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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, 1995 Commission File No.: 0-18011
ONBANCorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 16-1345830
(State of Incorporation) (I.R.S. Employer Identification No.)
101 South Salina Street, Syracuse, New York 13202
(Address of principal executive office and Zip Code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Series B 6.75% Cumulative Convertible Preferred 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 March 21, 1996, the aggregate market value of the 12,871,863 shares of
Common Stock of the Registrant outstanding on such date, excluding the 654,357
shares held by all directors and executive officers of the Registrant as a
group, was $431,207,410. This figure is based on the last sale price of $33.50
per share of the Registrant's Common Stock on March 21, 1996.
Number of shares of Common Stock outstanding as of March 21, 1996: 13,526,220.
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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, 1995 are incorporated by reference into Part 11, Items 5, 6, 7 and 8 of this
Form 10-K.
(2) Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in April 1996 are incorporated by reference into Part
III, Items 10 - 13 of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1995
ONBANCorp, INC.
PAGE #
PART I
Item 1. Business.......................................................................................... 3
Item 2. Properties........................................................................................ 24
Item 3. Legal Proceedings................................................................................. 24
Item 4. Submission of Matters to Vote of Security Holders................................................. 24
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.............................. 24
Item 6. Selected Financial Data........................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation...................................................................................... 24
Item 8. Financial Statements and Supplementary Data....................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................................. 25
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 25
Item 11. Executive Compensation............................................................................ 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................................................ 25
Item 13. Certain Relationships and Related Transactions.................................................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 25
2
PART I
ITEM 1. BUSINESS
General. ONBANCorp, Inc. (the "Company" or "ONBANCorp") is a Delaware
chartered bank holding company which operates three wholly owned subsidiaries,
OnBank & Trust Co., OnBank 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 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 acquired nine branches with $.3
billion in deposits in the Rochester metropolitan area and accounted for the
acquisition using the purchase method.
Diversified financial services are offered through 122 locations in the
upstate New York communities of Syracuse, Auburn, Rome, Utica, Buffalo,
Rochester, Binghamton, Poughkeepsie, and Albany, and Scranton/Wilkes-Barre,
Pennsylvania. 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, 1995, ONBANCorp had
total consolidated assets of $5.6 billion, deposits of $3.8 billion and
shareholders' equity of $388.8 million. At December 31, 1995, 66% of the
Company's earning assets were guaranteed by various government instrumentalities
or were secured by residential mortgages, and the remainder consisted primarily
of other loans and investment grade securities.
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 TradeStar
Investments, 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 this activity with
Liberty Securities Corporation.
3
ONBANCorp's current business strategy is to (i)continue its focus on
retail and business banking relationships through selective expansion in its
market areas, (ii)improve core earnings from loans and investments,
(iii)maintain adequate leverage and risk-based capital for regulatory purposes
and business operations, (iv)manage assets and liabilities to minimize the
negative effects of changing interest rate environments, (v)maintain its
emphasis on asset quality controls, (vi)achieve greater operating revenues while
continuing to be efficient and (vii)continue to broaden management depth.
ONBANCorp is building upon its traditional business of gathering
consumer deposits and making mortgage loans by selectively developing its
commercial lending and business relationships and increasing its portfolio of
commercial loans and deposits from small and medium-sized companies located in
the Company's market areas. To direct that growth, management has assembled a
team of bankers with extensive commercial banking experience.
Since 1993, capital has been leveraged in the form of financing
transactions. These transactions have generally involved short-term market rate
borrowings, such as repurchase agreements, funding assets such as Treasuries and
mortgage-backed securities. The intended short term nature of the financing
transactions along with the minimal credit risk associated with these assets
(generally U.S. Government or mortgage-backed securities) which were classified
as available for sale, would have provided the opportunity to increase return on
equity ("ROE") and earnings per share ("EPS") as well as adjust the balance
sheet as more traditional banking relationships were added. However, rapidly
rising interest rates in 1994 had an adverse effect on this strategy. Corporate
strategy was revised in 1995 to further accelerate the focus on core banking and
to significantly diminish investments in securities. Recent accounting rule
changes relating to investment securities have resulted in more volatile
financial statements for companies like ONBANCorp who are in the midst of
transitioning from the thrift profile of 1990 to the regional banking company
profile of 1995.
In connection with the implementation of Statement of Financial
Accounting Standards (FAS) No. 115 at December 31, 1993, securities, principally
mortgage-backed, with an amortized cost of $2.3 billion were transferred to the
available for sale portfolio. In 1994, the regulatory policy was revised to
require transfer of securities to available for sale only in cases where the
safety and soundness of an institution is an issue. In view of the policy
revision, in 1994, the Company transferred securities with a fair value of $1.27
billion from available for sale to held to maturity. These transfers had the
practical effect of limiting the potential capital erosion which could have
occurred if interest rates rose dramatically and these securities had remained
classified as available for sale.
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 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 will not materially affect net income, however, the net interest margin
should increase because net interest income (the numerator) should remain
approximately the same while the average earning assets (the denominator) will
significantly diminish by
4
approximately $1 billion. The increase in net interest margin effect will begin
in early 1996 since many of the transactions did not settle until December of
1995. Total securities have declined by $1.15 billion to $2.74 billion at
December 31, 1995 from $3.89 billion at December 31, 1994 and on a percentage
basis represent 49% and 58% of total assets on those respective dates.
At December 31, 1995 total assets were $5.6 billion, earning assets
were $5.2 billion, deposits $3.8 billion including $.4 billion of brokered time
deposits and shareholders' equity was $388.8 million, net of $19.0 million of
net unrealized holding loss on securities pursuant to FAS 115. It is expected
that a majority of this unrealized holding loss will be amortized back into
capital over the next two or three years.
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, 1995. 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.
5
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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Interest earning assets
Mortgage loans $ 279,428 317,424 455,600 351,749 1,404,201
Other loans 383,822 73,120 312,654 80,610 850,206
Loans available for sale 24,596 15,541 40,137
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Total loans 687,846 390,544 768,254 447,900 2,294,544
Mortgage-backed securities 466,211 546,191 866,666 492,791 2,371,859
Other securities 76,637 83,070 195,384 14,893 369,984
Federal funds sold and other 134,623 134,623
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Total interest earning assets $1,365,317 1,019,805 1,830,304 955,584 5,171,010
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Interest bearing liabilities
Savings deposits $ 768,887 768,887
Time deposits 637,145 971,440 466,068 121,528 2,196,181
Money market accounts, NOW accounts, and
escrow deposits 523,065 523,065
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Total deposits 1,929,097 971,440 466,068 121,528 3,488,133
Repurchase agreements - 127,083 234,534 - 361,617
Other borrowings 100,000 290,057 502,649 10,664 903,370
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Total interest bearing liabilities $2,029,097 1,388,580 1,203,251 132,192 4,753,120
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Period excess (deficiency) $ (663,780) (368,775) 627,053 823,392 417,890
As a percent of total earning assets -12.8% -7.1% 12.1% 15.9% 8.1%
Cummulative excess (deficiency) $ (663,780) (1,032,555) (405,502) 417,890
As a percent of total earning assets -12.8% -19.9% -7.8% 8.1%
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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 single most important 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"). GAP, duration
and simulation are the techniques which are used to monitor interest rate
6
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.
GAP Analysis: This measure utilizes a system of measuring the volumes
of assets and liabilities which will mature, reprice or otherwise become
available for reinvestment within certain time periods. The goal is to have no
more than a plus or minus ten percent mismatch within the one year time frame
when dividing the difference between ISAs and ISLs by earning assets.
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.
Both of these analysis techniques require 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. Duration analysis is considered more
comprehensive, therefore, more emphasis is generally placed upon keeping within
that guideline. At December 31, 1995 the Company was 4.0% liability sensitive on
a GAP basis and 2.7% asset sensitive on a duration basis. The different
assumptions used in calculating this GAP percentage are those recommended by the
Banking Agencies (i.e.: FDIC, Federal Reserve and OCC) in their proposed
interest rate risk requirements and are as follows. Sixty percent of NOW and
MMDA accounts are allocated in the one year category and forty percent in the
one to three year category. Sixty percent of savings accounts are allocated
evenly in the first thirty six months with the remaining forty percent allocated
in the three to five year term. The difference in allocation of these types of
deposit accounts for the difference between the one year GAP of 19.9% in the
preceding table and the 4.0% above. Based upon the results of the GAP duration
analysis at December 31, 1995 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.
Lending Activities
Loan Portfolio. ONBANCorp's net loan portfolio totaled $2.3 billion at
December 31, 1995, representing 40.5% 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. The acquisition of the Combined
Banks at December 31, 1992 resulted in a substantial increase in the level of
commercial loans and multi-family and commercial mortgage loans.
7
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:
/------------------------------------------December 31,---------------------------------------------/
/--------1995-------/ /-------1994-----/ /------1993-----/ /------1992-----/ /------1991--------/
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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Loans by type of security:
Mortgage loans:
Residential 1-4 family $1,132,947 48.6% 1,002,434 50.1% 963,803 50.7% 1,075,907 51.5% 1,013,375 67.1%
Multi family and
commercial 248,325 10.7% 193,150 9.7% 191,683 10.1% 195,872 9.4% 70,992 4.7%
Construction 53,624 2.3% 31,642 1.6% 31,111 1.6% 34,111 1.6% 19,283 1.3%
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Total mortgage loans 1,434,896 61.6% 1,227,226 61.4% 1,186,597 62.4% 1,305,890 62.5% 1,103,650 73.1%
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Commercial loans 271,798 11.7% 226,538 11.3% 187,250 9.8% 197,752 9.5% 25,811 1.7%
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Other loans:
Home equity 115,641 5.0% 120,888 6.0% 135,292 7.1% 174,900 8.4% 111,134 7.4%
Other consumer 504,607 21.7% 426,821 21.3% 394,707 20.7% 408,908 19.6% 268,828 17.8%
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Total other loans 620,248 26.7% 547,709 27.3% 529,999 27.8% 583,808 28.0% 379,962 25.2%
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Gross loans 2,326,942 100.0% 2,001,473 100.0% 1,903,846 100.0% 2,087,450 100.0% 1,509,423 100.0%
Net deferred fees 2,185 5,186 (6,036) (13,534) (6,538)
Allowance for loan losses (34,583) (33,775) (32,717) (31,722) (13,064)
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Net loans $2,294,544 1,972,884 1,865,093 2,042,194 1,489,821
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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, 1995 based on
contract terms.
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Maturing:
In 1 Year or 1 to 5 After Total
(In thousands) Less Years 5 Years Loans
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Construction $ 53,624 53,624
Commercial (1) 98,069 208,388 213,666 520,123
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Total commercial and construction $151,693 208,388 213,666 573,747
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Predetermined interest rates $ 76,084 31,025
Adjustable interest rates 132,304 182,641
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Total $208,388 213,666
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(1) Includes commercial real estate loans.
Origination, Purchase and Sale of Loans. Residential mortgage loan
originations were $254 million in 1995, $389 million in 1994 and $609 million in
1993. The Company has significantly expanded the market area for loan
originations through the establishment of lending offices in Binghamton,
Buffalo, Rochester, Poughkeepsie, and Utica New York and Scranton/Wilkes-Barre,
Bloomsburg, Hawley, Pocono Summit and Clarks Summit, Pennsylvania.
8
Based on market conditions and other competitive factors, ONBANCorp
supplemented its mortgage loan originations during 1995 with the purchase of $58
million of adjustable rate mortgage loans for its portfolio. Purchases of these
adjustable rate mortgage loans which were primarily 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 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 pursuant to SFAS 65.
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.
Year ended December 31,
(Dollars in Thousands) 1995 1994 1993
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Loans originated:
Mortgage:
Residential 1-4 family $ 253,760 389,480 609,120
Multi-family, commercial
and construction 117,592 47,929 84,537
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Total mortgage loans $ 371,352 437,409 693,657
Commercial 153,334 156,556 52,382
Other 296,193 258,581 240,691
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Total loans originated $ 820,879 852,546 986,730
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Residential Real Estate Lending. Management believes that ONBANCorp is
among the leading originators of residential real estate mortgage loans in
Onondaga County. During the year ended December 31, 1995, the Company was the
number one residential real estate lender in Onondaga County, originating
approximately 10.4% of the total mortgage loans made in the County during the
period. 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
9
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, 1995, as a result of this ongoing process of loan
securitization and sales, loans serviced for others were $1.1 billion, from
which the Company will continue to derive future servicing 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.
During 1994, the Company sold servicing rights to approximately $250
million of loans and recorded a gain of $3.4 million. This sale of servicing
rights was the result of an economic opportunity and not a planned strategy to
liquidate the servicing portfolio.
In May 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 122, Accounting
for Mortgage Servicing Rights, an amendment to SFAS No. 65, Accounting for
Certain Mortgage Banking Activities (Statement 122). Statement 122 requires a
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans based on their
relative fair values. Statement 122 will be prospectively adopted and is
effective for the Company's fiscal year beginning January 1, 1996. The expected
impact on the consolidated financial statements in 1996 will not be material
based on the Company's expected sale of loans with servicing retained during
1996.
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.
10
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. Recognizing the
specialized nature of agricultural lending, OnBank & Trust Co. employs an
experienced agricultural loan officer in the commercial lending department to
provide technical expertise and oversight to the officers engaged in
agricultural lending.
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, 1995, the Banks' gross consumer loan portfolio of $620 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 $116 million at December 31, 1995.
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 places the loan on a
non-accrual status, charges off any accrued interest, reviews it with the
Executive Committee of the Board quarterly, and institutes 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. The
collateral is repossessed and sold to pay off the loan balance. In the case of
unsecured installment loans, the Banks either commence legal action to collect
the balance or negotiates a "work out" payment schedule over a period which may
exceed the original term of the loan.
11
Non-accruing loans increased to $23.6 million at December 31, 1995 from
$22.5 million at December 31, 1994. 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 13, 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 $9.8 million or 79.7% of
the $12.3 million of conventional residential mortgage loans over 90 days
delinquent at December 31, 1995. Delinquencies in the Company's portfolio of
purchased adjustable rate mortgage loans serviced by others accounted for the
remaining $2.5 million or 20.3% of the conventional residential mortgage loans
over 90 days delinquent at December 31, 1995. Additionally, almost all other
delinquent loans were located in New York State and Pennsylvania.
12
The following table sets forth information with respect to loans
delinquent for 90 days or more, nonaccrual and restructured loans at December
31:
/--------------------------------December 31,---------------------------/
(Dollars in Thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
Delinquent mortgage loans:
Conventional $ 12,340 12,691 11,436 13,275 10,940
FHA and VA 705 612 905 1,155 1,055
Multi family and commercial 9,063 8,591 7,546 7,864 3,735
- --------------------------------------------------------------------------------------------------------------------
Total delinquent mortgage loans $ 22,108 21,894 19,887 22,294 15,730
- --------------------------------------------------------------------------------------------------------------------
As a percentage of gross mortgage loans 1.5% 1.8% 1.7% 1.7% 1.4%
- --------------------------------------------------------------------------------------------------------------------
Delinquent commercial loans: $ 4,387 5,593 6,655 9,782 357
- --------------------------------------------------------------------------------------------------------------------
As a percentage of gross commercial loans 1.6% 2.5% 3.6% 4.9% 1.4%
- --------------------------------------------------------------------------------------------------------------------
Delinquent other loans:
Home equity $ 738 720 414 528 389
Guaranteed student 183 157 97 902 5,829
Loans to individuals 1,542 1,396 1,651 1,815 1,033
- --------------------------------------------------------------------------------------------------------------------
Total delinquent other loans $ 2,463 2,273 2,162 3,245 7,251
- --------------------------------------------------------------------------------------------------------------------
As a percentage of gross other loans 0.4% 0.4% 0.4% 0.6% 1.9%
- --------------------------------------------------------------------------------------------------------------------
Delinquent loans as a percentage of gross loans 1.2% 1.5% 1.5% 1.7% 1.5%
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Non-accrual loans $ 23,580 22,525 25,381 30,236 14,999
Accruing loans delinquent 90 days or more 2,586 2,386 3,323 5,085 8,339
Restructured loans 2,792 4,849 5,559 4,053 7,991
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 28,958 29,760 34,263 39,374 31,329
Other nonperforming assets:
Other real estate owned 4,019 5,431 10,719 17,332 6,893
Repossessed assets 441 335 666 327 210
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 33,418 35,526 45,648 57,033 38,432
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of non-
performing loans 119.42% 113.49% 95.49% 80.57% 41.70%
Nonperforming assets as a percentage of total
assets 0.60% 0.53% 0.79% 1.21% 1.13%
- --------------------------------------------------------------------------------------------------------------------
"Potential problem loans" at December 31, 1995 amounted to $23,985,000
compared with $18,693,000 at December 31, 1994. 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
13
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.
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 changing nature of the overall loan portfolio and
the potential for charge-offs, ONBANCorp decreased its provision for loan losses
to $6.8 in 1995 from $7.6 million in 1994. The allowance, when expressed as a
percentage of loans, remained relatively stable at 1.51% at December 31, 1995
and 1.71% at year end 1994. 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.
- -------------------------------------------------------------------------------------------------------------------------
/-----------------------December 31,-------------------------/
(Dollars in Thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 33,775 32,717 31,722 13,064 10,937
Charge-offs
Mortgage loans 3,749 3,706 748 1,623 1,687
Commercial loans 1,437 1,746 7,303 8 6
Other loans 2,405 2,686 3,684 639 726
- -------------------------------------------------------------------------------------------------------------------------
Total charge-offs 7,591 8,138 11,735 2,270 2,419
- -------------------------------------------------------------------------------------------------------------------------
Recoveries
Mortgage loans 630 236 1 30 -
Commercial loans 352 598 1,341 9 -
Other loans 627 724 1,091 93 86
- -------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,609 1,558 2,433 132 86
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs 5,982 6,580 9,302 2,138 2,333
- -------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 6,790 7,638 10,297 5,900 4,460
Allowance of combined banks - - - 14,896 -
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $ 34,583 33,775 32,717 31,722 13,064
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans outstanding 0.28% 0.35% 0.47% 0.14% 0.15%
- -------------------------------------------------------------------------------------------------------------------------
The level of non-performing loans increased by $8.0 million during 1992
with the majority of the increase related to the acquisition of the Combined
Banks. The allowance for loan losses was also increased by $14.9 million as a
result of that acquisition. Since the Combined Banks were commercial banks and
the risk inherent in commercial lending is generally higher than than the
traditional residential real estate lending
14
which had previously occurred, net charge offs increased from .14% in 1992 to
.47% in 1993 and declined to .35% and .28% in 1994 and 1995, respectively. 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. The Banks have reduced the level of non-performing assets from
$57.0 million to $45.6 million to $35.5 million to $33.4 million at December 31,
1992, 1993, 1994 and 1995, respectively. In each of the last three years the
provision for loan losses has exceeded net charge offs and the allowance for
loan losses has increased from $31.7 million at December 31, 1992 to $34.6
million at December 31, 1995. The combination of the decreasing non-performing
loans and the increasing allowance for loan losses has resulted in the coverage
ratio increasing to 119.4% at December 31, 1995. The significant increase in the
provision for loan losses for 1993 relates to the continuing deterioration of
certain loans of the Combined Banks along with the increased emphasis on
commercial 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 $197.8 million or 9.5% at December
31, 1992 to $271.8 million or 11.7% at December 31, 1995.
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,
1995 is adequate as a general allowance.
The following table sets forth the allocation of the allowance for loan
losses at December 31:
- -------------------------------------------------------------------------------------------------------------------------------
/-------------------------------December 31,-------------------------------/
(Dollars in Thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage loans $ 15,629 17,374 17,313 15,237 9,122
Mortgage loans to total loans 59.36% 59.74% 60.89% 61.32% 72.22%
Construction loans 1,060 340 340 150 -
Construction loans to total loans 2.30% 1.58% 1.64% 1.64% 1.21%
Commercial loans 11,801 10,676 10,856 10,774 1,067
Commercial loans to total loans 11.68% 11.32% 9.53% 9.54% 1.72%
Other loans 6,093 5,385 4,208 5,561 2,875
Other loans to total loans 26.66% 27.36% 27.94% 27.50% 24.85%
- -------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 34,583 33,775 32,717 31,722 13,064
- -------------------------------------------------------------------------------------------------------------------------------
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 all transactions and activities in the securities portfolio on
a monthly basis. As of December 31, 1995, ONBANCorp's securities portfolio
totaled $2.7 billion, constituting 49.3% of total assets down from 57.9% at
December 31, 1994. The Company's long-term strategy is to decrease the
15
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.
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, 1995 and 1994,
see "Notes to Consolidated Financial Statements-Note 4".
- ----------------------------------------------------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Debt securities:
U.S. Government obligations $ 29,716 140,832 268,667
U.S. Government agencies 199,206 507,395 436,670
State and municipal 74,351 98,372 67,643
Corporate and other 424 505 1,711
- ----------------------------------------------------------------------------------------------------------------
Total debt secutities 303,697 747,104 774,691
- ----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
GNMA 189,692 419,563 272,563
FNMA 253,659 468,916 622,367
FHLMC 395,442 580,920 691,626
SBA 27,028 - -
Non-agency (AA rated) - 58,419 87,918
Collateralized mortgage obligations:
Agency 878,056 1,043,764 561,586
Non-agency 627,982 496,178 544,284
- ----------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,371,859 3,067,760 2,780,344
- ----------------------------------------------------------------------------------------------------------------
Equity securities:
Preferred stock 1,040 1,030 1,100
Common stock 764 14,982 11,534
Federal Home Loan Bank stock 64,483 59,811 60,135
- ----------------------------------------------------------------------------------------------------------------
Total equity securities 66,287 75,823 72,769
- ----------------------------------------------------------------------------------------------------------------
Total securities $2,741,843 3,890,687 3,627,804
- ----------------------------------------------------------------------------------------------------------------
16
The following table presents the carrying value and weighted average
book yield on debt and mortgage-backed securities at December 31, 1995 based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call priviledges of the issuer.
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of U.S.
Government and
U.S. Government agencies $ 19,977 6.0% 165,252 5.9% 39,027 8.0%
State and municipal 38,124 4.8% 26,142 5.2% 8,722 5.1%
Other 1,339 8.0% 74,969 6.4% 78,376 6.3%
- -----------------------------------------------------------------------------------------------------------
$ 59,440 5.2% 266,363 6.0% 126,125 6.8%
- -----------------------------------------------------------------------------------------------------------
Available for sale:
Obligations of U.S.
Government and
U.S. Government agencies $ - 0.0% 4,129 5.3% 514 6.3%
Other 294 5.6% 15,540 7.5% 18,443 7.8%
- -----------------------------------------------------------------------------------------------------------
$ 294 5.6% 19,669 7.0% 18,957 7.8%
- -----------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------
Weighted Weighted
Due after average average
(Dollars in Thousands) ten years yield Total yield
- ---------------------------------------------------------------------
Held to maturity:
Obligations of U.S.
Government and
U.S. Government agencies - 0.0% 224,256 6.3%
State and municipal 1,363 5.3% 74,351 5.0%
Other 1,308,401 6.9% 1,463,085 6.8%
- ---------------------------------------------------------------------
1,309,764 6.9% 1,761,692 6.7%
- ---------------------------------------------------------------------
Available for sale:
Obligations of U.S.
Government and
U.S. Government agencies 22 5.0% 4,665 5.4%
Other 874,922 7.1% 909,199 7.1%
- ---------------------------------------------------------------------
874,944 7.1% 913,864 7.1%
- ---------------------------------------------------------------------
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 $2.7
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 $381 million at December 31, 1995, down from the $430 million at
December 31, 1994. 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.
17
The following table sets forth deposits by type of account at
December 31:
- -----------------------------------------------------------------------------------------
Percentage
of Total
(Dollars in Thousands) Amount Deposits
- -----------------------------------------------------------------------------------------
Savings $ 768,887 20.2%
Time deposits 1,815,164 47.7%
NOW accounts (1) 273,921 7.2%
Money market accounts (2) 249,144 6.5%
Non-interest bearing demand accounts 320,140 8.4%
Brokered time deposits 381,017 10.0%
- -----------------------------------------------------------------------------------------
Total deposits $ 3,808,273 100.0%
- -----------------------------------------------------------------------------------------
(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:
- --------------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Deposits at beginning of year $ 3,793,343 3,005,999 3,023,901
Increase (decrease) in:
Savings (86,757) 96,409 49,932
Time deposits 203,949 199,085 (102,241)
NOW accounts (18,969) (152,963) (99,785)
Money market accounts (51,225) (69,200) 115,391
Non-interest bearing demand accounts 17,124 10,857 18,801
Brokered time deposits (49,192) 430,209 -
Deposits acquired in branch purchases - 272,947 -
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in deposits during the year 14,930 787,344 (17,902)
- --------------------------------------------------------------------------------------------------------------------------------
Deposits at end of year $ 3,808,273 3,793,343 3,005,999
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) before interest credit and acquisition $ (142,485) 401,730 (115,718)
Interest credited 157,415 112,667 97,816
Deposits purchased - 272,947 -
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in deposits during the year $ 14,930 787,344 (17,902)
- --------------------------------------------------------------------------------------------------------------------------------
18
The remaining maturity on certificates of deposit of $100,000 and over
at December 31, 1995 is presented below:
- ----------------------------------------------------------------------------------
Amount
Maturity (In Thousands)
- ----------------------------------------------------------------------------------
Three months or less $ 349,318
Over three through six months 81,632
Over six through twelve months 58,746
Over tweve months 35,458
- ----------------------------------------------------------------------------------
$ 525,154
- ----------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------
Return on average assets 0.71% 0.04% 1.19%
Return on average equity 11.75% 0.68% 16.42%
Dividend payout ratio 41.45% NM 16.23%
Average equity to average assets ratio 6.02% 6.17% 7.22%
- --------------------------------------------------------------------------------------------------
NM - not meaningful
19
Personnel. As of December 31, 1995, ONBANCorp has approximately 1,396
full-time equivalent employees. The employees are not represented by any
collective bargaining unit, and the Company considers its relationship with its
employees to be good.
Supervision and Regulation. The banking industry is subject to
extensive state and federal regulation and in 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, beginning September 29,
1995, bank holding companies to acquire banks in any state; permits, prior to
June 1, 1997, a bank to merge with an out-of-state bank and convert any offices
into branches of the resulting bank if the home states of both banks expressly
permit interstate bank mergers; permits, beginning June 1, 1997, a bank to merge
with an out-of-state bank and convert any offices into branches of the resulting
bank if both states have not opted out of interstate branching; permits a bank
to acquire branches from an out-of-state bank, beginning June 1, 1997, if the
law of the state where the branches are located permits the interstate branch
acquisition; and permits banks to establish and operate de novo interstate
branches whenever the host state opts-in to de novo branching. Bank holding
companies and banks seeking to engage in transactions authorized by the
Interstate Banking Act must be adequately capitalized and managed.
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 Reserve Board (or other appropriate bank
regulatory agency) is required, in connection with its examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate income neighborhoods. Furthermore, such
assessment is also required of 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
20
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 and OnBank by the 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 16 of Notes to
consolidated Financial Statements and to other statutory powers of bank
regulatory agencies.
Capital Adequacy. The Federal Reserve Board and the FDIC have adopted
risk-based capital adequacy guidelines for bank holding companies and banks
under their supervision. Under the guidelines the so-called "Tier I capital" and
"Total capital" as a percentage of risk-weighted assets and certain off-balance
sheet instruments must be at least 4% and 8%, respectively.
The Federal Reserve Board and the FDIC have also imposed a leverage
standard to supplement their risk-based ratios. This leverage standard focuses
on a banking institution's ratio of Tier 1 capital to average total assets,
adjusted for goodwill and certain other items. Under these guidelines, banking
institutions that meet certain criteria, including excellent asset quality, high
liquidity, low interest rate exposure and good earnings, and that have received
the highest regulatory rating must maintain a ratio of Tier 1 capital to total
assets of at least 3%. Institutions not meeting these criteria, as well as
institutions with supervisory, financial or operational weaknesses, along with
those experiencing or anticipating significant growth are expected to maintain a
Tier 1 capital to total assets ratio equal to at least 4 to 5%.
21
As reflected in the following table, the risk-based capital ratios and
leverage ratios of the Registrant, OnBank & Trust Co., OnBank and Franklin First
as of December 31, 1995 exceeded the risk-based capital adequacy guidelines and
the leverage standard.
Capital Components and Ratios at December 31, 1995
(Dollars in Millions)
Registrant
(Consolidated) OnBank & Trust Co. OnBank Franklin First
Capital components:
Tier 1 capital $ 385 230 32 108
Total capital $ 420 251 35 117
Risk-weighted assets
and off-balance sheet
instruments $2,780 1,772 268 774
Risk-based capital ratios:
Tier 1 capital 13.85% 12.98% 11.87% 14.00%
Total capital 15.10% 14.19% 13.12% 15.16%
Leverage ratio 6.92% 6.53% 5.18% 7.21%
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.
22
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.
Under pending federal legislation, the Company may be required to
participate in a one-time recapitalization of the FDIC's Savings Association
Insurance Fund (SAIF). If enacted in its current form, the assessment is
estimated to be between 75 to 80 basis points of SAIF insured deposits held as
of March 31, 1995. Based upon these rates the Company's pre-tax expense would be
approximately $6,961,000 to $7,426,000. The proposed legislation would also
repeal the bad debt reserve methods currently available to thrift institutions,
requiring the Company to recapture a portion of their existing tax bad debt
reserves. The aggregate potential Federal and state tax expense resulting from
recapture would be approximately $5,600,000. There is no assurance that this
pending legislation will be enacted into law, therefore, the FASB has stated
that the charge to earnings must be recorded in the period it is enacted.
Accordingly, the Company has made no accrual for this potential obligation.
Moreover, a number of other bills have been introduced in Congress
which would further regulate, deregulate or restructure the financial services
industry. It is not possible to predict whether these or any other proposals
will be enacted into law or, even if enacted, the effect which they may have on
the Company's business and earnings.
23
ITEM 2. PROPERTIES
ONBANCorp's executive offices are located at 101 South Salina Street,
Syracuse, New York 13202. At December 31, 1995, ONBANCorp operated from 122
locations including 80 full service branches, 1 public accommodation office, 11
specialized lending offices and 30 freestanding proprietary automated teller
machines. The Company owned the building and land for 34 of its locations and
leased space for 88 locations. 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, 1995, was $57,407,000.
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 in incorporated by reference from the
section captioned "Description of Business" of the Company's 1995 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 22 of the Company's 1995
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 23 to 32 of
the Company's 1995 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein is
incorporated by reference from pages 33 to 51 of the Company's 1995 Annual
Report.
24
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
The information required herein is incorporated by reference from pages
3 to 10 of the Company's definitive Proxy Statement filed with the Securities
and Exchange Commission ("SEC") on March 25, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
10 to 19 of the Company's definitive Proxy Statement filed with the SEC on March
25, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
2 and 7 of the Company's definitive Proxy Statement filed with the SEC on March
25, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
20 of the Company's definitive Proxy Statement filed with the SEC on March 25,
1996.
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, 1995 and 1994
Consolidated Statements of Income for Each of the Years in the Three
Year Period Ended December 31, 1995
Consolidated Statements of Changes in Shareholders' Equity for Each of
the Years in the Three Year Period Ended December 31, 1995
Consolidated Statements of Cash Flows for Each of the Years in the
Three Year Period Ended December 31, 1995
25
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.
No. Exhibit
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.
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.
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.
26
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.
11 Earnings per Share Computations
13 Annual Report to Shareholders for the Year ended December 31, 1995.
21 List of Registrant's Subsidiaries.
23 Consent of Independent Auditors
27 Selected Financial Data
(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.
27
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 25, 1996.
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
--------------------------- Senior Vice President and Secretary
David M. Dembowski
/s/ Robert J. Berger
--------------------------- Senior Vice President, Treasurer, Chief
Robert J. Berger Financial Officer and Chief Accounting
Officer
/s/ William F. Allyn
--------------------------- Director
William F. Allyn
/s/ Chester D. Amond
--------------------------- Director
Chester D. Amond
/s/ Joseph W. Balz
--------------------------- Director
Joseph W. Balz
/s/ William J. Donlon
--------------------------- Director
William J. Donlon
/s/ Russell A. King
--------------------------- Director
Russell A. King
28
--------------------------- Director
Henry G. Lavarnway, Jr.
/s/ John D. Marsellus
--------------------------- Director
John D. Marsellus
/s/ J. Kemper Matt
--------------------------- Director
J. Kemper Matt
/s/ Peter J. Meier
--------------------------- Director
Peter J. Meier
/s/ T. David Stapleton, Jr.
--------------------------- Director
T. David Stapleton, Jr.
/s/ William J. Umphred
--------------------------- Director
William J. Umphred
/s/ Thomas H. van Arsdale
--------------------------- Director
Thomas H. van Arsdale
/s/ John L. Vensel
--------------------------- Director
John L. Vensel
/s/ Joseph N. Walsh, Jr.
--------------------------- Director
Joseph N. Walsh, Jr.
29