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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, 1997 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 12,714,197
(Title of Class) (Shares Outstanding as of
October 31, 1997)
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This report contains 20 pages
2
ONBANCorp, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997, December 31, 1996, and September 30, 1996.......... 3
Condensed Consolidated Statements of Income for the
Three Months and Nine Months ended September 30, 1997 and 1996......... 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months ended September 30, 1997 and 1996........... 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1997 and 1996.................. 6
Notes to Condensed Consolidated Financial Statements..................... 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 11-18
PART II. OTHER INFORMATION....................................................... 19
Signatures....................................................................... 20
3
ONBANCorp. Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Date)
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September 30, December 31, September 30,
1997 1996 1996
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ASSETS
Cash and due from banks $ 146,427 169,740 166,598
Federal funds sold and other 8,537 12,253 13,390
Securities:
Trading 1,988 1,727 1,727
Available for sale 971,168 925,340 828,454
Held to maturity, fair value of
$1,352,935 at September 30, 1997,
$1,702,201 at December 31, 1996, and
$1,688,049 at September 30, 1996 1,332,414 1,683,908 1,678,030
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Total securities 2,305,570 2,610,975 2,508,211
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Loans:
Portfolio, net of premium and discount 2,822,149 2,448,474 2,386,956
Allowance for loan losses (39,162) (37,840) (38,541)
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Net loans 2,782,987 2,410,634 2,348,415
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Loans available for sale 106,935 38,759 90,333
Premises and equipment, net 63,259 62,557 62,845
Due from brokers -- -- 56,299
Other assets 118,315 112,959 112,502
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TOTAL ASSETS $5,532,030 5,417,877 5,358,593
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing 369,624 356,171 345,146
Interest bearing:
Savings, NOW and money market 1,204,710 1,214,823 1,245,875
Time deposits less than $100,000 1,770,594 1,646,576 1,659,425
Time deposits $100,000 and greater 680,376 604,336 578,163
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Total deposits 4,025,304 3,821,906 3,828,609
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Repurchase agreements 301,524 254,471 257,670
Other borrowings 740,447 874,917 809,760
Due to brokers -- 40,724 35,692
Other liabilities 79,513 65,808 67,179
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Total liabilities 5,146,788 5,057,826 4,998,910
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Capital trust securities 60,000 -- --
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Shareholders equity:
Preferred stock, par value $1.00 per
share; Series B 6.75% Convertible,
10,000,000 shares authorized; issued and
outstanding: none at September 30, 1997;
2,342,052 at December 31, 1996;
2,479,415 at September 30, 1996 -- 2,342 2,479
Common stock, par value $1.00 per share;
56,000,000 shares authorized; shares
issued: September 30, 1997 - 14,319,916;
December 31, 1996 - 14,139,475;
September 30, 1996 - 14,130,011 14,320 14,139 14,130
Additional paid-in capital 99,265 152,465 155,345
Retained earnings 300,440 276,767 269,431
Net unrealized holding loss on securities;
net of deferred taxes (16,867) (20,169) (23,854)
Treasury Stock, at cost, 1,608,108 shares
at September 30, 1997, 1,994,143 at
December 31, 1996, 1,797,200 at
September 30, 1996 (71,916) (65,343) (57,698)
Guarantee of ESOP indebtedness -- (150) (150)
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Total shareholders' equity 325,242 360,051 359,683
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TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $5,532,030 5,417,877 5,358,593
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See accompanying notes to condensed consolidated financial statements.
4
ONBANCorp, Inc.
Condensed Consolidated Statements of Income
(In Thousands, Except Share Data)
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For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
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Interest income:
Loans $ 58,762 51,146 164,222 148,755
Securities 38,908 41,359 122,056 127,972
Federal funds sold and other 216 746 988 2,382
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Total interest income 97,886 93,251 287,266 279,109
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Interest expense:
Deposits 43,633 38,295 125,796 114,152
Borrowings:
Repurchase agreements 4,474 4,304 14,398 14,803
Other 10,539 12,189 30,324 36,487
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Total interest expense 58,646 54,788 170,518 165,442
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Net interest income 39,240 38,463 116,748 113,667
Provision for loan losses 1,799 1,950 5,386 5,850
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Net interest income after provision for loan losses 37,441 36,513 111,362 107,817
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Other operating income:
Mortgage banking 750 854 2,611 2,670
Service charges 5,340 4,884 15,679 13,727
Net gain on securities transactions 2,412 3,096 6,607 5,733
Other 1,189 1,541 4,152 5,751
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Total other operating income 9,691 10,375 29,049 27,881
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Other operating expenses:
Salaries and employee benefits 10,029 10,490 30,905 31,688
Building, occupancy and equipment 4,513 4,481 13,789 13,724
Deposit insurance premiums 260 7,956 782 9,340
Contracted data processing 2,770 2,731 8,412 8,056
Legal and financial services 1,965 811 4,205 2,713
Capital trust securities 1,437 -- 3,684 --
Other 6,511 6,163 20,052 19,514
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Total other operating expenses 27,485 32,632 81,829 85,035
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Income before taxes 19,647 14,256 58,582 50,663
Income taxes 6,959 6,966 21,513 20,146
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Net income $ 12,688 7,290 37,069 30,517
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Income per common share:
Primary $ 0.98 0.49 2.78 2.06
Fully diluted 0.98 0.49 2.76 2.00
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See accompanying notes to condensed consolidated financial statements.
5
ONBANCorp, Inc.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(In Thousands, except Share Data)
Net
Unrealized
Additional Holding Guarantee of
Preferred Common Paid-in Retained Loss on Treasury ESOP
Stock Stock Capital Earnings Securities Stock Indebtedness Total
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Balance at December 31, 1995 $ 2,516 14,095 155,748 253,727 (18,952) (18,068) (300) 388,766
Net income -- -- -- 30,517 -- -- -- 30,517
Stock issued under:
Stock Option Plans -- 21 143 -- -- -- -- 164
Employee Stock Purchase Plan -- 14 380 -- -- -- -- 394
Cash dividends declared:
Preferred ($1.27 per share) -- -- -- (3,167) -- -- -- (3,167)
Common ($.90 per share) -- -- -- (11,646) -- -- -- (11,646)
Treasury stock purchases -- -- -- -- -- (39,630) -- (39,630)
Preferred stock redemption (37) -- (926) -- -- -- -- (963)
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Change in net unrealized holding loss
on securities, net of income tax effect
of ($3,269) -- -- -- -- (4,902) -- -- (4,902)
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Balance at September 30, 1996 $ 2,479 14,130 155,345 269,431 (23,854) (57,698) (150) 359,683
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Balance at December 31, 1996 $ 2,342 14,139 152,465 276,267 (20,169) (65,343) (150) 360,051
Net income -- -- -- 37,069 -- -- -- 37,069
Stock issued under:
Stock Option Plans -- 170 2,370 -- -- -- -- 2,540
Tax benefits related to stock options -- -- 1,549 -- -- -- -- 1,549
Employee Stock Purchase Plan -- 11 419 -- -- -- 430
Cash dividends declared:
Common ($1.02 per share) -- -- -- (13,396) -- -- -- (13,396)
Treasury stock purchases -- -- -- -- -- (65,529) -- (65,529)
Preferred stock redemption (36) -- (888) -- -- -- -- (924)
Preferred stock conversion (2,306) -- (56,650) -- -- 58,956 -- --
Employee Stock Ownership Plan
loan repayment -- -- -- -- -- -- 150 150
Change in net unrealized holding loss
on securities net of income tax effect
of $2,252 -- -- -- -- 3,302 -- -- 3,302
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Balance at September 30, 1997 $ -- 14,320 99,265 300,440 (16,867) (71,916) -- 325,242
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See accompanying notes to condensed consolidated financial statements.
6
ONBANCorp, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
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For the Nine Months Ended September 30,
1997 1996
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NET CASH USED BY OPERATING ACTIVITIES $ (13,355) (6,224)
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INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 687,893 510,947
Proceeds from sales of securities held to maturity 4,089
Proceeds from maturities of and principal collected on
securities available for sale 192,176 153,230
Proceeds from maturities of and principal collected on
securities held to maturity 423,096 524,524
Purchases of securities available for sale (942,319) (476,822)
Purchases of securities held to maturity (86,026) (480,182)
Net change in loans (384,828) (117,359)
Net payment made for sale of branches -- (19,820)
Purchases of premises and equipment (5,467) (3,116)
Proceeds from sale of building -- 250
Other 3,490 4,060
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NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (111,985) 99,801
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FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts excluding time
deposits 3,340 (8,511)
Net increase in time deposits 200,058 62,530
Net increase (decrease) in repurchase agreements 47,053 (103,947)
Net increase (decrease) in other borrowings (37,940) 43,382
Advances from Federal Home Loan Bank 537,780 266,717
Repayment of advances from Federal Home Loan Bank (632,096) (401,907)
Repayments of collateralized mortgage obligations (2,214) (1,802)
Issuance of Capital Trust Securities 60,000 --
Net proceeds from issuance of common stock 2,970 558
Purchase of treasury stock (65,529) (39,630)
Repurchase of preferred stock (924) (963)
Cash dividends paid on common stock (13,199) (12,077)
Cash dividends paid on preferred stock (988) (3,183)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 98,311 (198,833)
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Net decrease in cash and cash equivalents (27,029) (105,256)
Cash and cash equivalents at beginning of period 181,993 285,244
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Cash and cash equivalents at end of period $ 154,964 179,988
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Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest 169,705 166,554
Income taxes 15,422 17,624
Non-cash investing and financing activities:
Securitization of mortgage loans 3,833 44,083
Mortgage loans transferred to other real estate owned 3,815 4,140
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See accompanying notes to condensed consolidated financial statements
7
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, 1996.
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, 1997 and 1996 and the results of operations for the
three and nine months ended September 30, 1997 and 1996.
Certain reclassifications have been made to prior period amounts for
consistency in reporting.
(2) LOANS
Impaired loans were $11.8 million and $9.1 million at September 30, 1997 and
1996, respectively. Included in these amounts is $9.5 million and $7.8 million
of impaired loans for which the related allowance for loan losses is $2.3
million and $4.1 million at September 30, 1997 and 1996, respectively. In
addition, included in the total impaired loans is $2.3 million and $1.3 million
of impaired loans that, as a result of the adequacy of collateral values and
cash flow analysis do not have a specific impairment reserve at September 30,
1997 and 1996, respectively. The average recorded investments in impaired loans
during the nine months ended September 30, 1997 and 1996 was approximately $8.5
million and $9.6 million, respectively.
For the nine months ended September 30, 1997 and 1996, the Company
recognized interest income on those impaired loans of $204 thousand and $278
thousand, respectively using the cash basis method of income recognition.
8
(3) Securities
The following table sets forth securities available for sale as of September
30, 1997:
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Amortized Gross Unrealized Fair
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(In Thousands) Cost Gains Losses Value
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Debt securities:
U.S. Goverment obligations $ 19,296 41 28 19,309
U.S. Government agencies 124,945 835 987 124,793
Corporate and other 22,406 596 65 22,937
Mortgage-backed securities 753,730 4,621 1,281 757,070
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Total debt securities 920,377 6,093 2,361 924,109
Equity securities:
Common 13 220 -- 233
Federal Home Loan Bank 46,826 -- -- 46,826
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Total equity securities 46,839 220 -- 47,059
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$967,216 6,313 2,361 971,168
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The following table sets forth securities held to maturity as of September 30,
1997:
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Amortized Gross Unrealized Fair
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(In Thousands) Cost Gains Losses Value
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Debt securities:
U.S. Goverment obligations $ 14,969 23 -- 14,992
U.S. Government agencies 105,461 -- 5,819 99,642
State and municipal 60,197 1,166 4 61,359
Corporate and other 378 6 -- 384
Mortgage-backed securities 1,183,326 5,656 12,424 1,176,558
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Total debt securities 1,364,331 6,851 18,247 1,352,935
Unamortized holding loss on
securities transferred (31,917)
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$1,332,414
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In view of a regulatory policy revision in 1994, the Company transferred
securities with a fair value of $1.265 billion and a net unrealized holding loss
of $71.6 million at date of transfer from available for sale to held to
maturity. At September 30, 1997, the remaining unamortized loss relating to this
transfer totals $31.917 million comprised of US Government agency securities of
$6.4 million and mortgage-backed securities of $25.5 million.
The difference between the amortized cost and the fair value of both the
available for sale and the held to maturity categories of securities represents
the change in value which occurred following the purchase of these securities.
These differences will disappear as the assets prepay or mature and are
considered to be temporary in nature. There is minimal credit risk associated
with the portfolio given its secured nature. Over forty percent of the total
portfolio is available for sale, and therefore, a relatively instantaneous
source of liquidity. The held to maturity portfolio also provides ongoing
liquidity given the amortizing nature of the securities. The major uncertainty
relative to this portfolio which is predominantly mortgage-backed securities, is
prepayment risk. Accelerating or decelerating prepayments affect the cash flows
and hence the yield on these securities. These factors are taken into
consideration when the assets are acquired and are periodically monitored.
9
(4) CAPITAL TRUST SECURITIES
In February 1997, the Company, through a subsidiary Trust formed for the
sole purpose of issuing capital securities, issued $60,000,000, 9.25% Capital
Securities due February 1, 2027. Proceeds of this issue were used to fund the
1,400,000 common share repurchase announced in January 1997. In October of 1996
the Federal Reserve Board approved Tier I capital treatment for this type of
capital securities which provides the Company with a method of funding Tier I
capital that is tax deductible. The proceeds to the Trust are lent to the
holding company as long-term junior subordinated debentures that are
subordinated to all holding company debt but senior to all common stock. The
securities may be called at a premium, in whole or in part, on or after February
1, 2007 and provisions are included which provide for the temporary deferral of
interest payments for a period of up to five years.
(5) SHAREHOLDERS' EQUITY
In January 1997, the Company completed its previously announced Series "B"
Cumulative Convertible Preferred Stock redemption, which resulted in the
redemption of 35,514 shares at a cost of $.924 million and the remaining
2,306,538 shares being converted to 1,799,096 shares of Common Stock issued from
treasury stock. In 1997, the Company also repurchased 1,413,000 shares of Common
Stock at a cost of $65.529 million.
(6) OTHER ACCOUNTING ISSUES
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on a consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. In December 1996, the Financial Accounting Standards Board (FASB)
deferred for one year the effective date of SFAS No. 125 as it relates to
transfers of financial assets and secured borrowings and collateral. The
adoption of SFAS No. 125 has not had a material impact on the Company's
consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. All prior period EPS
will be restated after the effective date of this statement. Management does not
believe the adoption of SFAS No. 128 will have a material impact on its
financial condition or results of operation.
In September 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure and is effective for financial
statements for periods ending after December 15, 1997. Adoption of SFAS No. 129
is not expected to have an impact on the financial condition or results of
operation of the Company.
In September 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. The statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from nonowner sources. The impact of adopting SFAS No. 130,
which is effective for the 1998, has not been determined.
In September 1997, the FASB also issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires
publicly-held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the 1998 fiscal year. At the
present time, the impact of adoption has not been determined.
10
(7) SUBSEQUENT EVENT
On October 28, 1997, ONBANCorp, Inc. and First Empire State Corporation
entered into an agreement and plan of reorganization for a merger between the
two companies. Under the terms of the merger agreement, shareholders of
ONBANCorp will have the option of receiving .161 of a share of First Empire
common stock or $69.50 in cash in exchange for each share of ONBANCorp common
stock held. A minimum of 60 percent and a maximum of 70 percent of the shares of
ONBANCorp common stock outstanding must be exchanged for First Empire stock. The
selection of the method of payment of ONBANCorp's shareholders will be subject
to allocation and proration if the stock portion of the total merger
consideration would be less than the minimum or greater than the maximum.
ONBANCorp also granted First Empire a stock option to acquire up to 19.9
percent of the shares of common stock of ONBANCorp under certain circumstances.
The transaction has been approved by the Board of Directors of both companies,
and is subject to a number of conditions, including various regulatory approvals
and approvals of each company's shareholders. It is anticipated that the
transaction will be completed in early 1998.
11
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. and Franklin First Savings Bank ("the Banks"). On January 1,
1997 OnBank & Trust Co. and OnBank merged, thereby creating a single banking
entity in New York State.
On October 28, 1997, the Company entered into an agreement and plan of
reorganization for a merger with First Empire State Corporation. Upon
consummation of the merger OnBank & Trust Co. and Franklin First Savings Bank
will be merged into a single interstate M&T Bank.
Under the terms of the merger agreement, shareholders of ONBANCorp will
have the option of receiving .161 of a share of First Empire common stock or
$69.50 in cash in exchange for each outstanding share of ONBANCorp common
stock. A minimum of 60 percent and a maximum of 70 percent of the shares of
ONBANCorp common stock outstanding must be exchanged for First Empire stock.
The selection of the method of payment of ONBANCorp's shareholders will be
subject to allocation and proration if the stock portion of the total merger
consideration would be less than the minimum or greater than the maximum.
ONBANCorp also granted First Empire a stock option to acquire up to 19.9
percent of the shares of common stock of ONBANCorp under certain circumstances.
The transaction has been approved by the Board of Directors of both companies,
and is subject to a number of conditions, including various regulatory approvals
and approvals of each company's shareholders. It is anticipated that the
transaction will be completed in early 1998.
Reference is made to the Form 8-K which the Company has filed with the
Securities and Exchange Commission on November 10, 1997 for more information
concerning the merger.
Third quarter net income was $12.7 million compared to $7.3 million for the
1996 third quarter and first nine months net income was $37.1 million compared
to $30.5 million for the prior year period. The 1996 third quarter was impacted
by $5.1 million of significant one-time charges related primarily to a SAIF
deposit insurance assessment and tax on thrift bad debt reserves. Fully diluted
net income per common share was $.98 compared to $.49 for the 1996 third quarter
and 1997 first nine months fully diluted net income per common share was $2.76
compared to $2.00 for the prior year period. Return on average equity (ROE) was
15.6% and 14.7% for the three and nine month periods ended September 30, 1997
compared to 7.8% and 10.7% for the respective prior year periods. Return on
Average Assets (ROA) was .92% and .91% for the three and nine month periods
ended September 30, 1997 compared to .55% and .76% for the respective prior year
periods. As adjusted for net one-time charges of $5.1 million, 1996 ROE was
13.3% and 12.5% for the three and nine months ended September 30, 1996 and ROA
was .94% and .89% for the respective periods.
Book value per common share was $25.59 at September 30, 1997, $24.82 at
December 31, 1996 and $24.14 at September 30, 1996. A regular dividend of $.34
per common share was declared for the third quarter of 1997 and paid on October
1, 1997. Regular dividends of $1.02 per common share have been declared during
the first nine months of 1997.
NET INTEREST INCOME
Increasing core business activity has been a significant influence in year
over year performance improvements. During the one year period ended September
30, 1997, commercial loans have increased by $139 million or 22% to $786 million
and consumer loans increased by $198 million or 29% to $886 million. During the
last year residential mortgage loans have increased by $110 million or 10% to
$1,163 million. Softness in the local mortgage market has been partially offset
through the purchase of approximately $206 million of adjustable rate mortgages.
To manage overall interest rate risk in a relatively low yield market rate
environment $102 million
12
residential mortgage loans were securitized or sold, thereby, moderating loan
portfolio growth. Total assets increased by $ 173 million or 3.2% to $5.5
billion during the one year period ended September 30, 1997.
Net interest income was $39.2 million and $116.7 million for the three
and nine month periods ended September 30, 1997, compared to the $38.5
million and $113.7 million recorded in the respective prior year periods.
Average loans of $2.612 billion for the first nine months of 1997 were $268
million or 11% improved over the first nine months of 1996 as a result of the
Company's continuing focus on expanding loan generation. The yield on these
average loans declined by 7 basis points to 8.41% for the first nine months
of 1997 compared to the 8.48% for the prior year period. The volume of
average securities for the first nine months of 1997 declined to $2.497
billion or by $139 million compared to the prior year period. The yield on
these securities increased by 6 basis points to 6.54% as a combined result of
reinvestment and the scheduled repricing of certain adjustable-rate
securities. Average earning assets of $5.131 billion were $94 million more
for the first nine months of 1997 than for the first nine months of 1996. The
yield on total earning assets increased by 9 basis points to 7.49% for the
nine months of 1997 compared to the first nine months of 1996 reflecting the
increased proportion of loans to overall earning assets. The Company intends
to continue its efforts to increase its core lending business as a percentage
of overall earning assets.
The average balance of savings deposits decreased by $77 million to $670
million for the first nine months of 1997 compared to the prior year period. The
cost of these deposits decreased by 14 basis points to 2.48% for the first nine
months of 1997 compared to the prior year period. Average time deposits
increased $263 million to $2.434 billion for the first nine months of 1997
compared to the first nine months of 1996. The costs of these deposits increased
by 7 basis points to 5.63% for the first nine months ended September 30, 1997.
The increase in time deposits was the result of increases in retail and
municipal certificates of deposit and retail brokered certificates of deposit.
Average interest bearing transaction accounts (Money market, NOW and escrow
deposits) increased $11 million to $540 million and the cost increased 39 basis
points to 2.71% when comparing the first nine months of 1997 to the first nine
months of 1996. Average total interest bearing deposits increased by $196
million to $3.643 billion for the first nine months of 1997 compared to the
first nine months of 1996.
Total average borrowings (including repurchase agreements) of $.977 billion
for the first nine months of 1997 are $146 million or 13% less than the $1.123
billion for the first nine months of 1996 reflecting the Company's strategy to
reduce borrowings. The essentially flat slope of the yield curve in 1996
provided the opportunity for extending selected 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. As a result of the increased volume of higher cost deposits and higher
rates on time and money market deposits, the cost of total interest bearing
liabilities increased 9 basis points to 4.93% for the first nine months of 1997
compared to the first nine months of 1996.
The effect of the increase in yield on earning assets of 9 basis points
offset by a 9 basis point increase in rates on interest bearing liabilities
resulted in the net interest spread remaining at 2.56% for the first nine months
of 1997 and 1996. The effects of average interest earning assets increasing by
more than interest bearing liabilities resulted in the net interest margin,
which is affected by the relative average balances of interest earning assets
and interest bearing liabilities, increasing by 3 basis points to 3.04% for the
first nine months of 1997 compared to the first nine months of 1996.
Contributing to this improvement was the increase of $33 million in average
non-interest bearing deposits. The Banks intend to continue to emphasize
increasing the balances in non-interest bearing deposits.
13
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.
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------------
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS(1)
Loans $ 2,611,649 164,222 8.41% 2,343,832 148,755 8.48%
Securities 2,496,908 122,056 6.54% 2,636,402 127,972 6.48%
Federal funds sold and other 22,722 988 5.82% 56,611 2,382 5.62%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 5,131,279 287,266 7.49% 5,036,845 279,109 7.40%
Non-interest earning assets 298,228 292,110
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,429,507 5,328,955
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Savings deposits 669,800 12,427 2.48% 747,085 14,635 2.62%
Time deposits 2,433,670 102,418 5.63% 2,171,029 90,344 5.56%
Money market accounts, NOW accounts,
and escrow deposits 539,714 10,951 2.71% 529,091 9,173 2.32%
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,643,184 125,796 4.62% 3,447,205 114,152 4.42%
Repurchase agreements 320,953 14,398 6.00% 315,342 14,803 6.27%
Other borrowings 656,156 30,324 6.18% 807,750 36,487 6.03%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 4,620,293 170,518 4.93% 4,570,297 165,442 4.84%
Non-interest bearing deposits 349,349 316,446
Non-interest bearing liabilities 70,930 61,055
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,040,572 4,947,798
Capital trust securities 52,528
Shareholders' equity 336,407 381,157
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,429,507 5,328,955
Net interest income $ 116,748 113,667
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.56% 2.56%
Net interest margin(2) 3.04% 3.01%
Total interest earnings assets to total
interest bearing liabilities 1.11x 1.10x
Average equity to average assets 6.20% 7.15%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Nonaccruing loans, which are immaterial, have been included in interest
earning assets.
(2) Computed by dividing net interest income by total average interest
earning assets.
14
The following table represents 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.
- -------------------------------------------------------------------------------
1997 Compared to 1996
Increase (Decrease)
(Dollars in Thousands) Volume Rate Net
- -------------------------------------------------------------------------------
Interest earning assets
Loans $ 16,714 (1,247) 15,467
Securities (7,049) 1,133 (5,916)
Federal funds sold and other (1,476) 82 (1,394)
- --------------------------------------------------------------------------------
Total change in income from interest
earning assets 8,189 (32) 8,157
- --------------------------------------------------------------------------------
Interest bearing liabilities
Savings deposits (1,456) (752) (2,208)
Time deposits 10,936 1,138 12,074
Money market accounts, NOW accounts
and escrow deposits 189 1,589 1,778
- --------------------------------------------------------------------------------
Total change in interest expense on deposits 9,669 1,975 11,644
Repurchase agreements 254 (659) (405)
Other borrowings (7,042) 879 (6,163)
- --------------------------------------------------------------------------------
Total change in expense from interest
bearing liabilities 2,881 2,195 5,076
- --------------------------------------------------------------------------------
Net interest income $ 5,308 (2,227) 3,081
- --------------------------------------------------------------------------------
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 .76% of
total assets as September 30, 1997. During the second quarter of 1997, a $5.7
million mortgage loan became delinquent. Excluding the $5.6 million
guaranteed portion of this loan, the nonperforming asset ratio would have
been .66%. The Company's provision for loan losses of $1.8 million and $5.4
million for the three and nine month periods ended September 30, 1997
decreased from the $2.0 million and $5.9 million recorded in the respective
prior year periods. The coverage ratio of allowance for loan losses to
nonperforming loans decreased from 140% at year-end 1996 to 109% at September
30, 1997. The allowance as a percent of gross loans was 1.39% at September
30, 1997. The ratio of deliquent loans as a percentage of gross loans was
1.2% at September 30, 1997. Loan quality remains strong on ONBANCorp.
15
The following table sets forth the activity in the allowance for loan
losses for the nine months ended September 30, 1997 and the years ended
December 31, 1992 through 1996:
- -------------------------------------------------------------------------------------------------------------
September 30, December 31,
------------- ----------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
Beginning balance $ 37,840 34,583 33,775 32,717 31,722 13,064
Charge-offs
Mortgage loans 2,010 2,804 3,749 3,706 748 1,623
Commercial loans 539 1,136 1,437 1,746 7,303 8
Other loans 2,547 2,698 2,405 2,686 3,684 639
- -------------------------------------------------------------------------------------------------------------
Total Charge-offs 5,096 6,638 7,591 8,138 11,735 2,270
- -------------------------------------------------------------------------------------------------------------
Recoveries
Mortgage loans 437 1,073 630 236 1 30
Commercial loans 169 514 352 598 1,341 9
Other loans 426 495 627 724 1,091 93
- -------------------------------------------------------------------------------------------------------------
Total recoveries 1,032 2,082 1,609 1,558 2,433 132
- -------------------------------------------------------------------------------------------------------------
Net charge-offs 4,064 4,556 5,982 6,580 9,302 2,138
- -------------------------------------------------------------------------------------------------------------
Provision for loan losses 5,386 7,813 6,790 7,638 10,297 5,900
Allowance of combined banks -- -- -- -- -- 14,896
- -------------------------------------------------------------------------------------------------------------
Ending balance $ 39,162 37,840 34,583 33,775 32,717 31,722
- -------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding 0.16% 0.19% 0.28% 0.35% 0.47% 0.14%
- -------------------------------------------------------------------------------------------------------------
The following table sets forth the allocation of the allowance for loan losses:
- -------------------------------------------------------------------------------------------------------------
September 30, December 31,
------------- ----------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
Mortgage loans $ 15,811 16,532 15,629 17,374 17,313 15,237
Mortgage loans to total loans 53.07% 54.14% 59.36% 59.74% 60.68% 60.93%
Construction loans $ 2,038 1,486 1,060 340 340 150
Construction loans to total
loans 2.33% 2.17% 2.30% 1.58% 1.64% 1.63%
Commercial loans $ 13,170 11,851 11,801 10,676 10,856 10,774
Commercial loans to total
loans 13.56% 13.39% 11.98% 11.32% 9.84% 9.47%
Other loans $ 8,143 7,971 6,093 5,385 4,208 5,561
Other loans to total loans 31.04% 30.30% 26.36% 27.36% 27.84% 27.97%
- -------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 39,162 37,840 34,583 33,775 32,717 31,722
- -------------------------------------------------------------------------------------------------------------
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.
16
The following table sets forth information with respect to loans delinquent
for 90 days or more, restructured loans and other nonperforming assets:
- ---------------------------------------------------------------------------------------------------------------------
September December 31,
30, -------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Delinquent mortgage loans:
Residential $11,985 12,518 13,045 13,303 12,341 14,430
Multi family and commercial 13,323 7,891 9,063 8,591 7,546 7,864
- ---------------------------------------------------------------------------------------------------------------------
Total delinquent mortgage loans 25,308 20,409 22,108 21,894 19,887 22,294
- ---------------------------------------------------------------------------------------------------------------------
As a percentage of gross mortgage loans 1.6% 1.5% 1.5% 1.8% 1.7% 1.7%
- ---------------------------------------------------------------------------------------------------------------------
Delinquent commercial loans: $ 7,966 4,245 4,387 5,593 6,655 9,782
- ---------------------------------------------------------------------------------------------------------------------
As a percentage of gross commercial loans 2.0% 1.3% 1.6% 2.5% 3.6% 4.9%
- ---------------------------------------------------------------------------------------------------------------------
Delinquent other loans:
Home equity $ 484 599 738 720 414 528
Guaranteed student 524 222 183 157 97 902
Loans to individuals 1,768 1,602 1,542 1,396 1,651 1,815
- ---------------------------------------------------------------------------------------------------------------------
Total delinquent other loans $ 2,776 2,423 2,463 2,273 2,162 3,245
- ---------------------------------------------------------------------------------------------------------------------
As a percentage of gross other loans 0.3% 0.3% 0.4% 0.4% 0.4% 0.6%
- ---------------------------------------------------------------------------------------------------------------------
Delinquent loans as a percentage of gross loans 1.2% 1.1% 1.2% 1.5% 1.5% 1.7%
- ---------------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Non-accrual loans $20,211 20,172 23,580 22,525 25,381 30,236
Accruing loans delinquent 90 days or more 12,142 2,464 2,586 2,386 3,323 5,085
Restructured loans 3,697 4,441 2,792 4,849 5,559 4,053
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 36,050 27,077 28,958 29,760 34,263 39,374
Other nonperforming assets:
Other real estate owned 4,355 4,054 4,019 5,431 10,719 17,332
Repossessed assets 1,868 732 441 335 666 327
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $42,273 31,863 33,418 35,526 45,648 57,033
- ---------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of non-
performing loans 108.63% 139.75% 119.42% 113.49% 95.49% 80.57%
Nonperforming assets as a percentage of total
assets 0.76% 0.59% 0.60% 0.53% 0.79% 1.21%
- ---------------------------------------------------------------------------------------------------------------------
Potential problem loans at September 30, 1997 amounted to $40.2 million
compared with $18.1 million at September 30, 1996. "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 borrower's inability to comply with the present loan
repayment terms. 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.
17
OTHER OPERATING INCOME
Other operating income, which is generated by mortgage banking activities,
service charges, security transactions and miscellaneous other sources,
decreased by $.7 million and increased by $1.2 million for the three and nine
month periods ended September 30, 1997 compared to the respective prior year
periods.
Mortgage banking income decreased by $.1 million for the three and nine
month periods ended September 30, 1997 compared to the respective prior year
periods. The volume of loans serviced for others decreased from $1.082 billion
at September 30, 1996 to $1.045 billion at September 30, 1997.
Service charges increased $.5 million or 9% and $2.0 million or 14% for
the three and nine month periods ended September 30, 1997 compared to the
respective prior year periods. Increasing volumes of retail and commercial
banking business and consumer electronic banking services 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.
Net gains on security transactions decreased by $.7 million and increased by
$.9 million in the three and nine month periods ended September 30, 1997
compared to the respective prior year periods. Gains from the sale of trading
securities are primarily responsible for these changes.
Other income decreased by $.4 million and $1.6 million in the three and nine
month periods ended September 30, 1997 compared to the respective prior year
periods. Included in the 1996 nine month period are non-recurring items of a
$2.9 million gain on sale of three small branches and a $1.3 million loss on
sale of a building.
Continuing to increase other operating income in the future is a strategic
goal of the Company. The primary sources of the increases are targeted in the
retail and commercial banking areas along with electronic banking.
OTHER OPERATING EXPENSES
Third quarter and nine month operating expenses decreased $5.1 million and
$3.2 million from the comparative prior year periods. Excluding $3.7 million
capital trust securities expense for the nine months ended September 30, 1997
and the $7.3 million one-time deposit insurance assessment in 1996, operating
expenses year to date increased by $.4 million or less than 1%. Excluding the
capital trust securities expense, an efficiency ratio of 56.1% for the first
nine months of 1997 reflects ongoing control of other operating expenses.
DIVIDENDS
Payments of dividends by ONBANCorp on its common stock is subject to various
regulatory and tax restrictions. During the three and nine month periods ended
September 30, 1997 the Company declared dividends of $.34 and $1.02
respectively, per common share amounting to $4.3 million and $13.4 million
respectively. These dividends were paid in April, July and October of 1997 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 used by operating activities was
$13.4 million for the first nine months of 1997 compared to the $6.2 million net
cash used the prior year period. Investing activities used $112 million with
proceeds from sales, maturities and principal collected on securities exceeding
purchases of securities by $275 million, offset by the funding of loans
exceeding sales, maturities and principal collected by $385 million. The major
use of financing activity funds was to reduce net advances from Federal Home
Loan Bank and purchase treasury stock, with cash provided by the increase in
time deposits and the issuance of Capital Trust Securities, with total cash
provided from financing activities totaling $98 million. Cash and cash
equivalents of $155 million at September 30, 1997 were $25 million less than at
September 30, 1996.
18
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
The equity to asset ratio was 5.88% on September 30, 1997 as measured by
shareholders' equity of $325 million and assets of $5.532 billion. ONBANCorp's
capital ratios exceed all regulatory requirements, including the Company's
regulatory Tier I leverage capital ratio of 7.1% and total risk adjusted capital
ratio of 13.3%. Each of the Banks significantly exceeds the regulatory targets
of 5.0% and 10.0% , respectively, for "well capitalized" institutions.
19
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this
quarterly report on Form 10-Q.
NO. Exhibit
-- -------
11 Earnings Per Share Computations
27 Selected Financial Data
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 10, 1997, reporting the execution
of an agreement and plan of reorganization on October 28,1997 with First Empire
State Corporation, a New York corporation and Olympia Financial Corp., a
Delaware corporation and a wholly owned subsidiary of First Empire State
Corporation.
20
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, 12 1997 Robert J. Bennett
Chairman, President
and Chief Executive Officer
/s/ Robert J. Berger
-------------------------------------
DATE: November 12, 1997 Robert J. Berger
Senior Vice President, Treasurer
and Chief Financial Officer