<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18513
--------
CENTER BANKS INCORPORATED
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1368745
- -------- -----------
(State of incorporation) (I.R.S. Employer
Identification Number)
33 E. Genesee St. Skaneateles, New York, 13152-0460
---------------------------------------------------
(Address of principal executive office-Zip Code)
Registrant's Telephone Number including Area Code: (315) 685-2265
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
-----------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate 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. [ ]
As of March 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $16,015,000.
As of March 14, 1997, 950,501 shares of registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
Document Part of 10-K into which incorporated
-------- ------------------------------------
Portions of the Annual Report to Shareholders
for the year ended December 31, 1996 Parts II and IV
Portions of the definitive Proxy Statement
for Annual Meeting of Shareholders to be
held April 15, 1997 Part III
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1996
CENTER BANKS INCORPORATED
PAGE
----
PART I.
<S> <C> <C>
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 18
Item 3. Legal Proceedings................................................... 18
Item 4. Submission Of Matters To A Vote Of Security Holders................. 18
PART II.
Item 5. Market For The Registrant's Common Stock And Related Stockholder
Matters........................................................ 19
Item 6. Selected Financial Data............................................. 19
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations ..................................... 19
Item 8. Financial Statements And Supplementary Data......................... 19
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure....................................... 19
PART III.
Item 10. Directors And Executive Officers Of The Registrant ..................20
Item 11. Executive Compensation ..............................................20
Item 12. Security Ownership Of Certain Beneficial Owners And Management ......20
Item 13. Certain Relationships and Related Transactions ......................20
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .....20
</TABLE>
<PAGE> 3
1
PART I.
ITEM 1. BUSINESS
GENERAL
Center Banks Incorporated ("Center Banks" or 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 eight
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 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. In
December 1994, the Bank purchased a second branch in Syracuse. The Bank opened
three in-store branches in newly constructed or renovated supermarkets in
Onondaga and Oswego counties during the fourth quarter of 1994 and first four
months of 1995. 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.
On July 1, 1996, the Bank acquired substantially all of the assets and
assumed the deposit liabilities of Cicero Bank ("Cicero"). Total assets acquired
were $19.1 million, consisting of loans ($14.0 million), cash ($4.0 million) and
other assets ($1.1 million). Total deposit liabilities assumed were $19.1
million, consisting of time accounts ($9.9 million), money market accounts ($2.3
million) and savings and demand accounts ($6.9 million). The excess of the
purchase price over the fair value of assets acquired ("goodwill") amounted to
$494,000 and is included in other assets. Goodwill is being amortized over the
expected useful life of seven years on a straight line basis.
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.
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 local
residential loans are originated directly by Skaneateles. The Bank also
purchases loans for its portfolio from time to time, although no purchases were
made in 1996 or 1995.
1
<PAGE> 4
A large portion of the residential mortgages originated in 1996 and 1995
was referred to the Bank by third-party brokers in areas contiguous to the
Bank's designated lending area. Brokers were used to supplement the Bank's own
direct originations in order to meet mortgage lending goals. Increasing
competition in mortgage lending, however, has squeezed margins and
profitability. As a result, the Bank has shifted its lending focus, placing more
emphasis on consumer and commercial loans. In the third quarter of 1996, the
Bank effectively suspended the use of mortgage brokers, focusing instead on its
designated lending area for residential mortgages. It is expected that future
mortgage production will decrease as a result. Loans purchased or originated
through a broker are subject to the same underwriting standards as loans
originated directly by the Bank.
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 are originated for portfolio as long as they fit the
Company's established asset/liability mix, while fixed rate mortgages with terms
greater than 15 years are sold on the secondary market to control the Company's
interest rate risk. The Bank retains servicing on all loans sold.
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
2
<PAGE> 5
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.
To further increase consumer loan production, the Bank implemented an
indirect lending program in the third quarter of 1996, through which it receives
consumer loan applications from Bank-approved automobile, boat and recreational
vehicle dealerships on behalf of their customers to finance their purchases.
This program is expected to be an integral part of the Bank's consumer loan
origination efforts in 1997 and beyond. 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.
3
<PAGE> 6
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
Skaneateles' loan portfolio by loan type as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ----------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------------- ---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Loans secured by first
mortgages on real estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 129,651 62.74% 116,320 67.80% 110,404 66.10% 87,623 61.16% 53,033 46.92%
Commercial 31,728 15.35% 27,357 15.94% 28,175 16.87% 25,854 18.05% 24,423 21.61%
Other loans:
Commercial 18,861 9.13% 10,631 6.20% 13,274 7.95% 15,574 10.87% 20,571 18.20%
Home equity and
improvement 17,599 8.52% 14,578 8.50% 13,219 7.92% 12,454 8.69% 12,499 11.06%
Guaranteed student 882 0.43% 858 0.50% 789 0.47% 825 0.58% 1,094 0.97%
Other consumer 7,924 3.83% 1,821 1.06% 1,148 0.69% 928 0.65% 1,407 1.24%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 206,645 100.00% 171,565 100.00% 167,009 100.00% 143,258 100.00% 113,027 100.00%
=================================================================================================================================
</TABLE>
Total loans were $206.6 million at December 31, 1996, an increase of
$35.1 million or 20.5% from December 31, 1995. Gross loan growth was $20.7
million or 12.1% excluding loans acquired from Cicero. Loan originations for
1996 totaled $54.2 million, an increase of 154% from 1995's originations of
$21.3 million.
Residential mortgage originations were $30.4 million in 1996, an increase
of 141% from 1995's originations. This represented 56.1% of 1996's total loan
originations, down from 59.2% in 1995. Approximately $15.2 million or 50.0% of
the residential loans originated in 1996 were for fixed rates of interest,
compared with $12.0 million and 63.8%, respectively, in 1995. During 1996, the
Bank sold approximately $4.8 million of fixed rate residential loans, compared
with $2.0 million in 1995. Originations of 1 year and 3 year ARM's totaled $2.2
million or 7.2% of residential mortgage originations in 1996, compared with $2.6
million or 13.8% in 1995. Originations of 5/1 ARM's totaled $7.2 million or
23.7% of residential loan originations in 1996, compared with $4.2 million or
22.4% in 1995.
Consumer loan originations were $10.5 million or 19.4% of total loan
originations in 1996, compared with $4.7 million or 22.2% in 1995. Although the
relative level of originations is down from last year due to stronger growth in
the other loan categories, the actual origination volume of consumer loans
increased 122%, due primarily to a larger branch network and more focused
marketing efforts. The Bank opened two new in-supermarket branches in the second
quarter of 1995 and added another branch from Cicero in 1996. These three new
branches contributed significantly to consumer loan production in 1996,
accounting for approximately 41% of total originations. The Bank's marketing
strategy changed in 1996 from general media advertising to targeted mailings to
current and potential customers promoting specific products. In January 1997, a
marketing software package was purchased which allows the Bank to identify all
relationships with its customers on an individual or household level. This
software is expected to further enhance the effectiveness of the direct mail
marketing program.
Commercial loan and mortgage originations were $13.3 million or 24.5% of
total loan originations in 1996, up from $4.0 or 18.6% in 1995. Compared with
1995, total new commercial loan and mortgage volume increased 235%. The increase
resulted largely from a strengthening of the Bank's business development
activities, including an active calling program, a new indirect leasing program
and a greater presence by the Bank in local trade and business shows.
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
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<PAGE> 7
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,
1996.
<TABLE>
<CAPTION>
Within One to After
one year five years five years Total
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial loans - adjustable rate $ 4,541 5,847 2,877 13,265
Commercial loans - fixed rate 1,201 3,269 1,126 5,596
Real estate construction loans - adjustable rate 769 0 0 769
- --------------------------------------------------------------------------------------------------------------------
Total $ 6,511 9,116 4,003 19,630
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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 .98 at December 31, 1996. The duration of
interest-bearing assets and liabilities was 2.19 years and 1.58 years,
respectively. These measurements indicate a slightly liability-sensitive
position.
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<PAGE> 8
The following table sets forth, as of December 31, 1996, information
regarding the interest-sensitive assets and liabilities of the Company.
<TABLE>
<CAPTION>
0 to Over 3 Over 1 Over 5 Over
3 Months to 12 Months to 5Years to 10 Years 10 Years Total
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 3,800 0 0 0 0 3,800
Securities 2,041 6,961 6,123 502 1,251 16,878
Federal Home Loan Bank stock 1,410 0 0 0 0 1,410
Mortgage loans 18,386 56,072 50,000 25,851 11,070 161,379
Consumer loans 10,656 3,009 10,283 1,941 516 26,405
Commercial loans 10,445 2,862 4,275 0 1,279 18,861
- ---------------------------------------------------------------------------------------------------------------------
Total 46,738 68,904 70,681 28,294 14,116 228,733
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts(1) 3,870 11,607 15,471 7,742 0 38,690
Time certificates 27,475 44,409 30,366 5,179 0 107,429
Money market accounts 21,991 0 0 0 0 21,991
Now and escrow accounts(1) 1,071 3,505 13,987 3,495 0 22,058
Borrowings 2,516 2,000 10,025 2,450 1,190 18,181
- ---------------------------------------------------------------------------------------------------------------------
Total 56,923 61,521 69,849 18,866 1,190 208,349
- ---------------------------------------------------------------------------------------------------------------------
Gap $(10,185) 7,383 832 9,428 12,926 20,384
- ---------------------------------------------------------------------------------------------------------------------
Cumulative gap $(10,185) (2,802) (1,970) 7,458 20,384
- ---------------------------------------------------------------------------------------------------------------------
Cumulative gap as a
percentage of
interest-earning
assets (4.45%) (1.23%) (0.86%) 3.26% 8.91%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
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<PAGE> 9
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.
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
--------------------------------------------------------------------------
(In Thousands)
Interest income on interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 860 44 904 1,266 949 2,215
Other loans 793 (263) 530 (69) 422 353
Securities (151) (31) (182) 105 127 232
Federal funds sold 55 (16) 39 126 5 131
- --------------------------------------------------------------------------------------------------------------------
Total 1,557 (266) 1,291 1,428 1,503 2,931
- --------------------------------------------------------------------------------------------------------------------
Interest expense on interest-bearing liabilities:
Deposits:
Savings and club accounts $ 100 3 103 (108) 50 (58)
Time certificates 369 (59) 310 1,481 712 2,193
Money market accounts (35) 0 (35) (142) 137 (5)
Now and escrow accounts 75 (12) 63 41 24 65
- --------------------------------------------------------------------------------------------------------------------
Total deposits 509 (68) 441 1,272 923 2,195
Borrowings 94 (32) 62 (13) 77 64
- --------------------------------------------------------------------------------------------------------------------
Total 603 (100) 503 1,259 1,000 2,259
- --------------------------------------------------------------------------------------------------------------------
Net interest income $ 954 (166) 788 169 503 672
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
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.
<TABLE>
<CAPTION>
------------------------------------------------
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
Residential real estate mortgages $1,359 271 317 291 582
Commercial (1) 1,626 1,757 2,894 2,481 1,900
Consumer 186 110 40 10 63
- ---------------------------------------------------------------------------------------
Total $3,171 2,138 3,251 2,782 2,545
- ---------------------------------------------------------------------------------------
Other loans past due 90 days or more
and still accruing:
Consumer (2) $ 29 1 0 12 16
Commercial (1) 370 0 447 0 0
Lease loans 0 0 0 0 0
- ---------------------------------------------------------------------------------------
Total $ 399 1 447 12 16
- ---------------------------------------------------------------------------------------
Restructured loans, not included above 0 1,125 932 1,006 901
- ---------------------------------------------------------------------------------------
Real estate owned 717 397 984 1,807 1,578
- ---------------------------------------------------------------------------------------
Total assets containing specific risk
elements $4,287 3,661 5,614 5,607 5,040
- ---------------------------------------------------------------------------------------
Ratio of total loans past due
90 days or more to gross loans 1.73% 1.25% 2.05% 1.95% 2.27%
- ---------------------------------------------------------------------------------------
Ratio of assets containing specific
risk elements to total assets 1.77% 1.74% 2.78% 3.21% 2.98%
- ---------------------------------------------------------------------------------------
<FN>
(1) Includes commercial real estate loans
(2) Consists primarily of Guaranteed Student Loans.
</TABLE>
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).
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Income that would have been accrued
at original contract rates $ 283 155 172 104 112
</TABLE>
Nonperforming (nonaccrual loans and real estate owned) assets totaled
$3.9 million, or 1.6% of total assets at December 31, 1996, compared with $2.5
million, or 1.2% of total assets at December 31, 1995. Included in nonperforming
assets at December 31, 1996 were nonaccrual loans of $3.2 million or 1.5% of
gross loans, compared with $2.1 million or 1.2% at December 31, 1995. Nonaccrual
loans acquired in the Cicero transaction accounted for approximately 56% of the
increase in 1996. Excluding the loans acquired from Cicero, the Bank's
nonperforming loans would have been $2.5 million or 1.3% of gross loans at
December 31, 1996.
8
<PAGE> 11
Potential problem loans at December 31, 1996 amounted to $1.8 million.
"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
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 department to audit for adherence to
established Bank controls and to review the quality and anticipated
collectibility of the portfolio. The loan review department reports 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
$1.9 million and $4.0 million at December 31, 1996 and 1995, respectively.
Included in these amounts are $832,000 and $2.7 million of impaired loans for
which the related allowance for loan losses is $216,000 and $884,000,
respectively. In addition, included in the total impaired loans at December 31,
1996 and 1995 are $1.1 million and $1.3 million 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 1996 and
1995 was approximately $2.9 million and $3.9 million, respectively. The amount
of interest income recognized on impaired loans in 1996 and 1995 was
approximately $166,000 and $281,000, respectively. The Bank is not committed to
lend additional funds to these borrowers.
9
<PAGE> 12
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, 1996
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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance $ 2,667 3,040 2,938 2,847 4,019
Provision 175 235 360 600 455
Charge-offs
- -----------
Residential mortgages (74) 0 (18) 0 0
Commercial mortgages (168) (569) 0 (237) (522)
Business (999) (153) (331) (428) 1,145)
Other consumer (60) (10) (17) (64) (30)
- -------------------------------------------------------------------------------------------------------------------
(1,301) (732) (366) (729) (1,697)
- -------------------------------------------------------------------------------------------------------------------
Recoveries
- ----------
Commercial mortgages 0 0 0 4 0
Business 118 118 96 203 60
Other consumer 8 6 12 13 10
- -------------------------------------------------------------------------------------------------------------------
126 124 108 220 70
- -------------------------------------------------------------------------------------------------------------------
Net Charge-offs (1,175) (608) (258) (509) (1,627)
- -------------------------------------------------------------------------------------------------------------------
Allowance of acquired bank 447 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,114 2,667 3,040 2,938 2,847
- -------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the year
to average loans outstanding during the 0.62% 0.36% 0.17% 0.41% 1.43%
year
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
The following table sets forth the allocation of the allowance
for loan losses as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consumer $ 178 80 59 34 39
Commercial (1) 1,822 2,517 2,926 2,850 2,670
Residential 114 70 55 54 138
- ------------------------------------------------------------------------------------------------------------------
$ 2,114 2,667 3,040 2,938 2,847
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes commercial real estate loans.
</TABLE>
SECURITIES
Skaneateles has authority to purchase a wide range of securities,
subject to various restrictions. See "Regulation - New York Law."
Historically, Skaneateles' investment strategy was primarily to hold
securities for the purpose of providing liquidity and generating income. Such
securities consisted primarily of 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, 1996, 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. The Company expects to
re-evaluate the appropriateness of its portfolio designations, and may consider
reclassifying its held-to-maturity portfolio to available-for-sale sometime in
the future.
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.
11
<PAGE> 14
Presented below are the carrying values (in thousands) of the
securities portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1995 1994
--------------- ------------- -------------
SECURITIES AVAILABLE FOR SALE:
<S> <C> <C> <C>
U.S. government and Federal agency obligations $ 5,027 6,106 8,942
Mortgage-backed securities:
FNMA 0 0 191
FHLMC 0 2,547 8,143
Other asset-backed securities 982 0 0
- ------------------------------------------------------------------------------------------------------------------
$ 6,009 8,653 17,276
==================================================================================================================
SECURITIES HELD TO MATURITY:
U.S. government and Federal agency obligations $ 4,992 6,026 1,963
Mortgage-backed securities:
FNMA 145 170 0
FHLMC 3,674 4,493 0
Obligations of states and political subdivisions 1,782 1,714 1,731
Corporate bonds, notes and debentures 300 401 901
- ------------------------------------------------------------------------------------------------------------------
$10,893 12,804 4,595
==================================================================================================================
</TABLE>
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.
12
<PAGE> 15
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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -------------------------
Percent of Percent of Percent of
total total total
Amount deposits Amount deposits Amount deposits
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings and club accounts $ 38,690 18.87% 33,016 18.43% 36,255 21.24%
Time certificates 107,429 52.39% 99,474 55.54% 85,909 50.33%
Money market accounts 21,991 10.73% 21,448 11.98% 25,502 14.94%
NOW accounts 20,314 9.91% 13,244 7.39% 13,488 7.90%
Demand accounts 14,861 7.25% 9,927 5.54% 7,645 4.48%
Escrow accounts 1,744 0.85% 2,010 1.12% 1,897 1.11%
- ------------------------------------------------------------------------------------------------------------------
Total $ 205,029 100.00% 179,119 100.00% 170,696 100.00%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1996, 1995 and
1994, the aggregate amounts of certificates of deposit in denominations of
$100,000 or more were approximately $13,065,000, $9,074,000 and $7,839,000,
respectively.
The following table presents the amounts of certificates of deposit in
denominations of $100,000 or more at December 31, 1996 which mature during the
periods indicated.
<TABLE>
<CAPTION>
MATURITY AMOUNT
-------- ------
<S> <C>
3 months or less $ 4,590
3 to 6 months 3,101
6 to 12 months 2,330
Over 12 months 3,044
- ----------------------------------------------------------------
Total $13,065
- ----------------------------------------------------------------
</TABLE>
Total deposits, including escrow, were $205.0 million at December 31,
1996, an increase of $25.9 million or 14.5% from the end of 1995. Excluding
deposits assumed from Cicero, deposits increased $6.9 million or 3.9% in 1996.
The Bank changed its strategy for deposit growth in 1996, placing more emphasis
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. In February
1996, the Bank developed seven new checking account products, each targeted to
specific demographic groups and supported by an active direct mail marketing
campaign. As a result, the Bank's total checking account balances increased $7.8
million or 33.4% in 1996, while its savings account balances were up $2.9
million or 8.9%. Both gains were exclusive of accounts assumed from Cicero. More
than 7,700 new checking accounts were opened in 1996 as a result of this
program, representing a 133% increase in the number of accounts compared with
the end of 1995. The direct mail marketing 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.
13
<PAGE> 16
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.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
------------------------ ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------ ----------------------- -----------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings and club accounts $ 36,576 2.84% 33,133 2.83% 37,045 2.59%
Time certificates 104,023 5.68% 97,596 5.74% 70,395 4.84%
Money market accounts 21,919 3.33% 23,000 3.33% 27,652 2.79%
</TABLE>
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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994
------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Securities sold under repurchase agreements $ 2,516 1,651 1,229
Overnight advances from the FHLB of New York 0 0 0
Advances from the FHLB of New York 14,000 11,000 11,000
Municipal securities sold with put options 1,665 1,735 1,755
- --------------------------------------------------------------------------------------------------------------------
$ 18,181 14,386 13,984
- --------------------------------------------------------------------------------------------------------------------
Weighted average interest cost of
borrowings during the year 6.48% 6.70% 6.17%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
SELECTED PERFORMANCE RATIOS
Selected performance ratios of the Company are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Return on Assets
Net Income / Average Total Assets 0.65% 0.51% 0.54%
Return on Equity
Net Income / Average Stockholders' Equity 9.43% 7.24% 7.27%
Dividend Payout Ratio
Cash Dividends Declared / Net Income 17.83% 16.81% 11.32%
Equity to Asset Ratio
Average Stockholders' Equity /Average Total Assets 6.91% 7.03% 7.38%
</TABLE>
PERSONNEL
As of December 31, 1996 Skaneateles had 99 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, 1996.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C>
John P. Driscoll 56 Chairman, President and Chief Executive Officer
J. David Hammond 52 Executive Vice President & Secretary
J. Daniel Mohr 31 Treasurer
William J. Welch 47 Asst. Secretary & Asst. Treasurer
</TABLE>
REGULATION
General
As a bank holding company, Center Banks Incorporated 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.
15
<PAGE> 18
FEDERAL BANK HOLDING COMPANY REGULATION. Center Banks 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 Center Banks 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.
16
<PAGE> 19
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.
<TABLE>
<CAPTION>
Date Premium per $100 of total deposits
- -------------------------------------------------------------------------------
<S> <C>
January 1, 1996 to present (*) $.00
June 1, 1995 to December 31, 1995 $.04
January 1, 1995 to May 30, 1995 $.23
January 1, 1993 to December 31, 1994 $.26
<FN>
(*) The Bank's FDIC insurance premium was reduced to the legal minimum
of $2,000 per year effective January 1, 1996. Effective January 1,
1997 the FDIC eliminated the $2,000 per year legal minimum. Beginning
January 1, 1997, the Bank is paying a fee for Financing Corporation
(FICO) debt service at an annual rate of $.013 per $100 of insurable
deposits. This fee is not an FDIC insurance premium.
</TABLE>
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,
1996, net transaction accounts (transaction accounts, primarily NOW and regular
checking accounts, less certain permitted deductions) in the amount of $0 to
$49.3 million are subject to a reserve requirement of 3% of said amount. Net
transaction accounts over $49.3 million are subject to a reserve requirement of
$1,479,000 plus 10% of the total in excess of $49.3 million. However, $4.4
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.
17
<PAGE> 20
Item 2. PROPERTIES
Skaneateles conducts its business from eight full-service offices and
one administrative office. The following table sets forth certain information
relating to each of Skaneateles' offices as of December 31, 1996.
<TABLE>
<CAPTION>
Lease Expiration Net Book
Owned Date Including Value at
or Leased Options December 31, 1996
-------------------------------------------------------------------------------
Branch Office Location (In Thousands)
- ------------------------------
<S> <C> <C> <C>
33 E. Genesee Street
Skaneateles, New York 13152 Owned n/a $478
431 E. Fayette Street
Syracuse, New York 13202 Owned n/a 3,064
5791 East Seymour Street
Cicero, New York 13039 Owned n/a 597
100 Kasson Road
Camillus, New York 13031 Leased 2000 50
Teall Ave. & Grant Blvd.
Syracuse, New York 13206 Leased 2014 196
3803 Brewerton Road
North Syracuse, New York 13212 Leased 2009 195
7785 Frontage Road
Cicero, New York 13039 Leased 2010 190
137 East State Street
Oswego, New York 13126 Leased 2010 207
Administrative Office
- ------------------------------
27 Fennell Street
Skaneateles, New York 13152 Leased 2005 253
</TABLE>
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.
18
<PAGE> 21
Item 4. Submission Of Matters To A Vote Of Security Holders
During the fourth quarter of 1996, there were no matters submitted to a
vote of the shareholders of Center Banks.
PART II.
Item 5. Market For The Registrant's Common Stock And Related Stockholder
Matters
The information contained on the inside back cover of the Company's
Annual Report to Shareholders for the year ended December 31, 1996 (the "Annual
Report") and page 1 of the definitive Proxy Statement are incorporated herein by
reference.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Cash dividends declared per share $ 0.28 0.19 0.12 0 0
</TABLE>
Other required information contained in the table on page 8 of the
Annual Report is incorporated herein by reference.
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 of Financial Condition and Results of Operation" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements And Supplementary Data
The consolidated financial statements contained in the 1996 Annual
Report are incorporated herein by reference.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
Not applicable.
19
<PAGE> 22
PART III.
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
1996 were made in a timely manner, except for a Form 4 for Ann G. Higbee,
Director, which was 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. Executive Compensation
The information required herein is incorporated by reference from
pages 6 to 8 of the definitive Proxy Statement.
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. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
8 of the definitive Proxy Statement.
PART IV.
- --------
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, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995
and 1994.
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994.
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.
20
<PAGE> 23
(b) During the three-month period ended December 31, 1996, the Registrant filed
a Form 8-K announcing the establishment of a Dividend Reinvestment Plan. 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 Center Banks Incorporated(1)
3.2 Certificate of Amendment of Certificate of Incorporation of Center
Banks Incorporated(1)
3.3 Bylaws of the Company
10.1 Employment Agreement dated as of January 1, 1996 between Skaneateles
Savings Bank and John P. Driscoll(2)
10.2 Employment Agreement dated as of March 19, 1996 between Skaneateles
Savings Bank and J. David Hammond(2)
10.3 Employment Agreement dated as of March 19, 1996 between Skaneateles
Savings Bank and Karen E. Lockwood(2)
10.4 Employment Agreement dated as of March 19, 1996 between Skaneateles
Savings Bank and John A. Mason(2)
10.5 Employment Agreement dated as of March 19, 1996 between Skaneateles
Savings Bank and J. Daniel Mohr(2)
10.6 Employment Agreement dated as of March 11, 1996 between Skaneateles
Savings Bank and William J. Welch(2)
13 Annual Report to Shareholders for the Year Ended December 31, 1996
21 List of Registrant's Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
- ---------
(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 1995 Form 10-K filed by the Company with the Securities and
Exchange Commission on April 1, 1996.
21
<PAGE> 24
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.
CENTER BANKS INCORPORATED
- -------------------------
Registrant
By: /s/ John P. Driscoll Date: March 25, 1997
----------------------------------- --------------
John P. Driscoll
Chairman, President and Chief
Executive Officer
By: /s/ J. Daniel Mohr Date: March 25, 1997
----------------------------------- --------------
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.
/S/ Clifford C. Abrams Date: March 25, 1997
---------------------------- --------------
Clifford C. Abrams
Director
---------------------------- Date:
Israel Berkman ----------------
Director
---------------------------- Date:
David E. Blackwell -----------------
Director
/s/ Walter D. Copeland Date: March 25, 1997
---------------------------- --------------
Walter D. Copeland
Director
/s/ Carl W. Gerst Date: March 25, 1997
---------------------------- ---------------
Carl W. Gerst
Director
/s/ John Bernard Henry Date: March 25, 1997
---------------------------- ---------------
John Bernard Henry
Director
---------------------------- Date:
Ann G. Higbee ----------------
Director
---------------------------- Date:
Bruce H. Leslie -----------------
Director
22
<PAGE> 25
/s/ Howard J. Miller Date: March 25, 1997
------------------------------------ ---------------
Howard J. Miller
Director
/s/ Raymond C. Traver, Jr., M.D. Date: March 25, 1997
-------------------------------- ---------------
Raymond C. Traver, Jr., M.D.
Director
/s/ Anne E. O'connor Date: March 25, 1997
---------------------------- ---------------
Anne E. O' Connor
Director
23
<PAGE> 1
Exhibit 3.3
BYLAWS OF THE COMPANY
<PAGE> 2
Exhibit 3.3
BYLAWS
OF
CENTER BANKS INCORPORATED
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the city of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the board of
directors may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. Meetings of shareholders for the election
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware, as shall be designated from time
to time by the board of directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of shareholders shall
be held at 33 E. Genesee Street, Skaneateles, New York 13152 on the third
Tuesday of April at 11:00 a.m. or at such other place, date and hour as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting, at which meetings the shareholders shall elect by a plurality
vote a board of directors and transact such other business as may properly be
brought before the meeting. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each shareholder entitled
to vote at such meeting not less than 20 nor more than 50 days before the date
of the meeting. The notice shall also set forth the purpose or purposes for
which the meeting is called.
Section 3. Business at Annual Meeting. At an annual meeting of the
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the board of directors, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors, or (c) otherwise properly brought before the meeting by a
shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days or more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice of the date
of the meeting is given to shareholders or prior public disclosure of the date
of the meeting is made, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the shareholder, (d) any material
interest of the shareholder in such business and (e) the same information
required by clauses (b), (c) and (d) above with respect to any other shareholder
<PAGE> 3
that, to the knowledge of the shareholder proposing such business, supports such
proposal. Notwithstanding anything in these bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 3. The chairman of an annual meeting shall, if the
facts warrant, determine and declare to the annual meeting that a matter of
business was not properly brought before the meeting in accordance with the
provisions of this Section 3, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
Section 4. Special Meetings. Special meetings of shareholders for any
purpose may be called only as provided in the Certificate of Incorporation.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than 20 nor more than 50 days before the date of the meeting to
each shareholder entitled to vote at such meeting.
Section 5. Quorum. The holders of one-third of the capital stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder entitled to vote at the
meeting.
Section 6. Voting. Except as otherwise required by law, the Certificate
of Incorporation or these bylaws, any matter brought before any meeting of
shareholders shall be decided by the affirmative vote of the majority of the
votes cast on the matter. Each shareholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of common stock
entitled to vote thereat held by such shareholder and such number of votes,
including multiple or fractional votes, as may be provided by resolution of the
board of directors for each share of serial preferred stock entitled to vote
thereat held by such shareholder. The board of directors, in its discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 7. List of Shareholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least 10 days before every meeting of shareholders, a complete list
of the shareholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each shareholder and the number of shares
registered in the name of each shareholder. Such list shall be open to the
examination of any shareholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any shareholder of the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the shareholders entitled to examine the list
required by Section 7 of this Article II or to vote in person or by proxy at any
meeting of shareholders.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or his duly authorized
attorney-in-fact. Proxies solicited on behalf of the board of directors shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power.
Section 10. Voting of Shares in the Name of Two or More Persons. If
shares or other securities having voting power stand of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship
<PAGE> 4
respecting the same shares, unless the secretary of the Corporation is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (1) if only
one votes, his act binds all; (2) if more than one vote, the act of the majority
so voting binds all; (3) if more than one vote, but the vote is evenly split on
any particular matter, each faction may vote the securities in question
proportionally, or any person voting the shares, or a beneficiary, if any, may
apply to the Court of Chancery of the State of Delaware or such other court as
may have jurisdiction to appoint an additional person to act with the persons so
voting the shares, which shall then be voted as determined by a majority of such
persons and the person appointed by the Court. If the instrument so filed shows
that any such tenancy is held in unequal interests, a majority or even-split for
the purposes of this subsection shall be a majority or even-split in interest.
Section 11. (Intentionally omitted. By design, these bylaws contain no
Section 11.)
Section 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, but no
trustee shall be entitled to vote shares held by him without a transfer of such
shares into his name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer into his name if authority so to do
is contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. The number of inspectors shall be either one or three. If the board of
directors so appoints either one or three such inspectors, that appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, and on the request of
not less than 10 percent of the votes represented at the meeting shall, make
such appointments at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or by the chairman of the board or the
president.
Unless otherwise prescribed by law, the duties of such inspectors shall
include: determining the number of shares of stock entitled to vote, the voting
power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or the vote with fairness to all shareholders.
Section 14. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules prescribed by the presiding officer of the
meeting, unless otherwise prescribed by law or these bylaws. The board of
directors shall designate, when present, either the chairman of the board or the
chief executive officer to preside at such meetings.
ARTICLE III
DIRECTORS
<PAGE> 5
Section 1. Number and Election of Directors. The number of directors
shall be determined by resolution of the Board of Directors. Unless otherwise
provided by the Board, the number of directors shall be 11. Directors need not
be residents of the State of Delaware.
Directors shall be elected only by shareholders at annual meetings of
shareholders, other than the initial board of directors and except as provided
in Section 2 of this Article III in the case of vacancies and newly created
directorships. Each director elected shall hold office for the term for which he
is elected and until his successor is elected and qualified or until his earlier
resignation or removal.
Section 2. Classes; Terms of Office; Vacancies. The board of directors
shall divide the directors into three classes; and, when the number of directors
is changed, shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned; provided, further, that no
decrease in the number of directors shall affect the term of any director then
in office. At each annual meeting of shareholders, directors elected to succeed
those whose terms are expiring shall be elected for a term of office to expire
at the third succeeding annual meeting of shareholders and when their respective
successors are elected and qualified.
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors may be filled, for the unexpired term, by
the concurring vote of a majority of the directors then in office, whether or
not a quorum, and any director so chosen shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the board of directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these bylaws
directed or required to be exercised or done by the shareholders. The board of
directors shall annually elect a chairman of the board from among its members
who, when present, shall preside at its meetings.
Section 4. Meetings. The board of directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. The annual regular meeting of the board of directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of the shareholders. Additional regular meetings of the
board of directors shall be held quarterly in the months of January, April,
July, and October, and may be held without notice at such time and at such place
as may from time to time be determined by the board of directors. Special
meetings of the board of directors may be called by the chairman of the board,
the president or a majority of directors then in office. Notice thereof stating
the place, date and hour of the meeting shall be given to each director either
by mail not less than 48 hours before the date of the meeting, or by telephone
or telegram on 24 hours' notice.
Section 5. Quorum. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these bylaws, at all meetings of the
board of directors, a majority of the directors then in office shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the board of directors. If a quorum shall not be present at any meeting of the
board of directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions Without Meeting. Any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all the members of the board of directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board of directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Members of the
board of directors of the Corporation, or any committee designated by the board
of directors, may participate in a meeting of the board of directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the
<PAGE> 6
meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
Section 8. Compensation. The board of directors shall have the
authority to fix the compensation of directors. The directors may be paid their
reasonable expenses, if any, of attendance at each meeting of the board of
directors and may be paid a reasonable fixed sum for actual attendance at each
meeting of the board of directors. Directors, as such, may receive a stated
salary for their services. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 9. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board of directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the board of directors or the committee, and the board of directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the board of directors,
a committee thereof or the shareholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the board of
directors or of a committee which authorizes the contract or transaction.
Section 10. Corporate Books. The directors may keep the books of
the Corporation outside of the State of Delaware at such place or places as they
may from time to time determine.
Section 11. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any matter is
taken shall be presumed to have assented to the action taken unless his dissent
or abstention shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the Corporation within five days after the
date he receives a copy of the minutes of the meeting. Such right to dissent
shall not apply to a director who voted in favor of such action.
Section 12. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the chairman of the board or the
president of the Corporation. Unless otherwise specified therein such
resignation shall take effect upon receipt thereof by the chairman of the board
or the president. More than three consecutive absences from regular meetings of
the board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 13. Nominees. Only persons who are nominated in accordance with
the procedures set forth in this Section 13 shall be eligible for election as
directors. Nominations of persons for election to the board of directors of the
Corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 13. Such nominations, other than those made
by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days or more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days' notice of the date of the meeting is given to shareholders or
prior public disclosure of the date of the meeting is made, notice by the
shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such shareholder's
notice shall set forth (a) as to each person whom the shareholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of
<PAGE> 7
shares of the Corporation which are beneficially owned by such person, and (iv)
any other information relating to such person that is required to be disclosed
in solicitations or proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation l4A under the Securities Exchange Act of
1934, as amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the shareholder giving notice (i) the name and address,
as they appear on the Corporation's books, of such shareholder and (ii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder. At the request of the board of directors, any person nominated
by the board of directors for election as a director shall furnish to the
secretary of the Corporation that information required to be set forth in a
shareholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 13. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with procedures prescribed by the
bylaws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The Board of Directors, by resolution adopted
by a majority of the full Board, may designate an executive committee consisting
of the chief executive officer and all other eligible directors from which four
directors will serve on the executive committee on a rotating basis. The Board
of Directors shall approve the rotation schedule. The chairman of the executive
committee shall be designated by the Board of Directors. The designation of any
committee pursuant to this Article IV and the delegation of authority thereto
shall not operate to relieve the board of directors, or any director, of any
responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it, except to the extent, if any, that
such powers and authority shall be limited by the resolution appointing the
executive committee; and except also that the executive committee shall not have
the power or authority of the board of directors with reference to amending the
Certificate of Incorporation; adopting an agreement of merger or consolidation;
recommending to the shareholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets; recommending to the
shareholders a dissolution of the Corporation or a revocation of a dissolution;
amending the bylaws of the Corporation; filling a vacancy or creating a new
directorship; or approving a transaction in which any member of the executive
committee, directly or indirectly, has any material beneficial interest; and
unless the resolution or bylaws expressly so provide, the executive committee
shall not have the power or authority to declare a dividend or to authorize the
issuance of stock or securities convertible into or exercisable for stock.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next annual regular meeting of the board of directors following such member's
designation and until such member's successor is designated as a member of the
executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by the chairman of the executive committee, the chief executive
officer or any two members thereof upon not less than one day's notice stating
the place, date and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting. The executive committee shall not have
any minimum meeting requirements. The executive committee shall meet when a
meeting is called pursuant to the requirements of this Section 4 for the calling
of special meetings.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
<PAGE> 8
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee and the writing or
writings are filed with the minutes of the proceedings of the committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the chairman of the board or the president of the Corporation. Unless
otherwise specified therein, such resignation shall take effect upon receipt.
The acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee may fix its own rules of
procedure which shall not be inconsistent with these bylaws. It shall keep
regular minutes of its proceedings and report the same to the full board of
directors for its information at the meeting thereof held next after the
proceedings shall have been taken.
Section 10. Other Committees. The board of directors by resolution may
establish such other committees composed of directors as they may determine to
be necessary or appropriate for the conduct of the business of the Corporation
and may prescribe the duties and powers thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall include a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The chairman of the board may
also be designated as an officer of the Corporation by the board of directors.
The chairman of the board and the president may be the same person. The
secretary and treasurer may be the same person. A vice president may also be
either the secretary or the treasurer. The board of directors may designate one
or more vice presidents as executive vice president or senior vice president.
The board of directors may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers shall have
such authority and perform such duties as the board of directors may from time
to time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
to their respective offices. The salaries of all officers of the Corporation
shall be fixed by the board of directors.
Section 2. Election. The board of directors at its first meeting held
after the annual meeting of shareholders shall elect annually the officers of
the Corporation who shall exercise such powers and perform such duties as shall
be set forth in these bylaws and as determined from time to time by the board of
directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any vacancy occurring in any office of the Corporation shall be filled
by the board of directors.
Section 3. Removal. Any officer elected by the board of directors may
be removed at any time by the affirmative vote of a majority of the board of
directors. Any officer may be removed by the board of directors whenever in its
judgment the best interests of the Corporation will be served thereby, but such
removal, other than for cause, shall be without prejudice to the contract
rights, if any, of the person so removed.
Section 4. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the president or any vice president, and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of
<PAGE> 9
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
powers incident to the ownership of such securities and which, as the owner
thereof, the Corporation might have exercised and possessed if present. The
board of directors may, by resolution, from time to time confer like powers upon
any other person or persons.
ARTICLE VI
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by (i) the president and (ii) the secretary or an assistant
secretary of the Corporation, representing the number of shares registered in
certificate form.
Section 2. Signatures. Any or all of the signatures on a certificate
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer at the
date of issue.
Section 3. Lost Certificates. The president or any vice president may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the president or any vice president may, in his discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as such officer may require and/or to give the Corporation a
bond in such sum as he may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than 60 days nor less than 10 days before the date
of such meeting, nor more than 60 days prior to any other action. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 6. Registered Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof, except as otherwise required by law.
ARTICLE VII
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or shareholder, such notice may be given by mail, addressed to
such director, member of a committee or shareholder, at his address as it
appears on the records of the Corporation, with postage
<PAGE> 10
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these bylaws to be given to any director,
member of a committee or shareholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting with the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of the shareholders, directors, or members of a committee of directors need be
specified in any other waiver of notice unless so required by the Certificate of
Incorporation or these bylaws.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation and
the laws of the State of Delaware, may be declared by the board of directors at
any regular or special meeting, and may be paid in cash, in property, or in
shares of capital stock of the Corporation.
Subject to the provisions of the General Corporation Law of the State
of Delaware, such dividends may be paid either out of surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Section 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall end
on December 31 of each year.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
ARTICLE IX
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article IX, the Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, and any appeal therein, whether civil, criminal,
administrative, arbitrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, trustee, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, trustee, employee or
agent of another corporation, association, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding, and any appeal
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding, and any
appeal therein, by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
<PAGE> 11
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Corporation. Subject to Section 3 of this Article IX, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; provided, however, that
no indemnification shall be made against expenses in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Corporation or against amounts paid in settlement unless and only to the extent
that there is a determination (as set forth in Section 3 of this Article IX)
that despite the adjudication of liability or the settlement, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or amounts paid in settlement.
Section 3. Authorization of Indemnification. Any indemnification under
this Article IX (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because such director, officer, trustee, employee or agent
has met the applicable standard of conduct set forth in Section 1 or Section 2
of this Article IX and, if applicable, is fairly and reasonably entitled to
indemnity as set forth in the proviso in Section 2 of this Article IX, as the
case may be. Such determination shall be made (i) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the shareholders. To the extent,
however, that a director, officer, trustee, employee or agent of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire board of
directors.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article IX, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any association, partnership, joint venture, trust or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 1 or 2 of this Article IX, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. Notwithstanding any of
the foregoing, unless otherwise required by law, no director, officer, trustee,
employee or agent of the Corporation shall be entitled to indemnification in
connection with any action, suit or proceeding voluntarily initiated by such
person unless the action, suit or proceeding was authorized by a majority of the
entire board of directors.
<PAGE> 12
Section 6. Expenses Payable in Advance. Expenses incurred in connection
with a threatened or pending action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, trustee, employee or agent to repay such amount if it shall be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article IX.
Section 7. Contract, Non-exclusivity and Survival of Indemnification.
The indemnification provided by this Article IX shall be deemed to be a contract
between the Corporation and each director, officer, employee and agent who
serves in such capacity at any time while this Article IX is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any certificate of incorporation,
bylaw, agreement, contract, vote of shareholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 or 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, trustee,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent of another
corporation, association, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power or the obligation to indemnify him against such liability
under the provisions of this Article IX.
Section 9. Meaning of "Corporation" for Purposes of Article IX. For
purposes of this Article IX, references to "the Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article IX with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
ARTICLE X
AMENDMENTS
The board of directors or the shareholders may from time to time amend
the bylaws of the Corporation. Such action by the board of directors shall
require the affirmative vote of at least two-thirds of the directors then in
office at a duly constituted meeting of the board of directors called for such
purpose. Such action by the shareholders shall require the affirmative vote of
at least two-thirds of the total votes eligible to be voted at a duly
constituted meeting of shareholders called for such purpose.
<PAGE> 1
Exhibit 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 2
Exhibit 13
Annual Report to Shareholders for the year ended December 31, 1996
Item 5. Market For The Registrant's Common Stock And Related Security Holder
Matters
The common stock of Center Banks Incorporated trades on the NASDAQ National
Market System under the ticker symbol "CTBK".
The following table shows the range of high and low closing stock prices for
each quarter of 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Quarter High Low High Low
- -------
<S> <C> <C> <C> <C>
Fourth 15.25 13.75 15.25 14.00
Third 14.75 13.50 15.25 13.63
Second 14.00 13.13 14.25 12.38
First 16.75 13.75 14.00 10.75
</TABLE>
Cash dividends totaling $.28 and $.19 per share were declared in 1996 and 1995,
respectively.
On February 18,1997, there were 950,006 shares of Common Stock issued and
outstanding, held of record by 587 shareholders.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
==========================================================================================================================
(In Thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets $ 242,182 210,647 201,841 174,558 169,142
Net loans 204,830 168,967 163,921 140,224 110,145
Securities 16,902 21,457 21,871 24,329 43,651
Federal funds sold 3,800 3,400 1,200 0 3,200
Deposits, including escrow 205,029 179,119 170,696 149,173 152,331
Borrowings 18,181 14,386 13,984 11,120 4,045
Stockholders' equity 16,230 14,939 13,791 13,286 12,236
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Operations Data:
<S> <C> <C> <C> <C> <C>
Total interest income $ 17,162 15,871 12,940 11,844 13,121
Total interest expense 9,111 8,608 6,349 5,988 7,749
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,051 7,263 6,591 5,856 5,372
Provision for loan losses 175 235 360 600 455
Other operating income 1,116 587 509 907 610
Other operating expenses 7,418 6,211 5,580 5,373 5,224
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,481 1,052 983 803 348
- ------------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income $ 1.57 1.13 1.06 .87 .38
Dividends declared .28 .19 .12 0 0
Book value 17.12 16.05 14.90 14.37 13.23
- ------------------------------------------------------------------------------------------------------------------------------
Selected other data:
Earning asset yield 8.01% 8.07% 7.31% 7.28% 7.80%
Cost of funds 4.63% 4.71% 3.90% 3.99% 4.90%
Interest rate spread 3.38% 3.36% 3.41% 3.29% 2.90%
Net interest margin 3.76% 3.69% 3.72% 3.60% 3.19%
Full service banking offices 8 7 5 3 3
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
FINANCIAL CONDITION
General
- -------
Center Banks Incorporated (the "Company") is a bank holding company, with
Skaneateles Savings Bank (the "Bank") being its sole subsidiary. The financial
condition and operating results of the Company are largely dependent on the
Bank, its primary investment.
On July 1, 1996, the Bank acquired substantially all of the assets and assumed
the deposit liabilities of Cicero Bank ("Cicero"). Total assets acquired were
$19.1 million, consisting of loans ($14.0 million), cash ($4.0 million) and
other assets ($1.1 million). Total deposit liabilities assumed were $19.1
million, consisting of time accounts ($9.9 million), money market accounts ($2.3
million) and savings and demand accounts ($6.9 million). The excess of the
purchase price over the fair value of assets acquired ("goodwill") amounted to
$494,000 and is included in other assets. Goodwill is being amortized over the
expected useful life of seven years on a straight line basis.
Total assets were $242.1 million at December 31, 1996, compared with $210.6
million at December 31, 1995, an increase of $31.5 million or 15.0%. Excluding
assets acquired from Cicero, total assets increased $12.4 million or 5.9%.
<PAGE> 4
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets (millions) $169 $175 $202 $211 $242
</TABLE>
Loans
- -----
Net loans were $204.8 million at December 31, 1996, an increase of $35.8 million
or 21.2% from December 31, 1995. Loan growth was $21.8 million or 12.9%
excluding loans acquired from Cicero. Loan originations for 1996 totaled $54.2
million, an increase of 154% from 1995's originations of $21.3 million.
Residential mortgage originations were $30.4 million in 1996, an increase of
141% from 1995's originations. This represented 56.1% of 1996's total loan
originations, down from 59.2% in 1995. Approximately $15.2 million or 50.0% of
the residential loans originated in 1996 were for fixed rates of interest,
compared with $12.0 million and 63.8%, respectively, in 1995. Fixed rate
mortgages with terms of 15 years or less are originated for portfolio as long as
they fit the Bank's established asset/liability mix, while fixed rate mortgages
with terms greater than 15 years are sold on the secondary market to control the
Bank's interest rate risk. During 1996 the Bank sold approximately $4.8 million
of fixed rate residential loans, compared with $2.0 million in 1995. The Bank
retains servicing on all sold loans. In addition to fixed rate loans, the Bank
offers adjustable rate loans with rates that adjust annually (1 year ARM), or
once every three years (3 year ARM). Originations of 1 year and 3 year ARM's
totaled $2.2 million or 7.2% of residential mortgage originations in 1996,
compared with $2.6 million or 13.8% in 1995. 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. Originations of
5/1 ARM's totaled $7.2 million or 23.7% of residential loan originations in
1996, compared with $4.2 million or 22.4% in 1995. Adjustable rate loans are
generally retained for portfolio.
A large portion of the residential mortgages originated in 1996 and 1995 was
referred to the Bank by third-party brokers in areas contiguous to the Bank's
designated lending area. Brokers were used to supplement the Bank's own direct
originations in order to meet mortgage lending goals. Increasing competition in
mortgage lending, however, has squeezed margins and profitability. As a result,
the Bank has shifted its lending focus, placing more emphasis on consumer and
commercial loans. In the third quarter of 1996, the Bank effectively suspended
the use of mortgage brokers, focusing instead on its designated lending area for
residential mortgages. It is expected that future mortgage production will
decrease as a result.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total loans (millions) $110 $140 $164 $169 $205
</TABLE>
Consumer loan originations were $10.5 million or 19.4% of total loan
originations in 1996, compared with $4.7 million or 22.2% in 1995. Although the
relative level of originations is down from last year due to stronger growth in
the other loan categories, the actual origination volume of consumer loans
increased 122%, due primarily to a larger branch network and more focused
marketing efforts. The Bank opened two new in-supermarket branches in the second
quarter of 1995 and added another branch from Cicero in 1996. These three new
branches contributed significantly to consumer loan production in 1996,
accounting for approximately 41% of total originations. The Bank's marketing
strategy changed in 1996 from general media advertising to targeted mailings to
current and potential customers promoting specific products. In January 1997, a
marketing software package was purchased which allows the Bank to identify all
relationships with its customers on an individual or household level. This
software is expected to further enhance the effectiveness of the direct mail
marketing program.
To further increase consumer loan production, the Bank implemented an indirect
lending program in the third quarter of 1996, through which it receives consumer
loan applications from Bank-approved automobile and recreational vehicle
dealerships on behalf of their customers to finance their purchases. This
program is expected to be an integral part of the Bank's consumer loan
origination efforts in 1997 and beyond. These applications are subject to the
Bank's normal consumer loan underwriting criteria.
Commercial loan and mortgage originations were $13.3 million or 24.5% of total
loan originations in 1996, up from $4.0 or 18.6% in 1995. Compared with 1995,
total new commercial loan and mortgage volume increased 235%. The increase
<PAGE> 5
resulted largely from a strengthening of the Bank's business development
activities, including an active calling program, a new indirect leasing program
and a greater presence by the Bank in local trade and business shows.
Other Assets
- -------------
Other assets were $1.3 million at December 31, 1996, down 36.4% from December
31, 1995. The balance at December 31, 1995 included $1.1 million which was
reclassified from cash and due from banks, representing balances owed the Bank
by Nationar, which was in liquidation. During 1996, the Bank received 100% of
the amount owed. On July 1, 1996 the Bank recorded an intangible asset of
$494,000 representing goodwill relating to the Cicero transaction.
Deposits
- --------
Deposit growth was the primary source of funds for the Bank in 1996. Total
deposits, including escrow, were $205.0 million at December 31, 1996, an
increase of $25.9 million or 14.5% from the end of 1995. Excluding deposits
assumed from Cicero, deposits increased $6.9 million or 3.9% in 1996. The Bank
changed its strategy for deposit growth in 1996, placing more emphasis 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. In February
1996, the Bank developed seven new checking account products, each targeted to
specific demographic groups and supported by an active direct mail marketing
campaign. As a result, the Bank's total checking account balances increased $7.8
million or 33.4% in 1996, while its savings account balances were up $2.9
million or 8.9%. Both gains were exclusive of accounts assumed from Cicero. More
than 7,700 new checking accounts were opened in 1996 as a result of this
program, representing a 133% increase in the number of accounts compared with
the end of 1995. The direct mail marketing 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.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Deposits (millions) $151 $147 $169 $177 $203
</TABLE>
ASSET QUALITY
Nonperforming assets are comprised of nonaccrual loans and other real estate
owned. Management's policy is to place a loan on nonaccrual status with respect
to interest income recognition when collection of the interest is doubtful.
Generally, this occurs when principal or interest payments are ninety days or
more past due, although interest accruals may continue for certain loans that
are adequately secured. The classification of a loan as nonaccruing does not
necessarily indicate that the principal and interest ultimately will be
uncollectable. The Bank's historical experience suggests that a portion of
assets so classified will eventually be recovered. All nonperforming loans are
in various stages of workout, settlement or foreclosure.
Nonperforming assets totaled $3.9 million, or 1.6% of total assets at December
31, 1996, compared with $2.5 million, or 1.2% of total assets at December 31,
1995. Included in nonperforming assets at December 31, 1996 were nonaccrual
loans of $3.2 million or 1.5% of gross loans, compared with $2.1 million or 1.2%
at December 31, 1995. Nonaccrual loans acquired in the Cicero transaction
accounted for approximately 56% of the increase in 1996. Excluding the loans
acquired form Cicero, the Bank's nonperforming loans would have been $2.5
million or 1.3% of gross loans at December 31, 1996.
The allowance for loan losses was $2.1 million at December 31, 1996 compared
with $2.7 million at December 31, 1995. The Bank absorbed Cicero's allowance for
loan losses of $447,000 on July 1, 1996, which equaled 75% of Cicero's
nonperforming loans at the acquisition date. The ratio of the allowance to
nonperforming loans was 67% at December 31, 1996, compared with 125% at the end
of 1995. Loan loss provisions totaled $175,000 in 1996, compared with $235,000
in 1995. Charge-offs, net of recoveries, amounted to $1.3 million in 1996,
compared with $608,000 in 1995. The increase is attributable to the Bank
charging off $863,000 on one commercial loan. This loan was originated in 1988
and has been a collection problem for a number of years.
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
<PAGE> 6
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 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 department to audit for adherence to established Bank controls
and to review the quality and anticipated collectibility of the portfolio. The
loan review department reports 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.
Management believes the allowance for loan losses as of December 31, 1996 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.
ASSET/LIABILITY MANAGEMENT
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 .98 at December 31, 1996. The duration of
interest-bearing assets and liabilities was 2.19 years and 1.58 years,
respectively. These measurements indicate a slightly liability-sensitive
position.
<PAGE> 7
STOCKHOLDER'S EQUITY
At December 31, 1996, the Company's stockholders' equity totaled $16.2 million,
an increase of $1.3 million from $14.9 million at December 31, 1995. This
increase is the result of (i) net income of $1.5 million, (ii) proceeds of
$164,000 from issuance of stock under stock plans, (iii) cash dividends of
$264,000, and (iv) a $90,000 decrease in the fair value of securities, net of
taxes.
The Company's and Bank's leverage capital ratio was 6.46% at December 31, 1996
compared with 7.00% at December 31, 1995. Total capital to risk-adjusted assets
was 11.23% and 12.68%, respectively, at December 31, 1996 and 1995. The drop in
the capital ratios resulted from the Company's rate of asset growth exceeding
that of equity. Both capital measurements exceed the regulatory requirements of
5.00% and 10.00%, respectively, to be classified as a well-capitalized
institution.
LIQUIDITY AND CAPITAL RESOURCES
The purpose of liquidity management is to assure sufficient cash flow to meet
all of the Company's financial requirements and to be able to capitalize on
opportunities for increasing income. Liquidity is mainly provided by cash,
securities available for sale, principal and interest collections on loans and
mortgage-backed securities deposits and borrowing facilities from correspondent
banks. The Bank has overnight line of credit facilities with the Federal Home
Loan Bank of New York ("FHLB") totaling $21.1 million which can be used to meet
the Bank's daily cash needs. In addition, the Bank can borrow additional amounts
on a term basis from the FHLB.
The Company's liquidity position is monitored daily, and the Asset/Liability
Committee is responsible for setting general guidelines to ensure maintenance of
prudent levels of liquidity. At the end of 1996, the Bank's approved commitments
to extend credit amounted to $16.1 million. Further information on commitments
is in note (10) of Notes to Consolidated Financial Statements. The Company's
liquidity is considered adequate to meet all of its cash flow requirements.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income (thousands) $348 $803 $983 $1,052 $1,481
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
General
- -------
The Company's and Bank's earnings are largely dependent upon net interest
income, and are also affected by its provision for loan losses, other operating
income and expenses, and taxes.
Net income was $1,481,000 or $1.57 per share in 1996, compared with $1,052,000
or $1.13 per share in 1995. A $788,000 increase in net interest income and a
$529,000 increase in other operating income was partially offset by a $1.2
million increase in other expenses. Income taxes decreased $259,000.
Net Interest Income
- -------------------
Net interest income is affected by the difference between the yield earned on
interest earning assets and the rates paid on deposits and borrowings. The
relative amounts of interest earning assets, deposits, and borrowings also
impact net interest income levels.
Net interest income was $8.1 million in 1996, an increase of $788,000 or 10.8%
from 1995. Interest income increased $1.3 million or 8.1% in 1996 due to a $17.7
million increase in average interest earning assets, partially offset by a .06%
decrease in the yield on those assets. Loans acquired from Cicero, consisting
primarily of consumer and commercial loans, accounted for approximately $7.0
million of the increase in average balances. The rest of the increase in average
interest earning assets resulted from new loan originations during the year.
<PAGE> 8
Asset yields are generally down in 1996 due to a slightly lower interest rate
environment compared with 1995, as well as to competitive pressures in the
Bank's local lending area. Yields on other loans are heavily influenced by home
equity lines of credit and commercial loans which generally carry a variable
rate of interest tied to the Bank's prime rate. The rate on commercial loans
adjusts whenever the prime rate changes. Home equity adjustments take effect
between 15 and 45 days after a change in the prime rate. The Bank's prime rate,
which is directly impacted by movements in short term rates by the Federal
Reserve, averaged 8.27% in 1996, compared with 8.83% in 1995.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Margin 3.19% 3.60% 3.72% 3.69% 3.76%
</TABLE>
- -------------------------------------------------------------------------------
Analysis of Net Interest Income
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resulting average yields; (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost; (iii) net
interest income; (iv) interest rate spread; (v) net interest-earning assets;
(vi) net yield on interest-earning assets; and (vii) ratio of interest-earning
assets to interest-bearing liabilities. No tax equivalent adjustments were made.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $152,455 12,156 7.97% 141,802 11,252 7.94% 125,159 9,037 7.22%
Other loans 36,053 3,346 9.28% 27,702 2,816 10.17% 28,484 2,463 8.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 188,508 15,502 8.22% 169,504 14,068 8.30% 153,643 11,500 7.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities 22,166 1,461 6.59% 24,459 1,643 6.72% 22,824 1,411 6.18%
Federal funds sold 3,591 199 5.54% 2,619 160 6.11% 544 29 5.33%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 214,265 17,162 8.01% 196,582 15,871 8.07% 177,011 12,940 7.31%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets 12,998 0 10,176 0 6,163 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $227,263 17,162 206,758 15,871 183,174 12,940
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts $ 36,576 1,040 2.84% 33,133 937 2.83% 37,045 960 2.59%
Time certificates 104,023 5,908 5.68% 97,596 5,598 5.74% 70,395 3,405 4.84%
Money market accounts 21,919 730 3.33% 23,000 765 3.33% 27,652 770 2.79%
Now and escrow accounts 18,007 392 2.18% 14,575 329 2.26% 12,708 299 2.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 180,525 8,070 4.47% 168,304 7,629 4.53% 147,800 5,434 3.68%
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings 16,054 1,041 6.48% 14,618 979 6.70% 14,828 915 6.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 196,579 9,111 4.63% 182,922 8,608 4.71% 162,628 6,349 3.90%
Non-interest-bearing deposits 12,310 0 8,470 0 6,176 0
Non-interest-bearing liabilities 2,665 0 835 0 846 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 211,554 9,111 192,227 8,608 169,650 6,349
Stockholders' equity 15,709 0 14,531 0 13,524 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $227,263 9,111 206,758 8,608 183,174 6,349
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread 8,051 3.38% 7,263 3.36% 6,591 3.41%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net yield on interest-earning
assets $ 17,686 3.76% 13,660 3.69% 14,383 3.72%
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratio of interest-earning assets
to interest-bearing liabilities 1.09 1.07 1.09
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense increased $503,000 or 5.8% in 1996 due to a $13.7 million
increase in average interest-bearing liabilities partially offset by a .08%
decrease in the cost of funds. Deposits assumed from Cicero Bank accounted for
approximately $9.5 million of the increase in average interest-bearing deposits.
Of this amount, approximately $4.9 million were time accounts. The Bank's
deposit mix changed in 1996 as a function of the Bank's strategy to emphasize
and promote savings and checking accounts. While time deposits as a percentage
of total deposits (including escrow) increased from 44% in 1993 to 55% in 1995,
they dropped to 52% of total deposits in 1996. The corresponding increase in
lower costing transaction accounts (savings, demand and NOW accounts)
contributed to the decrease in the cost of funds, along with the effects of a
slightly lower interest rate environment in 1996.
Market interest rates alone do not dictate the rates the Company pays for its
funds, although they are an important factor. Other factors that impact the
Company's cost of funds include liquidity needs, the desired mix of deposits and
borrowings, local market competition and asset growth objectives.
The Company's net interest margin, which is computed by dividing net interest
income by average interest earning assets, increased to 3.76% in 1996, compared
with 3.69% in 1995.
Other Operating Income
- ----------------------
Other operating income includes gain or loss from sale of loans and securities,
and service charges and other income. other operating income in 1996 was $1.1
million, compared with $587,000 in 1995, an increase of $529,000 or 90.1%. Much
of the increase is attributable to higher service charges on deposits, which
increased $361,000 or 95.5% in 1996. This is a direct result of the growth in
the Company's savings and checking accounts.
Other Operating Expenses
- ------------------------
Other operating expenses were $7.4 million in 1996, compared with $6.2
million in 1995, an increase of $1.2 million or 19.4%.
Salaries and employee benefits expense was $3.2 million in 1996, compared with
$2.7 million in 1995, an increase of $545,000 or 20.2%. Salaries and benefits of
employees hired from Cicero accounted for approximately 35% of the increase,
with the remainder of the increase resulting primarily from salary adjustments
and incentive bonuses.
Correspondent bank fees were $250,000 in 1996, compared with $147,000 in 1995,
an increase of $103,000 or 70.1%. The increase resulted primarily from fees
associated with servicing the Company's larger deposit base.
Postage and delivery expense was $517,000 in 1996, compared with $181,000 in
1995, an increase of $336,000 or 185.6%. The cost of the Bank's direct mail
marketing program for its checking account products is the primary reason for
the increase. As was noted previously, this program contributed to significant
growth in the Company's lower costing checking and savings accounts, and to a
sharp increase in fee income.
Deposit insurance was $7,000 in 1996, compared with $197,000 in 1995, a decrease
of $190,000 or 96.4%. The Bank's cost of FDIC insurance dropped from $.04 per
$100 of insured deposits to the statutory minimum rate of $2,000 per year in
1996.
Real estate owned expense was $2,000 in 1996, compared with $273,000 in 1995, a
decrease of $271,000 or 99.3%. In 1995, the Company wrote down a number of
properties to their fair value less estimated selling costs. The types of
foreclosed properties owned by the Company in 1996 presented a significantly
lower risk of loss to the Company than in 1995.
Other expenses were $1.3 million in 1996, compared with $1.0 million in 1995, an
increase of $337,000 or 33.6%. One-time expenses in 1996 amounted to
approximately $127,000 or 37.7% of the increase in other expenses. Amortization
of goodwill from the Cicero transaction added approximately $29,000 of expense
in 1996. Other increases in this category were directly related to the growth in
the size of the Company in 1996.
<PAGE> 10
The Company's operating expense ratio to average assets was 3.26% in 1996,
compared with 3.00% in 1995. Management of the Company considers the containment
of operating expenses to be a high priority and has begun a review of all
expenses in an effort to reduce expenditures.
Income Taxes
- ------------
Statement of Financial Accounting Standards No. 109 was adopted by the Company
in 1992. The statement requires that a valuation allowance be provided when it
is more likely than not that some portion of deferred tax assets will not be
realized. The Company recognized no immediate financial statement effect from
adopting Statement No. 109 because a valuation allowance was provided on the
deferred tax asset. The Company generated sufficient earnings in 1996 to
eliminate the December 31, 1995 valuation allowance of $572,000, which
contributed to an effective rate lower than the expected statutory Federal and
State combined rates of 40%. The Company recorded income tax expense of $93,000
in 1996, compared with $352,000 in 1995.
Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
General
- -------
Net income was $1,052,000 or $1.13 per share in 1995, compared with $983,000 or
$1.06 per share in 1994. A $672,000 increase in net interest income and a
$125,000 decrease in provision for loan losses was partially offset by a
$631,000 increase in other expenses. Income taxes increased $175,000.
Net Interest Income
- -------------------
Net interest income was $7.3 million in 1995, an increase of $672,000 or 10.2%
from $6.6 million in 1994. Interest income increased $2.9 million or 22.7% in
1995 due to a $19.6 million increase in average interest earning assets and a
.76% increase in the yield on those assets. Residential mortgages accounted for
much of the growth in earning assets during 1995. Yields were up for all
categories of interest earning assets in 1995, due to the higher level of
interest rates that resulted from a series of rate hikes during 1994 and early
1995 by the Federal Reserve (the "Fed"). The yield on mortgage loans increased
.72% in 1995, and the yield on other loans increased 1.52%. The Bank's prime
rate averaged 8.83% in 1995, compared with 7.04% in 1994.
Interest expense increased $2.3 million or 35.6% in 1995 due to a $20.2 million
increase in average interest-bearing liabilities and a .81% increase in the cost
of funds. Average interest-bearing deposits increased $20.5 million or 13.9% due
in large part to the assumption of $16.1 million of interest-bearing deposits
acquired from First National Bank of Rochester in December 1994. The Company's
cost of funds trended downward beginning in the latter part of 1995 and
continuing into 1996 due in large part to the lower interest rate environment
compared with most of 1995.
The Company's net interest margin was 3.69% in 1995, compared with 3.72% in
1994.
Provision for loan losses
- -------------------------
The provision for loan losses was $235,000 in 1995, compared with $360,000 in
1994. The lower provision is the result of an improvement in the credit quality
of the Company's loan portfolio, as discussed previously.
Other Operating Income
- ----------------------
Other operating income in 1995 was $587,000, compared with $509,000 in 1994, an
increase of $78,000 or 15.3%. Excluding security transactions, operating income
increased $184,000 or 36.7%.
Net loss on securities transactions was $99,000 in 1995, compared with a $7,000
gain in 1994. The loss in 1995 is due entirely to the write off of the Bank's
investment in Nationar.
Service charges increased $151,000 or 66.5% in 1995 due primarily to the
increase in the Company's deposit base in 1995.
<PAGE> 11
Other Operating Expenses
- ------------------------
Other operating expenses were $6.2 million in 1995, compared with $5.6 million
in 1994, an increase of $631,000 or 11.3%.
Salaries and employee benefits expense was $2.7 million in 1995, compared with
$2.3 million in 1994, an increase of $416,000 or 18.2%. The increase is directly
attributable to the addition of four new branch offices between November 1994
and April 1995, as well as normal merit increases.
Building, occupancy and equipment expense was $1.0 million in 1995, compared
with $715,000 in 1994, an increase of $376,000 or 52.6%. Rent expense and
depreciation increased by a total of $319,000 in 1995 due to the addition of
four new branches and to a full year of depreciation on computer hardware and
communications systems purchased in 1994.
Deposit insurance was $197,000 in 1995, compared with $391,000 in 1994, a
decrease of $194,000 or 49.6%. The Bank's cost of FDIC insurance dropped from
$.23 per $100 of insured deposits to $.04 per $100 in the fourth quarter of
1995. The rate reduction was retroactive to June 1, 1995, the date the Bank
Insurance Fund reached the congressionally mandated capitalization level.
Other expenses were $1.4 million in 1995, compared with $1.2 million in 1994, an
increase of $186,000 or 15.5%. All increases in this category were directly
related to the growth in the size of the Company in 1995.
The Company's operating expense ratio to average assets was 3.0% in 1995, down
from 3.05% in 1994.
Income Taxes
- -------------
A $464,000 reduction in the valuation allowance for deferred tax assets in 1995
contributed to an effective rate lower than the expected statutory Federal and
state combined rates of 40%.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements presented in the Annual Report have been
prepared in accordance with generally accepted accounting principles.
Measurement of financial position and operating results have been made in terms
of historical dollars. Changes in the relative purchasing power of money due to
inflation are not reflected.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature, thus banks are more affected by changes in interest rates
than by inflation. Interest rates do not necessarily reflect the direction or
magnitude of changes in the price of goods and services which are primarily
affected by inflation. In the current interest rate environment, liquidity and
the maturity structure of the Company's assets and liabilities are of major
importance in maintaining acceptable levels of performance.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 122,
Accounting for Mortgage Servicing Rights, as of January 1, 1996 on a prospective
basis. SFAS No. 122 requires the Company to recognize as separate assets rights
to service mortgage loans for others, however those servicing rights are
acquired, and also requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights. The adoption of
SFAS No. 122 did not have a material impact on the Company's financial condition
or results of operations because its level of sales of mortgages where servicing
is retained is not significant.
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation by electing to continue accounting for stock options under the
provisions of Accounting Principles Board Opinion No. 25 and provide pro forma
net income and earnings per share disclosures.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is
<PAGE> 12
based on consistent application of a "financial components approach" that
focuses on control. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. In December 1996, FASB deferred for one year the
effective date of SFAS No. 125 as it relates to transfers of financial assets
and secured borrowings and collateral. Management does not believe that the
adoption of SFAS No. 125 will have a material impact on its financial condition
or results of operations.
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of Center Banks Incorporated is responsible for the accuracy and
content of the financial information in this Annual Report. In order to meet
this responsibility, the consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis.
The accounting systems which record, summarize and report financial data are
supported by a system of internal controls, augmented by written policies,
internal audits and an organizational structure which provides for an effective
division of responsibilities. The system is also designed to provide reasonable
assurance that transactions are executed in accordance with management's
authorizations, and that assets are safeguarded from significant loss or
unauthorized use.
The Examining Committee of the Board of Directors reviews the activities of the
internal audit function and meets regularly with representatives of KPMG Peat
Marwick LLP, independent auditors. KPMG Peat Marwick LLP has been appointed,
upon recommendation of the Board of Directors, to conduct an independent audit
and to express an opinion as to the fairness of the presentation of the
consolidated financial statements of Center Banks Incorporated, in conformance
with generally accepted accounting principles.
Item 8. Financial Statements And Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Center Banks Incorporated:
We have audited the accompanying consolidated balance sheets of Center Banks
Incorporated and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. 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 Center Banks
Incorporated and subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/S/ KPMG PEAT MARWICK LLP
Syracuse, New York
January 10, 1997
<PAGE> 13
<TABLE>
<CAPTION>
CENTER BANKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
- -------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
Cash and due from banks $ 5,726 5,889
Federal funds sold 3,800 3,400
Securities available for sale, at fair value 6,009 8,653
Securities held to maturity, fair value of
$11,138 in 1996 and $13,117 in 1995 10,893 12,804
Federal Home Loan Bank stock, at cost 1,410 1,303
Mortgage loans receivable 161,379 143,677
Other loans receivable 45,266 27,888
- -------------------------------------------------------------------------------
206,645 171,565
Net deferred costs 299 69
Allowance for loan losses (2,114) (2,667)
- -------------------------------------------------------------------------------
Loans receivable, net 204,830 168,967
Premises and equipment, net 6,195 5,885
Real estate owned, net 717 397
Accrued interest receivable 1,271 1,255
Other assets 1,331 2,094
- -------------------------------------------------------------------------------
$ 242,182 210,647
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 188,424 167,182
Demand deposits 14,861 9,927
- -------------------------------------------------------------------------------
Total deposits 203,285 177,109
Advance payments by borrowers
for property taxes and insurance 1,744 2,010
Borrowings 18,181 14,386
Other liabilities 2,742 2,203
- -------------------------------------------------------------------------------
Total liabilities 225,952 195,708
- -------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01
per share, authorized
500,000 shares, none issued 0 0
Common stock, par value $.01 per share,
authorized 2,500,000 shares, 948,092
and 1,033,619 shares issued in 1996 and
1995, respectively 9 10
Additional paid-in capital 8,978 9,526
Retained earnings 7,300 6,083
Net unrealized gain (loss) on securities,
net of taxes (57) 33
Treasury stock, at cost (102,700 shares in 1995) 0 (713)
- -------------------------------------------------------------------------------
Total stockholders' equity 16,230 14,939
- -------------------------------------------------------------------------------
$242,182 210,647
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------
(In Thousands, Except Share Data)
Interest income:
<S> <C> <C> <C>
Mortgage loans $ 12,156 11,252 9,037
Other loans 3,346 2,816 2,463
Securities 1,461 1,643 1,411
Federal funds sold 199 160 29
- ----------------------------------------------------------------------------------
Total interest income 17,162 15,871 12,940
- ----------------------------------------------------------------------------------
Interest expense:
Deposits 8,070 7,629 5,434
Borrowings 1,041 979 915
- ----------------------------------------------------------------------------------
Total interest expense 9,111 8,608 6,349
- ----------------------------------------------------------------------------------
Net interest income 8,051 7,263 6,591
Provision for loan losses 175 235 360
- ----------------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,876 7,028 6,231
- ----------------------------------------------------------------------------------
Other operating income:
Net gain (loss) on security transactions 77 (99) 7
Net gain (loss) on sale of loans 34 14 (8)
Service charges 739 378 227
Other 266 294 283
- ----------------------------------------------------------------------------------
Total other operating income 1,116 587 509
- ----------------------------------------------------------------------------------
8,992 7,615 6,740
- ----------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 3,247 2,702 2,286
Building, occupancy and equipment 1,205 1,091 715
Data processing 372 292 318
Correspondent bank fees 250 147 155
Advertising and promotions 262 152 151
Postage and delivery 517 181 135
Stationary and supplies 216 174 137
Deposit insurance 7 197 391
Real estate owned, net 2 273 324
Other 1,340 1,002 968
- ----------------------------------------------------------------------------------
Total other operating expenses 7,418 6,211 5,580
- ----------------------------------------------------------------------------------
Income before income tax expense 1,574 1,404 1,160
Income tax expense 93 352 177
- ----------------------------------------------------------------------------------
Net income $ 1,481 1,052 983
- ----------------------------------------------------------------------------------
Net income per common share $ 1.57 1.13 1.06
- ----------------------------------------------------------------------------------
Weighted average shares outstanding 942,074 927,633 925,092
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
Net
unrealized
Additional holding gain
Common paid-in- Retained (loss) on Treasury Loan to
stock capital earnings securities stock ESOP Total
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share and per Share Data)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 10 9,468 4,335 215 (713) (29) 13,286
Net income 0 0 983 0 0 0 983
ESOP loan payment 0 0 0 0 0 29 29
Sale of 1,075 shares under option 0 7 0 0 0 0 7
Cash dividend declared on
Common stock ($.12 per share) 0 0 (112) 0 0 0 (112)
Change in net unrealized holding gain
on securities available for sale, net of
tax effect of $303 0 0 0 (402) 0 0 (402)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 10 9,475 5,206 (187) (713) 0 13,791
- --------------------------------------------------------------------------------------------------------------------------
Net income 0 0 1,052 0 0 0 1,052
Sale of 3,860 shares under option 0 32 0 0 0 0 32
Issuance of 1,315 shares of stock
under 1995 Non-employee Director's
Stock Plan 0 19 0 0 0 0 19
Cash dividend declared on
Common stock ($.19 per share) 0 0 (175) 0 0 0 (175)
Change in net unrealized holding
gain on securities, net of
tax effect of $163 0 0 0 220 0 0 220
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 10 9,526 6,083 33 (713) 0 14,939
- --------------------------------------------------------------------------------------------------------------------------
Net income 0 0 1,481 0 0 0 1,481
Sale of 13,850 shares under option 0 117 0 0 0 0 117
Issuance of 3,323 shares of stock
under 1995 Non-employee Director's
Stock Plan 0 47 0 0 0 0 47
Cash dividend declared on
Common stock ($.28 per share) 0 0 (264) 0 0 0 (264)
Retirement of 102,700 shares of
treasury stock (1) (712) 0 0 713 0 0
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Change in net unrealized holding
gain on securities, net of
tax effect of $60 0 0 0 (90) 0 0 (90)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 9 $ 8,978 7,300 (57) 0 0 16,230
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net Income $ 1,481 1,052 983
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 175 235 360
Provision for losses on real estate owned 0 240 185
Depreciation and amortization 628 557 383
Mortgage loans originated for sale (4,454) (2,565) (2,764)
Proceeds from sale of mortgage loans originated for sale 4,861 2,060 2,989
Net (gain) loss on security transactions (77) 99 (7)
Net increase in interest receivable (16) (94) (204)
Net increase (decrease) in other liabilities 549 (1,253) 1,426
Receipt of balance due from Nationar 1,057 0 0
Other, net (105) (607) (196)
- ------------------------------------------------------------------------------------------------------------------
Total adjustments 2,618 (1,328) 2,172
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,099 (276) 3,155
Investing activities
Proceeds from maturities of securities available for sale 3,004 6,020 1,030
Proceeds from sale of securities available for sale 2,462 0 3,053
Proceeds from maturities of securities held to maturity 6,175 4,526 831
Purchase of securities held to maturity (5,135) (7,981) (1,960)
Purchase of securities available for sale (3,096) (2,978) (3,538)
Principal collected on asset-backed securities 1,110 1,244 2,240
Purchase of Federal Home Loan Bank stock (107) (103) (191)
Net increase in loans made to customers (22,698) (5,017) (24,195)
Net cash received from acquired bank 4,024 0 0
Proceeds from sale of real estate owned 196 714 495
Purchase of property and equipment, net (298) (829) (1,251)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,363) (4,404) (23,486)
Financing activities
Net cash received for deposits of acquired branch 0 0 16,434
Net increase (decrease) in time certificates (1,913) 13,565 8,711
Net increase (decrease) in other deposits 8,719 (5,142) (3,622)
Increase in overnight borrowings 865 422 129
Increase in long-term borrowings 4,000 1,000 10,000
Repayment of long-term borrowings (1,070) (1,020) (7,265)
Proceeds from issuance of stock pursuant to stock plans 164 51 7
Dividends paid (264) (175) (112)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,501 8,701 24,282
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 237 4,021 3,951
Reclassification of balance due from Nationar to other assets 0 (1,057) 0
Cash and cash equivalents at beginning of period 9,289 6,325 2,374
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,526 9,289 6,325
- ------------------------------------------------------------------------------------------------------------------
Interest paid $ 9,116 8,607 6,315
- ------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 92 269 468
- ------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing activities:
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Transfer of securities from available for sale to held to maturity $ 0 8,334 0
Transfer of securities from held to maturity to available for sale 0 2,471 0
Mortgage loans foreclosed and transferred to real estate owned 515 358 131
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
Business
Center Banks Incorporated (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956. The results of the Company are
largely dependent upon the results of Skaneateles Savings Bank (the "Bank"), its
sole subsidiary. Skaneateles Savings Bank is a full service retail bank.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain prior year amounts have been
reclassified to conform to current year classifications. A description of the
significant accounting policies is presented below. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany balances and transactions are eliminated
in consolidation.
(b) Securities
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.
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. Interest income is
recognized when earned. Purchases and sales are recorded on a trade date basis
with settlement occurring shortly thereafter. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
(c) Loans Receivable
Loans receivable are reported at the principal amount outstanding, net of
deferred fees and costs and an allowance for loan losses. Accrual of interest on
a loan, including impaired loans, is discontinued 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
<PAGE> 18
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.
Net loan fees and costs are capitalized as an adjustment of loan principal and
amortized over the life of the related loan as an adjustment of yield using the
interest method.
The Bank originates some mortgage loans with the intent to sell. These loans are
carried at the lower of aggregate cost or fair value. Gains or losses on sales
of mortgages are recorded equal to the difference between sales proceeds and the
carrying value of the loans. The Bank typically retains the servicing rights to
mortgages sold.
(d) Allowance for Loan Losses
The allowance for loan losses consists of the provision charged to operations
based upon past loan loss experience, management's evaluation of the loan
portfolio under current economic conditions and such other factors that require
current recognition in estimating loan losses. Loan losses and recoveries of
loans previously written-off are charged or credited to the allowance as
incurred or realized, respectively.
Management believes that the allowance for loan losses is adequate. Management
uses presently available information to recognize losses on loans; however,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses and may require the Company to recognize additions to the allowance based
on their judgment of information available to them at the time of their
examination.
The Company 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 Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Generally,
all commercial mortgage loans and commercial loans in a delinquent payment
status (90 days or more delinquent) are considered impaired. Residential
mortgage loans, consumer loans, home equity lines of credit and education loans
are evaluated collectively since they are homogenous and generally carry smaller
individual balances. Impairment losses are included as a component of the
allowance for loan losses. Troubled debt restructurings involving a modification
of terms are recorded at fair value as of the date of the transaction. 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 the related factors discussed above.
(e) Premises and Equipment
Land is carried at cost and buildings and improvements, furniture and equipment,
and leasehold improvements are carried at cost less allowances for depreciation
and amortization. Depreciation and amortization are provided over the estimated
service lives of the respective assets or lease terms on the straight-line
method.
(f) Real Estate Owned
Real estate acquired in settlement of loans is carried at the lower of the
impaired loan balance at the date of acquisition or fair value of the property
received. Write-downs from cost to fair value which are required at the time of
foreclosure are charged to the allowance for loan losses. Subsequent write-downs
to fair value, net of disposal costs, are charged to other operating expenses.
(g) Other Assets
On July 1, 1996, the Bank acquired substantially all the assets and assumed the
deposit liabilities of Cicero Bank. The fair value of total assets acquired was
$19.1 million, consisting of loans ($14.0 million), cash ($4.0 million) and
other assets ($1.1 million). Total deposit liabilities assumed were $19.1
million. The excess of the purchase price over the fair value of assets acquired
("goodwill") amounted to $494,000 and is included in other assets. Goodwill is
being amortized over the expected useful life of seven years on a straight line
basis. The amortization periods will be monitored to determine if events and
circumstances require the estimated useful lives to be reduced. Periodically,
the Company reviews the goodwill for events or changes in circumstances that may
indicate the carrying amount of the goodwill is impaired.
<PAGE> 19
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. 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.
(i) Per Common Share Data
Per common share data is computed based upon the weighted average number of
shares outstanding. Common stock equivalents are not included since dilution is
less than 3%.
(j) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
amounts due from banks and federal funds sold.
(k) Stock-Based Compensation
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.
(l) Off-Balance Sheet Instruments
The Company entered into an interest rate floor in 1996 as part of its interest
rate risk management strategy. Interest rate floors are used to hedge exposure
to falling interest rates and are accounted for using the accrual method. Fees
related to interest rate floors are amortized using the interest method over the
life of the floor. Income and expense are recorded in the same category as that
of the related balance sheet item.
(2) Securities
Securities available for sale at December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $4,996 31 0 5,027
Asset-backed securities 989 0 (7) 982
- -------------------------------------------------------------------------------------------------------
$5,985 31 (7) 6,009
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $5,980 126 0 6,106
Mortgage-backed securities-FHLMC 2,471 77 (1) 2,547
- ---------------------------------------------------------------------------------------------------------------------------
$8,451 203 (1) 8,653
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities held to maturity at December 31 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $4,992 15 0 5,007
Mortgage-backed securities:
FNMA 145 3 0 148
FHLMC 3,674 175 0 3,849
Obligations of states and political subdivisions 1,782 53 (2) 1,833
Corporate bonds, notes and debentures 300 1 0 301
- ---------------------------------------------------------------------------------------------------------------------------
$10,893 247 (2) 11,138
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $6,026 51 0 6,077
Mortgage-backed securities:
FNMA 170 4 0 174
FHLMC 4,493 192 0 4,685
Obligations of states and political subdivisions 1,714 66 (3) 1,777
Corporate bonds, notes and debentures 401 3 0 404
- ---------------------------------------------------------------------------------------------------------------------------
$12,804 316 (3) 13,117
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On January 1, 1995 the Company reclassified its entire portfolio of
mortgage-backed securities from available-for-sale to held-to-maturity, at the
securities' fair value of $8.3 million. The $234,000 unrealized loss on the
securities was maintained and is being amortized into earnings over the
remaining life of the securities as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated securities.
In November 1995, the Financial Accounting Standards Board (FASB) published "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" (Guide). Concurrent with the initial adoption of
the Guide, but no later than December 31, 1995, the Company was permitted to
reassess the appropriateness of the classifications of all securities held at
the time and implement reclassifications without calling into question the
Company's intent to hold other debt securities to maturity in the future.
Effective November 1995, the Company transferred securities with an amortized
cost of $2,471,000, having fair values of $2,517,000 from the held-to-maturity
portfolio to the available-
<PAGE> 21
for-sale category. The $46,000 net unrealized gain on the securities was
excluded from earnings and recorded in the separate component of stockholders'
equity, net of related taxes, at the time of transfer. As required by the Guide,
financial statements prior to adoption were not restated.
Gross realized gains on the sale of securities were approximately $77,000 and
$7,000 in 1996 and 1994, respectively. Losses of $99,000 were recognized in 1995
due to other than temporary impairment of the Bank's equity investment in
Nationar.
The contractual maturity distribution of securities at December 31, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
Within One to Five to After ten
one year five years ten years years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and Federal agency obligations $2,988 2,008 0 0 4,996
Asset-backed securities 0 0 989 0 989
- -------------------------------------------------------------------------------------------------------------
$2,988 2,008 989 0 5,985
- -------------------------------------------------------------------------------------------------------------
Fair value $3,004 2,023 982 0 6,009
- -------------------------------------------------------------------------------------------------------------
Weighted average yield of securities 6.60% 6.51% 6.20% 0 6.51%
- -------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. government and Federal agency obligations $998 3,994 0 0 4,992
Mortgage-backed securities:
FNMA 0 0 0 145 145
FHLMC 0 0 311 3,363 3,674
Obligations of states and political subdivisions 75 25 433 1,249 1,782
Corporate bonds, notes and debentures 100 100 100 0 300
- -------------------------------------------------------------------------------------------------------------
$1,173 4,119 844 4,757 10,893
- -------------------------------------------------------------------------------------------------------------
Fair value $1,174 4,135 891 4,938 11,138
- -------------------------------------------------------------------------------------------------------------
Weighted average yield of securities 5.77% 6.25% 7.62% 7.19% 6.71%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Securities carried at $6,838,000 at December 31, 1996 were pledged for
borrowings and other purposes required by law.
Accrued interest receivable on securities was $191,000 and $262,000 at December
31, 1996 and 1995, respectively.
(3) Loans Receivable, Net
Major categories of loans receivable at December 31, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Residential $129,651 116,320
Commercial 31,728 27,357
- ------------------------------------------------------------------------------
161,379 143,677
- ------------------------------------------------------------------------------
Other loans:
Business 18,861 10,631
Guaranteed student 882 858
Home equity and improvement 17,599 14,578
Other consumer 7,924 1,821
- ------------------------------------------------------------------------------
45,266 27,888
- ------------------------------------------------------------------------------
206,645 171,565
Net deferred costs 299 69
Allowance for loan losses (2,114) (2,667)
- ------------------------------------------------------------------------------
$204,830 168,967
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
Changes in the allowance for loan losses for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $2,667 3,040 2,938
Provision charged to operations 175 235 360
Recoveries 126 124 108
Loans charged off (1,301) (732) (366)
Allowance of acquired bank 447 0 0
- -------------------------------------------------------------------------------------
Balance at December 31 $2,114 2,667 3,040
- -------------------------------------------------------------------------------------
</TABLE>
The principal balances of loans not accruing interest amounted to approximately
$3,171,000 and $2,138,000 at December 31, 1996 and 1995, respectively. The
effect of non-accrual loans on interest income for 1996, 1995 and 1994 was
approximately $283,000, $155,000 and $172,000, respectively.
Impaired loans, which included troubled debt restructured loans, were $1,929,000
and $4,004,000 at December 31, 1996 and 1995, respectively. Included in these
amounts are $832,000 and $2,688,000 of impaired loans for which the related
allowance for loan losses is $216,000 and $884,000, respectively. In addition,
included in the total impaired loans at December 31, 1996 and 1995 are
$1,097,000 and $1,316,000 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 1996 and 1995 was
approximately $2,923,000 and $3,859,000, respectively. The amount of interest
income recognized on impaired loans in 1996 and 1995 was approximately $166,000
and $281,000, respectively. The Bank is not committed to lend additional funds
to these borrowers.
Accrued interest receivable on loans was $1,080,000 and $993,000 at December 31,
1996 and 1995, respectively.
The Bank serviced loans for others aggregating approximately $23,820,000,
$21,796,000 and $20,848,000 at December 31, 1996, 1995 and 1994, respectively.
From time to time, the Bank entered into loan transactions with the Company's
directors and officers (related parties). Such transactions were made on
substantially the same terms as those prevailing at the same time for comparable
loans to other customers, and did not, in the opinion of management, involve
more than normal credit risk or present other unfavorable features. An analysis
of related party loan activity follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $1,123 1,217
Increases 117 3
Decreases (68) (97)
- --------------------------------------------------------------------------------
Balance at December 31 $1,172 1,123
- --------------------------------------------------------------------------------
</TABLE>
(4) Premises and Equipment
A summary of premises and equipment at December 31 is as follows (in thousands):
<PAGE> 23
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 532 432
Buildings and improvements 5,144 4,611
Furniture and equipment 3,153 2,902
Leasehold improvements 1,602 1,592
- --------------------------------------------------------------------------------
10,431 9,537
Less accumulated depreciation and amortization 4,236 3,652
- --------------------------------------------------------------------------------
$ 6,195 5,885
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment included in building,
occupancy and equipment expense amounted to $584,000, $557,000 and $383,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
(5) Deposits
Deposits at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Savings and club accounts $ 38,690 33,016
Time certificates 107,429 99,474
Money market accounts 21,991 21,448
NOW accounts 20,314 13,244
Demand accounts 14,861 9,927
- --------------------------------------------------------------------------------
$203,285 177,109
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, the aggregate amounts of time deposits in
denominations of $100,000 or more were approximately $13,065,000 and $9,074,000,
respectively.
The following table presents the amount of certificate accounts at December 31,
1996 which mature during the periods indicated (in thousands):
<TABLE>
<CAPTION>
Maturing
- ------------------------------------------------------------------------------------------------
Within After
One Year Two Years Three Years Four Years Five Years Five Years Total
- ------------ -------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 68,254 11,803 8,531 10,203 3,333 5,305 107,429
- ------------ -------------- ------------- ------------- ------------- ------------- --------------
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings and club accounts $1,040 937 960
Time certificates 5,908 5,598 3,405
Money market accounts 730 765 770
NOW and escrow accounts 392 329 299
- --------------------------------------------------------------------------------
$8,070 7,629 5,434
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 24
(6) Borrowings
Borrowings at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements $2,516 4.48% 1,651 4.47%
Advances from the FHLB of New York, 0 0 1,000 7.13
due 1997 2,000 6.15-7.79 2,000 6.15-7.79
due 1998 7,000 5.45-6.15 6,000 5.45-5.60
due 1999 3,000 6.63 0 0
due 2002 2,000 10.51 2,000 10.51
Municipal securities sold with put options 1,665 6.32 1,735 6.48
- ------------------------------------------------------------------------------------------
$18,181 14,386
- ------------------------------------------------------------------------------------------
</TABLE>
The Bank enters into repurchase agreements with commercial demand deposit
customers under which balances greater than $25,000 earn interest at a rate of
90% of the weekly average auction yield of the 90 day U.S. Treasury Bill. These
transactions are recorded as borrowings. At December 31, 1996, the Bank pledged
U.S. Treasury Notes totaling $3,983,000 as collateral for the repurchase
agreements.
At December 31, 1996, Federal Home Loan Bank of New York (the "FHLB") advances
are collateralized by the investment in stock of the FHLB of $1,410,000 and
residential mortgage loans with a carrying value approximating $15,950,000.
These advances carry fixed rates of interest.
In 1985, the Bank sold certain municipal securities to a Municipal Investment
Trust Fund which have a par value at December 31, 1996 of $1,665,000. The trust
has put options which require the Bank to repurchase the securities at par value
on annual repurchase dates and on fourteen days' notice if any debt obligation
is deemed to be taxable or in default. The put options are collateralized by
approximately $1,846,000 of municipal and corporate bonds and U.S. Treasury
Notes of approximately $988,000. This transaction has been recorded as a
borrowing. The borrowing is reduced with proceeds from the maturity or call of
the municipal securities, which have maturity dates ranging from November 1998
to November 2017.
The Bank maintains two lines of credit with the FHLB of New York. Borrowings
under the lines bear interest at .125% above the federal funds rate. The total
amount available under the lines was $21,064,000 at December 31, 1996. The
amount of each line is equal to 5% of the Bank's total assets and is set each
year at March 31, the renewal date of the lines.
(7) Income Taxes
Total income taxes for the year ended December 31 were allocated as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $ 93 352 177
Stockholders' equity, for change in unrealized
gain (loss) on securities (60) 163 (303)
- --------------------------------------------------------------------------------
$ 33 515 (126)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 25
Actual income taxes applicable to operations differ from expected taxes,
computed by applying the Federal corporate tax rate of 34% to income before
income taxes as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense $ 535 477 394
Non-deductible expenses 0 101 0
State income taxes, net of Federal benefit 42 99 8
Change in valuation allowance for deferred tax assets (572) (464) (277)
Other 88 139 52
- -------------------------------------------------------------------------------------
Income tax expense $ 93 352 177
- -------------------------------------------------------------------------------------
</TABLE>
The components of income tax expense (benefit) applicable to operations are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 72 406 233
State 14 150 12
- -----------------------------------------------------------------------------------------------------
86 556 245
- -----------------------------------------------------------------------------------------------------
Deferred:
Federal 179 (204) (68)
State (172) 0 0
- -----------------------------------------------------------------------------------------------------
7 (204) (68)
- -----------------------------------------------------------------------------------------------------
$ 93 352 177
- -----------------------------------------------------------------------------------------------------
Deferred tax expense (exclusive of the change in valuation allowance) $ 579 260 209
Change in valuation allowance (572) (464) (277)
- -----------------------------------------------------------------------------------------------------
$ 7 (204) (68)
- -----------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are
presented below (in thousands).
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $844 1,065
Unrealized loss on securities available for sale 38 0
Alternative minimum tax credit carryforwards 143 137
Unrealized gain on securities available for sale for tax purposes 10 105
Other 144 90
- ------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,179 1,397
Less valuation allowance 0 (572)
- ------------------------------------------------------------------------------------------
Net deferred tax assets 1,179 825
- ------------------------------------------------------------------------------------------
Deferred tax liabilities:
Increase in tax bad debt reserve over base year 380 146
Unrealized gain on securities available for sale 0 22
Accumulated depreciation 162 117
Other 176 132
- ------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 718 417
- ------------------------------------------------------------------------------------------
Net deferred tax asset $461 408
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
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 and the level of historical taxable
income. The Company generated sufficient earnings in 1996 to fully recognize the
deferred tax assets.
The Company has an alternative minimum tax credit carryforward of approximately
$143,000 at December 31, 1996, which may be carried forward indefinitely.
Additionally, the Company has a New York State mortgage tax credit carryforward
of approximately $122,000 which is available to reduce future state income
taxes.
Included in retained earnings at December 31, 1996 is approximately $987,000
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 stock, or the failure of the institution to qualify as a
bank for Federal income tax purposes, would result in taxable income. However,
it is not contemplated that the reserves will be used in a manner that will
create tax liabilities.
(8) Stockholders' Equity and Regulatory Matters
The Company's principal source of funds to pay dividends on the Company's common
stock is dividends received from the Bank. In any calendar year, approval of the
Superintendent of Banks of the State of New York is required prior to the Bank
declaring dividends in an amount in excess of net income for that year plus net
income retained in the preceding two years. Under the regulations, the Bank has
approximately $3,078,000 available for payment of dividends to the Company at
December 31, 1996.
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1996, the Bank was required to
maintain a minimum leverage ratio of Tier I capital to average assets of 4%, and
minimum ratios of Tier I capital and total capital to risk weighted assets of 4%
and 8%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on an institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well-capitalized, adequately-capitalized, under-capitalized,
significantly under-capitalized and critically under-capitalized. Generally, an
institution is considered well-capitalized if it has a Tier I (core) capital
ratio of at least 5% (based on average assets), a Tier I risk based capital
ratio of at least 6%, and a total risk based capital ratio of at least10%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
weighting and other factors.
Management believes that as of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent FDIC
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since the notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, compared with the FDIC minimum capital adequacy requirements and
the FDIC requirements for classification as a well-capitalized institution:
<PAGE> 27
<TABLE>
<CAPTION>
For Classification
Actual Minimum Adequacy As Well-Capitalized
----------------------------- ----------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------- ----------------------------- ------------------------
1996
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier I) Capital $15,610 6.46% 9,664 4.00% 12,080 5.00%
Risk-based Capital:
Tier I 15,610 9.98% 6,257 4.00% 9,386 6.00%
Total 17,574 11.23% 12,514 8.00% 15,643 10.00%
1995
- ------------------------
Leverage (Tier I) Capital 14,725 7.00% 8,413 4.00% 10,516 5.00%
Risk-based Capital:
Tier I 14,725 11.41% 5,160 4.00% 7,740 6.00%
Total 16,338 12.68% 10,321 8.00% 12,901 10.00%
</TABLE>
The Company's capital amounts and ratios as of December 31, 1996 and 1995 were
not materially different than those of the Bank.
(9) Employee Benefits and Stock Plans
The Company adopted a Stock Option Plan which was approved by the stockholders
in 1987 (the "1987 Plan"). Under the 1987 Plan, 51,177 shares of authorized but
unissued common stock were reserved for the granting of options to officers and
key employees. Options are granted at the market price of shares at the date of
grant, adjusted when applicable for the effect of stock dividends, become
exercisable 20% per year after the date of grant and must be exercised within 10
years of the date of grant. This plan expired in May 1996.
To supplement the 1987 Plan, the Company adopted an additional Stock Option Plan
which was approved by the shareholders in 1991 (the "1991 Plan"). Under the 1991
Plan, 46,233 shares of authorized but unissued common stock were reserved for
future issuance. The terms, conditions, and provisions of the 1991 Plan are
substantially the same as those of the 1987 Plan described above, except that
the vesting of options is determined by the Company's board of directors at the
time of grant. At December 31, 1996, there were 19,108 options available for
grant.
The fair value of the stock options granted was arrived at using the Black
Scholes option-pricing model. The results and the assumptions used for the
options granted during 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------
<S> <C> <C>
Weighted-average fair value $ 3.57 4.42
Expected dividend yield 2.55% 1.40%
Risk free interest rate 6.10% 5.38%
Expected life (years) 5 5
Volatility ratio 25.42% 26.37%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans, and
accordingly, no compensation cost has been recognized for stock options in the
accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value of its stock options at the grant date
under SFAS 123, the Company's net income and earnings per share would have been
reduced to pro forma amounts indicated below:
<PAGE> 28
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------
<S> <C> <C>
Net income:
As reported $ 1,481 1,052
Pro forma 1,431 1,035
Earnings per share:
As reported $ 1.57 1.13
Pro forma 1.52 1.12
</TABLE>
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is reflected in the pro forma net income amounts because options are
generally granted based upon past service.
Stock options activity during the periods indicated is summarized as follows:
<TABLE>
<CAPTION>
Number of
Shares Under Wtd Avg
Option Exercise Price
- ----------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1993 44,860 $ 8.36
Granted 17,500 10.25
Exercised (1,075) 6.38
Forfeited (2,060) 7.66
- ----------------------------------------------------------------------
Outstanding, December 31, 1994 59,225 8.98
- ----------------------------------------------------------------------
Granted 5,000 15.25
Exercised (3,860) 8.27
Forfeited (1,665) 8.20
- ----------------------------------------------------------------------
Outstanding, December 31, 1995 58,700 9.56
- ----------------------------------------------------------------------
Granted 14,667 13.75
Exercised (13,850) 8.48
- ----------------------------------------------------------------------
Outstanding, December 31, 1996 59,517 $ 10.86
- ----------------------------------------------------------------------
</TABLE>
The range of exercise prices and weighted average remaining contractual life of
outstanding options at December 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
Number of
Shares Exercise Price Wtd Avg Wtd Avg Contractual
Under Option Range Exercise Price Life (Years)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3,100 $ 5.25 $ 5.25 3.95
36,750 8.50 - 11.00 9.59 7.15
19,667 13.75 - 15.25 14.13 9.16
- ---------------------------------------------------------------------------------
59,517 $ 10.86 7.65
- ---------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, 30,500 options were exercisable, and the weighted-average
exercise price of those options was $9.10.
The Company maintains an Employee Stock Ownership Plan (the "ESOP") which covers
substantially all employees who have completed one year of service, with
participants vesting in shares purchased by the ESOP based upon a graduated
scale over a 7 year period. In December 1987, 27,500 shares were purchased by
the ESOP Trust from $38,000 of contributions made to the ESOP by the Bank and
$196,000 from the proceeds of a promissory note obtained by the ESOP Trust. The
Company pays all administrative expenses associated with the ESOP.
In 1994, the Company expensed $30,000 which was paid to the ESOP trust. Of this
amount, $29,000 was for repayment of the note payable annual installment and
$1,000 was for interest. No contributions were made by the Company in 1996 and
1995. At December 31, 1996, all shares in the plan were allocated to plan
participants.
<PAGE> 29
The Bank has a 401(k) Savings Plan which covers all full time salaried employees
who have completed one year of service and are at least 21 years old. Expense of
the Plan in 1996, 1995 and 1994 was approximately $109,000, $89,000 and $91,000,
respectively.
The 1995 Non-Employee Directors Stock Plan (the "Plan") was approved by
shareholders and adopted by the Company in 1995. The Plan was established to
attract, retain and compensate for the services of highly qualified individuals
who are not employees of the Company or the Bank, as members of their respective
boards of directors, and to enable them to increase their ownership in the
Company's common stock through automatic, non-discretionary awards of shares in
lieu of cash meeting fees otherwise payable to them. The total number of shares
that may be awarded pursuant to the plan shall not exceed 25,000. Shares awarded
may be authorized-but-unissued shares, treasury shares or shares purchased on
the open market. The Plan terminates on December 31, 1999 unless terminated
earlier by the board of directors or extended by the board with the approval of
shareholders. During 1996 and 1995, 3,323 and 1,315 shares were awarded,
respectively. At December 31, 1996, 20,362 shares were available for award. The
cost of shares issued in lieu of cash payments under the Plan was $45,000 and
$32,000 in 1996 and 1995, respectively.
The 1995 Non-Employee Directors Warrant Plan (the "Warrant Plan") was
established to attract, retain and compensate for the services of highly
qualified individuals who are not employees of Company or the Bank, as members
of their respective boards of directors, and to enable them to increase their
ownership in the Company's common stock. The total number of shares that may be
issued pursuant to warrants granted under the Warrant Plan shall not exceed
75,000. Shares subject to warrants granted may be authorized-but-unissued
shares, treasury shares, shares purchased on the open market or shares issued
pursuant to a rights offering or dividends. If any warrant is surrendered before
exercise, or lapses without exercise, or for any other reason ceases to be
exercisable, in whole or in part, the shares reserved for the unexercised
portion thereof shall continue to be available for the grant of warrants
hereunder. Each warrant that is granted vests and becomes exercisable over a
three-year period in increments of one-third on each anniversary of the grant
date. There have been no warrants issued under this plan.
(10) Commitments
The Bank occupies five branches and other office space under noncancellable
operating leases with remaining terms through 2009. A summary of future minimum
rental commitments under the terms of such leases at December 31, 1996 follows
(in thousands):
<TABLE>
<CAPTION>
Year Amount
- ---------------------------------
<S> <C>
1997 $ 319
1998 325
1999 326
2000 347
2001 310
Subsequent years 1,700
- ---------------------------------
$3,327
- ---------------------------------
</TABLE>
Rent expense amounted to approximately $371,000, $321,000, and $146,000 for
1996, 1995 and 1994, respectively.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce exposure to fluctuations in interest rates. Those financial
instruments include commitments to extend credit and an interest rate floor.
Those instruments involve, to varying degrees, elements of credit and market
risk in excess of the amount recognized in the consolidated balance sheets.
Credit risk represents the accounting loss that would be recognized at the
reporting date if obligated counterparties failed completely to perform as
contracted. Unless noted otherwise, the Company does not require collateral or
other security to support off-balance sheet financial instruments with credit
risk. Market risk represents the risk that future changes in market prices make
a financial instrument less valuable.
<PAGE> 30
Commitments to fund loans (including lines of credit) and outstanding letters of
credit at December 31, 1996 and 1995 were approximately $16,082,000 and
$279,000, and $14,189,000 and $193,000, respectively. Approximately $2,542,000
of the loan commitments at December 31, 1996 were for fixed rates of interest.
The Bank has an interest rate floor outstanding on $18,000,000 of prime-based
loans at December 31, 1996. Interest rate floors require the payment of a fee
for the right to receive interest payments on the contract notional amount when
a floating rate (typically prime) falls below a strike rate. The original term
of the floor was three years with an expiration date of February 1999. Under the
agreement, 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 impact on net interest income is the excess of the strike rate
over the floating rate less the periodic amortization of the fee paid.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented by
the contractual or notional amount of these instruments. The Company uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. The Company controls its credit risk through credit approvals,
limits, and monitoring procedures.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses, and may
require payment of a fee. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation. Collateral held varies, but may include real estate, accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
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.
(11) Concentrations of Credit
A substantial portion of the Company's loans are secured by real estate in
Central New York State. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is susceptible to changes in
market conditions in this area. Other than general economic risks, management is
not aware of any material concentrations of credit risk to any industry or
individual borrower.
(12) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values of securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable rate loans that reprice frequently and loans due
on demand with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain mortgage loans (i.e. one-to-four
family residential) and other consumer loans are based on quoted market prices
of similar loans sold on the secondary market, adjusted for differences in loan
characteristics. The fair values of other loans (i.e. commercial real estate,
rental property mortgage loans and business loans) are estimates using
discounted cash flow analyses using interest rates currently being
<PAGE> 31
offered for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest approximates its fair value.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet
instruments (letters of credit, commitments to fund loans and an interest rate
floor contract) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair values of loan origination
commitments, lines of credit and standby letters of credit were estimated based
on an analysis of the interest rates, fees currently charged and market quotes,
if available, for similar transactions. These fair values were not significantly
different from the carrying amounts, which were not material, at December 31,
1996 and 1995, respectively.
Deposit Liabilities: The fair values disclosed for demand deposits (interest and
non-interest checking, savings accounts, and money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.
their carrying amounts). Fair values for fixed-rate time certificates are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of the time deposits.
These estimated fair values do not include the value of core deposit
relationships which comprise a significant portion of the Company's deposit
base. Management believes that the Company's core deposit relationships provide
a relatively stable, low-cost funding source which has a substantial intangible
value separate from the deposit balances.
Borrowings: The carrying amounts reported in the balance sheet for overnight
borrowings approximate the fair values of those liabilities . The fair values of
the Company's long-term borrowings are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The following is a summary of the carrying values and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995, respectively
(in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents 9,526 9,526 9,289 9,289
Securities available for sale 6,009 6,009 8,653 8,653
Securities held to maturity 10,893 11,138 12,804 13,117
Federal Home Loan Bank stock 1,410 1,410 1,303 1,303
Loans 204,830 206,785 168,967 171,751
Financial liabilities:
Demand, NOW, Savings and money market accounts 95,856 95,856 77,635 77,635
Time certificates 107,429 108,123 99,474 100,696
Borrowings 18,181 18,524 14,386 14,920
Advance payments by borrowers for property
taxes and insurance 1,744 1,744 2,010 2,010
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
<PAGE> 32
(13) Parent Company Financial Information
The following presents the condensed balance sheets of the Company (parent only)
as of December 31,1996 and 1995 and its condensed statements of operations and
cash flows for the years ended December 31, 1996, 1995 and 1994 (in thousands).
Condensed Balance Sheets
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Cash $ 109 58
Investment in subsidiary 16,121 14,881
- --------------------------------------------------------------------------------------------------------
Total Assets $ 16,230 14,939
- --------------------------------------------------------------------------------------------------------
Stockholders' equity $ 16,230 14,939
- --------------------------------------------------------------------------------------------------------
Condensed Statements of Operations
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiary $ 151 175 112
Equity in undistributed income of subsidiary 1,330 877 871
- --------------------------------------------------------------------------------------------------------
Net income $ 1,481 1,052 983
- --------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 1,481 1,052 983
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiary (1,330) (877) (871)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 151 175 112
- --------------------------------------------------------------------------------------------------------
Financing activities:
Cash dividends paid on common stock (264) (175) (112)
Proceeds from issuance of stock pursuant to stock option plans and
Non-Employee Director's Stock Plan 164 51 7
- --------------------------------------------------------------------------------------------------------
Net cash used in financing activities (100) (124) (105)
- --------------------------------------------------------------------------------------------------------
Cash at beginning of year 58 7 0
- --------------------------------------------------------------------------------------------------------
Cash at end of year 109 58 7
- --------------------------------------------------------------------------------------------------------
</TABLE>
(14) Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly financial data for the years
ended December 31, 1996 and 1995 (in thousands):
<PAGE> 33
<TABLE>
<CAPTION>
1996 Quarter Ended
- ------------------------------------------------------------------------------------ Total
March 31 June 30 September 30 December 31 Year
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $3,972 4,045 4,552 4,593 17,162
Total interest expense 2,173 2,170 2,367 2,401 9,111
- ---------------------------------------------------------------------------------------------
Net interest income 1,799 1,875 2,185 2,192 8,051
Provision for loan losses 25 25 50 75 175
- ---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,774 1,850 2,135 2,117 7,876
- ---------------------------------------------------------------------------------------------
Net gain on security transactions 77 0 0 0 77
Net gain on sale of loans 7 11 6 10 34
Other operating income 181 220 271 333 1,005
Other operating expense 1,620 1,803 1,982 2,013 7,418
- ---------------------------------------------------------------------------------------------
Income before income taxes 419 278 430 447 1,574
Income tax expense 24 16 25 28 93
- ---------------------------------------------------------------------------------------------
Net income $ 395 262 405 419 1,481
- ---------------------------------------------------------------------------------------------
Net income per common share $ 0.42 0.28 0.43 0.44 1.57
- ---------------------------------------------------------------------------------------------
<CAPTION>
1995 Quarter Ended
- ------------------------------------------------------------------------------------ Total
March 31 June 30 September 30 December 31 Year
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $3,799 4,011 4,049 4,012 15,871
Total interest expense 1,944 2,200 2,242 2,222 8,608
- ---------------------------------------------------------------------------------------------
Net interest income 1,855 1,811 1,807 1,790 7,263
Provision for loan losses 90 90 30 25 235
- ---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,765 1,721 1,777 1,765 7,028
- ---------------------------------------------------------------------------------------------
Net loss on security transactions (16) 0 (83) 0 (99)
Net gain on sale of loans 2 5 4 3 14
Other operating income 154 147 184 187 672
Other operating expense 1,543 1,568 1,593 1,507 6,211
- ---------------------------------------------------------------------------------------------
Income before income taxes 362 305 289 448 1,404
Income tax expense 94 76 71 111 352
- ---------------------------------------------------------------------------------------------
Net income $ 268 229 218 337 1,052
- ---------------------------------------------------------------------------------------------
Net income per common share $ 0.29 0.24 0.23 0.36 1.13
- ---------------------------------------------------------------------------------------------
</TABLE>
Summation of the quarterly earnings per common share does not necessarily equal
the annual amount due to the averaging effect of the number of shares throughout
the year.
<PAGE> 34
DIRECTORS OF CENTER BANKS
INCORPORATED
John P. Driscoll Chairman, President and Chief Executive Officer
Clifford C. Abrams Retired, President, Clifford C. Abrams, Inc.
Israel Berkman Retired, Examining Officer of the
Federal Reserve Bank of New York
David E. Blackwell President, Auburn Steel Company, Inc.
Walter D. Copeland Retired, President, Walter D. Copeland
Organization, Inc.
Carl W. Gerst, Jr. Executive Vice President and Chief
Operating Officer, Anaren Microwave, Inc.
John Bernard Henry Professor of Pathology
SUNY Health Science Center at Syracuse
Ann G. Higbee President of Public Relations Services,
Eric Mower and Associates
Bruce H. Leslie, Ph.D. Chancellor, Connecticut Community-
Technical Colleges
Howard J. Miller Retired, Vice President, Distribution,
Crucible Service Centers
Anne E. O'Connor Corporate Secretary, Kopp Billing Agency, Inc.
Raymond C. Traver, President, Raymond C. Traver, Jr.,
Jr., MD M.D., P.C.
Directors Emeritus
B. Burdette Lee
Frederick R. Platt
OFFICERS OF CENTER BANKS
INCORPORATED
John P. Driscoll Chairman, President and Chief Executive Officer
J. David Hammond Executive Vice President and Secretary
J. Daniel Mohr Treasurer
William J. Welch Assistant Secretary and Assistant
Treasurer
<PAGE> 35
OFFICERS OF SKANEATELES SAVINGS BANK
John P. Driscoll Chairman, President and Chief Executive Officer
J. David Hammond Executive Vice President and Secretary
Karen E. Lockwood Vice President
John A. Mason Vice President
J. Daniel Mohr Vice President, Treasurer and Chief Financial Officer
William J. Welch Vice President, Assistant Secretary and Assistant
Treasurer
Calvin L. Corriders Syracuse Urban Business Development Officer
John C. Daly Commercial Loan Officer
James E. Dove Branch Administrator
James J. Frawley Commercial Loan Officer
Donald G. Kaczmarek Commercial Loan Officer
Stephen G. Kunzinger Auditor
Richard M. Lambrecht, Jr. Controller
Beth H. Meyers Operations Officer
Donna L. Rouse Loan Operations Officer
Joan M. Rozycko Community Banking Officer
<PAGE> 36
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
Not applicable.
Item 10. Directors And Executive Officers Of The Registrant
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
Directly or Indirectly
Director as of February 18, 1997
Position with the Company and Principal of Bank ----------------------------
Name Age Occupation During the Past Five Years Since(1) Amount Percent(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Israel Berkman 68 Director; Retired, Examining Officer of the 1992(3) 1,842
Federal Reserve Bank of New York.
Ann G. Higbee 54 Director; President of Public Relations 1993 3,497
Services, Eric Mower and Associates.
Anne E. O'Connor 61 Director; Corporate Secretary, Kopp Billing 1995 92,399(4) 9.73
Agency, a medical billing agency.
Walter D. Copeland 63 Director; Retired, President, Walter D. 1994 667(5)
Copeland Organization, Inc., a real estate
consulting firm.
John P. Driscoll 57 Chairman, President and Chief Executive 1992 18,345(6) 1.89
Officer of the Company. President & CEO of
Steamatic of Greater Rochester, a commercial
restoration and reconstruction company
from 1989 to 1992.
Carl W. Gerst, Jr. 59 Director; Executive Vice President, 1982 3,852
Chief Operating Officer and Director of
Anaren Microwave, Inc., a manufacturer
of military electronic subsystems.
John Bernard Henry 68 Director; Professor of pathology and former 1989 2,500(7)
President of the State University of New York
Health Science Center at Syracuse.
Clifford C. Abrams 71 Director; Retired, President and General 1983 4,983(8)
Manager of Clifford C. Abrams, Inc., an
electrical contracting company.
David E. Blackwell 58 Director; President, Auburn Steel 1993 1,336
Company, Inc.
Howard J. Miller 64 Director; Retired, Vice President, Distribution 1993 2,046(9)
Crucible Service Centers.
Raymond C. Traver, Jr., M.D. 54 Director; Orthopedic Surgeon. 1990 7,278(10)
</TABLE>
<PAGE> 37
- ----------
(1) Includes terms as Trustee prior to the Bank's conversion from a mutual to
stock form of organization on May 30, 1986.
(2) All indicated holdings amount to less than 1% of the issued and outstanding
Common Stock, unless otherwise indicated.
(3) Mr. Berkman is a director of the Company, but not the Bank.
(4) Shares owned by Mrs. O'Connor's husband.
(5) Shares owned by Walter D. Copeland and Concetta M. Copeland Revocable Living
Trust dated October 11, 1995, Walter D. Copeland and Concetta M. Copeland,
trustees.
(6) Includes vested options to purchase 16,400 shares.
(7) All shares held jointly with Mr. Henry's wife, with whom Mr. Henry has
shared voting and investment power.
(8) Includes 1,575 shares held by Mr. Abrams' wife.
(9) Includes 500 shares held by Mr. Miller's wife.
(10)Includes 4,050 shares held in trust under a defined employee contribution
pension plan; and 524 shares held by Dr. Traver as custodian for his
children.
Item 11. Executive Compensation
Since the formation of Center Banks, none of its executive officers
have received any separate form of compensation from the Company. Officers
receive compensation in their positions as officers of the Bank.
The following table sets forth the compensation paid by the Bank to the
Company's Chairman, President and Chief Executive Officer and to each executive
officer whose aggregate annual salary and bonus exceeded $100,000 for services
rendered in all capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------------------------------------
Awards
Other ----------------
Annual Securities All Other
Name and Compen- Underlying Compen-
Principal Position Year Salary ($) (1) Bonus ($) sation ($) Options (#) sation ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John P. Driscoll 1996 142,899 30,670(2) 17,936(3) 4,667 16,375(4)
Chairman, President & CEO 1995 124,547 17,406 10,113 0 26,417
1994 110,104 0 10,784 8,000 14,627
J. David Hammond 1996 92,777 9,170(2) 0 1,500 1,492(5)
Executive Vice President 1995 22,332 0 0 5,000 0
& Secretary
<FN>
(1) Includes the cost of shares allocated under the Company's Employee Stock
Ownership Plan. Mr. Hammond joined the Company in September 1995.
(2) Bonuses were paid in January 1997.
(3) Comprised entirely of country club dues.
(4) Includes contributions to the Company's 401(k) plan totaling $8,228, premium
payments on an individual flexible premium deferred variable annuity
totaling $7,127 and premiums paid on term life insurance policy totaling
$1,020.
(5) Comprised entirely of contributions to the Company's 401(k) plan.
</TABLE>
OPTION GRANTS IN 1996
The following table sets forth stock options granted to the Company's
Chairman, President and Chief Executive Officer and named executive officers
during 1996.
<PAGE> 38
<TABLE>
<CAPTION>
Option Grants in 1996
Grant Date
Individual Grants Value
- ---------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Grant
Underlying Granted to Exercise Date
Options Employees Price Expiration Present
Name Granted (#) (1) in 1996 Per Share ($) Date Value ($) (2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John P. Driscoll 4,667 31.8 13.75 April 2006 16,661
J. David Hammond 1,500 10.2 13.75 April 2006 5,355
<FN>
(1) Options were granted on April 16, 1996 under the Company's Long Term
Incentive and Capital Accumulation Plan, and are exercisable 20% per year
after date of grant.
(2) The Black-Scholes option pricing model was used to calculate the grant date
present value. Significant assumptions are as follows:
-expected stock price volatility 25.42%
-risk-free rate of return 6.10%
-expected dividend yield 2.55%
-Expected time of exercise 5 years
</TABLE>
AGGREGATED OPTION EXERCISES IN 1996 AND 1996 YEAR END OPTION VALUES
The following table sets forth information with respect to the Chief
Executive Officer and named executive officers, concerning exercises of stock
options during 1996 and the number and value of unexercised options held at
December 31, 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Shares December 31, 1996 (#) December 31, 1996 ($) (2)
Acquired Value -------------------------------- ----------------------------------
Name on Exercise (#) Realized ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John P. Driscoll 600 3,900 16,400 9,467 111,600 40,468
J. David Hammond 0 0 1,000 5,500 1,000 7,750
<FN>
(1) Market value of underlying securities at exercise, minus the exercise price.
(2) Market value of underlying securities at 1996 year end, minus the exercise
price.
</TABLE>
Compensation of Directors
Directors who are not executive officers of the Company receive a fee
of $400 per Board meeting attended. In addition, non-officer members of
committees of the Board receive a fee of $250 per committee meeting attended.
Directors who are also officers of the Company receive no compensation for
attendance at Board or committee meetings.
The 1995 Non-Employee Directors Warrant Plan (the "Warrant Plan") was
established to attract, retain and compensate for the services of highly
qualified individuals who are not employees of Company or the Bank, as members
of their respective boards of directors, and to enable them to increase their
ownership in the Company's common stock. Under the Warrant Plan, those outside
directors receive warrants (or options) to purchase shares of Common Stock only
if the Company achieves specified performance levels. The total number of shares
that may be issued pursuant to warrants granted under the Warrant Plan shall not
exceed 75,000. Each warrant that is granted vests and becomes exercisable over a
three-
<PAGE> 39
year period in increments of one-third on each anniversary of the grant date. To
date, there have been no warrants issued under this plan.
Employment Agreements
Mr. Driscoll has an employment agreement with the Company and the Bank
which provides for an annual adjustment in Mr. Driscoll's salary as determined
by the Board of Directors based upon an annual review of his compensation. The
Board of Directors has set Mr. Driscoll's base salary for 1997 at $131,350. Mr.
Driscoll is also entitled to receive cash bonuses as the Board, in its
discretion, may award.
Under his agreement, Mr. Driscoll will receive a continuation of his
salary and benefits for two years if his employment is terminated by the Company
for any reason other than "cause", including a "change in control" of the
Company.
The Company and the Bank also entered into agreements with J. David
Hammond, Executive Vice President, and William Welch, John Mason, J. Daniel Mohr
and Karen Lockwood, Vice Presidents, pursuant to which they will receive a
continuation of their respective salaries and benefits for six months (twelve in
the case of Mr. Hammond) if a "change in control" of the Company occurs and
their employment is terminated as a result.
The named executive officers, like all eligible employees of the Bank,
are entitled to receive a bonus tied to specified target levels of the Company's
earnings per share, as well as to individual and departmental goals.
Performance Graph
The following graph compares cumulative total shareholder returns on
the Company's stock over the last five years to the Nasdaq Stock Market Index
for U.S. companies and the Nasdaq Bank Index. Total return values were
calculated assuming a $100 investment on December 31, 1991 and reinvestment of
all dividends. The following graph shall not be deemed incorporated by reference
into any filing under the Securities Act of 1933 or the 1934 Act, and shall not
be deemed filed under either such act.
<TABLE>
<CAPTION>
Total Return
------------------------------------------------------
Date Center Banks NASDAQ US NASDAQ Bank
- -----------------------------------------------------------------
<S> <C> <C> <C>
1991 100 100 100
1992 142 116 146
1993 142 134 166
1994 174 131 165
1995 226 185 246
1996 266 227 326
</TABLE>
Item 12. Security Ownership Of Certain Beneficial Owners And Management
PRINCIPAL HOLDERS OF COMMON STOCK
The following table (with notes thereto) sets forth information as of
the Record Date with respect to ownership of Common Stock by any person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) who is known to the Company to be
the beneficial owner of more than 5% of Common Stock and with respect to
ownership of Common Stock by all directors and executive officers of the Company
as a group (such information being based on information filed by or on behalf of
the beneficial holder concerned).
<PAGE> 40
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership (1) Class
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Francis R. O'Connor 92,399 (2) 9.73
511 E. Fayette Street
P.O. Box 2367
Syracuse, NY 13220
Jeffrey L. Gendell 88,200 (3) 9.28
Tontine Partners, L.P.
31 West 52nd Street, 17th Floor
New York, NY 10019
Dimensional Fund Advisors 77,000 (4) 8.11
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
All current directors and executive
officers as a group (15 persons) 153,085 (5) 15.76
<FN>
- ----------
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended ("1934 Act"), a person is deemed to be the beneficial owner for
purposes of this table of any shares of Center Banks Common Stock (a) over
which he or she has or shares voting or investment power, or (b) of which he
or she has the right to acquire beneficial ownership at any time within 60
days from February 18, 1997. For purposes of the 1934 Act, "voting power" is
the power to vote or direct the voting of shares, and "investment power" is
the power to dispose or direct the disposition of shares. All shares shown
in the table above have sole voting and investment power, except as
otherwise indicated. This table includes shares of Common Stock subject to
outstanding options granted pursuant to the Company's Stock Option Plans. As
of February 18, 1997, executive officers as a group held vested options to
purchase 21,350 shares. See "Compensation of Executive Officers."
(2) Mr. O'Connor's wife is a director of the Company.
(3) As reported by Jeffrey L. Gendell and Tontine Financial Partners, L.P.,
a Delaware limited partnership ("Tontine"), in a statement as of September
28, 1995 on Schedule 13D under the Exchange Act. Of the 88,200 shares
reported above, Mr. Gendell reported sole dispositive powers as to 35,000
shares, and both Mr. Gendell and Tontine reported shared voting and
dispositive powers as to 53,200 shares.
(4) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 77,000 shares of Center
Banks Inc. Common Stock as of December 31, 1996, all of which shares are
held in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
Sole Voting Power: 44,300 shares*
Shared Voting Power: 0
Sole Dispositive Power: 77,000
Shared Dispositive Power: 0
* Persons who are officers of Dimensional Fund Advisors Inc. also serve as
officers of DFA Investment Dimensions Group Inc., (the "Fund") and the DFA
Investment Trust Company (the "Trust"), each an open-end management
investment company registered under the Investment Company Act of 1940. In
their capacity as officers of the Fund and the Trust, these persons vote
22,800 additional shares which are owned by the Fund and 9,900 shares which
are owned by the trust (both included in Sole Dispositive Power above).
(5) Includes 92,399 shares owned by Mrs. O'Connor's husband.
</TABLE>
<PAGE> 41
Item 13. Certain Relationships and Related Transactions
Indebtedness of Management
Skaneateles may make loans to directors and any executive officers of
the Company to the extent permitted by banking law. Any extensions of credit,
whether past or future, to directors or executive officers of the Company are
made in the ordinary course of business on substantially the same terms,
including interest rates, collateral and repayment terms, as those prevailing at
the time for comparable transactions with other persons, and do not involve more
than the normal risk of collectibility or present other unfavorable features.
<PAGE> 1
Exhibit 21
LIST OF REGISTRANT'S SUBSIDIARIES
<PAGE> 2
Exhibit 21
List of Registrant's Subsidiaries
- ---------------------------------
Skaneateles Savings Bank, New York State-chartered.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE> 2
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Center Banks Incorporated:
We consent to incorporation by reference in the registration statement Nos.
33-37281, 33-37282, 33-92198 and 333-20445 on Form S-8 and 333-18287 on Form
S-3 of Center Banks Incorporated of our report dated January 10, 1997,
relating to the consolidated balance sheets of Center Banks Incorporated and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, which report has been
incorporated by reference in the December 31, 1996 annual report on Form 10-K
of Center Banks Incorporated.
/s/ KPMG Peat Marwick
Syracuse, New York
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED WITHIN THE COMPANY'S 1996 ANNUAL REPORT TO
STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,726
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,009
<INVESTMENTS-CARRYING> 10,893
<INVESTMENTS-MARKET> 11,138
<LOANS> 206,645
<ALLOWANCE> 2,114
<TOTAL-ASSETS> 242,182
<DEPOSITS> 205,029
<SHORT-TERM> 4,516
<LIABILITIES-OTHER> 2,742
<LONG-TERM> 13,665
<COMMON> 9
0
0
<OTHER-SE> 16,221
<TOTAL-LIABILITIES-AND-EQUITY> 242,182
<INTEREST-LOAN> 15,502
<INTEREST-INVEST> 1,660
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,162
<INTEREST-DEPOSIT> 8,070
<INTEREST-EXPENSE> 9,111
<INTEREST-INCOME-NET> 8,051
<LOAN-LOSSES> 175
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 7,418
<INCOME-PRETAX> 1,574
<INCOME-PRE-EXTRAORDINARY> 1,574
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,481
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 8.01
<LOANS-NON> 3,171
<LOANS-PAST> 399
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,792
<ALLOWANCE-OPEN> 2,667
<CHARGE-OFFS> 1,301
<RECOVERIES> 126
<ALLOWANCE-CLOSE> 2,114
<ALLOWANCE-DOMESTIC> 2,114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
