cumulative effect on prior year of change in method of accounting for benefit payments to participants (note 2) 109,764 49,345 303,465 64,529 - 527,103 ----------- ----------- ---------- ---------- --------- ----------- Net increase (decrease) in net assets available for plan benefits $5,746,817 2,628,433 (301,125) 1,921,738 333,135 $10,328,998 ========== ========== ========== ========== ========= ===========
16
SCHEDULE I SCHEDULE OF ASSETS HELD FOR INVESTMENT DECEMBER 31, 1994 Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- Short-term investments Vision Group of Funds, Inc. Money Market Fund 10,272,904 $ 1.000 $10,272,904 $ 1.000 $10,272,904 ----------- ----------- Total short-term investments $10,272,904 $10,272,904 ----------- ----------- Common stock Consumer products and services: Alltrista Corporation 625 17.909 11,193 19.750 12,344 Ball Corporation 7,000 28.970 202,787 31.500 220,500 CPC International Inc. 4,700 44.881 210,941 53.250 250,275 Colgate Palmolive Company 1,000 52.195 52,195 63.375 63,375 Dow Jones & Co. 4,000 30.995 123,980 31.000 124,000 Dun & Bradstreet Companies, Inc. 2,800 56.374 157,848 55.000 154,000 First Brands Corporation 6,200 32.714 202,828 35.000 217,000 Harcourt General Inc. 6,000 35.666 213,996 35.250 211,500 Kmart Corporation 3,200 22.896 73,268 13.000 41,600 Limited Inc. 9,500 19.963 189,653 18.125 172,188 McGraw Hill Inc. 1,000 67.370 67,370 66.875 66,875 Quaker State Corp. 16,500 14.734 243,116 14.000 231,000 Reader's Digest Association Inc. 2,500 47.070 117,675 49.125 122,813 Stride Rite Corp. 3,000 25.970 77,909 11.125 33,375 Toys-R-Us, Inc. 1,300 34.320 44,616 30.625 39,813 --------- --------- Total consumer products and services . 1,989,375 . 1,960,658 --------- ---------
17
Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- Common stock (continued) Energy: Burlington Resources Inc. 1,300 $ 52.399 $ 68,119 $ 35.000 $ 45,500 Exxon Corporation 1,200 53.173 63,807 60.750 72,900 Nabors Industries, Inc. 17,500 8.766 153,412 6.500 113,750 RTZ Corp. 3,300 53.332 175,996 52.625 173,662 Schlumberger Limited 4,000 58.498 233,993 50.375 201,500 Ultramar Corp. 8,000 19.243 153,943 25.500 204,000 Unocal Corp. 9,000 26.726 240,538 27.250 245,250 --------- --------- Total energy 1,089,808 1,056,562 --------- --------- Financial: American International Group Inc. 1,400 66.006 92,408 98.000 137,200 Federal National Mortgage Association 1,000 58.348 58,348 72.875 72,875 First Empire State Corporation* 190,088 98.493 18,722,361 136.000 25,851,968 General Reinsurance Corp. 600 85.778 51,467 123.500 74,100 Morgan, JP & Company, Inc. 1,200 54.675 65,610 56.125 67,350 ---------- ---------- Total financial 18,990,194 26,203,493 ---------- ---------- Health care: Bristol-Myers Squibb Co. 1,000 77.363 77,363 57.875 57,875 Johnson & Johnson Co. 1,200 48.798 58,558 54.750 65,700 Merck & Co., Inc. 1,500 51.539 77,309 38.125 57,187 Mylan Laboratories, Inc. 2,500 18.996 47,491 27.000 67,500 ---------- ---------- Total health care 260,721 248,262 ---------- ---------- * See note 5 to the financial statements
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Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- Common stock (continued) Industrials: Aluminum Company of America 1,200 $ 72.125 $ 86,550 $ 86.625 $ 103,950 Avnet Inc. 4,800 33.063 158,701 37.000 177,600 Commercial Metals Co. 8,066 19.970 161,076 27.000 217,782 Cooper Industries Inc. 5,400 43.551 235,175 34.000 183,600 Corning Inc. 2,800 36.570 102,396 29.875 83,650 Crown Cork & Seal Co. Inc. 2,200 36.245 79,739 37.750 83,050 Dresser Industries Inc. 4,000 23.120 92,480 18.875 75,500 Emerson Electric Company 3,000 54.370 163,109 62.375 187,125 Kirby Corp. 11,200 17.661 197,804 19.750 221,200 Santa Fe Pacific Corp. 6,000 9.853 59,115 17.500 105,000 Santa Fe Pacific Gold Corp. 8,100 13.316 107,860 13.000 105,300 Union Pacific Corp. 2,500 62.620 156,550 45.375 113,438 Zero Corp. 20,200 13.742 277,580 14.000 282,800 ---------- ---------- Total industrials 1,878,135 1,939,995 ---------- ---------- Materials: Champion International Corp. 3,200 30.074 96,236 36.500 116,800 Dupont (E.I.) DeNemours & Company 4,500 51.866 233,395 56.125 252,562 Hercules, Inc. 2,500 85.587 213,967 115.375 288,437 International Paper Co. 1,400 67.174 94,043 75.375 105,525 Material Sciences Corp. 19,750 12.227 241,489 15.875 313,531 Newmont Mining Company 6,666 40.648 270,961 36.000 239,976 Pall Corp. 4,000 20.430 81,718 18.750 75,000 Placer Dome Inc. 5,000 24.480 122,400 21.750 108,750 Potash Corp. Saskatchewan Inc. 7,700 27.433 211,232 34.000 261,800 Worthington Industries Inc. 2,000 16.834 33,667 20.000 40,000 --------- --------- Total materials 1,599,108 1,802,381 --------- ---------
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Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- Common stock (continued) Technology: AMP Inc. 2,900 $ 62.440 $ 181,075 $ 72.750 $ 210,975 Continuum Company Inc. 11,100 20.073 222,815 30.500 338,550 Hewlett-Packard Co. 1,300 62.740 81,562 99.875 129,838 Micron Technology Inc. 2,500 43.120 107,800 44.125 110,312 Texas Instruments, Inc. 1,700 58.046 98,679 74.875 127,288 ---------- ---------- Total technology 691,931 916,963 ---------- ---------- Utilities: American Telephone & Telegraph Co. 2,300 40.265 92,610 50.250 115,575 IPALCO Enterprises Inc. 4,800 30.221 145,063 30.000 144,000 PECO Energy 5,000 28.880 144,400 24.500 122,500 SCE Corp. 4,600 22.203 102,134 14.625 67,275 Union Electric Co. 2,500 35.302 88,256 35.375 88,437 ---------- ---------- Total utilities 572,463 537,787 Total common stock $27,071,735 $ 34,666,101 ----------- ------------
20
Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- U.S. government and agency obligations U.S. Treasury note, 7.750%, due 02/15/95 $ 50,000 101.390 $ 50,695 100.250 $ 50,125 U.S. Treasury note, 8.500%, due 05/15/95 75,000 100.016 75,012 100.749 75,562 U.S. Treasury note, 8.875%, due 02/15/96 100,000 101.094 101,094 101.500 101,500 U.S. Treasury note, 7.000%, due 09/30/96 50,000 99.710 49,855 98.968 49,484 U.S. Treasury note, 6.875%, due 10/31/96 500,000 99.406 497,031 98.656 493,280 U.S. Treasury note, 7.250%, due 11/30/96 225,000 99.281 223,382 99.250 223,313 U.S. Treasury note, 8.125%, due 02/15/98 125,000 98.485 123,106 100.812 126,015 Federal National Mortgage Association, 5.300%, due 07/25/98 191,490 100.203 191,879 98.600 188,809 U.S. Treasury, zero coupon note, due 11/15/98 100,000 78.433 78,433 74.179 74,179 Federal Home Loan Mortgage Corp., 6.000%, due 05/15/99 202,046 101.297 204,666 91.950 185,781 U.S. Treasury note, 8.000%, due 08/15/99 100,000 96.643 96,643 100.594 100,594 U.S. Treasury note, 6.375%, due 01/15/2000 150,000 99.805 149,708 94.000 141,000 U.S. Treasury note, 8.750%, due 08/15/2000 100,000 101.453 101,453 104.156 104,156 U.S. Treasury note, 8.000%, due 05/15/2001 125,000 99.434 124,293 100.812 126,015 U.S. Treasury note, 6.375%, due 08/15/2002 75,000 98.829 74,122 91.563 68,672 U.S. Treasury note, 7.250%, due 08/15/2004 400,000 97.188 388,750 96.000 384,000 Federal National Mortgage Association, 5.500%, due 01/25/2013 200,000 99.063 198,125 91.940 183,880 --------- ---------- Total U.S. government and agency obligations $ 2,728,247 $ 2,676,365 ----------- -----------
21
Number of shares or principal Total Current value Name and title of issue amount Unit cost cost Per unit Total ----------------------- --------- --------- ------ -------- ----- Corporate bonds General Tel. Co. Calif., 1st mtg., 4.500%, due 03/01/95 $ 100,000 100.125 $ 100,125 99.750 $ 99,750 Lehman Bros. Holdings Inc., zero coupon note, due 05/16/97 300,000 82.385 247,155 81.625 244,875 Discover Card, 6.250%, due 08/15/98 100,000 99.681 99,681 94.500 94,500 PepsiCo, Inc. note, 7.625%, due 11/01/98 50,000 99.758 49,879 97.876 48,938 Westinghouse Credit Corp. note, 8.875%, due 06/14/2014 150,000 112.517 168,775 99.000 148,500 GE Capital Mortgage Services Inc., 7.000%, due 03/25/2021 253,000 99.938 252,842 85.480 216,264 Prudential Home Mtg., 2nd mtg., 7.000%, due 08/25/2023 300,000 100.000 300,000 83.730 251,190 Residential Funding Mortgage 7.000%, due 08/25/2023 200,000 101.438 202,875 84.020 168,040 ----------- ----------- Total corporate bonds $ 1,421,332 $ 1,272,057 ----------- ----------- Loans to participants 7%-11%, fully secured by vested benefits, due 1995 through 1999 $ 1,827,121 - $ 1,827,121 - $ 1,827,121 ----------- ----------- Total investments $43,321,339 $50,714,548 =========== ===========
22
SCHEDULE II SCHEDULE OF TRANSACTIONS IN EXCESS OF 5% OF FAIR VALUE OF PLAN ASSETS FOR THE YEAR ENDED DECEMBER 31, 1994 Purchases Sales/distributions ----------------------- ---------------------------------------------- Number of Number of Gain Description of asset transactions Cost transactions Proceeds Basis (loss) -------------------- ------------ ---- ------------ -------- ----- ------ Short-term investments: Vision Group of Funds, Inc. Money Market Fund 410 $15,708,042 158 $14,630,881 14,630,881 - Common stock: First Empire State Corporation 27 4,218,308 16 636,446 608,537 27,909