-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ArgbrC5EC90oBvLzRnjfWbsIgrc+YAD4UQ5DfoPMJ6KlFOPHmlyPJSc4tpSeUPOC fW6WpcvLgwnXsLznapg8Sg== 0001047469-98-013195.txt : 19980401 0001047469-98-013195.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013195 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONBANCORP INC CENTRAL INDEX KEY: 0000846609 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 161345830 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18011 FILM NUMBER: 98584194 BUSINESS ADDRESS: STREET 1: 101 S SALINA ST STREET 2: P O BOX 4983 CITY: SYRACUSE STATE: NY ZIP: 13202 BUSINESS PHONE: 3154244400 MAIL ADDRESS: STREET 1: 101 S SALINA STREET STREET 2: P O BOX 4938 CITY: SYRACUSE STATE: NY ZIP: 13221-4983 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1997 Commission File No.: 0-18011 ONBANCorp, Inc. --------------- (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 (315) 424-4400 - ------------------------------------------------- -------------- (Address of principal executive office and Zip Code) (Registrant's telephone number) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] As of February 3, 1998, the aggregate market value of the 12,465,887 shares of Common Stock of the Registrant outstanding on such date, excluding the 246,309 shares held by all directors and executive officers of the Registrant as a group, was $921,696,520. This figure is based on the last sale price of $73.9375 per share of the Registrant's Common Stock on February 3, 1998. Number of shares of Common Stock outstanding as of February 3, 1998: 12,712,196. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE - -------------------------------------------------------------------------------- (1) Portions of the Annual Report to Shareholders for the year ended December 31, 1997 are incorporated by reference into Part 11, Items 5, 6, 7 and 8 of this Form 10-K. - -------------------------------------------------------------------------------- TABLE OF CONTENTS FORM 10-K ANNUAL REPORT 1997 ONBANCorp, INC.
PAGE # ------ PART I - ------ Item 1. Business.......................................... 3 Item 2. Properties........................................ 20 Item 3. Legal Proceedings................................. 20 Item 4. Submission of Matters to Vote of Security Holders.. 20 PART II - ------- Item 5. Market for Registrant's Common Stock and Related Shareholder Matters................................ 20 Item 6. Selected Financial Data........................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................ 20 Item 7. A Quantitative & Qualitative Disclosures about Market Risk............................................... 20 Item 8. Financial Statements and Supplementary Data.......... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 21 PART III - -------- Item 10. Directors and Executive Officers of the Registrant... 21 Item 11. Executive Compensation............................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 21 Item 13. Certain Relationships and Related Transactions....... 21 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 22
PART I ITEM 1. BUSINESS General. ONBANCorp, Inc. (the "Company" or "ONBANCorp") is a Delaware chartered bank holding company which operated two wholly owned subsidiaries during 1997, OnBank & Trust Co. and Franklin First Savings Bank ("the Banks"). ONBANCorp completed a purchase transaction on December 31, 1992 for the Merchants National Bank & Trust Company of Syracuse and Union National Bank, Albany, New York (the "Combined Banks") previously owned by MidLantic Corporation. The Combined Banks had assets of $1 billion, deposits of $.9 billion and 40 locations in metropolitan Syracuse and Albany. Since the Combined Banks were purchased on the last day of the fiscal year, their assets are included in the Company's consolidated 1992 year-end balance sheet. On January 1, 1993, the Combined Banks were converted from national banks to New York State trust companies. On January 15, 1993 OnBank and the acquired banks were reorganized, resulting in the creation of OnBank & Trust Co., a New York trust company, having total assets of approximately $3.1 billion and 61 locations, and the reduction in size of OnBank, a New York State savings bank, to total assets of approximately $.4 billion and 9 locations. On August 31, 1993 the Company merged with Franklin First Financial Corp., and Franklin First Savings Bank ("Franklin") a $1.3 billion Pennsylvania thrift with deposits of $.8 billion and 22 locations and Franklin became a subsidiary of the Company. This merger has been accounted for using the pooling of interests method and, therefore, prior period results have been restated. During June of 1994 OnBank & Trust Co. acquired nine branches with $.3 billion in deposits in the Rochester metropolitan area and accounted for the acquisition using the purchase method. On January 1, 1997 OnBank and OnBank & Trust Co. merged, thereby creating a single banking entity in New York State, operating under the name of OnBank & Trust Co.. On October 28, 1997, the Company entered into an agreement and plan of reorganization for a merger with First Empire State Corporation. Shareholder approval of the merger was obtained on March 17, 1998. Upon consummation of the merger, which is expected to occur on April 1, 1998, OnBank & Trust Co. and Franklin First Savings Bank will be merged into a single interstate M&T Bank. Financial services are offered through 86 banking locations, including 7 specialized lending offices, plus 131 stand alone on-line cash machines at various convenience stores and turnpike locations. Management believes that ONBANCorp has the largest share of retail deposits in Onondaga County, New York and is currently the County's leading residential mortgage lender, in addition to having a significant market presence in adjacent Oneida and Cayuga Counties. As of December 31, 1997, ONBANCorp had total consolidated assets of $5.3 billion, deposits of $4.0 billion and shareholders' equity of $335.2 million. 3 The principal business of the Banks is to accept deposits from the general public and to invest those deposits, together with funds from borrowings and ongoing operations, in business, consumer, and residential mortgage loans. ONBANCorp has concentrated its efforts in the retail, municipal and commercial banking business, expanding the types of financial products and services, including trust offered to its customers. The Banks offer a variety of deposit and loan products designed to meet the needs of residents and businesses of its market area, as well as discount brokerage services through Investor Services, Inc. and non-insured mutual funds and annuities through Liberty Securities Corporation. The Company does not believe that any potential obligations and/or exposures to loss exist as a result of these activities with Investor Services, Inc. and Liberty Securities Corporation. At December 31, 1997 total assets were $5.3 billion, earning assets were $5.0 billion, deposits were $4.0 billion and shareholders' equity was $335.2 million, net of $17.4 million of net unrealized holding loss on securities. The unrealized holding loss relating to the held to maturity securities ($17.9 million) will be amortized into capital as the related securities are repaid. The following table sets forth the amortization, maturity and repricing schedule of the Company's interest earning assets and interest bearing liabilities for all future time periods as of December 31, 1997. Most of the Company's adjustable rate mortgages and adjustable rate mortgage-backed securities provide for limitations on the interest rate adjustments that may occur during any one adjustment period, as well as during the life of the loan. Such limitations could have the effect of reducing the interest rate sensitivity of these loans if interest rates were to significantly increase for prolonged periods. In periods of high interest rates, prepayment levels of fixed rate mortgage loans and mortgage-backed securities would be expected to decrease and conversely they would be expected to increase if interest rates were to decline. The principal amount for each asset and liability is shown in the first period in which it is expected to be repaid or the rate thereon is scheduled to be reset. 4
Less Than Three Greater Three Months to 1 to 5 Than (Dollars in Thousands) Months 1 Year Years 5 years Total - ------------------------------------------------------------------------------------------------ Interest earning assets Mortgage loans 49,356 39,256 106,102 1,291,202 1,485,916 Other loans 67,536 196,474 477,176 601,090 1,342,276 Loans available for sale 130,412 130,412 - ------------------------------------------------------------------------------------------------ Total loans 247,304 235,730 583,278 1,892,292 2,958,604 Securities 67,926 526,252 71,984 1,351,649 2,017,811 Federal funds sold and other 10,044 10,044 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Total interest earning assets 325,274 761,982 655,262 3,243,941 4,986,459 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Interest bearing liabilities Savings deposits 626,273 626,273 Time deposits 861,285 997,868 519,374 64,863 2,443,390 Money market accounts, NOW accounts, and escrow deposits 573,344 573,344 - ------------------------------------------------------------------------------------------------ Total deposits 2,060,902 997,868 519,374 64,863 3,643,007 Repurchae agreements 25,803 22,053 51,591 65,155 164,602 Other borrowings 56,500 378,800 188,370 34,778 658,448 - ------------------------------------------------------------------------------------------------ Total interest bearing liabilities $ 2,143,205 1,398,721 759,335 164,796 4,466,057 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Period excess (deficiency) (1,817,931) (636,739) (104,073) 3,079,145 520,402 As a percent of total earning assets -36.5% -12.8% -2.1% 61.8% 10.4% Cummulative excess (deficiency) (1,817,931) (2,454,670) (2,558,743) 520,402 As a percent of total earning assets -36.5% -49.2% -51.3% 10.4% - ----------------------------------------------------------------------------------------------
The following major assumptions are reflected in the above table: 1. Fixed rate mortgages and fixed rate mortgage-backed securities prepayment assumptions are based on dealer long-term prepayment estimates for similar coupons. 2. Adjustable rate assets whose yield is not limited by periodic caps use actual weighted average repricing dates. 3. Adjustable rate assets whose yield is affected by periodic caps are allocated in periods when full indexing is estimated to occur. 4. Other non-amortizing fixed rate assets use actual maturity date. 5. Deposits without contractual maturity (i.e. savings deposits and interest bearing transaction accounts) are included in the less than three months category. The most significant component of the earnings stream of the Banks is net interest income which is directly correlated to net interest margin. It is the intent of the Banks to minimize the sensitivity of the net interest margin to changes in interest rates. The overriding philosophy of management is to establish and maintain a reasonable balance between interest rate sensitive assets ("ISAs") and interest rate sensitive liabilities ("ISLs"). Duration and simulation modeling are the techniques which are used to monitor interest rate risk exposure. Realizing that a perfectly matched balance sheet is a nearly impossible task to maintain, the following parameters are used as guidelines for operations. 5 Duration Analysis: This technique analyzes the cash flows of assets and liabilities discounted by current interest rates. The net dollar duration for the one year time frame represents the present value of expected cash flows to be received or paid out for assets or liabilities over the next year and is considered an important duration measure as it relates to the extent of near term interest rate risk in the balance sheet. The goal for this measure shall be to maintain the one year net dollar duration divided by average earning assets between plus or minus ten percent. This analysis technique requires that certain assumptions be made regarding flows of deposits and loan payments that are different than those in the preceding table. Estimates regarding loan prepayments and conversion of deposit accounts are based upon assumptions which have considered historical data and anticipated interest rates. The Company prepares GAP information only for regulatory reporting purposes and does not rely upon it for managing interest rate risk. Duration analysis is considered more comprehensive, therefore, emphasis is placed upon keeping within that guideline. At December 31, 1997 the Company was 4.5% asset sensitive on a duration basis. Based upon the results of the duration analysis at December 31, 1997 it appears that the Company is minimally exposed to interest rate changes over a one year period. The Company also performs simulation analyses which includes increasing and decreasing the interest rates on a parallel basis as well as analyzing scenarios in which the yield curve flattens or steepens or changes shape in some other fashion. The results of these scenarios are also used to help evaluate the Company's overall interest rate risk exposure. Simulations were performed at December 31, 1997 for three intest rate scenarios. Rates rising and falling by 50 basis points per quarter for one year and remaining constant for the next two years, and rates remaining constant for three years. The results indicated improving net interest income in the steady and rising rate scenarios and slightly declining net interest income in the declining interest rate scenario. Lending Activities Loan Portfolio. ONBANCorp's net loan portfolio totaled $3.09 billion at December 31, 1997, representing 55.69% of its total assets. Its mortgage loan portfolio is comprised principally of loans secured by first mortgages on one-to-four family residences and generally underwritten in conformity with secondary market standards. These loans are either conventional or insured by the Federal Housing Administration (the "FHA") or partially guaranteed by the Veterans Administration (the "VA"). In addition, the loan portfolio includes mortgage loans secured by income producing commercial real estate or multi-family dwellings, commercial, and other loans, such as home improvement, automobile, manufactured home, guaranteed student loans, secured and unsecured personal loans and home equity lines of credit. 6 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, --------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------- ----------------- ---------------- ---------------- ---------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - ---------------------------------------------------------------------------------------------------------------------------------- Mortgage loans Residential 1-4 family $1,201,660 39.8% 1,057,200 42.5% 1,132,947 48.6% 1,002,434 50.1% 963,803 50.7% Multi family and commercial 336,568 11.2% 290.121 11.7% 248,325 10.7% 193,150 9.7% 191,683 10.1% Construction 62,806 2.1% 53,998 2.2% 53,624 2.3% 31,642 1.6% 31,111 1.6% - ---------------------------------------------------------------------------------------------------------------------------------- Total mortgage loans 1,601,034 53.1% 1,401,319 56.4% 1,434,896 61.6% 1,227,226 61.4% 1,186,597 62.4% - ---------------------------------------------------------------------------------------------------------------------------------- Commercial loans 463,154 15.4% 333,073 13.4% 278,688 12.0% 226,538 11.3% 187,250 9.8% - ---------------------------------------------------------------------------------------------------------------------------------- Other loans: Home equity 114,602 3.8% 114,928 4.6% 115,641 5.0% 120,888 6.0% 135,292 7.1% Auto leases 289,926 9.6% 130,885 5.3% 42,636 1.8% 4,794 0.2% - 0.0% Other consumer 546,721 18.1% 508,251 20.4% 455,081 19.6% 422,027 21.1% 394,707 20.7% - ---------------------------------------------------------------------------------------------------------------------------------- Total other loans 951,249 31.5% 754,064 30.3% 613,358 26.4% 547,709 27.3% 529,999 27.8% - ---------------------------------------------------------------------------------------------------------------------------------- Gross loans 3,015,437 100.0% 2,488,456 100.1% 2,326,942 100.0% 2,001,473 100.0% 1,903,846 100.0% Net deferred fees (17,769) (1,223) 2,185 5,186 (6,036) Allowance for loan losses (39,064) (37,840) (34,583) (33,775) (32,717) - ---------------------------------------------------------------------------------------------------------------------------------- Net loans $2,958,604 2,449,393 2,294,544 1,972,884 1,865,093 - -----------------------------------------------------------------------------------------------------------------------------------
The cash flow from these loans, the preponderance of which are amortizing, provides liquidity for both funding new loans and/or general corporate purposes. The following table sets forth scheduled maturities of ONBANCorp's commercial and construction loan portfolio as of December 31, 1997 based on contract terms.
- ------------------------------------------------------------------------------- Maturing: --------- In 1 Year 1 to 5 After Total (In thousands) or Less Years 5 Years Loans - -------------------------------------------------------------------------------- Construction $ 49,487 12,524 795 62,806 Commercial(1) 247,157 244,299 308,266 799,722 - -------------------------------------------------------------------------------- Total commercial and construction $296,644 256,823 309,061 862,528 - -------------------------------------------------------------------------------- Predetermined interest rates 83,908 74,145 Adjustable interest rates 172,915 234,916 - ---------------------------------------------------------------------- Total $ 256,823 309,061 - --------------------------------------------------------------------------------
- ---------- (1) Includes commercial real estate loans. Origination, Purchase and Sale of Loans. Residential mortgage loan originations were $171 million in 1997, $195 million in 1996 and $254 million in 1995. Based on market conditions and other competitive factors, ONBANCorp supplemented its mortgage loan originations during 1997 and 1995 with the purchase of $208 million and $58 million, respectively of adjustable rate mortgage loans for its portfolio. Purchases of these adjustable rate mortgage loans which were both located in Upstate New York but outside the Syracuse area also provides a means for the Company to geographically diversify its residential mortgage loan portfolio. The purchase of loans further outside of a 7 Company's primary market area may involve certain risks, including adverse conditions in the general economy, economic conditions in the particular geographic region where the property securing the loan is located and risks associated with lending in a market area in which a lender may have limited knowledge and experience. In order to meet consumer demand for fixed rate mortgage loans, ONBANCorp has continued to originate conventional fixed rate mortgage loans. Based upon the absolute level of interest rates along with other considerations, the Banks either sell fixed rate mortgage loans in the secondary market or they may retain them in portfolio. Loans designated as available for sale are accounted for on a lower of cost or market (LOCOM) basis. The Company generally retains the servicing of loans sold in the secondary market, for which the Company earns a servicing fee. The following table shows the gross loan origination activity of the Company during the periods indicated.
-------------------------------------------------------------------- Year ended December 31, --------------------------------- (Dollars in Thousands) 1997 1996 1995 -------------------------------------------------------------------- Loans originated: Mortgage: Residential 1-4 family $ 171,408 $ 195,486 253,760 Multi-family, commercial and construction 195,745 156,985 117,592 -------------------------------------------------------------------- Total mortgage loans $ 367,153 $ 352,471 371,352 Commercial 252,588 159,427 153,334 Other 473,322 411,031 296,193 -------------------------------------------------------------------- Total loans originated $1,093,063 $ 922,929 820,879 --------------------------------------------------------------------
Residential Real Estate Lending. Management believes that ONBANCorp is among the leading originators of residential real estate mortgage loans in Onondaga County. Most of the residential mortgage loans originated by the Company are secured by first mortgages on real estate located in the Banks' upstate New York and northeastern Pennsylvania market area. Most residential loan originations are attributable to bank-employed solicitors who are paid on a incentive basis and referrals from real estate brokers and builders, depositors and walk-in customers. ONBANCorp has continued to originate conventional fixed rate mortgage loans. Such loans are offered for terms up to 30 years and are offered at a rate based on current market and economic conditions. Fixed-rate loans originated have periodically been sold in the secondary market as either whole loans or mortgage-backed securities with the servicing retained. This activity accommodated many customers' desires for fixed rate mortgages and provides for the Company's ongoing control of interest rate risk while continuing to maintain customer relationships. At December 31, 1997, as a result of this ongoing process of loan securitization and sales, loans serviced for others were $1.0 billion, from which the Company will continue to derive future servicing 8 income. When loans are sold in the secondary market ONBANCorp generally retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of the borrowers and otherwise servicing the loans. ONBANCorp receives a fee for performing such services and is also entitled to the interest income earned on escrow accounts and loan payments held by it before being remitted to the investor. Commercial Lending. ONBANCorp, Inc., through its subsidiaries, OnBank & Trust Co., OnBank and Franklin First Savings Bank provides commercial and industrial loans, commercial real estate loans, construction loans, agricultural loans, and loans to individuals, usually for investment purposes. Commercial and industrial loans are offered to small businesses in the trade areas serviced by the full service branches of the subsidiary banks. Such loans are available to borrowers for seasonal working capital purposes, to acquire plant and equipment, or to finance a business acquisition or expansion. Loans of this type are customarily collateralized by the assets of the borrowers. Repayment of these loans is dependent primarily upon the continued profitable operation of the borrower's business, hence the borrower's historical financial results, the characteristics of the industry, the character and ability of management, current financial position, and financial forecasts and business plans are all carefully scrutinized during the loan approval process. The Banks are active in developing loans which can be guaranteed by the Small Business Administration, and New York State and Pennsylvania agencies who offer loan guarantees. OnBank & Trust Co. is a Small Business Administration Certified Lender, and the other subsidiary Banks are pursuing that designation also. This should enhance the continued development of the guaranteed loan portfolio. Commercial real estate and construction loans are offered by the Banks only in the trade areas serviced by full service branches. The Banks emphasize relationship banking thus real estate and construction loans are normally available only to borrowers whose primary deposit relationships are maintained with the Banks. Real estate loans are customarily collateralized by owner occupied properties and the Banks usually require recourse to the owner. Professional offices, manufacturing, and distribution facilities are the most common types of real estate financed. The Banks also make available, for well established local entities, financing for multi-family housing primarily in the low to moderate income neighborhoods served by the Banks. Construction loans offered by the Banks are available when a permanent take out also exists. Loan amounts for commercial real estate loans are normally seventy-five percent (75%) of cost or appraised value (whichever is less). The primary source of repayment is expected to be the continuing profitable operation of the owner/occupant's business. Thus underwriting for these loans is little different than the requirements for commercial and industrial loans. Some of the geographic trade area of ONBANCorp includes land used for agricultural purposes. The Banks' branches serving these areas provide a variety of commercial loans to acquire land, purchase equipment or to fund the production cycle of livestock, dairy, and cash crop operators. Occasionally the Banks will provide loans to individuals needing liquidity. These loans usually require the pledge of negotiable collateral. Other Consumer Lending. New York State and Pennsylvania Banking Laws permit the Banks to engage in virtually all types of consumer lending. At December 31, 1997, the Banks' gross consumer loan 9 portfolio of $951 million consisted of guaranteed student loans, conventional home improvement loans, home equity lines of credit, loans on manufactured homes, loans and leases on automobiles, loans collateralized by savings accounts, lines of credit and other secured and unsecured loans. Borrowers pay a variable rate of interest on home equity lines of credit, which ranges from 0% to 2.50% over the prime rate, and are permitted under the Banks' policy to borrow up to 75% of the appraised value of their homes, less any outstanding mortgage loans on such premises. Interest paid on home equity loans is deductible by the borrower for federal income tax purposes within prescribed limits. The Banks' gross portfolio of home equity lines of credit totaled $115 million at December 31, 1997. Delinquencies. When a borrower fails to make a scheduled payment on a loan, the Banks take steps to have the borrower cure the delinquency. Such steps include written notices of delinquency and contact by telephone by the Banks' collection staff. All income producing property loans are reviewed monthly by management. If the delinquency exceeds 90 days and is not cured through the Banks' normal collection procedures, the Banks routinely place the loan on a nonaccrual status, charge off any accrued interest, review it with the Executive Committee of the Board quarterly, and institute measures to enforce its rights, including, in the case of mortgage loans, commencing foreclosure action. In certain cases, the Banks also consider accepting from the mortgagor a voluntary deed to the mortgage premises in lieu of foreclosure. Other loan delinquencies are remedied in a similar fashion. For secured loans, the collateral is repossessed and sold to pay off the loan balance. In the case of unsecured loans, the Banks either commence legal action to collect the balance or negotiate a "work out" payment schedule over a period which may exceed the original term of the loan. Nonaccruing loans increased to $23.4 million at December 31, 1997 from $20.2 million at December 31, 1996. Accrual of interest is discontinued when a loan becomes 90 days delinquent unless management believes, after considering economic and business conditions, collateral value and collection efforts, that continued accrual is warranted. For the nonaccruing loans shown on page 12, the amount of interest income that would have been recorded if these loans had been paid in accordance with their original terms as well as the amount of interest income that was recorded in each of the years was immaterial. Delinquencies in the Company's portfolio of conventional residential mortgage loans in its primary market area accounted for $11.7 million or 87% of the $13.5 million of conventional residential mortgage loans over 90 days delinquent at December 31, 1997. Delinquencies in the Company's portfolio of purchased adjustable rate mortgage loans serviced by others accounted for the remaining $1.8 million or 13% of the conventional residential mortgage loans over 90 days delinquent at December 31, 1997. Additionally, almost all other delinquent loans were located in New York State and Pennsylvania. 10 The following table sets forth information with respect to loans delinquent for 90 days or more and nonaccrual loans.
- -------------------------------------------------------------------------------- December 31, ------------------------------------------- (Dollars in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Delinquent mortgage loans: Residential $13,454 12,518 13,045 13,303 12,341 Multi family and commercial 7,255 7,891 9,063 8,591 7,546 - -------------------------------------------------------------------------------- Total delinquent mortgage loans 20,709 20,409 22,108 21,894 19,887 - -------------------------------------------------------------------------------- As a percent of gross mortgage loans 1.3% 1.5% 1.5% 1.8% 1.7% - -------------------------------------------------------------------------------- Delinquent commercial loans: $ 6,850 4,245 4,387 5,593 6,655 - -------------------------------------------------------------------------------- As a percent of gross commercial loans 1.5% 1.3% 1.6% 2.5% 3.6% - -------------------------------------------------------------------------------- Delinquent other loans: Home equity $ 340 599 738 720 414 Guaranteed student 480 222 183 157 97 Loans to individuals 1,678 1,602 1,542 1,396 1,651 - -------------------------------------------------------------------------------- Total delinquent other loans $ 2,498 2,423 2,463 2,273 2,162 - -------------------------------------------------------------------------------- As a percentage of gross other loans 0.3% 0.3% 0.4% 0.4% 0.4% - ------------------------------------------------------------------------------- Delinquent loans as a percentage of gross loans 1.0% 1.1% 1.2% 1.5% 1.5% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Nonperforming loans: Nonaccrual loans $23,400 20,172 23,580 22,525 25,381 Accruing loans delinquent 90 days or more 4,624 2,464 2,586 2,386 3,323 Restructured loans 2,033 4,441 2,792 4,849 5,559 - ------------------------------------------------------------------------------- Total nonperforming loans 30,057 27,077 28,958 29,760 34,263 Other nonperforming assets: Other real estate owned 4,908 4,054 4,019 5,431 10,719 Repossessed assets 2,772 732 441 335 666 - ------------------------------------------------------------------------------- Total nonperforming assets $37,737 31,863 33,418 35,526 45,648 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Allowance for loan losses as a percentage of non-performing loans 129.97% 139.75% 119.42% 113.49% 95.49% Nonperforming assets as a percentage of total assets 0.71% 0.59% 0.60% 0.53% 0.79% - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
"Potential problem loans" at December 31, 1997 amounted to $33,195,000 compared with $20,833,000 at December 31, 1996. These problem loans are defined as loans and commitments not included as non-performing loans discussed above, but about which management, through normal internal credit review procedures, has developed information regarding possible credit problems which may cause the borrowers future difficulties in complying with present loan repayment terms. There were no loans classified for regulatory purposes as loss, doubtful or substandard that are not included above or which caused 11 management to have serious doubts as to the ability of the borrower to comply with repayment terms. In addition, there were no material commitments to lend additional funds to borrowers whose loans were classified as non-performing. Allowance for Loan Losses. The allowance for loan losses is increased by provisions for loan losses charged to operations and decreased by charge-offs of loans, net of recoveries. Management's quarterly evaluation of the adequacy of the allowance takes into consideration the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrower's ability to repay, overall portfolio quality, and current and prospective economic conditions. In considering the sound nature of the overall loan portfolio and the potential for charge-offs, ONBANCorp kept its provision for loan losses relatively stable at $7.2 in 1997 compared to $7.8 million in 1996. The allowance, when expressed as a percentage of loans, decreased somewhat to 1.30% at December 31, 1997 from 1.52% at year end 1996. Management believes the allowance for loan losses is adequate. The following table sets forth the activity in the allowance for loan losses for the periods indicated:
December 31, --------------------------------------------- (Dollars in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Beginning balance $ 37,840 34,583 33,775 32,717 31,722 Charge-offs Mortgage loans 2,692 2,804 3,749 3,706 748 Commercial loans 861 1,136 1,437 1,746 7,303 Other loans 3,939 2,698 2,405 2,686 3,684 - -------------------------------------------------------------------------------- Total charge-offs 7,492 6,638 7,591 8,138 11,735 - -------------------------------------------------------------------------------- Recoveries Mortgage loans 634 1,073 630 236 1 Commercial loans 315 514 352 598 1,341 Other loans 599 495 627 724 1,091 - -------------------------------------------------------------------------------- Total recoveries 1,548 2,082 1,609 1,558 2,433 - -------------------------------------------------------------------------------- Net charge-offs 5,944 4,556 5,982 6,580 9,302 - -------------------------------------------------------------------------------- Provision for loan losses 7,168 7,813 6,790 7,638 10,297 - -------------------------------------------------------------------------------- Ending balance $ 39,064 37,840 34,583 33,775 32,717 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Ratio of net charge-offs to average loans outstanding 0.22% 0.19% 0.28% 0.35% 0.47% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The majority of the chargeoffs in 1993 and 1994 were related to non-performing loans of the Combined Banks including commercial real estate loans which were resolved during 1994. Although non-performing assets have increased from $31.9 million at December 31, 1996to $37.7 million at December 31, 1997, the balance continues to represent the same approximate ratio of gross loans at 1.0%. In each of the last five years the provision for loan losses has exceeded net charge offs and the allowance for loan losses has increased. The level of the loan loss allowance continues to more than cover non-performing loans at 130.0% at December 31, 1997. The significantly large provision for loan losses for 1993 relates to the deterioration of certain loans of the Combined Banks along with the increased emphasis on commercial 12 lending within the overall Company and the inherently higher risk factors associated with this type of lending. Commercial loans as a percentage of gross loans receivable have increased from $187.3 million or 9.8% at December 31, 1993 to $463.2 million or 15.4% at December 31, 1997. The loan loss allowance is considered by management to be a general allowance available to cover loan losses within the entire portfolio. The following table has been prepared to comply with requirements of the Securities Exchange Commission. The classifications within the table are based on management's current assessment of the loss potential associated with specific loans and elements of the portfolio. Allocation is especially problematical because of the difficulties inherent in predicting and evaluating with any degree of accuracy the impact of economic events. Management cautions that the loan loss allowance allocation provided does not necessarily represent the total amount which may or may not be available for actual future losses in any one or more of the categories. Management is of the opinion that the loan loss allowance as of December 31, 1997 is adequate as a general allowance. The following table sets forth the allocation of the allowance for loan losses at December 31:
December 31, -------------------------------------------- (Dollars in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Mortgage loans $ 14,119 16,532 15,629 17,374 17,313 Mortgage loans to total loans 51.01% 54.14% 59.36% 59.74% 60.68% Construction loans $ 1,872 1,486 1,060 340 340 Construction loans to total loans 2.08% 2.17% 2.30% 1.58% 1.64% Commercial loans $ 14,998 11,851 11,801 10,676 10,856 Commercial loans to total loans 15.36% 13.39% 11.98% 11.32% 9.84% Other loans $ 8,075 7,971 6,093 5,385 4,208 Other loans to total loans 31.55% 30.30% 26.36% 27.36% 27.84% - -------------------------------------------------------------------------------- Total allowance for loan losses $ 39,064 37,840 34,583 33,775 32,717 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Securities Activities. The Company has authority to purchase a wide range of securities deemed prudent by management, subject to various regulatory restrictions. The Board of Directors establishes the investment policy of the Company based upon the recommendations of the executive asset/liability team and the Board reviews the results of all transactions and activities in the securities portfolio on a monthly basis. As of December 31, 1997, ONBANCorp's securities portfolio totaled $2.0 billion, constituting 37.9% of total assets down from 48.2% at December 31, 1996. The Company's strategy has been to decrease the percentage of investments to assets and to increase the percentage of loans to assets. For purposes of this discussion, mortgage-backed securities are considered securities rather than loans even though securities can represent loans which have been originated and securitized. As of November 15, 1995, all companies subject to FAS 115 were permitted a one-time opportunity to reallocate securities previously classified as held to maturity into the available for sale category without calling into question the Company's intent to hold the remaining securities to maturity. ONBANCorp availed itself of this opportunity and transferred approximately $1.54 billion in securities from held to maturity to available for sale. Following this move the Company sold approximately $1.2 billion of its available for sale securities and used the proceeds to pay down borrowings and fund future loan growth. This sale enabled the Company to shrink the absolute levels of securities and borrowings. The yield on assets sold was approximately the same as the cost of the borrowings repaid, therefore, net interest income 13 was not adversely affected. Prepayment fees related to the prepayment of borrowings were more than offset by gains on securities sold. The future implications of these actions were that net interest income would remain approximately the same, however, net interest margin would improve because net interest income (the numerator) would remain approximately the same while the average earning assets (the denominator) would significantly diminish by approximately $1 billion. Total securities have declined to $2.02 billion at December 31, 1997 from $2.61 billion at December 31, 1996 from $2.74 billion at December 31, 1995 and on a percentage basis represent 38% ,48% and 49% of total assets on those respective dates. The following table sets forth ONBANCorp's investment portfolio at carrying value at the dates indicated. For information relating to the estimated fair value of the Company's investment portfolio at December 31, 1997 and 1996, see "Notes to Consolidated Financial Statements-Note 3".
- -------------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Debt securities: U.S. Government obligations $ 34,211 $ 33,961 29,716 U.S. Government agencies 155,442 200,416 199,206 State and municipal 55,385 61,668 74,351 Corporate and other 6,958 329 424 - -------------------------------------------------------------------------------- Total debt securities 251,996 296,374 303,697 - -------------------------------------------------------------------------------- Mortgage-backed securities: GNMA 73,512 137,594 189,692 FNMA 98,135 233,968 253,659 FHLMC 179,170 410,325 395,442 SBA 5,776 22,748 27,028 Collateralized mortgage obligations: Agency 833,882 786,008 878,056 Non-agency 527,627 676,177 627,982 - -------------------------------------------------------------------------------- Total mortgage-backed securities 1,718,102 2,266,820 2,371,859 - -------------------------------------------------------------------------------- Equity securities: Preferred stock - 1,022 1,040 Common stock 1,394 718 764 Federal Home Loan Bank stock 46,319 46,041 64,484 - -------------------------------------------------------------------------------- Total equity securities 47,713 47,781 66,288 Total securities $ 2,017,811 $ 2,610,975 2,741,844 - --------------------------------------------------------------------------------
14 The following table presents the carrying value and weighted average book yield on debt and mortgage-backed securities at December 31, 1997 based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
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 $ 74,137 5.0% - - 36,631 4.7% State and municipal 21,700 4.6% 28,692 4.9% 4,470 5.0% Mortgage-backed and other 4,532 6.5% 19,008 5.5% 104,803 5.9 - ------------------------------------------------------------------------------------------------------------------------------ $ 100,369 5.0% 47,700 5.1% 145,904 5.6% - ------------------------------------------------------------------------------------------------------------------------------ Available for sale: Obligations of U.S. Government and U.S. Government agencies $ - 29,177 6.1% 15,052 7.3% Mortgage-backed and other - 3,226 7.6% 45,918 6.7% - ------------------------------------------------------------------------------------------------------------------------------ $ - 32,403 6.2% 60,970 6.7% - ------------------------------------------------------------------------------------------------------------------------------
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 - 110,768 4.9% State and municipal 523 5.5% 55,385 4.8% Mortgage-backed and other 881,668 6.5% 1,010,011 6.4% - --------------------------------------------------------------------------------------------- 882,191 6.5% 1,176,164 6.2% - --------------------------------------------------------------------------------------------- Available for sale: Obligations of U.S. Government and U.S. Government agencies 34,656 7.2% 78,885 6.8% Mortgage-backed and other 665,904 6.5% 715,048 6.5% - --------------------------------------------------------------------------------------------- 700,560 6.5% 793,933 6.6% - ---------------------------------------------------------------------------------------------
The Company does not anticipate any losses from principal payment deficiencies based upon the overall credit quality of the portfolio. None of the principal of the combined debt and mortgage-backed securities portfolio of $2.0 billion is classified as non-investment grade. Securities are classified as either trading, available for sale or held to maturity at the time of purchase. The overall asset/liability position of the Banks taken together with general financial market conditions are the principal determinants affecting the classification. As a result, similar securities with identical risks and characteristics can be classified as either available for sale or held to maturity depending upon the existing economic environment and asset/liability considerations. Collateralized mortgage obligations which the Banks have purchased are short-term in nature with a weighted average duration of between three and four years. Structured notes which the Banks have purchased do not have characteristics which put principal at risk if they are held to maturity. The fair value fluctuations which may occur are the result of changes in interest rates including the shape of the yield curve. Deposits. ONBANCorp has a number of programs designed to attract both short-term and long-term savings of the general public at interest rates consistent with market conditions. Included among these programs are savings accounts, NOW accounts, money market accounts, fixed rate certificates of deposit, fixed rate and variable rate IRA's, and negotiable rate certificates of deposit. During 1994, the Banks began issuing brokered deposits. Brokered time deposits were $411 million at December 31, 1997, up from the $319 million at December 31, 1996. The Company controls deposit flows primarily by the pricing of deposits and, to a lesser extent, by promotional activities. Management believes rates offered on deposit accounts are generally competitive with other financial institutions in the area; however, from time to time, market conditions may temporarily make more or less aggressive pricing strategies advantageous. 15 The following table sets forth deposits by type of account at December 31:
- -------------------------------------------------------------------------------- Percentage of Total (Dollars in Thousands) Amount Deposits - -------------------------------------------------------------------------------- Savings $ 626,273 15.6% Time deposits 2,032,348 50.5% NOW accounts(1) 296,580 7.4% Money market accounts (2) 276,764 6.9% Non-interest bearing demand accounts 380,099 9.4% Brokered time deposits 411,042 10.2% - -------------------------------------------------------------------------------- Total deposits $ 4,023,106 100.0% - --------------------------------------------------------------------------------
- ------------------------ (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) 1997 1996 1995 - -------------------------------------------------------------------------------- Deposits at beginning of year $ 3,821,906 3,808,273 3,793,343 Increase (decrease) in: Savings (66,548) (64,916) (86,757) Time deposits 100,828 128,916 203,949 NOW accounts 41,142 (8,526) (18,969) Money market accounts 10,200 17,436 (51,225) Non-interest bearing demand accounts 23,928 36,031 17,124 Brokered time deposits 91,650 (61,625) (49,192) Deposits of branches sold - (33,683) - - -------------------------------------------------------------------------------- Net increase in deposits during the year 201,200 13,633 14,930 - -------------------------------------------------------------------------------- Deposits at end of year $ 4,023,106 3,821,906 3,808,273 - -------------------------------------------------------------------------------- Net increase (decrease) before interest credit $ 34,069 (107,017) (142,154) Interest credited 167,131 154,333 157,084 Deposits sold - (33,683) - Net increase in deposits during the year $ 201,200 13,633 14,930 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
16 The remaining maturity on certificates of deposit of $100,000 and over at December 31, 1997 is presented below:
--------------------------------------------- Amount Maturity (In Thousands) --------------------------------------------- Three months or less $ 480,625 Over three through six months 77,218 Over six through twelve months 60,895 Over twelve months 42,817 --------------------------------------------- $ 661,555 ---------------------------------------------
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:
------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------- Return on average assets 0.94% 0.81% 0.71% Return on average equity 15.30% 11.42% 11.75% Dividend payout ratio 34.61% 41.06% 39.58% Average equity to average assets ratio 6.15% 7.05% 6.02% -------------------------------------------------------------------
17 Personnel. As of December 31, 1997, ONBANCorp has approximately 1,344 full-time equivalent employees. Supervision and Regulation. The banking industry is subject to extensive state and federal regulation and is undergoing significant change. In 1991, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA substantially amended the Federal Deposit Insurance Act ("FDI Act") and certain other statutes. Since FDICIA's enactment, the federal bank regulatory agencies have been adopting regulations to implement its statutory provisions. The following discussion summarizes certain aspects of the banking laws and regulations that affect the Company. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in the state legislature, and before the various bank regulatory agencies. The likelihood and timing of any changes, and the impact such changes might have on the Company are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of the Company. To the extent that the following information describes statutory or regulatory provisions, it is qualified entirely by reference to the particular statutory or regulatory provision. Bank Holding Company Regulation. As a registered bank holding company, the Registrant and its subsidiaries are subject to supervision and regulation under the Bank Holding Company Act of 1956, as amended (" the BHCA") by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the New York State Banking Superintendent ("Banking Superintendent"). The Federal Reserve Board requires regular reports from the Registrant and is authorized by the BHCA to make regular examinations of the Registrant and its subsidiaries. On September 29, 1994, President Clinton signed into law the Riegle-Neal Interstate Banking Efficiency Act of 1994 (the "Interstate Banking Act"). Generally, the Interstate Banking Act permits, bank holding companies to acquire banks in any state; permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank, permits a bank to acquire branches from an out-of-state bank, if the law of the state where the branches are located permits the interstate branch acquisition; and permits banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed. Banking holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the terms of the CRA, the Federal Deposit Insurance Corporation (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of the bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of a federally-regulated financial institution, or to open or relocate a branch office. In the case of a bank holding company applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant bank holding company in considering the application. The Banking Law contains provisions similar to the CRA which are applicable to state chartered banks. Supervision and Regulation of Bank Subsidiaries. The Registrant's banking subsidiaries are subject to regulation, and are examined regularly, by various bank regulatory agencies: OnBank & Trust by the 18 FDIC and the Banking Department of New York; and Franklin by the FDIC and Banking Superintendent of Pennsylvania. The Registrant and its direct subsidiaries are affiliates, within the meaning of the Federal Reserve Act, of the Registrant's subsidiary banks and their subsidiaries. As a result, the Registrant's subsidiary banks and their subsidiaries are subject to restrictions on loans or extensions of credit to, purchases of assets from, investments in, and transactions with the Registrant and its direct subsidiaries and on certain other transactions with them or involving their securities. Dividends from Bank Subsidiaries. The subsidiary banks are subject, under one or more of the banking laws, to restrictions on the amount and frequency (no more often that quarterly) of dividend declarations. Future dividend payments to the Registrant by its subsidiary banks will be dependent on a number of factors, including the earnings and financial condition of each such bank, and are subject to the limitations referred to in Note 18 of Notes to consolidated Financial Statements and to other statutory powers of bank regulatory agencies. See "Notes to Consolidated Financial Statements - Note 17" for details of Shareholder's Equity. Governmental Policies. The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and Federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operation and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in the monetary and fiscal policies, or the effect which they may have on the Company's business and earnings. Competition. The Company competes in offering commercial and personal financial services with other banking institutions and with firms in a number of other industries, such as personal loan companies, sales finance companies, leasing companies, securities brokers and dealers, insurance companies and retail merchandising organizations. Furthermore, diversified financial services companies are able to offer a combination of these services to their customers on a nationwide basis. Compared to less extensively regulated financial services companies, the Company's operations are significantly impacted by state and federal regulations applicable to the banking industry. Other Legislative Initiatives. From time to time, various proposals are introduced in the United States Congress and in the New York and Pennsylvania Legislatures and before various bank regulatory authorities which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other financial institutions. A number of bills have been introduced in Congress which would further regulate, deregulate or restructure the financial services industry. It is not possible to predict whether these or any other proposals will be enacted into law or, even if enacted, the effect which they may have on the Company's business and earnings. 19 ITEM 2. PROPERTIES ONBANCorp's executive offices are located at 101 South Salina Street, Syracuse, New York 13202. At December 31, 1997, ONBANCorp operated from 86 locations including 78 full service branches, 1 public accommodation office, and 7 specialized lending offices. The Company owned the building and land for 32 of its locations and leased space for 54 locations. In addition, the Banks operate 131 freestanding proprietary cash dispensers. The aggregate net book value of premises owned by ONBANCorp and leasehold improvements of leased offices (net of accumulated depreciation and amortization) at December 31, 1997, was $56,994,000. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which ONBANCorp or its subsidiaries are a party or to which any of their property is subject. In the opinion of management, after consultation with counsel, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of ONBANCorp. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information required herein is incorporated by reference from the section captioned "Description of Business" of the Company's 1997 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required herein is incorporated by reference from the table captioned "Selected Financial Data" on page 2 of the Company's 1997 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required herein is incorporated by reference from the section captioned "Management's Discussion and Analysis" on pages 3 to 10 of the Company's 1997 Annual Report. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See pages 5 and 6 of the Form 10K. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required herein is incorporated by reference from pages 32 to 51 of the Company's 1997 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 11. EXECUTIVE COMPENSATION Pursuant to instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or. if such proxy statement is not filed within such period, by reference to an amendment to this Form 10K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are incorporated by reference from Part 11 Item 8 hereof: (Annual Report to Shareholders included as Exhibit 13). Independent Auditors' Report Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Income for Each of the Years in the Three Year Period Ended December 31, 1997 Consolidated Statements of Changes in Shareholders' Equity for Each of the Years in the Three Year Period Ended December 31, 1997 Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 1997 Notes to Consolidated Financial Statements (a)(2) There are no financial statement schedules which are required to be filed as part of this form since they are not applicable. (a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index. (b) There are no Reports on Form 8-K required to be filed as part of this form. (c) Exhibits. The following exhibits are either filed as part of this annual report on Form 10-K, or are incorporated herein by reference.
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. 2.2 Agreement and Plan of Reorganization and related Agreement and Plan of Merger, each dated as of October 28, 1997, providing for the merger of ONBANCorp, Inc. with and into Olympia Financial Corp., a direct wholly owned subsidiary of First Empire State Corporation, incorporated by reference to Exhibit 2.1 to the registrant's Form 8-K filed with the Commission on October 28, 1997. 3.1 The registrant's Certificate of Incorporation, as amended as of January 25, 1993, incorporated by reference to Exhibit 3.1 to the registrant's Form 10-K filed with the Commission on March 31, 1994. 3.2 The registrant's Bylaws, as currently in effect, incorporated by reference to Exhibit 3.2 to the registrant's Registration Statement on Form S-1 filed with the Commission on January 16, 1990. 4.1 Certificate of Stock Designation of Series A Participating Preferred Stock, incorporated by reference to Exhibit 10.1 to the registrant's Registration Statement on Form S-1 filed with the Commission on January 16, 1990.
22
4.2 Rights Agreement, dated as of September 25, 1989, incorporated by reference to Exhibit 10.2 to the registrant's Registration Statement on Form S-1 filed with the Commission on January 16, 1990. 10.1 Employment Agreement, dated as of September 30, 1990 between ONBANCorp, Inc., OnBank and Robert J. Bennett, incorporated by reference to Exhibit 10.3 to the registrant's Form 10-K filed with the Commission on March 29, 1991. 10.2 Severance Agreement, dated as of July 30, 1990 between ONBANCorp, Inc., OnBank and three executive officers of registrant, incorporated by reference to Exhibit 10.4 to the registrant's Form 10-K filed with the Commission on March 29, 1991. 10.3 Supplemental Employee Retirement Agreement, dated as of January 1, 1991 between ONBANCorp, Inc. and Robert J. Bennett, incorporated by reference to Exhibit 10.5 to the registrant's Form 10-K filed with the Commission on March 29, 1991. 10.4 1991 Long-Term Incentive Plan, dated as of January 28, 1992, incorporated by reference to Exhibit 10.6 to the registrant's Form 10-K filed with the Commission on March 29, 1991. 10.5 Restated 1987 Stock Option and Appreciation Rights Plan, incorporated by reference to Exhibit 10.7 to the registrant's Form 10-K filed with the Commission on March 31, 1993, as amended. 10.6 1992 Director's Stock Option Plan, incorporated by reference to Exhibit 10.8 to the registrant's Form 10-K filed with the Commission on March 31, 1993, as amended. 10.7 Employment Agreement, dated as of November 17, 1992 between ONBANCorp, Inc., Franklin First Savings Bank and Thomas H. van Arsdale, incorporated by reference to Exhibit 10.7 to the registrant's Form 10-K filed with the commission on March 31, 1994. 10.8 Stock Option Agreement, dated as of November 17, 1992 between ONBANCorp, Inc. Franklin First Financial Corp., incorporated by reference to Exhibit 10.1 to the registrant's Form S-4 filed with the commission on April 14, 1993. 10.9 Employment Agreement, dated as of January 15, 1993 between ONBANCorp Inc., OnBank & Trust Co., OnBank and Robert J. Bennett, incorporated by reference to Exhibit 10.9 to the registrant's Form 10-K filed with the commission on March 31, 1994. 10.10 Assumption Agreement to the Supplemental Employee Retirement Agreement, dated as of January 15, 1993, between ONBANCorp Inc., OnBank & Trust Co., OnBank and three executive officers, incorporated by reference to Exhibit 10.10 to the registrant's Form 10-K filed with the commission on March 31, 1994. 10.11 Assumption Agreement to the Supplemental Employee Retirement Agreement, dated as of January 15, 1993, between ONBANCorp, Inc., OnBank & Trust Co., OnBank and Robert J. Bennett, incorporated by reference to Exhibit 10.11 to the registrant's Form 10-K filed with the commission on March 31, 1994.
23
13 Annual Report to Shareholders for the Year ended December 31, 1997. 21 List of Registrant's Subsidiaries. 23 Consent of Independent Auditors 27 Financial Data Schedules
(d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report which are required to be included herein. 24 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 23, 1998. ONBANCorp, Inc. By: /s/ Robert J. Bennett -------------------------- Robert J. Bennett Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title --------- ----- /s/ Robert J. Bennett ---------------------- Chairman of the Board, President, Robert J. Bennett Chief Executive Officer and Director /s/ David M. Dembowski ---------------------- Executive Vice President and David M. Dembowski Secretary /s/ Robert J. Berger ---------------------- Senior Vice President, Treasurer, Robert J. Berger Chief Financial Officer /s/ William F. Allyn ---------------------- Director William F. Allyn /s/ William J. Donlon ---------------------- Director William J. Donlon /s/ Lee H. Flanagan ----------------------- Director Lee H. Flanagan /s/ Russell A. King ----------------------- Director Russell A. King /s/ Henry G. Lavarnway, Jr. --------------------------- Director Henry G. Lavarnway, Jr. 25 -------------------------- Director John D. Marsellus /s/ J. Kemper Matt --------------------------- Director J. Kemper Matt /s/ Peter J. Meier --------------------------- Director Peter J. Meier /s/ Peter J. O'Donnell, Jr. --------------------------- Director Peter J. O'Donnell, Jr. ---------------------------- Director T. David Stapleton, Jr. /s/ William J. Umphred ----------------------------- Director William J. Umphred /s/ Thomas H. van Arsdale ----------------------------- Director Thomas H. van Arsdale ------------------------------ Director John L. Vensel /s/ Joseph N. Walsh, Jr. ------------------------------ Director Joseph N. Walsh, Jr. 26 EX-13 2 EXHIBIT 13 Annual Report to Shareholders EXHIBIT 13
Selected Financial Data 2 Management's Discussion and Analysis 3 Management's Statement of Responsibility 11 Independent Auditors' Report 11 Consolidated Balance Sheets 12 Consolidated Statements of Income 13 Consolidated Statements of Changes in Shareholders' Equity 14 Consolidated Statements of Cash Flows 15 Notes to Consolidated Financial Statements 17 Selected Quarterly Financial Data 41
1 Selected Financial Data
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in Thousands-Except Share Data) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- BALANCE SHEET AT PERIOD END Securities $2,017,811 2,610,975 2,741,843 3,890,687 3,627,804 Net loans 2,828,192 2,410,634 2,254,407 1,949,197 1,680,721 Total assets 5,319,570 5,417,877 5,567,059 6,723,305 5,772,280 Deposits 4,023,106 3,821,906 3,808,273 3,793,343 3,005,999 Repurchase agreements 164,602 254,471 361,617 1,058,316 1,251,050 Other borrowings 658,448 874,917 903,370 1,158,772 1,022,947 Shareholders' equity 335,197 360,051 388,766 362,936 430,638 OPERATIONS DATA Interest income $ 385,690 374,845 431,459 388,275 327,622 Interest expense 229,591 222,098 278,944 224,646 171,055 Net interest income 156,099 152,747 152,515 163,629 156,567 Provision for loan losses 7,168 7,813 6,790 7,638 10,297 Other operating income (loss) 40,634 36,262 29,301 (52,689) 46,066 Other operating expenses 109,345 110,614 103,462 99,890 98,666 Income taxes 29,042 27,618 26,887 708 35,707 Cummulative effect of accounting change(1) -- -- -- -- 3,400 Net Income 51,178 42,964 44,677 2,704 61,363 PER COMMON SHARE DATA Net income (loss) diluted $ 3.88 2.88 2.76 (0.15) 3.97 Dividends declared 1.36 1.24 1.14 1.03 0.69 Book Value 26.35 24.82 24.11 20.82 25.77
(1) Reflects the effect of the adoption of the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. 2 Management Discussion and Analysis Overview ONBANCorp, Inc.'s ("ONBANCorp" or "the Company") results of operations have been dependent upon the results of operations of its wholly owned subsidiaries. Prior to January 1, 1997 the Company operated three wholly owned subsidiaries, OnBank & Trust Co., OnBank and Franklin First Savings Bank ("Franklin"), collectively (the "Banks"). On January 1, 1997 OnBank and OnBank & Trust Co. merged, thereby creating a single banking entity in New York State, operating under the name of OnBank & Trust Co. On October 28, 1997, the Company entered into an agreement and plan of reorganization for a merger with First Empire State Corporation. Shareholder approval of the merger was obtained on March 17, 1998. Upon consummation of the merger, which is expected to occur on April 1, 1998, OnBank & Trust Co. and Franklin First Savings Bank will be merged into a single interstate M&T Bank. ONBANCorp's major market areas serve metropolitan populations across New York State and Northeastern Pennsylvania. The Upstate New York Region from Westchester County to the Great Lakes of Ontario and Erie, has a population approximating seven million. This exceeds the populations of forty individual states including the neighboring states of Connecticut and Massachusetts. The Wilkes-Barre/Scranton area of Northeastern Pennsylvania has strikingly similar characteristics to Syracuse, Rochester, Albany and Buffalo namely, large and diverse populations, a wide variety of industries, good transportation infrastructure, many colleges and numerous small businesses. The size and diversity of the markets served tend to inhibit any radical changes in economic growth, unemployment or real estate values. The economy of the area, therefore, tends to follow the national trends. These large target markets offer considerable potential in the small business and household sectors to broaden the base of banking services. At December 31, 1997 total assets were $5.3 billion, earning assets were $5.0 billion, deposits were $4.0 billion and shareholders' equity was $335.2 million, net of $17.4 million of net unrealized holding loss on securities. The unrealized holding loss relating to the 1994 available for sale securities transferred to held to maturity securities will be amortized into capital as the related securities are repaid. Net income for 1997 was $51.2 million or $3.88 per common share on a diluted basis ("EPS") compared to $38.8 million or $2.88 EPS for 1996. Excluding the effect of certain one time government mandated 1996 charges related to the special SAIF deposit insurance premium and other net banking industry charges related to the thrift industry, 1996 net income and EPS would have been $48.1 million and $3.22, respectively. Net interest income in 1997 of $156.1 million increased from the $152.7 million for the prior year. The 1997 net interest margin remained constant at 3.03%. Full year 1997 operating expenses decreased by $1.3 million primarily as a result of the absence of $7.3 million in one time special SAIF charges in 1996 and the addition of capital trust securities expense of $5.1 million in 1997. The 1997 efficiency ratio of 55.9%, which excludes the capital trust expense and $10.4 million of net gains on securities transactions, is considered to be within good banking industry performance standards. Asset quality remains very sound as measured by the 0.71% ratio of non-performing loans ($30.1 million) plus other non-performing assets ($7.7 million) to total assets ($5.3 billion) at December 31, 1997. The coverage ratio of the allowance for loan losses to nonperforming loans was 130% at year-end. At December 31, 1997 the book value per common share of $26.35 represented a 6.2% increase from the $24.82 at December 31, 1996. This increase was the combined result of net income less dividends and the change in the unrealized holding loss on securities as well as share repurchases and preferred stock conversions. As a continuing part of its capital management plan, the Company repurchased 37,000 shares of Cumulative Convertible Preferred Stock and 1,522,000 shares of common stock during 1996. The Company converted 137,000 shares of Cumulative Convertible Preferred Stock into common stock during the fourth quarter of 1996 as part of the mandatory redemption of Cumulative Convertible Preferred Stock. This redemption was completed on January 8, 1997 with approximately 98%, of the Cumulative Convertible Preferred Stock outstanding being converted to approximately 1.8 million shares of common stock which were issued from treasury stock with the difference being redeemed for cash of $26.013 per Cumulative Convertible share. The conversion factor for each share of preferred stock was .78 shares of common stock. Repurchases generally have the effect of improving EPS and return on equity ("ROE") while slightly reducing return on assets ("ROA"). 3 Management Discussion and Analysis (continued) During January 1997 the Company, through a subsidiary Trust formed for the sole purpose of issuing capital securities, authorized and issued $60,000,000 OnBank Capital Trust I, 9.25% Capital Securities and used the proceeds of the issuance to fund the acquisition of 1,400,000 or approximately 10% of the outstanding shares of common stock as a continuation of the Company's capital management program. Net Interest Income The most significant impact on the Company's net income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. The volume of interest earning assets represented by loans and securities compared to the volume of interest bearing liabilities represented by deposits and borrowings combined with the spread between the two produces the changes in the net interest income between periods. The accompanying tables show the relative contribution of changes in average volume and average interest rates on changes in net interest income for the periods indicated. This table sets forth for the indicated years ended December 31, the average daily balances of the Company's major asset and liability items and the interest earned or paid thereon expressed in dollars and weighted average rates.
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------ --------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ (Dollars in Thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - --------------------------------------------------------------------------------------------------------------------------------- Interest earning assets(1)(2) Loans $2,690,969 224,900 8.36% 2,365,244 201,394 8.51% 2,129,445 184,591 8.67% Securities 2,434,180 159,362 6.55% 2,611,400 170,003 6.51% 3,819,923 244,078 6.39% Money market assets 24,534 1,428 5.82% 58,740 3,448 5.87% 42,801 2,790 6.52% - --------------------------------------------------------------------------------------------------------------------------------- Total interest earnings assets 5,149,683 385,690 7.49% 5,035,384 374,845 7.44% 5,992,169 431,459 7.20% Non-interest earning assets 304,481 300,003 327,291 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $5,454,164 5,335,387 6,319,460 - --------------------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities Savings deposits 659,759 16,153 2.45% 734,793 19,145 2.61% 804,737 22,931 3.85% Time deposits 2,466,226 139,471 5.66% 2,209,632 122,862 5.56% 2,170,492 121,124 5.58% Money market accounts, NOW accounts, and escrow deposits 551,451 15,213 2.76% 531,888 12,740 2.40% 552,626 13,360 2.42% - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 3,677,436 170,837 4.65% 3,476,313 154,747 4.45% 3,527,855 157,415 4.46% Repurchase agreements 301,698 17,988 5.96% 300,706 18,866 6.27% 856,327 51,306 5.99% Other borrowings 659,139 40,766 6.18% 798,313 48,485 6.07% 1,189,981 70,223 5.90% - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 4,638,273 229,591 4.95% 4,575,332 222,098 4.85% 5,574,163 278,944 5.00% Non-interest bearing deposits 353,989 321,978 298,464 Non-interest bearing liabilities 72,155 61,935 66,447 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 5,064,417 4,959,245 5,939,074 Capital trust securities 54,411 -- -- Shareholders' equity 335,336 376,142 380,386 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $5,454,164 5,335,387 6,319,460 Net interest income $ 156,099 152,747 152,515 - --------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.54% 2.59% 2.20% Net interest margin(3) 3.03% 3.03% 2.55% Total interest earning assets to total interest bearing liabilities 1.11X 1.10X 1.07X Average equity to average assets 6.15% 7.05% 6.02% - ---------------------------------------------------------------------------------------------------------------------------------
(1) Nonaccruing loans, which are immaterial, have been included in interest earning assets. (2) No adjustment is made for items exempt from Federal income taxes. (3) Computed by dividing net interest income by total interest earning assets. 4 Management Discussion and Analysis (continued) The following table presents changes in interest income and interest expense attributable to: changes in volume (change in average balance or volume multiplied by prior year rate), changes in rate (changes in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated proportionately to the absolute dollar amounts of the change in each.
- ---------------------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Increase (Decrease) ----------------------------- ----------------------------------- (Dollars in Thousands) Volume Rate Net Volume Rate Net - ---------------------------------------------------------------------------------------------------------------------- Interest earning assets Loans $ 27,129 (3,623) 23,506 20,243 (3,440) 16,803 Securities (11,674) 1,033 (10,641) (78,579) 4,504 (74,075) Money market assets (1,991) (29) (2,020) 958 (300) 658 - ---------------------------------------------------------------------------------------------------------------------- Total change in income from interest earning assets 13,464 (2,619) 10,845 (58,378) 764 (56,614) - ---------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities Savings deposits (1,869) (1,123) (2,992) (1,923) (1,863) (3,786) Time deposits 14,381 2,228 16,609 2,174 (436) 1,738 Money market accounts, NOW accounts, and escrow deposits 487 1,986 2,473 (508) (112) (620) - ---------------------------------------------------------------------------------------------------------------------- Total change in interest expense on deposits 12,999 3,091 16,090 (257) (2,411) (2,668) Borrowings: Repurchase agreements 62 (940) (878) (34,733) 2,293 (32,440) Other borrowings (89,583) 864 (7,719) (23,708) 1,970 (21,738) - ---------------------------------------------------------------------------------------------------------------------- Total change in expense from interest bearing liabilities 4,478 3,015 7,493 (58,698) 1,852 (56,846) - ---------------------------------------------------------------------------------------------------------------------- Net interest income $ 8,986 (5,634) 3,352 1,320 (1,088) 232 - ----------------------------------------------------------------------------------------------------------------------
Average interest earning assets increased to $5.15 billion in 1997 from $5.04 billion in 1996 which decreased from $5.99 billion in 1995. Average interest bearing liabilities increased to $4.64 billion in 1997 from $4.58 billion in 1996 which decreased from $5.57 billion in 1995 The yield on average earning assets was 7.49% in 1997 up from 7.44% in 1996 which was up from 7.20% in 1995. The increase in yield from 1996 to 1997 primarily related to the proportion of total earning assets that were represented by loans even though the average yield on the loans was 15 basis points less in 1997. The increase in yield from 1995 to 1996 primarily related to the proportion of total earning assets that were represented by loans even though the average yield on the loans was 16 basis points less in 1996. A combination of managed reductions, decreased prepayment rates on mortgage-backed securities and the direction and speed with which the interest rate environment has changed during the past three years directly affected the yields on securities. The changing interest rate environment of the past three years has had a similar effect on various components of interest bearing liabilities. Rates for savings deposits have declined from 2.85% in 1995 to 2.61% in 1996 and to 2.45% in 1997 while over the same time frame interest rates on money-market, NOW and escrow deposits were 2.42%, 2.40% and 2.76%, respectively. The rates of time deposits has been relatively stable at 5.58% in 1995, 5.56% in 1996 and 5.66% in 1997. These combined increased rates in 1997 are primarily a function of increased competition from money market funds and others as well as the change in time deposit mix, which includes increasing and more expensive deposits from municipalities and retail brokers. The rates on repurchase agreements varies and is directly related to their maturity and current market interest rates, which decreased in 1997, which resulted in a decrease to 5.96% in 1997 from 6.27% in 1996. The selective shortening or lengthening in maturities of these liabilities is done to maintain a reasonable duration balance between interest earning assets and interest bearing liabilities. The cost of other borrowings increased to 6.18% in 1997 from 6.07% in 1996 and from 5.90% in 1995 due to the repayment of shorter term borrowings. 5 Management Discussion and Analysis (continued) The sale of securities in late 1995 enabled the Company to shrink the absolute levels of securities and borrowings. Average securities declined by $1.2 billion from 1995 to 1996 while the yield on the securities portfolio increased slightly by 12 basis points to 6.51 % for 1996 due to slightly higher market interest rates as well as continued slower prepayments on mortgage backed securities and the associated decline in the rate of amortization of premium. Over the same time frame average loans increased by $236 million reflecting the banks continuing emphasis on changing the balance sheet mix to include more loans. The continuation of this strategy resulted in the average balance of loans increasing by $326 million from 1996 to 1997 while the yield on the portfolio declined by 15 basis points. The newer loans were predominantly commercial and consumer which are generally shorter in term than many of the fixed rate mortgages which they replaced as they paid down or were sold. A decline in interest rates is primarily responsible for the slight decline in loan yield however when taken together with the increase in proportions of loans to total earning assets the yield on total interest earning assets increased by 5 basis points to 7.49% from 1996 to 1997. The cost of total deposits increased by 20 basis points from 1996 to 1997 while the cost of repurchase agreements and other borrowings decreased 31 basis points and increased 11 basis points, respectively, from 1996 to 1997. The combined decreased cost of borrowings resulted from the decline in average volumes of $138 million and $947 million, respectively from 1996 to 1997 and 1995 to 1996 as the proceeds from the amortization from mortgage-backed securities and their periodic sales were used to pay down these borrowings. The combined effect of increasing the yield on interest earning assets by 24 basis points and decreasing the cost of interest bearing liabilities by 15 basis points from 1995 to 1996 along with an increase in non-interest bearing deposits of $23.5 million was an increase in net interest margin of 48 basis points to 3.03% in 1996 from 2.55% in 1995. Net interest income of $152.7 million in 1996 was up slightly from $152.5 million despite the substantial shrinkage of $984 million in the average balance sheet. The Asset-Liability Committee which includes members of senior management, monitors the Company's exposures to changing interest rates. Interest rate risk is measured by the variability of projected net interest income under various interest rate scenarios. Management's goal is to position the Company as to limit the variability of net interest income under these scenarios. The Company monitors interest rate risk with the aid of a computer model which considers the impact of lending, deposit gathering activities, the repricing of variable rate assets and liabilities, and the effect of changing interest rates on expected prepayments and other cash flows. At December 31, 1997 utilizing the model described above the Company's assessment is that the variability of net interest income would be largely unaffected by changes in interest rates over the next year, but large sustained decreases in interest rates or a significant flattening in the yield curve could have a negative impact on net interest income in subsequent periods. Management closely monitors the Company's exposure to changing interest rates and spreads and stands ready to take action to mitigate such exposure. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, changing the composition of interest earning assets and interest bearing liabilities, and the use of off balance sheet instruments. Provision for Loan Losses and Asset Quality The provision for loan losses decreased to $7.2 million in 1997 from $7.8 million in 1996 which had increased from $6.8 million in 1995. Net charge offs increased to $5.9 million in 1997 from $4.6 million in 1996 down from $6.0 million in 1995. The provisions for loan losses in 1997, 1996 and 1995 have exceed net charge offs in each year and have thereby caused the allowance for loan losses to continue to increase and the coverage ratio of the allowance for loan losses as a percentage of nonperforming loans to be at 130%, 140% and 119% at December 31, 1997, 1996, and 1995, respectively. This increased coverage ratio when compared with 96% at year end 1993 reflects the increased emphasis on commercial lending and the inherently higher risk factors associated with this type of lending. The adequacy of the allowance for loan losses is assessed based upon management's periodic evaluation considering past loan loss experience, known and inherent risk in the portfolio, adverse situations which may affect the borrowers' ability to repay, the estimated value of underlying collateral, if any, and current and prospective economic conditions. The allowance to ending loans was 1.30% at December 31, 1997, 1.52% at December 31, 1996 and 1.5l% at December 31 1995. The allowance for loan losses has increased to $39.1 million at year end 1997 from $37.8 million and from $34.6 million, respectively for year end 1996 and 1995 while net charge-offs to average loans have been 0.22%, 0.19% and 0.28% for 1997, 1996 and 1995, respectively. Other real estate owned ("OREO') has increased to $4.9 million at December 31, 1997 from $4.1 million at December 31, 1996 and from $4.0 million at December 31, 1995. This year end 1997 balance reflects the results of management's ongoing effort to maintain these non-earning assets to a minimal level. In evaluating the overall credit risk in the balance sheet, the ratio non-performing assets (non-performing loans plus OREO and repossessed assets) to total assets was 0.71% at December 31, 1997, 0.59% at December 31, 1996 and 0.60% at year end 1995. These percentages imply a relatively low credit risk profile for the Company with slight 6 Management Discussion and Analysis (continued) percentage increase being related more to the shrinkage in the balance sheet than to the slight increase of $2.2 million in nonperforming assets during the three year period ended December 31, 1997. Other Operating Income Other operating income, which is generated by service charges, mortgage banking activities, net gain (loss) on securities transactions and other sources, increased by $4.4 million to $40.6 million in 1997 and by $7.0 million to $36.3 million in 1996 from $29.3 million in 1995. Service charges increased by $2.4 million to $21.2 million in 1997 from $18.8 million in 1996 which was up $3.2 million from $15.6 million in 1995. These increases reflect the expansion of commercial banking services in conjunction with the Company's strategy which is to continue to increase commercial banking activities in the Central New York State market along with the Albany, Rochester and the Scranton/Wilkes-Barre markets which the Company currently serves. Electronic banking fees derived from merchant card processing as well as lock box processing and other consumer transaction related activities are becoming a more significant portion of this component of income. The Company's mortgage banking revenue consists of servicing income, gains and losses on the sale of loans originated for sale net of the amortization of loan servicing rights. Gains and losses on the sale of mortgage-backed securities created from loans originated by the Company are considered a mortgage banking activity as distinguished from the gains or losses arising from the sale of such securities purchased and available for sale. Residential mortgage loans are originated to meet consumer demand, which has traditionally been for long-term fixed rate mortgage loans in the Banks' New York and Pennsylvania market areas. Following the rapid rise in interest rates which occurred in 1994, the market for residential mortgage loans diminished substantially as a result of the higher rates and the associated decline in refinancings. Residential mortgage loan originations decreased to $171 million in 1997 from $195 million in 1996 from $254 million in 1995. As interest rates declined during 1997, the banks classified many of the loans originated as available for sale in order to facilitate the management of interest rate risk. An increase in the volume of variable rate loan originations occurred in 1997 compared with the prior two years. The mix in 1996 and in 1995 was predominantly fixed rate, however, because of the absolute level of rates and the overall duration characteristics of the balance sheet the Company retained most of the loans originated in 1996 and 1995 in portfolio. From time to time the Company sells loans in the secondary market to help manage interest rate sensitivity. Such sales generate income (or loss) at the time of sale, produce future servicing income and provide funds for additional lending and other purposes. Typically, loans are sold with the Banks retaining responsibility for collecting and remitting loan payments, inspecting properties, making certain insurance and tax payments on behalf of borrowers and otherwise servicing the loans, and receiving a fee for performing these services. Mortgage banking income decreased $.9 million in 1997 from the $4.3 million in 1996 which had increased $1.2 million from $3.1 million in 1995. The serviced for others loan portfolio has decreased over the past three years to $1,032 million from $1,091 million and $1,147 million at December 31, 1997, 1996 and 1995 respectively. During this period, loan originations and sales of new loans have decreased to a point where amortization and prepayments, which reduce the portfolio, have been greater than the increases created by the sale of new loans which are additions to the portfolio. Gains or losses on the sale of loans fluctuate and are generally related to interest rate risk management activity. Gains on the sale of loans were $.3 million and $1.8 million in 1997 and 1996, respectively, and immaterial in 1995. The Company capitalized mortgage servicing rights of $.9 million in 1997, $2.8 million in 1996 and $.7 million in 1995. The Company recognized amortization of these assets of $1.6 million in 1997, $2.2 million in 1996 and $1.9 million in 1995. The combined capitalized mortgage servicing rights and purchased mortgage servicing rights at December 31 were $7.0 million in 1997, $7.7 million in 1996, and $7.1 million in 1995. When expressed as a percentage of the serviced loan portfolio these balances are .7%, .7%, and .6%, respectively. Income from other sources, including trust income, decreased $1.5 million in 1997 to $5.7 million primarily as the net result of a $2.9 million non-recurring gain related to the sale of branches offset by $1.3 million loss on the sale of a building in 1996. This income component increased $2.1 million in 1996 to $7.2 million from $5.1 million in 1995 as a result of the aforementioned. 7 Management Discussion and Analysis (continued) Other Operating Expenses Total operating expenses decreased $1.3 million to $109.3 million for 1997 compared to 1996 and increased $7.2 million to $110.6 million for 1996 compared to 1995. Included in 1996 is a one-time, $7.3 million government mandated charge relating to the recapitalization of the SAIF insurance fund. Salaries and employee benefits decreased $.5 million to $41.0 million in 1997 from 1996, which had increased $1.1 million to $41.5 million from $40.4 million in 1995. The 1997 decrease represented primarily continued efficiencies in the back office and administrative areas. The 2.8% increase in 1996 was primarily related to merit increases. Building, occupancy and equipment expense increased slightly to $18.4 million in 1997 from $18.3 million in 1996 and $17.9 million in 1995. Additional technology related equipment expenses along with increased real estate taxes and rents account for the majority of the 1997 and 1996 increases. FDIC deposit insurance premiums decreased $8.3 million in 1997 to $1.1 million. Of the total 1996 premium, $7.3 million related to the government mandated one time assessment related to the recapitalization of the SAIF insurance fund. Absent any major dislocations in the banking industry, future FDIC insurance premiums are expected to be substantially less than those incurred in recent years. FDIC deposit insurance premiums increased $3.5 million in 1996 as the result of the aforementioned one time assessment in 1996. Contracted data processing expense increased $.5 million to $11.3 million in 1997 and $1.1 million to $10.8 million in 1996 resulting from increased business activity along with the assumption of additional responsibilities by our external vendor. Legal and financial service expenses increased by $1.7 million to $6.1 million in 1997 from $4.4 million in 1996 which was $1.1 million more than the $3.3 million in 1995. The levels of expense in all three years varies somewhat and are directly related to increased commercial banking activities and other corporate activity. Intangible expenses of $4.3 million in 1997 and $4.4 million in 1996 and 1995 are related almost totally to the amortization of deposit premium associated with the acquisition of the nine Rochester branches in June of 1994. The deposit premium is being amortized over a seven-year period. When measured as a ratio of other operating expenses to average assets the ratios of 1.9% (adjusted for capital trust securities expense), 1.9% (adjusted for the one-time SAIF charge of $7.3 million), and 1.6% for 1997, 1996 and 1995, respectively, are all under our 2.0% high performance target. Income Taxes The provision for income taxes as a percentage of pretax income was 36.2%, 39.1%, and 37.6% for 1997, 1996 and 1995, respectively. Under normal operating income levels, a tax rate of between 35% and 40% would be anticipated. Additional discussion of income taxes is presented in footnote (10) of notes to consolidated financial statements. Dividends Payment of dividends by ONBANCorp on its common stock is subject to various regulatory and tax restrictions. ONBANCorp is regulated by the Federal Reserve Board and as such is subject to its regulations and guidelines with respect to payment of dividends, including its Policy Statement of Cash Dividends Not Fully Covered by Earnings. Since substantially all of the funds available for the payment of dividends were derived from OnBank & Trust Co. and Franklin, future dividends will depend upon the earnings of the Banks, their financial condition, their need for funds, applicable governmental policies and regulations and such other matters as the Board of Directors of the respective Banks deem appropriate. Under New York State Banking Law, dividends may be declared and paid out of the net profits of the Banks. The approval of the Superintendent of the New York State Banking Department of Banking is required if the total of all dividends declared in any calendar year will exceed net profits for that year plus the retained net profits of the preceding two years Under federal law, no insured depository institution may make any capital distribution, including the payment of a dividend that would result in the institution failing to meet its minimum capital requirements. 8 Management Discussion and Analysis (continued) Liquidity The objective of liquidity management at ONBANCorp is to ensure the ability to access funding which enables each Bank to efficiently satisfy the cash flow requirements of depositors and borrowers and to allow ONBANCorp to meet its cash need. Liquidity is managed at ONBANCorp by monitoring funds availability from a number of primary sources. The first, largest and most reliable source of short-term balance sheet liquidity is represented by the $.8 billion in securities which have been classified as trading or available for sale. The securities are carried at fair value and could be liquidated very quickly, as evidenced by the sale in late 1995 of in excess of $1.0 billion in available for sale securities, either to reduce the duration and increase the yield of the portfolio or to shrink the Company as part of the overall interest rate risk management activities. Other sources of funds consist of deposits, cash flows from ongoing operations and borrowings. ONBANCorp's growth and overall profitability and financial strength have made available numerous external funding sources. The Company enters into financing transactions using repurchase agreements, which are collateralized by U.S. Treasury and mortgage-backed securities, as an additional funding source. Transactions are generally less than two years in maturity and at year end 1997 these repurchase agreements amounted to $165 million compared to $254 million at year end 1996. The decreases reflect the Company's downsizing which is related to the currently low relative net interest margin on these transactions associated with the current yield curve environment. At year end 1997, the Banks' approved commitments to extend credit amounted to $67.3 million. Further information is in notes (18) and (19) of notes to consolidated financial statements. ONBANCorp's liquidity should be sufficient to meet normal transaction requirements and flexible enough to take advantage of market opportunities and to react to other liquidity needs. Shareholders' Equity and Capital Adequacy ONBANCorp's ratio of shareholders' equity of $335.2 million to total assets of $5.3 billion at December 31, 1997 was 6.3%. The ratio decreased from 6.6% at December 31, 1996 when shareholders' equity was $360.1 million and total assets were $5.4 billion. The decrease in shareholders' equity, primarily represents the net income less dividends declared and the effect of the repurchase of common and preferred stock during 1997 which amounted to $65.4 million. Stock repurchase programs have been and will continue to be an important capital management tool of the Company. Total capital to risk adjusted assets was 13.6 and 13.8% as of December 31, 1997 and 1996, respectively. The Company and Banks are considered well capitalized and in compliance with Federal Reserve Board and FDIC capital requirements as of both of the above dates. Recent Accounting Developments Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", except for those transactions governed by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is based on consistent application of a "financial components approach" that focuses on control. SFAS 125 provides consistent standards for distinguishing transfers of financial assets on control. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 127 deferred for one year the effective date of SFAS 125 as it relates to transfers of financial assets and secured borrowings and collateral. The adoption of SFAS 125, as amended by SFAS 127, did not have a material effect on the Company's 1997 financial statements. On December 31, 1997, the Company adopted the provisions of SFAS 128, "Earnings Per Share." SFAS 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share" establishes standards for computing and presenting earnings per share (EPS) for entities with publicly held common stock and common stock equivalents. All prior period EPS amounts included in the consolidated financial statements and in the Company's 1997 Annual Report have been restated to conform with the computational provisions of SFAS 128. 9 Management Discussion and Analysis (continued) In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 is effective for years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods provided for comparative purposes. SFAS 130 establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no yet determined the impact of SFAS 130 on its financial statements. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. The Company has not yet determined the impact of SFAS 131 on its financial statements. Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this Annual Report includes certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and its subsidiaries based on current management expectations. The Company's ability to predict results or the effect of future plans and strategies is inherently uncertain and actual results, performance or achievements could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state, and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Banks' loan and securities portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Impact of the Year 2000 The financial services industry relies extensively on computer programs with dates. Many existing computer programs were written using only the last two digits to identify the applicable year. These programs were designed and developed without considering the impact of the upcoming change to a new century. Computer programs that have date sensitive software may, therefore, recognize a date using "00" as the year 1900 rather than the year 2000. The potential exists that such a mistake could result in system failures or miscalculations causing disruptions of operations not only for the Company, but for commercial customers who rely on computer software in managing their businesses. A committee comprised of all operating areas of the Banks has been formed to direct Year 2000 activities. The Committee has contacted all of the Company's hardware and software vendors regarding their individual Year 2000 initiatives. The Company presently believes that the Year 2000 problem will not pose significant operational problems or have significant impact on its financial condition, results of operations or cash flows. However, if third party modification plans are not completed and tested on a timely basis, the Year 2000 may have a material impact on the operations of the Company. 10 Management Statement of Responsibility Management is responsible for preparation of the consolidated financial statements and related financial information contained in all sections of this annual report, including the determination of amounts that must necessarily be based on judgments and estimates. It is the belief of management that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles and that the financial information appearing throughout this annual report is consistent with the consolidated financial statements. Management depends upon the Company's system of internal accounting controls in meeting its responsibility for reliable financial statements. This system is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded. The audit committee of the Board of Directors, composed solely of outside directors, meets periodically and privately with ONBANCorp, Inc.'s management, internal auditors and independent auditors, KPMG Peat Marwick LLP, to review matters relating to the quality of financial reporting, internal accounting control, and the nature, extent and results of audit efforts. The independent auditors and internal auditors have unlimited access to the audit committee to discuss all such matters. The financial statements have been audited by the Company's independent auditors for the purpose of expressing and opinion on the Company's consolidated financial statements. /s/ Robert J. Bennett /s/ Robert J. Berger - --------------------- -------------------- Robert J. Bennett Robert J. Berger Chairman, President & CEO Senior Vice President, Treasurer & CFO Independent Auditors' Report The Board of Directors and Shareholders of ONBANCorp, Inc.: We have audited the accompanying consolidated balance sheets of ONBANCorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ONBANCorp, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ------------------------- Syracuse, New York January 26, 1998 11 Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------- December 31, December 31, (In Thousands, Except Share Data) 1997 1996 - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 128,647 $ 169,740 Money-market assets 10,044 12,253 Securities: Trading 1,178 1,727 Available for sale 840,469 925,340 Held to maturity, fair value of $1,197,721 in 1997, $1,702,201 in 1996 1,176,164 1,683,908 - ----------------------------------------------------------------------------------------------------------- Total securities 2,017,811 2,610,975 - ----------------------------------------------------------------------------------------------------------- Loans, net of premium and discount 2,867,256 2,448,474 Allowance for loan losses (39,064) (37,840) - ----------------------------------------------------------------------------------------------------------- Net loans 2,828,192 2,410,634 - ----------------------------------------------------------------------------------------------------------- Loans available for sale 130,412 38,759 Premises and equipment, net 65,450 62,557 Other assets 139,014 112,959 - ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS $5,319,570 5,417,877 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing 380,099 356,171 Interest bearing: Savings, NOW and money market 1,199,617 1,214,823 Time deposits less than $100,000 1,781,835 1,646,576 Time deposits $100,000 and greater 661,555 604,336 - ----------------------------------------------------------------------------------------------------------- Total deposits 4,023,106 3,821,906 - ----------------------------------------------------------------------------------------------------------- Repurchase agreements 164,602 254,471 Other borrowings 658,448 874,917 Due to brokers -- 40,724 Other liabilities 78,217 65,808 - ----------------------------------------------------------------------------------------------------------- Total liabilities 4,924,373 5,057,826 - ----------------------------------------------------------------------------------------------------------- Capital trust securities 60,000 -- - ----------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock, par value $1.00 per share; Series D 6.75% Convertible, 10,000,000 shares authorized; issued and outstanding: 1997 - none; 1996 - 2,342,052 -- 2,342 Common stock, par value $1.00 per share; 56,000,0000 shares authorized; shares issued: 1997 - 14,327,349; 1996 - 14,139,475 14,327 14,139 Additional paid-in capital 99,786 152,465 Retained earnings 310,223 276,767 Net unrealized holding loss on securities, net of deferred taxes (17,379) (20,169) Treasury Stock, at cost, shares 1997 - 1,605,660; 1996 - 1,994,143 (71,760) (65,343) Guarantee of ESOP indebtedness -- (150) - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 335,197 360,051 - ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,319,570 5,417,877 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 12 Consolidated Statements of Income
- --------------------------------------------------------------------------------------------- Years Ended December 31, (In Thousands, Except Per Share Data) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Interest income: Loans $224,900 201,394 184,591 Securities 159,362 170,003 244,078 Money market assets 1,428 3,448 2,790 - --------------------------------------------------------------------------------------------- Total interest income 385,690 374,845 431,459 - --------------------------------------------------------------------------------------------- Interest expense: Deposits 170,837 154,747 157,415 Borrowings: Repurchase agreements 17,988 18,866 51,306 Other 40,766 48,485 70,223 - --------------------------------------------------------------------------------------------- Total interest expense 229,591 222,098 278,944 - --------------------------------------------------------------------------------------------- Net interest income 156,099 152,747 152,515 Provision for loan losses 7,168 7,813 6,790 - --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 148,931 144,934 145,725 - --------------------------------------------------------------------------------------------- Other operating income: Mortgage banking 3,371 4,287 3,135 Service charges 21,191 18,807 15,596 Net gain on securities transactions 10,360 6,018 5,457 Other 5,712 7,150 5,113 - --------------------------------------------------------------------------------------------- Total other operating income 40,634 36,262 29,301 - --------------------------------------------------------------------------------------------- Other operating expenses: Salaries and employee benefits 41,027 41,507 40,383 Building, occupancy and equipment 18,440 18,268 17,907 Deposit insurance premiums 1,058 9,343 5,867 Contracted data processing 11,285 10,828 9,682 Legal and financial services 6,093 4,393 3,326 Capital trust securities 5,084 -- -- Other 26,358 26,275 26,297 - --------------------------------------------------------------------------------------------- Total other operating expenses 109,345 110,614 103,462 - --------------------------------------------------------------------------------------------- Income before taxes 80,220 70,582 71,564 Income taxes 29,042 27,618 26,887 - --------------------------------------------------------------------------------------------- Net income $ 51,178 42,964 44,677 Dividends on preferred stock -- 4,155 4,522 - --------------------------------------------------------------------------------------------- Net income attributable to common shares $ 51,178 38,809 40,155 - --------------------------------------------------------------------------------------------- Income per common share: Basic $ 3.93 3.09 2.88 Diluted 3.88 2.88 2.76 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
13 Consolidated Statements of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------ Net Unrealized Additional Holding Guarantee of Preferred Common Paid-in Retained Loss on Treasury ESOP (In Thousands, Except Share Data) Stock Stock Capital Earnings Securities Stock Indebtedness Total - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 $ 2,818 14,050 162,960 229,374 (45,816) -- (450) 362,936 Net income -- -- -- 44,677 -- -- -- 44,677 Stock issued under: Stock option plans -- 23 220 -- -- -- -- 243 Tax benefits related to stock options -- -- 148 -- -- -- -- 148 Employee Stock Purchase Plan -- 22 478 -- -- -- -- 500 Cash dividends declared: Preferred ($1.69 per share) -- -- -- (4,522) -- -- -- (4,522) Common ($1.14 per share) -- -- -- (15,802) -- -- -- (15,802) Treasury stock purchases -- -- -- -- -- (18,068) -- (18,068) Preferred stock redemption (302) -- (8,058) -- -- -- -- (8,360) Employee Stock Ownership Plan loan repayment -- -- -- -- -- -- 150 150 Change in net unrealized holding loss on securities, net of income tax effect of $17,909 -- -- -- -- 26,864 -- -- 26,864 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 $ 2,516 14,095 155,748 253,727 (18,952) (18,068) (300) 388,766 - ------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 42,964 -- -- -- 42,964 Stock issued under: Stock option plans -- 26 190 -- -- -- -- 216 Tax benefits related to stock options -- -- 246 -- -- -- -- 246 Employee Stock Purchase Plan -- 18 516 -- -- -- -- 534 Cash dividends declared: Preferred ($1.69 per share) -- -- -- (4,155) -- -- -- (4,155) Common ($1.24 per share) -- -- -- (15,769) -- -- -- (15,769) Treasury stock purchases -- -- -- -- -- (50,721) -- (50,721) Preferred stock redemption (37) -- (926) -- -- -- -- (963) Preferred stock conversion (137) -- (3,309) -- -- 3,446 -- -- Employee Stock Ownership Plan loan repayment -- -- -- -- -- -- 150 150 Change in net unrealized holding loss on securities, net of income tax effect of ($860) -- -- -- -- (1,217) -- -- (1,217) - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 $ 2,342 14,139 152,465 276,767 (20,169) (65,343) (150) 360,051 - ------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 51,178 -- -- -- 51,178 Stock issued under: Stock option plans -- 174 2,474 -- -- -- -- 2,648 Tax benefits related to stock options -- -- 1,799 -- -- -- -- 1,799 Employee Stock Purchase Plan -- 14 586 -- -- -- 600 Cash dividends declared: Common ($1.36 per share) -- -- -- (17,722) -- -- -- (17,722) Treasury stock purchases -- -- -- -- -- (65,373) -- (65,373) Preferred stock redemption (36) -- (888) -- -- -- -- (924) Preferred stock conversion (2,306) -- (56,650) -- -- 58,956 -- -- Employee Stock Ownership Plan loan repayment -- -- -- -- -- -- 150 150 Change in net unrealized holding loss on securities, net of income tax effect of $1,908 -- -- -- -- 2,790 -- -- 2,790 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 $ -- 14,327 99,786 310,223 (17,379) (71,760) -- 335,197 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 14 Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (In Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 51,178 42,964 44,677 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and accretion of premiums, discounts and net deferred fees 11,118 4,455 (323) Depreciation and amortization 13,059 13,052 12,891 Provision for loan losses 7,168 7,813 6,790 Deferred income taxes 11,909 6,272 (862) Gain on sale of branches -- (2,939) -- Loss on sale of building -- 1,258 -- Net gains on sale of securities (9,122) (5,469) (2,113) Net decrease in trading securities 25,872 89,608 53,419 Net increase in loans available for sale (116,976) (88,167) (55,660) Decrease (increase) in other assets (35,750) (11,905) 39,729 Increase (decrease) in other liabilities 15,143 5,619 (1,482) - ------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (26,401) 62,561 97,066 - ------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of securities available for sale 1,172,947 589,176 2,095,113 Proceeds from sales of securities held to maturity -- 4,089 -- Proceeds from maturities of and principal collected on securities available for sale 261,392 204,371 229,948 Proceeds from maturities of and principal collected on securities held to maturity 592,557 677,244 640,609 Purchases of securities available for sale (1,383,054) (652,668) (669,896) Purchases of securities held to maturity (94,068) (627,336) (865,026) Loans made to customers, net of principal repayments (434,928) (182,331) (319,994) Net payment made for sale of branches -- (19,820) -- Purchases of premises and equipment (9,448) (4,502) (11,578) Proceeds from sale of building -- 250 -- Other 4,395 4,945 6,393 - ------------------------------------------------------------------------------------------------------------- Net cash provided (used) in investing activities 109,793 (6,582) 1,105,569 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 15 Consoldated Statements of Cash Flows (continued)
- ------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (In Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposit accounts excluding time deposits 8,722 (19,975) (139,827) Net increase in time deposits 192,478 67,291 154,757 Net decrease in repurchase agreements (89,869) (107,146) (800,812) Net decrease in other borrowings (127,840) (225) -- Advances from Federal Home Loan Bank 546,256 415,816 964,886 Repayment of advances from Federal Home Loan Bank (632,129) (441,509) (1,217,684) Repayments of collateralized mortgage obligations (2,756) (2,535) (2,604) Issuance of capital trust securities 60,000 -- -- Net proceeds from issuance of common stock 3,248 750 743 Purchase of treasury stock (65,373) (50,721) (18,068) Repurchase of preferred stock (924) (963) (8,360) Cash dividends paid on common stock (17,519) (15,784) (19,737) Cash dividends paid on preferred stock (988) (4,229) (4,649) - ------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (126,694) (159,230) (1,091,355) - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (43,302) (103,251) 111,280 Cash and cash equivalents at beginning of period 181,993 285,244 173,964 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 138,691 181,993 285,244 - ------------------------------------------------------------------------------------------------------------- Supplemental schedule of cash flow information: Cash paid during the period for: Interest 226,102 222,681 278,710 Income taxes 15,600 21,370 4,601 Non-cash investing and financing activities: Securitization of mortgage loans 25,323 89,545 39,210 Loans transferred to other real estate owned 5,294 4,815 4,682 Change in net unrealized holding gain (loss) on securities 2,790 (1,217) 26,864 Change in securities purchased not settled (40,724) (3,227) (240,281) Change in securities sold not settled 9,727 (65,156) (485,824) Transfer of securities to available for sale -- -- 1,543,160 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 16 Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies Business ONBANCorp, Inc. (the Company) is a financial services company primarily in the business of commercial and retail banking providing a wide range of banking, fiduciary and other financial services to corporate, institutional, municipal and individual customers. The Company is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by those regulatory agencies. On October 28, 1997, the Company entered into an agreement and plan of reorganization for a merger with First Empire State Corporation headquartered in Buffalo, New York for a merger between the two companies. Upon consummation of the merger, OnBank & Trust Co. and Franklin First Savings Bank will be merged into a single interstate M&T Bank. The following summarizes the significant accounting policies of ONBANCorp, Inc. and subsidiaries: Basis of Presentation The consolidated financial statements include the accounts of ONBANCorp, Inc. and its wholly-owned subsidiaries, OnBank, OnBank & Trust Co. and Franklin First Savings Bank (the Banks). On January 1, 1997 OnBank and OnBank & Trust Co. merged, thereby creating a single banking entity in New York State. All significant intercompany balances and transactions are eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities The Company classifies its debt securities in one of three categories: trading, available for sale, or held to maturity. Equity securities are classified as either trading or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those debt securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. Trading and available for sale securities are recorded at fair value. Held to maturity securities are recorded at amortized cost. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. The unrealized holding gains or losses included in the separate component of equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. A decline in the fair value of any available for sale or held to maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. 17 (1) Summary of Significant Accounting Policies (Continued) Loans Loans are stated at the amount of unpaid principal plus unamortized premiums, less net unamortized deferred fees and unearned discounts. Loans available for sale generally include both mortgage and student loans originated with the intent to sell and each is carried at the lower of aggregate cost or fair value. Loan fees and certain direct loan costs are deferred. Premiums, discounts and deferred fees on loans are accrued to income using the interest method. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrowers' financial condition precludes accrual (generally when payments are 90 days past due). Subsequent recognition of income occurs only to the extent payment is received. Loans are returned to an accrual status when both principal and interest are current, and the loan is determined to be performing in accordance with the applicable loan terms. Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to operations and decreased by charge-offs of loans, net of recoveries. Loans are charged off when, following reasonable and prudent collections efforts, management determines that ultimate success of the loan's collectibility is remote. Management's periodic evaluation of the adequacy of the allowance considers the Banks' past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrowers' ability to repay, estimated value of underlying collateral, if any, and current and prospective economic conditions. A substantial portion of the Banks' loans are secured by real estate in New York and Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion of the Banks' loan portfolio is susceptible to changes in market conditions in these areas. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly in New York and Pennsylvania. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowances for loan losses. Such agencies may require the Banks to recognize additions to the allowances based on their judgment of information available to them at the time of their examination. Management considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts of principal and interest under the original terms of the loan agreement. Significant factors impacting management's judgment in determining when a loan is impaired include an evaluation of compliance with repayment program, condition of collateral, deterioration in financial strength of borrower or any case when the expected future cash payments may be less than the recorded amount. Accordingly, the Company measures impaired loans based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price or fair value of collateral if the loan is collateral dependent. Management excludes large groups of smaller balance homogeneous loans such as residential mortgages and consumer loans which are collectively evaluated. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. The Company recognizes interest income on impaired loans using the cash basis of income recognition. Premises and Equipment Land is carried at cost and premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated by the straight-line method based on the estimated service lives of the respective assets (one to forty years for buildings and one to ten years for furniture, fixtures and equipment). Leasehold improvements are amortized by the straight-line method based on the lesser of estimated useful life or term of the lease (seven to twenty years). 18 (1) Summary of Significant Accounting Policies (Continued) Other Real Estate Owned Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at the lower of the unpaid loan balance on the property at the date of transfer, or fair value less estimated costs to sell. Adjustments to the carrying value of such properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of other real estate are included in income when title has passed and the sale has met the minimum down payment and other requirements prescribed by generally accepted accounting principles. Intangible Assets Included in other assets at December 31, 1997 is approximately $12,146,000 of unamortized premium on deposits acquired in 1994. The premium is being amortized over the expected useful life of seven years on a straight-line basis. The amortization periods are monitored to determine if events and circumstances require the estimated useful lives to be reduced. Periodically, the Company reviews the premium for events or changes in circumstances that may indicate the carrying amounts of the assets are impaired. Mortgage Banking Activities Mortgage banking income includes gains and losses on the sale of loans originated for sale, including mortgage-backed securities created with those loans, gains on the sale of loan servicing rights, servicing income and amortization of loan servicing rights. The cost of mortgage loans originated or purchased with a definite plan to sell the loans and retain the servicing assets is allocated between the loans and the servicing assets based on their relative fair values at the time of purchase or origination. Mortgage servicing assets are capitalized separately and are subsequently amortized as a reduction of future servicing income. Prior to 1996, the entire cost of originated mortgage loans was attributed to the loans. Mortgage servicing rights are stratified based on predominant risk characteristics of underlying loans for the purpose of evaluating impairment. An allowance is then established in the event the recorded value of an individual stratum exceeds fair value. Mortgage servicing assets, which are included in other assets, are amortized over the estimated lives of the loans serviced using the interest method adjusted for prepayments. Trust Department Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Company. Repurchase Agreements The Banks enter into sales of mortgage-backed securities under agreements to repurchase certificates of the same agency bearing the identical contract interest rate and similar remaining weighted average maturities as the original certificates that result in approximately the same market yield (fixed coupon dollar repurchase agreements). Fixed coupon dollar repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The dollar amount of certificates underlying the agreements remains in the asset accounts. During the period of the agreement, the certificates are delivered into the counterparties' accounts maintained at the securities dealer. The dealer may have sold, loaned, or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to return to the Banks substantially identical securities at the maturities of the agreements. The Banks also enter into sales of U.S. Treasury and mortgage-backed securities under agreements to repurchase the same securities (fixed coupon repurchase agreements). These agreements are also treated as financings and involve the delivery of U.S. Treasury and mortgage-backed securities to the dealer. 19 (1) Summary of Significant Accounting Policies (Continued) Financial Instruments The Company holds derivative financial instruments such as put and call options and interest rate swaps. The Company is not an issuer of any other financial instrument derivatives. In conjunction with its trading activities, the Banks issue financial call and put options, generally with contractual maturities of one month. Call options are issued on the Banks' available for sale or trading securities and are contracts allowing, but not requiring, the holder to buy a financial instrument from the Banks at a specified price during a specified time period. Put options are contracts allowing, but not requiring, the holder to sell a financial instrument to the Banks at a specified price during a specified time period. As the issuers of options, the Banks receive a premium, and then bear the risk of an unfavorable change in the price of the financial instrument underlying the option. When a call option is exercised, the fee collected is recorded as income. When a put option is exercised, the fee collected is treated as an adjustment to the basis of the underlying security. If fair value of the security is less than the option's strike price minus the premium, a loss is recognized. If an option expires unexercised, the fee is recognized as income. Interest rate swaps used in asset liability management activities to hedge exposure to fluctuating interest rates are accounted for using the accrual method. Employee Benefit Plans The Company's pension plan is a noncontributory defined benefit plan which covers eligible employees who have completed 1,000 hours of service, attained 21 years of age, and have one year of service. The projected unit credit method is utilized for measuring net periodic pension costs over the employees' service lives. The Company's funding policy is to contribute annually at least the minimum required to meet the funding standards set forth under provisions of the Employee Retirement Income Security Act of 1974 The Company maintains an Employee Stock Purchase Plan which allows, subject to certain limitations, eligible Company employees to purchase shares of ONBANCorp common stock for 85% of the market value of such stock through payroll deductions. Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1,1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows the Company to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Federal Income Taxes Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Per Share Data On December 31, 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per Share. The statement supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share, and specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock. It requires dual presentation of "Basic EPS" and "Diluted EPS" on the face of the income statement for all entities with complex capital structures. All prior period EPS data has been restated to conform to the provisions of this statement. 20 (1) Summary of Significant Accounting Policies (Continued) Basic net income per share is based on the weighted average number of shares outstanding during the year. Diluted shares outstanding includes the maximum dilutive effect of stock issuable upon conversion of convertible preferred stock and stock options. Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks and money-market investments. Reclassifications Certain reclassifications have been made to prior period amounts to conform to current year presentation. (2) Federal Reserve Board Reserve Requirement The Banks are subject to Federal Reserve Board regulations that require them to maintain average cash reserves against their deposits (primarily demand and NOW accounts). The regulations currently require that average reserves be maintained against transactions accounts in the amount of 3% of the aggregate of such accounts exceeding $4.7 million, plus 10% of the total in excess of $43.1 million. The reserve requirement at December 31, 1997 amounted to $33,843,000. (3) Securities Securities held to maturity at December 31, 1997 are summarized as follows:
- ----------------------------------------------------------------------------------------- Gross Unrealized Amortized -------------------- Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Debt securities: U.S. Government obligations $ 15,028 13 1 15,040 U.S. Government agencies 101,556 -- 5,725 95,831 State and municipal 55,385 1,164 1 56,548 Corporate and other 311 6 -- 317 Mortgage-backed securities 1,033,705 5,475 9,195 1,029,985 - ----------------------------------------------------------------------------------------- Total debt securities 1,205,985 6,658 14,922 1,197,721 Unamortized holding loss on securities transferred (29,821) - ----------------------------------------------------------------------------------------- $1,176,164 - -----------------------------------------------------------------------------------------
In view of a regulatory policy revision in 1994, the Company transferred securities with a fair value of $1.265 billion and a net unrealized holding loss of $71.6 million at date of transfer from available for sale to held to maturity. At December 31, 1997, the remaining net unamortized loss on US Government agency securities was $5,816,000 and mortgage-backed securities was $24,005,000. 21 (3) Securities (Continued) Securities available for sale at December 31, 1997 are summarized as follows:
- ----------------------------------------------------------------------------------------- Gross Unrealized Amortized -------------------- Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Debt securities: U.S. Government obligations $ 19,146 56 19 19,183 U.S. Government agencies 60,004 52 354 59,702 Corporate and other 6,969 -- 323 6,646 Mortgage-backed securities 707,163 2,702 1,463 708,402 - ----------------------------------------------------------------------------------------- Total debt securities 793,282 2,810 2,159 793,933 - ----------------------------------------------------------------------------------------- Equity securities: Common 13 203 -- 216 Federal Home Loan Bank 46,320 -- -- 46,320 - ----------------------------------------------------------------------------------------- Total equity securities 46,333 203 -- 46,536 - ---------------------------------------------------------------------------------------- $ 839,615 3,013 2,159 840,469 - -----------------------------------------------------------------------------------------
Securities in the trading account at December 31, 1997 and 1996 were equity securities. The change in net unrealized holding gain (loss) on trading securities included in net gain (loss) on securities transactions is a gain of $500,000 in 1997, a loss of $63,000 in 1996 and a gain of $2,434,000 in 1995. The following table presents the carrying value and fair value of debt securities at December 31, 1997, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
- ----------------------------------------------------------------------------------------- Held to Maturity Available for Sale -------------------------- ------------------------ Carrying Fair Amortized Fair (In Thousands) Value Value Cost Value - ----------------------------------------------------------------------------------------- 1 year or less $ 96,022 96,820 18,662 18,680 1 year through 5 years 28,817 29,461 10,489 10,497 5 years through 10 years 41,101 40,909 15,000 15,052 After 10 years 524 546 41,968 41,302 - ----------------------------------------------------------------------------------------- 166,464 167,736 86,119 85,531 Mortgage-backed securities 1,009,700 1,029,985 707,163 708,402 - ----------------------------------------------------------------------------------------- $1,176,164 1,197,721 793,282 793,933 - -----------------------------------------------------------------------------------------
Securities carried at $732,492,000 at December 31, 1997 were pledged on municipal deposits. 22 (3) Securities (Continued) Securities held to maturity at December 31, 1996 are summarized as follows:
- ----------------------------------------------------------------------------------------- Gross Unrealized Amortized -------------------- Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Debt securities: U.S. Government obligations $ 29,554 331 23 29,862 U.S. Government agencies 125,486 -- 7,796 117,690 State and municipal 61,668 1,280 16 62,932 Corporate and other 329 7 -- 336 Mortgage-backed securities 1,505,006 6,021 19,646 1,491,381 - ----------------------------------------------------------------------------------------- Total debt securities 1,722,043 7,639 27,481 1,702,201 Unamortized holding loss on securities transferred (38,135) - ----------------------------------------------------------------------------------------- $1,683,908 - -----------------------------------------------------------------------------------------
Securities available for sale at December 31, 1996 are summarized as follows:
- ----------------------------------------------------------------------------------------- Gross Unrealized Amortized -------------------- Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Debt securities: U.S. Government obligations $ 4,444 14 51 4,407 U.S. Government agencies 84,992 -- 1,478 83,514 Mortgage-backed securities 785,380 6,905 920 791,365 - ----------------------------------------------------------------------------------------- Total debt securities 874,816 6,919 2,449 879,286 Equity securities: Common 13 -- -- 13 Federal Home Loan Bank 46,041 -- -- 46,041 - ----------------------------------------------------------------------------------------- Total equity securities 46,054 -- -- 46,054 - ---------------------------------------------------------------------------------------- $ 920,870 6,919 2,449 925,340 - -----------------------------------------------------------------------------------------
The following table summarizes proceeds, gains and losses realized on the sale of securities available for sale for the years ended December 31, 1997, 1996 and 1995:
- ---------------------------------------------------------------------------------------------- Change in Cash Securities Sold Net Realized Realized (In Thousands) Proceeds Not Settled Proceeds Gains Losses - ---------------------------------------------------------------------------------------------- 1997 $1,172,947 9,713 1,182,660 9,493 371 1996 589,176 (65,156) 524,020 6,451 982 1995 2,095,113 (485,824) 1,609,289 13,700 10,662 - ----------------------------------------------------------------------------------------------
23 (4) Loans The composition of the loan portfolio at December 31, is summarized as follows:
- ------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------- Commercial $ 463,174 333,073 Commercial real estate 336,548 290,121 Commercial real estate construction 57,074 44,201 Residential real estate construction 5,732 9,797 Residential real estate 1,098,848 1,044,444 Consumer loans 923,649 728,061 - ------------------------------------------------------------------------- 2,885,025 2,449,697 Net deferred fees, discounts and premiums (17,769) (1,223) - ------------------------------------------------------------------------- $2,867,256 2,448,474 - -------------------------------------------------------------------------
The principal balances of loans not accruing interest amounted to approximately $23,400,000 and $20,172,000 at December 31, 1997 and 1996, respectively. The difference between the amount of interest income that would have been recorded if these loans had been paid in accordance with their original terms and the amount of interest income that was recorded in each of the years in the three-year period ended December 31, 1997 was immaterial. The Banks have entered into transactions with the Company's directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. the aggregate amount of loans to such related parties at December 31, 1997 was $14,135,000. Changes in the allowance for laon losses for the years ended December 31, were as follows:
- ------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - ------------------------------------------------------------------------- Balance, beginning of year $37,840 34,583 33,775 Provision charged to operations 7,168 7,813 6,790 Loans charged-off (7,492) (6,638) (7,591) Recoveries 1,548 2,082 1,609 - ------------------------------------------------------------------------- Balance, end of year $39,064 37,840 34,583 - -------------------------------------------------------------------------
Impaired loans were $18,940,000 and $6,944,000 at December 31, 1997 and 1996, respectively. Included in these amounts are $3,629,000 and $1,820,000 of impaired loans for which the related allowance for loan losses is $2,677,000 and $436,000 at December 31, 1997 and 1996, respectively. In addition, included in the total impaired loans is $15,311,000 and $5,124,000 of impaired loans that, as a result of the adequacy of collateral values and cash flow analysis do not have a specific impairment reserve at December 31, 1997 and 1996, respectively. The average impaired loans for the years ended December 31, 1997, 1996 and 1995 was approximately $11,100,000, $8,941,000 and $9,634,000 respectively. The effect on interest income of impaired loans was not material to the consolidated financial statements in 1997, 1996 and 1995. 24 (4) Loans (continued) The following table summarizes gross proceeds, gains and losses realized for loans available for sale for the years ended December 31, 1997, 1996 and 1995:
- ------------------------------------------------------------------------- Gross Realized Realized (In Thousands) Proceeds Gains Losses - ------------------------------------------------------------------------- 1997 $54,146 526 456 1996 32,990 851 441 1995 35,370 301 117 - -------------------------------------------------------------------------
(5) Mortgage Banking Activities Loans serviced for others totaled approximately $1,031,712,000, $1,091,477,000, and $1,146,989,000 at December 31, 1997, 1996 and 1995, respectively. Changes in the combined capitalized mortgage servicing rights and purchased mortgage servicing rights are as follows:
- ------------------------------------------------------------------------- Years ended December 31, (In Thousands) 1997 1996 1995 - ------------------------------------------------------------------------- Balance, beginning of year $ 7,707 7,107 8,350 Capitalized mortgage servicing rights 874 2,847 671 Amortization (1,572) (2,247) (1,914) - ------------------------------------------------------------------------- Balance, end of year $ 7,009 7,707 7,107 - -------------------------------------------------------------------------
Mortgage banking income is summarized as follows:
- ------------------------------------------------------------------------- Years ended December 31, (In Thousands) 1997 1996 1995 - ------------------------------------------------------------------------- Loan servicing fees received $ 4,685 4,728 5,062 Servicing rights amortization (1,645) (2,247) (1,914) Gain (loss) on sale: Loans 84 410 184 Mortgage-backed securities 247 1,396 (197) - ------------------------------------------------------------------------- $ 3,371 4,287 3,135 - -------------------------------------------------------------------------
25 (6) Premises and Equipment A summary of premises and equipment at December 31, is as follows:
- ------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------- Land $ 8,139 8,134 Buildings 63,705 61,775 Furniture, fixtures and equipment 31,834 29,311 Leasehold improvements 11,129 10,863 Construction in progress 3,647 1,024 - ------------------------------------------------------------------------- 118,454 111,107 Less accumulated depreciation and amortization 53,004 48,550 - ------------------------------------------------------------------------- $ 65,450 62,557 - -------------------------------------------------------------------------
Depreciation and amortization of premises and equipment included in building, occupancy and equipment expense amounted to $6,555,000, $6,746,000 and $6,271,000, for the years ended December 31, 1997, 1996 and 1995 respectively. (7) Deposits Contractual maturities of time deposits at December 31, 1997 were as follows:
- -------------------------------------------------- (In Thousands) Maturing Amount - -------------------------------------------------- 1998 $1,859,153 1999 307,606 2000 84,374 2001 61,915 2002 65,479 Thereafter 64,863 - -------------------------------------------------- $2,443,390 - --------------------------------------------------
(8) Repurchase Agreements Repurchase agreements, including accrued interest of $1,680,000 at December 31, 1997 are as follows:
- ----------------------------------------------------------------------------------- Securities Sold Weighted Carrying Market Repurchase Average (Dollars In Thousands) Values Values Liability Rate - ----------------------------------------------------------------------------------- 31-90 days $ 21,535 21,571 25,803 6.25% Over 90 days 160,786 161,349 138,799 5.73% - ----------------------------------------------------------------------------------- $ 182,321 182,920 164,602 5.82% - -----------------------------------------------------------------------------------
26 (8) Repurchase Agreements (continued) Information concerning borrowings under repurchase agreements for the years ended December 31, is as follows:
- --------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 - --------------------------------------------------------------------- Maximum month-end balance $ 369,891 351,174 Average Balance 301,698 300,706 Weighted average interest rate 5.96% 6.27% - ---------------------------------------------------------------------
Repurchase agreements, including accrued interest of $954,000 at December 31, 1996 are as follows:
- ----------------------------------------------------------------------------------- Securities Sold Weighted Carrying Market Repurchase Average (Dollars In Thousands) Values Values Liability Rate - ----------------------------------------------------------------------------------- 31-90 days $ 18,990 18,995 19,010 5.93% Over 90 days 245,862 248,230 235,461 6.35% - ----------------------------------------------------------------------------------- $ 264,852 267,225 254,471 6.32% - -----------------------------------------------------------------------------------
(9) Other Borrowings Other borrowings at December 31, are summarized as follows:
- --------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 - --------------------------------------------------------------------- Federal Home Loan Bank $ 638,555 852,028 Collateralized mortgage obligations 8,358 11,114 Industrial Development Agency bond 11,535 11,775 - --------------------------------------------------------------------- $ 658,448 874,917 - ---------------------------------------------------------------------
Borrowings from the Federal Home Loan Bank (FHLB) as of December 31, are due as follows:
- ------------------------------------------------------------------------------------- 1997 1996 (Dollars In Thousands) Amount Rate Amount Rate - ------------------------------------------------------------------------------------- 1997 $ -- 591,100 5.23 to 7.95% 1998 435,300 5.48 to 7.72% 250,000 5.48 to 7.72% 1999 185,000 6.08 to 6.53% -- 2000 -- -- 2001 495 5.86 to 7.02% 495 5.86 to 7.02% 2002 2,875 6.06 to 7.43% 425 7.43% Thereafter 14,885 4.05 to 7.97% 10,008 4.05 to 7.97% - ------------------------------------------------------------------------------------- $ 638,555 852,028 - -------------------------------------------------------------------------------------
27 (9) Other Borrowings (Continued) At December 31, 1997 and 1996, FHLB borrowings, substantially all at fixed rates, are collateralized by Federal Home Loan Bank stock of $46,320,000 and $46,041,000, respectively, and U.S. Government and mortgage-backed securities and mortgage loans with carrying values approximating $1,516,311,000 and $1,211,981,000, respectively. The Banks may borrow up to $150,000,000 from the Federal Home Loan Bank of New York (FHLB) during any calendar month without FHLB Board approval. The aggregate limit available without FHLB Board approval is 30% of assets. In June, 1989, collateralized mortgage obligations (CMOs) of $51,600,000, were issued. Net proceeds were used to reduce existing short-term borrowings and to fund mortgage commitments. In conjunction with the debt, $55,800,000 in mortgage loans were securitized and converted into mortgage-backed securities as collateral for the CMOs. CMO's are summarized as follows:
- --------------------------------------------------------------------------- (In Thousands) 1997 1996 - --------------------------------------------------------------------------- Class A-3, 9.05% interest rate, maturing in 2015 $ 7,895 10,651 Class A-4, 7.80% interest rate, maturing in 2018 463 463 - --------------------------------------------------------------------------- $ 8,358 11,114 - ---------------------------------------------------------------------------
The anticipated aggregate principal payments on the CMOs during each of the five years subsequent to December 31, 1997 are: 1998 - $2,064,000; 1999 - $1,032,000; 2000 - $1,032,000; 2001 - $1,032,000; 2002 - $516,000. Since the rate of payment of principal of each class will depend on the rate of repayment (including prepayments) of collateral, the actual maturity of any class could be significantly earlier that its stated maturity. The Company financed the expansion of its parking facility with the proceeds of $12,000,000 of City of Syracuse Industrial Development Agency Civil Facility Bonds. The obligation bears interest at a weekly variable rate, 4.35% at December 31, 1997, and is payable in monthly installments. the bonds are subject to a mandatory sinking fund redemption beginning in 1996 of $225,000 with a final maturity of April 1, 2018. The bonds are secured by a letter of credit which is collateralized by mortgage-backed securities having carrying value of $17,480,000 and a fair value of $17,612,000 at December 31, 1997. The Company enters into interest rate swaps which involve the exchange of fixed and floating rate interest payment obligations without the exchange of underlying principal obligations. These agreements have been utilized by the Company to effectively convert variable-rate liabilities into fixed-rate liabilities to more closely match the interest rate sensitivity of assets and liabilities. Entering into interest rate swaps involves not only the risk of default by the other party but also interest rate risk if positions are not matched. The Company has swaps outstanding on $25,000,000 of FHLB borrowings at December 31, 1997. The original terms to maturity of swaps was three years and the weighted average remaining term of the agreements was .5 years. Under the agreements, the Company pays interest at a fixed rate and receives interest at rates that vary according to the London Interbank Offered Rate. interest payments are exchanged at three or six month intervals. The weighted average fixed interest rate the Company was paying was 5.60% and 5.55%, and the weighted average variable interest rate the Company was receiving was 5.13% and 5.63% at December 31, 1997 and 1996, respectively. The fair value was $3,000 and $108,700 at December 31, 1997 and 1996. (10) Capital Trust Securities In February 1997, the Company, through a subsidiary Trust formed for the sole purpose of issuing capital securities, issued $60,000,000, 9.25% Capital Securities due February 1, 2027. Proceeds of this issue were used to fund the 1,400,000 common share repurchase announced in January 1997. In October 1996, the Federal Reserve Board approved Tier I capital treatment for this type of capital securities which provides the Company with a method of funding Tier I capital that is tax deductible. The proceeds to the Trust are lent to the holding company as long-term junior subordinated debentures that are subordinate to all holding company debt but senior to all common stock. The securities may be called at a premium, in whole or in part, on or after February 1, 2007 and provisions are included which provide the temporary deferral of interest payments for a period of up to five years. 28 (11) Income Taxes Total income tax expense (benefit) was allocated as follows:
- --------------------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------- Income before income taxes $ 29,042 27,618 26,887 Paid-in capital, for stock options exercised (1,799) (246) (148) Shareholders' equity, for unrealized gain (loss) on securities 1,908 (860) 17,909 - --------------------------------------------------------------------------------------- $ 29,151 26,512 44,648 - ---------------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income from operations:
- --------------------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------- Current: Federal $ 14,623 15,208 21,461 State 2,510 6,138 6,288 - --------------------------------------------------------------------------------------- 17,133 21,346 27,749 Deferred: Federal 9,613 5,526 (273) State 2,296 746 (589) - --------------------------------------------------------------------------------------- 11,909 6,272 (862) - --------------------------------------------------------------------------------------- Total $ 29,042 27,618 26,887 - ---------------------------------------------------------------------------------------
Income tax expense attributable to income before income taxes diffeed from the amounts computed by applying the U.S. Federal statutory income tax rate to pre-tax income as follows:
- --------------------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------- Federal statutory rate 35% 35% 35% Computed "expected" tax expense $ 28,077 24,704 25,047 State taxes, net of Federal benefit 3,124 4,475 3,704 Tax exempt income (921) (945) (1,037) Other (1,238) (616) (827) - --------------------------------------------------------------------------------------- Actual income tax expense $ 29,042 27,618 26,887 - ---------------------------------------------------------------------------------------
29 (11) Income Taxes (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 1996 follow:
- ------------------------------------------------------------------------------ (In Thousands) 1997 1996 - ------------------------------------------------------------------------------ Deferred tax assets: Net unrealized holding loss on securities $ 11,588 13,496 Deferred loan origination fees and expenses 1,870 2,227 Financial statement allowance for loan losses $ 14,726 14,556 Core deposit intangible assets 4,579 4,483 Other 4,652 3,868 - ------------------------------------------------------------------------------ Total deferred tax assets 37,415 38,630 - ------------------------------------------------------------------------------ Deferred tax liabilities: Leasing transactions $ 24,568 9,692 Tax loan loss reserve in excess of base year reserve 3,347 3,861 Other 2,345 4,105 - ------------------------------------------------------------------------------ Total deferred tax liabilities 30,260 17,658 - ------------------------------------------------------------------------------ Net deferred tax assets $ 7,155 20,972 - ------------------------------------------------------------------------------
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance is necessary. Included in retained earnings at December 31, 1997 is approximately $27,300,000 representing aggregate provisions for loan losses taken under the Internal Revenue Code. Use of these reserves to pay dividends in excess of earnings and profits or to redeem stocks, or if the institution fails to qualify as a bank for Federal income tax purposes would result in taxable income to the Company. 30 (12) Earnings Per Share Basic and diluted earnings per share were computed as follows:
- ----------------------------------------------------------------------------------------------- Years Ended December 31, (In Thousands, Except Per Share Data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Basic earnings per share Earnings available for common shares: Earnings from operations $ 51,178 42,964 44,677 Provision for cash dividends on preferred stock (Series B) -- (4,155) (4,522) - ----------------------------------------------------------------------------------------------- Net earnings available for common shareholders $ 51,178 38,809 40,155 - ----------------------------------------------------------------------------------------------- Basic earnings per share $ 3.93 3.02 2.88 - ----------------------------------------------------------------------------------------------- Shares used in computation Weighted average common shares outstanding (net of treasury shares) 13,023,988 12,855,072 13,966,682 - ----------------------------------------------------------------------------------------------- Diluted earnings per share Net earnings available for common shares and common stock equivalent shares deemed to have a dilutive effect $ 51,178 42,964 44,677 - ----------------------------------------------------------------------------------------------- Diluted earnings per share $ 3.88 2.88 2.76 - ----------------------------------------------------------------------------------------------- Weighted average common shares outstanding 13,023,988 12,855,072 13,966,682 Additional potentially dilutive securities (equivalent in common stock): Convertable preferred stock (Series B) 30,742 1,945,314 2,116,875 Stock options 126,593 113,121 94,170 - ----------------------------------------------------------------------------------------------- Total 13,181,323 14,913,507 16,177,727 - ----------------------------------------------------------------------------------------------- Summary of cash dividends declared per share Preferred-Series B $ -- 1.69 1.69 Common $ 1.36 1.24 1.14 - -----------------------------------------------------------------------------------------------
31 (13) Pension Plan The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31:
- ------------------------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $10,145 and $10,795 at 1997 and 1996, respectively $ 13,890 11,957 - ------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date 17,152 15,882 Plan assets at fair value, primarily listed stocks and fixed income securities 21,046 18,276 - ------------------------------------------------------------------------------------------- Plan assets in excess of the projected benefit obligation 3,894 2,394 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (3,134) (1,722) Unrecognized past service liability (1,270) (1,358) Unrecognized net asset being amortized over 12.5 years (217) (288) - ------------------------------------------------------------------------------------------- Accrued pension cost included in other liabilities $ (727) (974) - -------------------------------------------------------------------------------------------
Net period pension expense included in the following components at December 31:
- ----------------------------------------------------------------------------------- (In Thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 1,322 1,559 1,459 Interest cost on projected benefit obligation 1,076 1,095 1,005 Actual return on plan assets (3,995) (1,808) (2,728) Net amortization and deferral 2,139 236 1,433 - ----------------------------------------------------------------------------------- Net periodic pension expense $ 542 1,082 1,169 - -----------------------------------------------------------------------------------
The weighted-average discount rate and expected long-term rate of return on pension plan assets were 7.25% and 8.5%, respectively, for 1997 and 8.0% and 8.5%, respectively, for 1996. The rate of increase of future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5.0% for 1997 and was 5.5% for 1996. (14) Incentive Savings Plan The Company maintains an incentive savings 401(k) plan which is a defined contribution plan providing for contributions to several trust funds by both the Banks and their employees. Participants may contribute 1% to 15% of their compensation subject to IRS limitations. The Banks make matching contributions equal to 50% of participant contributions up to a limit of 3% of the participant's base pay. Participants vest immediately in their own contributions and over a period of five years in the Banks' contributions. Plan expense was approximately $645,000, $639,000, and $578,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (15) Employee Stock Ownership Plan All salaried and hourly employees of the Banks are eligible to participate in an Employee Stock Ownership Plan (ESOP) upon attaining age 21 and completing a year of service. Participants vest in the shares allocated to their accounts depending on their length of service, with 100% vesting occurring after 6 years of service. The ESOP is designed to invest in the Company's common stock and has the authority to borrow funds from a third party to acquire such stock. ESOP expense approximates $150,000 in each of the years in the three year period ending December 31, 1997. 32 (16) Stock Option Plans Under the terms of the Stock Option and Appreciation Rights Plan (the Option Plan), options to purchase up to 700,000 shares of common stock may be granted to officers and employees of the Company and its subsidiaries. Options granted may be nonqualified stock options or qualified stock options, which afford favorable tax treatment to recipients upon compliance with certain restrictions and do not normally result in tax deductions to the Company. The Option Plan initially permitted the granting of tandem stock appreciation rights (SARS) in respect to options which enable the recipient on exercise to elect payment in cash based upon increases in market value of the stock from the date of grant. Options granted are exercisable as determined by the Option Committee of the Board of Directors, may have a term of up to ten years and are exercisable at a price at least equal to the fair market value at the date of grant. Under the terms of the Directors Stock Option Plan, as of the date of each annual meeting, options to purchase 3,000 shares of the Company's common stock are granted to non-employee directors who continue as a member of the Board and have not previously been granted such options. The Directors Stock Option Plan requires that options be granted at an exercise price at not less than fair market value on the date of the grant. Options vest over three years and are exercisable over a ten year period if the optionee continues to serve as a director of the Company. Under the terms of the plan, 100,000 shares of common stock were reserved for issuance upon the exercise of options granted. Under Franklin First Savings Bank's Incentive Plan, non-qualified and quantified stock options were granted to directors, officers and employees of Franklin. All options are vested and exercisable over a ten year period. The following is a summary of the changes in options outstanding:
- -------------------------------------------------------------------------------- Number Number Weighted of of Average Shares SARS Price - -------------------------------------------------------------------------------- Balance at December 31, 1994 515,626 72,000 $ 21.22 Granted 16,100 -- 22.88 Exercised (23,540) -- 10.54 Forfeited (16,994) (4,500) 29.68 - -------------------------------------------------------------------------------- December 31, 1995 491,192 67,500 21.50 - -------------------------------------------------------------------------------- Options exercisable, December 31, 1995 387,525 67,500 18.38 - -------------------------------------------------------------------------------- Granted 80,600 -- 33.28 Exercised (24,994) -- 8.58 Forfeited (5,400) (6,500) 32.96 - -------------------------------------------------------------------------------- December 31, 1996 541,398 61,000 23.73 - -------------------------------------------------------------------------------- Options exercisable, December 31, 1996 420,065 61,000 21.06 - -------------------------------------------------------------------------------- Granted 83,600 -- 39.12 Exercised (173,894) -- 15.23 Forfeited (354) (8,000) 17.27 - -------------------------------------------------------------------------------- December 31, 1997 450,750 53,000 29.87 - -------------------------------------------------------------------------------- Options exercisable, December 31, 1997 310,083 53,000 $ 26.86 - --------------------------------------------------------------------------------
33 (16) Stock Option Plans (continued) The following summarizes outstanding and exercisable options at December 31, 1997:
- ---------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable --------------------------------------------------- -------------------------------- Range of Weighted Average Weighted Weighted Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------------------------------------- $6.00 - $15.00 60,216 2.47 $ 9.91 60,216 $ 9.91 $15.01 - $25.00 69,500 4.46 21.49 66,167 21.42 $25.01 - $35.00 237,434 6.45 34.13 183,701 34.38 $35.01 - $50.00 83,600 9.09 39.12 -- -- - ----------------------------------------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its stock option plans, and, accordingly no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements. Had compensation cost been determined based on the fair value at the grant dates for awards under the plans, consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ----------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------- Net Income: As reported $ 51,178 42,964 44,677 Pro forma 50,899 42,835 44,661 Diluted earnings per common share: As reported $ 3.88 2.88 2.76 Pro forma $ 3.86 2.87 2.76 - -----------------------------------------------------------------------------
The per share weighted average fair value and weighted average exercise prices of stock options granted during 1997 at a price equal to the market price of the stock on the grant date are $9.71 and $37.66, respectively, and the per share weighted average fair value and weighted average exercise prices of stock options granted during 1997 at a price in excess of the market price of the stock on the grant date are $8.45 and $40.70, respectively. The per share weighted average fair value of stock options granted during 1996 and 1995 was $7.18 and $5.54, respectively. The fair values were determined using the Black-Scholes option-pricing model with the following weighted average assumptions:
- ----------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------- Expected dividend yield 3.7% 3.7% 4.5% Risk free interest rate 6.5% 5.5% 7.8% Expected life 7 years 7 years 7 years Volatility 25.0% 27.6% 23.2% - -----------------------------------------------------------------------------
(17) Shareholders' Equity In January 1997, the Company completed its Series B 6.75% Cumulative Convertible Preferred Stock redemption, which resulted in the redemption of 35,514 shares at a cost of $924,000 and the remaining 2,306,538 shares were converted to 1,799,096 shares of common stock issued from treasury stock. 34 (17) Shareholders' Equity (continued) The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies which regulate them. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997 and 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
- --------------------------------------------------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets): Consolidated $ 437,748 13.59% $ 398,308 13.78% OnBank NA 34,141 15.50% OnBank & Trust Co. 320,585 14.07% 256,698 13.69% Franklin First Savings Bank 112,726 12.18% 99,257 12.30% Tier I Capital (to Risk Weighted Assets): Consolidated 398,684 12.37% 362,015 12.52% OnBank NA 31,383 14.25% OnBank & Trust Co. 292,101 12.82% 233,255 12.44% Franklin First Savings Bank 102,570 11.08% 89,166 11.05% Tier I Capital (to Average Assets): Consolidated 398,684 7.23% 362,015 6.79% OnBank NA 31,383 6.46% OnBank & Trust Co. 292,101 7.28% 233,255 6.66% Franklin First Savings Bank 102,570 6.93% 89,166 6.57% - ---------------------------------------------------------------------------------------------------------
(18) Dividends The payment of dividends by the Banks to the Company, which in turn pays dividends to its shareholders, is subject to the Banks being in compliance with regulatory capital requirements. Under New York State Banking law, dividends may be declared and paid only out of net profits of the Banks. The approval of the Superintendent of the New York State Department of Banking is required if the total of all dividends declared in any calendar year will exceed net profits for that year plus the retained net profits of the preceding two years. Under Pennsylvania Banking law, no dividend may be paid that would constitute an unsafe or unsound practice or result in an institution failing to meet its capital requirements. 35 (19) Commitments and Contingencies In the normal course of the Banks' business, there are various outstanding commitments and contingent liabilities that have not been reflected in the consolidated financial statements. In addition, in the normal course of business, there are various outstanding legal proceedings. In the opinion of management, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Company. At December 31, 1997, the Banks were obligated under non-cancelable operating leases. Building, occupancy and equipment expense includes rental expense of $3,954,000, $3,849,000 and $3,592,000, for the years ended December 31, 1997, 1996 and 1995, respectively. The minimum rentals at December 31, 1997 under the existing terms of these leases are as follows: $4,274,000 in 1998; $3,877,000 in 1999; $3,193,000 in 2000; $2,723,000 in 2001; $2,360,000 in 2002 and $10,740,000 in later years. At December 31, 1997 the Company was obligated under a contract with Alltel Services, Inc. for on-site data processing management services. Future contractual expenses $7,875,000 in 1998 and $2,795,000 in 1999. (20) Financial Instruments with Off-Balance-Sheet Risk The Banks are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers and to reduce exposure to fluctuations in interest rates. Those financial instruments include commitments to extend credit, the serviced loan portfolio, options written and forward purchase and sale contracts. Those instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated statement of financial position. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Unless noted otherwise, the Banks do not require collateral or other security to support off-balance-sheet financial instruments with credit risk. Market risk represents the accounting loss that would be recognized at the reporting date if future changes in market prices make a financial instrument less valuable. The Banks' exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for commitments to extend credit, forward purchase contracts, and put options written is represented by the contractual notional amount of those instruments. The Banks use the same credit policies to evaluate the creditworthiness of counterparties to these transactions as it does for on-balance-sheet instruments. The Banks control their credit risk through credit approvals, limits, and monitoring procedures. The Banks' credit risk with respect to mortgage servicing losses results from unrecoverable advances of delinquent principal, interest and tax payments made on behalf of mortgagors. To date, the Banks have not suffered significant losses from their loan servicing activities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis using the same criteria and credit policies as it does for on-balance-sheet instruments. The credit risk amounts are equal to the contractual amounts assuming that the amounts are fully advanced and the collateral or other security is of no value. The amount of collateral obtained by the Banks upon extension of credit is based on management's credit evaluation of the counterparty. The type of collateral varies but is primarily mortgages on real estate. The Banks have experienced little difficulty in accessing collateral when required. The Banks enter into forward contract commitments involving the delayed delivery or purchase of mortgage-backed securities and loans. These forward contracts are used to reduce the market risk associated with the underlying securities or loans. Contractual terms of forward commitments specify the aggregate amount of contract, the interest yield or prices at which securities or loans are to be delivered, and the period covered. Credit and market risks arise from the potential inability of counterparties to meet the terms of their contracts and from movements in security and loan values, respectively. Deferred fees from put options outstanding at December 31, 1997 and 1996 amounted to approximately $19,000 and $90,000, respectively, with average fair values of $99,000 and $74,000 for the years ending December 31, 1997 and 1996, respectively. The fair value of these options approximated the deferred fees outstanding at December 31, 1997 and 1996. 36 (20) Financial Instruments with Off-Balance-Sheet Risk (continued) Net trading gains (losses) on financial options included in gain (loss) on securities transactions totaled $564,000, ($353,000), and $910,000 in 1997, 1996 and 1995, respectively. A summary of the contract or notional amounts of the Banks' exposure to off-balance-sheet risk, at December 31, excluding unused lines of credit of approximately $331,328,000 as of December 31, 1997, follows:
- ------------------------------------------------------------------------------ Contract or Notional Amount (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Financial instruments whose contract amount represents credit risk: Commitments to extend credit: Fixed $ 27,223 30,942 Variable 40,117 51,049 Standby letters of credit 68,831 44,349 Put options written 15,000 36,000 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Interest rate swaps 25,000 50,000 - ------------------------------------------------------------------------------
(21) Concentrations of Credit Risk Concentrations of credit risk (whether on or off balance sheet) arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Banks do not have a significant exposure to any individual customer or counterparty. A geographic concentration arises because the Banks operate only in Upstate New York and Northeastern Pennsylvania. The credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. The Banks have experienced little difficulty in accessing collateral when required. (22) Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments: (a) Cash and Cash Equivalents For these short-term instruments that generally mature in ninety days or less, the fair value approximates carrying value. (b) Securities Fair values for securities and derivative instruments are based on quoted market prices or dealer quotes, where available. Where quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of FHLB stock, which is redeemable at par, approximates fair value. (c) Loans Fair values for residential mortgage loans are based on quoted market prices of similar loans sold in the secondary market, adjusted for differences in loan characteristics. The fair values for commercial and consumer loans are estimated through discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit quality. The fair value of loans available for sale is based on quoted market prices. Where quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 37 (22) Fair Values of Financial Instruments (continued) Delinquent loans (not in foreclosure) are valued using the methods noted above. While credit risk is a component of the discount rate used to value loans, delinquent loans are presumed to possess additional risk. Therefore, the calculated fair value of loans delinquent more than thirty days are reduced by an allocated amount of the general allowance for loan losses. (d) Due from Brokers Due to the short term nature, the carrying value approximates fair value. (e) Accrued Interest Receivable and Payable For these short-term instruments, the carrying value approximates fair value. (f) Deposits The fair values disclosed for demand deposits, savings accounts and money market accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values). The fair value of fixed maturity time deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities on time deposits. (g) Repurchase Agreements For these short term instruments that mature in less than six months, the carrying value approximates fair value. For those with maturities greater than six months, the fair value is estimated using a discounted cash flow approach. This approach applies the current incremental rates to such borrowings. (h) Other Borrowings The fair value of long term debt has been estimated using discounted cash flow analyses that apply interest rates currently being offered for notes with similar terms. (i) Due to Brokers Due to the short term nature, the carrying value approximates fair value. (j) Commitments to Extend Credit and Letters of Credit The fair value of commitments to extend credit are equal to the deferred fees outstanding, as the contractual rates and fees approximate those currently charged to originate similar commitments. The estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 are as follows:
- -------------------------------------------------------------------------------------------------- 1997 1996 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------------------------------------------- Financial assets: Securities $ 2,017,811 2,039,368 2,610,975 2,629,268 Net loans (1) 2,958,604 3,007,071 2,449,393 2,481,779 - -------------------------------------------------------------------------------------------------- Financial liabilities: Deposits $ 4,023,106 4,030,402 3,821,906 3,807,100 Repurchase agreements 164,602 165,224 254,471 255,407 Other borrowings 658,448 662,161 874,917 863,595 Capital Trust Securities 60,000 69,631 -- -- - --------------------------------------------------------------------------------------------------
(1) includes loans available for sale 38 (23) Parent Company Financial Information The condensed balance sheets of ONBANCorp, Inc. at December 31, follow:
- ------------------------------------------------------------------------------ (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Assets: Cash $ 2,391 1,870 Due from subsidiary banks 8,704 10,986 Securities: Trading 1,178 1,727 Available for sale 6,576 -- Investment in subsidiary banks 393,234 351,840 Other assets 8,248 1,217 - ------------------------------------------------------------------------------ Total assets $ 420,331 367,640 - ------------------------------------------------------------------------------ Liabilities and shareholders' equity: Liabilities: Accounts payable, accrued dividends & other liabilities $ 23,278 7,589 Intercompany subordinated debentures 61,856 -- Total shareholders' equity 335,197 360,051 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 420,331 367,640 - ------------------------------------------------------------------------------
The condensed statements of income for the years ended December 31, follow:
- --------------------------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Income: Net interest income $ 2,093 224 439 Gain (loss) on securities transactions 1,553 (63) 2,318 Dividends from subsidiary banks 19,000 66,000 43,000 - --------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiary banks 22,646 66,161 45,757 Equity in undistributed earnings of subsidiary banks 36,404 (20,777) 1,540 - --------------------------------------------------------------------------------------------------- Total income 59,050 45,384 47,297 Operating expenses 10,499 3,778 2,417 - --------------------------------------------------------------------------------------------------- Income before income taxes 48,551 41,606 44,880 Income taxes (benefit) (2,627) (1,358) 203 - --------------------------------------------------------------------------------------------------- Net income 51,178 42,964 44,677 - ---------------------------------------------------------------------------------------------------
39 (23) Parent Company Financial Information (continued) The condensed statements of cash flows for the years ended December 31, follow:
- --------------------------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 51,178 42,964 44,677 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary banks (36,404) 20,777 (1,540) Net change in trading securities 549 63 14,209 Other 12,660 (879) 1,138 - --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 27,983 62,925 58,484 - --------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of securities available for sale (78,647) -- -- Proceeds from sale of securities available for sale 72,741 -- -- - --------------------------------------------------------------------------------------------------- Net cash used by investing activities (5,906) -- -- - --------------------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of intercompany subordinated debentures 60,000 -- -- Proceeds from issuance of common stock 3,248 750 743 Purchase of treasury stock (65,373) (50,721) (18,068) Redemption of preferred stock (924) (963) (8,360) Cash dividends paid on common stock (17,519) (15,784) (19,737) Cash dividends paid on preferred stock (988) (4,229) (4,649) - --------------------------------------------------------------------------------------------------- Net cash used by financing activities (21,556) (70,947) (50,071) - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 521 (8,022) 8,413 Cash & cash equivalents at beginning of year 1,870 9,892 1,479 - --------------------------------------------------------------------------------------------------- Cash & cash equivalents at end of year $ 2,391 1,870 9,892 - --------------------------------------------------------------------------------------------------- Supplemental disclosure of non-cash investing activities: Change in net unrealized holding gain (loss) on securities of subsidiaries $ 2,790 (1,217) 26,864 - ---------------------------------------------------------------------------------------------------
40 Selected Quarterly Financial Data Summarized quarterly financial data for the years ended December 31, 1997 and 1996 are as follows: - ------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------- Three Months Ended (In thousands, except share data) Mar 31, 1997 June 30, 1997 Sept 30, 1997 Dec 31, 1997 - ----------------------------------------------------------------------------------------------------------------- Total interest income $ 92,628 96,752 97,886 98,424 Total interest expense 54,341 57,531 58,646 59,073 - ----------------------------------------------------------------------------------------------------------------- Net interest income 38,287 39,221 39,240 39,351 Provision for loan losses 1,796 1,791 1,799 1,782 - ----------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 36,491 37,430 37,441 37,569 Other operating income 9,799 9,559 9,691 11,585 Other operating expenses 26,955 27,389 27,485 27,516 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 19,335 19,600 19,647 21,638 Income taxes 7,187 7,367 6,959 7,529 - ----------------------------------------------------------------------------------------------------------------- Net income 12,148 12,233 12,688 14,109 - ----------------------------------------------------------------------------------------------------------------- Earnings per common share (2) Basic $ 0.88 0.93 0.98 1.11 Diluted $ 0.87 0.92 0.98 1.10 - -----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------- Three Months Ended (In thousands, except share data) Mar 31, 1996 June 30, 1996 Sept 30, 1996 Dec 31, 1996 - ----------------------------------------------------------------------------------------------------------------- Total interest income $ 94,827 91,031 93,251 95,736 Total interest expense 56,945 53,709 54,788 56,656 - ----------------------------------------------------------------------------------------------------------------- Net interest income 37,882 37,322 38,463 39,080 Provision for loan losses 1,950 1,950 1,950 1,963 - ----------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 35,932 35,372 36,513 37,117 Other operating income 8,514 8,992 10,375 8,381 Other operating expenses 26,213 26,190 32,632 (1) 25,579 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 18,233 18,174 14,256 19,919 Income taxes 6,667 6,513 6,966 7,472 - ----------------------------------------------------------------------------------------------------------------- Net income 11,566 11,661 7,290 12,447 - ----------------------------------------------------------------------------------------------------------------- Earnings per common share (2) Basic $ 0.77 0.80 0.49 0.93 Diluted $ 0.74 0.76 0.49 0.83 - -----------------------------------------------------------------------------------------------------------------
(1) Includes $7,282,000 one time SAIF deposit insurance assessment. (2) Summation of the quarterly net income per common share does not necessarily equal the annual amount due to the averaging effect of the number of shares throughout the year. 41 EX-21 3 EXHIBIT 21 EXHIBIT 21 As of December 31, 1997, the Registrant had three wholly owned subsidiaries, OnBank & Trust Co., a New York trust company, Franklin First Savings Bank, a Pennsylvania savings bank, and OnBank Capital Trust I, a Delaware statutory business trust. 27 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors ONBANCorp, Inc.: We consent to incorporation by reference in the registration statement Nos. 33-22113, 33-30813, 33-49504, 33-49506 and 33-49508 on Form S-8 of ONBANCorp, Inc. of our report dated January 26, 1998, relating to the consolidated balance sheets of ONBANCorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report has been incorporated by reference in the December 31, 1997 annual report on Form 10-K of ONBANCorp, Inc. /s/ KPMG Peat Marwick LLP - ------------------------------ KPMG Peat Marwick LLP Syracuse, New York March 27, 1998 28 EX-27.1 5 EXHIBIT 27 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 128,647 169,740 150,621 10,044 12,253 19,123 0 0 115,500 1,178 1,727 1,790 840,469 925,340 978,361 1,176,164 1,683,908 1,761,692 1,197,721 1,702,201 1,797,286 2,867,256 2,448,474 2,329,127 39,064 37,840 34,583 5,319,570 5,417,877 5,567,059 4,023,106 3,821,906 3,808,273 484,583 774,678 506,497 78,217 106,532 105,033 338,467 354,710 758,490 0 0 0 0 2,342 2,516 14,327 14,139 14,095 320,870 343,570 372,155 5,319,570 5,417,877 5,567,059 224,900 201,394 184,591 159,362 170,003 244,078 1,428 3,448 2,790 385,690 374,845 431,459 170,837 154,747 157,415 229,591 222,098 278,944 156,099 152,747 152,515 7,168 7,813 6,790 10,360 6,018 5,457 109,345 110,614 103,462 80,220 70,582 71,564 51,178 42,964 40,155 0 0 0 0 0 0 51,178 42,964 40,155 3.93 3.02 2.88 3.88 2.88 2.76 7.49 7.44 7.20 23,400 20,172 23,580 4,624 2,464 2,586 2,033 4,441 2,792 33,195 20,833 23,985 37,840 34,583 33,775 7,492 6,638 7,591 1,548 2,082 1,609 39,064 37,840 34,583 39,064 37,840 34,583 0 0 0 0 0 0
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