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$872 MILLION DEAL MAKES FIRST EMPIRE THE LARGEST UPSTATE HOLDER OF DEPOSITS

First Empire State Corp. said Tuesday it is acquiring Syracuse-based Onbancorp in an $872 million cash and stock deal that will make the Buffalo-based parent of M&T Bank the largest deposit holder in upstate New York.

The deal, scheduled to close within five months, will result in roughly 200 new jobs for the Buffalo market and mark First Empire's first retail branch foray outside the Empire State. Onbancorp subsidiary Franklin First Savings Bank has its headquarters in Wilkes-Barre, Pa.

The merged bank's total branch network will swell to 255 from M&T's current 178.

The 200 jobs projected to come to Buffalo would include operations and systems-related positions, along with credit-approval jobs. Roughly 250 to 300 jobs will be eliminated systemwide, as First Empire sheds some back-office positions due to consolidation.

"We are delighted to have Onbancorp join forces with First Empire," said Robert G. Wilmers, First Empire's chairman, president and chief executive officer. "Together we will become the premier banking franchise in upstate New York."

Wilmers has agreed to relinquish his title as chairman of First Empire to Robert J. Bennett, Onbancorp's current chairman, president and chief executive officer, once the merger is completed. Wilmers will keep his other titles.

Under the terms of the merger -- by far the largest in First Empire's history -- Onbancorp shareholders will have the option of receiving 0.161 of a share of First Empire stock, worth roughly $68.26, or $69.50 in cash for each Onbancorp common share.

A minimum of 60 percent and maximum of 70 percent of the firm's 12.71 million shares outstanding must be exchanged for First Empire stock.

"On the surface, it appears that it's a good deal for Onbancorp shareholders," said Kevin T. Timmons, a bank analyst with First Albany Corp. who follows both banks.

Timmons said First Empire is projecting to save 6 percent of yearly combined operating expenses, a figure that equates to about 30 percent of Onbancorp's expenses, or roughly $33 million on an annualized basis.

"If they can do that, without disrupting Onbancorp's existing customer base -- which is extremely important in a deal such as this -- then it will be a good deal for First Empire and its shareholders," he said.

The takeover will be watched particularly closely in Syracuse, where M&T immediately takes the lead in market share, according to Timmons.

Ironically, Onbancorp was named earlier this month as one of the nation's five most undervalued bank stocks.

Alan Morel of Louisville-based J.J.B. Hilliard, W.L. Lyons & Co. said the stock of the five banks advanced at a compound rate of 27 percent over the last six years. At the time of his report, Onbancorp stock was selling at 59 3/4 per share.

The combined First Empire-Onbancorp will be a powerhouse across New York State -- remarkably with little overlap:

M&T operates roughly 79 branches in the Greater Buffalo area and holds 36 percent of bank deposits. Onbancorp's local market presence for years had been a single Williamsville loan office, which has closed.

The combined bank becomes Rochester's third-largest bank based on deposit market share, with 14 percent of deposits and 46 branches.

M&T, under which Onbancorp's OnBank & Trust Co. and Franklin First branches will operate, immediately becomes the No. 1 bank in Syracuse, with a 30 percent share of deposits and 40 branches in the Greater Syracuse market.

"We're starting from the top on the retail side of the business in Syracuse, but we also think we can grow our commercial business in the area," said Robert E. Sadler Jr., M&T's president. "In 1990, we had no commercial presence in Rochester, and now we are No. 2 in terms of commercial business."

M&T's Albany and Hudson Valley network swells to 38 branches. Importantly, M&T's Albany presence goes from zero to 11 offices.

Gary S. Paul, First Empire senior vice president, noted, "In Central and Western New York, our 20 percent share of deposits is tops, and across all of upstate, no one will have a bigger deposit share."

First Empire also will enter Pennsylvania with the acquisition of Onbancorp's Franklin First Savings and its 19 offices in the Wilkes-Barre/Scranton area. They have roughly $1.2 billion in assets.

First Empire and Onbancorp were not strangers; the two had partnered in 1992 in a deal in which First Empire purchased Rochester-based Central Trust Co. and Endicott Trust Co. of Endicott from Midlantic Corp. of Edison, N.J.

A lawyer representing Onbancorp had approached First Empire executives earlier this year and said that Onbancorp's Bennett greatly admired First Empire, liked its culture and its large commercial business operation.

"We actually had been talking with Onbancorp since July but came to a meeting of the minds about one week ago," said Michael P. Pinto, First Empire's chief financial officer.

Bennett also liked First Empire's stock price, which passed the $400-per-share mark in late September. Ironically, it was about one year ago that Seymour Holtzman, at the time Onbancorp's largest shareholder, again made a major push to have the bank sold. Earlier in the year, Holtzman said similarly sized financial institutions sold for in excess of twice book value.

Holtzman Tuesday applauded the decision, saying it fulfills his goal of enhancing the value of Onbancorp stock.

As the deal is structured, First Empire is paying about 2.7 times Onbancorp's book value, about middle-of-the-road for recent bank deals, and 18.9 times the earnings of the Syracuse firm for the past 12 months.

But First Empire believes with the value added and synergies it brings to the deal, that 18.9 figure can be reduced to 13.4 times earnings compared with First Empire's own 14.3 times earnings multiple.

"That means it adds value immediately for our shareholders," Paul said.

Unlike First Empire's most noteworthy deals of the 1990s -- assimilating portions of Buffalo's own Empire of America and Goldome -- this deal is not a case of the well-capitalized acquirer picking up pieces of a distressed bank.

"This deal allows us to build market share with a healthy institution," Paul said.

In its latest quarterly earnings report, Onbancorp reported third-quarter net income of $12.7 million, or 98 cents per common share, up from $7.29 million and 49 cents per share a year ago.

Last year's numbers were skewed primarily by Onbancorp's contribution to recapitalizing the Savings Association Insurance Fund.

"Onbancorp has very acceptable (loan) charge-offs and a loan portfolio largely comprised of residential mortgages, which generally are very secure," Paul said. "They have good credit and cost cultures, which is what Bennett saw in us."

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