Item 1. BUSINESS
GENERAL
Skaneateles Bancorp, Inc. (the "Company") is a Delaware-chartered bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the primary business of which is the ownership and operation of its sole subsidiary, Skaneateles Savings Bank ("Skaneateles" or the "Bank"). Skaneateles is a New York-chartered stock savings bank headquartered in the Village of Skaneateles, Onondaga County, New York. Deposit accounts of the Bank are insured by the Bank Insurance Fund ("BIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"). In continuous operation since 1866, the Bank conducts business from nine full-service banking offices located in Onondaga and Oswego counties of New York State. Historically, Skaneateles has been engaged in the business of attracting deposits from the general public and earning income on those funds through various lending and investment activities.
The Company's financial performance depends primarily on the Bank's net interest income, which is the difference between interest income on interest-earning assets, primarily loans, investments and securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The relative amounts of interest-earning assets, deposits and borrowings also impact net interest income. The Company's financial performance is also affected by the establishment of provisions for loan losses and the level of its other income, including fees on loans sold, deposit service charges, the results of foreclosed real estate activities, gains or losses from the sale of loans as well as its other operating expenses and income tax provisions. The Company's financial performance has historically been affected by local economic and competitive conditions, primarily in the market area of Metropolitan Syracuse. Changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the attendant actions of the regulatory authorities all have an impact on the Company's financial performance of the Bank and the Company.
The Bank operated as a single office savings bank in Skaneateles, New York until 1967 when it opened its first branch office in Camillus, a suburb of Syracuse. During 1988, the Bank opened an office in downtown Syracuse. Since 1994, the Bank acquired or opened six branch offices in and around Syracuse. Three of these branches are in-store facilities in newly constructed or renovated supermarkets The in-store branches provide all of the same products and services as the Bank's traditional branches, with the exception of safe deposit boxes.
The Company was incorporated as Center Banks Incorporated. On April 15, 1997, stockholders approved the Company's proposal to change its name from to Skaneateles Bancorp, Inc. The name change was effective April 16, at which time the Company's stock began trading under the symbol "SKAN" on the NASDAQ National Market System.
In October, 1997, the Company declared a three-for-two stock split in the form of a 50% stock dividend, payable on November 28, 1997 to shareholders of record on November 12. The total number of shares outstanding increased by approximately 478,000 as a result of the split. All share and per-share information has been retroactively adjusted to reflect the split.
Certain statements in this discussion are forward-looking. These may be identified by the use of forward-looking words or phrases, such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." These forward-looking statements are based on the Company's current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such statements. To comply with the terms of the safe harbor, the Company notes that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Among the risks and uncertainties that may affect the operations, performance and results of the business of the Company and the Bank are prevailing market rates of interest for both loans and deposits, loan prepayments by, and the financial health of, the Bank's borrowers, general economic conditions in the Bank's designated lending area, and competition from banks and other financial institutions with greater resources operating in the Bank's marketplace.
LENDING ACTIVITIES
The lending activities of Skaneateles are affected principally by the demand for such loans, competition and the supply of funds available for lending purposes. These factors are in turn affected by general economic conditions, monetary policies of the Federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
RESIDENTIAL REAL ESTATE LENDING. Most of Skaneateles' residential loan portfolio is secured by first mortgages on real estate located in the greater Syracuse area, and to a lesser extent, the greater Rochester area. Most residential loans are originated directly by Skaneateles. The Bank has also purchased loans for its portfolio from time to time, although no such purchases were made in 1997 or 1996.
It is Skaneateles' policy to require borrowers to obtain title insurance naming the Bank as the insured party on certain real estate loans. Borrowers are required to obtain hazard insurance prior to closing. Borrowers typically are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which Skaneateles makes disbursements for items such as real estate taxes, hazard insurance and private mortgage insurance premiums as they are due.
The Bank originates both fixed and adjustable rate residential mortgages with a maximum maturity of 30 years, and for fixed rate loans, a monthly or bi-weekly payment option. The bi-weekly mortgages require the borrower to maintain a deposit account with the Bank from which mortgage payments are automatically deducted. Loans will be granted in amounts up to 95% of appraised value; however, all loans with a loan-to-value ratio in excess of 80% are required to carry private mortgage insurance sufficient to reduce the Bank's exposure to 75% of appraised value.
Fixed rate mortgages are predominately underwritten in accordance with secondary market standards, and therefore can be sold at any time in response to changes in interest rates or to meet liquidity needs. Fixed rate mortgages with terms of 15 years or less were originated for portfolio prior to January, 1998. Beginning in January, 1998, the Bank began selling all conforming fixed rate mortgages at the time of origination due to the relatively low interest rate environment and the resulting increased interest rate risk associated with long term fixed rate assets. The Bank generally retains servicing on sold loans.
The Bank offers adjustable rate loans, indexed to the one-year or three-year U.S. Treasury Note, with rates that adjust annually (1 year ARM), or once every three years (3 year ARM). The Bank also offers a 5/1 ARM. The 5/1 ARM is a loan with a fixed rate of interest for the first five years. On the loan's fifth anniversary, the rate converts to the current rate for a 1-year ARM, and adjusts annually over the remaining term of the loan. Adjustable rate loans are generally retained for portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Skaneateles originates loans secured by multi-family (over four units) and commercial properties, such as small office buildings, which are generally owner-occupied.
The majority of loans on income-producing property currently offered by Skaneateles carry an adjustable rate tied to the one-, three- or five-year U.S. Treasury Note, typically with a maximum amortization period of 20 years. In setting interest rates and origination fees on new loans and loan extensions, management considers both current conditions and its analysis of the risk associated with the particular project.
Skaneateles' underwriting policies with respect to loans on income producing properties are designed to ensure that a project's cash flow will be sufficient to cover operating expenses and debt service payments. A detailed analysis of the project is undertaken by Skaneateles' commercial real estate loan underwriters. Loan-to-value ratios on commercial real estate loans made by Skaneateles generally do not exceed 75%. All income producing properties are appraised by an independent appraiser approved by the Board of Directors. Skaneateles requires that the borrower obtain title insurance and hazard insurance in the amount of the loan, naming Skaneateles as loss payee.
COMMERCIAL LENDING. The Bank makes loans to small and medium-sized businesses in its primary market area of Onondaga County, eastern Cayuga County and the city of Oswego, New York, offering mortgages, secured and unsecured working capital loans, term loans, leases and lines of credit. In January 1997, the Bank expanded its commercial loan products by offering dealer floor plans. Through this program the Bank offers revolving credit lines to local automobile, boat and recreational vehicle dealerships to finance inventory purchases. Rates, terms, compensatory
balances, fees and charges are based upon market conditions and the risk involved for each loan. The risks involved are determined based upon a credit analysis performed on the potential borrower which emphasizes economic conditions as well as the availability of cash flow from operations to support the credits, and collateral.
Commercial loans generally involve a higher degree of risk than residential mortgage loans. Unlike residential mortgage loans, which are generally made on the basis of the borrower's ability to make repayment from employment and other income, and which are secured by real property whose value tends to be easily ascertainable, commercial loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the business and are generally secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may not be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the business. The Bank attempts to mitigate the risks inherent in commercial lending through its underwriting, documentation, financial analysis and monitoring of the borrower's financial performance.
CONSUMER LENDING. New York State law permits Skaneateles to engage in various types of consumer lending. Consumer loan products include auto and boat loans, unsecured personal loans, home equity loans and home equity lines of credit. All consumer loans, except home equity lines of credit, carry fixed rates of interest and terms ranging from three years to fifteen years. The Bank's home equity line of credit program offers a credit line secured by a second mortgage of up to 75% of appraised market value less other mortgages outstanding on residential properties, repricing monthly indexed to the prime rate. The Bank also originates student loans and hold them in its portfolio while the student is in school. At the time the loan is to go into repayment, it will be sold to the Student Loan Marketing Association under a continuing commitment.
The Bank also originates consumer loans through an indirect lending program through which it receives loan applications from Bank-approved automobile, boat and recreational vehicle dealerships on behalf of their customers to finance their purchases. These applications are subject to the Bank's normal consumer loan underwriting criteria.
LOAN ORIGINATION FEES AND OTHER FEES. Loan origination fees vary with the volume and type of loans made and with competitive conditions in the mortgage market. Loan demand, new construction activity and availability of money affect these market conditions. The Bank defers net loan fees (costs) and amortizes such net fees (costs) over the life of the loan as an adjustment of yield.
DELINQUENCIES. When a borrower fails to make a scheduled payment on a loan, Skaneateles takes steps to have the borrower cure the delinquency. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition precludes accrual. Generally, interest income is not recognized on loans which are delinquent over 90 days, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. If the delinquency exceeds 90 days or is not cured through Skaneateles' normal collection procedures, Skaneateles will institute measures to enforce its remedies resulting from the default, including, in the case of mortgage loans, commencing a foreclosure action. In certain cases, Skaneateles will also consider accepting from the mortgagor a voluntary deed to the mortgaged premises in lieu of foreclosure. Property acquired by Skaneateles as a result of foreclosure or by deed in lieu of foreclosure is classified as "Real Estate Owned."
Other loan delinquencies are remedied in a similar fashion. The collateral is repossessed and sold to pay off the loan balance. In the case of unsecured installment and commercial business loans, Skaneateles either commences legal action to collect the balance or negotiates a "work-out" payment schedule over a period which may exceed the original term of the loan.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of Skaneateles' loan portfolio by loan type as of the dates indicated.
Total loans were $214.6 million at December 31, 1997, an increase of $8 million, or 3.9% from December 31, 1996. Loan originations for 1997 totaled $50 million, a decrease of 7.7% from 1996's originations of $54.2 million. Substantial increases in both consumer and commercial loan originations were offset by a decrease in residential lending.
Residential mortgage originations were $9.7 million in 1997, a decrease of 68.3% from 1996's originations. Residential mortgages represented 19.3% of 1997's total loan originations, down from 56.1% in 1996. As a result of increasing competition in mortgage lending, which squeezed margins and profitability, the Bank shifted its lending focus late in 1996, placing more emphasis on consumer and commercial loans. To that end, the Bank effectively suspended the use of mortgage brokers, who had been used to supplement the Bank's direct originations, especially outside of the Bank's designated lending area. Accordingly, as expected, residential mortgage originations dropped significantly in 1997.
Approximately $7.9 million, or 81.4% of the residential loans originated in 1997 were for fixed rates of interest, compared with $15.2 million and 50%, respectively, in 1996. Fixed rate mortgages with terms of 15 years or less were originated for portfolio prior to January, 1998. Beginning in January, 1998, the Bank began selling all conforming fixed rate mortgages at the time of origination due to the relatively low interest rate environment and the resulting increased interest rate risk associated with long term fixed rate assets.
Consumer loan originations were $20.8 million, or 41.6% of total loan originations in 1997, compared with $10.5 million, or 19.4% in 1996. The Bank has seen a substantial increase in deposit customers through its Checking Account Marketing Program ("CHAMP"). Cross-sales of consumer loan products to these new customers was a significant factor behind the loan growth in 1997. The CHAMP program is a long-term marketing program and cross-selling to new customers obtained through the program is expected to be an important component of consumer loan growth in future years. The Bank's indirect lending program was also an important factor, accounting for approximately 33.5% of the Bank's total consumer loan originations in 1997.
Commercial loan and mortgage originations were $19.6 million, or 39.1% of total loan originations in 1997, up from $13.3 million, or 24.5% in 1996. The increase resulted largely from the Bank's dealer floor plan program begun in January, 1997. Through the program, the Bank provides lines of credit to local boat, automobile, and recreational vehicle dealers to finance inventory purchases. At December 31, 1997, total outstanding balances on dealer floor plans was $4.7 million.
Contractual maturities of mortgage loans do not reflect the actual term of Skaneateles' loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give Skaneateles the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage while the loan is outstanding. The average life of mortgage loans tends to increase, however, when current mortgage rates substantially exceed rates on existing mortgages, and tends to decrease due to prepayments when current mortgage interest rates are below the rates on existing mortgages.
The following table sets forth the contractual maturity of the commercial loan portfolio and real estate construction loans at December 31, 1997.
INTEREST SENSITIVITY ANALYSIS
The goal of asset/liability management is to reduce the volatility of net interest income during periods of changing market interest rates (interest rate risk). The Company uses three methods to measure its interest rate risk: i) gap; ii) duration; and iii) simulation analysis. Gap analysis measures the difference between assets and liabilities which reprice and/or mature within a given time frame, typically the cumulative one-year horizon. An asset-sensitive gap position could lead to an increase in net interest income in a rising rate environment, and a decrease in net interest income in a falling rate environment, as assets reprice or mature quicker than liabilities. Conversely, a liability-sensitive gap position could lead to a decrease in net interest income in a rising rate environment and an increase in net interest income in a falling rate environment. Duration analysis measures the weighted average time to receive (pay) all cash flows (principal and interest) on a financial instrument. The shorter the duration of a financial instrument, the quicker its cash flows are received (paid). Simulation analysis measures the impact on net interest income and market value of equity of hypothetical changes in interest rates. Through simulation analysis, management can also estimate the impact on net interest income of different investing and funding strategies.
In February 1996, the Bank purchased an interest rate floor with a notional amount of $18 million, to hedge a portion of its prime-based loan portfolio. Under the agreement, which expires in February 1999, the Bank will receive payments on a quarterly basis if the prime rate drops below 8.25% (the "strike rate"). Payments are equal to the amount by which the prime rate falls below the strike rate multiplied by the notional amount of the floor. The fee paid for the floor is included in other assets and is being amortized to interest income using the interest method over the life of the floor.
The Company's cumulative 1 year ratio of rate sensitive assets to rate sensitive liabilities (1 year gap) was 1.10 at December 31, 1997. This indicates a slightly asset-sensitive position.
The following table sets forth, as of December 31, 1997, information regarding the interest-sensitive assets and liabilities of the Company.
(1)The scheduled repricing of savings and Now accounts is based on FDIC guidelines. These guidelines state savings and Now accounts may be distributed across any of the first four time bands, with a maximum of 20 percent in the 5 to 10 year time band and no more than 40 percent combined in years 3 through 10.
RATE/VOLUME ANALYSIS
The following table presents changes in interest income and expense attributable to (i) changes in volume (change in volume multiplied by old rate), and (ii) changes in rate (change in rate multiplied by old volume). The net change attributable to the combined impact of volume and rate has been allocated in proportion to the absolute change due to volume and the change due to rate. Interest earned on non-accruing loans is included in interest income on loans only when collected, but the average balances of such loans are included in the average balances of loans.
The following table sets forth information with respect to loans delinquent 90 days or more, nonaccrual loans, restructured loans, and real estate owned as of the dates indicated.
The following table sets forth the amounts of interest income not recognized on nonaccruing loans during each period (not including the effect of loans charged off during the period).
Nonperforming assets (nonaccrual loans and real estate owned) totaled $4.9 million, or 1.9% of total assets at December 31, 1997, compared with $3.9 million, or 1.6% of total assets at December 31, 1996. Included in nonperforming assets at December 31, 1997 were nonaccrual loans of $3.9 million, or 1.8% of gross loans, compared with $3.2 million, or 1.5% of gross loans at December 31, 1996.
Potential problem loans at December 31, 1997 amounted to $779,000. "Potential problem loans" are defined as loans which are not included with past due and non-accrual loans discussed above, but about which management, through normal internal credit review procedures, has information about possible credit problems which may result in
the borrower's inability to comply with the present loan repayment terms. There have been no loans classified for regulatory purposes as loss, doubtful, or substandard that are not included above or which caused management to have serious doubts as to the ability of the borrower to comply with repayment terms. In addition, there were no material commitments to lend additional funds to borrowers whose loans were classified as non-performing.
ALLOWANCE FOR LOAN LOSSES. Skaneateles uses the allowance method of accounting for loan losses. Under this method, provisions for loan losses are charged to operations and actual loan losses (recoveries) are charged (credited) to the allowance. The allowance for loan losses represents amounts provided to absorb anticipated future loan losses in the existing loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly, and is determined primarily by management's informed judgment concerning the amount of risk inherent in the portfolio. Management's judgment is based upon a number of factors including historical loan loss experience, the present and prospective financial condition of borrowers, estimated value of underlying collateral, industry and geographic concentrations, and current and prospective economic conditions.
The Bank utilizes a risk rating system in its credit quality estimation process. This system involves an ongoing review of business loans and commercial real estate loans that culminates in loans being assigned a risk rating based upon various credit criteria. If the review indicates a sufficient level of risk, an allowance is established proportionate to the perceived risk for each loan. Loans not having an individually established allowance are aggregated by the type of loan and an allowance is estimated based upon aging statistics, past experience and economic factors.
Generally, all commercial mortgage loans and commercial loans in a delinquent payment status (90 days or more delinquent) are considered impaired. The Bank estimates losses on impaired loans based on the present value of expected future cash flows (discounted at the loan's effective interest rate) or the fair value of the underlying collateral if the loan is collateral dependent. An impairment loss exists if the recorded investment in a loan exceeds the value of the loan as measured by the aforementioned methods. A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Residential mortgage loans, consumer loans, home equity lines of credit and education loans, respectively, are evaluated collectively since they are homogenous and generally carry smaller individual balances.
As with any financial institution, poor economic conditions, high interest rates, high unemployment and other matters outside of the Bank's control may lead to increased losses in the loan portfolio. Management has various controls in place designed in an effort to limit losses, such as: 1) a comprehensive "watch list" of possible loan problems, 2) a fully documented policy concerning loan administration (loan file documentation, disclosures, approvals, etc.) and 3) a loan review function to audit for adherence to established Bank controls and to review the quality and anticipated collectibility of the portfolio. Loan review reports are presented monthly to the Executive Committee of the board of directors, which in turn, reports to the full board of directors. The power to authorize charge-offs rests solely with the board of directors.
Impaired loans, which included troubled debt restructured loans, were $2,079,000 and $1,929,000 at December 31, 1997 and 1996, respectively. Included in these amounts are $1,911,000 and $832,000 of impaired loans for which the related allowance for loan losses is $219,000 and $216,000, respectively. In addition, included in the total impaired loans at December 31, 1997 and 1996 are $168,000 and $1,097,000 of impaired loans for which no allowance is recorded due to the adequacy of collateral values in accordance with SFAS 114. The average recorded investment in impaired loans during 1997, 1996 and 1995 was approximately $1,480,000, $2,923,000, and $3,859,000, respectively. The amount of interest income recognized on impaired loans in 1997, 1996 and 1995 was approximately $84,000, $166,000, and $281,000, respectively. The Bank is not committed to lend additional funds to these borrowers.
The Company recognizes interest income on impaired loans using the cash basis of income recognition. Cash receipts on impaired loans are generally applied according to the terms of the loan agreement, or as a reduction of principal, based upon management judgment and other factors.
Management believes the allowance for loan losses as of December 31, 1997 was adequate based upon the quality of the loan portfolio at that date. Future additions to the allowance will be based, among other factors, on changes in economic conditions and financial stress of the Company's borrowers.
The following table sets forth the activity in the allowance for loan losses for the periods indicated.
The following table sets forth the allocation of the allowance for loan losses as of the dates indicated.
SECURITIES
Skaneateles has authority to purchase a wide range of securities, subject to various restrictions. See "Regulation - New York Law."
Skaneateles' investment strategy is primarily to hold securities for the purpose of providing liquidity and generating income. The Bank invests primarily in U.S. Treasury Notes, high grade corporate bonds and mortgage-backed securities (primarily fixed rate and variable rate pass through certificates issued and guaranteed by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC)). Pursuant to the Bank's investment policy, all purchases for the investment portfolio must be investment grade securities that are included in one of the top four bond rating categories. At December 31, 1997, all of the corporate bond portfolio consisted of investments which were included in such a category.
The Company classifies its debt securities as either available-for-sale or held-to-maturity, as the Company does not hold any securities considered to be trading. Equity securities are classified as available-for-sale. Held-to-maturity securities are those debt securities that the Company has the ability and intent to hold until maturity. All other securities not included as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost. Unrealized 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 stockholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized gains or losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of stockholders' equity until realized. The unrealized gains or losses included in the separate component of equity for securities transferred from available-for-sale to held-for-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.
Presented below are the carrying values (in thousands) of the securities portfolio as of the dates indicated.
DEPOSITS
Skaneateles attracts both short-term and long-term deposits of individuals and businesses by providing a wide assortment of accounts. Included among these products are savings accounts, demand deposit accounts, NOW accounts, money market deposit accounts (MMDA) and certificates of deposit. Skaneateles has no brokered deposits. The Bank's most direct competition for deposits has historically come from commercial banks and other savings institutions located in its market area. The Bank faces additional significant competition for investors' funds from short-term money market mutual funds and issuers of corporate and government securities. Skaneateles competes for deposits principally by offering depositors a wide variety of deposit programs with competitive terms, convenient branch locations and hours, tax deferred retirement programs and other services. Skaneateles does not rely upon any individual group or entity for a material portion of its deposits.
Skaneateles offers fixed rate certificates of deposit with maturities of 91 days to seven years. A minimum of $500 is required to open a certificate of deposit. Generally, interest rates on these certificates are determined by the combination of open market interest rates, rates offered by competitors, and the Bank's liquidity needs. Interest is compounded and credited monthly on such certificates.
The Bank currently offers a tiered money market deposit account. Accounts with balances $50,000 and over earn an annual yield equal to 90% of the average discount rate set weekly at the 91-day Treasury Bill auction. Accounts with lower balances earn interest based on a graduated scale. Interest is compounded and credited monthly on these accounts.
Regular savings accounts currently earn interest at an annual rate of 2.85%, which accrues daily and is compounded and credited monthly. No minimum balance is required to earn interest on these accounts.
Skaneateles offers a wide array of checking accounts, including a non-interest bearing account which has no minimum balance requirement, no monthly maintenance fee and no per check charge. The Bank also offers interest bearing checking accounts whose rates and fees vary based on the type of the account and amount on deposit.
Skaneateles also offers non-deposit products including annuities and mutual funds through an arrangement with a third party agent. These products are not insured by the FDIC.
The following table sets forth deposits by type of account as of the dates indicated:
The Bank offers preferred rates on certificates of deposit of $100,000 or more. These rates are determined daily based upon the factors noted above. The Bank does not rely heavily on these deposits. At December 31, 1997, 1996 and 1995, the aggregate amounts of certificates of deposit in denominations of $100,000 or more were approximately $13,427,000, $13,065,000 and $9,074,000, respectively.
The following table presents the amounts of certificates of deposit in denominations of $100,000 or more at December 31, 1997 which mature during the periods indicated.
Maturity Amount -------- ------ 3 months or less $ 4,615
3 to 6 months 2,301
6 to 12 months 2,040
Over 12 months 4,471 - ----------------------------------------------------------- Total 13,427 - -----------------------------------------------------------
Deposit growth was the primary source of funds for the Bank in 1997. Total deposits, including escrow, were $218 million at December 31, 1997, an increase of $13 million or 6.3% from the end of 1996. The Bank experienced an increase of $6.1 million in December 1997 alone, at least half of which were short-term increases in personal and commercial demand accounts which were withdrawn in January 1998.
The Bank's strategy for deposit growth is focused on savings and checking accounts, which carry lower rates of interest than time accounts and tend to be less sensitive to changes in interest rates. The Bank offers seven checking account products, each targeted to specific demographic groups and supported by an active direct mail marketing campaign (CHAMP). Total checking account balances increased $9.5 million, or 27.1% in 1997, on top of a $7.8 million or 33.4% increase in 1996 (excluding accounts acquired from Cicero Bank). The Bank opened more than 6,400 new checking accounts in 1997 as a result of the CHAMP program.
Savings account balances increased $3.8 million, or 9.7% in 1997, compared with an increase of $2.9 million or 8.9% in 1996 (excluding accounts acquired from Cicero Bank). The gains resulted primarily from cross-sales to new checking account customers.
The CHAMP program will be a key part of the Bank's deposit growth strategy for the foreseeable future. In addition to the lower interest cost of these deposits, the accounts generate fee income which will provide a stable
source of revenue regardless of fluctuations in interest rates. Also, the increase in checking account customers provides a significant opportunity to cross sell other deposit and loan products.
Time certificates of deposit totaled $105.1 million at December 31, 1997, compared with $107.4 million at the end of 1996. The Bank generally kept its rates on time certificates at or slightly above the average rates in its market area during 1997. The Bank expects to continue this practice in 1998. Premium rates may be offered from time to time for specific branch promotions or in the event loan demand so justifies.
The following table sets forth the average amount of and the average rate paid on each category of deposits which is in excess of ten percent of average total deposits.
BORROWINGS
The Bank occasionally borrows funds to invest in assets to manage its asset/liability position and its net interest income. Additionally, the Bank also borrowed $2.0 million from the Federal Home Loan Bank of New York (FHLB) in 1987 at 10.51% for 15 years to fund the purchase of the downtown Syracuse banking center.
The following table sets forth the borrowings of Skaneateles as of the dates indicated.
SELECTED PERFORMANCE RATIOS
Selected performance ratios of the Company are as follows:
PERSONNEL
As of December 31, 1997 Skaneateles had 119 full-time equivalent employees. The employees are not represented by a collective bargaining unit, and Skaneateles considers its relationship with its employees to be good.
EXECUTIVE OFFICERS. The following information is supplied with respect to the executive officers of the Company as of December 31, 1997.
REGULATION
General
As a bank holding company, Skaneateles Bancorp, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company is also required to file certain reports and otherwise comply with the rules and regulations of the Securities and Exchange Commission (the "Commission") under the federal securities laws. Skaneateles Savings Bank is a banking corporation chartered under the laws of the State of New York, and its deposits are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC. It is also a member of the FHLB System. As such, Skaneateles is subject to the regulation, examination and supervision of the Banking Department of the State of New York (the "Department") and the FDIC. The Bank is further subject to the regulation of the Federal Reserve Board with respect to reserves required to be maintained against deposits and certain other matters. The Federal Reserve Board, the Department and the FDIC issue regulations and require the filing of reports describing the activities and financial condition of the institutions under their jurisdiction. Each agency conducts periodic examinations to test compliance with various regulatory requirements and generally supervises the operations of such institutions. This supervision and regulation is intended primarily for the protection of depositors. Certain of the regulatory requirements applicable to the Company and to Skaneateles are referred to below or elsewhere herein.
FEDERAL BANK HOLDING COMPANY REGULATION. Skaneateles Bancorp, Inc. is required to file with the Federal Reserve Board annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Federal Reserve Board may conduct examinations of Skaneateles Bancorp, Inc. and its subsidiary. Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease, or sale of property or furnishing of services.
Under the BHCA, Federal Reserve Board approval is required for any action which causes a bank or other company to become a bank holding company and for any action which causes a bank to become a subsidiary of a bank holding company. A bank holding company must obtain Federal Reserve Board approval before it acquires direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it will own or control directly or indirectly more than 5% of the voting stock of such bank unless it already owns a majority of the voting stock of such bank. Federal Reserve Board approval must also be obtained before a bank holding company acquires all or substantially all of the assets of a bank or merges or consolidates with another bank holding company. Any acquisition, directly or indirectly, by a bank holding company or its subsidiaries of more than 5% of the voting shares of, or interest in, or all or substantially all of the assets of any bank located outside of the state in which the operations of the bank holding company's banking subsidiaries are principally conducted may not be approved by the Federal Reserve Board unless the laws of the state in which the bank to be acquired is located expressly authorize such an acquisition.
A bank holding company is prohibited, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing its applications to the Federal Reserve Board. In addition, the Federal Reserve Board has the power to issue capital directives (having the force of cease and desist orders) to mandate the maintenance of adequate capital levels. The Company is in compliance with Federal Reserve Board capital requirements.
FEDERAL DEPOSIT INSURANCE CORPORATION. Skaneateles' deposit accounts are insured by the FDIC up to a maximum of $100,000 per insured depositor. As an insured bank, Skaneateles is subject to certain FDIC requirements designed to maintain the safety and soundness of individual banks and the banking system. The FDIC periodically conducts examinations of insured institutions and, based upon evaluations, may revalue assets of an insured institution and require establishment of specific reserves in amounts equal to the difference between such revaluation and the book value of the assets. In addition, the FDIC has adopted regulations and a statement of policy which define and establish certain minimum requirements for capital adequacy. Under the regulations, insured state nonmember banks such as Skaneateles are required to maintain minimum risk-based capital and leverage capital. The Bank is in compliance with FDIC capital requirements.
The annual premium charge for FDIC insurance is based on the level of capital maintained by the institution and results of periodic regulatory examinations. The following table sets forth the annual premium charge for the periods indicated for FDIC insurance per $100 of the Bank's total deposits.
FEDERAL RESERVE SYSTEM. Skaneateles is subject to regulation of certain matters by the Federal Reserve Board. The Federal Reserve Board requires depository institutions, including savings banks the deposits of which are insured by the FDIC, to maintain reserves in accordance with applicable regulations for the purpose of facilitating the implementation of monetary policy by the Federal Reserve System. Generally, the Federal Reserve Board establishes reserve requirements for net transaction accounts. It also has authority, subject to the satisfaction of certain conditions, to impose emergency reserve and supplemental reserve requirements. As of December 31, 1997, net transaction accounts (transaction accounts, primarily NOW and regular checking accounts, less certain permitted deductions) in the amount of $0 to $47.8 million are subject to a reserve requirement of 3% of said amount. Net transaction accounts over $47.8 million are subject to a reserve requirement of $1,434,000 plus 10% of the total in excess of $47.8 million. However, $4.7 million of otherwise reservable liabilities are subject to an exemption from reserve requirements. The amount of this exemption is subject to adjustment by the Federal Reserve Board each calendar year. The Bank was in compliance with its reserve requirements throughout 1996.
FEDERAL HOME LOAN BANK SYSTEM. In 1986, Skaneateles became a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks each subject to Federal Housing Finance Board supervision and regulation. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. Skaneateles, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in that Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5% of its advances (borrowings) from the FHLB, whichever is greater. Skaneateles is in compliance with this requirement.
New York Law
The Bank derives its lending and investment authority primarily from the applicable provisions of the New York Banking Law and the General Regulations of the Banking Board of the State of New York. Under these laws and regulations, savings banks may invest in real estate mortgage, commercial and consumer loans, home improvement and educational loans, certain types of debt securities, including certain corporate debt securities and the federal and state government and agency obligations, certain types of corporate equity securities and certain other assets.
Savings banks have the power to make commercial, corporate and business loans, to make secured and unsecured installment loans for personal, family and household purposes, and to exercise trust powers upon approval of the Banking Board. These lending powers are not subject to percentage of asset limitations, although there are limits applicable to single borrowers.
Item 2.
Item 2. PROPERTIES
Skaneateles conducts its business from nine full-service offices and one administrative office. The following table sets forth certain information relating to each of Skaneateles' offices as of December 31, 1997.
Item 3.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings other than routine legal proceedings undertaken in the ordinary course of business. 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 the Company.
Item 4.
Item 4. Submission Of Matters To A Vote Of Security Holders
During the fourth quarter of 1997, there were no matters submitted to a vote of the shareholders of Skaneateles Bancorp, Inc..
PART II.
Item 5.
Item 5. Market For The Registrant's Common Stock And Related Stockholder Matters
The information contained on page 40 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 (the "Annual Report") and page 1 of the definitive Proxy Statement are incorporated herein by reference.
Other required information contained in the table on page 8 of the Annual Report is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
The information contained in the section captioned "Management's Discussion and Analysis" in the Annual Report is incorporated herein by reference.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in the section captioned "Interest Sensitivity Analysis" in this report.
Item 8.
Item 8. Financial Statements And Supplementary Data
The consolidated financial statements contained in the 1997 Annual Report are incorporated herein by reference.
Item 9.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Not applicable.
PART III.
Item 10.
Item 10.Directors And Executive Officers Of The Registrant
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") requires the reporting of transactions by insiders in the Company's common stock to the Securities and Exchange Commission (the "Commission") within required time frames. All filings required under Section 16 of the Exchange Act during 1997 were made in a timely manner, except for a Form 4 due for the month of January 1997 for the following directors: Clifford C. Abrams, Israel Berkman, David E. Blackwell, Walter D. Copeland, Carl W. Gerst, Jr., Ann G. Higbee, Howard J. Miller and Raymond C. Traver, Jr. The required forms were filed late due to an oversight. In making these statements, the Company has relied on written representations of its incumbent executive officers and directors.
Additional information regarding directors of the Company is incorporated by reference from pages 2 to 5 of the definitive Proxy Statement.
Item 11.
Item 11.Executive Compensation
The information required herein is incorporated by reference from pages 5 to 7 of the definitive Proxy Statement.
Item 12.
Item 12.Security Ownership Of Certain Beneficial Owners And Management
The information required herein is incorporated by reference from pages 2 to 4 of the definitive Proxy Statement.
Item 13.
Item 13.Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page 7 of the definitive Proxy Statement.
PART IV. - --------
Item 14.
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a)(1) The following financial statements are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
(a)(2) There are no financial statement schedules which are required to be filed as a part of this form since they are not applicable.
(a)(3) See (c) below for all exhibits filed herewith.
(b) During the three-month period ended December 31, 1997, the Registrant filed a Form 8-K announcing a three-for-two stock split effected through a 50% stock dividend paid on November 28, 1997. No financial statements were filed with this report.
(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 - --- -------
3.1 Certificate of Incorporation of Skaneateles Bancorp, Inc. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of Skaneateles Bancorp, Inc.
3.3 Bylaws of the Company (2)
10.1 Employment Agreement dated as of January 1, 1998 between Skaneateles Savings Bank and John P. Driscoll
10.2 Employment Agreement dated as of March 25, 1998 between Skaneateles Savings Bank and J. David Hammond
10.3 Employment Agreement dated as of March 25, 1998 between Skaneateles Savings Bank and Karen E. Lockwood
10.4 Employment Agreement dated as of March 25, 1998 between Skaneateles Savings Bank and J. Daniel Mohr
10.5 Employment Agreement dated as of March 25, 1998 between Skaneateles Savings Bank and William J. Welch
10.6 Supplemental Retirement Agreement dated as of January 1, 1998 between Skaneateles Savings Bank and John P. Driscoll
10.7 Trust Under Supplemental Retirement Agreement Dated January 1, 1998 between Skaneateles Savings Bank and John P. Driscoll
10.8 Amendment To Long Term Incentive And Capital Accumulation Plan dated October 28, 1997
10.9 Amendment to Long Term Incentive And Capital Accumulation Plan dated October 28, 1997
10.10 Amendment to 1995 Non-Employee Directors Stock Plan dated October 28,
10.11 Amendment to 1995 Non-Employee Directors Warrant Plan dated October 28,
10.12 Amendment to Center Banks Incorporated Employee Stock Purchase Plan dated October 28, 1997
10.13 Amendment to Center Banks Incorporated Dividend Reinvestment Plan dated October 28, 1997
13 Annual Report to Shareholders for the Year Ended December 31, 1997
21 List of Registrant's Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
27.1996 Financial Data Schedule - Restated 1996
27.1995 Financial Data Schedule - Restated 1995
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1 Exhibit is incorporated herein by reference to the identically numbered exhibit to the 1990 Form 10-K filed by the Company with the Securities and Exchange Commission on April 1, 1991.
2 Exhibit is incorporated herein by reference to the identically numbered exhibit to the 1996 Form 10-K filed by the Company with the Securities and Exchange Commission on March 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SKANEATELES BANCORP, INC. Registrant
By: /s/ John P. Driscoll Date: March 30, 1998 ---------------------------------- -------------- John P. Driscoll Chairman, President and Chief Executive Officer
By: /s/ J. Daniel Mohr Date: March 30, 1998 ---------------------------------- -------------- J. Daniel Mohr Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange 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.
Date: ---------------------------------- ------------- Clifford C. Abrams Director
/s/ Israel Berkman Date: March 30, 1998 ---------------------------------- -------------- Israel Berkman Director
/s/ David E. Blackwell Date: March 30, 1998 ---------------------------------- -------------- David E. Blackwell Director
Date: ---------------------------------- ------------- Walter D. Copeland Director
/s/ Carl W. Gerst Date: March 30, 1998 ---------------------------------- -------------- Carl W. Gerst Director
/s/ John B. Henry Date: March 30, 1998 ---------------------------------- -------------- John Bernard Henry Director
Date: ---------------------------------- ------------- Ann G. Higbee Director
/s/ Howard J. Miller Date: March 30, 1998 ---------------------------------- -------------- Howard J. Miller Director
/s/ Raymond C. Traver, Jr., M.D. Date: March 30, 1998 ------------------------------------ -------------- Raymond C. Traver, Jr., M.D. Director
/s/ Anne E. O' Connor Date: March 30, 1998 ---------------------------------- -------------- Anne E. O' Connor Director