<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1997 Commission File No.: 0-18011
ONBANCorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 16-1345830
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(State of Incorporation) (I.R.S. Employer Identification No.)
101 South Salina Street, Syracuse, New York 13202 (315) 424-4400
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(Address of principal executive office and Zip Code) (Registrant's telephone
number)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days. YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
As of February 3, 1998, the aggregate market value of the 12,465,887 shares of
Common Stock of the Registrant outstanding on such date, excluding the 246,309
shares held by all directors and executive officers of the Registrant as a
group, was $921,696,520. This figure is based on the last sale price of $73.9375
per share of the Registrant's Common Stock on February 3, 1998.
Number of shares of Common Stock outstanding as of February 3, 1998: 12,712,196.
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DOCUMENTS INCORPORATED BY REFERENCE
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(1) Portions of the Annual Report to Shareholders for the year ended December
31, 1997 are incorporated by reference into Part 11, Items 5, 6, 7 and 8 of this
Form 10-K.
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<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1997
ONBANCorp, INC.
<TABLE>
<CAPTION>
PAGE #
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<S> <C> <C>
PART I
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Item 1. Business.......................................... 3
Item 2. Properties........................................ 20
Item 3. Legal Proceedings................................. 20
Item 4. Submission of Matters to Vote of Security Holders.. 20
PART II
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Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters................................ 20
Item 6. Selected Financial Data........................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation................ 20
Item 7. A Quantitative & Qualitative Disclosures about Market
Risk............................................... 20
Item 8. Financial Statements and Supplementary Data.......... 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 21
PART III
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Item 10. Directors and Executive Officers of the Registrant... 21
Item 11. Executive Compensation............................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 21
Item 13. Certain Relationships and Related Transactions....... 21
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................... 22
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
General. ONBANCorp, Inc. (the "Company" or "ONBANCorp") is a Delaware
chartered bank holding company which operated two wholly owned subsidiaries
during 1997, OnBank & Trust Co. and Franklin First Savings Bank ("the Banks").
ONBANCorp completed a purchase transaction on December 31, 1992 for the
Merchants National Bank & Trust Company of Syracuse and Union National Bank,
Albany, New York (the "Combined Banks") previously owned by MidLantic
Corporation. The Combined Banks had assets of $1 billion, deposits of $.9
billion and 40 locations in metropolitan Syracuse and Albany. Since the Combined
Banks were purchased on the last day of the fiscal year, their assets are
included in the Company's consolidated 1992 year-end balance sheet.
On January 1, 1993, the Combined Banks were converted from national banks to
New York State trust companies. On January 15, 1993 OnBank and the acquired
banks were reorganized, resulting in the creation of OnBank & Trust Co., a New
York trust company, having total assets of approximately $3.1 billion and 61
locations, and the reduction in size of OnBank, a New York State savings bank,
to total assets of approximately $.4 billion and 9 locations.
On August 31, 1993 the Company merged with Franklin First Financial Corp.,
and Franklin First Savings Bank ("Franklin") a $1.3 billion Pennsylvania thrift
with deposits of $.8 billion and 22 locations and Franklin became a subsidiary
of the Company. This merger has been accounted for using the pooling of
interests method and, therefore, prior period results have been restated.
During June of 1994 OnBank & Trust Co. acquired nine branches with $.3
billion in deposits in the Rochester metropolitan area and accounted for the
acquisition using the purchase method.
On January 1, 1997 OnBank and OnBank & Trust Co. merged, thereby creating a
single banking entity in New York State, operating under the name of OnBank &
Trust Co..
On October 28, 1997, the Company entered into an agreement and plan of
reorganization for a merger with First Empire State Corporation. Shareholder
approval of the merger was obtained on March 17, 1998. Upon consummation of
the merger, which is expected to occur on April 1, 1998, OnBank & Trust Co.
and Franklin First Savings Bank will be merged into a single interstate M&T
Bank.
Financial services are offered through 86 banking locations, including 7
specialized lending offices, plus 131 stand alone on-line cash machines at
various convenience stores and turnpike locations. Management believes that
ONBANCorp has the largest share of retail deposits in Onondaga County, New York
and is currently the County's leading residential mortgage lender, in addition
to having a significant market presence in adjacent Oneida and Cayuga Counties.
As of December 31, 1997, ONBANCorp had total consolidated assets of $5.3
billion, deposits of $4.0 billion and shareholders' equity of $335.2 million.
3
<PAGE>
The principal business of the Banks is to accept deposits from the general
public and to invest those deposits, together with funds from borrowings and
ongoing operations, in business, consumer, and residential mortgage loans.
ONBANCorp has concentrated its efforts in the retail, municipal and commercial
banking business, expanding the types of financial products and services,
including trust offered to its customers. The Banks offer a variety of deposit
and loan products designed to meet the needs of residents and businesses of its
market area, as well as discount brokerage services through Investor Services,
Inc. and non-insured mutual funds and annuities through Liberty Securities
Corporation. The Company does not believe that any potential obligations and/or
exposures to loss exist as a result of these activities with Investor Services,
Inc. and Liberty Securities Corporation.
At December 31, 1997 total assets were $5.3 billion, earning assets were
$5.0 billion, deposits were $4.0 billion and shareholders' equity was $335.2
million, net of $17.4 million of net unrealized holding loss on securities. The
unrealized holding loss relating to the held to maturity securities ($17.9
million) will be amortized into capital as the related securities are repaid.
The following table sets forth the amortization, maturity and repricing
schedule of the Company's interest earning assets and interest bearing
liabilities for all future time periods as of December 31, 1997. Most of the
Company's adjustable rate mortgages and adjustable rate mortgage-backed
securities provide for limitations on the interest rate adjustments that may
occur during any one adjustment period, as well as during the life of the loan.
Such limitations could have the effect of reducing the interest rate sensitivity
of these loans if interest rates were to significantly increase for prolonged
periods. In periods of high interest rates, prepayment levels of fixed rate
mortgage loans and mortgage-backed securities would be expected to decrease and
conversely they would be expected to increase if interest rates were to decline.
The principal amount for each asset and liability is shown in the first period
in which it is expected to be repaid or the rate thereon is scheduled to be
reset.
4
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<TABLE>
<CAPTION>
Less Than Three Greater
Three Months to 1 to 5 Than
(Dollars in Thousands) Months 1 Year Years 5 years Total
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<S> <C> <C> <C> <C> <C>
Interest earning assets
Mortgage loans 49,356 39,256 106,102 1,291,202 1,485,916
Other loans 67,536 196,474 477,176 601,090 1,342,276
Loans available for sale 130,412 130,412
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Total loans 247,304 235,730 583,278 1,892,292 2,958,604
Securities 67,926 526,252 71,984 1,351,649 2,017,811
Federal funds sold and other 10,044 10,044
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Total interest earning assets 325,274 761,982 655,262 3,243,941 4,986,459
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Interest bearing liabilities
Savings deposits 626,273 626,273
Time deposits 861,285 997,868 519,374 64,863 2,443,390
Money market accounts, NOW
accounts, and escrow deposits 573,344 573,344
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Total deposits 2,060,902 997,868 519,374 64,863 3,643,007
Repurchae agreements 25,803 22,053 51,591 65,155 164,602
Other borrowings 56,500 378,800 188,370 34,778 658,448
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Total interest bearing
liabilities $ 2,143,205 1,398,721 759,335 164,796 4,466,057
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Period excess (deficiency) (1,817,931) (636,739) (104,073) 3,079,145 520,402
As a percent of total earning
assets -36.5% -12.8% -2.1% 61.8% 10.4%
Cummulative excess (deficiency) (1,817,931) (2,454,670) (2,558,743) 520,402
As a percent of total earning
assets -36.5% -49.2% -51.3% 10.4%
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</TABLE>
The following major assumptions are reflected in the above table:
1. Fixed rate mortgages and fixed rate mortgage-backed securities
prepayment assumptions are based on dealer long-term prepayment
estimates for similar coupons.
2. Adjustable rate assets whose yield is not limited by periodic caps use
actual weighted average repricing dates.
3. Adjustable rate assets whose yield is affected by periodic caps are
allocated in periods when full indexing is estimated to occur.
4. Other non-amortizing fixed rate assets use actual maturity date.
5. Deposits without contractual maturity (i.e. savings deposits and
interest bearing transaction accounts) are included in the less than
three months category.
The most significant component of the earnings stream of the Banks is net
interest income which is directly correlated to net interest margin. It is the
intent of the Banks to minimize the sensitivity of the net interest margin to
changes in interest rates. The overriding philosophy of management is to
establish and maintain a reasonable balance between interest rate sensitive
assets ("ISAs") and interest rate sensitive liabilities ("ISLs"). Duration and
simulation modeling are the techniques which are used to monitor interest rate
risk exposure. Realizing that a perfectly matched balance sheet is a nearly
impossible task to maintain, the following parameters are used as guidelines for
operations.
5
<PAGE>
Duration Analysis: This technique analyzes the cash flows of assets and
liabilities discounted by current interest rates. The net dollar duration for
the one year time frame represents the present value of expected cash flows to
be received or paid out for assets or liabilities over the next year and is
considered an important duration measure as it relates to the extent of near
term interest rate risk in the balance sheet. The goal for this measure shall be
to maintain the one year net dollar duration divided by average earning assets
between plus or minus ten percent.
This analysis technique requires that certain assumptions be made regarding
flows of deposits and loan payments that are different than those in the
preceding table. Estimates regarding loan prepayments and conversion of deposit
accounts are based upon assumptions which have considered historical data and
anticipated interest rates. The Company prepares GAP information only for
regulatory reporting purposes and does not rely upon it for managing interest
rate risk. Duration analysis is considered more comprehensive, therefore,
emphasis is placed upon keeping within that guideline. At December 31, 1997 the
Company was 4.5% asset sensitive on a duration basis. Based upon the results of
the duration analysis at December 31, 1997 it appears that the Company is
minimally exposed to interest rate changes over a one year period.
The Company also performs simulation analyses which includes increasing and
decreasing the interest rates on a parallel basis as well as analyzing scenarios
in which the yield curve flattens or steepens or changes shape in some other
fashion. The results of these scenarios are also used to help evaluate the
Company's overall interest rate risk exposure. Simulations were performed at
December 31, 1997 for three intest rate scenarios. Rates rising and falling
by 50 basis points per quarter for one year and remaining constant for the
next two years, and rates remaining constant for three years. The results
indicated improving net interest income in the steady and rising rate
scenarios and slightly declining net interest income in the declining
interest rate scenario.
Lending Activities
Loan Portfolio. ONBANCorp's net loan portfolio totaled $3.09 billion at
December 31, 1997, representing 55.69% of its total assets. Its mortgage loan
portfolio is comprised principally of loans secured by first mortgages on
one-to-four family residences and generally underwritten in conformity with
secondary market standards. These loans are either conventional or insured by
the Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). In addition, the loan portfolio includes
mortgage loans secured by income producing commercial real estate or
multi-family dwellings, commercial, and other loans, such as home improvement,
automobile, manufactured home, guaranteed student loans, secured and unsecured
personal loans and home equity lines of credit.
6
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The following schedule sets forth the composition of ONBANCorp's total
portfolio of loans (including loans available for sale) by type of security and
percentage of gross loans at December 31:
<TABLE>
<CAPTION>
December 31,
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1997 1996 1995 1994 1993
-------------------- ----------------- ---------------- ---------------- ----------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans
Residential 1-4 family $1,201,660 39.8% 1,057,200 42.5% 1,132,947 48.6% 1,002,434 50.1% 963,803 50.7%
Multi family and commercial 336,568 11.2% 290.121 11.7% 248,325 10.7% 193,150 9.7% 191,683 10.1%
Construction 62,806 2.1% 53,998 2.2% 53,624 2.3% 31,642 1.6% 31,111 1.6%
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Total mortgage loans 1,601,034 53.1% 1,401,319 56.4% 1,434,896 61.6% 1,227,226 61.4% 1,186,597 62.4%
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Commercial loans 463,154 15.4% 333,073 13.4% 278,688 12.0% 226,538 11.3% 187,250 9.8%
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Other loans:
Home equity 114,602 3.8% 114,928 4.6% 115,641 5.0% 120,888 6.0% 135,292 7.1%
Auto leases 289,926 9.6% 130,885 5.3% 42,636 1.8% 4,794 0.2% - 0.0%
Other consumer 546,721 18.1% 508,251 20.4% 455,081 19.6% 422,027 21.1% 394,707 20.7%
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Total other loans 951,249 31.5% 754,064 30.3% 613,358 26.4% 547,709 27.3% 529,999 27.8%
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Gross loans 3,015,437 100.0% 2,488,456 100.1% 2,326,942 100.0% 2,001,473 100.0% 1,903,846 100.0%
Net deferred fees (17,769) (1,223) 2,185 5,186 (6,036)
Allowance for loan losses (39,064) (37,840) (34,583) (33,775) (32,717)
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Net loans $2,958,604 2,449,393 2,294,544 1,972,884 1,865,093
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</TABLE>
The cash flow from these loans, the preponderance of which are amortizing,
provides liquidity for both funding new loans and/or general corporate purposes.
The following table sets forth scheduled maturities of ONBANCorp's
commercial and construction loan portfolio as of December 31, 1997 based on
contract terms.
<TABLE>
<CAPTION>
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Maturing:
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<S> <C> <C> <C> <C>
In 1 Year 1 to 5 After Total
(In thousands) or Less Years 5 Years Loans
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Construction $ 49,487 12,524 795 62,806
Commercial(1) 247,157 244,299 308,266 799,722
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Total commercial and construction $296,644 256,823 309,061 862,528
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Predetermined interest rates 83,908 74,145
Adjustable interest rates 172,915 234,916
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Total $ 256,823 309,061
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</TABLE>
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(1) Includes commercial real estate loans.
Origination, Purchase and Sale of Loans. Residential mortgage loan
originations were $171 million in 1997, $195 million in 1996 and $254 million
in 1995.
Based on market conditions and other competitive factors, ONBANCorp
supplemented its mortgage loan originations during 1997 and 1995 with the
purchase of $208 million and $58 million, respectively of adjustable rate
mortgage loans for its portfolio. Purchases of these adjustable rate mortgage
loans which were both located in Upstate New York but outside the Syracuse area
also provides a means for the Company to geographically diversify its
residential mortgage loan portfolio. The purchase of loans further outside of a
7
<PAGE>
Company's primary market area may involve certain risks, including adverse
conditions in the general economy, economic conditions in the particular
geographic region where the property securing the loan is located and risks
associated with lending in a market area in which a lender may have limited
knowledge and experience.
In order to meet consumer demand for fixed rate mortgage loans, ONBANCorp
has continued to originate conventional fixed rate mortgage loans. Based upon
the absolute level of interest rates along with other considerations, the Banks
either sell fixed rate mortgage loans in the secondary market or they may retain
them in portfolio. Loans designated as available for sale are accounted for on a
lower of cost or market (LOCOM) basis. The Company generally retains the
servicing of loans sold in the secondary market, for which the Company earns a
servicing fee.
The following table shows the gross loan origination activity of the Company
during the periods indicated.
<TABLE>
<CAPTION>
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Year ended December 31,
---------------------------------
(Dollars in Thousands) 1997 1996 1995
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<S> <C> <C> <C>
Loans originated:
Mortgage:
Residential 1-4 family $ 171,408 $ 195,486 253,760
Multi-family, commercial
and construction 195,745 156,985 117,592
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Total mortgage loans $ 367,153 $ 352,471 371,352
Commercial 252,588 159,427 153,334
Other 473,322 411,031 296,193
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Total loans originated $1,093,063 $ 922,929 820,879
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</TABLE>
Residential Real Estate Lending. Management believes that ONBANCorp is among
the leading originators of residential real estate mortgage loans in Onondaga
County. Most of the residential mortgage loans originated by the Company are
secured by first mortgages on real estate located in the Banks' upstate New York
and northeastern Pennsylvania market area. Most residential loan originations
are attributable to bank-employed solicitors who are paid on a incentive basis
and referrals from real estate brokers and builders, depositors and walk-in
customers.
ONBANCorp has continued to originate conventional fixed rate mortgage loans.
Such loans are offered for terms up to 30 years and are offered at a rate based
on current market and economic conditions. Fixed-rate loans originated have
periodically been sold in the secondary market as either whole loans or
mortgage-backed securities with the servicing retained. This activity
accommodated many customers' desires for fixed rate mortgages and provides for
the Company's ongoing control of interest rate risk while continuing to maintain
customer relationships.
At December 31, 1997, as a result of this ongoing process of loan
securitization and sales, loans serviced for others were $1.0 billion, from
which the Company will continue to derive future servicing
8
<PAGE>
income. When loans are sold in the secondary market ONBANCorp generally retains
responsibility for collecting and remitting loan payments, inspecting the
properties, making certain insurance and tax payments on behalf of the borrowers
and otherwise servicing the loans. ONBANCorp receives a fee for performing such
services and is also entitled to the interest income earned on escrow accounts
and loan payments held by it before being remitted to the investor.
Commercial Lending. ONBANCorp, Inc., through its subsidiaries, OnBank &
Trust Co., OnBank and Franklin First Savings Bank provides commercial and
industrial loans, commercial real estate loans, construction loans, agricultural
loans, and loans to individuals, usually for investment purposes.
Commercial and industrial loans are offered to small businesses in the trade
areas serviced by the full service branches of the subsidiary banks. Such loans
are available to borrowers for seasonal working capital purposes, to acquire
plant and equipment, or to finance a business acquisition or expansion. Loans of
this type are customarily collateralized by the assets of the borrowers.
Repayment of these loans is dependent primarily upon the continued profitable
operation of the borrower's business, hence the borrower's historical financial
results, the characteristics of the industry, the character and ability of
management, current financial position, and financial forecasts and business
plans are all carefully scrutinized during the loan approval process.
The Banks are active in developing loans which can be guaranteed by the
Small Business Administration, and New York State and Pennsylvania agencies who
offer loan guarantees. OnBank & Trust Co. is a Small Business Administration
Certified Lender, and the other subsidiary Banks are pursuing that designation
also. This should enhance the continued development of the guaranteed loan
portfolio.
Commercial real estate and construction loans are offered by the Banks only
in the trade areas serviced by full service branches. The Banks emphasize
relationship banking thus real estate and construction loans are normally
available only to borrowers whose primary deposit relationships are maintained
with the Banks.
Real estate loans are customarily collateralized by owner occupied
properties and the Banks usually require recourse to the owner. Professional
offices, manufacturing, and distribution facilities are the most common types of
real estate financed. The Banks also make available, for well established local
entities, financing for multi-family housing primarily in the low to moderate
income neighborhoods served by the Banks. Construction loans offered by the
Banks are available when a permanent take out also exists. Loan amounts for
commercial real estate loans are normally seventy-five percent (75%) of cost or
appraised value (whichever is less). The primary source of repayment is expected
to be the continuing profitable operation of the owner/occupant's business. Thus
underwriting for these loans is little different than the requirements for
commercial and industrial loans.
Some of the geographic trade area of ONBANCorp includes land used for
agricultural purposes. The Banks' branches serving these areas provide a variety
of commercial loans to acquire land, purchase equipment or to fund the
production cycle of livestock, dairy, and cash crop operators.
Occasionally the Banks will provide loans to individuals needing liquidity.
These loans usually require the pledge of negotiable collateral.
Other Consumer Lending. New York State and Pennsylvania Banking Laws permit
the Banks to engage in virtually all types of consumer lending. At December 31,
1997, the Banks' gross consumer loan
9
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portfolio of $951 million consisted of guaranteed student loans, conventional
home improvement loans, home equity lines of credit, loans on manufactured
homes, loans and leases on automobiles, loans collateralized by savings
accounts, lines of credit and other secured and unsecured loans.
Borrowers pay a variable rate of interest on home equity lines of credit,
which ranges from 0% to 2.50% over the prime rate, and are permitted under the
Banks' policy to borrow up to 75% of the appraised value of their homes, less
any outstanding mortgage loans on such premises. Interest paid on home equity
loans is deductible by the borrower for federal income tax purposes within
prescribed limits. The Banks' gross portfolio of home equity lines of credit
totaled $115 million at December 31, 1997.
Delinquencies. When a borrower fails to make a scheduled payment on a loan,
the Banks take steps to have the borrower cure the delinquency. Such steps
include written notices of delinquency and contact by telephone by the Banks'
collection staff. All income producing property loans are reviewed monthly by
management. If the delinquency exceeds 90 days and is not cured through the
Banks' normal collection procedures, the Banks routinely place the loan on a
nonaccrual status, charge off any accrued interest, review it with the Executive
Committee of the Board quarterly, and institute measures to enforce its rights,
including, in the case of mortgage loans, commencing foreclosure action. In
certain cases, the Banks also consider accepting from the mortgagor a voluntary
deed to the mortgage premises in lieu of foreclosure.
Other loan delinquencies are remedied in a similar fashion. For secured
loans, the collateral is repossessed and sold to pay off the loan balance. In
the case of unsecured loans, the Banks either commence legal action to collect
the balance or negotiate a "work out" payment schedule over a period which may
exceed the original term of the loan.
Nonaccruing loans increased to $23.4 million at December 31, 1997 from $20.2
million at December 31, 1996. Accrual of interest is discontinued when a loan
becomes 90 days delinquent unless management believes, after considering
economic and business conditions, collateral value and collection efforts, that
continued accrual is warranted.
For the nonaccruing loans shown on page 12, the amount of interest income
that would have been recorded if these loans had been paid in accordance with
their original terms as well as the amount of interest income that was recorded
in each of the years was immaterial.
Delinquencies in the Company's portfolio of conventional residential
mortgage loans in its primary market area accounted for $11.7 million or 87% of
the $13.5 million of conventional residential mortgage loans over 90 days
delinquent at December 31, 1997. Delinquencies in the Company's portfolio of
purchased adjustable rate mortgage loans serviced by others accounted for the
remaining $1.8 million or 13% of the conventional residential mortgage loans
over 90 days delinquent at December 31, 1997. Additionally, almost all other
delinquent loans were located in New York State and Pennsylvania.
10
<PAGE>
The following table sets forth information with respect to loans delinquent for
90 days or more and nonaccrual loans.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
-------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Delinquent mortgage loans:
Residential $13,454 12,518 13,045 13,303 12,341
Multi family and commercial 7,255 7,891 9,063 8,591 7,546
- --------------------------------------------------------------------------------
Total delinquent mortgage loans 20,709 20,409 22,108 21,894 19,887
- --------------------------------------------------------------------------------
As a percent of gross mortgage loans 1.3% 1.5% 1.5% 1.8% 1.7%
- --------------------------------------------------------------------------------
Delinquent commercial loans: $ 6,850 4,245 4,387 5,593 6,655
- --------------------------------------------------------------------------------
As a percent of gross commercial
loans 1.5% 1.3% 1.6% 2.5% 3.6%
- --------------------------------------------------------------------------------
Delinquent other loans:
Home equity $ 340 599 738 720 414
Guaranteed student 480 222 183 157 97
Loans to individuals 1,678 1,602 1,542 1,396 1,651
- --------------------------------------------------------------------------------
Total delinquent other loans $ 2,498 2,423 2,463 2,273 2,162
- --------------------------------------------------------------------------------
As a percentage of gross other loans 0.3% 0.3% 0.4% 0.4% 0.4%
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Delinquent loans as a percentage
of gross loans 1.0% 1.1% 1.2% 1.5% 1.5%
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Nonperforming loans:
Nonaccrual loans $23,400 20,172 23,580 22,525 25,381
Accruing loans delinquent
90 days or more 4,624 2,464 2,586 2,386 3,323
Restructured loans 2,033 4,441 2,792 4,849 5,559
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Total nonperforming loans 30,057 27,077 28,958 29,760 34,263
Other nonperforming assets:
Other real estate owned 4,908 4,054 4,019 5,431 10,719
Repossessed assets 2,772 732 441 335 666
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Total nonperforming assets $37,737 31,863 33,418 35,526 45,648
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Allowance for loan losses as a
percentage of non-performing loans 129.97% 139.75% 119.42% 113.49% 95.49%
Nonperforming assets as a
percentage of total assets 0.71% 0.59% 0.60% 0.53% 0.79%
- -------------------------------------------------------------------------------
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</TABLE>
"Potential problem loans" at December 31, 1997 amounted to $33,195,000
compared with $20,833,000 at December 31, 1996. These problem loans are defined
as loans and commitments not included as non-performing loans discussed above,
but about which management, through normal internal credit review procedures,
has developed information regarding possible credit problems which may cause the
borrowers future difficulties in complying with present loan repayment terms.
There were no loans classified for regulatory purposes as loss, doubtful or
substandard that are not included above or which caused
11
<PAGE>
management to have serious doubts as to the ability of the borrower to comply
with repayment terms. In addition, there were no material commitments to lend
additional funds to borrowers whose loans were classified as non-performing.
Allowance for Loan Losses. The allowance for loan losses is increased by
provisions for loan losses charged to operations and decreased by charge-offs of
loans, net of recoveries. Management's quarterly evaluation of the adequacy of
the allowance takes into consideration the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations which may affect
the borrower's ability to repay, overall portfolio quality, and current and
prospective economic conditions.
In considering the sound nature of the overall loan portfolio and the
potential for charge-offs, ONBANCorp kept its provision for loan losses
relatively stable at $7.2 in 1997 compared to $7.8 million in 1996. The
allowance, when expressed as a percentage of loans, decreased somewhat to 1.30%
at December 31, 1997 from 1.52% at year end 1996. Management believes the
allowance for loan losses is adequate.
The following table sets forth the activity in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 37,840 34,583 33,775 32,717 31,722
Charge-offs
Mortgage loans 2,692 2,804 3,749 3,706 748
Commercial loans 861 1,136 1,437 1,746 7,303
Other loans 3,939 2,698 2,405 2,686 3,684
- --------------------------------------------------------------------------------
Total charge-offs 7,492 6,638 7,591 8,138 11,735
- --------------------------------------------------------------------------------
Recoveries
Mortgage loans 634 1,073 630 236 1
Commercial loans 315 514 352 598 1,341
Other loans 599 495 627 724 1,091
- --------------------------------------------------------------------------------
Total recoveries 1,548 2,082 1,609 1,558 2,433
- --------------------------------------------------------------------------------
Net charge-offs 5,944 4,556 5,982 6,580 9,302
- --------------------------------------------------------------------------------
Provision for loan losses 7,168 7,813 6,790 7,638 10,297
- --------------------------------------------------------------------------------
Ending balance $ 39,064 37,840 34,583 33,775 32,717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding 0.22% 0.19% 0.28% 0.35% 0.47%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The majority of the chargeoffs in 1993 and 1994 were related to
non-performing loans of the Combined Banks including commercial real estate
loans which were resolved during 1994. Although non-performing assets have
increased from $31.9 million at December 31, 1996to $37.7 million at December
31, 1997, the balance continues to represent the same approximate ratio of
gross loans at 1.0%. In each of the last five years the provision for loan
losses has exceeded net charge offs and the allowance for loan losses has
increased. The level of the loan loss allowance continues to more than cover
non-performing loans at 130.0% at December 31, 1997. The significantly large
provision for loan losses for 1993 relates to the deterioration of certain
loans of the Combined Banks along with the increased emphasis on commercial
12
<PAGE>
lending within the overall Company and the inherently higher risk factors
associated with this type of lending. Commercial loans as a percentage of gross
loans receivable have increased from $187.3 million or 9.8% at December 31, 1993
to $463.2 million or 15.4% at December 31, 1997.
The loan loss allowance is considered by management to be a general
allowance available to cover loan losses within the entire portfolio. The
following table has been prepared to comply with requirements of the Securities
Exchange Commission. The classifications within the table are based on
management's current assessment of the loss potential associated with specific
loans and elements of the portfolio. Allocation is especially problematical
because of the difficulties inherent in predicting and evaluating with any
degree of accuracy the impact of economic events.
Management cautions that the loan loss allowance allocation provided does
not necessarily represent the total amount which may or may not be available for
actual future losses in any one or more of the categories. Management is of the
opinion that the loan loss allowance as of December 31, 1997 is adequate as a
general allowance.
The following table sets forth the allocation of the allowance for loan
losses at December 31:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans $ 14,119 16,532 15,629 17,374 17,313
Mortgage loans to total loans 51.01% 54.14% 59.36% 59.74% 60.68%
Construction loans $ 1,872 1,486 1,060 340 340
Construction loans to total loans 2.08% 2.17% 2.30% 1.58% 1.64%
Commercial loans $ 14,998 11,851 11,801 10,676 10,856
Commercial loans to total loans 15.36% 13.39% 11.98% 11.32% 9.84%
Other loans $ 8,075 7,971 6,093 5,385 4,208
Other loans to total loans 31.55% 30.30% 26.36% 27.36% 27.84%
- --------------------------------------------------------------------------------
Total allowance for loan losses $ 39,064 37,840 34,583 33,775 32,717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Securities Activities. The Company has authority to purchase a wide range of
securities deemed prudent by management, subject to various regulatory
restrictions. The Board of Directors establishes the investment policy of the
Company based upon the recommendations of the executive asset/liability team and
the Board reviews the results of all transactions and activities in the
securities portfolio on a monthly basis. As of December 31, 1997, ONBANCorp's
securities portfolio totaled $2.0 billion, constituting 37.9% of total assets
down from 48.2% at December 31, 1996. The Company's strategy has been to
decrease the percentage of investments to assets and to increase the percentage
of loans to assets. For purposes of this discussion, mortgage-backed securities
are considered securities rather than loans even though securities can represent
loans which have been originated and securitized.
As of November 15, 1995, all companies subject to FAS 115 were permitted a
one-time opportunity to reallocate securities previously classified as held to
maturity into the available for sale category without calling into question the
Company's intent to hold the remaining securities to maturity. ONBANCorp availed
itself of this opportunity and transferred approximately $1.54 billion in
securities from held to maturity to available for sale. Following this move the
Company sold approximately $1.2 billion of its available for sale securities and
used the proceeds to pay down borrowings and fund future loan growth. This sale
enabled the Company to shrink the absolute levels of securities and borrowings.
The yield on assets sold was approximately the same as the cost of the
borrowings repaid, therefore, net interest income
13
<PAGE>
was not adversely affected. Prepayment fees related to the prepayment of
borrowings were more than offset by gains on securities sold. The future
implications of these actions were that net interest income would remain
approximately the same, however, net interest margin would improve because net
interest income (the numerator) would remain approximately the same while the
average earning assets (the denominator) would significantly diminish by
approximately $1 billion. Total securities have declined to $2.02 billion at
December 31, 1997 from $2.61 billion at December 31, 1996 from $2.74 billion at
December 31, 1995 and on a percentage basis represent 38% ,48% and 49% of total
assets on those respective dates.
The following table sets forth ONBANCorp's investment portfolio at carrying
value at the dates indicated. For information relating to the estimated fair
value of the Company's investment portfolio at December 31, 1997 and 1996, see
"Notes to Consolidated Financial Statements-Note 3".
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 34,211 $ 33,961 29,716
U.S. Government agencies 155,442 200,416 199,206
State and municipal 55,385 61,668 74,351
Corporate and other 6,958 329 424
- --------------------------------------------------------------------------------
Total debt securities 251,996 296,374 303,697
- --------------------------------------------------------------------------------
Mortgage-backed securities:
GNMA 73,512 137,594 189,692
FNMA 98,135 233,968 253,659
FHLMC 179,170 410,325 395,442
SBA 5,776 22,748 27,028
Collateralized mortgage obligations:
Agency 833,882 786,008 878,056
Non-agency 527,627 676,177 627,982
- --------------------------------------------------------------------------------
Total mortgage-backed securities 1,718,102 2,266,820 2,371,859
- --------------------------------------------------------------------------------
Equity securities:
Preferred stock - 1,022 1,040
Common stock 1,394 718 764
Federal Home Loan Bank stock 46,319 46,041 64,484
- --------------------------------------------------------------------------------
Total equity securities 47,713 47,781 66,288
Total securities $ 2,017,811 $ 2,610,975 2,741,844
- --------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
The following table presents the carrying value and weighted average book
yield on debt and mortgage-backed securities at December 31, 1997 based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call privileges of the issuer.
<TABLE>
<CAPTION>
Weighted Due after one Weighted Due after five Weighted
Due in one average year through average years through average
(Dollars in Thousands) year or less yield five years yield ten years yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Obligations of U.S. Government and
U.S. Government agencies $ 74,137 5.0% - - 36,631 4.7%
State and municipal 21,700 4.6% 28,692 4.9% 4,470 5.0%
Mortgage-backed and other 4,532 6.5% 19,008 5.5% 104,803 5.9
- ------------------------------------------------------------------------------------------------------------------------------
$ 100,369 5.0% 47,700 5.1% 145,904 5.6%
- ------------------------------------------------------------------------------------------------------------------------------
Available for sale:
Obligations of U.S. Government and
U.S. Government agencies $ - 29,177 6.1% 15,052 7.3%
Mortgage-backed and other - 3,226 7.6% 45,918 6.7%
- ------------------------------------------------------------------------------------------------------------------------------
$ - 32,403 6.2% 60,970 6.7%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted
Due after average average
(Dollars in Thousands) ten years yield Total yield
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Obligations of U.S. Government and
U.S. Government agencies - 110,768 4.9%
State and municipal 523 5.5% 55,385 4.8%
Mortgage-backed and other 881,668 6.5% 1,010,011 6.4%
- ---------------------------------------------------------------------------------------------
882,191 6.5% 1,176,164 6.2%
- ---------------------------------------------------------------------------------------------
Available for sale:
Obligations of U.S. Government and
U.S. Government agencies 34,656 7.2% 78,885 6.8%
Mortgage-backed and other 665,904 6.5% 715,048 6.5%
- ---------------------------------------------------------------------------------------------
700,560 6.5% 793,933 6.6%
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company does not anticipate any losses from principal payment
deficiencies based upon the overall credit quality of the portfolio. None of the
principal of the combined debt and mortgage-backed securities portfolio of $2.0
billion is classified as non-investment grade. Securities are classified as
either trading, available for sale or held to maturity at the time of purchase.
The overall asset/liability position of the Banks taken together with general
financial market conditions are the principal determinants affecting the
classification. As a result, similar securities with identical risks and
characteristics can be classified as either available for sale or held to
maturity depending upon the existing economic environment and asset/liability
considerations. Collateralized mortgage obligations which the Banks have
purchased are short-term in nature with a weighted average duration of between
three and four years. Structured notes which the Banks have purchased do not
have characteristics which put principal at risk if they are held to maturity.
The fair value fluctuations which may occur are the result of changes in
interest rates including the shape of the yield curve.
Deposits. ONBANCorp has a number of programs designed to attract both
short-term and long-term savings of the general public at interest rates
consistent with market conditions. Included among these programs are savings
accounts, NOW accounts, money market accounts, fixed rate certificates of
deposit, fixed rate and variable rate IRA's, and negotiable rate certificates of
deposit. During 1994, the Banks began issuing brokered deposits. Brokered time
deposits were $411 million at December 31, 1997, up from the $319 million at
December 31, 1996. The Company controls deposit flows primarily by the pricing
of deposits and, to a lesser extent, by promotional activities. Management
believes rates offered on deposit accounts are generally competitive with other
financial institutions in the area; however, from time to time, market
conditions may temporarily make more or less aggressive pricing strategies
advantageous.
15
<PAGE>
The following table sets forth deposits by type of account at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage
of Total
(Dollars in Thousands) Amount Deposits
- --------------------------------------------------------------------------------
<S> <C> <C>
Savings $ 626,273 15.6%
Time deposits 2,032,348 50.5%
NOW accounts(1) 296,580 7.4%
Money market accounts (2) 276,764 6.9%
Non-interest bearing demand accounts 380,099 9.4%
Brokered time deposits 411,042 10.2%
- --------------------------------------------------------------------------------
Total deposits $ 4,023,106 100.0%
- --------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) Includes NOW and IMMC accounts
(2) Includes MMDA and escrow accounts
The following table sets forth ONBANCorp's deposit flows and the effects of
credited interest on the net change in deposits for the periods ended December
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposits at beginning of year $ 3,821,906 3,808,273 3,793,343
Increase (decrease) in:
Savings (66,548) (64,916) (86,757)
Time deposits 100,828 128,916 203,949
NOW accounts 41,142 (8,526) (18,969)
Money market accounts 10,200 17,436 (51,225)
Non-interest bearing demand accounts 23,928 36,031 17,124
Brokered time deposits 91,650 (61,625) (49,192)
Deposits of branches sold - (33,683) -
- --------------------------------------------------------------------------------
Net increase in deposits during the
year 201,200 13,633 14,930
- --------------------------------------------------------------------------------
Deposits at end of year $ 4,023,106 3,821,906 3,808,273
- --------------------------------------------------------------------------------
Net increase (decrease) before interest
credit $ 34,069 (107,017) (142,154)
Interest credited 167,131 154,333 157,084
Deposits sold - (33,683) -
Net increase in deposits during the
year $ 201,200 13,633 14,930
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
The remaining maturity on certificates of deposit of $100,000 and over at
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
---------------------------------------------
Amount
Maturity (In Thousands)
---------------------------------------------
<S> <C>
Three months or less $ 480,625
Over three through six months 77,218
Over six through twelve months 60,895
Over twelve months 42,817
---------------------------------------------
$ 661,555
---------------------------------------------
</TABLE>
The Company generally offers negotiable rate certificates of deposits in
excess of $100,000 with terms of one year or less, however, any term is
available. Management believes that based upon the historical renewals of these
certificates of deposit that the total balances are relatively stable.
Borrowings. The Company's primary source of long-term borrowings has been
Federal Home Loan Bank ("FHLB") advances. As a member of the FHLB, the Company
is required to own capital stock in the FHLB and is authorized to apply for
advances secured by such stock and by certain of its home mortgage loans and
other assets, provided standards related to credit worthiness have been met.
See "Notes to Consolidated Financial Statements-Notes 8 and 9" for details
of borrowings.
Liquidity. ONBANCorp's main source of funds is savings and time deposits
from the general public. Deposit inflows and outflows are significantly
influenced by interest rates, money market conditions, the rate of consumer
savings and other economic and competitive factors. In addition to deposits,
ONBANCorp derives funds from interest and principal payments on loans and other
investments, sales of securities and borrowings. Interest and principal payments
on loans are a relatively stable source of funds. The Company's liquidity should
be sufficient to meet normal transaction requirements and flexible enough to
take advantage of market opportunities and to react to other liquidity needs.
Return on Equity and Assets. The following table shows operating and capital
ratios of the Company for each of the last three years:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 0.94% 0.81% 0.71%
Return on average equity 15.30% 11.42% 11.75%
Dividend payout ratio 34.61% 41.06% 39.58%
Average equity to average assets ratio 6.15% 7.05% 6.02%
-------------------------------------------------------------------
</TABLE>
17
<PAGE>
Personnel. As of December 31, 1997, ONBANCorp has approximately 1,344
full-time equivalent employees.
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 subsidiaries are subject to supervision and regulation under
the Bank Holding Company Act of 1956, as amended (" 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.
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, bank holding companies to acquire
banks in any state; permits a bank to merge with an out-of-state bank and
convert any offices into branches of the resulting bank, permits a bank to
acquire branches from an out-of-state bank, if the law of the state where the
branches are located permits the interstate branch acquisition; and permits
banks to establish and operate de novo interstate branches whenever the host
state opts-in to de novo branching. Bank holding companies and banks seeking to
engage in transactions authorized by the Interstate Banking Act must be
adequately capitalized and managed.
Banking 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 Deposit Insurance Corporation (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 the 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 state 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: OnBank & Trust by the
18
<PAGE>
FDIC and the Banking Department of New York; and Franklin by the FDIC and
Banking Superintendent of Pennsylvania. The Registrant and its direct
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 subsidiaries and on certain
other transactions with them or involving their securities.
Dividends from Bank Subsidiaries. The subsidiary banks are subject, under
one or more of the banking laws, to restrictions on the amount and frequency (no
more often that quarterly) of dividend declarations. Future dividend payments to
the Registrant by its subsidiary banks will be dependent on a number of factors,
including the earnings and financial condition of each such bank, and are
subject to the limitations referred to in Note 18 of Notes to consolidated
Financial Statements and to other statutory powers of bank regulatory agencies.
See "Notes to Consolidated Financial Statements - Note 17" for details of
Shareholder's Equity.
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 operation and the discount rate, to influence the
level of interest rates and to affect the strength of the economy, the level of
inflation or the price of the dollar in foreign exchange markets. The monetary
policies of the Federal Reserve Board have had a significant effect on the
operating results of banking institutions in the past and are expected to
continue to do so in the future. It is not possible to predict the nature of
future changes in the 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 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.
Other Legislative Initiatives. From time to time, various proposals are
introduced in the United States Congress and in the New York and Pennsylvania
Legislatures 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.
A number of 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.
19
<PAGE>
ITEM 2. PROPERTIES
ONBANCorp's executive offices are located at 101 South Salina Street,
Syracuse, New York 13202. At December 31, 1997, ONBANCorp operated from 86
locations including 78 full service branches, 1 public accommodation office, and
7 specialized lending offices. The Company owned the building and land for 32 of
its locations and leased space for 54 locations. In addition, the Banks operate
131 freestanding proprietary cash dispensers. The aggregate net book value of
premises owned by ONBANCorp and leasehold improvements of leased offices (net of
accumulated depreciation and amortization) at December 31, 1997, was
$56,994,000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which ONBANCorp or its
subsidiaries are a party or to which any of their property is subject. In the
opinion of management, after consultation with counsel, the aggregate amount
involved in such proceedings is not material to the financial condition or
results of operations of ONBANCorp.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information required herein is incorporated by reference from the
section captioned "Description of Business" of the Company's 1997 Annual Report
to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from the table
captioned "Selected Financial Data" on page 2 of the Company's 1997 Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required herein is incorporated by reference from the
section captioned "Management's Discussion and Analysis" on pages 3 to 10 of the
Company's 1997 Annual Report.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 5 and 6 of the Form 10K.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein is
incorporated by reference from pages 32 to 51 of the Company's 1997 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement for its
1998 annual meeting of shareholders to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997, or, if such proxy statement is
not filed within such period, by reference to an amendment to this Form 10K to
be filed within 120 days of the registrant's fiscal year ended December 31,
1997.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement for its
1998 annual meeting of shareholders to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997, or, if such proxy statement is
not filed within such period, by reference to an amendment to this Form 10K to
be filed within 120 days of the registrant's fiscal year ended December 31,
1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement for its
1998 annual meeting of shareholders to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997, or, if such proxy statement is
not filed within such period, by reference to an amendment to this Form 10K to
be filed within 120 days of the registrant's fiscal year ended December 31,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement for its
1998 annual meeting of shareholders to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997, or. if such proxy statement is
not filed within such period, by reference to an amendment to this Form 10K to
be filed within 120 days of the registrant's fiscal year ended December 31,
1997.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated by reference from
Part 11 Item 8 hereof: (Annual Report to Shareholders included as Exhibit 13).
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for Each of the Years in the Three Year
Period Ended December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity for Each of the
Years in the Three Year Period Ended December 31, 1997
Consolidated Statements of Cash Flows for Each of the Years in the Three
Year Period Ended December 31, 1997 Notes to Consolidated Financial
Statements
(a)(2) There are no financial statement schedules which are required to be
filed as part of this form since they are not applicable.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index.
(b) There are no Reports on Form 8-K required to be filed as part of this
form.
(c) Exhibits. The following exhibits are either filed as part of this annual
report on Form 10-K, or are incorporated herein by reference.
<TABLE>
<CAPTION>
No. Exhibit
- --- -------
<S> <C>
2.1 Plan of Reorganization, dated as of January 15, 1993, between OnBank &
Trust Co. and OnBank, incorporated by reference to Exhibit 2.1 to the
registrant's Form 10-K filed with the Commission on March 31, 1994.
2.2 Agreement and Plan of Reorganization and related Agreement and Plan
of Merger, each dated as of October 28, 1997, providing for the
merger of ONBANCorp, Inc. with and into Olympia Financial Corp., a
direct wholly owned subsidiary of First Empire State Corporation,
incorporated by reference to Exhibit 2.1 to the registrant's Form
8-K filed with the Commission on October 28, 1997.
3.1 The registrant's Certificate of Incorporation, as amended as of January
25, 1993, incorporated by reference to Exhibit 3.1 to the registrant's
Form 10-K filed with the Commission on March 31, 1994.
3.2 The registrant's Bylaws, as currently in effect, incorporated by
reference to Exhibit 3.2 to the registrant's Registration Statement on
Form S-1 filed with the Commission on January 16, 1990.
4.1 Certificate of Stock Designation of Series A Participating Preferred
Stock, incorporated by reference to Exhibit 10.1 to the registrant's
Registration Statement on Form S-1 filed with the Commission on January
16, 1990.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.2 Rights Agreement, dated as of September 25, 1989, incorporated by
reference to Exhibit 10.2 to the registrant's Registration Statement on
Form S-1 filed with the Commission on January 16, 1990.
10.1 Employment Agreement, dated as of September 30, 1990 between ONBANCorp,
Inc., OnBank and Robert J. Bennett, incorporated by reference to
Exhibit 10.3 to the registrant's Form 10-K filed with the Commission on
March 29, 1991.
10.2 Severance Agreement, dated as of July 30, 1990 between ONBANCorp, Inc.,
OnBank and three executive officers of registrant, incorporated by
reference to Exhibit 10.4 to the registrant's Form 10-K filed with the
Commission on March 29, 1991.
10.3 Supplemental Employee Retirement Agreement, dated as of January 1, 1991
between ONBANCorp, Inc. and Robert J. Bennett, incorporated by
reference to Exhibit 10.5 to the registrant's Form 10-K filed with the
Commission on March 29, 1991.
10.4 1991 Long-Term Incentive Plan, dated as of January 28, 1992,
incorporated by reference to Exhibit 10.6 to the registrant's Form 10-K
filed with the Commission on March 29, 1991.
10.5 Restated 1987 Stock Option and Appreciation Rights Plan, incorporated
by reference to Exhibit 10.7 to the registrant's Form 10-K filed with
the Commission on March 31, 1993, as amended.
10.6 1992 Director's Stock Option Plan, incorporated by reference to Exhibit
10.8 to the registrant's Form 10-K filed with the Commission on March
31, 1993, as amended.
10.7 Employment Agreement, dated as of November 17, 1992 between ONBANCorp,
Inc., Franklin First Savings Bank and Thomas H. van Arsdale,
incorporated by reference to Exhibit 10.7 to the registrant's Form 10-K
filed with the commission on March 31, 1994.
10.8 Stock Option Agreement, dated as of November 17, 1992 between
ONBANCorp, Inc. Franklin First Financial Corp., incorporated by
reference to Exhibit 10.1 to the registrant's Form S-4 filed with the
commission on April 14, 1993.
10.9 Employment Agreement, dated as of January 15, 1993 between ONBANCorp
Inc., OnBank & Trust Co., OnBank and Robert J. Bennett, incorporated by
reference to Exhibit 10.9 to the registrant's Form 10-K filed with the
commission on March 31, 1994.
10.10 Assumption Agreement to the Supplemental Employee Retirement Agreement,
dated as of January 15, 1993, between ONBANCorp Inc., OnBank & Trust
Co., OnBank and three executive officers, incorporated by reference to
Exhibit 10.10 to the registrant's Form 10-K filed with the commission
on March 31, 1994.
10.11 Assumption Agreement to the Supplemental Employee Retirement Agreement,
dated as of January 15, 1993, between ONBANCorp, Inc., OnBank & Trust
Co., OnBank and Robert J. Bennett, incorporated by reference to Exhibit
10.11 to the registrant's Form 10-K filed with the commission on March
31, 1994.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
13 Annual Report to Shareholders for the Year ended December 31, 1997.
21 List of Registrant's Subsidiaries.
23 Consent of Independent Auditors
27 Financial Data Schedules
</TABLE>
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are required to
be included herein.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 23, 1998.
ONBANCorp, Inc.
By: /s/ Robert J. Bennett
--------------------------
Robert J. Bennett
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities 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
--------- -----
/s/ Robert J. Bennett
---------------------- Chairman of the Board, President,
Robert J. Bennett Chief Executive Officer and
Director
/s/ David M. Dembowski
---------------------- Executive Vice President and
David M. Dembowski Secretary
/s/ Robert J. Berger
---------------------- Senior Vice President, Treasurer,
Robert J. Berger Chief Financial Officer
/s/ William F. Allyn
---------------------- Director
William F. Allyn
/s/ William J. Donlon
---------------------- Director
William J. Donlon
/s/ Lee H. Flanagan
----------------------- Director
Lee H. Flanagan
/s/ Russell A. King
----------------------- Director
Russell A. King
/s/ Henry G. Lavarnway, Jr.
--------------------------- Director
Henry G. Lavarnway, Jr.
25
<PAGE>
-------------------------- Director
John D. Marsellus
/s/ J. Kemper Matt
--------------------------- Director
J. Kemper Matt
/s/ Peter J. Meier
--------------------------- Director
Peter J. Meier
/s/ Peter J. O'Donnell, Jr.
--------------------------- Director
Peter J. O'Donnell, Jr.
---------------------------- Director
T. David Stapleton, Jr.
/s/ William J. Umphred
----------------------------- Director
William J. Umphred
/s/ Thomas H. van Arsdale
----------------------------- Director
Thomas H. van Arsdale
------------------------------ Director
John L. Vensel
/s/ Joseph N. Walsh, Jr.
------------------------------ Director
Joseph N. Walsh, Jr.
26
<PAGE>
Annual Report to Shareholders EXHIBIT 13
<TABLE>
<CAPTION>
<S> <C>
Selected Financial Data 2
Management's Discussion and Analysis 3
Management's Statement of Responsibility 11
Independent Auditors' Report 11
Consolidated Balance Sheets 12
Consolidated Statements of Income 13
Consolidated Statements of Changes in Shareholders' Equity 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 17
Selected Quarterly Financial Data 41
</TABLE>
1
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in Thousands-Except Share Data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AT PERIOD END
Securities $2,017,811 2,610,975 2,741,843 3,890,687 3,627,804
Net loans 2,828,192 2,410,634 2,254,407 1,949,197 1,680,721
Total assets 5,319,570 5,417,877 5,567,059 6,723,305 5,772,280
Deposits 4,023,106 3,821,906 3,808,273 3,793,343 3,005,999
Repurchase agreements 164,602 254,471 361,617 1,058,316 1,251,050
Other borrowings 658,448 874,917 903,370 1,158,772 1,022,947
Shareholders' equity 335,197 360,051 388,766 362,936 430,638
OPERATIONS DATA
Interest income $ 385,690 374,845 431,459 388,275 327,622
Interest expense 229,591 222,098 278,944 224,646 171,055
Net interest income 156,099 152,747 152,515 163,629 156,567
Provision for loan losses 7,168 7,813 6,790 7,638 10,297
Other operating income (loss) 40,634 36,262 29,301 (52,689) 46,066
Other operating expenses 109,345 110,614 103,462 99,890 98,666
Income taxes 29,042 27,618 26,887 708 35,707
Cummulative effect of accounting change(1) -- -- -- -- 3,400
Net Income 51,178 42,964 44,677 2,704 61,363
PER COMMON SHARE DATA
Net income (loss) diluted $ 3.88 2.88 2.76 (0.15) 3.97
Dividends declared 1.36 1.24 1.14 1.03 0.69
Book Value 26.35 24.82 24.11 20.82 25.77
</TABLE>
(1) Reflects the effect of the adoption of the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
2
<PAGE>
Management Discussion and Analysis
Overview
ONBANCorp, Inc.'s ("ONBANCorp" or "the Company") results of operations
have been dependent upon the results of operations of its wholly owned
subsidiaries. Prior to January 1, 1997 the Company operated three wholly owned
subsidiaries, OnBank & Trust Co., OnBank and Franklin First Savings Bank
("Franklin"), collectively (the "Banks"). On January 1, 1997 OnBank and OnBank &
Trust Co. merged, thereby creating a single banking entity in New York State,
operating under the name of OnBank & Trust Co.
On October 28, 1997, the Company entered into an agreement and plan of
reorganization for a merger with First Empire State Corporation. Shareholder
approval of the merger was obtained on March 17, 1998. Upon consummation of the
merger, which is expected to occur on April 1, 1998, OnBank & Trust Co. and
Franklin First Savings Bank will be merged into a single interstate M&T Bank.
ONBANCorp's major market areas serve metropolitan populations across New York
State and Northeastern Pennsylvania. The Upstate New York Region from
Westchester County to the Great Lakes of Ontario and Erie, has a population
approximating seven million. This exceeds the populations of forty individual
states including the neighboring states of Connecticut and Massachusetts. The
Wilkes-Barre/Scranton area of Northeastern Pennsylvania has strikingly similar
characteristics to Syracuse, Rochester, Albany and Buffalo namely, large and
diverse populations, a wide variety of industries, good transportation
infrastructure, many colleges and numerous small businesses. The size and
diversity of the markets served tend to inhibit any radical changes in economic
growth, unemployment or real estate values. The economy of the area, therefore,
tends to follow the national trends. These large target markets offer
considerable potential in the small business and household sectors to broaden
the base of banking services.
At December 31, 1997 total assets were $5.3 billion, earning assets were $5.0
billion, deposits were $4.0 billion and shareholders' equity was $335.2 million,
net of $17.4 million of net unrealized holding loss on securities. The
unrealized holding loss relating to the 1994 available for sale securities
transferred to held to maturity securities will be amortized into capital as the
related securities are repaid.
Net income for 1997 was $51.2 million or $3.88 per common share on a diluted
basis ("EPS") compared to $38.8 million or $2.88 EPS for 1996. Excluding the
effect of certain one time government mandated 1996 charges related to the
special SAIF deposit insurance premium and other net banking industry charges
related to the thrift industry, 1996 net income and EPS would have been $48.1
million and $3.22, respectively. Net interest income in 1997 of $156.1 million
increased from the $152.7 million for the prior year. The 1997 net interest
margin remained constant at 3.03%. Full year 1997 operating expenses decreased
by $1.3 million primarily as a result of the absence of $7.3 million in one time
special SAIF charges in 1996 and the addition of capital trust securities
expense of $5.1 million in 1997. The 1997 efficiency ratio of 55.9%, which
excludes the capital trust expense and $10.4 million of net gains on securities
transactions, is considered to be within good banking industry performance
standards.
Asset quality remains very sound as measured by the 0.71% ratio of
non-performing loans ($30.1 million) plus other non-performing assets ($7.7
million) to total assets ($5.3 billion) at December 31, 1997. The coverage ratio
of the allowance for loan losses to nonperforming loans was 130% at year-end.
At December 31, 1997 the book value per common share of $26.35 represented a
6.2% increase from the $24.82 at December 31, 1996. This increase was the
combined result of net income less dividends and the change in the unrealized
holding loss on securities as well as share repurchases and preferred stock
conversions. As a continuing part of its capital management plan, the Company
repurchased 37,000 shares of Cumulative Convertible Preferred Stock and
1,522,000 shares of common stock during 1996. The Company converted 137,000
shares of Cumulative Convertible Preferred Stock into common stock during the
fourth quarter of 1996 as part of the mandatory redemption of Cumulative
Convertible Preferred Stock. This redemption was completed on January 8, 1997
with approximately 98%, of the Cumulative Convertible Preferred Stock
outstanding being converted to approximately 1.8 million shares of common stock
which were issued from treasury stock with the difference being redeemed for
cash of $26.013 per Cumulative Convertible share. The conversion factor for each
share of preferred stock was .78 shares of common stock. Repurchases generally
have the effect of improving EPS and return on equity ("ROE") while slightly
reducing return on assets ("ROA").
3
<PAGE>
Management Discussion and Analysis (continued)
During January 1997 the Company, through a subsidiary Trust formed for the sole
purpose of issuing capital securities, authorized and issued $60,000,000 OnBank
Capital Trust I, 9.25% Capital Securities and used the proceeds of the
issuance to fund the acquisition of 1,400,000 or approximately 10% of
the outstanding shares of common stock as a continuation of the Company's
capital management program.
Net Interest Income
The most significant impact on the Company's net income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest earning assets and interest bearing liabilities. The volume of
interest earning assets represented by loans and securities compared to the
volume of interest bearing liabilities represented by deposits and borrowings
combined with the spread between the two produces the changes in the net
interest income between periods. The accompanying tables show the relative
contribution of changes in average volume and average interest rates on changes
in net interest income for the periods indicated.
This table sets forth for the indicated years ended December 31, the average
daily balances of the Company's major asset and liability items and the interest
earned or paid thereon expressed in dollars and weighted average rates.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets(1)(2)
Loans $2,690,969 224,900 8.36% 2,365,244 201,394 8.51% 2,129,445 184,591 8.67%
Securities 2,434,180 159,362 6.55% 2,611,400 170,003 6.51% 3,819,923 244,078 6.39%
Money market assets 24,534 1,428 5.82% 58,740 3,448 5.87% 42,801 2,790 6.52%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earnings
assets 5,149,683 385,690 7.49% 5,035,384 374,845 7.44% 5,992,169 431,459 7.20%
Non-interest earning assets 304,481 300,003 327,291
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $5,454,164 5,335,387 6,319,460
- ---------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities
Savings deposits 659,759 16,153 2.45% 734,793 19,145 2.61% 804,737 22,931 3.85%
Time deposits 2,466,226 139,471 5.66% 2,209,632 122,862 5.56% 2,170,492 121,124 5.58%
Money market accounts, NOW
accounts, and escrow deposits 551,451 15,213 2.76% 531,888 12,740 2.40% 552,626 13,360 2.42%
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,677,436 170,837 4.65% 3,476,313 154,747 4.45% 3,527,855 157,415 4.46%
Repurchase agreements 301,698 17,988 5.96% 300,706 18,866 6.27% 856,327 51,306 5.99%
Other borrowings 659,139 40,766 6.18% 798,313 48,485 6.07% 1,189,981 70,223 5.90%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 4,638,273 229,591 4.95% 4,575,332 222,098 4.85% 5,574,163 278,944 5.00%
Non-interest bearing deposits 353,989 321,978 298,464
Non-interest bearing liabilities 72,155 61,935 66,447
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,064,417 4,959,245 5,939,074
Capital trust securities 54,411 -- --
Shareholders' equity 335,336 376,142 380,386
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $5,454,164 5,335,387 6,319,460
Net interest income $ 156,099 152,747 152,515
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.54% 2.59% 2.20%
Net interest margin(3) 3.03% 3.03% 2.55%
Total interest earning assets
to total interest bearing
liabilities 1.11X 1.10X 1.07X
Average equity to average assets 6.15% 7.05% 6.02%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonaccruing loans, which are immaterial, have been included in interest
earning assets.
(2) No adjustment is made for items exempt from Federal income taxes.
(3) Computed by dividing net interest income by total interest earning assets.
4
<PAGE>
Management Discussion and Analysis (continued)
The following table presents changes in interest income and interest expense
attributable to: changes in volume (change in average balance or volume
multiplied by prior year rate), changes in rate (changes in rate multiplied by
prior year volume), and the net change in net interest income. The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
----------------------------- -----------------------------------
(Dollars in Thousands) Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans $ 27,129 (3,623) 23,506 20,243 (3,440) 16,803
Securities (11,674) 1,033 (10,641) (78,579) 4,504 (74,075)
Money market assets (1,991) (29) (2,020) 958 (300) 658
- ----------------------------------------------------------------------------------------------------------------------
Total change in income from interest
earning assets 13,464 (2,619) 10,845 (58,378) 764 (56,614)
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities
Savings deposits (1,869) (1,123) (2,992) (1,923) (1,863) (3,786)
Time deposits 14,381 2,228 16,609 2,174 (436) 1,738
Money market accounts, NOW accounts,
and escrow deposits 487 1,986 2,473 (508) (112) (620)
- ----------------------------------------------------------------------------------------------------------------------
Total change in interest expense
on deposits 12,999 3,091 16,090 (257) (2,411) (2,668)
Borrowings:
Repurchase agreements 62 (940) (878) (34,733) 2,293 (32,440)
Other borrowings (89,583) 864 (7,719) (23,708) 1,970 (21,738)
- ----------------------------------------------------------------------------------------------------------------------
Total change in expense from
interest bearing liabilities 4,478 3,015 7,493 (58,698) 1,852 (56,846)
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ 8,986 (5,634) 3,352 1,320 (1,088) 232
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Average interest earning assets increased to $5.15 billion in 1997 from $5.04
billion in 1996 which decreased from $5.99 billion in 1995. Average interest
bearing liabilities increased to $4.64 billion in 1997 from $4.58 billion in
1996 which decreased from $5.57 billion in 1995 The yield on average earning
assets was 7.49% in 1997 up from 7.44% in 1996 which was up from 7.20% in
1995. The increase in yield from 1996 to 1997 primarily related to the
proportion of total earning assets that were represented by loans even though
the average yield on the loans was 15 basis points less in 1997. The increase
in yield from 1995 to 1996 primarily related to the proportion of total
earning assets that were represented by loans even though the average yield
on the loans was 16 basis points less in 1996. A combination of managed
reductions, decreased prepayment rates on mortgage-backed securities and the
direction and speed with which the interest rate environment has changed
during the past three years directly affected the yields on securities. The
changing interest rate environment of the past three years has had a similar
effect on various components of interest bearing liabilities. Rates for
savings deposits have declined from 2.85% in 1995 to 2.61% in 1996 and to
2.45% in 1997 while over the same time frame interest rates on money-market,
NOW and escrow deposits were 2.42%, 2.40% and 2.76%, respectively. The rates
of time deposits has been relatively stable at 5.58% in 1995, 5.56% in 1996
and 5.66% in 1997. These combined increased rates in 1997 are primarily a
function of increased competition from money market funds and others as well
as the change in time deposit mix, which includes increasing and more
expensive deposits from municipalities and retail brokers. The rates on
repurchase agreements varies and is directly related to their maturity and
current market interest rates, which decreased in 1997, which resulted in a
decrease to 5.96% in 1997 from 6.27% in 1996. The selective shortening or
lengthening in maturities of these liabilities is done to maintain a
reasonable duration balance between interest earning assets and interest
bearing liabilities. The cost of other borrowings increased to 6.18% in 1997
from 6.07% in 1996 and from 5.90% in 1995 due to the repayment of shorter
term borrowings.
5
<PAGE>
Management Discussion and Analysis (continued)
The sale of securities in late 1995 enabled the Company to shrink the
absolute levels of securities and borrowings. Average securities declined by
$1.2 billion from 1995 to 1996 while the yield on the securities portfolio
increased slightly by 12 basis points to 6.51 % for 1996 due to slightly
higher market interest rates as well as continued slower prepayments on
mortgage backed securities and the associated decline in the rate of
amortization of premium. Over the same time frame average loans increased by
$236 million reflecting the banks continuing emphasis on changing the balance
sheet mix to include more loans. The continuation of this strategy resulted
in the average balance of loans increasing by $326 million from 1996 to 1997
while the yield on the portfolio declined by 15 basis points. The newer loans
were predominantly commercial and consumer which are generally shorter in
term than many of the fixed rate mortgages which they replaced as they paid
down or were sold. A decline in interest rates is primarily responsible for
the slight decline in loan yield however when taken together with the
increase in proportions of loans to total earning assets the yield on total
interest earning assets increased by 5 basis points to 7.49% from 1996 to
1997. The cost of total deposits increased by 20 basis points from 1996 to
1997 while the cost of repurchase agreements and other borrowings decreased
31 basis points and increased 11 basis points, respectively, from 1996 to
1997. The combined decreased cost of borrowings resulted from the decline in
average volumes of $138 million and $947 million, respectively from 1996 to
1997 and 1995 to 1996 as the proceeds from the amortization from
mortgage-backed securities and their periodic sales were used to pay down
these borrowings. The combined effect of increasing the yield on interest
earning assets by 24 basis points and decreasing the cost of interest bearing
liabilities by 15 basis points from 1995 to 1996 along with an increase in
non-interest bearing deposits of $23.5 million was an increase in net
interest margin of 48 basis points to 3.03% in 1996 from 2.55% in 1995. Net
interest income of $152.7 million in 1996 was up slightly from $152.5 million
despite the substantial shrinkage of $984 million in the average balance
sheet.
The Asset-Liability Committee which includes members of senior management,
monitors the Company's exposures to changing interest rates. Interest rate risk
is measured by the variability of projected net interest income under various
interest rate scenarios. Management's goal is to position the Company as to
limit the variability of net interest income under these scenarios.
The Company monitors interest rate risk with the aid of a computer model which
considers the impact of lending, deposit gathering activities, the repricing of
variable rate assets and liabilities, and the effect of changing interest rates
on expected prepayments and other cash flows. At December 31, 1997 utilizing the
model described above the Company's assessment is that the variability of net
interest income would be largely unaffected by changes in interest rates over
the next year, but large sustained decreases in interest rates or a significant
flattening in the yield curve could have a negative impact on net interest
income in subsequent periods.
Management closely monitors the Company's exposure to changing interest rates
and spreads and stands ready to take action to mitigate such exposure. Possible
actions include, but are not limited to, changes in the pricing of loan and
deposit products, changing the composition of interest earning assets and
interest bearing liabilities, and the use of off balance sheet instruments.
Provision for Loan Losses and Asset Quality
The provision for loan losses decreased to $7.2 million in 1997 from $7.8
million in 1996 which had increased from $6.8 million in 1995. Net charge offs
increased to $5.9 million in 1997 from $4.6 million in 1996 down from $6.0
million in 1995. The provisions for loan losses in 1997, 1996 and 1995 have
exceed net charge offs in each year and have thereby caused the allowance for
loan losses to continue to increase and the coverage ratio of the allowance for
loan losses as a percentage of nonperforming loans to be at 130%, 140% and 119%
at December 31, 1997, 1996, and 1995, respectively. This increased coverage
ratio when compared with 96% at year end 1993 reflects the increased emphasis on
commercial lending and the inherently higher risk factors associated with this
type of lending. The adequacy of the allowance for loan losses is assessed based
upon management's periodic evaluation considering past loan loss experience,
known and inherent risk in the portfolio, adverse situations which may affect
the borrowers' ability to repay, the estimated value of underlying collateral,
if any, and current and prospective economic conditions. The allowance to ending
loans was 1.30% at December 31, 1997, 1.52% at December 31, 1996 and 1.5l% at
December 31 1995. The allowance for loan losses has increased to $39.1 million
at year end 1997 from $37.8 million and from $34.6 million, respectively for
year end 1996 and 1995 while net charge-offs to average loans have been 0.22%,
0.19% and 0.28% for 1997, 1996 and 1995, respectively.
Other real estate owned ("OREO') has increased to $4.9 million at December 31,
1997 from $4.1 million at December 31, 1996 and from $4.0 million at December
31, 1995. This year end 1997 balance reflects the results of management's
ongoing effort to maintain these non-earning assets to a minimal level. In
evaluating the overall credit risk in the balance sheet, the ratio
non-performing assets (non-performing loans plus OREO and repossessed assets) to
total assets was 0.71% at December 31, 1997, 0.59% at December 31, 1996 and
0.60% at year end 1995. These percentages imply a relatively low credit risk
profile for the Company with slight
6
<PAGE>
Management Discussion and Analysis (continued)
percentage increase being related more to the shrinkage in the balance sheet
than to the slight increase of $2.2 million in nonperforming assets during the
three year period ended December 31, 1997.
Other Operating Income
Other operating income, which is generated by service charges, mortgage banking
activities, net gain (loss) on securities transactions and other sources,
increased by $4.4 million to $40.6 million in 1997 and by $7.0 million to $36.3
million in 1996 from $29.3 million in 1995. Service charges increased by $2.4
million to $21.2 million in 1997 from $18.8 million in 1996 which was up $3.2
million from $15.6 million in 1995. These increases reflect the expansion of
commercial banking services in conjunction with the Company's strategy which is
to continue to increase commercial banking activities in the Central New York
State market along with the Albany, Rochester and the Scranton/Wilkes-Barre
markets which the Company currently serves. Electronic banking fees derived from
merchant card processing as well as lock box processing and other consumer
transaction related activities are becoming a more significant portion of this
component of income.
The Company's mortgage banking revenue consists of servicing income, gains and
losses on the sale of loans originated for sale net of the amortization of loan
servicing rights. Gains and losses on the sale of mortgage-backed securities
created from loans originated by the Company are considered a mortgage banking
activity as distinguished from the gains or losses arising from the sale of such
securities purchased and available for sale. Residential mortgage loans are
originated to meet consumer demand, which has traditionally been for long-term
fixed rate mortgage loans in the Banks' New York and Pennsylvania market areas.
Following the rapid rise in interest rates which occurred in 1994, the market
for residential mortgage loans diminished substantially as a result of the
higher rates and the associated decline in refinancings. Residential mortgage
loan originations decreased to $171 million in 1997 from $195 million in 1996
from $254 million in 1995. As interest rates declined during 1997, the banks
classified many of the loans originated as available for sale in order to
facilitate the management of interest rate risk. An increase in the volume of
variable rate loan originations occurred in 1997 compared with the prior two
years. The mix in 1996 and in 1995 was predominantly fixed rate, however,
because of the absolute level of rates and the overall duration characteristics
of the balance sheet the Company retained most of the loans originated in 1996
and 1995 in portfolio.
From time to time the Company sells loans in the secondary market to help manage
interest rate sensitivity. Such sales generate income (or loss) at the time of
sale, produce future servicing income and provide funds for additional lending
and other purposes. Typically, loans are sold with the Banks retaining
responsibility for collecting and remitting loan payments, inspecting
properties, making certain insurance and tax payments on behalf of borrowers and
otherwise servicing the loans, and receiving a fee for performing these
services.
Mortgage banking income decreased $.9 million in 1997 from the $4.3 million in
1996 which had increased $1.2 million from $3.1 million in 1995. The serviced
for others loan portfolio has decreased over the past three years to $1,032
million from $1,091 million and $1,147 million at December 31, 1997, 1996 and
1995 respectively. During this period, loan originations and sales of new loans
have decreased to a point where amortization and prepayments, which reduce the
portfolio, have been greater than the increases created by the sale of new loans
which are additions to the portfolio. Gains or losses on the sale of loans
fluctuate and are generally related to interest rate risk management activity.
Gains on the sale of loans were $.3 million and $1.8 million in 1997 and 1996,
respectively, and immaterial in 1995.
The Company capitalized mortgage servicing rights of $.9 million in 1997, $2.8
million in 1996 and $.7 million in 1995. The Company recognized amortization of
these assets of $1.6 million in 1997, $2.2 million in 1996 and $1.9 million in
1995. The combined capitalized mortgage servicing rights and purchased mortgage
servicing rights at December 31 were $7.0 million in 1997, $7.7 million in 1996,
and $7.1 million in 1995. When expressed as a percentage of the serviced loan
portfolio these balances are .7%, .7%, and .6%, respectively.
Income from other sources, including trust income, decreased $1.5 million in
1997 to $5.7 million primarily as the net result of a $2.9 million non-recurring
gain related to the sale of branches offset by $1.3 million loss on the sale of
a building in 1996. This income component increased $2.1 million in 1996 to $7.2
million from $5.1 million in 1995 as a result of the aforementioned.
7
<PAGE>
Management Discussion and Analysis (continued)
Other Operating Expenses
Total operating expenses decreased $1.3 million to $109.3 million for 1997
compared to 1996 and increased $7.2 million to $110.6 million for 1996 compared
to 1995. Included in 1996 is a one-time, $7.3 million government mandated charge
relating to the recapitalization of the SAIF insurance fund. Salaries and
employee benefits decreased $.5 million to $41.0 million in 1997 from 1996,
which had increased $1.1 million to $41.5 million from $40.4 million in 1995.
The 1997 decrease represented primarily continued efficiencies in the back
office and administrative areas. The 2.8% increase in 1996 was primarily related
to merit increases.
Building, occupancy and equipment expense increased slightly to $18.4 million in
1997 from $18.3 million in 1996 and $17.9 million in 1995. Additional technology
related equipment expenses along with increased real estate taxes and rents
account for the majority of the 1997 and 1996 increases.
FDIC deposit insurance premiums decreased $8.3 million in 1997 to $1.1 million.
Of the total 1996 premium, $7.3 million related to the government mandated one
time assessment related to the recapitalization of the SAIF insurance fund.
Absent any major dislocations in the banking industry, future FDIC insurance
premiums are expected to be substantially less than those incurred in recent
years. FDIC deposit insurance premiums increased $3.5 million in 1996 as the
result of the aforementioned one time assessment in 1996.
Contracted data processing expense increased $.5 million to $11.3 million in
1997 and $1.1 million to $10.8 million in 1996 resulting from increased business
activity along with the assumption of additional responsibilities by our
external vendor.
Legal and financial service expenses increased by $1.7 million to $6.1 million
in 1997 from $4.4 million in 1996 which was $1.1 million more than the $3.3
million in 1995. The levels of expense in all three years varies somewhat and
are directly related to increased commercial banking activities and other
corporate activity.
Intangible expenses of $4.3 million in 1997 and $4.4 million in 1996 and 1995
are related almost totally to the amortization of deposit premium associated
with the acquisition of the nine Rochester branches in June of 1994. The deposit
premium is being amortized over a seven-year period.
When measured as a ratio of other operating expenses to average assets the
ratios of 1.9% (adjusted for capital trust securities expense), 1.9% (adjusted
for the one-time SAIF charge of $7.3 million), and 1.6% for 1997, 1996 and 1995,
respectively, are all under our 2.0% high performance target.
Income Taxes
The provision for income taxes as a percentage of pretax income was 36.2%,
39.1%, and 37.6% for 1997, 1996 and 1995, respectively. Under normal operating
income levels, a tax rate of between 35% and 40% would be anticipated.
Additional discussion of income taxes is presented in footnote (10) of notes to
consolidated financial statements.
Dividends
Payment of dividends by ONBANCorp on its common stock is subject to various
regulatory and tax restrictions. ONBANCorp is regulated by the Federal Reserve
Board and as such is subject to its regulations and guidelines with respect to
payment of dividends, including its Policy Statement of Cash Dividends Not Fully
Covered by Earnings. Since substantially all of the funds available for the
payment of dividends were derived from OnBank & Trust Co. and Franklin, future
dividends will depend upon the earnings of the Banks, their financial condition,
their need for funds, applicable governmental policies and regulations and such
other matters as the Board of Directors of the respective Banks deem
appropriate. Under New York State Banking Law, dividends may be declared and
paid out of the net profits of the Banks. The approval of the Superintendent of
the New York State Banking Department of Banking is required if the total of all
dividends declared in any calendar year will exceed net profits for that year
plus the retained net profits of the preceding two years Under federal law, no
insured depository institution may make any capital distribution, including the
payment of a dividend that would result in the institution failing to meet its
minimum capital requirements.
8
<PAGE>
Management Discussion and Analysis (continued)
Liquidity
The objective of liquidity management at ONBANCorp is to ensure the ability to
access funding which enables each Bank to efficiently satisfy the cash flow
requirements of depositors and borrowers and to allow ONBANCorp to meet its cash
need. Liquidity is managed at ONBANCorp by monitoring funds availability from a
number of primary sources.
The first, largest and most reliable source of short-term balance sheet
liquidity is represented by the $.8 billion in securities which have been
classified as trading or available for sale. The securities are carried at fair
value and could be liquidated very quickly, as evidenced by the sale in late
1995 of in excess of $1.0 billion in available for sale securities, either to
reduce the duration and increase the yield of the portfolio or to shrink the
Company as part of the overall interest rate risk management activities. Other
sources of funds consist of deposits, cash flows from ongoing operations and
borrowings.
ONBANCorp's growth and overall profitability and financial strength have made
available numerous external funding sources. The Company enters into financing
transactions using repurchase agreements, which are collateralized by U.S.
Treasury and mortgage-backed securities, as an additional funding source.
Transactions are generally less than two years in maturity and at year end 1997
these repurchase agreements amounted to $165 million compared to $254 million at
year end 1996. The decreases reflect the Company's downsizing which is related
to the currently low relative net interest margin on these transactions
associated with the current yield curve environment.
At year end 1997, the Banks' approved commitments to extend credit amounted to
$67.3 million. Further information is in notes (18) and (19) of notes to
consolidated financial statements. ONBANCorp's liquidity should be sufficient to
meet normal transaction requirements and flexible enough to take advantage of
market opportunities and to react to other liquidity needs.
Shareholders' Equity and Capital Adequacy
ONBANCorp's ratio of shareholders' equity of $335.2 million to total assets of
$5.3 billion at December 31, 1997 was 6.3%. The ratio decreased from 6.6% at
December 31, 1996 when shareholders' equity was $360.1 million and total assets
were $5.4 billion. The decrease in shareholders' equity, primarily represents
the net income less dividends declared and the effect of the repurchase of
common and preferred stock during 1997 which amounted to $65.4 million. Stock
repurchase programs have been and will continue to be an important capital
management tool of the Company.
Total capital to risk adjusted assets was 13.6 and 13.8% as of December 31, 1997
and 1996, respectively. The Company and Banks are considered well capitalized
and in compliance with Federal Reserve Board and FDIC capital requirements as of
both of the above dates.
Recent Accounting Developments
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", except for those transactions
governed by SFAS 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is based on consistent
application of a "financial components approach" that focuses on control. SFAS
125 provides consistent standards for distinguishing transfers of financial
assets on control. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 127 deferred for one year the effective date of SFAS 125 as it
relates to transfers of financial assets and secured borrowings and collateral.
The adoption of SFAS 125, as amended by SFAS 127, did not have a material effect
on the Company's 1997 financial statements.
On December 31, 1997, the Company adopted the provisions of SFAS 128, "Earnings
Per Share." SFAS 128, which supersedes Accounting Principles Board ("APB")
Opinion No. 15, "Earnings Per Share" establishes standards for computing and
presenting earnings per share (EPS) for entities with publicly held common stock
and common stock equivalents. All prior period EPS amounts included in the
consolidated financial statements and in the Company's 1997 Annual Report have
been restated to conform with the computational provisions of SFAS 128.
9
<PAGE>
Management Discussion and Analysis (continued)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 is effective for years beginning
after December 15, 1997 and requires reclassification of financial statements
for earlier periods provided for comparative purposes. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components.
Comprehensive income is defined as all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company has no yet determined the impact of SFAS 130 on its financial
statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. SFAS
131 requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The Company has not yet
determined the impact of SFAS 131 on its financial statements.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report includes certain
forward-looking statements with respect to the financial condition, results of
operations and business of the Company and its subsidiaries based on current
management expectations. The Company's ability to predict results or the effect
of future plans and strategies is inherently uncertain and actual results,
performance or achievements could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state, and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Banks' loan
and securities portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
Impact of the Year 2000
The financial services industry relies extensively on computer programs with
dates. Many existing computer programs were written using only the last two
digits to identify the applicable year. These programs were designed and
developed without considering the impact of the upcoming change to a new
century. Computer programs that have date sensitive software may, therefore,
recognize a date using "00" as the year 1900 rather than the year 2000. The
potential exists that such a mistake could result in system failures or
miscalculations causing disruptions of operations not only for the Company,
but for commercial customers who rely on computer software in managing their
businesses.
A committee comprised of all operating areas of the Banks has been formed to
direct Year 2000 activities. The Committee has contacted all of the Company's
hardware and software vendors regarding their individual Year 2000
initiatives.
The Company presently believes that the Year 2000 problem will not pose
significant operational problems or have significant impact on its financial
condition, results of operations or cash flows. However, if third party
modification plans are not completed and tested on a timely basis, the Year
2000 may have a material impact on the operations of the Company.
10
<PAGE>
Management Statement of Responsibility
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
annual report, including the determination of amounts that must necessarily be
based on judgments and estimates. It is the belief of management that the
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and that the financial information
appearing throughout this annual report is consistent with the consolidated
financial statements.
Management depends upon the Company's system of internal accounting controls in
meeting its responsibility for reliable financial statements. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and are
properly recorded.
The audit committee of the Board of Directors, composed solely of outside
directors, meets periodically and privately with ONBANCorp, Inc.'s management,
internal auditors and independent auditors, KPMG Peat Marwick LLP, to review
matters relating to the quality of financial reporting, internal accounting
control, and the nature, extent and results of audit efforts. The independent
auditors and internal auditors have unlimited access to the audit committee to
discuss all such matters. The financial statements have been audited by the
Company's independent auditors for the purpose of expressing and opinion on the
Company's consolidated financial statements.
/s/ Robert J. Bennett /s/ Robert J. Berger
- --------------------- --------------------
Robert J. Bennett Robert J. Berger
Chairman, President & CEO Senior Vice President, Treasurer & CFO
Independent Auditors' Report
The Board of Directors and Shareholders of ONBANCorp, Inc.:
We have audited the accompanying consolidated balance sheets of ONBANCorp, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 referred to above present
fairly, in all material respects, the financial position of ONBANCorp, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
Syracuse, New York
January 26, 1998
11
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31, December 31,
(In Thousands, Except Share Data) 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 128,647 $ 169,740
Money-market assets 10,044 12,253
Securities:
Trading 1,178 1,727
Available for sale 840,469 925,340
Held to maturity, fair value of $1,197,721 in 1997, $1,702,201 in 1996 1,176,164 1,683,908
- -----------------------------------------------------------------------------------------------------------
Total securities 2,017,811 2,610,975
- -----------------------------------------------------------------------------------------------------------
Loans, net of premium and discount 2,867,256 2,448,474
Allowance for loan losses (39,064) (37,840)
- -----------------------------------------------------------------------------------------------------------
Net loans 2,828,192 2,410,634
- -----------------------------------------------------------------------------------------------------------
Loans available for sale 130,412 38,759
Premises and equipment, net 65,450 62,557
Other assets 139,014 112,959
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,319,570 5,417,877
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing 380,099 356,171
Interest bearing:
Savings, NOW and money market 1,199,617 1,214,823
Time deposits less than $100,000 1,781,835 1,646,576
Time deposits $100,000 and greater 661,555 604,336
- -----------------------------------------------------------------------------------------------------------
Total deposits 4,023,106 3,821,906
- -----------------------------------------------------------------------------------------------------------
Repurchase agreements 164,602 254,471
Other borrowings 658,448 874,917
Due to brokers -- 40,724
Other liabilities 78,217 65,808
- -----------------------------------------------------------------------------------------------------------
Total liabilities 4,924,373 5,057,826
- -----------------------------------------------------------------------------------------------------------
Capital trust securities 60,000 --
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, par value $1.00 per share; Series D 6.75% Convertible,
10,000,000 shares authorized; issued and outstanding: 1997 - none;
1996 - 2,342,052 -- 2,342
Common stock, par value $1.00 per share; 56,000,0000 shares authorized;
shares issued: 1997 - 14,327,349; 1996 - 14,139,475 14,327 14,139
Additional paid-in capital 99,786 152,465
Retained earnings 310,223 276,767
Net unrealized holding loss on securities, net of deferred taxes (17,379) (20,169)
Treasury Stock, at cost, shares 1997 - 1,605,660;
1996 - 1,994,143 (71,760) (65,343)
Guarantee of ESOP indebtedness -- (150)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 335,197 360,051
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,319,570 5,417,877
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31,
(In Thousands, Except Per Share Data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $224,900 201,394 184,591
Securities 159,362 170,003 244,078
Money market assets 1,428 3,448 2,790
- ---------------------------------------------------------------------------------------------
Total interest income 385,690 374,845 431,459
- ---------------------------------------------------------------------------------------------
Interest expense:
Deposits 170,837 154,747 157,415
Borrowings:
Repurchase agreements 17,988 18,866 51,306
Other 40,766 48,485 70,223
- ---------------------------------------------------------------------------------------------
Total interest expense 229,591 222,098 278,944
- ---------------------------------------------------------------------------------------------
Net interest income 156,099 152,747 152,515
Provision for loan losses 7,168 7,813 6,790
- ---------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 148,931 144,934 145,725
- ---------------------------------------------------------------------------------------------
Other operating income:
Mortgage banking 3,371 4,287 3,135
Service charges 21,191 18,807 15,596
Net gain on securities transactions 10,360 6,018 5,457
Other 5,712 7,150 5,113
- ---------------------------------------------------------------------------------------------
Total other operating income 40,634 36,262 29,301
- ---------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 41,027 41,507 40,383
Building, occupancy and equipment 18,440 18,268 17,907
Deposit insurance premiums 1,058 9,343 5,867
Contracted data processing 11,285 10,828 9,682
Legal and financial services 6,093 4,393 3,326
Capital trust securities 5,084 -- --
Other 26,358 26,275 26,297
- ---------------------------------------------------------------------------------------------
Total other operating expenses 109,345 110,614 103,462
- ---------------------------------------------------------------------------------------------
Income before taxes 80,220 70,582 71,564
Income taxes 29,042 27,618 26,887
- ---------------------------------------------------------------------------------------------
Net income $ 51,178 42,964 44,677
Dividends on preferred stock -- 4,155 4,522
- ---------------------------------------------------------------------------------------------
Net income attributable to common shares $ 51,178 38,809 40,155
- ---------------------------------------------------------------------------------------------
Income per common share:
Basic $ 3.93 3.09 2.88
Diluted 3.88 2.88 2.76
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
13
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Additional Holding Guarantee of
Preferred Common Paid-in Retained Loss on Treasury ESOP
(In Thousands, Except Share Data) Stock Stock Capital Earnings Securities Stock Indebtedness Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 2,818 14,050 162,960 229,374 (45,816) -- (450) 362,936
Net income -- -- -- 44,677 -- -- -- 44,677
Stock issued under:
Stock option plans -- 23 220 -- -- -- -- 243
Tax benefits related to stock
options -- -- 148 -- -- -- -- 148
Employee Stock Purchase Plan -- 22 478 -- -- -- -- 500
Cash dividends declared:
Preferred ($1.69 per share) -- -- -- (4,522) -- -- -- (4,522)
Common ($1.14 per share) -- -- -- (15,802) -- -- -- (15,802)
Treasury stock purchases -- -- -- -- -- (18,068) -- (18,068)
Preferred stock redemption (302) -- (8,058) -- -- -- -- (8,360)
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Change in net unrealized holding
loss on securities, net of
income tax effect of $17,909 -- -- -- -- 26,864 -- -- 26,864
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 2,516 14,095 155,748 253,727 (18,952) (18,068) (300) 388,766
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 42,964 -- -- -- 42,964
Stock issued under:
Stock option plans -- 26 190 -- -- -- -- 216
Tax benefits related to
stock options -- -- 246 -- -- -- -- 246
Employee Stock Purchase Plan -- 18 516 -- -- -- -- 534
Cash dividends declared:
Preferred ($1.69 per share) -- -- -- (4,155) -- -- -- (4,155)
Common ($1.24 per share) -- -- -- (15,769) -- -- -- (15,769)
Treasury stock purchases -- -- -- -- -- (50,721) -- (50,721)
Preferred stock redemption (37) -- (926) -- -- -- -- (963)
Preferred stock conversion (137) -- (3,309) -- -- 3,446 -- --
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Change in net unrealized
holding loss on securities,
net of income tax effect
of ($860) -- -- -- -- (1,217) -- -- (1,217)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,342 14,139 152,465 276,767 (20,169) (65,343) (150) 360,051
- ------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 51,178 -- -- -- 51,178
Stock issued under:
Stock option plans -- 174 2,474 -- -- -- -- 2,648
Tax benefits related to
stock options -- -- 1,799 -- -- -- -- 1,799
Employee Stock Purchase Plan -- 14 586 -- -- -- 600
Cash dividends declared:
Common ($1.36 per share) -- -- -- (17,722) -- -- -- (17,722)
Treasury stock purchases -- -- -- -- -- (65,373) -- (65,373)
Preferred stock redemption (36) -- (888) -- -- -- -- (924)
Preferred stock conversion (2,306) -- (56,650) -- -- 58,956 -- --
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Change in net unrealized
holding loss on securities,
net of income tax effect of
$1,908 -- -- -- -- 2,790 -- -- 2,790
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- 14,327 99,786 310,223 (17,379) (71,760) -- 335,197
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 51,178 42,964 44,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of premiums, discounts
and net deferred fees 11,118 4,455 (323)
Depreciation and amortization 13,059 13,052 12,891
Provision for loan losses 7,168 7,813 6,790
Deferred income taxes 11,909 6,272 (862)
Gain on sale of branches -- (2,939) --
Loss on sale of building -- 1,258 --
Net gains on sale of securities (9,122) (5,469) (2,113)
Net decrease in trading securities 25,872 89,608 53,419
Net increase in loans available for sale (116,976) (88,167) (55,660)
Decrease (increase) in other assets (35,750) (11,905) 39,729
Increase (decrease) in other liabilities 15,143 5,619 (1,482)
- -------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (26,401) 62,561 97,066
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 1,172,947 589,176 2,095,113
Proceeds from sales of securities held to maturity -- 4,089 --
Proceeds from maturities of and principal collected on
securities available for sale 261,392 204,371 229,948
Proceeds from maturities of and principal collected on
securities held to maturity 592,557 677,244 640,609
Purchases of securities available for sale (1,383,054) (652,668) (669,896)
Purchases of securities held to maturity (94,068) (627,336) (865,026)
Loans made to customers, net of principal repayments (434,928) (182,331) (319,994)
Net payment made for sale of branches -- (19,820) --
Purchases of premises and equipment (9,448) (4,502) (11,578)
Proceeds from sale of building -- 250 --
Other 4,395 4,945 6,393
- -------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities 109,793 (6,582) 1,105,569
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
Consoldated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposit accounts excluding
time deposits 8,722 (19,975) (139,827)
Net increase in time deposits 192,478 67,291 154,757
Net decrease in repurchase agreements (89,869) (107,146) (800,812)
Net decrease in other borrowings (127,840) (225) --
Advances from Federal Home Loan Bank 546,256 415,816 964,886
Repayment of advances from Federal Home Loan Bank (632,129) (441,509) (1,217,684)
Repayments of collateralized mortgage obligations (2,756) (2,535) (2,604)
Issuance of capital trust securities 60,000 -- --
Net proceeds from issuance of common stock 3,248 750 743
Purchase of treasury stock (65,373) (50,721) (18,068)
Repurchase of preferred stock (924) (963) (8,360)
Cash dividends paid on common stock (17,519) (15,784) (19,737)
Cash dividends paid on preferred stock (988) (4,229) (4,649)
- -------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (126,694) (159,230) (1,091,355)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (43,302) (103,251) 111,280
Cash and cash equivalents at beginning of period 181,993 285,244 173,964
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 138,691 181,993 285,244
- -------------------------------------------------------------------------------------------------------------
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest 226,102 222,681 278,710
Income taxes 15,600 21,370 4,601
Non-cash investing and financing activities:
Securitization of mortgage loans 25,323 89,545 39,210
Loans transferred to other real estate owned 5,294 4,815 4,682
Change in net unrealized holding gain (loss) on securities 2,790 (1,217) 26,864
Change in securities purchased not settled (40,724) (3,227) (240,281)
Change in securities sold not settled 9,727 (65,156) (485,824)
Transfer of securities to available for sale -- -- 1,543,160
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Business
ONBANCorp, Inc. (the Company) is a financial services company primarily in the
business of commercial and retail banking providing a wide range of banking,
fiduciary and other financial services to corporate, institutional, municipal
and individual customers. The Company is subject to the regulations of certain
Federal and state agencies and undergoes periodic examinations by those
regulatory agencies.
On October 28, 1997, the Company entered into an agreement and plan of
reorganization for a merger with First Empire State Corporation headquartered in
Buffalo, New York for a merger between the two companies. Upon consummation of
the merger, OnBank & Trust Co. and Franklin First Savings Bank will be merged
into a single interstate M&T Bank.
The following summarizes the significant accounting policies of ONBANCorp, Inc.
and subsidiaries:
Basis of Presentation
The consolidated financial statements include the accounts of ONBANCorp, Inc.
and its wholly-owned subsidiaries, OnBank, OnBank & Trust Co. and Franklin First
Savings Bank (the Banks). On January 1, 1997 OnBank and OnBank & Trust Co.
merged, thereby creating a single banking entity in New York State. All
significant intercompany balances and transactions are eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Securities
The Company classifies its debt securities in one of three categories: trading,
available for sale, or held to maturity. Equity securities are classified as
either trading or available for sale. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held to maturity
securities are those debt securities which the Company has the ability and
intent to hold until maturity. All other securities not included in trading or
held to maturity are classified as available for sale.
Trading and available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available for sale securities are
excluded from earnings and are reported as a separate component of shareholders'
equity until realized. Realized gains and losses are included in earnings and
are derived using the specific identification method for determining the cost of
securities sold. Transfers of securities between categories are recorded at fair
value at the date of transfer. Unrealized holding gains and losses are
recognized in earnings for transfers into trading securities. The unrealized
holding gains or losses included in the separate component of equity for
securities transferred from available for sale to held to maturity are
maintained and amortized into earnings over the remaining life of the security
as an adjustment to yield in a manner consistent with the amortization or
accretion of premium or discount on the associated security.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned.
17
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Loans
Loans are stated at the amount of unpaid principal plus unamortized premiums,
less net unamortized deferred fees and unearned discounts.
Loans available for sale generally include both mortgage and student loans
originated with the intent to sell and each is carried at the lower of aggregate
cost or fair value.
Loan fees and certain direct loan costs are deferred. Premiums, discounts and
deferred fees on loans are accrued to income using the interest method.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrowers' financial condition precludes accrual (generally when payments are 90
days past due). Subsequent recognition of income occurs only to the extent
payment is received. Loans are returned to an accrual status when both principal
and interest are current, and the loan is determined to be performing in
accordance with the applicable loan terms.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to operations
and decreased by charge-offs of loans, net of recoveries. Loans are charged off
when, following reasonable and prudent collections efforts, management
determines that ultimate success of the loan's collectibility is remote.
Management's periodic evaluation of the adequacy of the allowance considers the
Banks' past loan loss experience, known and inherent risks in the portfolio,
adverse situations which may affect the borrowers' ability to repay, estimated
value of underlying collateral, if any, and current and prospective economic
conditions.
A substantial portion of the Banks' loans are secured by real estate in New York
and Pennsylvania. Accordingly, the ultimate collectibility of a substantial
portion of the Banks' loan portfolio is susceptible to changes in market
conditions in these areas.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in New York and Pennsylvania. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowances for loan losses. Such agencies may
require the Banks to recognize additions to the allowances based on their
judgment of information available to them at the time of their examination.
Management considers a loan impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts of
principal and interest under the original terms of the loan agreement.
Significant factors impacting management's judgment in determining when a loan
is impaired include an evaluation of compliance with repayment program,
condition of collateral, deterioration in financial strength of borrower or any
case when the expected future cash payments may be less than the recorded
amount. Accordingly, the Company measures 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 market price or fair value of collateral if
the loan is collateral dependent. Management excludes large groups of smaller
balance homogeneous loans such as residential mortgages and consumer loans which
are collectively evaluated.
Impairment losses are included in the allowance for loan losses through a charge
to the provision for loan losses. The Company recognizes interest income on
impaired loans using the cash basis of income recognition.
Premises and Equipment
Land is carried at cost and premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is calculated by the
straight-line method based on the estimated service lives of the respective
assets (one to forty years for buildings and one to ten years for furniture,
fixtures and equipment). Leasehold improvements are amortized by the
straight-line method based on the lesser of estimated useful life or term of the
lease (seven to twenty years).
18
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Other Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure is
recorded at the lower of the unpaid loan balance on the property at the date of
transfer, or fair value less estimated costs to sell. Adjustments to the
carrying value of such properties that result from subsequent declines in value
are charged to operations in the period in which the declines occur. Operating
costs associated with the properties are charged to expense as incurred. Gains
on the sale of other real estate are included in income when title has passed
and the sale has met the minimum down payment and other requirements prescribed
by generally accepted accounting principles.
Intangible Assets
Included in other assets at December 31, 1997 is approximately $12,146,000 of
unamortized premium on deposits acquired in 1994. The premium is being amortized
over the expected useful life of seven years on a straight-line basis. The
amortization periods are monitored to determine if events and circumstances
require the estimated useful lives to be reduced. Periodically, the Company
reviews the premium for events or changes in circumstances that may indicate the
carrying amounts of the assets are impaired.
Mortgage Banking Activities
Mortgage banking income includes gains and losses on the sale of loans
originated for sale, including mortgage-backed securities created with those
loans, gains on the sale of loan servicing rights, servicing income and
amortization of loan servicing rights.
The cost of mortgage loans originated or purchased with a definite plan to sell
the loans and retain the servicing assets is allocated between the loans and the
servicing assets based on their relative fair values at the time of purchase or
origination. Mortgage servicing assets are capitalized separately and are
subsequently amortized as a reduction of future servicing income. Prior to 1996,
the entire cost of originated mortgage loans was attributed to the loans.
Mortgage servicing rights are stratified based on predominant risk
characteristics of underlying loans for the purpose of evaluating impairment. An
allowance is then established in the event the recorded value of an individual
stratum exceeds fair value.
Mortgage servicing assets, which are included in other assets, are amortized
over the estimated lives of the loans serviced using the interest method
adjusted for prepayments.
Trust Department
Assets held in a fiduciary or agency capacity for customers are not included in
the accompanying consolidated balance sheets, since such assets are not assets
of the Company.
Repurchase Agreements
The Banks enter into sales of mortgage-backed securities under agreements to
repurchase certificates of the same agency bearing the identical contract
interest rate and similar remaining weighted average maturities as the original
certificates that result in approximately the same market yield (fixed coupon
dollar repurchase agreements). Fixed coupon dollar repurchase agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the consolidated balance sheets. The dollar amount
of certificates underlying the agreements remains in the asset accounts. During
the period of the agreement, the certificates are delivered into the
counterparties' accounts maintained at the securities dealer. The dealer may
have sold, loaned, or otherwise disposed of such securities to other parties in
the normal course of their operations, and have agreed to return to the Banks
substantially identical securities at the maturities of the agreements.
The Banks also enter into sales of U.S. Treasury and mortgage-backed securities
under agreements to repurchase the same securities (fixed coupon repurchase
agreements). These agreements are also treated as financings and involve the
delivery of U.S. Treasury and mortgage-backed securities to the dealer.
19
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Financial Instruments
The Company holds derivative financial instruments such as put and call options
and interest rate swaps. The Company is not an issuer of any other financial
instrument derivatives.
In conjunction with its trading activities, the Banks issue financial call
and put options, generally with contractual maturities of one month. Call
options are issued on the Banks' available for sale or trading securities and
are contracts allowing, but not requiring, the holder to buy a financial
instrument from the Banks at a specified price during a specified time
period. Put options are contracts allowing, but not requiring, the holder to
sell a financial instrument to the Banks at a specified price during a
specified time period. As the issuers of options, the Banks receive a
premium, and then bear the risk of an unfavorable change in the price of the
financial instrument underlying the option. When a call option is exercised,
the fee collected is recorded as income. When a put option is exercised, the
fee collected is treated as an adjustment to the basis of the underlying
security. If fair value of the security is less than the option's strike
price minus the premium, a loss is recognized. If an option expires
unexercised, the fee is recognized as income.
Interest rate swaps used in asset liability management activities to hedge
exposure to fluctuating interest rates are accounted for using the accrual
method.
Employee Benefit Plans
The Company's pension plan is a noncontributory defined benefit plan which
covers eligible employees who have completed 1,000 hours of service, attained 21
years of age, and have one year of service. The projected unit credit method is
utilized for measuring net periodic pension costs over the employees' service
lives. The Company's funding policy is to contribute annually at least the
minimum required to meet the funding standards set forth under provisions of the
Employee Retirement Income Security Act of 1974
The Company maintains an Employee Stock Purchase Plan which allows, subject to
certain limitations, eligible Company employees to purchase shares of ONBANCorp
common stock for 85% of the market value of such stock through payroll
deductions.
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1,1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also
allows the Company to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair value
based method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
Federal Income Taxes
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Per Share Data
On December 31, 1997, the Company adopted the provisions of SFAS No. 128,
Earnings Per Share. The statement supersedes Accounting Principles Board Opinion
No. 15, Earnings Per Share, and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock. It requires dual presentation of "Basic EPS" and "Diluted
EPS" on the face of the income statement for all entities with complex capital
structures. All prior period EPS data has been restated to conform to the
provisions of this statement.
20
<PAGE>
(1) Summary of Significant Accounting Policies (Continued)
Basic net income per share is based on the weighted average number of shares
outstanding during the year. Diluted shares outstanding includes the maximum
dilutive effect of stock issuable upon conversion of convertible preferred stock
and stock options.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash
and due from banks and money-market investments.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to
current year presentation.
(2) Federal Reserve Board Reserve Requirement
The Banks are subject to Federal Reserve Board regulations that require them to
maintain average cash reserves against their deposits (primarily demand and NOW
accounts). The regulations currently require that average reserves be maintained
against transactions accounts in the amount of 3% of the aggregate of such
accounts exceeding $4.7 million, plus 10% of the total in excess of $43.1
million. The reserve requirement at December 31, 1997 amounted to $33,843,000.
(3) Securities
Securities held to maturity at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Unrealized
Amortized -------------------- Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 15,028 13 1 15,040
U.S. Government agencies 101,556 -- 5,725 95,831
State and municipal 55,385 1,164 1 56,548
Corporate and other 311 6 -- 317
Mortgage-backed securities 1,033,705 5,475 9,195 1,029,985
- -----------------------------------------------------------------------------------------
Total debt securities 1,205,985 6,658 14,922 1,197,721
Unamortized holding loss on
securities transferred (29,821)
- -----------------------------------------------------------------------------------------
$1,176,164
- -----------------------------------------------------------------------------------------
</TABLE>
In view of a regulatory policy revision in 1994, the Company transferred
securities with a fair value of $1.265 billion and a net unrealized holding loss
of $71.6 million at date of transfer from available for sale to held to
maturity. At December 31, 1997, the remaining net unamortized loss on US
Government agency securities was $5,816,000 and mortgage-backed securities was
$24,005,000.
21
<PAGE>
(3) Securities (Continued)
Securities available for sale at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Unrealized
Amortized -------------------- Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 19,146 56 19 19,183
U.S. Government agencies 60,004 52 354 59,702
Corporate and other 6,969 -- 323 6,646
Mortgage-backed securities 707,163 2,702 1,463 708,402
- -----------------------------------------------------------------------------------------
Total debt securities 793,282 2,810 2,159 793,933
- -----------------------------------------------------------------------------------------
Equity securities:
Common 13 203 -- 216
Federal Home Loan Bank 46,320 -- -- 46,320
- -----------------------------------------------------------------------------------------
Total equity securities 46,333 203 -- 46,536
- ----------------------------------------------------------------------------------------
$ 839,615 3,013 2,159 840,469
- -----------------------------------------------------------------------------------------
</TABLE>
Securities in the trading account at December 31, 1997 and 1996 were equity
securities. The change in net unrealized holding gain (loss) on trading
securities included in net gain (loss) on securities transactions is a gain of
$500,000 in 1997, a loss of $63,000 in 1996 and a gain of $2,434,000 in 1995.
The following table presents the carrying value and fair value of debt
securities at December 31, 1997, based on scheduled maturities. Actual
maturities can be expected to differ from scheduled maturities due to prepayment
or early call privileges of the issuer.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Held to Maturity Available for Sale
-------------------------- ------------------------
Carrying Fair Amortized Fair
(In Thousands) Value Value Cost Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year or less $ 96,022 96,820 18,662 18,680
1 year through 5 years 28,817 29,461 10,489 10,497
5 years through 10 years 41,101 40,909 15,000 15,052
After 10 years 524 546 41,968 41,302
- -----------------------------------------------------------------------------------------
166,464 167,736 86,119 85,531
Mortgage-backed securities 1,009,700 1,029,985 707,163 708,402
- -----------------------------------------------------------------------------------------
$1,176,164 1,197,721 793,282 793,933
- -----------------------------------------------------------------------------------------
</TABLE>
Securities carried at $732,492,000 at December 31, 1997 were pledged on
municipal deposits.
22
<PAGE>
(3) Securities (Continued)
Securities held to maturity at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Unrealized
Amortized -------------------- Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 29,554 331 23 29,862
U.S. Government agencies 125,486 -- 7,796 117,690
State and municipal 61,668 1,280 16 62,932
Corporate and other 329 7 -- 336
Mortgage-backed securities 1,505,006 6,021 19,646 1,491,381
- -----------------------------------------------------------------------------------------
Total debt securities 1,722,043 7,639 27,481 1,702,201
Unamortized holding loss on
securities transferred (38,135)
- -----------------------------------------------------------------------------------------
$1,683,908
- -----------------------------------------------------------------------------------------
</TABLE>
Securities available for sale at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Gross Unrealized
Amortized -------------------- Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 4,444 14 51 4,407
U.S. Government agencies 84,992 -- 1,478 83,514
Mortgage-backed securities 785,380 6,905 920 791,365
- -----------------------------------------------------------------------------------------
Total debt securities 874,816 6,919 2,449 879,286
Equity securities:
Common 13 -- -- 13
Federal Home Loan Bank 46,041 -- -- 46,041
- -----------------------------------------------------------------------------------------
Total equity securities 46,054 -- -- 46,054
- ----------------------------------------------------------------------------------------
$ 920,870 6,919 2,449 925,340
- -----------------------------------------------------------------------------------------
</TABLE>
The following table summarizes proceeds, gains and losses realized on the sale
of securities available for sale for the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Change in
Cash Securities Sold Net Realized Realized
(In Thousands) Proceeds Not Settled Proceeds Gains Losses
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $1,172,947 9,713 1,182,660 9,493 371
1996 589,176 (65,156) 524,020 6,451 982
1995 2,095,113 (485,824) 1,609,289 13,700 10,662
- ----------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
(4) Loans
The composition of the loan portfolio at December 31, is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 463,174 333,073
Commercial real estate 336,548 290,121
Commercial real estate construction 57,074 44,201
Residential real estate construction 5,732 9,797
Residential real estate 1,098,848 1,044,444
Consumer loans 923,649 728,061
- -------------------------------------------------------------------------
2,885,025 2,449,697
Net deferred fees, discounts and premiums (17,769) (1,223)
- -------------------------------------------------------------------------
$2,867,256 2,448,474
- -------------------------------------------------------------------------
</TABLE>
The principal balances of loans not accruing interest amounted to approximately
$23,400,000 and $20,172,000 at December 31, 1997 and 1996, respectively. The
difference between the amount of interest income that would have been recorded
if these loans had been paid in accordance with their original terms and the
amount of interest income that was recorded in each of the years in the
three-year period ended December 31, 1997 was immaterial.
The Banks have entered into transactions with the Company's directors,
significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. the aggregate amount of loans to such
related parties at December 31, 1997 was $14,135,000.
Changes in the allowance for laon losses for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $37,840 34,583 33,775
Provision charged to operations 7,168 7,813 6,790
Loans charged-off (7,492) (6,638) (7,591)
Recoveries 1,548 2,082 1,609
- -------------------------------------------------------------------------
Balance, end of year $39,064 37,840 34,583
- -------------------------------------------------------------------------
</TABLE>
Impaired loans were $18,940,000 and $6,944,000 at December 31, 1997 and 1996,
respectively. Included in these amounts are $3,629,000 and $1,820,000 of
impaired loans for which the related allowance for loan losses is $2,677,000 and
$436,000 at December 31, 1997 and 1996, respectively. In addition, included in
the total impaired loans is $15,311,000 and $5,124,000 of impaired loans that,
as a result of the adequacy of collateral values and cash flow analysis do not
have a specific impairment reserve at December 31, 1997 and 1996, respectively.
The average impaired loans for the years ended December 31, 1997, 1996 and 1995
was approximately $11,100,000, $8,941,000 and $9,634,000 respectively. The
effect on interest income of impaired loans was not material to the consolidated
financial statements in 1997, 1996 and 1995.
24
<PAGE>
(4) Loans (continued)
The following table summarizes gross proceeds, gains and losses realized for
loans available for sale for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Gross Realized Realized
(In Thousands) Proceeds Gains Losses
- -------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $54,146 526 456
1996 32,990 851 441
1995 35,370 301 117
- -------------------------------------------------------------------------
</TABLE>
(5) Mortgage Banking Activities
Loans serviced for others totaled approximately $1,031,712,000, $1,091,477,000,
and $1,146,989,000 at December 31, 1997, 1996 and 1995, respectively.
Changes in the combined capitalized mortgage servicing rights and purchased
mortgage servicing rights are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Years ended December 31,
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 7,707 7,107 8,350
Capitalized mortgage servicing
rights 874 2,847 671
Amortization (1,572) (2,247) (1,914)
- -------------------------------------------------------------------------
Balance, end of year $ 7,009 7,707 7,107
- -------------------------------------------------------------------------
</TABLE>
Mortgage banking income is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Years ended December 31,
(In Thousands) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Loan servicing fees received $ 4,685 4,728 5,062
Servicing rights amortization (1,645) (2,247) (1,914)
Gain (loss) on sale:
Loans 84 410 184
Mortgage-backed securities 247 1,396 (197)
- -------------------------------------------------------------------------
$ 3,371 4,287 3,135
- -------------------------------------------------------------------------
</TABLE>
25
<PAGE>
(6) Premises and Equipment
A summary of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Land $ 8,139 8,134
Buildings 63,705 61,775
Furniture, fixtures and equipment 31,834 29,311
Leasehold improvements 11,129 10,863
Construction in progress 3,647 1,024
- -------------------------------------------------------------------------
118,454 111,107
Less accumulated depreciation
and amortization 53,004 48,550
- -------------------------------------------------------------------------
$ 65,450 62,557
- -------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment included in building,
occupancy and equipment expense amounted to $6,555,000, $6,746,000 and
$6,271,000, for the years ended December 31, 1997, 1996 and 1995 respectively.
(7) Deposits
Contractual maturities of time deposits at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------
(In Thousands) Maturing Amount
- --------------------------------------------------
<S> <C> <C>
1998 $1,859,153
1999 307,606
2000 84,374
2001 61,915
2002 65,479
Thereafter 64,863
- --------------------------------------------------
$2,443,390
- --------------------------------------------------
</TABLE>
(8) Repurchase Agreements
Repurchase agreements, including accrued interest of $1,680,000 at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Securities Sold Weighted
Carrying Market Repurchase Average
(Dollars In Thousands) Values Values Liability Rate
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31-90 days $ 21,535 21,571 25,803 6.25%
Over 90 days 160,786 161,349 138,799 5.73%
- -----------------------------------------------------------------------------------
$ 182,321 182,920 164,602 5.82%
- -----------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
(8) Repurchase Agreements (continued)
Information concerning borrowings under repurchase agreements for the years
ended December 31, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Maximum month-end balance $ 369,891 351,174
Average Balance 301,698 300,706
Weighted average interest rate 5.96% 6.27%
- ---------------------------------------------------------------------
</TABLE>
Repurchase agreements, including accrued interest of $954,000 at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Securities Sold Weighted
Carrying Market Repurchase Average
(Dollars In Thousands) Values Values Liability Rate
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31-90 days $ 18,990 18,995 19,010 5.93%
Over 90 days 245,862 248,230 235,461 6.35%
- -----------------------------------------------------------------------------------
$ 264,852 267,225 254,471 6.32%
- -----------------------------------------------------------------------------------
</TABLE>
(9) Other Borrowings
Other borrowings at December 31, are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank $ 638,555 852,028
Collateralized mortgage obligations 8,358 11,114
Industrial Development Agency bond 11,535 11,775
- ---------------------------------------------------------------------
$ 658,448 874,917
- ---------------------------------------------------------------------
</TABLE>
Borrowings from the Federal Home Loan Bank (FHLB) as of December 31, are
due as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997 1996
(Dollars In Thousands) Amount Rate Amount Rate
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $ -- 591,100 5.23 to 7.95%
1998 435,300 5.48 to 7.72% 250,000 5.48 to 7.72%
1999 185,000 6.08 to 6.53% --
2000 -- --
2001 495 5.86 to 7.02% 495 5.86 to 7.02%
2002 2,875 6.06 to 7.43% 425 7.43%
Thereafter 14,885 4.05 to 7.97% 10,008 4.05 to 7.97%
- -------------------------------------------------------------------------------------
$ 638,555 852,028
- -------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
(9) Other Borrowings (Continued)
At December 31, 1997 and 1996, FHLB borrowings, substantially all at fixed
rates, are collateralized by Federal Home Loan Bank stock of $46,320,000 and
$46,041,000, respectively, and U.S. Government and mortgage-backed securities
and mortgage loans with carrying values approximating $1,516,311,000 and
$1,211,981,000, respectively.
The Banks may borrow up to $150,000,000 from the Federal Home Loan Bank of New
York (FHLB) during any calendar month without FHLB Board approval. The aggregate
limit available without FHLB Board approval is 30% of assets.
In June, 1989, collateralized mortgage obligations (CMOs) of $51,600,000, were
issued. Net proceeds were used to reduce existing short-term borrowings and to
fund mortgage commitments. In conjunction with the debt, $55,800,000 in mortgage
loans were securitized and converted into mortgage-backed securities as
collateral for the CMOs.
CMO's are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In Thousands) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Class A-3, 9.05% interest rate, maturing in 2015 $ 7,895 10,651
Class A-4, 7.80% interest rate, maturing in 2018 463 463
- ---------------------------------------------------------------------------
$ 8,358 11,114
- ---------------------------------------------------------------------------
</TABLE>
The anticipated aggregate principal payments on the CMOs during each of the five
years subsequent to December 31, 1997 are: 1998 - $2,064,000; 1999 - $1,032,000;
2000 - $1,032,000; 2001 - $1,032,000; 2002 - $516,000. Since the rate of payment
of principal of each class will depend on the rate of repayment (including
prepayments) of collateral, the actual maturity of any class could be
significantly earlier that its stated maturity.
The Company financed the expansion of its parking facility with the proceeds of
$12,000,000 of City of Syracuse Industrial Development Agency Civil Facility
Bonds. The obligation bears interest at a weekly variable rate, 4.35% at
December 31, 1997, and is payable in monthly installments. the bonds are subject
to a mandatory sinking fund redemption beginning in 1996 of $225,000 with a
final maturity of April 1, 2018. The bonds are secured by a letter of credit
which is collateralized by mortgage-backed securities having carrying value of
$17,480,000 and a fair value of $17,612,000 at December 31, 1997.
The Company enters into interest rate swaps which involve the exchange of fixed
and floating rate interest payment obligations without the exchange of
underlying principal obligations. These agreements have been utilized by the
Company to effectively convert variable-rate liabilities into fixed-rate
liabilities to more closely match the interest rate sensitivity of assets and
liabilities. Entering into interest rate swaps involves not only the risk of
default by the other party but also interest rate risk if positions are not
matched. The Company has swaps outstanding on $25,000,000 of FHLB borrowings at
December 31, 1997. The original terms to maturity of swaps was three years and
the weighted average remaining term of the agreements was .5 years. Under the
agreements, the Company pays interest at a fixed rate and receives interest at
rates that vary according to the London Interbank Offered Rate. interest
payments are exchanged at three or six month intervals.
The weighted average fixed interest rate the Company was paying was 5.60% and
5.55%, and the weighted average variable interest rate the Company was receiving
was 5.13% and 5.63% at December 31, 1997 and 1996, respectively. The fair value
was $3,000 and $108,700 at December 31, 1997 and 1996.
(10) Capital Trust Securities
In February 1997, the Company, through a subsidiary Trust formed for the sole
purpose of issuing capital securities, issued $60,000,000, 9.25% Capital
Securities due February 1, 2027. Proceeds of this issue were used to fund the
1,400,000 common share repurchase announced in January 1997. In October 1996,
the Federal Reserve Board approved Tier I capital treatment for this type of
capital securities which provides the Company with a method of funding Tier I
capital that is tax deductible. The proceeds to the Trust are lent to the
holding company as long-term junior subordinated debentures that are subordinate
to all holding company debt but senior to all common stock. The securities may
be called at a premium, in whole or in part, on or after February 1, 2007 and
provisions are included which provide the temporary deferral of interest
payments for a period of up to five years.
28
<PAGE>
(11) Income Taxes
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 29,042 27,618 26,887
Paid-in capital, for stock options exercised (1,799) (246) (148)
Shareholders' equity, for unrealized
gain (loss) on securities 1,908 (860) 17,909
- ---------------------------------------------------------------------------------------
$ 29,151 26,512 44,648
- ---------------------------------------------------------------------------------------
</TABLE>
Income tax expense (benefit) attributable to income from operations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 14,623 15,208 21,461
State 2,510 6,138 6,288
- ---------------------------------------------------------------------------------------
17,133 21,346 27,749
Deferred:
Federal 9,613 5,526 (273)
State 2,296 746 (589)
- ---------------------------------------------------------------------------------------
11,909 6,272 (862)
- ---------------------------------------------------------------------------------------
Total $ 29,042 27,618 26,887
- ---------------------------------------------------------------------------------------
</TABLE>
Income tax expense attributable to income before income taxes diffeed from
the amounts computed by applying the U.S. Federal statutory income tax rate to
pre-tax income as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
Computed "expected" tax expense $ 28,077 24,704 25,047
State taxes, net of Federal benefit 3,124 4,475 3,704
Tax exempt income (921) (945) (1,037)
Other (1,238) (616) (827)
- ---------------------------------------------------------------------------------------
Actual income tax expense $ 29,042 27,618 26,887
- ---------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
(11) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997
1996 follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net unrealized holding loss on securities $ 11,588 13,496
Deferred loan origination fees and expenses 1,870 2,227
Financial statement allowance for loan losses $ 14,726 14,556
Core deposit intangible assets 4,579 4,483
Other 4,652 3,868
- ------------------------------------------------------------------------------
Total deferred tax assets 37,415 38,630
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Leasing transactions $ 24,568 9,692
Tax loan loss reserve in excess of base year reserve 3,347 3,861
Other 2,345 4,105
- ------------------------------------------------------------------------------
Total deferred tax liabilities 30,260 17,658
- ------------------------------------------------------------------------------
Net deferred tax assets $ 7,155 20,972
- ------------------------------------------------------------------------------
</TABLE>
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary.
Included in retained earnings at December 31, 1997 is approximately $27,300,000
representing aggregate provisions for loan losses taken under the Internal
Revenue Code. Use of these reserves to pay dividends in excess of earnings and
profits or to redeem stocks, or if the institution fails to qualify as a bank
for Federal income tax purposes would result in taxable income to the Company.
30
<PAGE>
(12) Earnings Per Share
Basic and diluted earnings per share were computed as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years Ended December 31,
(In Thousands, Except Per Share Data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Earnings available for common shares:
Earnings from operations $ 51,178 42,964 44,677
Provision for cash dividends on preferred
stock (Series B) -- (4,155) (4,522)
- -----------------------------------------------------------------------------------------------
Net earnings available for common shareholders $ 51,178 38,809 40,155
- -----------------------------------------------------------------------------------------------
Basic earnings per share $ 3.93 3.02 2.88
- -----------------------------------------------------------------------------------------------
Shares used in computation
Weighted average common shares outstanding
(net of treasury shares) 13,023,988 12,855,072 13,966,682
- -----------------------------------------------------------------------------------------------
Diluted earnings per share
Net earnings available for common shares
and common stock equivalent shares deemed
to have a dilutive effect $ 51,178 42,964 44,677
- -----------------------------------------------------------------------------------------------
Diluted earnings per share $ 3.88 2.88 2.76
- -----------------------------------------------------------------------------------------------
Weighted average common shares outstanding 13,023,988 12,855,072 13,966,682
Additional potentially dilutive securities
(equivalent in common stock):
Convertable preferred stock (Series B) 30,742 1,945,314 2,116,875
Stock options 126,593 113,121 94,170
- -----------------------------------------------------------------------------------------------
Total 13,181,323 14,913,507 16,177,727
- -----------------------------------------------------------------------------------------------
Summary of cash dividends declared per share
Preferred-Series B $ -- 1.69 1.69
Common $ 1.36 1.24 1.14
- -----------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
(13) Pension Plan
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated financial statements at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $10,145 and $10,795 at 1997 and 1996, respectively $ 13,890 11,957
- -------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date 17,152 15,882
Plan assets at fair value, primarily listed stocks and
fixed income securities 21,046 18,276
- -------------------------------------------------------------------------------------------
Plan assets in excess of the projected benefit obligation 3,894 2,394
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions (3,134) (1,722)
Unrecognized past service liability (1,270) (1,358)
Unrecognized net asset being amortized over 12.5 years (217) (288)
- -------------------------------------------------------------------------------------------
Accrued pension cost included in other liabilities $ (727) (974)
- -------------------------------------------------------------------------------------------
</TABLE>
Net period pension expense included in the following components at
December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 1,322 1,559 1,459
Interest cost on projected benefit obligation 1,076 1,095 1,005
Actual return on plan assets (3,995) (1,808) (2,728)
Net amortization and deferral 2,139 236 1,433
- -----------------------------------------------------------------------------------
Net periodic pension expense $ 542 1,082 1,169
- -----------------------------------------------------------------------------------
</TABLE>
The weighted-average discount rate and expected long-term rate of return on
pension plan assets were 7.25% and 8.5%, respectively, for 1997 and 8.0% and
8.5%, respectively, for 1996. The rate of increase of future compensation levels
used in determining the actuarial present value of the projected benefit
obligation was 5.0% for 1997 and was 5.5% for 1996.
(14) Incentive Savings Plan
The Company maintains an incentive savings 401(k) plan which is a defined
contribution plan providing for contributions to several trust funds by both the
Banks and their employees. Participants may contribute 1% to 15% of their
compensation subject to IRS limitations. The Banks make matching contributions
equal to 50% of participant contributions up to a limit of 3% of the
participant's base pay. Participants vest immediately in their own contributions
and over a period of five years in the Banks' contributions. Plan expense was
approximately $645,000, $639,000, and $578,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
(15) Employee Stock Ownership Plan
All salaried and hourly employees of the Banks are eligible to participate in an
Employee Stock Ownership Plan (ESOP) upon attaining age 21 and completing a year
of service. Participants vest in the shares allocated to their accounts
depending on their length of service, with 100% vesting occurring after 6 years
of service. The ESOP is designed to invest in the Company's common stock and has
the authority to borrow funds from a third party to acquire such stock.
ESOP expense approximates $150,000 in each of the years in the three year period
ending December 31, 1997.
32
<PAGE>
(16) Stock Option Plans
Under the terms of the Stock Option and Appreciation Rights Plan (the Option
Plan), options to purchase up to 700,000 shares of common stock may be granted
to officers and employees of the Company and its subsidiaries. Options granted
may be nonqualified stock options or qualified stock options, which afford
favorable tax treatment to recipients upon compliance with certain restrictions
and do not normally result in tax deductions to the Company. The Option Plan
initially permitted the granting of tandem stock appreciation rights (SARS) in
respect to options which enable the recipient on exercise to elect payment in
cash based upon increases in market value of the stock from the date of grant.
Options granted are exercisable as determined by the Option Committee of the
Board of Directors, may have a term of up to ten years and are exercisable at a
price at least equal to the fair market value at the date of grant.
Under the terms of the Directors Stock Option Plan, as of the date of each
annual meeting, options to purchase 3,000 shares of the Company's common stock
are granted to non-employee directors who continue as a member of the Board and
have not previously been granted such options. The Directors Stock Option Plan
requires that options be granted at an exercise price at not less than fair
market value on the date of the grant. Options vest over three years and are
exercisable over a ten year period if the optionee continues to serve as a
director of the Company. Under the terms of the plan, 100,000 shares of common
stock were reserved for issuance upon the exercise of options granted.
Under Franklin First Savings Bank's Incentive Plan, non-qualified and quantified
stock options were granted to directors, officers and employees of Franklin. All
options are vested and exercisable over a ten year period.
The following is a summary of the changes in options outstanding:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Number Weighted
of of Average
Shares SARS Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 515,626 72,000 $ 21.22
Granted 16,100 -- 22.88
Exercised (23,540) -- 10.54
Forfeited (16,994) (4,500) 29.68
- --------------------------------------------------------------------------------
December 31, 1995 491,192 67,500 21.50
- --------------------------------------------------------------------------------
Options exercisable, December 31, 1995 387,525 67,500 18.38
- --------------------------------------------------------------------------------
Granted 80,600 -- 33.28
Exercised (24,994) -- 8.58
Forfeited (5,400) (6,500) 32.96
- --------------------------------------------------------------------------------
December 31, 1996 541,398 61,000 23.73
- --------------------------------------------------------------------------------
Options exercisable, December 31, 1996 420,065 61,000 21.06
- --------------------------------------------------------------------------------
Granted 83,600 -- 39.12
Exercised (173,894) -- 15.23
Forfeited (354) (8,000) 17.27
- --------------------------------------------------------------------------------
December 31, 1997 450,750 53,000 29.87
- --------------------------------------------------------------------------------
Options exercisable, December 31, 1997 310,083 53,000 $ 26.86
- --------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
(16) Stock Option Plans (continued)
The following summarizes outstanding and exercisable options at December 31,
1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.00 - $15.00 60,216 2.47 $ 9.91 60,216 $ 9.91
$15.01 - $25.00 69,500 4.46 21.49 66,167 21.42
$25.01 - $35.00 237,434 6.45 34.13 183,701 34.38
$35.01 - $50.00 83,600 9.09 39.12 -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option plans,
and, accordingly no compensation cost has been recognized for its stock options
in the accompanying consolidated financial statements.
Had compensation cost been determined based on the fair value at the grant dates
for awards under the plans, consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $ 51,178 42,964 44,677
Pro forma 50,899 42,835 44,661
Diluted earnings per common share:
As reported $ 3.88 2.88 2.76
Pro forma $ 3.86 2.87 2.76
- -----------------------------------------------------------------------------
</TABLE>
The per share weighted average fair value and weighted average exercise
prices of stock options granted during 1997 at a price equal to the market
price of the stock on the grant date are $9.71 and $37.66, respectively, and
the per share weighted average fair value and weighted average exercise
prices of stock options granted during 1997 at a price in excess of the
market price of the stock on the grant date are $8.45 and $40.70,
respectively. The per share weighted average fair value of stock options
granted during 1996 and 1995 was $7.18 and $5.54, respectively. The fair
values were determined using the Black-Scholes option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 3.7% 3.7% 4.5%
Risk free interest rate 6.5% 5.5% 7.8%
Expected life 7 years 7 years 7 years
Volatility 25.0% 27.6% 23.2%
- -----------------------------------------------------------------------------
</TABLE>
(17) Shareholders' Equity
In January 1997, the Company completed its Series B 6.75% Cumulative Convertible
Preferred Stock redemption, which resulted in the redemption of 35,514 shares at
a cost of $924,000 and the remaining 2,306,538 shares were converted to
1,799,096 shares of common stock issued from treasury stock.
34
<PAGE>
(17) Shareholders' Equity (continued)
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies which regulate them. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1997,
that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Banks must maintain minimum ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Consolidated $ 437,748 13.59% $ 398,308 13.78%
OnBank NA 34,141 15.50%
OnBank & Trust Co. 320,585 14.07% 256,698 13.69%
Franklin First Savings Bank 112,726 12.18% 99,257 12.30%
Tier I Capital (to Risk Weighted Assets):
Consolidated 398,684 12.37% 362,015 12.52%
OnBank NA 31,383 14.25%
OnBank & Trust Co. 292,101 12.82% 233,255 12.44%
Franklin First Savings Bank 102,570 11.08% 89,166 11.05%
Tier I Capital (to Average Assets):
Consolidated 398,684 7.23% 362,015 6.79%
OnBank NA 31,383 6.46%
OnBank & Trust Co. 292,101 7.28% 233,255 6.66%
Franklin First Savings Bank 102,570 6.93% 89,166 6.57%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(18) Dividends
The payment of dividends by the Banks to the Company, which in turn pays
dividends to its shareholders, is subject to the Banks being in compliance with
regulatory capital requirements.
Under New York State Banking law, dividends may be declared and paid only out of
net profits of the Banks. The approval of the Superintendent of the New York
State Department of Banking is required if the total of all dividends declared
in any calendar year will exceed net profits for that year plus the retained net
profits of the preceding two years.
Under Pennsylvania Banking law, no dividend may be paid that would constitute an
unsafe or unsound practice or result in an institution failing to meet its
capital requirements.
35
<PAGE>
(19) Commitments and Contingencies
In the normal course of the Banks' business, there are various outstanding
commitments and contingent liabilities that have not been reflected in the
consolidated financial statements. In addition, in the normal course of
business, there are various outstanding legal proceedings. In the opinion of
management, the aggregate amount involved in such proceedings is not material to
the financial condition or results of operations of the Company.
At December 31, 1997, the Banks were obligated under non-cancelable operating
leases. Building, occupancy and equipment expense includes rental expense of
$3,954,000, $3,849,000 and $3,592,000, for the years ended December 31, 1997,
1996 and 1995, respectively. The minimum rentals at December 31, 1997 under the
existing terms of these leases are as follows: $4,274,000 in 1998; $3,877,000 in
1999; $3,193,000 in 2000; $2,723,000 in 2001; $2,360,000 in 2002 and $10,740,000
in later years.
At December 31, 1997 the Company was obligated under a contract with Alltel
Services, Inc. for on-site data processing management services. Future
contractual expenses $7,875,000 in 1998 and $2,795,000 in 1999.
(20) Financial Instruments with Off-Balance-Sheet Risk
The Banks are a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers and
to reduce exposure to fluctuations in interest rates. Those financial
instruments include commitments to extend credit, the serviced loan portfolio,
options written and forward purchase and sale contracts. Those instruments
involve, to varying degrees, elements of credit and market risk in excess of the
amount recognized in the consolidated statement of financial position. Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. Unless noted
otherwise, the Banks do not require collateral or other security to support
off-balance-sheet financial instruments with credit risk. Market risk represents
the accounting loss that would be recognized at the reporting date if future
changes in market prices make a financial instrument less valuable.
The Banks' exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments for commitments to extend credit, forward
purchase contracts, and put options written is represented by the contractual
notional amount of those instruments. The Banks use the same credit policies to
evaluate the creditworthiness of counterparties to these transactions as it does
for on-balance-sheet instruments.
The Banks control their credit risk through credit approvals, limits, and
monitoring procedures. The Banks' credit risk with respect to mortgage servicing
losses results from unrecoverable advances of delinquent principal, interest and
tax payments made on behalf of mortgagors. To date, the Banks have not suffered
significant losses from their loan servicing activities.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis using the same criteria and credit
policies as it does for on-balance-sheet instruments. The credit risk amounts
are equal to the contractual amounts assuming that the amounts are fully
advanced and the collateral or other security is of no value. The amount of
collateral obtained by the Banks upon extension of credit is based on
management's credit evaluation of the counterparty. The type of collateral
varies but is primarily mortgages on real estate. The Banks have experienced
little difficulty in accessing collateral when required.
The Banks enter into forward contract commitments involving the delayed delivery
or purchase of mortgage-backed securities and loans. These forward contracts are
used to reduce the market risk associated with the underlying securities or
loans. Contractual terms of forward commitments specify the aggregate amount of
contract, the interest yield or prices at which securities or loans are to be
delivered, and the period covered. Credit and market risks arise from the
potential inability of counterparties to meet the terms of their contracts and
from movements in security and loan values, respectively.
Deferred fees from put options outstanding at December 31, 1997 and 1996
amounted to approximately $19,000 and $90,000, respectively, with average fair
values of $99,000 and $74,000 for the years ending December 31, 1997 and 1996,
respectively. The fair value of these options approximated the deferred fees
outstanding at December 31, 1997 and 1996.
36
<PAGE>
(20) Financial Instruments with Off-Balance-Sheet Risk (continued)
Net trading gains (losses) on financial options included in gain (loss) on
securities transactions totaled $564,000, ($353,000), and $910,000 in 1997, 1996
and 1995, respectively.
A summary of the contract or notional amounts of the Banks' exposure to
off-balance-sheet risk, at December 31, excluding unused lines of credit of
approximately $331,328,000 as of December 31, 1997, follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Contract or Notional Amount
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amount
represents credit risk:
Commitments to extend credit:
Fixed $ 27,223 30,942
Variable 40,117 51,049
Standby letters of credit 68,831 44,349
Put options written 15,000 36,000
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Interest rate swaps 25,000 50,000
- ------------------------------------------------------------------------------
</TABLE>
(21) Concentrations of Credit Risk
Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Banks
do not have a significant exposure to any individual customer or counterparty. A
geographic concentration arises because the Banks operate only in Upstate New
York and Northeastern Pennsylvania.
The credit risk represents the maximum accounting loss that would be recognized
at the reporting date if counterparties failed completely to perform as
contracted and any collateral or security proved to be of no value. The Banks
have experienced little difficulty in accessing collateral when required.
(22) Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
(a) Cash and Cash Equivalents
For these short-term instruments that generally mature in ninety days or less,
the fair value approximates carrying value.
(b) Securities
Fair values for securities and derivative instruments are based on quoted market
prices or dealer quotes, where available. Where quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
The carrying value of FHLB stock, which is redeemable at par, approximates fair
value.
(c) Loans
Fair values for residential mortgage loans are based on quoted market prices of
similar loans sold in the secondary market, adjusted for differences in loan
characteristics. The fair values for commercial and consumer loans are estimated
through discounted cash flow analyses using interest rates currently being
offered for loans with similar terms and credit quality. The fair value of loans
available for sale is based on quoted market prices. Where quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments.
37
<PAGE>
(22) Fair Values of Financial Instruments (continued)
Delinquent loans (not in foreclosure) are valued using the methods noted above.
While credit risk is a component of the discount rate used to value loans,
delinquent loans are presumed to possess additional risk. Therefore, the
calculated fair value of loans delinquent more than thirty days are reduced by
an allocated amount of the general allowance for loan losses.
(d) Due from Brokers
Due to the short term nature, the carrying value approximates fair value.
(e) Accrued Interest Receivable and Payable
For these short-term instruments, the carrying value approximates fair value.
(f) Deposits
The fair values disclosed for demand deposits, savings accounts and money market
accounts are, by definition, equal to the amounts payable on demand at the
reporting date (i.e., their carrying values). The fair value of fixed maturity
time deposits is estimated using a discounted cash flow approach that applies
interest rates currently being offered to a schedule of aggregated expected
monthly maturities on time deposits.
(g) Repurchase Agreements
For these short term instruments that mature in less than six months, the
carrying value approximates fair value. For those with maturities greater than
six months, the fair value is estimated using a discounted cash flow approach.
This approach applies the current incremental rates to such borrowings.
(h) Other Borrowings
The fair value of long term debt has been estimated using discounted cash flow
analyses that apply interest rates currently being offered for notes with
similar terms.
(i) Due to Brokers
Due to the short term nature, the carrying value approximates fair value.
(j) Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit are equal to the deferred fees
outstanding, as the contractual rates and fees approximate those currently
charged to originate similar commitments. The estimated fair values of the
Company's financial instruments as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1997 1996
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Securities $ 2,017,811 2,039,368 2,610,975 2,629,268
Net loans (1) 2,958,604 3,007,071 2,449,393 2,481,779
- --------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $ 4,023,106 4,030,402 3,821,906 3,807,100
Repurchase agreements 164,602 165,224 254,471 255,407
Other borrowings 658,448 662,161 874,917 863,595
Capital Trust Securities 60,000 69,631 -- --
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) includes loans available for sale
38
<PAGE>
(23) Parent Company Financial Information
The condensed balance sheets of ONBANCorp, Inc. at December 31, follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 2,391 1,870
Due from subsidiary banks 8,704 10,986
Securities:
Trading 1,178 1,727
Available for sale 6,576 --
Investment in subsidiary banks 393,234 351,840
Other assets 8,248 1,217
- ------------------------------------------------------------------------------
Total assets $ 420,331 367,640
- ------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities: Accounts payable, accrued
dividends & other liabilities $ 23,278 7,589
Intercompany subordinated debentures 61,856 --
Total shareholders' equity 335,197 360,051
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 420,331 367,640
- ------------------------------------------------------------------------------
</TABLE>
The condensed statements of income for the years ended December 31, follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Net interest income $ 2,093 224 439
Gain (loss) on securities transactions 1,553 (63) 2,318
Dividends from subsidiary banks 19,000 66,000 43,000
- ---------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiary banks 22,646 66,161 45,757
Equity in undistributed earnings of
subsidiary banks 36,404 (20,777) 1,540
- ---------------------------------------------------------------------------------------------------
Total income 59,050 45,384 47,297
Operating expenses 10,499 3,778 2,417
- ---------------------------------------------------------------------------------------------------
Income before income taxes 48,551 41,606 44,880
Income taxes (benefit) (2,627) (1,358) 203
- ---------------------------------------------------------------------------------------------------
Net income 51,178 42,964 44,677
- ---------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
(23) Parent Company Financial Information (continued)
The condensed statements of cash flows for the years ended December 31, follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 51,178 42,964 44,677
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings of
subsidiary banks (36,404) 20,777 (1,540)
Net change in trading securities 549 63 14,209
Other 12,660 (879) 1,138
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,983 62,925 58,484
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (78,647) -- --
Proceeds from sale of securities available
for sale 72,741 -- --
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,906) -- --
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of intercompany subordinated
debentures 60,000 -- --
Proceeds from issuance of common stock 3,248 750 743
Purchase of treasury stock (65,373) (50,721) (18,068)
Redemption of preferred stock (924) (963) (8,360)
Cash dividends paid on common stock (17,519) (15,784) (19,737)
Cash dividends paid on preferred stock (988) (4,229) (4,649)
- ---------------------------------------------------------------------------------------------------
Net cash used by financing activities (21,556) (70,947) (50,071)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 521 (8,022) 8,413
Cash & cash equivalents at beginning of year 1,870 9,892 1,479
- ---------------------------------------------------------------------------------------------------
Cash & cash equivalents at end of year $ 2,391 1,870 9,892
- ---------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing
activities:
Change in net unrealized holding gain
(loss) on securities of subsidiaries $ 2,790 (1,217) 26,864
- ---------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Selected Quarterly Financial Data
Summarized quarterly financial data for the years ended December 31, 1997 and
1996 are as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended
(In thousands, except share data) Mar 31, 1997 June 30, 1997 Sept 30, 1997 Dec 31, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 92,628 96,752 97,886 98,424
Total interest expense 54,341 57,531 58,646 59,073
- -----------------------------------------------------------------------------------------------------------------
Net interest income 38,287 39,221 39,240 39,351
Provision for loan losses 1,796 1,791 1,799 1,782
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 36,491 37,430 37,441 37,569
Other operating income 9,799 9,559 9,691 11,585
Other operating expenses 26,955 27,389 27,485 27,516
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 19,335 19,600 19,647 21,638
Income taxes 7,187 7,367 6,959 7,529
- -----------------------------------------------------------------------------------------------------------------
Net income 12,148 12,233 12,688 14,109
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share (2)
Basic $ 0.88 0.93 0.98 1.11
Diluted $ 0.87 0.92 0.98 1.10
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended
(In thousands, except share data) Mar 31, 1996 June 30, 1996 Sept 30, 1996 Dec 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 94,827 91,031 93,251 95,736
Total interest expense 56,945 53,709 54,788 56,656
- -----------------------------------------------------------------------------------------------------------------
Net interest income 37,882 37,322 38,463 39,080
Provision for loan losses 1,950 1,950 1,950 1,963
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 35,932 35,372 36,513 37,117
Other operating income 8,514 8,992 10,375 8,381
Other operating expenses 26,213 26,190 32,632 (1) 25,579
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 18,233 18,174 14,256 19,919
Income taxes 6,667 6,513 6,966 7,472
- -----------------------------------------------------------------------------------------------------------------
Net income 11,566 11,661 7,290 12,447
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share (2)
Basic $ 0.77 0.80 0.49 0.93
Diluted $ 0.74 0.76 0.49 0.83
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $7,282,000 one time SAIF deposit insurance assessment.
(2) Summation of the quarterly net income per common share does not
necessarily equal the annual amount due to the averaging
effect of the number of shares throughout the year.
41
<PAGE>
EXHIBIT 21
As of December 31, 1997, the Registrant had three wholly owned subsidiaries,
OnBank & Trust Co., a New York trust company, Franklin First Savings Bank, a
Pennsylvania savings bank, and OnBank Capital Trust I, a Delaware statutory
business trust.
27
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
ONBANCorp, Inc.:
We consent to incorporation by reference in the registration statement Nos.
33-22113, 33-30813, 33-49504, 33-49506 and 33-49508 on Form S-8 of
ONBANCorp, Inc. of our report dated January 26, 1998, relating to the
consolidated balance sheets of ONBANCorp, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997, which report has been
incorporated by reference in the December 31, 1997 annual report on Form 10-K
of ONBANCorp, Inc.
/s/ KPMG Peat Marwick LLP
- ------------------------------
KPMG Peat Marwick LLP
Syracuse, New York
March 27, 1998
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 128,647 169,740 150,621
<INT-BEARING-DEPOSITS> 10,044 12,253 19,123
<FED-FUNDS-SOLD> 0 0 115,500
<TRADING-ASSETS> 1,178 1,727 1,790
<INVESTMENTS-HELD-FOR-SALE> 840,469 925,340 978,361
<INVESTMENTS-CARRYING> 1,176,164 1,683,908 1,761,692
<INVESTMENTS-MARKET> 1,197,721 1,702,201 1,797,286
<LOANS> 2,867,256 2,448,474 2,329,127
<ALLOWANCE> 39,064 37,840 34,583
<TOTAL-ASSETS> 5,319,570 5,417,877 5,567,059
<DEPOSITS> 4,023,106 3,821,906 3,808,273
<SHORT-TERM> 484,583 774,678 506,497
<LIABILITIES-OTHER> 78,217 106,532 105,033
<LONG-TERM> 338,467 354,710 758,490
0 0 0
0 2,342 2,516
<COMMON> 14,327 14,139 14,095
<OTHER-SE> 320,870 343,570 372,155
<TOTAL-LIABILITIES-AND-EQUITY> 5,319,570 5,417,877 5,567,059
<INTEREST-LOAN> 224,900 201,394 184,591
<INTEREST-INVEST> 159,362 170,003 244,078
<INTEREST-OTHER> 1,428 3,448 2,790
<INTEREST-TOTAL> 385,690 374,845 431,459
<INTEREST-DEPOSIT> 170,837 154,747 157,415
<INTEREST-EXPENSE> 229,591 222,098 278,944
<INTEREST-INCOME-NET> 156,099 152,747 152,515
<LOAN-LOSSES> 7,168 7,813 6,790
<SECURITIES-GAINS> 10,360 6,018 5,457
<EXPENSE-OTHER> 109,345 110,614 103,462
<INCOME-PRETAX> 80,220 70,582 71,564
<INCOME-PRE-EXTRAORDINARY> 51,178 42,964 40,155
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 51,178 42,964 40,155
<EPS-PRIMARY> 3.93 3.02 2.88
<EPS-DILUTED> 3.88 2.88 2.76
<YIELD-ACTUAL> 7.49 7.44 7.20
<LOANS-NON> 23,400 20,172 23,580
<LOANS-PAST> 4,624 2,464 2,586
<LOANS-TROUBLED> 2,033 4,441 2,792
<LOANS-PROBLEM> 33,195 20,833 23,985
<ALLOWANCE-OPEN> 37,840 34,583 33,775
<CHARGE-OFFS> 7,492 6,638 7,591
<RECOVERIES> 1,548 2,082 1,609
<ALLOWANCE-CLOSE> 39,064 37,840 34,583
<ALLOWANCE-DOMESTIC> 39,064 37,840 34,583
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
