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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 1995 Commission File No.: 0-18011
ONBANCorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 16-1345830
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
101 South Salina Street, Syracuse, New York 13202
(Address of principal executive office and Zip Code)
(315) 424-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share 13,868,691
(Title of Class) (Shares Outstanding)
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This report contains 18 pages
1
ONBANCorp, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets .
September 30, 1995, December 31, 1994,
and September 30, 1994......................................3
Condensed Consolidated Statements of
Income for the Three Months and
Nine Months ended September 30, 1995 and 1994...............4
Condensed Consolidated Statements of
Changes in Shareholders' Equity for the
Nine Months ended September 30, 1995 and 1994...............5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1995 and 1994.......6
Notes to Condensed Consolidated Financial Statements..........7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................10-17
PART II. OTHER INFORMATION.................................................18
Signatures..................................................................19
2
ONBANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
==================================================================================================================================
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
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ASSETS
Cash and due from banks $ 131,022 135,387 129,874
Federal funds sold and other 29,378 38,577 14,621
Securities:
Trading 5,606 26,024 16,444
Available for sale 698,158 710,767 1,546,568
Held to maturity, fair value of $3,278,955 at September 30, 1995,
$3,035,242 at December 31, 1994 and $2,882,079 at September 30, 1994 ,245,923 3,153,896 2,887,178
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Total securities 3,949,687 3,890,687 4,450,190
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Loans:
Portfolio, net of premium and discount 2,222,974 1,977,643 1,906,195
Allowance for loan losses (35,146) (33,775) (34,393)
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Net loans 2,187,828 1,943,868 1,871,802
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Loans available for sale 42,812 23,687 12,754
Premises and equipment, net 66,114 60,973 57,349
Due from brokers 25 446,916 --
Other assets 138,332 183,210 164,370
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TOTAL ASSETS $6,545,198 6,723,305 6,700,960
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing 303,478 303,016 285,698
Interest bearing:
Savings, NOW and money market 1,331,844 1,448,903 1,521,359
Time deposits less than $100,000 1,738,991 1,565,708 1,577,652
Time deposits $100,000 and greater 451,527 475,716 375,954
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Total deposits 3,825,840 3,793,343 3,760,663
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Repurchase agreements 867,823 1,058,316 1,413,263
Other borrowings 1,291,560 1,158,772 1,089,402
Due to brokers 93,660 284,232 --
Other liabilities 84,481 65,706 61,132
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Total liabilities 6,163,364 6,360,369 6,324,460
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Shareholders' equity:
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized;
Series B 6.75% Cummulative Convertible; shares outstanding: 9/30/95 --
2,608,800; 12/31/94 and 9/30/94--2,817,500 2,609 2,818 2,818
Common stock, par value $1.00 per share; 56,000,000 shares authorized;
shares issued: 9/30/95--14,084,991; 12/31/94--14,050,321;
9/30/94--14,037,994 14,085 14,050 14,038
Additional paid-in capital 157,993 162,960 162,404
Retained earnings 246,868 229,374 272,890
Net unrealized holding loss on securities, net of deferred
taxes of $(22,030) at September 30,1995, $(30,544) at
December 31, 1994 and $(50,134) at September 30, 1994 (33,045) (45,816) (75,200)
Treasury Stock, at cost, 216,300 common shares (6,376) -- --
Guarantee of ESOP indebtedness (300) (450) (450)
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Total shareholders' equity 381,834 362,936 376,500
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,545,198 6,723,305 6,700,960
===================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
ONBANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
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FOR THE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
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Interest income:
Loans $47,794 38,723 135,507 112,525
Mortgage-backed securities 52,920 51,816 150,509 136,191
Other securities 11,135 10,669 34,183 32,299
Federal funds sold and other 621 321 1,892 1,115
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Total interest income 12,470 101,529 322,091 282,130
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Interest expense:
Deposits 39,902 30,850 115,749 77,629
Borrowings:
Repurchase agreements 13,906 14,612 40,248 41,936
Other 19,848 13,438 52,318 37,959
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Total interest expense 73,656 58,900 208,315 157,524
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Net interest income 38,814 42,629 113,776 124,606
Provision for loan losses 1,610 1,510 4,990 6,128
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Net interest income after provision for loan losses 37,204 41,119 108,786 118,478
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Other operating income:
Mortgage banking 1,247 3,651 2,441 4,586
Service charges 3,881 3,669 11,385 10,704
Net gain on securities 104 832 2,874 674
Other 1,307 1,191 3,761 5,427
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Total other operating income 6,539 9,343 20,461 21,391
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Other operating expenses:
Salaries and employee benefits 10,219 10,505 30,424 31,033
Building, occupancy and equipment 4,112 4,148 13,227 13,270
Deposit insurance premiums 602 1,890 4,944 5,307
Contracted data processing 2,475 2,585 7,248 3,988
Legal and financial services 697 658 2,470 2,303
Other 5,913 6,530 18,191 17,163
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Total other operating expenses 24,018 26,316 76,504 73,064
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Income before income taxes 19,725 24,146 52,743 66,805
Income taxes 7,059 9,291 20,016 25,709
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Net income $12,666 14,855 32,727 41,096
===================================================================================================================================
INCOME PER COMMON SHARE:
Primary $ 0.82 0.96 2.06 2.64
Fully diluted 0.78 0.91 2.00 2.51
===================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
4
ONBANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
Net
Unrealized
Holding
Additional Gain Guarantee
Preferred Common Paid-in Retained (Loss) on Treasury of ESOP
Stock Stock Capital Earnings Securities Stock Indebtedness Total
===================================================================================================================================
Balance at December 31, 1993 $2,818 13,980 161,633 245,872 6,935 -- (600) 430,638
Net income -- -- -- 41,096 -- -- -- 41,096
Stock issued under:
Stock Option Plans -- 44 413 -- -- -- -- 457
Employee Stock Purchase Plan -- 14 358 -- -- -- -- 372
Cash dividends declared:
Preferred ($1.27 per share) -- -- -- (3,566) -- -- -- (3,566)
Common ($.75 per share) -- -- -- (10,512) -- -- -- (10,512)
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Changes in net unrealized holding
loss on securities, net of income
tax effect of $(55,311) -- -- -- -- (82,135) -- -- (82,135)
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Balance at September 30, 1994 $2,818 14,038 162,404 272,890 (75,200) -- (450) 376,500
===================================================================================================================================
Balance at December 31, 1994 $2,818 14,050 162,960 229,374 (45,816) -- (450) 362,936
Net income -- -- -- 32,727 -- -- -- 32,727
Stock issued under:
Stock Option Plans -- 18 158 -- -- -- -- 176
Employee Stock Purchase Plan -- 17 354 -- -- -- -- 371
Cash dividends declared:
Preferred ($1.27 per share) -- -- -- (3,460) -- -- -- (3,460)
Common ($.84 per share) -- -- -- (11,773) -- -- -- (11,773)
Preferred Stock Repurchased (209) -- (5,479) -- -- -- (5,688)
Common Stock Repurchased -- -- -- -- -- (6,376) -- (6,376)
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Changes in net unrealized holding
gain on securities, net of income
tax effect of $8,514 -- -- -- -- 12,771 -- -- 12,771
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Balance at September 30, 1995 $2,609 14,085 157,993 246,868 (33,045) (6,376) (300) 381,834
===================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
ONBANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
===================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 95,003 149,872
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INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 768,274 573,864
Proceeds from maturities of and principal collected on securities
available for sale 249,300 214,277
Proceeds from maturities of and principal collected on securities held to
maturity 540,122 558,993
Purchases of securities available for sale (498,216) (355,703)
Purchases of securities held to maturity (752,584) (1,899,829)
Net change in loans (254,776) (172,942)
Purchases of premises and equipment (9,382) (4,556)
Cash recieved in purchase of Columbia Branches, net of transaction costs paid -- 248,508
Other 4,910 4,106
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NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 47,648 (833,282)
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FINANCING ACTIVITIES
Net decrease in deposit accounts excluding time deposits (116,597) (59,759)
Net increase in time deposits 149,094 541,328
Net increase (decrease) in repurchase agreements (294,606) 162,213
Net increase (decrease) in other borrowings (28,436) 27
Advances from Federal Home Loan Bank 895,064 364,093
Repayment of advances from Federal Home Loan Bank (732,021) (289,857)
Repayments of collateralized mortgage obligations (1,819) (7,808)
Net proceeds from issuance of common stock 547 829
Repurchase of preferred stock (5,688) --
Purchase of treasury stock (6,376) --
Cash dividends paid on common stock (11,822) (10,472)
Cash dividends paid on preferred stock (3,555) (3,566)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (156,215) 697,028
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,564) 13,618
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 173,964 130,877
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $160,400 144,495
===================================================================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 204,135 154,405
Income taxes 19,480 37,202
Non-cash investing and financing activities:
Securitization of mortgage loans 10,518 232,027
Mortgage loans transferred to other real estate owned 3,370 2,669
Transfer of securities to held to maturity -- 1,265,441
Transfer of securities to trading -- 12,621
===================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
6
ONBANCorp, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and related
notes should be read in conjunction with the consolidated financial statements
and related notes thereto included in the Company's Form 10-K for the year ended
December 31, 1994.
The condensed consolidated financial statements included herein reflect all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position at September 30, 1995 and 1994 and the results of operations for the
three and nine months ended September 30, 1995 and 1994.
Certain reclassifications have been made to prior period amounts for
consistency in reporting.
(2) ACQUISITION
On June 3, 1994, the Company acquired from the Resolution Trust Corporation
(RTC) $273 million of deposits at 9 branches of Columbia Banking Federal Savings
Association, Rochester, New York. These branches were acquired at a premium of
$24.9 million.
(3) SECURITIES
On July 1, 1994, U.S. Government agency securities with an amortized cost
of $369 million and an unrealized loss of $25.7 million were transferred from
available for sale to held to maturity. On August 31, 1994, collateralized
mortgage obligations with an amortized cost of $968 million and an unrealized
loss of $45.9 million were transferred from available for sale to held to
maturity. The unrealized loss shall continue to be reported in shareholders'
equity but shall be amortized over the remaining life of the security as an
adjustment to yield using the interest method. The amortization of the
unrealized loss reported in equity will offset the effect on interest income of
the amortization of the discount.
(4) LOANS
The Financial Accounting Standards Board issued Statement 114 Accounting by
Creditors for Impairment of a Loan as amended by Statement 118, Accounting by
Creditors for Impairment of a Loan - Income and Disclosure. These statements
prescribe recognition criteria for loan impairment, generally related to
commercial type loans, and measurement methods for certain impaired loans and
all loans whose terms are modified in troubled debt restructuring subsequent to
the adoption of these statements. A loan is considered impaired when it is
probable that the borrower will be unable to repay the loan according to the
original contractual terms of the loan agreement.
As of January 1, 1995, the Company has adopted the provisions of SFAS No.
114 and SFAS No. 118 and has provided the required disclosures. The effect of
adoption was not material to the consolidated financial statements. As of
January 1, 1995, all of the Company's in substance foreclosed assets were
reclassified into impaired loan status as required by SFAS No. 114. For all
prior periods presented, all amounts related to in substance foreclosures have
also been reclassified. These reclassifications did not impact the Company's
consolidated financial condition or results of operations.
As a result of the adoption of SFAS No. 114, the allowance for possible
loan losses related to impaired loans that are identified for evaluation in
accordance with SFAS No. 114 is based on the present value of expected cash
flows discounted at the loan's initial effective interest rate, except that as a
practical expedient, impairment may be measured at the loan's observable market
price, or the fair value of the collateral for certain loans where
7
repayment of the loan is expected to be provided solely by the underlying
collateral (collateral dependent loans). The Company's impaired loans are
generally collateral dependent. The Company considers estimated costs to sell,
on a discounted basis, when determining the fair value of collateral in the
measurement of impairment of those costs are expected to reduce the cash flows
available to repay or otherwise satisfy the loans. Prior to the adoption of SFAS
No. 114 and 118, the allowance for possible loan losses related to these loans
was based on estimated undiscounted cash flows or the fair value of the
collateral, less estimated costs to sell for collateral dependent loans.
Other real estate owned included both formally foreclosed and in-substance
foreclosed real properties. In accordance with SFAS No. 114, a loan is
classified as an in-substance foreclosure when the Company has taken possession
of the collateral regardless of whether formal foreclosure proceedings have
taken place. Prior to the adoption of SFAS No. 114 and SFAS No. 118,
in-substance foreclosed properties included those properties where the borrower
had little or no remaining equity in the property considering its fair value
remaining equity; where repayment was only expected to come from the operation
or sale of the property; and where the borrower had effectively abandoned
control of the property or it was doubtful that the borrower would be able to
rebuild equity in the property.
At September 30, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 totaled $8.2 million. Included in this amount
is $6.0 million of impaired loans for which the related allowance for credit
losses is $2.2 million. In addition, included in the total impaired loans at
September 30, 1995 is $2.2 million of impaired loans that as a result of the
adequacy of collateral values do not have an allowance for credit losses
determined in accordance with SFAS No. 114. The average recorded investments in
impaired loans during the nine months ended September 30, 1995 was approximately
$10.1 million.
Impaired loans are included in non-performing loans, generally as
non-accrual loans. Commercial type loans past due greater than 90 days and still
accruing are generally not considered to be impaired as the Company expects to
collect all amounts due, including interest accrued at the contractual interest
rate for the delinquent period. Restructured loans amounting to $2.7 million
were restructured prior to the adoption of SFAS No. 114, and are therefore not
considered impaired.
For the nine months ended September 30, 1995 the Company recognized
interest income on those impaired loans of $182 thousand which included $182
thousand of interest income recognized using the cash basis method of income
recognition.
Potential problem loans at September 30, 1995 amounted to $24.0 million.
"Potential problem loans" are defined as loans which are not included with past
due and non-accrual loans discussed above, but about which management, through
normal internal credit review procedures, has information about possible credit
problems which may result in the borrowers inability to comply with the present
loan repayment terms. Of the $24.0 million in potential problem loans, none are
considered impaired under SFAS No. 114. There have been no loans classified for
regulatory purposes as loss, doubtful, or substandard that are not included
above or which caused 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.
(5) SHAREHOLDERS' EQUITY
In 1995 the Company repurchased and retired 208,700 shares of Series "B"
Cumulative Convertible Preferred Stock at a cost of $5.688 million and
repurchased 216,300 shares of Common Stock at a cost of $6.376 million. The
Company intends to continue to acquire, as market conditions permit, both
preferred and common stock up to the limit of 5% of fully diluted shares which
was announced during the first quarter of 1995.
Primary earnings per share are based upon the weighted average number of
common shares and common share equivalents outstanding, after provision for
dividends on preferred shares. The average number of shares used to compute
primary earnings per share was 14,173,117 and 14,209,641 for the three months
ended September 30, 1995 and 1994, respectively; and 14,196,745 and 14,207,552
for the nine months ended September 30, 1995 and 1994, respectively.
8
Fully diluted earnings per share are based upon the weighted average number
of common shares and common share equivalents outstanding and the assumed
conversion of the preferred shares. The average number of shares used to compute
fully diluted earnings per share was 16,275,970 and 16,403,955 for the three
months ended September 30, 1995 and 1994, respectively; and 16,385,824 and
16,401,867 for the nine months ended September 30, 1995 and 1994, respectively.
9
ONBANCorp, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
ONBANCorp, Inc.'s ("ONBANCorp" or "the Company") results of operations are
dependent upon the results of operations of its wholly owned subsidiary banks:
OnBank & Trust Co., Franklin First Savings Bank and OnBank ("the Banks").
On June 3, 1994 the Company purchased nine branches with $273 millon in
deposits of Columbia Banking Federal Savings Association of Rochester, New York
from the RTC.
Third quarter net income was $12.7 million compared to $14.9 million for
the 1994 third quarter and first nine months net income was $32.7 million
compared to $41.1 million for the prior year period. Fully diluted net income
per common share was $.78 compared to $.91 for the 1994 third quarter and 1995
first nine months fully diluted net income per common share $2.00 compared to
$2.51 prior year period. Book value per common share increased to $22.83 at
September 30, 1995 from $20.82 at December 31, 1994 and from $21.80 at September
30, 1994. A regular dividend of $.28 per common share was declared for the third
quarter of 1995 and paid on October 2, 1995. Regular dividends of $.84 per
common share have been declared and paid during the first nine months of 1995.
Return on average equity (ROE) was 13.1% and 11.6% for the three and nine month
periods ended September 30, 1995 compared to 15.7% and 13.7% for the respective
prior year periods. Return on Average Assets (ROA) was .78% and .69% for the
three and nine month periods ended September 30, 1995 compared to .89% and .88%
for the respective prior year periods.
Net Interest Income
The operating results of the three and nine month periods ended September
30, 1995 have been significantly influenced by the balance sheet repositioning
activity which the Company undertook late in 1994. The net effect of the
activity was to reduce the duration and the absolute size of the
available-for-sale portfolio and to pay down existing short-term borrowings to
reduce interest rate risk which had been created by the rapidly rising interest
rates in 1994. The Company's one-year interest rate sensitivity is about 97% in
balance at September 30, 1995 when measured on a duration basis. The Company is
smaller at September 30, 1995 than it was at either September, 30 or December
31, 1994 and less sensitive to rapid increases in interest rates than it was
during the fourth quarter of 1994.
Net interest income was $38.8 million and $113.8 million for the three and
nine month periods ended September 30, 1995 down from the $42.6 million and
$124.6 million recorded in the respective prior year periods. Average loans of
$2.089 billion for the first nine months of 1995 were $297 million or 17%
improved over the first nine months of 1994 as a result of the Company's
continuing focus on expanding its loan generation. The yield on these average
loans also improved by .27% to 8.67% for the first nine months of 1995 compared
to the 8.40% for the prior year period. The volume of average mortgage-backed
securities for the first nine months of 1995 declined to $3.106 billion or by
$174 million compared to the prior year period. The yield on these
mortgage-backed securities increased by .93% to 6.48% as a combined result of
the reinvestment of part of the proceeds from the sale of securities during the
fourth quarter 1994 repositioning and the scheduled repricing of certain
adjustable-rate mortgage-backed securities which the Company had acquired prior
to year-end 1994. Other securities 1995 first nine month average balances
declined by $70 million to $791 million and the yield increased by .76 to 5.78%
compared to the 1994 first nine months. Average loans increased by more than the
decrease in average mortgage-backed securities and other securities, therefore,
average interest earning assets of $6.025 billion were $57 million more for the
first nine months of 1995 than for the first nine months of 1994. The yield on
total earning assets increased by .83% to 7.15% for the nine months of 1995
compared to the first nine months of 1994. The Company intends to continue its
efforts to increase its core lending business as a percentage of overall earning
assets.
10
The average balance of savings deposits increased by $140 million to $816
million for the first nine months of 1995 compared to the prior year period. The
cost of these deposits also increased by .28% to 2.84% for the first nine months
of 1995 compared to the prior year period. Average time deposits increased $527
million to $2.136 billion for the first nine months of 1995 compared to the
first nine months of 1994. The costs of these deposits also increased by 1.29%
to 5.53% for the first nine months ended September 30, 1995. The increase in
time deposits was the result of increases in municipal and retail brokered
certificates of deposit being greater than the decrease in retail consumer
certificates of deposit. The increase in cost of time deposits was directly
related to the increases in market interest rates which occurred on a continuing
basis during 1994. Average interest bearing transaction accounts (Money market,
NOW and excrow deposits) decreased $231 million to $560 million and the cost
increased .11% to 2.41% when comparing the first nine months of 1995 to the
first nine months of 1994. The decrease in these accounts is mainly attributable
to higher market interest rates during the second half of 1994 and the
associated consumer preferecnce for higher yielding certificates of deposit, as
well as, alternative investments such as stocks and bonds. Average total
interest bearing deposits increased by $436 million or 14% to $3.512 billion for
the first nine months of 1995 compared to the first nine months of 1994.
Increases in municipal deposits, brokered deposits and the effect of the
Rochester area branches acquired in June, 1994 were the major factors affecting
the increase in interest bearing deposits.
Total average borrowings (including repurchase agreements) of $2.097
billion for the first nine months of 1995 are $346 million or 14% less than the
$2.443 billion for the first nine months of 1994. Rising interest rates during
1994 also affected the costs of the borrowings with repurchase agreements
increasing by 1.99% to 5.97% and other borrowings increasing .95% to 5.85% when
comparing the first nine months of 1995 to the first nine months of 1994. The
Company has extended the average maturity of its new borrowings during the first
nine months of 1995 with more than $1.2 billion being extended to approximately
two years maturity. The essentially flat slope of the yield curve provides the
opportunity for extending liabilities and thereby helping to protect against
rising interest rates, however, the offset is that the Company's net interest
income will not benefit as much from declining interest rates. The increase in
average deposits was greater than the decrease in average borrowings when
comparing the first nine months of 1995 to the first nine months of 1994. As a
result of rising interest rates during 1994, the cost of total interest bearing
liabilities increased by 1.15% to 4.97% for the first nine months of 1995
compared to the first nine months of 1994.
Interest rates rose dramatically during 1994 and the full impact was not
realized until the first nine months of 1995 because of the time lag in the
repricing of various assets and liabilities. The effect of the increases in cost
of 1.15% being .32% greater than the .83% increase in the yield resulted in the
net interest spread declining from 2.50% to 2.18% for the first nine months of
1995 compared to the first nine months of 1994. The effects of average interest
bearing liabilities increasing by more than interest earning assets was
partially offset by the increase in non-interest bearing liabilities for the
first nine months of 1995 compared to the first nine months of 1994, however,
the net interest margin, which is affected by the relative average balances of
interest earning assets and interest bearing liabilities, declined by .27% to
2.52% for the first nine months of 1995 compared to the first nine months of
1994.
The Federal Reserve increased interest rates on seven separate occasions
between the first quarter of 1994 and the first quarter of 1995, one of the most
dramatic inceases in recent history. Many of the adjustable-rate mortgage-backed
securities and loans held by the Banks reached their annual caps during this
rapid increase in rates and potential yield increases were limited over this
time period and theoretically over the next several years if rates continued to
rapidly rise. During periods of unusually rapidly rising rates the contracual
annual caps can have a limiting effect on annual yield increases and on the
market value of the loans and securities. Market rate borrowings are not limited
by the same type of caps and will generally increase in tandem with increasing
market rates of interest. Consumer deposit costs are administered by the Banks
and historically have lagged market rates of interest during periods of rising
rates. Therefore, a continuation of increasing interest rates could have a
compressing effect on the Bank's net interest margins over time. The actions
take by the Banks during the fourth quarter of 1994 and the first nine months of
1995 to reposition a significant portion of the available-for-sale securities
portfolio, to reduce the volume of financing transactions and to selectively
lengthen borrowings have lessened the Banks' interest rate sensitivity, not
eliminated it.
As interest rates rose during 1994 the mix of residential real estate loans
also changed so that approximately 37% of these loans were adjustable rate. The
higher yields of fixed rate loans with inherent prepayment risk in a declining
interest rate scenario made these loans more acceptable to retain in portfolio.
Given
11
the fact that interest rates have declined since December 31, 1994, the
Banks have again begun selling fixed rate real estate loan production to limit
interest rate risk. Loans available for sale, consisting relatively equal
balances of education loans and fixed rate mortgage loans, were $43 million at
September 30, 1995. The Banks continually monitor their overall interest rate
risk profiles and, based upon that profile and market conditions, the Banks
determine whether or not to sell loan production with the ultimate objective
being to minimize interest rate risk and to increase net income and, therefore,
increase shareholder value.
This table sets forth for the nine months ended September 30, 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.
===================================================================================================================================
1995 1994
(DOLLARS IN THOUSANDS) AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS(1)
Loans 2,089,412 135,507 8.67% 1,791,931 112,525 8.40%
Mortgage-backed securities 3,105,799 150,509 6.48% 3,279,532 136,191 5.55%
Other Securities 790,798 34,183 5.78% 860,556 32,299 5.02%
Federal funds sold and other 39,107 1,892 6.47% 35,836 1,115 4.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 6,025,116 322,091 7.15% 5,967,855 282,130 6.32%
Non-interest earning assets 325,438 293,222
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $6,350,554 6,261,077
===================================================================================================================================
INTEREST BEARING LIABILITIES
Savings deposits 816,324 17,354 2.84% 676,095 12,939 6.32%
Time deposits 2,135,704 88,281 5.53% 1,609,088 51,058 4.24%
Money market accounts, NOW acounts,
and escrow deposits 560,318 10,114 2.41% 790,865 13,632 2.30%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 3,512,346 115,749 4.41% 3,076,048 77,629 3.37%
Repurchase agreements 901,011 40,248 5.97% 1,407,550 41,936 3.98%
Other borrowings 1,196,067 52,318 5.85% 1,035,591 37,959 4.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 5,609,424 208,315 4.97% 5,519,189 157,524 3.82%
Non-interest bearing deposits 296,354 285,415
Non-interest bearing liabilities 66,654 54,307
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,972,432 5,858,911
Shareholders' equity 378,122 402,166
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,350,554 6,261,077
Net interest income $ 113,776 124,606
===================================================================================================================================
Interest rate spread 2.18% 2.50%
Net interest margin(2) 2.52% 2.79%
Total interest earning assets to total interest
bearing liabilities 1.07X 1.08X
Average equity to average assets 5.95% 6.42%
===================================================================================================================================
(1) Nonaccruing loans, which are immaterial, have been included in interest earning assets.
(2) Computed by dividing net interest income by total interest earning assets.
12
The following table presents changes in interest income and interest
expense attributable to: changes in volume (changes in average balance or volume
multiplied by prior year rate), changes in rate (change 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 amount of the change in each.
1995 COMPARED TO 1994
INCREASE (DECREASE)
(dollars in thousands) VOLUME RATE NET
- -----------------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Loans $ 19,254 3,728 22,982
Mortgage-backed securities (7,520) 21,838 14,318
Other securities (2,755) 4,639 1,884
Federal funds sold and other 110 667 777
- -----------------------------------------------------------------------------------------
Total change in income from interest earning
assets 9,089 30,872 39,961
- -----------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Savings deposits 2,891 1,524 4,415
Time deposits 19,291 17,932 37,223
Money market accounts, NOW accounts,
and escrow deposits (4,140) 622 (3,518)
- ------------------------------------------------------------------------------------------
Total change in interest expense on deposits 18,042 20,078 38,120
Repurchase agreements (18,243) 16,555 (1,688)
Other borrowings 6,379 7,980 14,359
- ------------------------------------------------------------------------------------------
Total change in expense from interest bearing 6,178 44,613 50,791
liabilities
- ------------------------------------------------------------------------------------------
Net interest income $ 12,911 (13,741) (10,830)
==========================================================================================
Allowance for Loan Losses. Management's 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.
Non-performing loans plus other real estate owned represented .49% of total
assets at September 30, 1995. The Company's provision for loan losses of $1.6
million and $5.0 million for the three and nine month periods ended September
30, 1995 were slightly more than the $1.5 million and less than the $6.1 million
recorded in the respective prior year periods. These provisions reflect both the
increase in overall lending which has occurred in 1995 and the continuing
decrease in non-performing loans to $27.4 million at September 30, 1995 from
$29.8 million at December 31, 1994 and a year-end high of $39.4 million at
December 31, 1992. The coverage ratio of allowance for loan losses to
nonperforming loans increased from 113% at year-end 1994 to 128% at September
30, 1995. The allowance as a percent of gross loans was 1.58% at September 30,
1995. The ratio of delinquent loans as a percentage of gross loans was 1.2% at
September 30, 1995. Loan quality remains strong at ONBANCorp.
13
The following table sets forth the activity in the allowance for loan
losses for the periods indicated:
SEPTEMBER 30, -----------------------DECEMBER 31,-------------------------
(Dollars in Thousands) 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning balance $33,775 32,717 31,722 13,064 10,937 5,238
Charge-offs
Mortgage loans 2,971 3,706 748 1,623 1,687 2,487
Commercial loans 209 1,746 7,303 8 6 --
Other loans 1,653 2,686 3,684 639 726 481
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 4,833 8,138 11,735 2,270 2,419 2,968
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries
Mortgage loans 416 236 1 30 -- 6
Commercial loans 293 598 1,341 9 -- --
Other loans 505 724 1,091 93 86 70
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,214 1,558 2,433 132 86 76
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 3,619 6,580 9,302 2,138 2,333 2,892
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 4,990 7,638 10,297 5,900 4,460 8,591
Allowance of combined banks -- -- -- 14,896 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Ending balance $35,146 33,775 32,717 31,722 13,064 10,937
===================================================================================================================================
Ratio of net charge-offs to average loans
outstanding 0.17% 0.35% 0.47% 0.14% 0.15% 0.19%
===================================================================================================================================
The following table sets forth the allocation of the allowance for loan
losses:
SEPTEMBER 30, ------------------------DECEMBER 31,------------------------
(Dollars in Thousands) 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage loans $16,441 17,374 17,313 15,237 9,122 8,369
Mortgage loans to total loans 59.71% 59.74% 60.89% 61.32% 72.22% 77.29%
Construction loans $ 1.060 340 340 150 -- --
Construction loans to total loans 1.98% 1.58% 1.64% 1.64% 1.21% 1.04%
Commercial loans $11,730 10,676 10,856 10,774 1,067 979
Commercial loans to total loans 11.59% 11.32% 9.53% 9.54% 1.72% 1.17%
Auto Leases $ 341 50 -- -- -- --
Auto Leases to total loans 1.49% 0.24% -- -- -- --
Other loans $ 5.547 5.335 4.208 5,561 2,875 1,589
Other loans to total loans 25.23% 27.12% 27.94% 27.50% 24.85% 20.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $35,146 33,775 32,717 31,722 13,064 10,937
===================================================================================================================================
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.
14
The following table sets forth information with respect to loans delinquent
for 90 days or more, restructured loans and other nonperforming assets:
SEPTEMBER 30, -------------------- DECEMBER 31,--------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993 1992 1991 1990-
- -----------------------------------------------------------------------------------------------------------------------------------
Delinquent mortgage loans:
Conventional $12,511 12,691 11,436 13,275 10,940 8,600
FHA and VA 717 612 905 1,155 1,055 1,005
Multi family and commercial 7,509 8,591 7,546 7,864 3,735 3,368
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquent mortgage loans $20,737 21,894 19,887 22,294 15,730 12,973
- -----------------------------------------------------------------------------------------------------------------------------------
As a percentage of gross mortgage loans 1.5% 1.8% 1.7% 1.7% 1.4% 1.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Delinquent commercial loans: $ 4,171 5,593 6,655 9,782 357 290
- -----------------------------------------------------------------------------------------------------------------------------------
As a percentage of gross commercial loans 1.6% 2.5% 3.6% 4.9% 1.4% 1.6%
- -----------------------------------------------------------------------------------------------------------------------------------
Delinquent other loans:
Home equity $ 783 720 414 528 389 242
Guaranteed student 124 157 97 902 5,829 8,873
Loans to individuals 1,550 1,396 1,651 1,815 1,033 837
Autos Leases -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquent other loans $ 2,457 2,273 2,162 3,245 7,251 9,952
- -----------------------------------------------------------------------------------------------------------------------------------
As a percentage of gross other loans 0.4% 0.4% 0.4% 0.6% 1.9% 3.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Delinquent loans as a percentage of gross loans 1.2% 1.5% 1.5% 1.7% 1.5% 1.5%
===================================================================================================================================
Nonperforming loans:
Non-accrual loans $22,015 22,525 25,381 30,236 14,999 12,675
Accruing loans delinquent 90 days or more 2,604 2,386 3,323 5,085 8,339 10,540
Restructured loans 2,746 4,849 5,559 4,053 7,991 9,802
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 27,365 29,760 34,263 39,374 31,329 33,017
Other nonperforming assets:
Other real estate owned 4,170 5,431 10,719 17,332 6,893 6,656
Repossessed assets 588 335 666 327 210 299
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $32,123 35,526 45,648 57,033 38,432 39,972
===================================================================================================================================
Allowance for loan losses as a percentage of non-
performing loans 128.43% 113.49% 95.49% 80.57% 41.70% 33.13%
Nonperforming assets as a percentage of total
assets 0.49% 0.53% 0.79% 1.21% 1.13% 1.43%
==================================================================================================================================
15
OTHER OPERATING INCOME
Other operating income, which is generated by mortgage banking activities,
service charges, security transactions and miscellaneous other sources,
decreased by $2.8 million and $.9 million for the three and nine month periods
ended September 30, 1995 compared to the respective prior year periods.
Mortgage banking income decreased by $2.4 million and $2.1 million for the
three and nine month periods ended September 30, 1995 compared to the respective
prior year periods. The Company recognized a $2.7 million gain on the sale of
servicing during the third quarter of 1994. Absent this nonrecurring gain the
mortgage banking income increased in the three and nine month periods ended
September 30, 1995 compared to the respective prior year periods. The volume of
loans serviced for others has decreased from $1.253 billion at September 30,
1994 to $1.147 billion at September 30, 1995.
Service charges increased $.2 million or 5.8% and $.7 million or 6.4% for
the three and nine month periods ended September 30, 1995 compared to the
respective prior year periods. Increasing volumes of commercial banking business
and the associated fees are primarily responsible for these increases. The
Company intends to continue to emphasize the growth of "core" commercial banking
in the form of deposit growth and electronic fee generated business. For
example, OnBank & Trust Co. recently won the bid to be the sole provider of
ATM's at almost all (26) New York State Thruway Service Areas. This type of
activity will provide additional fee income.
Gains on the sale of securities were $.7 million less and $2.2 million
greater in the three and nine month periods ended September 30, 1995 compared to
the respective prior year periods. These gains generally reflect improvements in
value in the trading account and sale of selected available-for-sale securities.
OTHER OPERATING EXPENSES
Other operating expenses decreased $2.3 million and increased $3.4 million
for the three and nine month periods ended September 30, 1995 compared to the
respective prior year periods. A reduction of FDIC insurance premiums of $1.3
million for the third quarter of 1995 along with approximately $1.0 million of
other operating efficiencies related primarily to systems consolidations
accounted for the $2.3 million decrease. The FDIC assessment reduction and a
portion of the other reductions are expected to continue. The $3.4 million
increase on a year to year basis is primarily related to the acquisition of nine
branches in the Rochester market area in June of 1994. Incremental goodwill
amortization of $1.5 million for the nine month period ended September 30, 1995
compared to the prior year period and the additional costs of operating the
branches account for the majority of the increase. The increased volume of
banking activity and the associated expenses also influenced the increase in the
year over year operating expenses, however, when compared to almost any peer
group the Company's expenses to average assets ratio of 1.61% for the first nine
months and 1.48% for the third quarter of 1995 is favorable.
Congress currently has proposed legislation to recapitalize the Savings
Association Insurance Fund. If enacted in its current form, the Banks' one-time
FDIC assessment would be approximately $10 million.
DIVIDENDS
Payments of dividends by ONBANCorp on its common and preferred stock is
subject to various regulatory and tax restrictions. During the three and nine
month periods ended September 30, 1995 the Company declared dividends of $.28
and $.84 respectively, per common share amounting to $3.9 million and $11.8
million, respectively. For the same periods the Company declared dividends of
$.42 and $1.27 respectively, per preferred share amounting to $1.1 and $3.5
million, respectively. These dividends were paid in April, July and October of
1995 to appropriate shareholders of record.
LIQUIDITY
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. Net cash provided by operating activities
decreased to $71 million for the first nine months of 1995 from $150 million for
the prior year period.
16
Investing activities provided $71 million primarily from sales of securities
available for sale. The major use of financing activity funds was to reduce
various types of borrowings with total uses of cash from financing activities
totaling $156 million. Cash and cash equivalents of $160 million at September
30, 1995 were $16 million greater than at September 30 , 1994.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
The capital to asset ratio was 5.8% on September 30, 1995 as measured by
shareholders' equity of $382 million and assets of $6.545 billion. ONBANCorp's
capital ratios exceed all regulatory requirements including the total risk
adjust capital ratio of 14.4% which is almost double the regulatory requirements
of 8.0%.
17
PART II. OTHER INFORMATION
-----------------
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONBANCorp, INC.
/s/ Robert J. Bennett
--------------------------------
DATE: November 13, 1995 Chairman, President
and Chief Executive Officer
/s/ Robert J. Berger
--------------------------------
DATE: November 13, 1995 Senior Vice President, Treasurer
and Chief Financial Officer
19