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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-18513
SKANEATELES BANCORP, INC.
--------------------------
(Exact name of Registrant as specified in its charter)
Delaware 16-1368745
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
33 E. Genesee St. Skaneateles, New York, 13152-0460
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(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 10, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $33,018,000.
As of March 10, 1999, 1,452,372 shares of registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of 10-K into which incorporated
-------- ------------------------------------
None
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1998
SKANEATELES BANCORP, INC.
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Page
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PART I.
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Item 1. Business ............................................................... 1
Item 2. Properties ............................................................. 53
Item 3. Legal Proceedings ...................................................... 54
Item 4. Submission of Matters to a vote of Security Holders .................... 54
PART II.
Item 5. Market For the Registrant's Common Stock and Related Stockholder Matters 54
Item 6. Selected Financial Data ................................................ 55
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 55
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 55
Item 8. Financial Statements And Supplementary Data ............................ 55
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ........................................ 55
PART III.
Item 10. Directors and Executive Officers of the Registrant ..................... 55
Item 11. Executive Compensation .................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 62
Item 13. Certain Relationships and Related Transactions .......................... 64
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 65
</TABLE>
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PART I.
Item 1. BUSINESS
GENERAL
Skaneateles Bancorp, Inc. (the "Company") is a Delaware-chartered bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), the primary business of which is the ownership and
operation of its sole subsidiary, Skaneateles Savings Bank ("Skaneateles" or the
"Bank"). Skaneateles is a New York-chartered stock savings bank headquartered in
the Village of Skaneateles, Onondaga County, New York. Deposit accounts of the
Bank are insured by the Bank Insurance Fund ("BIF"), as administered by the
Federal Deposit Insurance Corporation ("FDIC"). In continuous operation since
1866, the Bank conducts business from nine full-service banking offices located
in Onondaga and Oswego counties of New York State. Historically, Skaneateles has
been engaged in the business of attracting deposits from the general public and
earning income on those funds through various lending and investment activities.
The Bank operated as a single office savings bank in Skaneateles, New
York until 1967, when it opened its first branch office in Camillus, a suburb of
Syracuse. During 1988, the Bank opened an office in downtown Syracuse. Since
1994, the Bank has acquired or opened six branch offices in and around Syracuse
and Oswego, New York. Three of these branches are in-store facilities in newly
constructed or renovated supermarkets. The in-store branches provide all of the
same products and services as the Banks' traditional branches, with the
exception of safe deposit boxes.
In September 1998, the Bank formed Skaneateles Preferred Capital
Corporation ("SPCC"), a wholly-owned, real estate investment trust subsidiary.
SPCC was formed for the purpose of purchasing real estate secured loans
originated by the Bank from time to time.
The Company was incorporated in the State of Delaware as Center Banks
Incorporated on January 7, 1988. On April 15, 1997, the stockholders approved
the Board of Director's proposal to change the Company's name to Skaneateles
Bancorp, Inc. The name change became effective April 16, 1997 at which time the
Company's stock began trading under the symbol "SKAN" on the NASDAQ National
Market System.
On January 25, 1999, the Company entered into a definitive Agreement and
Plan of Merger with BSB Bancorp, Inc. ("BSB"), which provides for the
acquisition of the Company by BSB in a tax-free, stock-for-stock exchange to be
accounted for as a pooling of interests. In the transaction, Skaneateles
stockholders will receive 0.970 shares of BSB stock for each share of
Skaneateles stock. Based on BSB's closing price on January 22, 1999 (the last
trading day before the Agreement and Plan of Merger was signed), Skaneateles
stockholders will receive $27.89 per share in BSB stock, for a total transaction
value of approximately $41 million.
The definitive Agreement and Plan of Merger, which has been approved by
both BSB's and the Company's boards of directors, is subject to approval by the
Company's stockholders as well as by regulatory authorities. The transaction is
expected to close in the Summer of 1999. In connection with the Agreement and
Plan of Merger, Skaneateles Bancorp also granted BSB an option to purchase
290,142 newly issued shares (19.9% of the Company's outstanding stock). Also in
connection with the Agreement and Plan of Merger, certain stockholders of the
Company, including the Company's directors and executive officers, entered into
a Stockholder Agreement pursuant to which each of such stockholders agreed to
vote in favor of the Agreement and Plan of Merger.
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. In addition, the Company's financial
performance is 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
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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, New York. 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 performance of the Bank and the Company.
This Annual Report, including certain statements made in Management's
Discussion and Analysis of Financial Condition and Results of Operations, may
include "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Any statements with regard to the
Company's expectations as to its financial results, other aspects of its
business, and general economic conditions, may constitute forward-looking
statements. Although the Company makes such statements based on assumptions
which it believes to be reasonable, there can be no assurance that actual
results will not differ materially from the Company's expectations. Accordingly,
the Company hereby identifies the following important factors, among others,
which could cause its results to differ from any results which might be
projected, forecasted or estimated based on such forward-looking statements: (i)
general economic and competitive conditions in the markets in which the Company
operates, and the risks inherent in its operations; (ii) the Company's ability
to continue to control its provision for credit losses and non-interest
expenses, increase earning assets and non-interest income, and maintain its
margins; and (iii) the level of consumer demand for new and existing products.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in the forward-looking statements. The Company does not intend
to update forward-looking statements.
Although the Company is a small business issuer, it has elected to make
certain disclosures not normally required by small business issuers for the
benefit of the Company's stockholders.
LENDING ACTIVITIES
The lending activities of Skaneateles are affected principally by the
demand for loans, competition from other financial institutions and the supply
of funds available for lending purposes. These factors are in turn affected by
general economic conditions, the 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 minor extent, the greater Rochester, New York area. Most
residential loans are originated directly by Skaneateles. The Bank has also
purchased loans for its portfolio from time to time, although no such purchases
were made in 1998 or 1997.
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 become 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. These bi-weekly mortgages require the borrower to
maintain a deposit account with the Bank from which mortgage payments are
automatically deducted. Loans are 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 predominantly 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. Prior to January, 1998,
fixed rate mortgages with terms of 15 years or less were originated for
portfolio, thereafter, beginning in January, the Bank began selling all
conforming fixed rate mortgages at the time of origination due to the relatively
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low interest rate environment and the resulting increased interest rate risk
associated with long term fixed rate assets. The Bank generally retains
servicing rights on sold loans.
The Bank offers adjustable rate loans, indexed to the one-year or
three-year U.S. Treasury Note, with rates that adjust annually (1 year ARM), or
once every three years (3 year ARM). The Bank also offers a 5/1 ARM. The 5/1 ARM
is a loan with a fixed rate of interest for the first five years. On the loan's
fifth anniversary, the rate converts to the current rate for a 1-year ARM, and
adjusts annually over the remaining term of the loan. Adjustable rate loans are
generally retained for portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Skaneateles originates
loans secured by multi-family (over four residential 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.
The Bank's 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 each project is undertaken by the Bank's 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,
New York and the city of Oswego, New York, offering mortgages, secured and
unsecured working capital loans, term loans, leases and lines of credit. The
Bank also offers revolving credit lines to local automobile, boat and
recreational vehicle dealerships to finance inventory purchases through its
dealer floor plan program. 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, 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. Furthermore, 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 offered by the Bank, 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. Student loans originated by the Bank are held in its
portfolio while the student is in school, then sold to the Student Loan
Marketing Association under a continuing commitment at the time the loan is to
go into repayment.
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The Bank also originates consumer loans through an indirect lending
program through which it receives loan applications from Bank-approved
automobile, boat and recreational vehicle dealerships on behalf of their
customers to finance purchases. These applications are subject to the Bank's
normal consumer loan underwriting criteria.
LOAN ORIGINATION FEES AND COSTS. 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, the
Bank 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 with proceeds applied against 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.
SECURITIES
Skaneateles has authority to purchase a wide range of securities,
subject to various restrictions. See "Regulation - New York Law."
The Bank's investment strategy is primarily to hold securities for the
purpose of providing liquidity and generating income. The Bank invests primarily
in U.S. Treasury Notes, high grade corporate bonds and mortgage-backed
securities (primarily fixed rate and variable rate pass through certificates
issued and guaranteed by the Federal National Mortgage Association (FNMA) and
the Federal Home Loan Mortgage Corporation (FHLMC)). Pursuant to the Bank's
investment policy, all purchases for the investment portfolio must be investment
grade securities that are included in one of the top four bond rating
categories.
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.
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Presented below are the carrying values (in thousands) of the securities
portfolio as of the dates indicated.
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December 31,
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1998 1997 1996
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Securities Available for Sale:
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U.S. government and Federal agency obligations $13,100 6,026 5,027
Mortgage-backed securities:
FNMA 648 752 0
Asset-backed securities 1,051 1,638 982
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$14,799 8,416 6,009
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Securities Held to Maturity:
U.S. government and Federal agency obligations $ 1,019 3,007 4,992
Mortgage-backed securities:
FNMA 103 130 145
FHLMC 2,087 2,998 3,674
Obligations of states and political subdivisions 806 1,470 1,782
Corporate bonds, notes and debentures 0 100 300
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$ 4,015 7,705 10,893
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</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
2.50%, which accrues daily and is compounded and credited monthly. No minimum
balance is required to earn interest on these accounts.
Skaneateles offers a wide array of checking accounts, including a
non-interest bearing account which has no minimum balance requirement, no
monthly maintenance fee and no per check charge. The Bank also offers interest
bearing checking accounts whose rates and fees vary based on the type of the
account and amount on deposit.
Skaneateles also offers non-deposit products including annuities and
mutual funds through an arrangement with a third party agent. These products are
not insured by the Federal Deposit Insurance Corporation ("FDIC").
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REGULATION
As a bank holding company, Skaneateles Bancorp, Inc. is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Company is also required to file certain reports and
otherwise comply with the rules and regulations of the Securities and Exchange
Commission (the "Commission") under the federal securities laws. Skaneateles
Savings Bank is a banking corporation chartered under the laws of the State of
New York, and its deposits are insured by the Bank Insurance Fund ("BIF"), as
administered by the FDIC. It is also a member of the Federal Home Loan Bank
System. As such, Skaneateles is subject to the regulation, examination and
supervision of the Banking Department of the State of New York (the
"Department") and the FDIC. The Bank is further subject to the regulation of the
Federal Reserve Board with respect to reserves required to be maintained against
deposits and certain other matters. The Federal Reserve Board, the Department
and the FDIC issue regulations and require the filing of reports describing the
activities and financial condition of the institutions under their jurisdiction.
Each agency conducts periodic examinations to test compliance with various
regulatory requirements and generally supervises the operations of such
institutions. This supervision and regulation is intended primarily for the
protection of depositors. Certain of the regulatory requirements applicable to
the Company and to Skaneateles are referred to below or elsewhere herein.
FEDERAL BANK HOLDING COMPANY REGULATION. Skaneateles Bancorp, Inc. is
required to file with the Federal Reserve Board annual reports and such
additional information as the Federal Reserve Board may require pursuant to the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Federal Reserve
Board may conduct examinations of Skaneateles Bancorp, Inc. and its subsidiary.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its subsidiaries are prohibited from requiring certain
tie-in arrangements in connection with any extension of credit, lease, or sale
of property or furnishing of services.
Under the BHCA, Federal Reserve Board approval is required for any
action which causes a bank or other company to become a bank holding company and
for any action which causes a bank to become a subsidiary of a bank holding
company. A bank holding company must obtain Federal Reserve Board approval
before it acquires direct or indirect ownership or control of any voting shares
of any bank if, after such acquisition, it will own or control directly or
indirectly more than 5% of the voting stock of such bank unless it already owns
a majority of the voting stock of such bank. Federal Reserve Board approval must
also be obtained before a bank holding company acquires all or substantially all
of the assets of a bank or merges or consolidates with another bank holding
company. Any acquisition, directly or indirectly, by a bank holding company or
its subsidiaries of more than 5% of the voting shares of, or interest in, or all
or substantially all of the assets of any bank located outside of the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted may not be approved by the Federal Reserve Board unless
the laws of the state in which the bank to be acquired is located expressly
authorize such an acquisition.
A bank holding company is prohibited, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank or bank
holding company, and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or furnishing services to
its subsidiaries.
The Federal Reserve Board has adopted capital adequacy guidelines
pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing its applications to the
Federal Reserve Board. In addition, the Federal Reserve Board has the power to
issue capital directives (having the force of cease and desist orders) to
mandate the maintenance of adequate capital levels. The Company is in compliance
with Federal Reserve Board capital requirements.
FEDERAL DEPOSIT INSURANCE CORPORATION. Skaneateles' deposit accounts are
insured by the FDIC up to a maximum of $100,000 per insured depositor. As an
insured bank, Skaneateles is subject to certain FDIC requirements designed to
maintain the safety and soundness of individual banks and the banking system.
The FDIC periodically conducts examinations of insured institutions and, based
upon evaluations, may revalue assets of an insured institution and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. In addition, the FDIC has
adopted regulations and a statement of
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policy which define and establish certain minimum requirements for capital
adequacy. Under the regulations, insured state nonmember banks such as
Skaneateles are required to maintain minimum risk-based capital and leverage
capital. The Bank is in compliance with FDIC capital requirements.
The annual premium charge for FDIC insurance is based on the level of
capital maintained by the institution and results of periodic regulatory
examinations. The following table sets forth the annual premium charge for the
periods indicated for FDIC insurance per $100 of the Bank's total deposits.
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Date Premium per $100 of total deposits
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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
</TABLE>
(*) 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.
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,
1998, net transaction accounts (transaction accounts, primarily NOW and regular
checking accounts, less certain permitted deductions) in the amount of $0 to
$46.5 million are subject to a reserve requirement of 3% of said amount. Net
transaction accounts over $46.5 million are subject to a reserve requirement of
$1,395,000 plus 10% of the total in excess of $46.5 million. However, $4.9
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 1998.
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.
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets $ 276,148 256,101 242,182 210,647 201,841
Net loans 212,578 212,462 204,830 168,967 163,921
Securities 18,814 16,121 16,902 21,457 21,871
Federal funds sold 24,300 6,700 3,800 3,400 1,200
Deposits, including escrow 237,333 218,018 205,029 179,119 170,696
Borrowings 15,979 18,057 18,181 14,386 13,984
Stockholders' equity 19,101 17,671 16,230 14,939 13,791
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Operations Data:
Total interest income $ 20,055 18,965 17,162 15,871 12,940
Total interest expense
9,519 9,435 9,111 8,608 6,349
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 10,536 9,530 8,051 7,263 6,591
Provision for loan losses 675 500 175 235 360
Other operating income 2,338 1,849 1,116 587 509
Other operating expenses 9,676 8,308 7,418 6,211 5,580
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 1,649 1,662 1,481 1,052 983
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Share data:
<S> <C> <C> <C> <C> <C>
Net income - basic $ 1.14 1.16 1.05 .76 .71
Net income - diluted 1.11 1.13 1.03 .74 .70
Dividends declared .28 .27 .19 .13 .08
Book value 13.17 12.31 11.41 10.70 9.93
Shares outstanding 1,450,712 1,435,992 1,422,138 1,396,379 1,388,616
- ----------------------------------------------------------------------------------------------------------------------
Selected other data:
Tier I Capital (to average assets) 6.78% 6.91% 6.46% 7.00% 7.16%
Total Capital (to risk weighted assets) 11.30% 11.31% 11.23% 12.68% 12.17%
Nonperforming assets to total assets 1.48% 1.90% 1.61% 1.20% 2.10%
Net loans charged off to average loans 0.17% 0.03% 0.62% 0.36% 0.17%
Loan loss allowance to nonperforming 90% 65% 67% 125% 94%
loans
Earning asset yield 8.05% 8.17% 8.01% 8.07% 7.31%
Cost of interest bearing liabilities 4.32% 4.51% 4.63% 4.71% 3.90%
Interest rate spread 3.73% 3.66% 3.38% 3.36% 3.41%
Net interest margin 4.23% 4.11% 3.76% 3.69% 3.72%
Full service banking offices 9 9 8 7 5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
GENERAL
Skaneateles Bancorp, Inc. (the "Company") is a bank holding company,
with Skaneateles Savings Bank ("Skaneateles" or the "Bank") being its sole
subsidiary. The financial condition and operating results of the Company are
largely dependent on the Bank, its primary investment.
Total assets of the Company were $276.1 million at December 31, 1998,
compared with $256.1 million at December 31, 1997, an increase of $20 million,
or 7.8%. Net loans were virtually unchanged, while federal funds sold increased
$17.6 million and securities increased $2.7 million in 1998.
The pending acquisition of the Company by BSB Bancorp, Inc., scheduled
to close in the Summer of 1999, is expected to negatively impact the Company's
earnings in the first and second quarters in 1999 as merger related expenses are
incurred.
LOANS
Net loans were $212.6 million at December 31, 1998, an increase of
$116,000, or .1% from December 31, 1997. The Company experienced strong growth
in its consumer and commercial loan portfolios in 1998, while the residential
mortgage portfolio decreased by $18.7 million due to an increased level of loan
sales, coupled with a historically high level of refinancings and prepayments.
Consumer and commercial loans grew a combined $18.9 million.
Loan originations for 1998 totaled $72.3 million, an increase of 44.6%
from 1997's originations of $50 million. Residential mortgage originations were
$18.8 million in 1998, an increase of 94.5% from 1997's originations.
Residential mortgages represented 26% of 1998's total loan originations, up from
19.3% in 1997. Much of the growth was fueled by a surge in refinancings due to
the historically low level of interest rates in 1998.
Approximately $17.5 million or 93% of the residential loans originated
in 1998 were for fixed rates of interest, compared with $7.9 million and 81.4%,
respectively, in 1997. Fixed rate mortgages with terms of 15 years or less were
originated for portfolio prior to January 1998. Beginning in January 1998, the
Bank began selling all conforming fixed rate mortgages at the time of
origination due to the relatively low interest rate environment and the
resulting increased interest rate risk associated with long term fixed rate
assets. As a result, sales of residential mortgages increased to $13.5 million
in 1998, compared with $4 million in 1997. The Bank generally retains servicing
rights on sold loans.
Absent a marked increase in interest rates, it is likely that consumer
demand will continue to be overwhelmingly in favor of fixed rate loans for the
foreseeable future, thereby continuing to impede the Company's ability to grow
its residential portfolio.
Consumer loan originations were $27.5 million, or 38% of total loan
originations in 1998, compared with $20.8 million, or 41.6% in 1997. The Bank
has seen a substantial increase in deposit customers through its Checking
Account Marketing Program ("CHAMP"), which has directly correlated with the
strong consumer loan growth in 1998.
Also contributing to the 38% increase in consumer loan originations is
the Bank's indirect lending program. Through the indirect program, the Bank
receives consumer loan applications from Bank-approved automobile, boat and
recreational vehicle dealerships on behalf of their customers to finance
purchases from the dealers. These applications are subject to the Bank's normal
consumer loan underwriting criteria. Indirect consumer loans accounted for
approximately 50% of the Bank's total consumer loan originations in 1998,
compared with 33.5% in 1997.
9
<PAGE> 12
Commercial loan and commercial mortgage originations were $26 million,
or 36% of total loan originations in 1998, up from $19.6 million or 39.1% in
1997. The increase resulted largely from greater penetration in the Bank's local
market area due to an active calling program.
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,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ---------------- ---------------- ----------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- ------ ----- ------- ----- ------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by first
mortgages
on real estate:
Residential $100,685 46.89% 119,350 55.63% 129,651 62.74% 116,320 67.80% 110,404 66.10%
Commercial 34,676 16.15% 33,962 15.83% 31,728 15.35% 27,357 15.94% 28,175 16.87%
Other loans:
Commercial 27,788 12.94% 22,995 10.72% 18,861 9.13% 10,631 6.20% 13,274 7.95%
Home equity and
improvement 20,658 9.62% 20,624 9.61% 17,599 8.52% 14,578 8.50% 13,219 7.92%
Guaranteed student 910 0.42% 1,059 0.49% 882 0.43% 858 0.50% 789 0.47%
Other consumer 30,028 13.98% 16,565 7.72% 7,924 3.83% 1,821 1.06% 1,148 0.69%
- ----------------------------------------------------------------------------------------------------------------------------
Total $214,745 100.00% 214,555 100.00% 206,645 100.00% 171,565 100.00% 167,009 100.00%
=============================================================================================================================
</TABLE>
The following table sets forth the contractual maturity of the
commercial loan portfolio and real estate construction loans at December 31,
1998.
<TABLE>
<CAPTION>
Within One to After
one year five years five years Total
- --------------------------------------------------------------------------------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C>
Commercial loans - adjustable rate $ 7,670 6,763 2,552 16,985
Commercial loans - fixed rate
973 8,885 945 10,803
Real estate construction loans - adjustable rate
1,892 0 0 1,892
- --------------------------------------------------------------------------------------------------------------------
Total $ 10,535 15,648 3,497 29,680
====================================================================================================================
</TABLE>
DEPOSITS
Total deposits, including escrow, were $237.3 million at December 31,
1998, an increase of $19.3 million or 8.9% from the end of 1997. However, the
Bank experienced an increase of $6.1 million in December 1998 alone, much of
which were short-term increases in personal and commercial demand accounts that
were withdrawn in January 1999, resulting in a rate of growth for 1998 somewhat
lower than indicated.
The Bank's strategy for deposit growth is focused on savings and
checking accounts, which carry lower rates of interest than time accounts and
tend to be less sensitive to changes in interest rates. The Bank offers seven
checking account products, each targeted to specific demographic groups and
supported by an active direct mail marketing campaign (CHAMP). Total checking
account balances (NOW and demand) increased $14.6 million, or 31.5% in 1998,
following a $9.5 million or 27.1% increase in 1997. The Bank opened more than
8,300 new checking accounts in 1998 as a result of the CHAMP program.
Savings account balances increased $7.9 million or 18.7% in 1998,
compared with an increase of $3.8 million or 9.7% in 1997. The gains resulted
primarily from cross-sales to new checking account customers.
10
<PAGE> 13
Time certificates of deposit totaled $100.1 million at December 31,
1998, compared with $105.1 million at the end of 1997. The Bank generally kept
its rates on time certificates in the mid range of rates offered in its market
area during 1998, which, as expected, resulted in a decrease in these accounts.
The Bank expects to continue this practice in 1999. Premium rates may be offered
from time to time for specific branch promotions or in the event loan demand so
justifies.
The following table sets forth deposits by type of account as of the
dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -------------------------
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 $ 50,399 21.23% 42,451 19.47% 38,690 18.86%
Time certificates 100,072 42.16% 105,072 48.19% 107,429 52.40%
Money market accounts 26,050 10.98% 24,234 11.12% 21,991 10.73%
NOW and escrow accounts 33,457 14.10% 26,025 11.94% 22,058 10.76%
Demand accounts 27,355 11.53% 20,236 9.28% 14,861 7.25%
- ---------------------------------------------------------------------------------------------------------------------
Total $ 237,333 100.00% 218,018 100.00% 205,029 100.00%
=====================================================================================================================
</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, 1998, 1997 and
1996, the aggregate amounts of certificates of deposit in denominations of
$100,000 or more were approximately $15,224,000, $13,427,000 and $13,065,000,
respectively.
The following table presents the amounts of certificates of deposit in
denominations of $100,000 or more at December 31, 1998 which mature during the
periods indicated (in thousands):
<TABLE>
<CAPTION>
Maturity Amount
- -------- ------
<S> <C>
3 months or less $ 4,536
3 to 6 months 3,773
6 to 12 months 1,846
Over 12 months 5,069
- ----------------------------------------------------------------
Total $ 15,224
- ----------------------------------------------------------------
</TABLE>
11
<PAGE> 14
The following table sets forth the average amount of and the average
rate paid on each category of interest-bearing deposits:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------------------ ----------------------- -----------------------
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 $ 45,955 2.80% 41,004 2.85% 36,576 2.84%
Time certificates 103,562 5.43% 104,447 5.53% 104,023 5.68%
Money market accounts 25,189 3.64% 22,551 3.64% 21,919 3.33%
NOW and escrow accounts 27,760 2.05% 22,911 2.10% 18,007 2.18%
</TABLE>
ASSET QUALITY
Nonperforming assets are comprised of nonaccrual loans and other real
estate owned (REO). 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 $4.1 million or 1.5% of total assets at
December 31, 1998, compared with $4.9 million or 1.9% of total assets at
December 31, 1997. Included in nonperforming assets at December 31, 1998 were
nonaccrual loans of $3.2 million or 1.5% of gross loans, compared with $3.9
million or 1.8% of gross loans at December 31, 1997.
The allowance for loan losses was $2.9 million at December 31, 1998
compared with $2.6 million at December 31, 1997. The ratio of the allowance to
nonperforming loans was 90% at December 31, 1998, compared with 65% at the end
of 1997. Loan loss provisions totaled $675,000 in 1998, compared with $500,000
in 1997. The loan loss provision was increased to reflect the higher credit risk
inherent in consumer and commercial lending. Charge-offs net of recoveries
amounted to $373,000 in 1998, compared with $54,000 in 1997, when the Bank
recovered $311,000 on a loan charged off in 1996.
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 probable 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 evaluation
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.
12
<PAGE> 15
Generally, all commercial mortgage loans and commercial loans in a
delinquent payment status (90 days or more delinquent) are considered impaired.
The Bank estimates losses on impaired loans based on the present value of
expected future cash flows (discounted at the loan's effective interest rate) or
the fair value of the underlying collateral if the loan is collateral dependent.
An impairment loss exists if the recorded investment in a loan exceeds the value
of the loan as measured by the aforementioned methods. A loan is considered
impaired when it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Residential
mortgage loans, consumer loans, home equity lines of credit and education loans,
respectively, are evaluated collectively since they are homogenous and generally
carry smaller individual balances.
As with any financial institution, poor economic conditions, high
interest rates, high unemployment and other matters outside of the Bank's
control may lead to increased losses in the loan portfolio. Management has
various controls in place which it designed in an effort to limit losses, such
as: (i) a comprehensive "watch list" of possible loan problems; (ii) a fully
documented policy concerning loan administration (loan file documentation,
disclosures, approvals, etc.); and (iii) an independent loan review function to
audit for adherence to established Bank controls and to review the quality and
anticipated collectibility of the portfolio. Loan review reports are presented
monthly to the Executive Committee of the Board of Directors, which in turn,
reports to the full Board of Directors. Charge-offs are authorized by the Board
of Directors based on management's recommendations after applying the credit
review process described above.
Management believes the allowance for loan losses as of December 31,
1998 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.
13
<PAGE> 16
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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ ------------ ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
Residential real estate mortgages $ 1,112 1,091 1,359 271 317
Commercial (1) 1,763 2,573 1,626 1,757 2,894
Consumer 305 253 186 110 40
- ---------------------------------------------------------------------------------------------------------------------
Total 3,180 3,917 3,171 2,138 3,251
=====================================================================================================================
Other loans past due 90 days or more and still
accruing:
Consumer (2) 0 0 29 1 0
Commercial (1) 0 0 370 0 447
- ---------------------------------------------------------------------------------------------------------------------
Total 0 0 399 1 447
=====================================================================================================================
Restructured loans, not included above 0 0 0 1,125 932
=====================================================================================================================
Real estate owned 900 951 717 397 984
=====================================================================================================================
Total assets containing specific risk
elements 4,080 4,868 4,287 3,661 5,614
=====================================================================================================================
Ratio of total loans past due
90 days or more to gross loans 1.48% 1.83% 1.73% 1.25% 2.21%
=====================================================================================================================
Ratio of assets containing specific
risk elements to total assets 1.48% 1.90% 1.77% 1.74% 2.78%
=====================================================================================================================
</TABLE>
(1) Includes commercial real estate loans.
(2) Consists primarily of Guaranteed Student Loans.
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>
Year ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Income that would have been accrued
at original contract rates $ 298 274 283 155 172
</TABLE>
Potential problem loans at December 31, 1998 amounted to $1.2 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 that 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.
14
<PAGE> 17
Impaired loans, which included troubled debt restructured loans, were
$1.5 million and $2.1 million at December 31, 1998 and 1997, respectively.
Included in these amounts are $554,000 and $1.9 million of impaired loans for
which the related allowance for loan losses is $205,000 and $219,000,
respectively. The average recorded investment in impaired loans during 1998,
1997 and 1996 was approximately $2.1 million, $1.5 million, and $2.9 million,
respectively. The amount of interest income recognized on impaired loans in
1998, 1997 and 1996 was approximately $91,000, $84,000, and $166,000,
respectively. The Bank is not committed to lend additional funds to these
borrowers.
The Company recognizes interest income on impaired loans using the cash
basis of income recognition. Cash receipts on impaired loans are generally
applied according to the terms of the loan agreement, or as a reduction of
principal, based upon management judgment and other factors.
The following table sets forth the activity in the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance $ 2,560 2,114 2,667 3,040 2,938
Provision 675 500 175 235 360
CHARGE-OFFS
Residential mortgages (92) (92) (74) 0 (18)
Commercial mortgages (95) (237) (168) (569) 0
Commercial (126) (137) (999) (153) (331)
Credit card (4) (1) 0 0 0
Other consumer (150) (106) (60) (10) (17)
- ----------------------------------------------------------------------------------------------------------------
(467) (573) (1,301) (732) (366)
- ----------------------------------------------------------------------------------------------------------------
RECOVERIES
Residential mortgages 0 2 0 0 0
Commercial mortgages 34 5 0 0 0
Commercial 39 496 118 118 96
Other consumer 21 16 8 6 12
- ----------------------------------------------------------------------------------------------------------------
94 519 126 124 108
- ----------------------------------------------------------------------------------------------------------------
Net Charge-offs (373) (54) (1,175) (608) (258)
- ----------------------------------------------------------------------------------------------------------------
Allowance of acquired bank 0 0 447 0 0
- ----------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,862 2,560 2,114 2,667 3,040
================================================================================================================
Ratio of net charge-offs during the year
to average loans outstanding during the 0.17% 0.03% 0.62% 0.36% 0.17%
year
==================================================================================================================
</TABLE>
15
<PAGE> 18
The following table sets forth the allocation of the allowance for loan
losses as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Consumer $ 661 428 178 80 59
Commercial (1) 1,932 2,039 1,822 2,517 2,926
Residential 269 93 114 70 55
- ------------------------------------------------------------------------------------------------------------------
$ 2,862 2,560 2,114 2,667 3,040
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes commercial real estate loans.
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) income simulation; and (iii) market value of equity 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. Income simulation measures
the potential impact on net interest income of hypothetical changes in interest
rates. Market value of equity analysis measures the potential impact on
stockholders' equity of hypothetical changes in interest rates.
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 expired in February 1999, the Bank
received payments on a quarterly basis when the prime rate dropped below 8.25%
(the "strike rate"), in the amount by which the prime rate fell below the strike
rate multiplied by the notional amount of the floor. The fee paid for the floor
was included in other assets and was amortized to interest income using the
interest method over the life of the floor. The Bank did not replace this
instrument upon its expiration.
The Company's cumulative one-year ratio of rate sensitive assets to rate
sensitive liabilities (one-year gap) was 1.15 at December 31, 1998.
16
<PAGE> 19
The following table sets forth the amortization, maturity and repricing
schedule of the Company's interest earning assets and interest bearing
liabilities for all future time periods as of December 31, 1998.
<TABLE>
<CAPTION>
0 to Over 3 Over 1 Over 5 Over
3 Months to 12 Months to 5 Years to 10 Years 10 Years Total
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 24,300 0 0 0 0 24,300
Securities 2,239 6,877 7,901 1,432 346 18,795
Federal Home Loan Bank stock 1,561 0 0 0 0 1,561
Mortgage loans 18,893 57,155 42,864 14,307 2,142 135,361
Consumer loans 10,965 8,766 29,167 2,698 0 51,596
Commercial loans 17,255 2,331 8,128 0 74 27,788
- ---------------------------------------------------------------------------------------------------------------------
Total 75,213 75,129 88,060 18,437 2,562 259,401
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts 5,040 15,120 20,155 10,084 0 50,399
Time certificates 25,953 40,727 32,077 1,315 0 100,072
Money market accounts 26,050 0 0 0 0 26,050
NOW and escrow accounts 1,599 5,595 22,021 4,242 0 33,457
Borrowings 7,773 3,000 4,265 665 276 15,979
- ----------------------------------------------------------------------------------------------- ------------
----------
Total 66,415 64,442 78,518 16,306 276 225,957
- ---------------------------------------------------------------------------------------------------------------------
Gap $ 8,798 10,687 9,542 2,131 2,286 33,444
=====================================================================================================================
Cumulative gap $ 8,798 19,485 29,027 31,158 33,444
=====================================================================================================================
Cumulative gap as a
Percentage of
Interest-earning
Assets 3.39% 7.51% 11.19% 12.01% 12.89%
=====================================================================================================================
</TABLE>
STOCKHOLDER'S EQUITY
Stockholders' equity totaled $19.1 million at December 31, 1998,
compared with $17.7 million at December 31, 1997. The change is the result of:
(i) net income of $1.6 million; (ii) proceeds of $179,000 from issuance of stock
under stock plans; (iii) cash dividends of $404,000; and (iv) a $6,000 increase
in the fair value of securities, net of taxes.
The Company's and Bank's leverage capital ratio was 6.78% at December
31, 1998 compared with 6.91% at December 31, 1997. Total capital to
risk-adjusted assets was 11.30% and 11.31%, respectively, at December 31, 1998
and 1997. Both capital measurements exceed the regulatory requirements of 5% and
10%, respectively, to be classified as a well-capitalized institution.
17
<PAGE> 20
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 $25.6 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 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,
---------------------------------------------------
1998 1997 1996
------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities sold under repurchase agreements $ 1,773 2,204 2,516
Line of credit advances from the FHLB of New York 6,000 0 0
Advances from the FHLB of New York 7,465 14,486 14,000
Municipal securities sold with put options 741 1,367 1,665
- --------------------------------------------------------------------------------------------------------------------
$ 15,979 18,057 18,181
=====================================================================================================================
Weighted average interest cost of
borrowings during the year 6.25% 6.47% 6.48%
=====================================================================================================================
</TABLE>
The Bank's liquidity position is monitored daily, and the
Asset/Liability Committee of the Board of Directors is responsible for setting
general guidelines to ensure maintenance of prudent levels of liquidity. At
December 31, 1998, the Bank's approved commitments to extend credit amounted to
$27.1 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
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. All earnings per share information is
calculated assuming dilution pursuant to Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
Net income was $1.65 million or $1.11 per diluted share in 1998,
compared with $1.66 million or $1.13 per diluted share in 1997. A $1 million
increase in net interest income and a $489,000 increase in other operating
income was offset by a $175,000 increase in loan loss provisions and a $1.4
million increase in other expenses.
18
<PAGE> 21
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 $10.5 million in 1998, an increase of $1
million, or 10.6% from 1997. Interest income increased $1.1 million or 5.7% in
1998 due to a $17 million increase in average interest earning assets which was
partially offset by a 12 basis point decrease in the yield on those assets.
Total average loans increased $4.5 million or 2.1% while federal funds sold
increased $12.4 million or 352%.
The rate of growth in interest income and net interest income, although
healthy, slowed compared with 1997 due to a sharp decline in the growth rate of
average loans. Average loans increased 2.1% in 1998, compared with 11.4% in
1997. The impact of the slowdown in loan growth was partially mitigated by a
significant change in the mix of the loan portfolio. The average balance of
higher yielding consumer and commercial loans increased $18.6 million or 35.3%
in 1998, while mortgages decreased $14.1 million or 9%. This trend is expected
to continue into 1999 if interest rates do not rise appreciably in the near
future.
The yield on loans was 8.41% in 1998, compared with 8.36% in 1997. The
increase was due mainly to the increase in the average balance of other loans
(consumer and commercial), which yielded 9.25% in 1998, compared with 9.22% in
1997.
Interest expense increased $84,000 or .9% in 1998. An $11.1 million
increase in average interest-bearing liabilities was substantially offset by a
19 basis point decrease in the cost of these funds. The Bank's deposit mix
continued to change in 1998 due to its strategy of emphasizing and promoting
savings and checking accounts. Average interest-bearing transaction accounts
(savings and NOW accounts) as a percentage of total interest-bearing deposits
(including escrow) were 36.4% in 1998, compared with 33.5% in 1997. The average
cost of interest-bearing transaction accounts was 2.52% in 1998, while the
average cost of time deposits was 5.43%. This compares with 2.58% and 5.53%,
respectively, in 1997. The overall cost of funds, including non interest-bearing
demand accounts, was 3.93% in 1998, down from 4.17% in 1997.
Interest rates were, on average, lower in 1998 compared with 1997. The
Bank's prime rate, which is directly impacted by movements in short term rates
by the Federal Reserve, averaged 8.36% in 1998, compared with 8.44% in 1997.
Treasury yields on maturities of 5 years or more decreased on average more than
100 basis points, while yields on shorter maturities declined by a lesser
degree.
Market interest rates alone do not dictate the rates the Bank pays for
its funds, although they are an important factor. Other factors that impact the
Bank's cost of funds include liquidity needs, the desired mix of deposits and
borrowings, local market competition and asset growth objectives.
The net interest margin, which is computed by dividing net interest
income by average interest earning assets, increased to 4.23% in 1998, compared
with 4.11% in 1997.
19
<PAGE> 22
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. Nonaccruing loans,
which are immaterial, have been included in interest earning assets. No tax
equivalent adjustments were made.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
----------------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------- ------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 143,052 11,431 7.99% 157,177 12,681 8.07%
Other loans 71,468 6,610 9.25% 52,836 4,872 9.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 214,520 18,041 8.41% 210,013 17,553 8.36%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities 18,652 1,148 6.15% 18,537 1,198 6.46%
Federal funds sold 15,930 866 5.44% 3,524 214 6.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 249,102 20,055 8.05% 232,074 18,965 8.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets 15,271 0 13,417 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 264,373 20,055 245,491 18,965
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts $ 45,955 1,287 2.80% 41,004 1,169 2.85%
Time certificates 103,562 5,628 5.43% 104,447 5,774 5.53%
Money market accounts 25,189 916 3.64% 22,551 821 3.64%
NOW and escrow accounts 27,760 568 2.05% 22,911 480 2.10%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 202,466 8,399 4.15% 190,913 8,244 4.32%
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings 17,930 1,120 6.25% 18,406 1,191 6.47%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 220,396 9,519 4.32% 209,319 9,435 4.51%
Non-interest-bearing deposits 21,537 0 16,892 0
Non-interest-bearing liabilities 3,945 0 2,067 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 245,878 9,519 228,278 9,435
Stockholders' equity 18,495 0 17,213 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 264,373 9,519 245,491 9,435
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread 10,536 3.73% 9,530 3.66%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net yield on interest-earning
assets $ 28,706 4.23% 22,755 4.11%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.11
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31,
1996
-------------------------------------------------------
Average Yield/
Balance Interest Rate
-------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans 152,455 12,156 7.97%
Other loans 36,053 3,346 9.28%
- --------------------------------------------------------------------------------------------------
Total loans 188,508 15,502 8.22%
- -------------------------------------------------------------------------------------------------
Securities 22,166 1,461 6.59%
Federal funds sold 3,591 199 5.54%
- ------------------------------------------------------------------------------------------------
Total interest-earning assets 214,265 17,162 8.01%
- -------------------------------------------------------------------------------------------------
Non-interest earning assets 12,998 0
- -------------------------------------------------------------------------------------------------
Total assets 227,263 17,162
- -------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts 36,576 1,040 2.84%
Time certificates 104,023 5,908 5.68%
Money market accounts 21,919 730 3.33%
NOW and escrow accounts 18,007 392 2.18%
- -------------------------------------------------------------------------------------------------
Total interest-bearing deposits 180,525 8,070 4.47%
- -------------------------------------------------------------------------------------------------
Borrowings 16,054 1,041 6.48%
- -------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 196,579 9,111 4.63%
Non-interest-bearing deposits 12,310 0
Non-interest-bearing liabilities 2,665 0
- -------------------------------------------------------------------------------------------------
Total liabilities 211,554 9,111
Stockholders' equity 15,709 0
- -------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity 227,263 9,111
- -------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread 8,051 3.38%
- -------------------------------------------------------------------------------------------------
Net interest-earning assets/
net yield on interest-earning
assets 17,686 3.76%
- -------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 1.09
- -------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
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>
1998 vs. 1997 1997 vs. 1996
----------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
--------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $(1,126) (124) (1,250) 374 151 525
Other loans 1,722 16 1,738 1,548 (22) 1,526
Securities 7 (57) (50) (235) (28) (263)
Federal funds sold 676 (24) 652 (4) 19 15
- -------------------------------------------------------------------------------------------------------------------------
Total 1,279 (189) 1,090 1,683 120 1,803
=========================================================================================================================
Interest expense on interest-bearing liabilities:
Deposits:
Savings and club accounts $ 139 (21) 118 125 4 129
Time certificates (47) (99) (146) 24 (158) (134)
Money market accounts 95 0 95 21 70 91
NOW and escrow accounts 100 (12) 88 103 (15) 88
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 287 (132) 155 273 (99) 174
Borrowings (31) (40) (71) 152 (2) 150
- -------------------------------------------------------------------------------------------------------------------------
Total 256 (172) 84 425 (101) 324
=========================================================================================================================
Net interest income $ 1,023 (17) 1,006 1,258 221 1,479
=========================================================================================================================
</TABLE>
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 1998
was $2.3 million, compared with $1.8 million in 1997, an increase of $489,000 or
26.4%. Much of the increase is attributable to higher service charges on
deposits, which increased $340,000 or 24.4% in 1998. This is a direct result of
the growth in the Company's checking accounts. In addition, net gain on sale of
loans increased $125,000 or 154.3% in 1998 due to a higher volume of loan sales.
OTHER OPERATING EXPENSES
Other operating expenses were $9.7 million in 1998, compared with $8.3
million in 1997, an increase of $1.4 million or 16.5%.
Salaries and employee benefits expense was $4.1 million in 1998,
compared with $3.7 million in 1997, an increase of $407,000 or 11.1%. The
increase is attributable to staffing of a new branch opened in the North Medical
Plaza in Liverpool in September 1997, higher benefits expense due to greater
employee participation in the Company's benefit plans and normal salary
increases.
Building, occupancy and equipment expense increased $210,000 or 16.4%
due to the cost of operating the new branch, and to depreciation on computer
equipment purchased in early 1998. In addition, a $38,000 write-off was recorded
upon the disposition of obsolete equipment in 1998.
21
<PAGE> 24
Data processing expense increased $294,000 or 67.9% in 1998.
Approximately 51% of the increase was due to cost of the Bank's Year 2000
program, with the rest of the increase due to the Bank's growth.
Correspondent bank fees increased $160,000 or 37.5% due to higher
transaction volume resulting from the growth in the Bank's customer base.
Professional services increased $140,000 or 65.7% in 1998, due to
increased reliance on outside firms for information technology, internal audit
and services related to the formation of a Real Estate Investment Trust
subsidiary.
Other expenses increased $113,000 or 10% in 1998. Real estate owned
expense accounted for approximately 55% of the increase, due to anticipated
losses in the portfolio.
The Company's efficiency ratio was 75.7% in 1998, compared with 71.5% in
1997. The efficiency ratio is equal to total operating expenses (net of real
estate owned expense and amortization of intangibles) divided by net interest
income plus other operating income (excluding securities gains). The degradation
in the efficiency ratio reflects the high cost to the Company of offering
competitive products and services in a fast changing banking environment.
INCOME TAXES
Income tax expense was $874,000 for 1998 and $909,000 for 1997. The
decrease generally corresponds to lower income before income taxes. Effective
income tax rates were 34.6% for 1998 and 35.4% for 1997. At December 31, 1998,
the Company has deferred tax assets of $1.3 million and deferred tax liabilities
of $698,000. Management has determined that a valuation allowance for the
deferred tax assets is not needed at December 31, 1998. Additional information
on income taxes is provided in the notes to consolidated financial statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
GENERAL
Net income was $1.66 million, or $1.13 per diluted share in 1997,
compared with $1.48 million, or $1.03 per diluted share in 1996. A $1.48 million
increase in net interest income and a $733,000 increase in other operating
income was partially offset by a $325,000 increase in loan loss provisions and
an $890,000 increase in other operating expenses. Income taxes increased
$816,000.
NET INTEREST INCOME
Net interest income was $9.5 million in 1997, an increase of $1.5
million, or 18.4% from 1996. Interest income increased $1.8 million, or 10.5% in
1997 due to a $17.8 million increase in average interest earning assets and a 16
basis point increase in the yield on those assets. Total average loans increased
$21.5 million, or 11.4% while securities and federal funds sold decreased $3.7
million, or 14.4%.
The yield on loans was 8.36% in 1997, compared with 8.22% in 1996. The
increase was due mainly to a $16.8 million, or 46.6% increase in the average
balance of other loans (consumer and commercial), which yielded 9.22% in 1997.
Interest rates were, on average, little changed between 1997 and 1996.
The Bank's prime rate averaged 8.44% in 1997, compared with 8.27% in 1996.
Treasury yields on maturities of 5 years or less increased on average less than
20 basis points, while yields were down slightly on longer maturities.
Interest expense increased $324,000 or 3.6% in 1997 due to a $12.7
million increase in average interest-bearing liabilities partially offset by a
12 basis point decrease in the cost of funds. Average interest-bearing
transaction
22
<PAGE> 25
accounts (savings and NOW accounts) as a percentage of total interest-bearing
deposits (including escrow) were 33.5% in 1997, compared with 30.2% in 1996. The
average cost of interest-bearing transaction accounts was 2.58% in 1997, while
the average cost of time deposits was 5.53%. This compares with 2.62% and 5.68%,
respectively, in 1996. The overall cost of funds, including non interest-bearing
demand accounts, was 4.17% in 1997, down from 4.36% in 1996.
The net interest margin increased to 4.11% in 1997, compared with 3.76%
in 1996.
OTHER OPERATING INCOME
Other operating income in 1997 was $1.8 million, compared with $1.1
million in 1996, an increase of $733,000 or 65.7%. Much of the increase is
attributable to higher service charges on deposits, which increased $655,000 or
88.4% in 1997. This is a direct result of the growth in the Company's checking
accounts.
OTHER OPERATING EXPENSES
Other operating expenses were $8.3 million in 1997, compared with $7.4
million in 1996, an increase of $890,000 or 12%. The increase in expenses was
primarily growth related.
Salaries and employee benefits expense was $3.7 million in 1997,
compared with $3.2 million in 1996, an increase of $408,000 or 12.6%. Most of
the increase is attributable to a full year of salary expense in 1997 for
employees of the Cicero Bank branch that was acquired on July 1, 1996, and the
hiring of 6 new full-time equivalent employees to staff the new North Medical
branch, which opened in September, 1997. The remainder of the increase resulted
primarily from salary adjustments and incentive bonuses.
Building, occupancy and equipment expense increased $73,000 or 6.1% due
primarily to a full year of depreciation and maintenance in 1997 on the branch
acquired from Cicero Bank and to four months of expense on the North Medical
branch.
Data processing and correspondent bank fees increased a combined
$238,000 or 38.3% in 1997 due primarily to transaction processing costs on the
Bank's larger customer base.
Real estate owned expense was $83,000 in 1997, compared with $2,000 in
1996. The Bank recorded a provision totaling $50,000 in the fourth quarter of
1997 on certain commercial properties.
The Company's efficiency ratio was 71.5% in 1997, down from 81% in 1996.
The improvement in the efficiency ratio was driven by growth in net interest
income and other operating income exceeding the increase in operating expenses.
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
fully recognize the deferred tax assets. The Company recorded income tax expense
of $909,000 in 1997, compared with $93,000 in 1996. Additional information on
income taxes is provided in the notes to consolidated financial statements.
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.
In as much as virtually all of the assets and liabilities of a financial
institution are monetary in nature, 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
23
<PAGE> 26
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
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes comprehensive
accounting and reporting requirements for derivative instruments and hedging
activities. The statement requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair value. The
accounting for gains and losses resulting from changes in fair value of the
derivative instrument depends on the intended use of the derivative and the type
of risk being hedged. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, although earlier adoption is
permitted. The Company does not have significant investments in derivative
instruments, therefore the provisions of SFAS No. 133 are not expected to have a
significant effect on the financial statements of the Company. SFAS No. 133 also
permits certain reclassifications of securities among the trading,
available-for-sale and held-to-maturity classifications. The Company has no
current intention to reclassify any securities pursuant to SFAS No.
133.
YEAR 2000 ISSUE
The Year 2000 issue stems from date coding practices in both software
and hardware. Specifically, hardware and software developers have often used
two-digit numbers rather than four-digit numbers to represent years. This was
done in a conscious effort to provide cost-effective and efficient business
solutions, given resource constraints and requirements in the past.
Consequently, when the year turns to 2000, the software may calculate the date
as 1900 because the century has not been properly defined.
The Year 2000 problem creates risk for the Company from both unforeseen
problems in its own information technology ("IT") systems and from problems in
the IT systems of third parties (including vendors and service providers) with
whom the Company deals on financial transactions. Failures of the Company's
and/or third parties' IT systems could have a material adverse impact on the
Company's ability to conduct its business. The Company has been actively
communicating with third parties concerning the status of their Year 2000
readiness by, among other things, sending written Year 2000 inquiries, and has
undertaken to evaluate the Year 2000 readiness of its commercial borrowers. The
Company believes that its reasonably likely worst case Year 2000 scenario is:
(i) a material increase in the Company's credit losses due to Year 2000 problems
for the Company's borrowers and obligors; and (ii) disruption in financial
markets causing liquidity stress to the Company. The magnitude of these
potential credit losses or disruption cannot be determined at this time.
The Company's non-IT systems used to conduct business at its facilities
consist primarily of office equipment (other than computer and communications
equipment) and other equipment at the Company's leased office facilities. The
Company has inventoried its non-IT systems and has sent Year 2000 questionnaires
to its office equipment vendors and landlords to determine the status of their
Year 2000 readiness.
The Company has an enterprise-wide program to prepare its IT systems for
the year 2000. A senior management committee directs the Company's Year 2000
activities under the framework of the Federal Financial Institutions Examination
Council's Five Step Program: (i) Awareness; (ii) Assessment; (iii) Renovation;
(iv) Validation; and (v) Implementation. Approximately $350,000 has been
expended on the Year 2000 project as of December 31, 1998. This amount includes
the costs of additional hardware, software and technology consultants necessary
to achieve Year 2000 compliance for the Company's systems.
The Company's pending merger with BSB, expected to close by Summer 1999,
has changed the scope of the Company's Year 2000 project. Most, if not all, of
the Company's systems will be converted to BSB's systems prior to year-end. BSB
has replaced or upgraded most of its mission critical IT systems, including its
core processing systems, which has been certified Year 2000 compliant by the
Information Technology Association of America. The weekend of July 10 and 11,
1999 has been tentatively reserved for the conversion of the Company's core data
24
<PAGE> 27
processing system to BSB's system. This date assumes the merger is closed by
July 1. Contingency plans are being developed by BSB and will be completed in
1999.
As a result of the Company's pending merger with BSB, the Company has
suspended remediation and testing of systems that will not be in use following
the merger, and has ceased development of Year 2000 related contingency plans.
The Company plans to continue to monitor the readiness of its larger commercial
customers, and vendors as well as correspondents with whom the Company expects a
continuing relationship following the merger.
In the unlikely event the acquisition of the Company by BSB Bancorp is
not consummated, the Company would resume its Year 2000 project as originally
planned. The Company does not expect that such a situation would negatively
impact its ability to achieve Year 2000 compliance in a timely manner, nor does
the Company believe that such costs would have a material impact on its
financial position.
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of Skaneateles Bancorp, Inc. 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
LLP, the Company's independent auditors. KPMG 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 Skaneateles, in conformity with generally accepted
accounting principles.
25
<PAGE> 28
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Skaneateles Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Skaneateles
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 Skaneateles Bancorp,
Inc. and subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Syracuse, New York
January 8, 1999
26
<PAGE> 29
SKANEATELES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
Cash and due from banks $ 9,338 9,658
Federal funds sold 24,300 6,700
Securities available-for-sale, at fair value 14,799 8,416
Securities held-to-maturity, fair value of
$4,171 in 1998 and $7,935 in 1997 4,015 7,705
Federal Home Loan Bank stock, at cost 1,561 1,561
Loans, including deferred origination costs 215,440 215,022
Allowance for loan losses (2,862) (2,560)
- -----------------------------------------------------------------------------------------------------------------------
Net loans 212,578 212,462
Premises and equipment, net 5,763 6,155
Real estate owned, net 900 951
Accrued interest receivable 1,534 1,372
Other assets 1,360 1,121
- -----------------------------------------------------------------------------------------------------------------------
$ 276,148 256,101
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 209,978 197,782
Demand deposits 27,355 20,236
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 237,333 218,018
Borrowings 15,979 18,057
Other liabilities 3,735 2,355
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 257,047 238,430
- -----------------------------------------------------------------------------------------------------------------------
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 4,000,000 shares,
1,450,712 and 1,435,992 shares issued in 1998 and 1997, respectively 15 14
Additional paid-in capital 9,297 9,119
Retained earnings 9,818 8,573
Accumulated other comprehensive income (29) (35)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,101 17,671
- -----------------------------------------------------------------------------------------------------------------------
$ 276,148 256,101
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
SKANEATELES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Mortgage loans $ 11,431 12,681 12,156
Other loans 6,610 4,872 3,346
Securities 1,148 1,198 1,461
Federal funds sold 866 214 199
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 20,055 18,965 17,162
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 8,399 8,244 8,070
Borrowings 1,120 1,191 1,041
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,519 9,435 9,111
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 10,536 9,530 8,051
Provision for loan losses 675 500 175
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 9,861 9,030 7,876
- ---------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges 1,734 1,394 739
Net gain on security transactions 0 0 77
Net gain on sale of loans 206 81 34
Other 398 374 266
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating income 2,338 1,849 1,116
- ---------------------------------------------------------------------------------------------------------------------------
12,199 10,879 8,992
- ---------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,062 3,655 3,247
Building, occupancy and equipment 1,488 1,278 1,205
Data processing 727 433 372
Correspondent bank fees 587 427 250
Advertising and promotions 245 225 262
Postage and delivery 472 546 517
Stationery and supplies 233 206 216
ATM service fees 272 201 133
Professional services 353 213 203
Other 1,237 1,124 1,013
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 9,676 8,308 7,418
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 2,523 2,571 1,574
Income tax expense 874 909 93
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,649 1,662 1,481
===========================================================================================================================
Net income per common share - basic
$ 1.14 1.16 1.05
Net income per common share - diluted 1.11 1.13 1.03
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
SKANEATELES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in- Retained comprehensive Treasury
stock capital earnings income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 10 9,526 6,083 33 (713) 14,939
Comprehensive income:
Net income 0 0 1,481 0 0 1,481
Change in net unrealized gain on securities, net of taxes 0 0 0 (90) 0 (90)
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,391
- ------------------------------------------------------------------------------------------------------------------------------
Sale of 20,775 shares under option
0 117 0 0 0 117
Issuance of 4,985 shares of stock under
1995 Non-employee Director's Stock Plan 0 47 0 0 0 47
Cash dividend declared on Common stock ($.19 per share) 0 0 (264) 0 0 (264)
Retirement of 154,050 shares of treasury stock (1) (712) 0 0 713 0
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 9 8,978 7,300 (57) 0 16,230
==============================================================================================================================
Comprehensive income:
Net income 0 0 1,662 0 0 1,662
Change in net unrealized gain on securities, net of
taxes 0 0 0 22 0 22
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,684
- ------------------------------------------------------------------------------------------------------------------------------
Sale of 7,350 shares under option 1 46 0 0 0 47
Issuance of 3,473 shares of stock under
1995 Non-employee Director's Stock Plan 0 47 0 0 0 47
Issuance of 2,688 shares of stock under Dividend
Reinvestment Plan 0 36 0 0 0 36
Issuance of 728 shares of stock under
1997 Employee Stock Purchase Plan 0 12 0 0 0 12
3-for-2 stock split 4 0 (4) 0 0 0
Cash paid for fractional shares on stock split 0 0 (4) 0 0 (4)
Cash dividend declared on Common stock ($.27 per share) 0 0 (381) 0 0 (381)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 14 9,119 8,573 (35) 0 17,671
==============================================================================================================================
Comprehensive income:
Net income 0 0 1,649 0 0 1,649
Change in net unrealized gain on securities, net of taxes 0 0 0 6 0 6
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,655
- ------------------------------------------------------------------------------------------------------------------------------
Sale of 6,280 shares under option 1 41 0 0 0 42
Issuance of 3,619 shares of stock under
1995 Non-employee Director's Stock Plan 0 65 0 0 0 65
Issuance of 1,500 shares of stock under
1995 Non-employee Director's Warrant Plan
0 19 0 0 0 19
Issuance of 2,322 shares of stock under Dividend
Reinvestment Plan 0 37 0 0 0 37
Issuance of 999 shares of stock under
1997 Employee Stock Purchase Plan 0 16 0 0 0 16
Cash dividend declared on Common stock ($.28 per share) 0 0 (404) 0 0 (404)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 15 9,297 9,818 (29) 0 19,101
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
SKANEATELES BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net Income
$ 1,649 1,662 1,481
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 675 500 175
Provision for losses on real estate owned 110 50 0
Depreciation and amortization 846 692 628
Mortgage loans originated for sale (15,225) (3,363) (4,454)
Proceeds from sale of mortgage loans originated for sale 13,720 4,090 4,861
Net gain on sale of loans (206) (81) (34)
Net gain on security transactions 0 0 (77)
Net increase in interest receivable (162) (101) (16)
Net increase (decrease) in other liabilities 1,380 (387) 549
Receipt of balance due from Nationar 0 0 1,057
Other, net (552) (132) (105)
- -----------------------------------------------------------------------------------------------------
Total adjustments 586 1,268 2,584
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,215 2,930 4,065
Investing activities
Proceeds from maturities of securities available for sale 4,000 3,000 3,004
Proceeds from sale of securities available for sale 0 0 2,462
Proceeds from maturities of securities held to maturity 2,836 2,490 6,175
Purchase of securities held to maturity (70) 0 (5,135)
Purchase of securities available for sale (11,124) (5,756) (3,096)
Principal collected on asset-backed securities
available for sale 1,680 1,113 1,110
Purchase of Federal Home Loan Bank stock 0 (151) (107)
Net decrease (increase) in loans made to customers 804 (8,982) (22,664)
Net cash received from acquired bank 0 0 4,024
Proceeds from sale of real estate owned 284 164 196
Purchase of property and equipment, net (377) (602) (298)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,967) (8,724) (14,329)
Financing activities
Net decrease in time certificates (5,000) (2,357) (1,913)
Net increase in other deposits 24,315 15,346 8,719
Increase (decrease) in overnight borrowings 5,569 (312) 865
Increase in long-term borrowings 0 2,500 4,000
Repayment of long-term borrowings (7,647) (2,312) (1,070)
Proceeds from issuance of stock pursuant to stock plans 179 142 164
Dividends paid (404) (381) (264)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,012 12,626 10,501
- -----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 17,280 6,832 237
Cash and cash equivalents at beginning of year 16,358 9,526 9,289
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 33,638 16,358 9,526
=====================================================================================================
Interest paid $ 9,554 9,433 9,116
=====================================================================================================
Income taxes paid $ 820 1,075 92
=====================================================================================================
Supplemental schedule of noncash investing activities:
Mortgage loans foreclosed and transferred to real
estate owned $ 365 452 515
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
SKANEATELES BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Business
Skaneateles Bancorp, Inc. (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, and
disclosure of contingent 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. 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 accumulated other comprehensive income, a 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-to-maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or discount on
the associated security.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the interest method. 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
Loans are reported at the principal amount outstanding, net of deferred
origination fees and costs. Interest on loans is accrued and included in income
at contractual rates applied to principal outstanding. 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 the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments has improved, in which case the loan is returned
to accrual status.
31
<PAGE> 34
Net loan origination fees and costs are deferred 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 Company has the ability and intent to hold its loans to maturity except for
education loans which are sold to a third party upon reaching repayment status.
Also, the Company 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 is based on management's evaluation of the loan
portfolio considering past loan loss experience, review of specific loans,
current economic conditions and such other factors that require current
recognition in estimating loan losses. The allowance for loan losses is
increased by the provision for loan losses charged to operations. 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. The
allowance for loan losses is maintained at a level believed by management to be
sufficient to absorb probable future losses related to loans outstanding as of
the balance sheet date. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the loan portfolio and other
relevant factors and requires material estimates including the amounts and
timing of expected future cash flows on impaired loans. 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. Impairment losses are
included as a component of the allowance for loan losses. 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. 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.
(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 on the
straight-line method over the estimated service lives of the respective assets
(40 years for building and improvements and 3 to 10 years for furniture and
equipment) or lease terms.
(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 less selling
expenses 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, or the
establishment of allowances are charged to other operating expenses.
32
<PAGE> 35
(g) Other Assets
On July 1, 1996, the Bank acquired substantially all the assets and assumed the
deposit liabilities of Cicero Bank. 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 period of benefit
of seven years on a straight line basis. The amortization period is monitored to
determine if events and circumstances require the estimated useful life 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.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which temporary differences are expected
to be recovered or settled and tax carryforwards are expected to be utilized.
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
Basic earnings per share is calculated by dividing net income available to
common shareholders by the weighted average number of shares outstanding during
the year. Diluted earnings per share also includes the maximum dilutive effect
of stock issuable upon conversion of stock options and warrants.
(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
The Company continues to apply the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its stock-based compensation plans.
Disclosures in the footnotes to the financial statements provide pro forma net
income and earnings per share information as if the Company had adopted the fair
value-based method of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation."
(l) Financial Instruments with Off-Balance Sheet Risk
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 at amortized cost. Fees paid by
the Company at inception of interest rate floors are deferred and amortized
using the interest method over the life of the floor. Income and expense on the
floors are recorded in the same category as that of the related balance sheet
item.
(m) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. At the
Company, comprehensive income represents net income and the net change in
unrealized gains or losses on securities available for sale, net of taxes, and
is presented in the Consolidated Statements of Stockholders' Equity and
Comprehensive Income. Prior year consolidated financial statements have been
reclassified to conform to the requirements of SFAS No. 130
(n) Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires public companies to
report certain financial and other information about key revenue-producing
segments for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments include profit and loss, certain revenue and expense items, and total
assets. As a community-oriented financial institution, substantially all of the
Company's operations involve the delivery of loans and deposit products to
customers. Management makes operating decisions
33
<PAGE> 36
and assesses performance based on an ongoing review of these community banking
operations, which constitute the Bank's only operating segment for financial
reporting purposes. Therefore, adoption of SFAS No. 131 did not result in any
changes in the Company's reporting.
(2) Securities
Securities available for sale at December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $ 13,116 40 (56) 13,100
Mortgage-backed securities-FNMA 622 26 0 648
Asset-backed securities 1,042 9 0 1,051
- -----------------------------------------------------------------------------------------------------------------
$ 14,780 75 (56) 14,799
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $ 6,013 13 0 6,026
Mortgage-backed securities-FNMA 733 19 0 752
Asset-backed securities 1,630 10 (2) 1,638
- -----------------------------------------------------------------------------------------------------------------
$ 8,376 42 (2) 8,416
=================================================================================================================
</TABLE>
34
<PAGE> 37
Securities held to maturity at December 31 are summarized as follows ( dollars
in thousands):
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $ 1,019 4 0 1,023
Mortgage-backed securities:
FNMA 103 4 0 107
FHLMC 2,087 87 0 2,174
Obligations of states and political subdivisions 806 61 0 867
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,015 156 0 4,171
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997
---------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and Federal agency obligations $ 3,007 10 0 3,017
Mortgage-backed securities:
FNMA 130 4 0 134
FHLMC 2,998 168 0 3,166
Obligations of states and political subdivisions 1,470 48 0 1,518
Corporate bonds, notes and debentures 100 0 0 100
- ----------------------------------------------------------------------------------------------------------------------------
$ 7,705 230 0 7,935
============================================================================================================================
</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.
There were no realized gains or losses in 1998 or 1997. Gross realized gains on
the sale of securities were approximately $77,000 in 1996.
35
<PAGE> 38
The contractual maturity distribution of securities at December 31, 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
One to Five to
Within five ten After ten
one year years years years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and Federal agency obligations $ 5,023 7,093 1,000 0 13,116
Mortgage-backed securities:
FNMA 0 0 0 622 622
Asset-backed securities 0 357 685 0 1,042
- ----------------------------------------------------------------------------------------------------------------------------
$ 5,023 7,450 1,685 622 14,780
============================================================================================================================
Fair value $ 5,035 7,421 1,694 649 14,799
============================================================================================================================
Weighted average yield of securities 5.22% 4.88% 6.08% 6.55% 5.20%
============================================================================================================================
Securities held to maturity:
U.S. government and Federal agency obligations $ 999 20 0 0 1,019
Mortgage-backed securities:
FNMA 0 0 0 103 103
FHLMC 0 0 68 2,019 2,087
Obligations of states and political subdivisions 0 257 215 334 806
- ----------------------------------------------------------------------------------------------------------------------------
$ 999 277 283 2,456 4,015
============================================================================================================================
Fair value $1,003 298 311 2,559 4,171
============================================================================================================================
Weighted average yield of securities 6.10% 6.43% 7.19% 7.14% 6.88%
============================================================================================================================
</TABLE>
Securities carried at $7,346,000 at December 31, 1998 were pledged for
borrowings and other purposes required by law.
Accrued interest receivable on securities was $201,000 and $177,000 at December
31, 1998 and 1997, respectively.
The following summarizes the components of other comprehensive income for the
years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
Net unrealized holding gains (loss) on securities $ 10 36 (73)
Reclassification adjustment for net realized gains 0 0 (77)
included in net income
- ----------------------------------------------------- ------------- ------------- -------------
Other comprehensive, before tax 10 36 (150)
Income tax expense (4) (14) 60
- ----------------------------------------------------- ------------- ------------- -------------
Other comprehensive income, net of tax $ 6 22 (90)
===================================================== ============= ============= =============
</TABLE>
36
<PAGE> 39
(3) Loans
Major categories of loans at December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Residential $ 100,685 119,350
Commercial
34,676 33,962
- ----------------------------------------------------------------------------------------------------
135,361 153,312
- ----------------------------------------------------------------------------------------------------
Other loans:
Commercial 27,788 22,995
Guaranteed student 910 1,059
Home equity and improvement 20,658 20,624
Other consumer 30,028 16,565
- ----------------------------------------------------------------------------------------------------
79,384 61,243
- ----------------------------------------------------------------------------------------------------
214,745 214,555
Net deferred origination costs 695 467
- ----------------------------------------------------------------------------------------------------
$ 215,440 $ 215,022
====================================================================================================
</TABLE>
Changes in the allowance for loan losses for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1 $ 2,560 2,114 2,667
Provision charged to operations 675 500 175
Recoveries 94 519 126
Loans charged off (467) (573) (1,301)
Allowance of acquired bank 0 0 447
- -----------------------------------------------------------------------------------------
Balance at December 31 $ 2,862 2,560 2,114
=========================================================================================
</TABLE>
The principal balances of loans not accruing interest, including impaired loans,
amounted to approximately $3,180,000 and $3,917,000 at December 31, 1998 and
1997, respectively. The effect of non-accrual loans on interest income for 1998,
1997 and 1996 was a reduction of approximately $298,000, $274,000 and $283,000,
respectively.
Impaired loans were $1,485,000 and $2,079,000 at December 31, 1998 and 1997,
respectively. Included in these amounts are $554,000 and $1,911,000 of impaired
loans for which the related allowance for loan losses is $205,000 and $219,000,
at December 31, 1998 and 1997, respectively. The average recorded investment in
impaired loans during 1998, 1997 and 1996 was approximately $2,063,000,
$1,480,000, and $2,923,000, respectively. The amount of interest income
recognized on impaired loans in 1998, 1997 and 1996 was approximately $91,000,
$84,000, and $166,000, respectively. The Bank is not committed to lend
additional funds to these borrowers.
Accrued interest receivable on loans was $1,333,000 and $1,194,000 at December
31, 1998 and 1997, respectively.
The Bank serviced loans for others aggregating approximately $35,047,000,
$25,487,000 and $23,820,000 at December 31, 1998, 1997 and 1996, respectively.
Originated mortgage servicing rights of approximately $127,000 are recorded on
the balance sheet as of December 31, 1998. No mortgage servicing rights were
recorded as of December 31, 1997 due to immateriality.
37
<PAGE> 40
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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $ 1,017 1,172
Increases 158 113
Decreases (114) (268)
- --------------------------------------------------------------------------------
Balance at December 31 $ 1,061 1,017
================================================================================
</TABLE>
<TABLE>
<CAPTION>
(4) Premises and Equipment
A summary of premises and equipment at December 31 is as follows (in thousands):
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 532 532
Buildings and improvements 5,223 5,146
Furniture and equipment 3,609 3,539
Leasehold improvements 1,798 1,796
- --------------------------------------------------------------------------------
11,162 11,013
Less accumulated depreciation and amortization 5,399 4,858
- --------------------------------------------------------------------------------
$ 5,763 6,155
================================================================================
</TABLE>
Depreciation and amortization of premises and equipment included in building,
occupancy and equipment expense amounted to $760,000, $632,000 and $584,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(5) Deposits
Deposits at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Savings and club accounts $ 50,399 42,451
Time certificates 100,072 105,072
Money market accounts 26,050 24,234
NOW and escrow accounts 33,457 26,025
Demand accounts 27,355 20,236
- --------------------------------------------------------------------------------------
$237,333 218,018
======================================================================================
</TABLE>
At December 31, 1998 and 1997, the aggregate amounts of time time certificate
accounts in denominations of $100,000 or more were approximately $15,224,000 and
$13,427,000, respectively.
38
<PAGE> 41
The following table presents the amount of time certificate accounts at December
31, 1998 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> <C>
$ 66,073 15,462 5,354 8,556 3,233 1,394 100,072
=====================================================================================================
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings and club accounts $ 1,287 1,169 1,040
Time certificates 5,628 5,774 5,908
Money market accounts 916 821 730
NOW and escrow accounts 568 480 392
- --------------------------------------------------------------------------------------
$ 8,399 8,244 8,070
======================================================================================
</TABLE>
(6) Borrowings
Borrowings at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under repurchase
agreements $ 1,773 4.06% 2,204 4.76%
Advances from the FHLB of New York,
Line of credit 6,000 5.63% 0
due 1998 0 0 7,000 5.45-6.45%
due 1999 3,000 6.63% 3,000 6.63%
due 2000 2,000 6.26-6.31% 2,000 6.26-6.31%
due 2002 2,000 10.51% 2,000 10.51%
due 2007 465 7.08% 486 7.08%
Municipal securities sold with put options 741 5.99% 1,367 6.25%
- ----------------------------------------------------------------------------------------------------------------------------
$15,979 6.40% 18,057 6.40%
============================================================================================================================
</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, 1998, the Bank pledged
U.S. Treasury Notes totaling $2,500,000 as collateral for the repurchase
agreements.
At December 31, 1998, Federal Home Loan Bank of New York (the "FHLB") advances
are collateralized by the investment in stock of the FHLB of $1,561,000 and
residential mortgage loans with a carrying value approximating $14,812,000.
These advances carry fixed rates of interest.
The Bank maintains two lines of credit with the FHLB of New York. Borrowings
under the lines bear interest at 0.125% above the federal funds rate. Additional
borrowings of $19,618,000 were available under the lines at December 31, 1998.
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.
39
<PAGE> 42
In 1985, the Bank sold certain municipal securities to a Municipal Investment
Trust Fund which have a par value at December 31, 1998 of $741,000. 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 $741,000 of municipal bonds and U.S. Treasury Notes of
approximately $1,000,000. 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 May 2001 to November 2017.
(7) Income Taxes
Total income taxes for the year ended December 31 were allocated as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $ 874 909 93
Stockholders' equity, for change in
unrealized gain (loss) on securities 4 14 (60)
- -------------------------------------------------------------------------------------------------------------
$ 878 923 33
=============================================================================================================
</TABLE>
Actual income taxes applicable to income from 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>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense $ 858 874 535
State income taxes, net of Federal benefit 81 105 42
Change in valuation allowance for deferred tax assets 0 0 (572)
Other (65) (70) 88
- -------------------------------------------------------------------------------------------------------------
Income tax expense $ 874 909 93
=============================================================================================================
</TABLE>
The components of income tax expense applicable to operations are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 934 817 72
State 153 (7) 14
- -------------------------------------------------------------------------------------------------------------
1,087 810 86
- -------------------------------------------------------------------------------------------------------------
Deferred:
Federal (182) (67) 179
State (31) 166 (172)
- -------------------------------------------------------------------------------------------------------------
(213) 99 7
- -------------------------------------------------------------------------------------------------------------
$ 874 909 93
- -------------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit), exclusive of the change
in valuation allowance $ (213) 99 579
Change in valuation allowance 0 0 (572)
- -------------------------------------------------------------------------------------------------------------
$ (213) 99 7
- -------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 43
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>
1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,126 948
Unrealized loss on securities 20 24
Other 108 86
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 1,254 1,058
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan origination costs 278 186
Increase in tax bad debt reserve over base 205 322
Accumulated depreciation 120 168
Capitalized servicing rights 51 0
Other 44 35
- ------------------------------------------------------------------------------------------------
Total deferred tax liabilities 698 711
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $ 556 347
=================================================================================================
</TABLE>
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. The Company
generated sufficient earnings in 1996 to fully recognize the deferred tax
assets.
Based on its assessment, management determined that no valuation allowance was
necessary for 1998 and 1997.
Included in retained earnings at December 31, 1998 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 $4,149,000 available for payment of dividends to the Company at
December 31, 1998.
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1998, the Bank was required to
maintain a minimum Tier I capital (as defined in the regulations) to average
assets ratio of 4%, and minimum ratios of Tier I capital and total capital to
risk weighted assets (as defined) 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 capital ratio (to
average assets) of at least 5%, a Tier I capital ratio (to risk weighted assets)
of at least 6%, and a total capital ratio (to risk weighted assets) of at least
10%.
41
<PAGE> 44
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, 1998, 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
(dollars in thousands):
<TABLE>
<CAPTION>
For Classification
Actual Minimum Adequacy As Well-Capitalized
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
- ----------------------------------
Tier I Capital (to average
assets) $ 18,612 6.78% 10,978 4.00% 13,722 5.00%
Tier I Capital (to risk weighted
assets) 18,612 10.04% 7,415 4.00% 11,123 6.00%
Total Capital (to risk weighted
assets) 20,941 11.30% 14,830 8.00% 18,538 10.00%
1997
- ----------------------------------
Tier I Capital (to average
assets) 17,173 6.91% 9,937 4.00% 12,421 5.00%
Tier I Capital (to risk weighted
assets) 17,173 10.06% 6,830 4.00% 10,246 6.00%
Total Capital (to risk weighted
assets) 19,319 11.31% 13,661 8.00% 17,076 10.00%
</TABLE>
The Company's capital amounts and ratios as of December 31, 1998 and 1997 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, 76,765 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. All options available under the plan have been
granted.
To supplement the 1987 Plan, the Company adopted a Stock Option Plan which was
approved by the stockholders in 1991 (the "1991 Plan"). Under the 1991 Plan,
69,350 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, 1998, there were 4,313 options available for
grant.
The Company adopted an additional Stock Option Plan which was approved by the
stockholders in 1998 (the "1998 Plan"). Under the 1998 Plan, 71,500 shares of
authorized but unissued common stock were reserved for future issuance. The
terms, conditions, and provisions of the 1998 Plan are substantially the same as
those of the 1991 Plan. At December 31, 1998, all 71,500 options were available
for grant.
The 1995 Non-Employee Directors Warrant Plan (the "1995 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. Shares subject to warrants granted may
be authorized-but-unissued shares, treasury shares, shares
42
<PAGE> 45
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. In 1998 and 1997, 15,000 and
13,500 warrants, respectively, were granted at exercise prices of $19.59 and
$12.83, respectively. There were no warrants issued in 1996. The 1995 Warrant
Plan expired on April 1, 1998.
The 1998 Non-Employee Directors Warrant Plan (the "1998 Warrant Plan") was
established to replace the 1995 Warrant Plan. The total number of shares that
may be issued pursuant to warrants granted under the 1998 Warrant Plan shall not
exceed 65,000. The terms, conditions, and provisions of the 1998 Warrant Plan
are substantially the same as those of the 1995 Warrant Plan described above.
There were no warrants issued under the 1998 Warrant Plan in 1998.
Stock option and warrant activity during the periods indicated is summarized as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number of Weighted
shares under average
option exercise
price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1995 88,050 $ 6.39
Granted 22,000 9.17
Exercised (20,775) 5.65
- -----------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 89,275 7.24
- -----------------------------------------------------------------------------------------------------
Granted 27,300 11.82
Exercised (7,350) 6.24
Forfeited (6,375) 8.27
- -----------------------------------------------------------------------------------------------------
Outstanding, December 31, 1997 102,850 8.46
- -----------------------------------------------------------------------------------------------------
Granted 26,000 19.45
Exercised (7,780) 7.81
Forfeited (2,520) 15.15
- -----------------------------------------------------------------------------------------------------
Outstanding December 31, 1998 118,550 $ 10.77
=====================================================================================================
</TABLE>
The range of exercise prices and weighted average remaining contractual life of
outstanding options and warrants at December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Exercise Weighted Average Weighted Average
Number of Shares Price Exercise Contractual
Under Option Range Price Life (Years)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,625 $ 3.50 $ 3.50 1.95
42,725 5.66 - 6.83 6.39 5.07
36,700 9.16 - 10.83 9.93 7.45
12,000 12.83 12.83 8.25
24,500 19.25 - 19.59 19.44 9.20
</TABLE>
At December 31, 1998, 61,255 options and warrants were exercisable, and the
weighted-average exercise price was $7.62.
The fair value of the stock options and warrants granted was arrived at using
the Black Scholes option-pricing model. The results and the assumptions used for
the options and warrants granted during 1998, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average fair value $ 5.76 3.56 2.38
Expected dividend yield 1.92% 1.32% 2.55%
Risk free interest rate 5.50% 5.70% 6.10%
Expected life (years) 5 5 5
Volatility ratio 26.61% 26.61% 25.42%
</TABLE>
43
<PAGE> 46
The Company applies APB Opinion No. 25 in accounting for its option and warrant
plans, and accordingly, no compensation cost has been recognized for stock
options and warrants in the accompanying consolidated financial statements. Had
the Company determined compensation cost based on the fair value of its stock
options and warrants at the grant date under SFAS No. 123, the Company's net
income and earnings per share would have been reduced to pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (in thousands):
As reported $ 1,649 1,662 1,481
Pro forma 1,552 1,599 1,431
Earnings per share:
Basic
As reported $1.14 1.16 1.05
Pro forma 1.07 1.12 1.01
Diluted
As reported 1.11 1.13 1.03
Pro forma 1.04 1.08 0.99
</TABLE>
The full impact of calculating compensation for stock options and warrants under
SFAS No. 123 is reflected in the pro forma net income amounts because options
and warrants are generally granted based upon past service.
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. The Company pays all administrative expenses
associated with the ESOP. In 1997, the Company contributed $25,000 to the ESOP
trust. No contributions were made by the Company in 1998 and 1996. At December
31, 1998, all shares in the plan were allocated to plan participants.
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 1998, 1997 and 1996 was approximately $223,000, $113,000 and
$109,000, respectively.
The 1995 Non-Employee Directors Stock Plan (the "Plan") was approved by
stockholders 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 37,500. 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
stockholders. During 1998, 1997 and 1996, 3,619, 3,473 and 4,985 shares were
awarded, respectively. At December 31, 1998, 23,450 shares were available for
award. The cost of shares issued in lieu of cash payments under the Plan was
$65,000, $47,000 and $47,000 in 1998, 1997 and 1996, respectively.
The Company maintains an Employee Stock Purchase Plan which allows, subject to
certain limitations, eligible Company employees to purchase shares of
Skaneateles Bancorp common stock for 95% of the market value of such stock
through payroll deductions.
44
<PAGE> 47
(10) Commitments
The Bank occupies six branches and other office space under noncancellable
operating leases with remaining terms through 2010. A summary of future minimum
rental commitments under the terms of such leases at December 31, 1998 follows
(in thousands):
<TABLE>
<CAPTION>
Year Amount
- --------------------------------------------------------------------------
<S> <C>
1999 $ 396
2000 417
2001 380
2002 387
2003 387
Subsequent years 1,325
- --------------------------------------------------------------------------
$ 3,292
==========================================================================
</TABLE>
Rent expense amounted to approximately $408,000, $349,000, and $371,000 for
1998, 1997 and 1996, 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.
Commitments to fund loans (including lines of credit) and outstanding letters of
credit were approximately $27,106,000 and $171,000, respectively, at December
31, 1998, and $20,479,000 and $168,000, respectively, at December 31, 1997.
Approximately $4,339,000 of the loan commitments at December 31, 1998 were for
fixed rates of interest.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments 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.
The Bank has an interest rate floor outstanding on $18,000,000 of prime-based
loans at December 31, 1998. 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, which expired in February 1999, the Bank received payments on a
quarterly basis when the prime rate dropped below 8.25% (the "strike rate"), in
the amount by which the prime rate fell below the strike rate multiplied by the
notional amount of the floor ($18,000,000). 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.
45
<PAGE> 48
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the proceedings should not have a
material effect on 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: 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: 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 estimated using
discounted cash flow analyses based on interest rates currently being 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, standby letters of credit, and interest rate floor
contracts 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, 1998 and 1997.
Deposits: 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.
46
<PAGE> 49
The following is a summary of the carrying values and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 33,638 33,638
16,358 16,358
Securities available for sale 14,799 14,799
8,416 8,416
Securities held to maturity 4,015 4,171
7,705 7,935
Federal Home Loan Bank stock 1,561 1,561
1,561 1,561
Loans 212,578 215,594
212,462 213,736
Financial liabilities:
Demand, NOW, savings, escrow, and
Money market accounts 137,261 137,261 112,946 112,946
Time certificates 100,072 100,789
105,072 105,565
Borrowings 15,979 16,546
18,057 18,607
</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.
47
<PAGE> 50
(13) Parent Company Financial Information
The following presents the condensed balance sheets of the Company (parent only)
as of December 31, 1998 and 1997 and its condensed statements of income and cash
flows for the years ended December 31, 1998, 1997 and 1996 (in thousands):
Condensed Balance Sheets
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Cash $ 133 56
Investment in subsidiary 18,968 17,615
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 19,101 17,671
=============================================================================================================
Stockholders' equity $ 19,101 17,671
=============================================================================================================
Condensed Statements of Income
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Income:
<S> <C> <C> <C>
Dividends from subsidiary $ 302 190 151
Equity in undistributed income of subsidiary 1,347 1,472 1,330
- -------------------------------------------------------------------------------------------------------------
Net income $ 1,649 1,662 1,481
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,649 1,662 1,481
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiary (1,347) (1,472) (1,330)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 302 190 151
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Cash dividends paid on common stock (404) (385) (264)
Proceeds from issuance of stock pursuant to stock plans 179 142 164
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (225) (243) (100)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 77 (53) 51
Cash at beginning of year 56 109 58
- -------------------------------------------------------------------------------------------------------------
Cash at end of year 133 56 109
=============================================================================================================
</TABLE>
48
<PAGE> 51
(14) Earnings Per Share
The following table presents a reconciliation of the numerator and denominator
of the earnings per share computations (in thousands except share and per-share
amounts):
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------------- ----------------- -----------------
Basic earnings per share:
<S> <C> <C> <C>
Net income $ 1,649 1,444,264 $ 1.14
Effect of assumed exercise of stock options and warrants 0 47,908
Diluted earnings per share:
Income available to common shareholders
---------------- ----------------- -----------------
and assumed exercise of stock options and warrants $ 1,649 1,492,172 $ 1.11
====================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------------- ----------------- -----------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 1,662 1,430,177 $ 1.16
Effect of assumed exercise of stock options and warrants 0 45,647
Diluted earnings per share:
Income available to common shareholders
---------------- ----------------- -----------------
and assumed exercise of stock options and warrants $ 1,662 1,475,824 $ 1.13
====================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------------- ----------------- -----------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 1,481 1,411,565 $ 1.05
Effect of assumed exercise of stock options 0 33,322
Diluted earnings per share:
Income available to common shareholders
---------------- ----------------- -----------------
and assumed exercise of stock options $ 1,481 1,444,887 $ 1.03
====================================================
</TABLE>
49
<PAGE> 52
Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected quarterly data for the years ended
December 31, 1998 and 1997 (in thousands, except for per share data):
<TABLE>
<CAPTION>
1998 Quarter Ended Total
- --------------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 4,884 5,065 5,083 5,023 20,044
Total interest expense 2,376 2,391 2,425 2,327 9,519
- --------------------------------------------------------------------------------------------------------------------
Net interest income 2,508 2,674 2,658 2,696 10,536
Provision for loan losses 100 150 200 225 675
- --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,408 2,524 2,458 2,471 9,861
Net gain on sale of loans 21 24 122 39 206
Other operating income 449 525 554 604 2,132
Other operating expense 2,341 2,422 2,480 2,433 9,676
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 537 651 654 681 2,523
Income tax expense 190 233 233 218 874
- --------------------------------------------------------------------------------------------------------------------
Net income $ 347 418 421 463 1,649
====================================================================================================================
Net income per common share - basic $ .24 .29 .29 .32 1.14
Net income per common share - diluted $ .23 .28 .28 .31 1.11
====================================================================================================================
<CAPTION>
1997 Quarter Ended
Total
- ---------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Year
- --------------------------------------------------------------------------------------------------------------------
Total interest income $ 4,572 4,710 4,853 4,830 18,965
Total interest expense 2,330 2,330 2,381 2,394 9,435
- --------------------------------------------------------------------------------------------------------------------
Net interest income 2,242 2,380 2,472 2,436 9,530
Provision for loan losses 100 100 200 100 500
- --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,142 2,280 2,272 2,336 9,030
Net gain on sale of loans 50 15 8 8 81
Other operating income 371 434 457 506 1,768
Other operating expense 1,939 2,035 2,076 2,258 8,308
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 624 694 661 592 2,571
Income tax expense 222 247 231 209 909
- --------------------------------------------------------------------------------------------------------------------
Net income $ 402 447 430 383 1,662
====================================================================================================================
Net income per common share - basic $ .28 .31 .30 .27 1.16
Net income per common share - diluted $ .28 .30 .29 .26 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.
Subsequent Events (Unaudited)
On January 25, 1999, the Company entered into a definitive Agreement and
Plan of Merger with BSB Bancorp, Inc. ("BSB"), which provides for the
acquisition of the Company by BSB in a tax-free, stock-for-stock exchange to be
accounted for as a pooling of interests. In the transaction, Skaneateles
Bancorp, Inc. stockholders
50
<PAGE> 53
will receive 0.970 shares of BSB stock for each share of Skaneateles stock.
Based on BSB's closing price on January 22, 1999 (the last trading day before
the Agreement and Plan of Merger was signed), Skaneateles stockholders will
receive $27.89 per share in BSB stock, for a total transaction value of
approximately $41 million.
The definitive Agreement and Plan of Merger, which has been approved by
both BSB's and the Company's boards of directors, is subject to approval by the
Skaneateles stockholders as well as by regulatory authorities. The transaction
is expected to close in Summer of 1999. In connection with the Agreement and
Plan of Merger, Skaneateles Bancorp also granted BSB an option to purchase
290,142 newly issued shares (19.9% of the Company's outstanding stock).
51
<PAGE> 54
SELECTED PERFORMANCE RATIOS
Selected performance ratios of the Company are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Return on Assets
Net Income/Average Total Assets .62% .68% .65%
Return on Equity
Net Income/Average Stockholders' Equity 8.92% 9.66% 9.43%
Dividend Payout Ratio
Cash Dividends Declared/Net Income 24.50% 22.92% 17.83%
Equity to Asset Ratio
Average Stockholders' Equity/Average Total Assets 7.00% 7.01% 6.91%
</TABLE>
PERSONNEL
As of December 31, 1998 Skaneateles had 122 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.
52
<PAGE> 55
Item 2. PROPERTIES
Skaneateles conducts its business from nine full-service banking offices
and one administrative office. The following table sets forth certain
information relating to each of Skaneateles' offices as of December 31, 1998.
<TABLE>
<CAPTION>
Lease Expiration Net Book
Owned Date Including Value at
or Leased Options December 31, 1998
-------------------------------------------------------------------------------
Branch Office Location (In Thousands)
- ------------------------------
<S> <C> <C> <C>
33 E. Genesee Street
Skaneateles, New York 13152 Owned Not Applicable $ 408
431 E. Fayette Street
Syracuse, New York 13202 Owned Not Applicable 2,870
5791 East Seymour Street
Cicero, New York 13039 Owned Not Applicable 570
100 Kasson Road
Camillus, New York 13031 Leased 2000 27
Teall Ave. & Grant Blvd.
Syracuse, New York 13206 Leased 2014 146
3803 Brewerton Road
North Syracuse, New York 13212 Leased 2009 165
7785 Frontage Road
Cicero, New York 13039 Leased 2010 161
137 East State Street
Oswego, New York 13126 Leased 2010 176
5100 West Taft Road
Liverpool, New York 13088 Leased 2007 174
Administrative Office
- ------------------------------
27 Fennell Street
Skaneateles, New York Leased 2005 191
13152
</TABLE>
53
<PAGE> 56
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings other than
routine legal proceedings undertaken in the ordinary course of business. In the
opinion of management, after consultation with counsel, the aggregate amount
involved in such proceedings is not material to the financial condition or
results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, there were no matters submitted to a
vote of the stockholders of Skaneateles Bancorp, Inc.
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock of Skaneateles Bancorp, Inc. trades on the NASDAQ National
Market System under the ticker symbol "SKAN".
The following table shows the range of high and low closing stock prices
for each quarter of 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Quarter High Low High Low
- ------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
Fourth $ 16.00 12.50 22.13 18.00
Third 18.50 11.19 19.67 13.59
Second 20.75 17.19 14.00 12.25
First 22.38 18.75 13.33 10.67
</TABLE>
On March 10, 1999, there were 1,452,372 shares of Common Stock issued and
outstanding, held of record by 533 stockholders, and the Company had no other
class of equity securities outstanding.
Quarterly cash dividends totaling $.28 and $.27 per share were declared in 1998
and 1997, respectively.
On January 22, 1999, the last day of trading prior to the announcement by
Skaneateles of the proposed merger with BSB, the closing price of Skaneateles'
common stock was $19.00.
The effect of Skaneateles' proposed merger with BSB will have on: (i) 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 be the beneficial owner of more than 5% of the common stock of
Skaneateles; (ii) each director; and (iii) all officers and directors as a group
is set forth at Item 12 on page 62 under the caption "Principal Holders of
Common Stock."
54
<PAGE> 57
Item 6. SELECTED FINANCIAL DATA
The information required by this item is included in the section captioned
"Five Year Summary of Selected Financial Data" in this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included in the section captioned
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" in this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in the section captioned
"Asset/Liability Management" in this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the section captioned
"Financial Statements And Supplementary Data" beginning at page 26 of this
report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The following information is supplied with respect to the
directors of the Company as of December 31, 1998. Additional information
required by this item is included in the section captioned "Security Ownership
Of Certain Beneficial Owners And Management".
<TABLE>
<CAPTION>
Directors with a Term Expiring in 1999
Position with the Company and Principal Director of
Name Age Occupation During the Past Five Years (1) Bank Since
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David E. Blackwell 60 Director; Retired, President, Auburn Steel 1993
Company, Inc., a steel manufacturer.
Howard J. Miller 66 Director; Retired, Vice President, 1993
Distribution Crucible Service Centers,
a steel manufacturer.
Raymond C. Traver, Jr., M.D. 56 Director; Retired, Orthopedic Surgeon, 1990
Raymond C. Traver, Jr., M.D. P.C.
</TABLE>
(1) None of the companies listed are affiliated with the Company.
55
<PAGE> 58
<TABLE>
<CAPTION>
Directors with a Term Expiring in 2000
Director
Position with the Company and Principal of Bank
Name Age Occupation During the Past Five Years (1) Since
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Israel Berkman 70 Director; Retired, Examining Officer of the 1992
Federal Reserve Bank of New York.
Ann G. Higbee 56 Director; Managing Partner, Public Relations 1993
Services, Eric Mower and Associates, an
advertising agency.
Anne E. O'Connor 63 Director; Corporate Secretary, Kopp Billing 1995
Agency, a medical billing agency.
</TABLE>
(1) None of the companies listed are affiliated with the Company.
<TABLE>
<CAPTION>
Directors with a Term Expiring in 2001
Position with the Company and Principal Director of
Name Age Occupation During the Past Five Years Bank Since (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Walter D. Copeland 65 Director; Retired, President, Walter D. 1994
Copeland Organization, Inc. (1), a real
estate consulting company.
John P. Driscoll 59 Chairman, President and Chief Executive 1992
Officer of the Company.
Carl W. Gerst, Jr. 61 Director; Vice President and Chief Technical 1982
Officer, Anaren Microwave, Inc. (1), a
manufacturer of microwave and electronic
subsystems for commercial and defense
applications.
John Bernard Henry 70 Director; Distinguished Service Professor, 1989
State University of New York Health Science
Center at Syracuse. (1)
</TABLE>
(1) Not affiliated with the Company.
(2) Includes terms as Trustee prior to the Bank's conversion from a mutual to
stock form of organization on May 30, 1986.
56
<PAGE> 59
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS. The following information is supplied with respect to
the executive officers of the Company:
Number of
Years
in
Position with the Company and Principal Current
Name Age Occupation During the Past Five Years Position
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John P. Driscoll 59 Chairman, President and Chief Executive Officer. 6
J. David Hammond 54 Executive Vice President & Secretary. Vice President
Chase Manhattan Bank, NA. 3
J. Daniel Mohr 33 Vice President and Treasurer 6
William J. Welch 49 Vice President, Asst. Secretary & Asst. Treasurer 6
</TABLE>
Officers of the Company are re-elected annually by the Board of Directors.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
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
1998 were made in a timely manner, except for a Form 4 due for the month of
April 1998 for the following directors: Israel Berkman, David E. Blackwell,
Walter D. Copeland, Carl W. Gerst, Jr., Ann G. Higbee, John Bernard Henry,
Howard J. Miller, Anne E. O'Connor and Raymond C. Traver, Jr. The forms,
reporting the issuance of stock by the Company pursuant to its 1995 Non-Employee
Directors Stock Plan, were filed late due to an oversight. In making these
statements, the Company has relied solely on a review of the forms submitted to
it during 1998 and on written representations of its incumbent executive
officers and directors.
Item 11. EXECUTIVE COMPENSATION
Since the formation of Skaneateles Bancorp, Inc., none of its executive
officers has received any separate form of compensation from the Company.
Officers receive compensation in their positions as officers of the Bank.
57
<PAGE> 60
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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
-------------------------------------------- --------------
Securities
Underlying
Other Annual Options (#) All Other
Name and Principal Position Year Salary (1) Bonus Compensation Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John P. Driscoll 1998 $ 169,129(2) $ 27,600(3) $ 11,713(4) 5,000 $ 18,004(5)
Chairman, President & CEO 1997 143,691 34,588 11,635 5,700 21,233
1996 141,969 30,670 17,936 4,667 18,475
J. David Hammond 1998 101,924 9,857(3) 0 1,500 10,878(6)
Executive Vice President & 1997 94,248 13,436 0 3,000 6,165
Secretary 1996 92,777 9,170 0 1,500 1,492
</TABLE>
(1) Includes the cost of shares allocated under the Company's Employee Stock
Ownership Plan.
(2) Includes $14,200 payable under a defined contribution Supplemental
Retirement Agreement dated January 1, 1998.
(3) Bonuses were paid for the year ended December 31, 1998 in February 1999.
(4) Comprised entirely of country club dues.
(5) Includes contributions to the Company's 401(k) plan totaling $10,877 and
premium payments on an individual flexible premium deferred variable
annuity totaling $7,127.
(6) Comprised entirely of contributions to the Company's 401(k) plan.
58
<PAGE> 61
OPTION GRANTS IN 1998
The following table sets forth stock options granted to the Company's
Chairman, President and Chief Executive Officer and named executive officers
during 1998.
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options Granted to Employees in Exercise Price Expiration Grant Date Present
Name (1) 1998 Per Share Date Value (2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John P. Driscoll 5,000 45.5 $ 19.25 February 2008 $ 28,495
J. David Hammond 1,500 13.6 19.25 February 2008 8,548
</TABLE>
(1) Options were granted on February 11, 1998 under the Company's 1991 Long
Term Incentive and Capital Accumulation Plan, and are exercisable 50% 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 26.61%
- risk-free rate of return 5.50%
- expected dividend yield 1.92%
- Expected time of exercise 5 years
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 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 1998 and the number and value of unexercised options held at
December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at December
Shares at December 31, 1998 31, 1998 (2)
Acquired Value -------------------------------- ---------------------------------
Name on Exercise(#) Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John P. Driscoll 100 $ 822 34,950 14,450 $ 278,533 55,430
J. David Hammond 0 0 6,900 7,350 32,860 28,293
</TABLE>
(1) Market value of underlying securities at exercise, minus the exercise
price.
(2) Market value of underlying securities at December 31, 1998, minus the
exercise price.
COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company receive a fee of
$500 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 "1995 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 1995 Warrant Plan, those
outside directors receive warrants (or options) to
59
<PAGE> 62
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 1995 Warrant Plan shall not exceed 112,500. 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. In April 1998,
15,000 warrants were granted at an exercise price of $19.59 per share. This plan
expired on April 1, 1998.
The 1998 Non-Employee Directors Warrant Plan (the "1998 Warrant Plan")
replaced the 1995 Warrant Plan. The terms of the 1998 Warrant Plan are identical
to those of the 1995 Warrant Plan, except for the specific performance
measurements under which warrants are granted. The total number of shares that
may be issued pursuant to warrants granted under the 1998 Warrant Plan shall not
exceed 65,000.
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 1999 at $147,660. Mr.
Driscoll is also entitled to receive cash bonuses based on the Company's
attainment of specific levels of earnings per share, and as the Board, in its
discretion, may award.
Under his agreement, Mr. Driscoll will receive a continuation of his salary
and benefits for three 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, J. Daniel Mohr and Karen
Lockwood, Vice Presidents, pursuant to which they will receive a continuation of
their respective salaries and benefits for eighteen months (twenty-four in the
case of Mr. Hammond) if a "change in control" of the Company occurs.
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.
60
<PAGE> 63
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, 1993 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
- --------------------------------------------------------------------------------
SKANEATELES
DATE BANCORP NASDAQ US NASDAQ Bank
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 100 100 100
1994 120 98 100
1995 156 138 148
1996 183 170 196
1997 381 209 328
1998 274 293 325
</TABLE>
61
<PAGE> 64
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
March 10, 1999 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).
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Percent of
Name and Address of Beneficial Owner Ownership (1) Class
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jeffrey L. Gendell 132,300(2) 8.72%
Tontine Partners, L.P.
31 West 52nd Street, 17th Floor
New York, NY 10019
Dimensional Fund Advisors 90,000(3) 5.93%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Directors and executive officers of the Company 139,509(4) 9.19%
33 East Genesee Street
Skaneateles, NY 13152
</TABLE>
(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 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
March 10, 1999. 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 Employee Stock Option
and Director's Warrant Plans. As of December 31, 1998, executive officers
as a group held vested options to purchase 62,875 shares. There were 4,000
vested warrants as of this date. See "Compensation of Executive Officers."
(2) 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 132,300 shares
reported above, Mr. Gendell reported sole dispositive powers as to 52,500
shares, and both Mr. Gendell and Tontine reported shared voting and
dispositive powers as to 79,800 shares.
62
<PAGE> 65
(3) Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisers Act of 1940,
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other investment vehicles, including commingled group trusts.
(These investment companies and investment vehicles are the "Portfolios").
In its role as investment advisor and investment manager, Dimensional
possesses both voting and investment power over the securities of the
Issuer that are owned by the Portfolios. All securities of the Issuer are
owned by the Portfolios, and Dimensional disclaims beneficial ownership of
such securities.
Sole Voting Power: 90,000
Shared Voting Power: 0
Sole Dispositive Power: 90,000
Shared Dispositive Power: 0
(4) Directors and executive officers of Skaneateles Bancorp, Inc. as a group
reported beneficial ownership of 139,509 shares on Schedule 13D filed on
February 16, 1999 in connection with the execution of a Stockholder
Agreement (the "Agreement") with BSB Bancorp, Inc., dated as of January 25,
1999. Pursuant to the Agreement, each stockholder who executed the
Agreement agreed to vote in favor of the Agreement and Plan of Merger By
and Between Skaneateles Bancorp, Inc. and BSB Bancorp, Inc. The members of
the group, their positions with the Company and their voting and
dispositive powers is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Pro forma
Percent Sole Shared Sole Shared Percent of
Name Common Stock Of Voting Voting Dispositive Dispositive Class
Position Beneficially Class Power Power Power Power After
Owned Proposed
Merger (i)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John P. Driscoll 44,341 2.91% 44,341 0 44,341 0 .33%
Chairman, President and
Chief Executive Officer
- --------------------------------------------------------------------------------------------------------------------------
J. David Hammond 14,623 96% 14,623 0 14,623 0 .11%
Executive Vice President and
Secretary
- --------------------------------------------------------------------------------------------------------------------------
Karen E. Lockwood 6,623 .44% 6,623 0 6,623 0 .05%
Vice President of Skaneateles
Savings Bank
- --------------------------------------------------------------------------------------------------------------------------
J. Daniel Mohr 3,168 .21% 3,168 0 3,168 0 .02%
Vice President and Treasurer
- --------------------------------------------------------------------------------------------------------------------------
William J. Welch 14,993 .99% 14,993 0 14,993 0 .11%
Vice President, Assistant
Secretary and Assistant
Treasurer
- --------------------------------------------------------------------------------------------------------------------------
Israel Berkman 3,934 .26% 3,934 0 3,934 0 .03%
Director
- --------------------------------------------------------------------------------------------------------------------------
David E. Blackwell 3,071 .20% 3,071 0 3,071 0 .02%
Director
- --------------------------------------------------------------------------------------------------------------------------
Walter D. Copeland (ii) 2,488 .16% 0 2,488 0 2,488 .02%
Director
- --------------------------------------------------------------------------------------------------------------------------
Carl W. Gerst, Jr. 7,007 .46% 7,007 0 7,007 0 .05%
Director
- --------------------------------------------------------------------------------------------------------------------------
John Bernard Henry, M.D. (iii) 4,443 .29% 0 4,443 0 4,443 .03%
Director
- --------------------------------------------------------------------------------------------------------------------------
Ann G. Higbee 7,103 .47% 7,103 0 7,103 0 .05%
Director
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Pro forma
Percent Sole Shared Sole Shared Percent of
Name Common Stock Of Voting Voting Dispositive Dispositive Class
Position Beneficially Class Power Power Power Power After
Owned Proposed
Merger (i)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Howard J. Miller (iv) 4,431 .29% 3,681 0 3,681 0 .03%
Director
- --------------------------------------------------------------------------------------------------------------------------
Francis R. O'Connor (v) 10,916 .69% 10,416 0 10,416 0 .08%
Former director; spouse of Anne E.
O'Connor
- --------------------------------------------------------------------------------------------------------------------------
Anne E. O'Connor 500 .03% 500 0 500 0 0%
Director
- --------------------------------------------------------------------------------------------------------------------------
Raymond C. Traver, Jr., M.D.(vi) 12,368 .81% 12,368 0 12,.368 0 .09%
Director
- --------------------------------------------------------------------------------------------------------------------------
Directors and officers as a group 140,009 9.19% 131,828 6,931 131,828 6,931 1.02%
- --------------------------------------------------------------------------------------------------------------------------
(i) Calculation is based upon 11,237,470 shares of BSB Common Stock
outstanding as of December 31, 1998, as described in BSB's 10-K filed
with the commission, 1,452,372 shares of the Company's Common Stock
outstanding as of December 31, 1998, using the stated exchange ratio
of .97 shares of BSB Common Stock for each share of the Company's
Common Stock.
(ii) 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.
(iii) All shares held jointly with Mr. Henry's wife, with whom Mr. Henry
has shared voting and investment power.
(iv) Mr. Miller reports beneficially ownership of 4,431 shares, including
750 shares held by Mr. Miller's spouse.
(v) Mr. O'Connor reports beneficial ownership of 10,916, including 500
shares held by Mr. O'Connor's spouse.
(vi) Includes 6,075 shares held in trust under an employee defined
contribution pension plan and 786 shares held by Dr. Traver as
custodian for his children.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information required by this item is included in the section
captioned "Directors And Executive Officers Of The Registrant" at page 54 of
this report.
On January 25, 1999 Skaneateles Bancorp entered into an Agreement and Plan of
Merger with BSB Bancorp, Inc., which provides for the acquisition by BSB
Bancorp, Inc. of Skaneateles in a tax-free, stock-for-stock exchange (the
"merger"). The consummation of the merger is subject to certain conditions,
including the approval of Skaneateles Bancorp, Inc's. stockholders and the
receipt of required regulatory approvals. In connection with the Agreement and
Plan of Merger, BSB Bancorp, Inc. and Skaneateles entered into an option
agreement pursuant to which Skaneateles granted BSB Bancorp an option,
exercisable upon certain circumstances, to purchase an aggregate of 290,142
newly issued shares of Skaneateles Common Stock. Also in connection with the
Agreement and Plan of Merger, certain stockholders of Skaneateles, including its
directors and executive officers, entered into a Stockholder Agreement pursuant
to which each of such stockholders agreed to vote in favor of the Merger, among
other things.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank may make loans to directors and any executive officers of the
Company to the extent permitted by banking law. Any extensions of credit, to
directors or executive officers of the Company whether past or future, 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.
64
<PAGE> 67
PART IV.
- --------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following financial statements are filed as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
During the three-month period ended December 31, 1998, the Registrant filed no
current reports on Form 8-K. On January 27, 1999, the Registrant filed a Form
8-K announcing a definitive merger agreement with BSB Bancorp, Inc. which
provides for BSB Bancorp to acquire Skaneateles Bancorp, in a tax-free,
stock-for-stock exchange. No financial statements were filed with this report.
The following exhibits are either filed as part of this annual report on Form
10-K, or are incorporated herein by reference:
No. Exhibit
- --- -------
2.1 Agreement and Plan of Merger, dated January 25, 1999, by and between
BSB Bancorp and Skaneateles Bancorp, Inc.
3.1 Certificate of Incorporation of Skaneateles Bancorp, Inc.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
Skaneateles Bancorp, Inc.(2)
3.3 Bylaws of the Company (3)
10.1 Employment Agreement dated as of January 1, 1998 between Skaneateles
Savings Bank and John P. Driscoll(2)
10.2 Employment Agreement dated as of March 25, 1998 between Skaneateles
Savings Bank and J. David Hammond(2)
10.3 Employment Agreement dated as of March 25, 1998 between Skaneateles
Savings Bank and Karen E. Lockwood(2)
10.4 Employment Agreement dated as of March 25, 1998 between Skaneateles
Savings Bank and J. Daniel Mohr(2)
10.5 Employment Agreement dated as of March 25, 1998 between Skaneateles
Savings Bank and William J. Welch(2)
10.6 Supplemental Retirement Agreement dated as of January 1, 1998 between
Skaneateles Savings Bank and John P. Driscoll(2)
10.7 Trust Under Supplemental Retirement Agreement Dated January 1, 1998
between Skaneateles Savings Bank and John P. Driscoll(2)
10.8 Amendment to Long Term Incentive And Capital Accumulation Plan dated
October 28, 1997(2)
10.9 Amendment to Long Term Incentive And Capital Accumulation Plan dated
October 28, 1997(2)
10.10 Amendment to 1995 Non-Employee Directors Stock Plan dated October 28,
1997(2)
10.11 Amendment to 1995 Non-Employee Directors Warrant Plan dated October
28, 1997(2)
10.12 Amendment to Center Banks Incorporated Employee Stock Purchase Plan
dated October 28, 1997(2)
10.13 Amendment to Center Banks Incorporated Dividend Reinvestment Plan
dated October 28, 1997(2)
21 List of Registrant's Subsidiaries
65
<PAGE> 68
23 Consent of KPMG LLP
27 Financial Data Schedule
99.1 Option Agreement, dated as of January 25, 1999, by and between
Skaneateles Bancorp, Inc. and BSB Bancorp, Inc.
99.2 Stockholder Agreement, dated as of January 25, 1999, by and between
BSB Bancorp, Inc. and certain stockholders of Skaneateles Bancorp,
Inc.
- ---------
(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 1997 Form 10-K filed by the Company with the
Securities and Exchange Commission on March 30, 1998.
(3) Exhibit is incorporated herein by reference to the identically
numbered exhibit to the 1996 Form 10-K filed by the Company with the
Securities and Exchange Commission on March 31, 1997.
66
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SKANEATELES BANCORP, INC.
- -------------------------
Registrant
By: /s/ John P. Driscoll Date: March 23, 1999
---------------------------- --------------
John P. Driscoll
Chairman, President and Chief Executive Officer
By: /s/ J. Daniel Mohr Date: March 23, 1999
---------------------------- --------------
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/ Israel Berkman Date: March 23, 1999
---------------------------- --------------
Israel Berkman
Director
/s/ David E. Blackwell Date: March 23, 1999
---------------------------- --------------
David E. Blackwell
Director
/s/ Walter D. Copeland Date: March 23, 1999
---------------------------- --------------
Walter D. Copeland
Director
/s/ Carl W. Gerst Date: March 23, 1999
---------------------------- --------------
Carl W. Gerst
Director
/s/ John Bernard Henry Date: March 23, 1999
---------------------------- --------------
John Bernard Henry
Director
/s/ Ann G. Higbee Date: March 23, 1999
---------------------------- --------------
Ann G. Higbee
Director
/s/ Howard J. Miller Date: March 23, 1999
---------------------------- --------------
Howard J. Miller
Director
Date:
---------------------------- --------------
Raymond C. Traver, Jr., M.D.
Director
/s/ Anne E. O'Connor Date: March 23, 1999
--------------------- --------------
Anne E. O' Connor
Director
67
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER, DATED JANUARY 25, 1999, BY
AND BETWEEN BSB BANCORP AND SKANEATELES BANCORP, INC.
68
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
BSB BANCORP, INC.
AND
SKANEATELES BANCORP, INC.
DATED AS OF
JANUARY 25, 1999
69
<PAGE> 3
i
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I THE MERGER 1
1.1 The Merger........................................................................................1
1.2 Effective Time....................................................................................1
1.3 Effects of the Merger.............................................................................1
1.4 Conversion of SKAN Common Stock...................................................................2
1.5 Options...........................................................................................3
1.6 Certificate of Incorporation......................................................................3
1.7 Bylaws............................................................................................3
1.8 Directors and Officers............................................................................3
1.9 Tax Consequences..................................................................................3
ARTICLE II EXCHANGE OF SHARES 4
2.1 BSB Bancorp to Make Shares Available..............................................................4
2.2 Exchange of Shares................................................................................4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SKAN 5
3.1 Corporate Organization............................................................................5
3.2 Capitalization....................................................................................6
3.3 Authority; No Violation...........................................................................6
3.4 Consents and Approvals............................................................................7
3.5 Loan Portfolio; Reports...........................................................................8
3.6 Financial Statements; Exchange Act Filings; Books and Records.....................................8
3.7 Broker's Fees.....................................................................................9
3.8 Absence of Certain Changes or Events..............................................................9
3.9 Legal Proceedings.................................................................................9
3.10 Taxes and Tax Returns............................................................................9
3.11 Employee Plans...................................................................................11
3.12 Certain Contracts................................................................................12
3.13 Agreements with Regulatory Agencies..............................................................12
3.14 State Takeover Laws; Certificate of Incorporation................................................12
3.15 Environmental Matters............................................................................13
3.16 Reserves for Losses..............................................................................13
3.17 Properties and Assets............................................................................14
3.18 Insurance........................................................................................14
3.19 Compliance with Applicable Laws..................................................................15
3.20 Loans............................................................................................15
3.21 Affiliates.......................................................................................15
3.22 Ownership of BSB Bancorp Common Stock............................................................16
3.23 Fairness Opinion.................................................................................16
3.24 SKAN DRIP and Purchase Plan......................................................................16
3.25 Accounting Matters...............................................................................16
3.26 Accuracy of Information..........................................................................16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BSB BANCORP 17
4.1 Corporate Organization............................................................................17
4.2 Capitalization....................................................................................17
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C> <C>
4.3 Authority; No Violation...........................................................................18
4.4 Regulatory Approvals..............................................................................18
4.5 Financial Statements; Exchange Act Filings; Books and Records.....................................19
4.6 Agreements with Regulatory Agencies...............................................................19
4.7 Legal Proceedings.................................................................................20
4.8 Compliance with Applicable Laws...................................................................20
4.9 Accounting Matters................................................................................20
4.10 Ownership of SKAN Common Stock...................................................................20
4.11 Insurance of Deposits............................................................................20
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 20
5.1 Covenants of SKAN.................................................................................20
5.2 Merger Covenants..................................................................................23
5.3 Compliance with Antitrust Laws....................................................................23
5.4 Termination of 401(k) Plan and ESOP...............................................................24
ARTICLE VI ADDITIONAL AGREEMENTS 24
6.1 Regulatory Matters................................................................................24
6.2 Access to Information.............................................................................25
6.3 Shareholder Meeting...............................................................................26
6.4 Legal Conditions to Merger........................................................................26
6.5 Stock Exchange Listing............................................................................26
6.6 Employees and Advisory Directors..................................................................26
6.7 Indemnification...................................................................................27
6.8 Subsequent Interim and Annual Financial Statements................................................28
6.9 Additional Agreements.............................................................................29
6.10 Advice of Changes................................................................................29
6.11 Current Information..............................................................................29
6.12 Execution and Authorization of Bank Merger Agreement.............................................29
6.13 Change in Structure..............................................................................29
6.14 Transaction Expenses of SKAN.....................................................................30
ARTICLE VII CONDITIONS PRECEDENT 30
7.1 Conditions to Each Party's Obligation To Effect the Merger........................................30
7.2 Conditions to Obligations of BSB Bancorp..........................................................31
7.3 Conditions to Obligations of SKAN.................................................................33
ARTICLE VIII TERMINATION AND AMENDMENT 34
8.1 Termination.......................................................................................34
8.2 Effect of Termination.............................................................................36
8.3 Amendment.........................................................................................36
8.4 Extension; Waiver.................................................................................37
ARTICLE IX GENERAL PROVISIONS 37
9.1 Closing...........................................................................................37
9.2 Nonsurvival of Representations, Warranties and Agreements.........................................37
9.3 Expenses..........................................................................................37
9.4 Notices...........................................................................................37
9.5 Interpretation....................................................................................38
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C> <C>
9.6 Counterparts......................................................................................38
9.7 Entire Agreement..................................................................................39
9.8 Governing Law.....................................................................................39
9.9 Enforcement of Agreement..........................................................................39
9.10 Severability.....................................................................................39
9.11 Publicity........................................................................................39
9.12 Assignment; Limitation of Benefits...............................................................39
9.13 Additional Definitions...........................................................................40
</TABLE>
EXHIBITS
A Bank Plan of Merger
B Option Agreement
C Certificate of Merger
D Stockholder Agreement
E Index Group
iii
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of January 25, 1999 (this
"Agreement"), is entered into by and between BSB BANCORP, INC., a Delaware
corporation ("BSB Bancorp"), and SKANEATELES BANCORP, INC., a Delaware
corporation ("SKAN").
WHEREAS, the Boards of Directors of BSB Bancorp and SKAN have
determined that it is in the best interests of their respective companies and
shareholders to consummate the business combination transaction provided for
herein in which SKAN will, subject to the terms and conditions set forth herein,
merge (the "Merger") with and into BSB Bancorp, with BSB Bancorp being the
Surviving Corporation (as defined below);
WHEREAS, prior to consummation of the Merger, BSB Bancorp and SKAN will
respectively cause BSB Bank & Trust Company, a New York-chartered commercial
bank and trust company and wholly owned subsidiary of BSB Bancorp ("BSB Bank"),
and Skaneateles Savings Bank, a New York-chartered savings bank and wholly owned
subsidiary of SKAN ("Skaneateles Bank"), to enter into a merger agreement, in
the form attached hereto as Exhibit A (the "Bank Merger Agreement"), providing
for the merger (the "Bank Merger") of Skaneateles Bank with and into BSB Bank,
with BSB Bank being the surviving Bank of the Bank Merger, and it is intended
that the Bank Merger be consummated immediately after consummation of the
Merger;
WHEREAS, as an inducement to BSB Bancorp to enter into this Agreement,
SKAN has entered into an option agreement, in the form attached hereto as
Exhibit B (the "Option Agreement"), with BSB Bancorp concurrently with the
execution of this Agreement pursuant to which SKAN has granted BSB Bancorp an
option to purchase, under certain circumstances, an aggregate of 290,142 newly
issued shares of common stock, par value $.01 per share, of SKAN ("SKAN Common
Stock") upon the terms and conditions therein contained (which number of shares
is equal to 19.99% of the total number of outstanding shares of SKAN Common
Stock on the date hereof); and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with the Merger and also to prescribe certain
conditions to the Merger as set forth hereinbelow.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
Subject to the terms and conditions of this Agreement, in accordance
with the Delaware General Corporation Law (the "DGCL"), at the Effective Time
(as defined in Section 1.2 hereof), SKAN shall merge with and into BSB Bancorp,
with BSB Bancorp being the surviving corporation (hereinafter sometimes called
the "Surviving Corporation") in the Merger. Upon consummation of the Merger, the
corporate existence of SKAN shall cease and the Surviving Corporation shall
continue to exist as a Delaware corporation.
Effective Time.
The Merger shall become effective on the Closing Date (as defined in
Section 9.1 hereof), as set forth in the certificate of merger (the "Certificate
of Merger") in the form attached as Exhibit C hereto which shall be filed with
the Secretary of State of the State of Delaware on or before the Closing Date.
The term "Effective Time" shall be the date and time when the Merger becomes
effective on the Closing Date, as set forth in the Certificate of Merger.
1.3 Effects of the Merger.
<PAGE> 7
At and after the Effective Time, the Merger shall have the effects set
forth in Sections 259 and 261 of the DGCL.
1.4 Conversion of SKAN Common Stock.
(a) At the Effective Time, subject to Sections 1.4(b), 2.2(e) and 8.1(h)
hereof, each share of SKAN Common Stock issued and outstanding prior to the
Effective Time shall, by virtue of this Agreement and without any action on the
part of the holder thereof, be converted into and exchangeable for .970 shares
of BSB Bancorp common stock, par value $.01 per share ("BSB Bancorp Common
Stock"). The ratio of the number of shares of BSB Bancorp Common Stock to be
exchanged for each share of SKAN Common Stock issued and outstanding is
hereinafter referred to as the "Exchange Ratio." For the purposes of this
Agreement, references to BSB Bancorp Common Stock shall be deemed to include,
where appropriate, references to the right to receive shares of BSB Bancorp's
Series A Junior Participating Preferred Stock pursuant to the Rights Agreement,
dated as of May 22, 1989, as amended, between BSB Bancorp and American Stock
Transfer & Trust Company (the "Rights Agreement").
(b) All of the shares of SKAN Common Stock converted into BSB Bancorp
Common Stock pursuant to this Article I shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each certificate (each a
"Certificate") previously representing any such shares of SKAN Common Stock
shall thereafter represent the right to receive (i) the number of whole shares
of BSB Bancorp Common Stock and (ii) cash in lieu of fractional shares into
which the shares of SKAN Common Stock represented by such Certificate have been
converted pursuant to Section 1.4(a) and Section 2.2(e) hereof. Certificates
previously representing shares of SKAN Common Stock shall be exchanged for
certificates representing whole shares of BSB Bancorp Common Stock and cash in
lieu of fractional shares issued in consideration therefor upon the surrender of
such Certificates in accordance with Section 2.2 hereof, without any interest
thereon. If prior to the Effective Time BSB Bancorp should split or combine its
common stock, or pay a dividend or other distribution in such common stock, then
the Exchange Ratio shall be appropriately adjusted to reflect such split,
combination, dividend or distribution.
(c) At the Effective Time, all shares of SKAN Common Stock that are
owned by SKAN as treasury stock and all shares of SKAN Common Stock that are
owned directly or indirectly by BSB Bancorp or SKAN or any of their respective
Subsidiaries (other than shares of SKAN Common Stock held directly or indirectly
in trust accounts, managed accounts and the like or otherwise held in a
fiduciary capacity that are beneficially owned by third parties (any such
shares, and shares of BSB Bancorp Common Stock which are similarly held, whether
held directly or indirectly by BSB Bancorp or SKAN, as the case may be, being
referred to herein as "Trust Account Shares") and other than any shares of SKAN
Common Stock held by BSB Bancorp or SKAN or any of their respective Subsidiaries
in respect of a debt previously contracted (any such shares of SKAN Common
Stock, and shares of BSB Bancorp Common Stock which are similarly held, whether
held directly or indirectly by BSB Bancorp or SKAN, being referred to herein as
"DPC Shares")) shall be canceled and shall cease to exist and no stock of BSB
Bancorp or other consideration shall be delivered in exchange therefor. All
shares of BSB Bancorp Common Stock that are owned by SKAN or any of its
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of BSB Bancorp.
(d) Certificates for fractions of shares of BSB Bancorp Common Stock
will not be issued. In lieu of a fraction of a share of BSB Bancorp Common
Stock, each holder of SKAN Common Stock otherwise entitled to a fraction of a
share of BSB Bancorp Common Stock shall be entitled to receive an amount of cash
equal to (i) the fraction of a share of the BSB Bancorp Common Stock to which
such holder would otherwise be entitled, multiplied by (ii) the actual market
value of the BSB Bancorp Common Stock, which shall be deemed to be the average
of the daily closing prices per share for BSB Bancorp Common Stock for the
twenty consecutive trading days on which shares of BSB Bancorp Common Stock are
actually traded (as reported on the Nasdaq Stock Market National Market System)
ending on the third trading day preceding the Closing Date. Following
consummation of the Merger, no holder of SKAN Common Stock shall be entitled to
dividends or any other rights in respect of any such fraction.
2
<PAGE> 8
Options.
At the Effective Time, each option or warrant granted by SKAN to
purchase shares of SKAN Common Stock which is outstanding and unexercised
immediately prior thereto shall be converted automatically into an option to
purchase shares of BSB Bancorp Common Stock in an amount and at an exercise
price determined as provided below (and otherwise subject to the terms of the
1995 Non-Employee Directors Warrant Plan and 1998 Non-Employee Directors Warrant
Plan, the 1998 Stock Option Plan, the 1991 Long Term Incentive and Capital
Accumulation Plan and the 1987 Long Term Incentive and Capital Accumulation Plan
(collectively, all such plans are referred to as the "SKAN Stock Plans");
(1) The number of shares of BSB Bancorp Common Stock to be subject to
the option or warrant immediately after the Effective Time shall
be equal to the product of the number of shares of SKAN Common
Stock subject to the option or warrant immediately before the
Effective Time, multiplied by the Exchange Ratio, provided that
any fractional shares of BSB Bancorp Common Stock resulting from
such multiplication shall be rounded down to the nearest share;
and
(2) The exercise price per share of BSB Bancorp Common Stock under the
option or warrant immediately after the Effective Time shall be
equal to the exercise price per share of SKAN Common Stock under
the option or warrant immediately before the Effective Time
divided by the Exchange Ratio, provided that such exercise price
shall be rounded down to the nearest cent.
The adjustment provided herein shall be and is intended to be effected in a
manner which is consistent with Section 424(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The duration and other terms of the option or
warrant immediately after the Effective Time shall be the same as the
corresponding terms in effect immediately before the Effective Time, except that
all references to SKAN or Skaneateles Bank in the SKAN Stock Plans (and the
corresponding references in the option or warrant agreement documenting such
option or warrant) shall be deemed to be references to BSB Bancorp. Nothing
herein shall be construed as preventing option or warrant holders from
exercising the same prior to the Effective Time in accordance with the terms
thereof.
1.6 Certificate of Incorporation.
At the Effective Time, the Certificate of Incorporation of BSB Bancorp,
as in effect at the Effective Time, shall become the Certificate of
Incorporation of the Surviving Corporation.
1.7 Bylaws.
At the Effective Time, the Bylaws of BSB Bancorp, as in effect
immediately prior to the Effective Time, shall become the Bylaws of the
Surviving Corporation.
Directors and Officers.
At the Effective Time, the directors and officers of BSB Bancorp
immediately prior to the Effective Time shall become the directors and officers
of the Surviving Corporation. As of the Effective Time, BSB Bancorp shall amend
its Bylaws to increase the size of its Board of Directors by two members, and
promptly thereafter invite two members of the SKAN Board of Directors (as
constituted on the date hereof) to serve as members of the Board of Directors of
BSB Bancorp
1.9 Tax Consequences.
It is intended that the Merger shall constitute a reorganization within
the meaning of Section 368(a) of the Code, and that this Agreement shall
constitute a "plan of reorganization" for the purposes of the Code.
3
<PAGE> 9
ARTICLE II
EXCHANGE OF SHARES
2.1 BSB Bancorp to Make Shares Available.
At or prior to the Effective Time, BSB Bancorp shall deposit, or shall
cause to be deposited, with BSB Bancorp's transfer agent, American Stock
Transfer & Trust Company, or such other bank, trust company or transfer agent as
BSB Bancorp may select (the "Exchange Agent"), for the benefit of the holders of
Certificates, for exchange in accordance with this Article II, certificates
representing the shares of BSB Bancorp Common Stock and the cash in lieu of
fractional shares (such cash and certificates for shares of BSB Bancorp Common
Stock, being hereinafter referred to as the "Exchange Fund") to be issued
pursuant to Section 1.4 and paid pursuant to Section 2.2(a) hereof
(collectively, sometimes referred to herein as the "Shares") in exchange for
outstanding shares of SKAN Common Stock.
2.2 Exchange of Shares.
(a) As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a Certificate or Certificates a form
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing the
shares of BSB Bancorp Common Stock and the cash in lieu of fractional shares
into which the shares of SKAN Common Stock represented by such Certificate or
Certificates shall have been converted pursuant to this Agreement. SKAN shall
have the right to review both the letter of transmittal and the instructions
prior to such documents being finalized. Upon surrender of a Certificate for
exchange and cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive promptly in exchange therefor (x) a certificate representing that number
of whole shares of BSB Bancorp Common Stock to which such holder of SKAN Common
Stock shall have become entitled pursuant to the provisions of Article I hereof
and (y) a check representing the amount of cash in lieu of fractional shares, if
any, which such holder has the right to receive in respect of the Certificate
surrendered pursuant to the provisions of Article I, and the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or accrued on
the cash in lieu of fractional shares and unpaid dividends and distributions, if
any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the Effective
Time with respect to BSB Bancorp Common Stock and payable to the holders of
record thereof shall be paid to the holder of any unsurrendered Certificate
until the holder thereof shall surrender such Certificate in accordance with
this Article II. After the surrender of a Certificate in accordance with this
Article II, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of BSB Bancorp Common
Stock represented by such Certificate. No holder of an unsurrendered Certificate
shall be entitled, until the surrender of such Certificate, to vote the shares
of BSB Bancorp Common Stock into which his SKAN Common Stock shall have been
converted.
(c) If any certificate representing shares of BSB Bancorp Common Stock
is to be issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it shall be a condition of the issuance
thereof that the Certificate so surrendered shall be properly endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in proper
form for transfer, and that the person requesting such exchange shall pay to the
Exchange Agent in advance any transfer or other taxes required by reason of the
issuance of a certificate representing shares of BSB Bancorp Common Stock in any
name other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(d) As of the Effective Time, there shall be no transfers on the stock
transfer books of SKAN of the shares of SKAN Common Stock which were issued and
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates representing such shares are presented for transfer to the
Exchange Agent, they shall be
4
<PAGE> 10
canceled and exchanged for certificates representing shares of BSB Bancorp
Common Stock as provided in this Article II.
(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of SKAN for nine months after the Effective Time may be returned to
BSB Bancorp. After such funds have been returned to BSB Bancorp, any
shareholders of SKAN who have not theretofore complied with this Article II
shall thereafter look only to BSB Bancorp for payment of their shares of BSB
Bancorp Common Stock, cash in lieu of fractional shares and unpaid dividends and
distributions on BSB Bancorp Common Stock deliverable in respect of each share
of SKAN Common Stock such shareholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon. Notwithstanding the
foregoing, none of BSB Bancorp, SKAN, the Exchange Agent or any other person
shall be liable to any former holder of shares of SKAN Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by BSB
Bancorp, the posting by such person of a bond in such amount as BSB Bancorp may
reasonably direct as indemnity against any claim that may be made against it
with respect to such Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate the shares of BSB Bancorp Common
Stock and cash in lieu of fractional shares deliverable in respect thereof
pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SKAN
SKAN hereby makes the following representations and warranties to BSB
Bancorp as set forth in this Article III, each of which is being relied upon by
BSB Bancorp as a material inducement to enter into and perform this Agreement.
All of the disclosure schedules of SKAN referenced below and thereby required of
SKAN pursuant to this Agreement, which disclosure schedules shall be
cross-referenced to the specific sections and subsections of this Agreement and
delivered herewith, are referred to herein as the "SKAN Disclosure Schedule."
3.1 Corporate Organization.
(a) SKAN is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. SKAN has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted, and is duly licensed or qualified to
do business in each jurisdiction in which the nature of any material business
conducted by it or the character or location of any material properties or
assets owned or leased by it makes such licensing or qualification necessary.
SKAN is duly registered as a bank holding company with the Board of Governors of
the Federal Reserve System ("FRB") under the Bank Holding Company Act of 1956,
as amended ("BHCA"). The Certificate of Incorporation and Bylaws of SKAN, copies
of which have previously been delivered to BSB Bancorp, are true, correct and
complete copies of such documents as in effect as of the date of this Agreement.
Skaneateles Bank and Skaneateles Preferred Capital Corp., a New York corporation
("SPCC"), are the only Subsidiaries of SKAN.
(b) Skaneateles Bank is a New York-chartered savings bank duly organized
and validly existing and in good standing under the laws of New York. The
deposit accounts of Skaneateles Bank are insured by the Federal Deposit
Insurance Corporation (the "FDIC") through the Bank Insurance Fund (the "BIF")
to the fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid by Skaneateles Bank. Skaneateles
Bank has the corporate power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being conducted and is duly
licensed or qualified to do business in each jurisdiction in which the nature of
any material business conducted by it or the character or the location of any
material properties or assets owned or leased by it makes such licensing or
qualification necessary. The Certificate of Incorporation and Bylaws of
Skaneateles Bank, copies of which have previously been delivered to BSB Bancorp,
are true, correct and complete copies of such documents as in effect as of the
date of this Agreement.
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(c) SPCC is a New York corporation duly organized and validly existing
and in good standing under the laws of New York. SPCC is a subsidiary of
Skaneateles Bank. SPCC has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business in each jurisdiction
in which the nature of any material business conducted by it or the character or
the location of any material properties or assets owned or leased by it makes
such licensing or qualification necessary. The Certificate of Incorporation and
Bylaws of SPCC, copies of which have previously been delivered to BSB Bancorp,
are true, correct and complete copies of such documents as in effect as of the
date of this Agreement.
3.2 Capitalization.
(a) The authorized capital stock of SKAN consists of 4,000,000 shares of
SKAN Common Stock and 500,000 shares of serial preferred stock, par value $.01
per share (the "SKAN Preferred Stock"). As of the date hereof, there are (x)
1,450,712 shares of SKAN Common Stock issued and outstanding and no shares of
SKAN Common Stock are held in SKAN's treasury, (y) no shares of SKAN Common
Stock reserved for issuance upon exercise of outstanding stock options or
otherwise, except for (i) 345,163 shares of SKAN Common Stock reserved for
issuance pursuant to the SKAN Stock Plans other than those referred to in clause
(ii) (of which options for 120,350 shares are currently outstanding), (ii)
203,150 shares of SKAN Common Stock reserved for issuance pursuant to the 1998
Directors Stock Purchase Plan and Employee Stock Purchase Plan (collectively,
the "Purchase Plan") and the Skaneateles Bancorp, Inc. Dividend Reinvestment
Plan (the "SKAN DRIP"), and (iii) 290,142 shares of SKAN Common Stock reserved
for issuance upon exercise of the option issued to BSB Bancorp pursuant to the
Option Agreement, and (z) no shares of SKAN Preferred Stock issued or
outstanding, held in SKAN's treasury or reserved for issuance upon exercise of
outstanding stock options or otherwise. All of the issued and outstanding shares
of SKAN Common Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. Except for the Option Agreement and the SKAN
Stock Plans, SKAN does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of SKAN Common
Stock or SKAN Preferred Stock or any other equity security of SKAN or any
securities representing the right to purchase or otherwise receive any shares of
SKAN Common Stock or any other equity security of SKAN. The names of the
optionees, the date of each option to purchase SKAN Common Stock granted, the
number of shares subject to each such option, the expiration date of each such
option, and the price at which each such option may be exercised under the SKAN
Stock Plans are set forth in Section 3.2(a)(i) of the SKAN Disclosure Schedule.
Except as set forth at Section 3.2(a)(ii) of the SKAN Disclosure Schedule, since
December 31, 1997 SKAN has not issued any shares of its capital stock or any
securities convertible into or exercisable for any shares of its capital stock.
(b) Section 3.2(b) of the SKAN Disclosure Schedule sets forth a true,
correct and complete list of all direct or indirect Subsidiaries of SKAN as of
the date of this Agreement. Except as set forth at Section 3.2(b) of the SKAN
Disclosure Schedule, SKAN owns, directly or indirectly, all of the issued and
outstanding shares of capital stock of each of its Subsidiaries, free and clear
of all liens, charges, encumbrances and security interests whatsoever, and all
of such shares are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No SKAN Subsidiary has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
3.3 Authority; No Violation.
(a) SKAN has full corporate power and authority to execute and deliver
this Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement and the consummation of the transactions contemplated
hereby and thereby
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have been duly and validly approved by the Board of Directors of SKAN. The Board
of Directors of SKAN has directed that this Agreement and the transactions
contemplated hereby be submitted to SKAN's shareholders for approval at a
special meeting of such shareholders and, except for the adoption of this
Agreement by the requisite vote of SKAN's shareholders, no other corporate
proceedings on the part of SKAN (except for matters related to setting the date,
time, place and record date for the special meeting) are necessary to approve
this Agreement or the Option Agreement or to consummate the transactions
contemplated hereby or thereby. This Agreement has been, and the Option
Agreement will be, duly and validly executed and delivered by SKAN and (assuming
due authorization, execution and delivery by BSB Bancorp of this Agreement and
by BSB Bancorp of the Option Agreement) will constitute valid and binding
obligations of SKAN, enforceable against SKAN in accordance with their terms,
except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(b) Skaneateles Bank has full corporate power and authority to execute
and deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby have been duly and
validly approved by the Board of Directors of Skaneateles Bank and by SKAN as
the sole shareholder of Skaneateles Bank. No other corporate proceedings on the
part of Skaneateles Bank will be necessary to consummate the transactions
contemplated thereby. The Bank Merger Agreement, upon execution and delivery by
Skaneateles Bank, will be duly and validly executed and delivered by Skaneateles
Bank and will (assuming due authorization, execution and delivery by BSB Bank)
constitute a valid and binding obligation of Skaneateles Bank, enforceable
against Skaneateles Bank in accordance with its terms, except as enforcement may
be limited by general principles of equity whether applied in a court of law or
a court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(c) Neither the execution and delivery of this Agreement and the Option
Agreement by SKAN or the Bank Merger Agreement by Skaneateles Bank, nor the
consummation by SKAN or Skaneateles Bank, as the case may be, of the
transactions contemplated hereby or thereby, nor compliance by SKAN or
Skaneateles Bank with any of the terms or provisions hereof or thereof, will (i)
violate any provision of the Certificate of Incorporation or Bylaws of SKAN or
the Certificate of Incorporation or Bylaws of Skaneateles Bank, or (ii) assuming
that the consents and approvals referred to in Section 3.4 hereof are duly
obtained, (x) violate any Laws (as defined in Section 9.13) applicable to SKAN
or Skaneateles Bank or any of their respective properties or assets, or (y)
violate, conflict with, result in a breach of any provision of or the loss of
any benefit under, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination
of or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the respective properties or assets of
SKAN or Skaneateles Bank under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which SKAN or Skaneateles Bank is a party, or
by which they or any of their respective properties or assets may be bound or
affected.
3.4 Consents and Approvals.
(a) Except for (i) the filing of applications, notices and waiver
requests, as applicable, as to the Merger and the Bank Merger with the FRB under
the BHCA, the FDIC under the Bank Merger Act and the Superintendent of Banks of
New York State (the "New York Superintendent"), and approval of the foregoing
applications, notices and waiver requests, (ii) the filing of any required
applications or notices with the FDIC and the New York Superintendent as to the
subsidiary activities of Skaneateles Bank which become subsidiaries of BSB Bank
and approval of such applications and notices, (iii) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement on Form
S-4 to register the shares of BSB Bancorp Common Stock to be issued in
connection with the Merger (including the shares of BSB Bancorp Common Stock
that may be issued upon the exercise of the options referred to in Section 1.5
hereof), which will include the proxy statement/prospectus to be used in
soliciting the approval of SKAN's shareholders at a special meeting to be held
in connection with this Agreement and the transactions contemplated hereby (the
"Proxy Statement/Prospectus"), (iv) the approval of this Agreement by the
requisite vote of the shareholders of SKAN, (v) the filing of the Certificate of
Merger with the Secretary of State of
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Delaware pursuant to the DGCL, (vi) the filings required by the Bank Merger
Agreement, and (vii) such filings, authorizations or approvals as may be set
forth in Section 3.4 of the SKAN Disclosure Schedule, no consents or approvals
of or filings or registrations with any court, administrative agency or
commission or other governmental authority or instrumentality (each a
"Governmental Entity"), or with any third party are necessary in connection with
(1) the execution and delivery by SKAN of this Agreement and the Option
Agreement, (2) the consummation by SKAN of the Merger and the other transactions
contemplated hereby, (3) the execution and delivery by Skaneateles Bank of the
Bank Merger Agreement, (4) the consummation by SKAN of the Option Agreement; and
(5) the consummation by Skaneateles Bank of the Bank Merger and the transactions
contemplated thereby, except, in each case, for such consents, approvals or
filings, the failure of which to obtain will not have a material adverse effect
on the ability of BSB Bancorp to consummate the transactions contemplated
hereby.
(b) SKAN hereby represents to BSB Bancorp that it has no knowledge of
any reason why approval or effectiveness of any of the applications, notices or
filings referred to in Section 3.4(a) cannot be obtained or granted on a timely
basis.
3.5 Loan Portfolio; Reports.
(a) Except as set forth at Section 3.5(a) of the SKAN Disclosure
Schedule, as of December 31, 1998 and thereafter through and including the date
of this Agreement, neither SKAN nor Skaneateles Bank is a party to any written
or oral loan agreement, note or borrowing arrangement (including, without
limitation, leases, credit enhancements, commitments, guarantees and
interest-bearing assets) (collectively, "Loans"), with any Affiliated Person (as
defined in Section 9.13).
(b) SKAN and Skaneateles Bank have timely filed all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that they were required to file since December 31, 1993
with (i) the FRB, (ii) the FDIC, (iii) the New York Superintendent and any other
state banking commissions or any other state regulatory authority (each a "State
Regulator"), (iv) the SEC and (v) any other self-regulatory organization ("SRO")
(collectively "Regulatory Agencies"). Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of SKAN and its
Subsidiaries, no Governmental Entity is conducting, or has conducted, any
proceeding or investigation into the business or operations of SKAN or
Skaneateles Bank since December 31, 1993, other than as set forth at Section
3.5(b) of the SKAN Disclosure Schedule.
3.6 Financial Statements; Exchange Act Filings; Books and Records.
SKAN has previously delivered to BSB Bancorp true, correct and complete
copies of the consolidated balance sheets of SKAN and its Subsidiaries as of
December 31 for the fiscal years 1996 and 1997 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the fiscal years
1995 through 1997, inclusive, as reported in SKAN's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case
accompanied by the audit report of KPMG LLP, independent auditors, and the
interim financial statements of SKAN as of and for the nine months ended
September 30, 1997 and 1998, as included in the SKAN quarterly report on Form
10-Q for the period ended September 30, 1998 as filed with the SEC. The
financial statements referred to in this Section 3.6 (including the related
notes, where applicable) fairly present, and the financial statements referred
to in Section 6.8 hereof will fairly present (subject, in the case of the
unaudited statements, to recurring audit adjustments normal in nature and
amount), the results of the consolidated operations and consolidated financial
condition of SKAN and its Subsidiaries for the respective fiscal periods or as
of the respective dates therein set forth; each of such statements (including
the related notes, where applicable) comply, and the financial statements
referred to in Section 6.8 hereof will comply, with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto and each of such statements (including the related notes, where
applicable) has been, and the financial statements referred to in Section 6.8
hereof will be prepared in accordance with generally accepted accounting
principles consistently applied during the periods involved ("GAAP"), except in
each case as indicated in such statements or in the notes thereto or, in the
case of unaudited statements, as permitted
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by Form 10-Q. SKAN's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and all reports filed under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act since December 31, 1995 comply in all material respects with
the appropriate requirements for such reports under the Exchange Act, and SKAN
has previously delivered or made available to BSB Bancorp true, correct and
complete copies of such reports. SKAN has made all filings required of it under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act. The books and records of
SKAN and Skaneateles Bank have been, and are being, maintained in all material
respects in accordance with GAAP and any other applicable legal and accounting
requirements.
3.7 Broker's Fees.
Neither SKAN nor any SKAN Subsidiary nor any of their respective
officers or directors has employed any broker or finder or incurred any
liability for any broker's fees, commissions or finder's fees in connection with
any of the transactions contemplated by this Agreement, the Bank Merger
Agreement or the Option Agreement, except that SKAN has engaged, and will pay a
fee or commission to McConnell, Budd & Downes, Inc. ("MBD") in accordance with
the terms of a letter agreement between MBD and SKAN, dated December 17, 1998, a
true, complete and correct copy of which is attached at Section 3.7 of the SKAN
Disclosure Schedule.
3.8 Absence of Certain Changes or Events.
(a) Except as set forth at Section 3.8 of the SKAN Disclosure Schedule,
or as disclosed in SKAN's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, since December 31, 1997 (i) neither SKAN nor any of its
Subsidiaries has incurred any material liability, except as contemplated by the
Agreement or in the ordinary course of their business consistent with their past
practices, and (ii) no event has occurred which has had, or is likely to have,
individually or in the aggregate, a Material Adverse Effect (as defined in
Section 9.13) on SKAN
(b) Except for (i) the organization of SPCC, and (ii) the transactions
contemplated by this Agreement, since December 31, 1997 SKAN and its
Subsidiaries have carried on their respective businesses in the ordinary and
usual course consistent with their past practices.
3.9 Legal Proceedings.
(a) Except as set forth at Section 3.9 of the SKAN Disclosure Schedule,
neither SKAN nor any of its Subsidiaries is a party to any, and there are no
pending or to the knowledge of SKAN, threatened, legal, administrative,
arbitration or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against SKAN or any of its Subsidiaries in which,
to the knowledge of SKAN, there is a reasonable probability of any material
recovery against or other material effect upon SKAN or any of its Subsidiaries
or which challenge the validity or propriety of the transactions contemplated by
this Agreement, the Bank Merger Agreement or the Option Agreement as to which
there is a reasonable probability of success.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than regulations of general application) imposed upon SKAN,
any of its Subsidiaries or the assets of SKAN or any of its Subsidiaries.
3.10 Taxes and Tax Returns.
(a) Each of SKAN and its Subsidiaries has duly filed all Tax Returns
required to be filed by it on or prior to the date hereof (all such returns
being accurate and complete in all material respects) and has duly paid or made
provision on the financial statements referred to in Sections 3.6 and 6.8 hereof
in accordance with GAAP for the payment of all material Taxes which have been
incurred or are due or claimed to be due from it by Taxing Authorities on or
prior to the date hereof other than Taxes (a) which (x) are not yet delinquent
or (y) are being contested in good faith and set forth in Section 3.10 of the
SKAN Disclosure Schedule and (b) which have not been finally determined. All
liability with respect to the Tax Returns of SKAN and its Subsidiaries has been
satisfied for all years to and including 1997. The Internal Revenue Service
("IRS") has not notified SKAN of, or otherwise
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asserted, that there are any material deficiencies with respect to the federal
income Tax Returns of SKAN subsequent to 1993. There are no material disputes
pending, or claims asserted for, Taxes or assessments upon SKAN or any of its
Subsidiaries, nor has SKAN or any of its Subsidiaries been requested to give any
currently effective waivers extending the statutory period of limitation
applicable to any federal or state income Tax Return for any period. In
addition, Tax Returns which are accurate and complete in all material respects
have been filed by SKAN and its Subsidiaries for all periods for which returns
were due with respect to income tax withholding, Social Security and
unemployment taxes and the amounts shown on such Tax Returns to be due and
payable have been paid in full or adequate provision therefor in accordance with
GAAP has been included by SKAN in the financial statements referred to in
Sections 3.6 and 6.8 hereto. All SKAN Tax Returns relating to federal income
taxes have been examined by the relevant Taxing Authorities, or closed without
audit by applicable statutes of limitations, and all deficiencies proposed as a
result of such examinations have been paid or settled, for all periods before
and including the taxable year ended 1992. Neither SKAN nor any of its
Subsidiaries has consented to any waiver or extension of any statute of
limitations with respect to any Tax. Neither SKAN nor any SKAN Subsidiary has
made an election under Section 341(f) of the IRC. SKAN has provided or made
available to BSB Bancorp complete and correct copies of its Tax Returns and all
material correspondence and documents, if any, relating directly or indirectly
to taxes for each taxable year or other relevant period as to which the
applicable statute of limitations has not run on the date hereof. For this
purpose, "correspondence and documents" include, without limitation, amended Tax
Returns, claims for refunds, notices from Taxing Authorities of proposed changes
or adjustments to Taxes or Tax Returns, consents to assessment or collection of
Taxes, acceptances of proposed adjustments, closing agreements, rulings and
determination letters and requests therefor, and all other written
communications to or from Taxing Authorities relating to any material Tax
liability of SKAN or any SKAN Subsidiary. SKAN will not be a "foreign person" as
that term is used in ss. 1.1445-2 of the Treasury Regulations promulgated under
the IRC. Skaneateles Bank is not a "United States real property holding
corporation" within meaning of ss. 897 of the IRC and was not a "United States
real property holding corporation" on any "determination date" (as defined in
ss. 1.897-2(c) of such Regulations) that occurred during any relevant period.
(b) For all taxable years commencing with December 31, 1998, SPCC has
been subject to taxation as a real estate investment trust within the meaning of
Section 856 of the Code ("REIT") and has satisfied all requirements to qualify
as a REIT for such years, (B) has operated, and intends to continue to operate,
in such a manner as to qualify as a REIT for the tax year ending December 31,
1999, and (C) has not taken or omitted to take any action which would reasonably
be expected to result in a challenge to its status as a REIT, and to SKAN's
knowledge, no such challenge is pending or threatened. SPCC does not hold any
asset (x) the disposition of which would be subject to rules similar to Section
1374 of the Code as a result of an election under IRS Notice 88-19 or (y) that
is subject to a consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder.
(c) For purposes of this Agreement:
"Tax" means any tax (including any income tax, capital gains tax, value-added
tax, sales tax, property tax, gift tax, or estate tax), levy, assessment,
tariff, duty (including any customs duty), deficiency, or other fee, and any
related charge or amount (including any fine, penalty, interest, or addition to
tax), imposed, assessed, or collected by or under the authority of any Taxing
Authority or payable pursuant to any tax-sharing agreement or any other contract
relating to the sharing or payment of any such tax, levy, assessment, tariff,
duty, deficiency, or fee. "Tax Return" means any return (including any
information return), report, statement, schedule, notice, form, or other
document or information filed with or submitted to, or required to be filed with
or submitted to, any Taxing Authority in connection with the determination,
assessment, collection, or payment of any Tax or in connection with the
administration, implementation, or enforcement of or compliance with any law,
regulation or other legal requirement relating to any Tax. "Taxing Authority"
means any:
(i) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign, or other
government;
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(iii) governmental or quasi-governmental authority of any
nature (including any governmental agency, branch, department, official, or
entity and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
3.11 Employee Plans.
(a) Section 3.11(a) of the SKAN Disclosure Schedule sets forth a true
and complete list of each employee benefit plan (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), arrangement or agreement that is maintained or contributed to as of
the date of this Agreement, or that has within the last six years been
maintained or contributed to, by SKAN or any of its Subsidiaries or any other
entity which together with SKAN would be deemed a "single employer" within the
meaning of Section 4001 of ERISA or Code Sections 414(b), (c) or (m) or under
which SKAN or any such Subsidiary has any liability (collectively, the "Plans").
(b) SKAN has heretofore delivered or made available to BSB Bancorp true,
correct and complete copies of each of the Plans and all related documents,
including but not limited to (i) the actuarial report for such Plan (if
applicable) for each of the last five years, (ii) the most recent determination
letter from the IRS (if applicable) for such Plan, (iii) the current summary
plan description and any summaries of material modification, (iv) all annual
reports (Form 5500 series) for each Plan filed for the preceding five plan
years, (v) all agreements with fiduciaries and service providers relating to the
Plan, and (vi) all substantive correspondence relating to any such Plan
addressed to or received from the Internal Revenue Service, the Department of
Labor, the Pension Benefit Guaranty Corporation or any other governmental
agency.
(c) Except as set forth at Section 3.11(c) of the SKAN Disclosure
Schedule, (i) Each of the Plans has been operated and administered in all
material respects in compliance with applicable Laws, including but not limited
to ERISA and the Code, (ii) each of the Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code is so qualified, (iii) with respect to
each Plan which is subject to Title IV of ERISA, the present value of accrued
benefits under such Plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by such Plan's actuary
with respect to such Plan, did not, as of its latest valuation date, exceed the
then current value of the assets of such Plan allocable to such accrued
benefits, (iv) no Plan provides benefits, including, without limitation, death
or medical benefits (whether or not insured), with respect to current or former
employees of SKAN or any SKAN Subsidiary beyond their retirement or other
termination of service, other than (w) coverage mandated by applicable Law, (x)
death benefits or retirement benefits under a Plan that is an "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (y) deferred
compensation benefits under a Plan that are accrued as liabilities on the books
of SKAN or any SKAN Subsidiary, or (z) benefits the full cost of which is borne
by the current or former employee (or his beneficiary), (v) no liability under
Title IV of ERISA has been incurred by SKAN or any SKAN Subsidiary that has not
been satisfied in full, and no condition exists that presents a material risk of
SKAN or any SKAN Subsidiary incurring a material liability thereunder, (vi) no
Plan is a "multi employer pension plan," as such term is defined in Section
3(37) of ERISA, (vii) all contributions or other amounts payable by SKAN or any
SKAN Subsidiary as of the Effective Time with respect to each Plan and all other
liabilities of each such entity with respect to each Plan, in respect of current
or prior plan years have been paid or accrued in accordance with generally
accepted accounting practices and Section 412 of the Code, (viii) neither SKAN
nor any SKAN Subsidiary has engaged in a transaction in connection with which
SKAN or any SKAN Subsidiary could be subject to either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section
4975 or 4976 of the Code, (ix) to the knowledge of SKAN, there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the plans or any trusts related thereto, and (x) all
Plans (other than Plans providing for the payment of benefits from the general
assets of SKAN or any SKAN Subsidiary) could be terminated as of the Effective
Time without material liability; (xi) no Plan, program, agreement or other
arrangement, either individually or collectively, provides for any payment by
SKAN or any SKAN Subsidiary that would not be deductible under Code Sections
162(a)(1), 162(m) or 404 or that would constitute a "parachute payment" within
the meaning of Code Section 280G; (xii) no "accumulated funding
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deficiency" as defined in Section 302(a)(2) of ERISA or Section 412 of the Code,
whether or not waived, and no "unfunded current liability" as determined under
Section 412(l) of the Code exists with respect to any Plan; and (xiii) no Plan
has experienced a "reportable event" (as such term is defined in Section 4043(b)
of ERISA) that is not subject to an administrative or statutory waiver from the
reporting requirement.
3.12 Certain Contracts.
(a) Except as set forth at Section 3.12 of the SKAN Disclosure Schedule,
neither SKAN nor any of its Subsidiaries is a party to or bound by any contract,
arrangement or commitment (i) with respect to the employment of any directors,
officers, employees or consultants, (ii) which, upon the consummation of the
transactions contemplated by this Agreement or the Bank Merger Agreement will
(either alone or upon the occurrence of any additional acts or events) result in
any payment (whether of severance pay or otherwise) becoming due from BSB
Bancorp, SKAN, Skaneateles Bank, BSB Bank or any of their respective
Subsidiaries to any director, officer or employee thereof, (iii) which
materially restricts the conduct of any line of business by SKAN or Skaneateles
Bank, (iv) with or to a labor union or guild (including any collective
bargaining agreement) or (v) except as set forth on Section 3.12(a)(v) of the
SKAN Disclosure Schedule, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated by the occurrence of any of
the transactions contemplated by this Agreement or the Bank Merger Agreement, or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement or the Bank Merger Agreement
(including as to this clause (v), any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan). Except as set forth
at Section 3.12 of the SKAN Disclosure Schedule, there are no employment,
consulting and deferred compensation agreements to which SKAN or any of its
Subsidiaries is a party. Section 3.12(a) of the SKAN Disclosure Schedule sets
forth a list of all material contracts (as defined in Item 601(b)(10) of
Regulation S-K) of SKAN and its Subsidiaries. Each contract, arrangement or
commitment of the type described in this Section 3.12(a), whether or not set
forth in Section 3.12(a) of the SKAN Disclosure Schedule, is referred to herein
as a "SKAN Contract," and neither SKAN nor any of its Subsidiaries has received
notice of, nor do any executive officers of such entities know of, any violation
of any SKAN Contract.
(b) (i) Each SKAN Contract is valid and binding and in full force and
effect, (ii) SKAN and each of its Subsidiaries has in all material respects
performed all obligations required to be performed by it to date under each SKAN
Contract, and (iii) no event or condition exists which constitutes or, after
notice or lapse of time or both, would constitute, a material default on the
part of SKAN or any of its Subsidiaries under any such SKAN Contract.
3.13 Agreements with Regulatory Agencies.
Neither SKAN nor Skaneateles Bank is subject to any cease-and-desist or
other order issued by, or is a party to any written agreement, consent agreement
or memorandum of understanding with, or has adopted any board resolutions at the
request of (each, whether or not set forth on Section 3.13 of the SKAN
Disclosure Schedule, a "Regulatory Agreement") any Governmental Entity that
restricts the conduct of its business or that in any manner relates to its
capital adequacy, its credit policies, its management or its business, nor has
SKAN or Skaneateles Bank been advised by any Governmental Entity that it is
considering issuing or requesting any Regulatory Agreement.
3.14 State Takeover Laws; Certificate of Incorporation.
The Board of Directors of SKAN has approved the offer of BSB Bancorp to
enter into this Agreement, the Bank Merger Agreement and the Option Agreement,
and has authorized and approved this Agreement, the Bank Merger Agreement and
the Option Agreement, and the consummation of the transactions contemplated
hereby and thereby, such that under applicable law and SKAN's Certificate of
Incorporation the only vote of SKAN shareholders necessary to consummate the
transactions contemplated hereby (including the Bank Merger and issuance under
the Option Agreement) is the approval of two-thirds of the outstanding shares of
SKAN Common Stock. Assuming that the consents and approvals referred to in
Section 3.4 hereof are obtained, the Board of Directors of SKAN has conclusively
determined that the provisions of Articles 10 and 12 of the Certificate of
Incorporation of SKAN
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does not apply to this Agreement, the Bank Merger Agreement or the Option
Agreement, or any of the transactions contemplated hereby or thereby.
3.15 Environmental Matters.
(a) Each of SKAN and the SKAN Subsidiaries is in compliance in all
material respects with all applicable federal and state laws and regulations
relating to pollution or protection of the environment (including without
limitation, laws and regulations relating to emissions, discharges, releases and
threatened releases of Hazardous Materials (as hereinafter defined), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials;
(b) There is no suit, claim, action, proceeding, investigation or notice
pending or, to the knowledge of SKAN, threatened (or, to the knowledge of SKAN,
past or present actions or events that could form the basis of any such suit,
claim, action, proceeding, investigation or notice), in which SKAN or any SKAN
Subsidiary has been or, with respect to threatened suits, claims, actions,
proceedings, investigations or notices may be, named as a defendant (i) for
alleged material noncompliance (including by any predecessor), with any
environmental law, rule or regulation or (ii) relating to any material release
or threatened release into the environment of any Hazardous Material, occurring
at or on a site owned, leased or operated by SKAN or any SKAN Subsidiary, or to
the knowledge of SKAN, relating to any material release or threatened release
into the environment of any Hazardous Material, occurring at or on a site not
owned, leased or operated by SKAN or any SKAN Subsidiary;
(c) During the period of SKAN's or any SKAN Subsidiary's ownership or
operation of any of its properties, there has not been any material release of
Hazardous Materials in, on, under or affecting any such property.
(d) To the knowledge of SKAN, neither SKAN nor any SKAN Subsidiary has
made or participated in any loan to any person who is subject to any suit,
claim, action, proceeding, investigation or notice, pending or threatened, with
respect to (i) any alleged material noncompliance as to any property securing
such loan with any environmental law, rule or regulation, or (ii) the release or
the threatened release into the environment of any Hazardous Material at a site
owned, leased or operated by such person on any property securing such loan.
(e) For purposes of this section 3.15, the term "Hazardous Material"
means any hazardous waste, petroleum product, polychlorinated biphenyl,
chemical, pollutant, contaminant, pesticide, radioactive substance, or other
toxic material, or other material or substance (in each such case, other than
small quantities of such substances in retail containers) regulated under any
applicable environmental or public health statute, law, ordinance, rule or
regulation.
3.16 Reserves for Losses.
All reserves or other allowances for possible losses reflected in
SKAN's most recent financial statements referred to in Section 3.6 complied with
all Laws and are adequate under GAAP. Neither SKAN nor Skaneateles Bank has been
notified by the FRB, the FDIC, the New York Superintendent or SKAN's independent
auditor, in writing or otherwise, that such reserves are inadequate or that the
practices and policies of SKAN or Skaneateles Bank in establishing such reserves
and in accounting for delinquent and classified assets generally fail to comply
with applicable accounting or regulatory requirements, or that the FRB, the
FDIC, the New York Superintendent or SKAN's independent auditor believes such
reserves to be inadequate or inconsistent with the historical loss experience of
SKAN or Skaneateles Bank. SKAN has previously furnished BSB Bancorp with a
complete list of all extensions of credit and other real estate owned ("OREO")
that have been classified by any bank or trust examiner (regulatory or internal)
as other loans specially mentioned, special mention, substandard, doubtful,
loss, classified or criticized, credit risk assets, concerned loans or words of
similar import. SKAN agrees to update such list no less frequently than monthly
after the date of this Agreement until the earlier of the Closing Date or the
date that this Agreement is
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terminated in accordance with Section 8.1. All OREO held by SKAN or Skaneateles
Bank is being carried net of reserves at the lower of cost or net realizable
value.
3.17 Properties and Assets.
Section 3.17 of the SKAN Disclosure Schedule lists (i) all real
property owned by SKAN and each SKAN Subsidiary; (ii) each real property lease,
sublease or installment purchase arrangement to which SKAN or any SKAN
Subsidiary is a party; (iii) a description of each contract for the purchase,
sale, or development of real estate to which SKAN or any SKAN Subsidiary is a
party; and (iv) all items of SKAN's or any SKAN Subsidiary's tangible personal
property and equipment with a book value of $10,000 or more or having any annual
lease payment of $10,000 or more. Except for (a) items reflected in SKAN's
consolidated financial statements as of December 31, 1997 referred to in Section
3.6 hereof, (b) exceptions to title that do not interfere materially with SKAN's
or any SKAN Subsidiary's use and enjoyment of owned or leased real property
(other than OREO), (c) liens for current real estate taxes not yet delinquent,
or being contested in good faith, properly reserved against (and reflected on
the financial statements referred to in Section 3.6 above), (d) properties and
assets sold or transferred in the ordinary course of business consistent with
past practices since December 31, 1997, and (e) items listed in Section 3.17 of
the SKAN Disclosure Schedule, SKAN and each SKAN Subsidiary have good and, as to
owned real property, marketable and insurable title to all their properties and
assets, free and clear of all liens, claims, charges and other encumbrances.
SKAN and each SKAN Subsidiary, as lessees, have the right under valid and
subsisting leases to occupy, use and possess all property leased by them, and
neither SKAN nor any SKAN Subsidiary has experienced any material uninsured
damage or destruction with respect to such properties since December 31, 1997.
All properties and assets used by SKAN and each SKAN Subsidiary are in good
operating condition and repair suitable for the purposes for which they are
currently utilized and comply in all material respects with all Laws relating
thereto now in effect or scheduled to come into effect. SKAN and each SKAN
Subsidiary enjoy peaceful and undisturbed possession under all leases for the
use of all property under which they are the lessees, and all leases to which
SKAN or any SKAN Subsidiary is a party are valid and binding obligations in
accordance with the terms thereof. Neither SKAN nor any SKAN Subsidiary is in
material default with respect to any such lease, and there has occurred no
default by SKAN or any SKAN Subsidiary or event which with the lapse of time or
the giving of notice, or both, would constitute a material default under any
such lease. There are no Laws, conditions of record, or other known impediments
which interfere with the intended use by SKAN or any SKAN Subsidiary of any of
the property owned, leased, or occupied by them.
3.18 Insurance.
Section 3.18 of the SKAN Disclosure Schedule contains a true, correct
and complete list of all insurance policies and bonds maintained by SKAN and any
SKAN Subsidiary, including the name of the insurer, the policy number, the type
of policy and any applicable deductibles, and all such insurance policies and
bonds (or other insurance policies and bonds that have, from time to time, in
respect of the nature of the risks insured against and amount of coverage
provided, been substantially similar in kind and amount to that customarily
carried by parties similarly situated who own properties and engage in
businesses substantially similar to that of SKAN and any SKAN Subsidiary) are in
full force and effect and have been in full force and effect. As of the date
hereof, neither SKAN nor any SKAN Subsidiary has received any notice of
cancellation or amendment of any such policy or bond or is in default under any
such policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion. The existing insurance
carried by SKAN and SKAN Subsidiaries is and will continue to be, in respect of
the nature of the risks insured against and the amount of coverage provided,
substantially similar in kind and amount to that customarily carried by parties
similarly situated who own properties and engage in businesses substantially
similar to that of SKAN and the SKAN Subsidiaries, and is sufficient for
compliance by SKAN and the SKAN Subsidiaries with all requirements of Law and
agreements to which SKAN or any of the SKAN Subsidiaries is subject or is a
party. True, correct and complete copies of all such policies and bonds
reflected at Section 3.18 of the SKAN Disclosure Schedule, as in effect on the
date hereof, have been delivered to BSB Bancorp.
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3.19 Compliance with Applicable Laws.
Each of SKAN and any SKAN Subsidiary has complied in all material
respects with all Laws applicable to it or to the operation of its business.
Neither SKAN nor any SKAN Subsidiary has received any notice of any material
alleged or threatened claim, violation, or liability under any such Laws that
has not heretofore been cured and for which there is no remaining liability.
3.20 Loans.
As of the date hereof:
(a) All loans owned by SKAN or any SKAN Subsidiary, or in which SKAN or
any SKAN Subsidiary has an interest, comply in all material respects with all
Laws, including, but not limited to, applicable usury statutes, underwriting and
recordkeeping requirements and the Truth in Lending Act, the Equal Credit
Opportunity Act, and the Real Estate Procedures Act, and other applicable
consumer protection statutes and the regulations thereunder.
(b) All loans owned by SKAN or any SKAN Subsidiary, or in which SKAN or
any SKAN Subsidiary has an interest, have been made or acquired by SKAN in
accordance with board of director-approved loan policies. Each of SKAN and each
SKAN Subsidiary holds mortgages contained in its loan portfolio for its own
benefit to the extent of its interest shown therein; such mortgages evidence
liens having the priority indicated by their terms, subject, as of the date of
recordation or filing of applicable security instruments, only to such
exceptions as are discussed in attorneys' opinions regarding title or in title
insurance policies in the mortgage files relating to the loans secured by real
property or are not material as to the collectability of such loans; and all
loans owned by SKAN and each SKAN Subsidiary are with full recourse to the
borrowers (except as set forth at Section 3.20(b) of the SKAN Disclosure
Schedule), and each of SKAN and any SKAN Subsidiary has taken no action which
would result in a waiver or negation of any rights or remedies available against
the borrower or guarantor, if any, on any loan. All applicable remedies against
all borrowers and guarantors are enforceable except as may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting creditors'
rights and except as may be limited by the exercise of judicial discretion in
applying principles of equity. Except as set forth at Section 3.20(b) of the
SKAN Disclosure Schedule, all loans purchased or originated by SKAN or any SKAN
Subsidiary and subsequently sold by SKAN or any SKAN Subsidiary have been sold
without recourse to SKAN or any SKAN Subsidiary and without any liability under
any yield maintenance or similar obligation. True, correct and complete copies
of loan delinquency reports as of December 31, 1998 prepared by SKAN and each
SKAN Subsidiary, which reports include all loans delinquent or otherwise in
default, have been furnished to BSB Bancorp. True, correct and complete copies
of the currently effective lending policies and practices of SKAN and each SKAN
Subsidiary also have been furnished to BSB Bancorp.
(c) Except as set forth at Section 3.20(c) of the Disclosure Schedule
each outstanding loan participation sold by SKAN or any SKAN Subsidiary was sold
with the risk of non-payment of all or any portion of that underlying loan to be
shared by each participant (including SKAN or any SKAN Subsidiary)
proportionately to the share of such loan represented by such participation
without any recourse of such other lender or participant to SKAN or any SKAN
Subsidiary for payment or repurchase of the amount of such loan represented by
the participation or liability under any yield maintenance or similar
obligation. SKAN and any SKAN Subsidiary have properly fulfilled in all material
respects its contractual responsibilities and duties in any loan in which it
acts as the lead lender or servicer and has complied in all material respects
with its duties as required under applicable regulatory requirements.
(d) SKAN and each SKAN Subsidiary have properly perfected or caused to
be properly perfected all security interests, liens, or other interests in any
collateral securing any loans made by it.
3.21 Affiliates.
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Each director, executive officer and other person who is an "affiliate"
(for purposes of Rule 145 under the Securities Act of 1933, as amended (the
"Securities Act"), and for purposes of qualifying the Merger for
"pooling-of-interests" accounting treatment) of SKAN is listed at Section 3.21
of the SKAN Disclosure Schedule, and except as indicated thereon each such
person has delivered to BSB Bancorp, concurrently with the execution of this
Agreement, a stockholder agreement in the form of Exhibit D hereto (the "SKAN
Stockholder Agreement"). The SKAN Stockholder Agreement has been duly and
validly executed and delivered by each person that is a party thereto and,
assuming due authorization, execution and delivery by BSB Bancorp, constitutes
the valid and binding obligation of such person, enforceable against such person
in accordance with their terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
3.22 Ownership of BSB Bancorp Common Stock.
Except as set forth at Section 3.23 of the SKAN Disclosure Schedule,
neither SKAN nor, to its knowledge, any of its directors, officers or affiliates
(as used above in Section 3.21) (i) beneficially own, directly or indirectly, or
(ii) is a party to any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of, in each case, any shares of
outstanding capital stock of BSB Bancorp (other than those agreements,
arrangements or understandings specifically contemplated hereby).
3.23 Fairness Opinion.
SKAN has received an oral opinion from MBD to the effect that, in its
opinion as of the date hereof, the Exchange Ratio is fair to SKAN's shareholders
from a financial point of view (the "MBD Fairness Opinion"). MBD has agreed to
furnish a written opinion to such effect (the "MBD Fairness Opinion") for
inclusion, and has consented to such inclusion, in the Registration Statement
(as hereinafter defined).
3.24 SKAN DRIP and Purchase Plan.
Except as disclosed in Section 3.24 of the SKAN Disclosure Schedule,
SKAN has taken such action as is necessary to terminate the SKAN DRIP and the
Purchase Plan such that from the date hereof, no issuances or purchases of SKAN
Common Stock under the SKAN DRIP or the Purchase Plan shall be permitted, nor
shall any other obligations thereunder accrue.
3.25 Accounting Matters.
Neither SKAN nor, to its knowledge, any of its affiliates (as such term
is defined in Rule 145 under the Securities Act), has through the date of this
Agreement taken or agreed to take any action that would prevent SKAN from
accounting for the business combination contemplated by this Agreement as a
"pooling of interests".
3.26 Accuracy of Information.
No representation or warranty by SKAN in this Agreement or any exhibit,
schedule or certificate delivered or to be delivered by SKAN to BSB Bancorp
pursuant hereto contains, or when so delivered will contain, any untrue
statement of a material fact, or omits, or when so delivered will omit, a
material fact necessary in order to make the statement(s) of facts contained
herein or therein (in light of the circumstances under which they were made) not
misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BSB BANCORP
BSB Bancorp, on behalf of itself and its wholly owned subsidiary, BSB
Bank hereby makes the following representations and warranties to SKAN as set
forth in this Article IV, each of which is being relied upon by SKAN as a
material inducement to enter into and perform this Agreement.
4.1 Corporate Organization.
(a) BSB Bancorp is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. BSB Bancorp has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary.
BSB Bancorp is duly registered as a bank holding company with the FRB under the
BHCA. The Certificate of Incorporation and Bylaws of BSB Bancorp, copies of
which have previously been made available to SKAN, are true, correct and
complete copies of such documents as in effect as of the date of this Agreement.
(b) BSB Bank is a New York-chartered commercial duly organized and
validly existing and in good standing under the laws of New York. The deposit
accounts of BSB Bank are insured by the FDIC through the BIF to the fullest
extent permitted by law, and all premiums and assessments required in connection
therewith have been paid by BSB Bank. BSB Bank has the corporate power and
authority to own or lease all of its properties and assets and to carry on
business as is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary. The Charter and Bylaws of
BSB Bank, copies of which have previously been made available to SKAN, are true,
correct and complete copies of such documents as in effect as of the date of
this Agreement.
4.2 Capitalization.
(a) The authorized capital stock of BSB Bancorp consists of (i)
30,000,000 shares of BSB Bancorp Common Stock, of which 8,646,977 shares were
outstanding (net of 2,604,180 treasury shares) at January 8, 1999 and (ii)
2,500,000 shares of serial preferred stock, par value $.01 per share ("BSB
Bancorp Preferred Stock"), none of which were outstanding at January 8, 1999. At
such date, there were 697,351 shares of BSB Bancorp Common Stock reserved for
issuance pursuant to options. All of the issued and outstanding shares of BSB
Bancorp Common Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof, and upon issuance in accordance with the
terms hereof, the Shares will be duly authorized and validly issued, and fully
paid, nonassessable and free of preemptive rights. As of the date of this
Agreement, except as set forth above, BSB Bancorp does not have and is not bound
by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of BSB Bancorp Common Stock or BSB Bancorp Preferred Stock or any other equity
securities of BSB Bancorp or any securities presenting the right to purchase or
otherwise receive any shares of BSB Bancorp Common Stock or BSB Bancorp
Preferred Stock, other than pursuant to the Rights Agreement.
(b) All of the outstanding shares of common stock of BSB Bank are owned
by BSB Bancorp free and clear of all liens, charges, encumbrances and security
interests whatsoever, and all of such shares are duly authorized and validly
issued and fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to ownership thereof.
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4.3 Authority; No Violation.
(a) BSB Bancorp has full corporate power and authority to execute and
deliver this Agreement and the Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Option Agreement and the consummation of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of BSB Bancorp. No other corporate proceedings on the part of BSB
Bancorp are necessary to approve this Agreement or the Option Agreement or to
consummate the transactions contemplated hereby or thereby. This Agreement has
been, and the Option Agreement will be, duly and validly executed and delivered
by BSB Bancorp and (assuming due authorization, execution and delivery by SKAN)
will constitute valid and binding obligations of BSB Bancorp, enforceable
against BSB Bancorp in accordance with their terms, except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar law affecting
creditors' rights and remedies generally.
(b) BSB Bank has full corporate power and authority to execute and
deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby have been duly and
validly approved by the Board of Directors of BSB Bank and by BSB Bancorp as the
sole shareholder of BSB Bank. All corporate proceedings on the part of BSB Bank
necessary to consummate the transactions contemplated thereby have been taken.
The Bank Merger Agreement, upon execution and delivery by BSB Bank, will be duly
and validly executed and delivered by BSB Bank and will (assuming due
authorization, execution and delivery by Skaneateles Bank) constitute a valid
and binding obligation of BSB Bank, enforceable against BSB Bank in accordance
with its terms, except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(c) Neither the execution and delivery of this Agreement or the Option
Agreement by BSB Bancorp or the Bank Merger Agreement by BSB Bank, nor the
consummation by BSB Bancorp or BSB Bank, as the case may be, of the transactions
contemplated hereby or thereby, nor compliance by BSB Bancorp or BSB Bank with
any of the terms or provisions hereof or thereof, will (i) violate any provision
of the Certificate of Incorporation or Bylaws of BSB Bancorp or the Charter or
Bylaws of BSB Bank, as the case may be, or (ii) assuming that the consents and
approvals referred to in Section 4.4 are duly obtained, (x) violate any Laws
applicable to BSB Bancorp, BSB Bank or any of their respective properties or
assets, or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, or result in the creation of any lien, pledge,
security interest, charge or other encumbrance upon any of the respective
properties or assets of BSB Bancorp or BSB Bank under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which BSB Bancorp
or BSB Bank is a party, or by which they or any of their respective properties
or assets may be bound or affected.
4.4 Regulatory Approvals.
(a) Except for (i) the filing of applications, notices and waiver
requests, as applicable, as to the Merger and the Bank Merger with the FRB and
the New York Superintendent and approval of such applications, notices and
waiver requests, (ii) the filing of any required applications or notices with
the FDIC and the New York Superintendent as to the subsidiary activities of
Skaneateles Bank which become service corporation or operating subsidiaries of
BSB Bank and approval of such applications and notices, (iii) the filing with
the SEC of a registration statement on Form S-4 to register the shares of BSB
Bancorp Common Stock to be issued in connection with the Merger (including the
shares of BSB Bancorp Common Stock that may be issued upon the exercise of the
options referred to in Section 1.5 hereof), which will include the Proxy
Statement/Prospectus, (iv) the approval of this Agreement by the requisite vote
of the shareholders of SKAN, (v) the filing of the Certificate of Merger with
the Secretary of State of Delaware pursuant to the DGCL, (vi) the filings
required by the Bank Merger Agreement, and
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(vii) such filings and approvals as are required to be made or obtained under
the securities or "Blue Sky" laws of various states or with Nasdaq (or such
other exchange as may be applicable) in connection with the issuance of the
shares of BSB Bancorp Common Stock pursuant to this Agreement, no consents or
approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary in connection with (1) the execution and delivery
by BSB Bancorp of this Agreement and the Option Agreement, (2) the consummation
by BSB Bancorp of the Merger and the other transactions contemplated hereby, (3)
the execution and delivery by BSB Bank of the Bank Merger Agreement, and (4) the
consummation by BSB Bank of the transactions contemplated by the Bank Merger
Agreement except for such consents, approvals or filings the failure of which to
obtain will not have a material adverse effect on the ability of SKAN to
consummate the transactions contemplated thereby.
(b) BSB Bancorp hereby represents to SKAN that it has no knowledge of
any reason why approval or effectiveness of any of the applications, notices or
filings referred to in Section 4.4(a) cannot be obtained or granted on a timely
basis.
4.5 Financial Statements; Exchange Act Filings; Books and Records.
(a) BSB Bancorp's consolidated balance sheets as of December 31, 1996
and 1997 and the related consolidated statements of income, changes in
shareholders' equity and cash flows are as reported in BSB Bancorp's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the
SEC under the Exchange Act, in each case accompanied by the audit report of BSB
Bancorp's independent auditors, and the interim financial statements of BSB
Bancorp as of and for the nine months ended September 30, 1997 and 1998, are as
included in BSB Bancorp's quarterly report on Form 10-Q for the period ended
September 30, 1998, as filed with the SEC. The financial statements referred to
in this Section 4.5 (including the related notes, where applicable) fairly
present, and the financial statements referred to in Section 6.8 hereof will
fairly present (subject, in the case of the unaudited statements, to recurring
audit adjustments normal in nature and amount), the results of the consolidated
operations and consolidated financial condition of BSB Bancorp and its
Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) comply, and the financial statements referred to in Section 6.8
hereof will comply, with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto; and each of
such statements (including the related notes, where applicable) has been, and
the financial statements referred to in Section 6.8 hereof will be, prepared in
accordance with GAAP consistently applied during the periods involved, except as
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q. BSB Bancorp's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and all subsequently filed reports under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act comply in all material respects
with the appropriate requirements for such reports under the Exchange Act, and
BSB Bancorp has previously delivered to SKAN true, correct and complete copies
of such reports. BSB Bancorp has made all filings required of it under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act. The books and records of BSB
Bancorp and BSB Bank have been, and are being, maintained in all material
respects in accordance with GAAP and any other applicable legal and accounting
requirements and reflect only actual transactions.
(b) Neither BSB Bancorp nor any of its Subsidiaries is an "affiliate"
(as such term is defined in DGCLss.203(c) (1)) or an "associate" (as such term
is defined in DGCLss.203(c) (2)) of SKAN.
4.6 Agreements with Regulatory Agencies.
Neither BSB Bancorp nor any of its affiliates is subject to any
cease-and-desist or other order issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or has adopted
any board resolutions at the request of any Governmental Entity that restricts
the conduct of its business or that in any manner relates to its capital
adequacy, its credit policies, its management or its business, nor has BSB
Bancorp, nor BSB Bank been advised by any Governmental Entity that it is
considering issuing or requesting any Regulatory Agreement.
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4.7 Legal Proceedings.
(a) Neither BSB Bancorp nor any of its Subsidiaries is a party to any,
and there are no pending or, to BSB Bancorp's knowledge, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against BSB Bancorp or
any of its Subsidiaries in which, to BSB Bancorp's knowledge, there is a
reasonable probability of any material recovery against or other material effect
upon BSB Bancorp or any of its Subsidiaries or which challenge the validity or
propriety of the transactions contemplated by this Agreement, the Bank Merger
Agreement or the Option Agreement as to which there is a reasonable probability
of success.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than regulations of general application) imposed upon BSB
Bancorp, any of its Subsidiaries or the assets of BSB Bancorp or any of its
Subsidiaries.
4.8 Compliance with Applicable Laws.
Each of BSB Bancorp and any BSB Bancorp Subsidiary has complied in all
material respects with all Laws applicable to it or to the operation of its
business. Neither BSB Bancorp nor any BSB Bancorp Subsidiary has received any
notice of any material alleged or threatened claim, violation, or liability
under any such Laws that has not heretofore been cured and for which there is no
remaining liability.
4.9 Accounting Matters.
Neither BSB Bancorp nor, to its knowledge, any of its affiliates (as
such term is defined in Rule 145 under the Securities Act), has through the date
of this Agreement taken or agreed to take any action that would prevent BSB
Bancorp from accounting for the business combination contemplated by this
Agreement as a "pooling of interests".
4.10 Ownership of SKAN Common Stock.
Except for BSB Bancorp's right to acquire share of SKAN Common Stock
pursuant to the Option Agreement, neither BSB Bancorp nor any of its affiliates
or associates beneficially owns, directly or indirectly, more than 5% of the
outstanding shares of SKAN Common Stock.
4.11 Insurance of Deposits.
Deposit accounts in BSB Bank are insured by the Federal Deposit
Insurance Corporation in accordance with the Federal Deposit Insurance Act
("FDIA"). BSB Bank has paid all assessments and filed all reports required under
the FDIA and is in compliance with all regulatory requirements imposed in
connection with the insurance of its deposits.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Covenants of SKAN
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During the period from the date of this Agreement and continuing until
the Effective Time, except as expressly contemplated or permitted by this
Agreement, the Bank Merger Agreement or the Option Agreement or with the prior
written consent of BSB Bancorp, SKAN and each SKAN Subsidiary shall carry on
their respective businesses in the ordinary course consistent with past
practices and consistent with prudent banking practices. SKAN will use its
reasonable efforts to (x) preserve its business organization and that of each
SKAN Subsidiary intact, (y) keep available to itself and BSB Bancorp the present
services of the employees of SKAN and each SKAN Subsidiary and (z) preserve for
itself and BSB Bancorp the goodwill of the customers of SKAN and each SKAN
Subsidiary and others with whom business relationships exist. Without limiting
the generality of the foregoing, and except as set forth in Section 5.1 of the
SKAN Disclosure Schedule or as otherwise contemplated by this Agreement or
consented to by BSB Bancorp in writing, SKAN shall not, and shall not permit any
SKAN Subsidiary to:
(a) declare or pay any dividends on, or make other distributions in
respect of, any of its capital stock (except for the payment of regular
quarterly cash dividends by SKAN not to exceed $.07 per share on the SKAN Common
Stock with declaration, record and payment dates corresponding to the quarterly
dividends paid by SKAN during its fiscal year ended December 31, 1998 and except
that any SKAN Subsidiary may declare and pay dividends and distributions to
SKAN; provided, however, that SPCC may make any required distributions to
holders of its capital stock within 30 days after the end of calendar year 1998
pursuant to a distribution declared and payable to holders of record prior to
the end of calendar year 1998; provided further, however, that under no
circumstances shall SKAN declare, set aside or pay any dividends if it would
result in the holders of SKAN Common Stock receiving more than four cash
dividend payments in fiscal 1998, when considered with anticipated BSB Bancorp
dividends based on past practice, nor shall SKAN be prohibited from declaring,
setting aside or paying dividends consistent herewith if the Closing Date is
such that holders of SKAN Common Stock would receive fewer than four cash
dividends in 1999, when considered with anticipated BSB Bancorp dividends based
on past practice, it being understood that the parties hereto intend for SKAN to
pay its regular quarterly cash dividends to shareholders as to any completed
fiscal quarter prior to the Effective Time;
(b) (i) split, combine or reclassify any shares of its capital stock or
issue, authorize or propose the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock except upon the
exercise or fulfillment of rights or options issued or existing pursuant to the
SKAN Stock Plans in accordance with their present terms, all to the extent
outstanding and in existence on the date of this Agreement, and except pursuant
to the Option Agreement, or (ii) repurchase, redeem or otherwise acquire (except
for the acquisition of Trust Account Shares and DPC Shares, as such terms are
defined in Section 1.4(c) hereof), any shares of the capital stock of SKAN or
any SKAN Subsidiary, or any securities convertible into or exercisable for any
shares of the capital stock of SKAN or any SKAN Subsidiary;
(c) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing, other than (i) the issuance of SKAN Common Stock pursuant to stock
options or similar rights to acquire SKAN Common Stock granted pursuant to the
SKAN Stock Plans and outstanding prior to the date of this Agreement, in each
case in accordance with their present terms, (ii) pursuant to the Option
Agreement and (iii) the issuance of 10% Cumulative Preferred Stock in accordance
with the subscriptions therefor accepted by SPCC through January 7, 1999;
(d) amend its Certificate of Incorporation, Bylaws or other similar
governing documents;
(e) authorize or permit any of its officers, directors, employees or
agents to, directly or indirectly, (i) solicit, initiate or encourage any
inquiries relating to, or the making of any proposal from, (ii) engage in
discussions or negotiations with or (iii) provide any information to, any
person, entity or group (other than BSB Bancorp) concerning any Acquisition
Transaction (as defined below). Notwithstanding the foregoing, SKAN may enter
into discussions or negotiations or provide information in connection with a
possible Acquisition Transaction if the Board of Directors of SKAN, based upon a
written opinion of counsel, reasonably determines in the exercise of its
fiduciary duty that such discussions or negotiations must be commenced or such
information must be furnished. SKAN shall promptly communicate to BSB Bancorp
the material terms of any proposal, whether written or oral, which it may
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receive in respect of any such Acquisition Transaction and whether it is having
discussions or negotiations with a third party about an Acquisition Transaction
with, or providing information in connection with, or which may lead to, an
Acquisition Transaction with a third party. SKAN will promptly cease and cause
to be terminated any existing activities, discussions or negotiations previously
conducted with any parties other than BSB Bancorp with respect to any of the
foregoing. As used in this Agreement, Acquisition Transaction shall mean any
offer, proposal or expression of interest relating to (I) any tender or exchange
offer, (II) merger, consolidation or other business combination involving SKAN
or any SKAN Subsidiary, or (III) the acquisition in any manner of a substantial
equity interest in, or a substantial portion of the assets out of the ordinary
course of business of, SKAN or Skaneateles Bank other than the transactions
contemplated or permitted by this Agreement, the Bank Merger Agreement and the
Option Agreement;
(f) make capital expenditures aggregating in excess of $10,000;
(g) enter into any new line of business;
(h) acquire or agree to acquire, by merging or consolidating with, or by
purchasing an equity interest in or the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings, or in the ordinary course of business consistent
with prudent banking practices;
(i) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue or in any of the conditions to the Merger set forth in
Article VII not being satisfied, or in a violation of any provision of this
Agreement or the Bank Merger Agreement, except, in every case, as may be
required by applicable law;
(j) change its methods of accounting in effect at December 31, 1997
except as required by changes in GAAP or regulatory accounting principles as
concurred to by BSB Bancorp's independent auditors;
(k) (i) except as required by applicable law or to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any Plan or
any agreement, arrangement, plan or policy between SKAN or any SKAN Subsidiary
and one or more of its current or former directors or officers, (ii) increase in
any manner the compensation of any employee or director or pay any benefit not
required by any plan or agreement as in effect as of the date hereof (including,
without limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares), (iii)
enter into, modify or renew any contract, agreement, commitment or arrangement
providing for the payment to any director, officer or employee of compensation
or benefits, (iv) hire any new employee at an annual compensation in excess of
$20,000, (v) pay expenses of any employees or directors for attending
conventions or similar meetings which conventions or meetings are held after the
date hereof, (vi) promote to a rank of vice president or more senior any
employee, or (vii) pay any retention or other bonuses to any employees;
(l) except for short-term borrowings with a maturity of one year or less
in the ordinary course of business consistent with past practices, incur any
indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other individual,
corporation or other entity;
(m) sell, purchase, enter into a lease, relocate, open or close any
banking or other office, or file an application pertaining to such action with
any Governmental Entity;
(n) make any equity investment or commitment to make such an investment
in real estate or in any real estate development project, other than in
connection with foreclosure, settlements in lieu of foreclosure, or troubled
loan or debt restructuring, in the ordinary course of business consistent with
past banking practices;
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(o) make any new loans to, modify the terms of any existing loan to, or
engage in any other transactions (other than routine banking transactions) with,
any Affiliated Person of SKAN or any SKAN Subsidiary other than transfers of
loans to SPCC;
(p) make any investment, or incur deposit liabilities, other than in the
ordinary course of business consistent with past practices, including deposit
pricing, and which would not change the risk profile of Skaneateles Bank based
on its existing deposit and lending policies or make any equity investments;
(q) purchase any loans or sell, purchase or lease any real property,
except for the sale of real estate that is the subject of a casualty loss or
condemnation or the sale of OREO on a basis consistent with past practices;
(r) originate (i) any loans except in accordance with existing
Skaneateles Bank lending policies, (ii) conforming residential mortgage loans in
excess of $200,000, (iii) unsecured consumer loans in excess of $25,000, (iv)
commercial business loans in excess of $100,000 as to any loan or $100,000 in
the aggregate as to related loans, or loans to related persons, (v) commercial
real estate first mortgage loans in excess of $100,000 as to any loan or
$100,000 in the aggregate as to related loans, or loans to related persons, or
(vi) land acquisition loans to borrowers who intend to construct a residence on
such land in excess of the lesser of 75% of the appraised value of such land or
$25,000, except in each case for loans for which written applications have been
received by Skaneateles Bank as of the date hereof (each of which is set forth
at Section 5.1(r) of the SKAN Disclosure Schedule);
(s) make any investments in any equity or derivative securities, or any
debt securities issued or guaranteed by any municipality or otherwise exempt to
any extent from federal, state or local taxation, or engage in any forward
commitment, futures transaction, financial options transaction, hedging or
arbitrage transaction or covered asset trading activities or make any
investments in any investment security with a maturity of greater than one year;
(t) sell or purchase any mortgage loan servicing rights other than
selling servicing rights associated with FHA loans; or
(u) agree or commit to do any of the actions set forth in (a) - (t)
above.
The consent of BSB Bancorp to any action by SKAN or any SKAN Subsidiary that is
not permitted by any of the preceding paragraphs shall be evidenced by a writing
signed by the Chairman, President or any Senior Vice President of BSB Bancorp.
5.2 Merger Covenants.
Notwithstanding that SKAN believes that it has established all reserves
and taken all provisions for possible loan losses required by GAAP and
applicable laws, rules and regulations, SKAN recognizes that BSB Bancorp may
have adopted different loan, accrual and reserve policies (including loan
classifications and levels of reserves for possible loan losses). In that
regard, and in general, from and after the date of this Agreement to the
Effective Time, SKAN and BSB Bancorp shall consult and cooperate with each other
in order to formulate the plan of integration for the Merger, including, among
other things, with respect to conforming, based upon such consultation, SKAN's
loan, accrual and reserve policies to those policies of BSB Bancorp to the
extent appropriate.
5.3 Compliance with Antitrust Laws.
Each of BSB Bancorp and SKAN shall use its reasonable best efforts to
resolve objections, if any, which may be asserted with respect to the Merger
under antitrust laws, including, without limitation, the Hart-Scott-Rodino Act.
In the event a suit is threatened or instituted challenging the Merger as
violative of antitrust laws, each of BSB Bancorp and SKAN shall use its
reasonable best efforts to avoid the filing of, or resist or resolve
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such suit. BSB Bancorp and SKAN shall use their reasonable best efforts to take
such action as may be required: (a) by the Antitrust Division of the Department
of Justice or the Federal Trade Commission in order to resolve such objections
as either of them may have to the Merger under antitrust laws, or (b) by any
federal or state court of the United States, in any suit brought by a private
party or governmental entity challenging the Merger as violative of antitrust
laws, in order to avoid the entry of, or to effect the dissolution of, any
injunction, temporary restraining order, or other order which has the effect of
preventing the consummation of the Merger. Reasonable best efforts shall not
include, among other things and to the extent BSB Bancorp so desires, the
willingness of BSB Bancorp to accept an order agreeing to the divestiture, or
the holding separate, of any assets of BSB Bancorp or SKAN.
5.4 Termination of 401(k) Plan and ESOP.
As soon as practicable after the date of this Agreement, but in no
event less than 24 hours prior to the Effective Time, SKAN and each SKAN
Subsidiary shall adopt all corporate resolutions necessary to: (i) freeze
participation and benefit accruals under all Plans that are intended to the
"qualified" under Code section 401 (the "Qualified Plans"), effective no later
than 24 hours prior to the Effective Time; and (ii) terminate such Qualified
Plans, effective no later than 24 hours prior to the Effective Time. As soon as
practicable after the date of this Agreement, but in no event less than 24 hours
prior to the Effective Time, SKAN and each SKAN Subsidiary shall contribute to
each Qualified Plan all contributions, including but not limited to employee
deferrals and related matching contributions, required or necessary under the
terms of such Qualified Plan covering the benefits that have accrued as of the
Effective Time.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters.
(a) Upon the execution and delivery of this Agreement, BSB Bancorp and
SKAN (as to information to be included therein pertaining to SKAN) shall
promptly cause to be prepared and filed with the SEC a registration statement of
BSB Bancorp on Form S-4, including the Proxy Statement/Prospectus (the
"Registration Statement") for the purpose of registering the BSB Bancorp Common
Stock to be issued in the Merger, and for soliciting the approval of this
Agreement and the Merger by the shareholders of SKAN. BSB Bancorp and SKAN shall
use their reasonable best efforts to have the Registration Statement declared
effective by the SEC as soon as possible after the filing. The parties shall
cooperate in responding to and considering any questions or comments from the
SEC staff regarding the information contained in the Registration Statement. If
at any time after the Registration Statement is filed with the SEC, and prior to
the Closing Date, any event relating to SKAN is discovered by SKAN which should
be set forth in an amendment of, or a supplement to, the Registration Statement,
including the Prospectus/Proxy Statement, SKAN shall promptly inform BSB
Bancorp, and shall furnish BSB Bancorp with all necessary information relating
to such event whereupon BSB Bancorp shall promptly cause an appropriate
amendment to the Registration Statement to be filed with the SEC. Upon the
effectiveness of such amendment, each of BSB Bancorp and SKAN (if prior to the
meeting of shareholders pursuant to Section 6.3 hereof) will take all necessary
action as promptly as practicable to permit an appropriate amendment or
supplement to be transmitted to its shareholders entitled to vote at such
meeting. If at any time after the Registration Statement is filed with the SEC,
and prior to the Closing Date, any event relating to BSB Bancorp is discovered
by BSB Bancorp which should be set forth in an amendment of, or a supplement to,
the Registration Statement, including the Prospectus/Proxy Statement, BSB
Bancorp shall promptly inform SKAN, and BSB Bancorp shall promptly cause an
appropriate amendment to the Registration Statement to be filed with the SEC.
Upon the effectiveness of such amendment, each of BSB Bancorp and SKAN (if prior
to the meeting of shareholders pursuant to Section 6.3 hereof) will take all
necessary action as promptly as practicable to permit an appropriate amendment
or supplement to be transmitted to its shareholders entitled to vote at such
meeting. BSB Bancorp shall also use reasonable efforts to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement and the Bank Merger Agreement
and SKAN shall furnish
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all information concerning SKAN and the holders of SKAN Common Stock as may be
reasonably requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, and to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including without limitation
the Merger and the Bank Merger). SKAN and BSB Bancorp shall have the right to
review in advance, and to the extent practicable each will consult the other on,
in each case subject to applicable laws relating to the exchange of information,
all the information relating to SKAN or BSB Bancorp, as the case may be, which
appears in any filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the transactions
contemplated by this Agreement; provided, however, that nothing contained herein
shall be deemed to provide either party with a right to review any information
provided to any Governmental Entity on a confidential basis in connection with
the transactions contemplated hereby. In exercising the foregoing right, each of
the parties hereto shall act reasonably and as promptly as practicable. The
parties hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to contemplation of the transactions
contemplated herein.
(c) SKAN shall, upon request, furnish BSB Bancorp with all information
concerning SKAN and its directors, officers and shareholders and such other
matters as may be reasonably necessary or advisable in connection with the
Registration Statement or any other statement, filing, notice or application
made by or on behalf of BSB Bancorp to any Governmental Entity in connection
with the Merger or the other transactions contemplated by this Agreement.
(d) SKAN shall provide all information relating to SKAN and its
Subsidiaries necessary for inclusion in the Registration Statement, and such
information shall not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. Each of SKAN and BSB
Bancorp shall cause the portions of the Registration Statement relating to it or
any of its Subsidiaries to comply in all material respects with the provisions
of the Securities Act, Exchange Act and the rules and regulations thereunder.
(e) BSB Bancorp and SKAN shall promptly advise each other upon receiving
any communication from any Governmental Entity whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
any Requisite Regulatory Approval (defined in Section 7.1(c) hereof) will not be
obtained or that the receipt of any such approval will be materially delayed.
6.2 Access to Information.
(a) Upon reasonable notice and subject to applicable Laws relating to
the exchange of information, SKAN shall accord to the officers, employees,
accountants, counsel and other representatives of BSB Bancorp, access, during
normal business hours during the period prior to the Effective Time, to all its
and its Subsidiaries' properties, books, contracts, commitments and records and,
during such period, SKAN shall make available to BSB Bancorp (i) a copy of each
report, schedule, registration statement and other document filed or received by
it (including Skaneateles Bank) during such period pursuant to the requirements
of federal securities laws or federal or state banking laws and (ii) all other
information concerning its (including Skaneateles Bank) business, properties and
personnel as BSB Bancorp may reasonably request. BSB Bancorp shall receive
notice of all meetings of the SKAN and Skaneateles Bank Board of Directors and
any committees thereof, and of any management committees (in all cases, at least
as timely as all SKAN and Skaneateles Bank, as the case may be, representatives
to such meetings are required to be provided notice). Up to two representatives
of BSB Bancorp shall be permitted to attend all meetings
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of the Board of Directors (except for the portion of such meetings which relate
to the Merger or an Acquisition Transaction or such other matters deemed
confidential ("Confidential Matters") of SKAN or Skaneateles Bank, as the case
may be) and such meetings of committees of the Board of Directors and management
of SKAN and Skaneateles Bank which BSB Bancorp desires. BSB Bancorp will hold
all such information in confidence to the extent required by, and in accordance
with, the provisions of that certain confidentiality agreement between BSB
Bancorp and SKAN dated January 15, 1999 (the "Confidentiality Agreement").
(b) No investigation by either of the parties or their respective
representatives shall affect the representations and warranties of the other set
forth herein.
(c) SKAN shall provide BSB Bancorp with true, correct and complete
copies of all financial and other information provided to directors of SKAN and
Skaneateles Bank in connection with meetings of their Boards of Directors or
committees thereof.
6.3 Shareholder Meeting.
SKAN shall take all steps necessary to duly call, give notice of,
convene and hold a meeting of its shareholders within 35 days after the
Registration Statement becomes effective for the purpose of voting upon the
approval of this Agreement and the Merger (the "Special Meeting"). Management
and the Board of Directors of SKAN shall recommend to SKAN's shareholders
approval of this Agreement, including the Merger, and the transactions
contemplated hereby, together with any matters incident thereto, and shall
oppose any third party proposal or other action that is inconsistent with this
Agreement or the consummation of the transactions contemplated hereby, unless
the Board of Directors of SKAN reasonably determines, based upon the written
advice of SKAN's legal counsel, that such recommendation or opposition, as the
case may be, would constitute a breach of the exercise of its fiduciary duty.
SKAN and BSB Bancorp shall coordinate and cooperate with respect to the
foregoing matters.
6.4 Legal Conditions to Merger.
Each of BSB Bancorp and SKAN shall use their reasonable best efforts
(a) to take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements which may be imposed on such party
with respect to the Merger and, subject to the conditions set forth in Article
VII hereof, to consummate the transactions contemplated by this Agreement and
(b) to obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity and any other third party which is required to be obtained by SKAN or BSB
Bancorp in connection with the Merger and the other transactions contemplated by
this Agreement.
6.5 Stock Exchange Listing.
BSB Bancorp shall cause the shares of BSB Bancorp Common Stock to be
issued in the Merger and pursuant to options referred to herein to be approved
for quotation on the Nasdaq Stock Market National Market System (or such other
exchange on which the BSB Bancorp Common Stock has become listed, or approved
for listing) prior to or at the Effective Time.
6.6 Employees and Advisory Directors.
(a) To the extent permissible under the applicable provisions of the
Code and ERISA, for purposes of crediting periods of service for eligibility to
participate under employee pension benefit plans (within the meaning of
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ERISA Section 3(2)) maintained by BSB Bancorp or BSB Bank, as applicable, and in
the case of BSB Bank's 401(k) Plan, for purposes of vesting, individuals who are
employees of SKAN or any SKAN Subsidiary at the Effective Time will be credited
with periods of service with SKAN or any SKAN Subsidiary before the Effective
Time as if such service had been with BSB Bancorp or BSB Bank, as applicable;
provided, however, that no such service credit shall be given for purposes of
benefit accrual and (except in the case of BSB Bank' s 401(k) Plan) vesting.
Similar service credit shall also be given by BSB Bancorp or BSB Bank in
determining eligibility to participate in other retirement, vacation and similar
benefits provided to such employees of SKAN or Skaneateles Bank after the
Merger.
(b) After the Effective Time, employees of SKAN or its Subsidiaries who
continue to be employed by BSB Bancorp or any of its Subsidiaries, will be
eligible for benefits that BSB Bancorp or such Subsidiary, as the case may be,
provides to its employees generally and on substantially the same basis to such
employees. BSB Bancorp will cause BSB Bank to use its reasonable best efforts to
offer a position of at-will employment to each of the non-officer and
non-managerial branch office personnel of SKAN or its Subsidiaries who is in
good standing as of the Effective Time (a "SKAN Employee") at or within 25 miles
of his or her place of employment as of the Effective Time. In addition, BSB
Bancorp will cause BSB Bank to use its reasonable best efforts in connection
with reviewing applicants for employment positions to give SKAN Employees who
are not offered positions at the Effective Time the same consideration as is
afforded BSB Bancorp or BSB Bank employees for such position in accordance with
its policies in effect at such time. BSB Bancorp or BSB Bank will use their
reasonable best efforts to provide reasonable and appropriate on-the-job
training to SKAN Employees whose positions are eliminated as a result of the
Merger or the Bank Merger. For purposes of the severance policies of BSB Bank
(as now in effect or hereafter amended), employees of SKAN and its Subsidiaries
who become employees of BSB Bancorp or BSB Bank as a result of the Merger or the
Bank Merger (other than any such employee who is a party to a written agreement
with BSB Bancorp or BSB Bank relating to employment or severance, including any
such agreement with SKAN or any Subsidiary that is assumed as a result of the
Merger or the Bank Merger) shall be credited with periods of service with SKAN
and such Subsidiaries as if such service had been with BSB Bancorp or BSB Bank,
as appropriate. BSB Bancorp will or will cause BSB Bank to (i) give credit to
employees of SKAN and its Subsidiaries, with respect to the satisfaction of the
limitations as to pre-existing condition exclusions and waiting periods for
participation and coverage which are applicable under the welfare benefit plans
of BSB Bancorp or BSB Bank, equal to the credit that any such employee had
received as of the Effective Time towards the satisfaction of any such
limitations and waiting periods under the comparable welfare benefit plans of
SKAN or its Subsidiaries.
(c) Following the Merger, BSB Bancorp agrees that it shall honor the
existing written deferred compensation, employment, change of control and
severance contracts with directors and employees of SKAN and its Subsidiaries
that are specifically listed at Section 3.12(a) of the SKAN Disclosure Schedule;
provided, however, that in making the foregoing agreement, except as otherwise
required by law, BSB Bancorp will honor such contracts only to the extent that,
as represented at Section 3.11 hereof, none of such deferred compensation,
employment, change of control and severance contracts, nor any other Plan,
program, agreement or other arrangement, either individually or collectively,
provides for any payment by SKAN or any Subsidiary that would not be deductible
under Code Sections 162(a)(1), 162(m) or 404 or that would constitute a
"parachute payment" within the meaning of Code Section 280G.
(d) Following the Merger, BSB Bancorp shall offer to any Skaneateles
Bank employee who, as of the Bank Merger, has a title at BSB Bank of
Administrative Vice President or higher, a Change of Control Severance Agreement
in the form offered to other such senior officers of BSB Bank.
(e) The non-employee directors of Skaneateles Bank serving immediately
prior to the Effective Time will be invited to serve on an advisory board to BSB
Bank after the Bank Merger for a period of at least 12 months. Such advisory
directors each will be paid an annual retainer for such service of $2,000.
6.7 Indemnification.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative, in which
any person who is now, or has been at any time prior to the date of this
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Agreement, or who becomes prior to the Effective Time, a director or officer or
employee of SKAN (the "Indemnified Parties") is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director, officer or employee of
SKAN or any of their respective predecessors or (ii) this Agreement or any of
the transactions contemplated hereby, whether in any case asserted or arising
before or after the Effective Time, the parties hereto agree to cooperate and
defend against and respond thereto to the extent permitted by applicable law and
the Certificate of Incorporation and Bylaws of SKAN. It is understood and agreed
that after the Effective Time, BSB Bancorp shall indemnify and hold harmless, as
and to the fullest extent permitted by applicable law and the Certificate of
Incorporation and Bylaws of BSB Bancorp as in effect on the date hereof (subject
to change as required by law), each such Indemnified Party against any losses,
claims, damages, liabilities, costs, expenses (including reasonable attorney's
fees and expenses in advance of the final disposition of any claim, suit,
proceeding or investigation to each Indemnified Party to the fullest extent
permitted by law upon receipt of any undertaking required by applicable law),
judgments, fines and amounts paid in settlement in connection with any such
threatened or actual claim, action, suit, proceeding or investigation, and in
the event of any such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or arising before or after the Effective Time),
the Indemnified Parties may retain counsel reasonably satisfactory to BSB
Bancorp; provided, however, that (1) BSB Bancorp shall have the right to assume
the defense thereof and upon such assumption BSB Bancorp shall not be liable to
any Indemnified Party for any legal expenses of other counsel or any other
expenses subsequently incurred by any Indemnified Party in connection with the
defense thereof, except that if BSB Bancorp elects not to assume such defense or
counsel for the Indemnified Parties reasonably advises the Indemnified Parties
that there are issues which raise conflicts of interest between BSB Bancorp and
the Indemnified Parties, the Indemnified Parties may retain counsel reasonably
satisfactory to BSB Bancorp, and BSB Bancorp shall pay the reasonable fees and
expenses of such counsel for the Indemnified Parties, (2) BSB Bancorp shall be
obligated pursuant to this paragraph to pay for only one firm of counsel for
each Indemnified Party, (3) BSB Bancorp shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld or delayed), and (4) BSB Bancorp shall not be obligated
pursuant to this paragraph to the extent that a final judgment determines that
any such losses, claims, damages, liabilities, costs, expenses, judgments, fines
and amounts paid in settlement are as a result of the gross negligence, willful
misconduct or malfeasance of the Indemnified Party. BSB Bancorp shall have no
obligation to advance expenses incurred in connection with a threatened or
pending action, suit or preceding in advance of final disposition of such
action, suit or proceeding, unless (i) BSB Bancorp would be permitted to advance
such expenses pursuant to the DGCL and BSB Bancorp's Certificate of
Incorporation or Bylaws, and (ii) BSB Bancorp receives an undertaking by the
Indemnified Party to repay such amount if it is determined that such party is
not entitled to be indemnified by BSB Bancorp pursuant to the DGCL and BSB
Bancorp's Certificate of Incorporation or Bylaws. Any Indemnified Party wishing
to claim indemnification under this Section 6.7, upon learning of any such
claim, action, suit, proceeding or investigation, shall notify BSB Bancorp
thereof; provided, however, that the failure to so notify shall not affect the
obligations of BSB Bancorp under this Section 6.7 except to the extent such
failure to notify materially prejudices BSB Bancorp. BSB Bancorp's obligations
under this Section 6.7 continue in full force and effect for a period of three
years from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim asserted or made within such period
shall continue until the final disposition of such claim.
(b) BSB Bancorp shall use commercially reasonable efforts to cause the
persons serving as officers and directors of SKAN immediately prior to the
Effective Time to be covered by a directors' and officers' liability insurance
policy ("Tail Insurance") of substantially the same coverage and amounts
containing terms and conditions which are generally not less advantageous than
SKAN's current policy with respect to acts or omissions occurring prior to the
Effective Time which were committed by such officers and directors in their
capacity as such for an aggregate premium cost for the Tail Insurance reasonably
consistent with the aggregate premium cost for SKAN's current policy and for a
period not less than one year.
6.8 Subsequent Interim and Annual Financial Statements.
As soon as reasonably available, but in no event more than 45 days
after the end of each fiscal quarter (other than the fourth fiscal quarter, as
to which the time period shall be 90 days), BSB Bancorp will deliver to SKAN and
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SKAN will deliver to BSB Bancorp their respective Quarterly Reports on Form 10-Q
and Annual Reports on Form 10-K, as filed with the SEC under the Exchange Act.
Each party shall deliver to the other any Current Reports on Form 8-K promptly
after filing such reports with the SEC.
6.9 Additional Agreements.
In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, or to vest
the Surviving Corporation or the Surviving Bank with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, or the constituent banks to the Bank Merger, as the case
may be, the proper officers and directors of each party to this Agreement and
BSB Bancorp's and SKAN's Subsidiaries shall take all such necessary action as
may be reasonably requested by BSB Bancorp.
6.10 Advice of Changes.
BSB Bancorp and SKAN shall promptly advise the other party of any
change or event that, individually or in the aggregate, has or would be
reasonably likely to have a Material Adverse Effect on it or to cause or
constitute a material breach of any of its representations, warranties or
covenants contained herein. From time to time prior to the Effective Time, each
party will promptly supplement or amend its disclosure schedule delivered in
connection with the execution of this Agreement to reflect any matter which, if
existing, occurring or known at the date of this Agreement, would have been
required to be set forth or described in such disclosure schedule or which is
necessary to correct any information in such disclosure schedule which has been
rendered inaccurate thereby. No supplement or amendment to such disclosure
schedule shall have any effect for the purpose of determining satisfaction of
the conditions set forth in Sections 7.2(a) or 7.3(a) hereof, as the case may
be, or the compliance by SKAN with the covenants set forth in Section 5.1
hereof.
6.11 Current Information.
During the period from the date of this Agreement to the Effective
Time, SKAN will cause one or more of its designated representatives to confer on
a regular and frequent basis (not less than monthly) with representatives of BSB
Bancorp and to report the general status of the ongoing operations of SKAN. SKAN
will promptly notify BSB Bancorp of any material change in the normal course of
business or in the operation of the properties of SKAN and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of litigation
involving SKAN, and will keep BSB Bancorp fully informed of such events.
6.12 Execution and Authorization of Bank Merger Agreement.
Prior to the Effective Time, (a) BSB Bancorp and SKAN each shall
execute and deliver the Certificate of Merger substantially in the form at
Exhibit C, and (b) BSB Bancorp and SKAN each shall cause BSB Bank and
Skaneateles Bank, respectively, to execute and deliver the Bank Merger
Agreement, in substantially the form at Exhibit A.
6.13 Change in Structure.
BSB Bancorp may elect to modify the structure of the transactions
contemplated by this Agreement as noted herein so long as (i) there are no
material adverse federal income tax consequences to the SKAN shareholders as a
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result of such modification, (ii) the consideration to be paid to the SKAN
shareholders under this Agreement is not thereby changed or reduced in kind or
amount, and (iii) such modification will not be reasonably likely to delay
materially or jeopardize receipt of any required regulatory approvals. In the
event that BSB Bancorp elects to change the structure of the Merger, the Bank
Merger or any other transactions contemplated hereby, the parties agree to
modify this Agreement and the various exhibits hereto, or enter into any other
agreements, to reflect such revised structure. In such event, BSB Bancorp shall
prepare appropriate amendments to this Agreement and the exhibits hereto, or
other documents, for execution by the parties hereto. BSB Bancorp and SKAN agree
to cooperate fully with each other to effect such amendments or other documents.
6.14 Transaction Expenses of SKAN.
(a) For planning purposes, SKAN shall, within 15 days from the
date hereof, provide BSB Bancorp with its estimated budget of
transaction-related expenses reasonably anticipated to be payable by SKAN in
connection with this transaction, including the fees and expenses of counsel,
accountants, investment bankers and other professionals. SKAN shall promptly
notify BSB Bancorp if or when it determines that it will expect to exceed its
budget.
(b) Promptly after the execution of this Agreement, SKAN shall
ask all of its attorneys and other professionals to render current and correct
invoices for all unbilled time and disbursements. SKAN shall accrue and/or pay
all of such amounts which are actually due and owing as soon as possible.
(c) SKAN shall advise BSB Bancorp monthly of all out-of-pocket
expenses which SKAN has incurred in connection with this transaction.
(d) BSB Bancorp, in reasonable consultation with SKAN, shall
make all arrangements with respect to the printing and mailing of the Proxy
Statement/Prospectus. SKAN shall, if BSB Bancorp reasonably deems necessary,
also engage a proxy solicitation firm to assist in the solicitation of proxies
for their respective the Special Meeting. SKAN agrees to cooperate as to such
matters.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligation of each party to effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval.
This Agreement, including the Certificate of Merger, and the Merger
shall have been approved and adopted by the affirmative vote of the holders of a
two-thirds of the outstanding shares of SKAN Common Stock entitled to vote
thereon.
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(b) Stock Exchange Listing.
The shares of BSB Bancorp Common Stock which shall be issued in the
Merger (including the BSB Bancorp Common Stock that may be issued upon exercise
of the options referred to in Section 1.5 hereof) upon consummation of the
Merger shall have been authorized for quotation on the Nasdaq Stock Market
National Market System (or such other exchange on which the BSB Bancorp Common
Stock may become listed).
(c) Other Approvals.
All regulatory approvals required to consummate the transactions
contemplated hereby shall have been obtained and shall remain in full force and
effect and all statutory waiting periods in respect thereof shall have expired
(all such approvals and the expiration of all such waiting periods being
referred to herein as the "Requisite Regulatory Approvals"). No Requisite
Regulatory Approval shall contain a non-customary condition that BSB Bancorp
reasonably determines to be burdensome or otherwise alter the benefits for which
it bargained in this Agreement.
(d) Registration Statement.
The Registration Statement shall have become effective under the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality.
No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions (an "Injunction")
contemplated by this Agreement or the Certificate of Merger shall be in effect.
No statute, rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
(f) Federal Tax Opinion.
BSB Bancorp and SKAN shall have received from [Hogan & Hartson L.L.P.,
counsel to BSB Bancorp], an opinion in form and substance reasonably
satisfactory to BSB Bancorp, substantially to the effect that on the basis of
facts, representations, and assumptions set forth in such opinion which are
consistent with the state of facts existing at the time of such opinion, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such opinion,
such counsel may require and, to the extent such counsel deems necessary or
appropriate, may rely upon representations made in certificates of officers of
SKAN, BSB Bancorp, their respective affiliates and others.
(g) Pooling of Interests.
BSB Bancorp shall have received (i) advice of PricewaterhouseCoopers LLP
and KPMG LLP, independent accountants, within two weeks of the date hereof, to
the effect that the Merger will be accounted for as a pooling of interests, and
(ii) as of the Effective Time, a written opinion of each of
PricewaterhouseCoopers LLP and KPMG LLP to the effect that the Merger will be
accounted for as a pooling-of-interests.
7.2 Conditions to Obligations of BSB Bancorp.
The obligation of BSB Bancorp to effect the Merger is also subject to
the satisfaction or waiver by BSB Bancorp at or prior to the Effective Time of
the following conditions:
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(a) Representations and Warranties.
The representations and warranties of SKAN set forth in this Agreement
shall be true and correct as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct, unless the failure or
failures of such representations and warranties to be so true and correct,
individually or in the aggregate, would have a Material Adverse Effect on SKAN.
Such determination of aggregate Material Adverse Effect shall be made as if
there were no materiality qualifications in such representations and warranties.
BSB Bancorp shall have received a certificate signed on behalf of SKAN by each
of the President and Chief Executive Officer and the Chief Financial Officer of
SKAN to the foregoing effect.
(b) Performance of Covenants and Agreements of SKAN
SKAN shall have performed in all material respects all covenants and
agreements required to be performed by it under this Agreement at or prior to
the Closing Date. BSB Bancorp shall have received a certificate signed on behalf
of SKAN by each of the President and Chief Executive Officer and the Chief
Financial Officer of SKAN to such effect.
(c) Consents under Agreements.
(i) The consent, approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c) hereof) whose consent or
approval shall be required in order to permit the succession by the Surviving
Corporation pursuant to the Merger to any obligation, right or interest of SKAN
under any loan or credit agreement, note, mortgage, indenture, lease, license or
other agreement or instrument shall have been obtained except for those, the
failure of which to obtain, will not result in a Material Adverse Effect on the
Surviving Corporation.
(ii) The consent, approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c) hereof) whose consent or
approval shall be required in order to permit the succession by the Surviving
Bank pursuant to the Bank Merger to any obligation, right or interest of
Skaneateles Bank under any loan or credit agreement, note, mortgage, indenture,
lease, license or other agreement or instrument shall have been obtained except
for those, the failure of which to obtain, will not result in a Material Adverse
Effect on the Surviving Bank.
(d) No Pending Governmental Actions.
No proceeding initiated by any Governmental Entity seeking an Injunction
shall be pending.
(e) No Material Adverse Change.
There shall have been no changes, other than changes contemplated by
this Agreement, in the business, operations, condition (financial or otherwise),
assets or liabilities of SKAN or any SKAN Subsidiary (regardless of whether or
not such events or changes are inconsistent with the representations and
warranties given herein) that individually or in the aggregate has had or would
have a Material Adverse Effect on SKAN.
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(f) Legal Opinion.
BSB Bancorp shall have received the opinion of Harter, Secrest & Emery
LLP, counsel to SKAN, dated the Closing Date, as to such matters as BSB Bancorp
may reasonably request. As to any matter in such opinion which involves matters
of fact, such counsel may rely upon the certificates of officers and directors
of SKAN and of public officials, reasonably acceptable to BSB Bancorp.
(g) Accountant's Comfort Letter.
SKAN shall have caused to be delivered on the respective dates thereof
to BSB Bancorp "comfort letters" from KPMG LLP, SKAN's independent auditors,
dated the date on which the Registration Statement or last amendment thereto
shall become effective, and dated the date of the Closing (defined in Section
9.1 hereof), and addressed to BSB Bancorp and SKAN, with respect to SKAN's
financial data presented in the Proxy Statement/Prospectus, which letters shall
be based upon Statements on Auditing Standards Nos. 72 and 76.
7.3 Conditions to Obligations of SKAN.
The obligation of SKAN to effect the Merger is also subject to the
satisfaction or waiver by SKAN at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties.
The representations and warranties of BSB Bancorp set forth in this
Agreement shall be true and correct as of the date of this Agreement and (except
to the extent such representations and warranties speak as of an earlier date)
as of the Closing Date as though made on and as of the Closing Date; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct, unless the failure or
failures of such representations and warranties to be so true and correct,
individually or in the aggregate, would have a Material Adverse Effect on BSB
Bancorp. Such determination of aggregate Material Adverse Effect shall be made
as if there were no materiality qualifications in such representations and
warranties. SKAN shall have received a certificate signed on behalf of BSB
Bancorp by each of the President and the Chief Financial Officer of BSB Bancorp
to the foregoing effect.
(b) Performance of Covenants and Agreements of BSB Bancorp.
BSB Bancorp shall have performed in all material respects all covenants
and agreements required to be performed by it under this Agreement at or prior
to the Closing Date. SKAN shall have received a certificate signed on behalf of
BSB Bancorp by each of the President and the Chief Financial Officer of BSB
Bancorp to such effect.
(c) Consents under Agreements.
The consent or approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c)) whose consent or approval
shall be required in connection with the transactions contemplated hereby under
any loan or credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument to which BSB Bancorp is a party or is otherwise bound
shall have been obtained.
(d) No Pending Governmental Actions.
No proceeding initiated by any Governmental Entity seeking an Injunction
shall be pending.
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(e) Legal Opinion.
SKAN shall have received the opinion of Hogan & Hartson L.L.P., counsel
to BSB Bancorp, as to the authorization, validity and non-assessibility of the
BSB Bancorp Common Stock to be issued pursuant to this Agreement. As to any
matter in such opinion which involves matters of fact, such counsel may rely
upon the certificates of officers and directors of BSB Bancorp and of public
officials and opinions of local counsel, reasonably acceptable to SKAN
(f) No Material Adverse Change.
There shall have been no changes, other than changes contemplated by
this Agreement, in the business, operations, condition (financial or otherwise),
assets or liabilities of BSB Bancorp or any BSB Bancorp Subsidiary (regardless
of whether or not such events or changes are inconsistent with the
representations and warranties given herein) that individually or in the
aggregate has had or would have a Material Adverse Effect on BSB Bancorp.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination.
This Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of SKAN:
(a) by mutual consent of BSB Bancorp and SKAN in a written instrument,
if the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either BSB Bancorp or SKAN upon written notice to the other party
(i) 30 days after the date on which any request or application for a Regulatory
Approval shall have been denied or withdrawn at the request or recommendation of
the Governmental Entity which must grant such Regulatory Approval, unless within
the 30-day period following such denial or withdrawal the parties agree to file,
and have filed with the applicable Governmental Entity, a petition for rehearing
or an amended application, provided, however, that no party shall have the right
to terminate this Agreement pursuant to this Section 8.1(b), if such denial or
request or recommendation for withdrawal shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe the covenants
and agreements of such party set forth herein;
(c) by either BSB Bancorp or SKAN if the Merger shall not have been
consummated on or before December 31, 1999, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein;
(d) by either BSB Bancorp or SKAN (provided that SKAN is not in breach
of its obligations under Section 6.3 hereof) if the approval of the shareholders
of SKAN required for the consummation of the Merger shall not have been obtained
by reason of the failure to obtain the required vote at a duly held meeting of
shareholders or at any adjournment or postponement thereof;
(e) by either BSB Bancorp or SKAN (provided that the terminating party
is not then in breach of any representation, warranty, covenant or other
agreement contained herein that, individually or in the aggregate, would give
the other party the right to terminate this Agreement) if there shall have been
a breach of any of the representations or warranties set forth in this Agreement
on the part of the other party, if such breach, individually or in the
aggregate, has had or is likely to have a Material Adverse Effect on the
breaching party, and such breach shall
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not have been cured within 30 days following receipt by the breaching party of
written notice of such breach from the other party hereto or such breach, by its
nature, cannot be cured prior to the Closing;
(f) by either BSB Bancorp or SKAN (provided that the terminating party
is not then in breach of any representation, warranty, covenant or other
agreement contained herein that, individually or in the aggregate, would give
the other party the right to terminate this Agreement) if there shall have been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part of the other party, and such breach shall not have been
cured within 30 days following receipt by the breaching party of written notice
of such breach from the other party hereto or such breach, by its nature, cannot
be cured prior to the Closing;
(g) by BSB Bancorp, if the management of SKAN or its Board of Directors,
for any reason, (i) fails to call and hold within 35 days of the effectiveness
of the Registration Statement a special meeting of SKAN's shareholders to
consider and approve this Agreement and the transactions contemplated hereby,
(ii) fails to recommend to shareholders the approval of this Agreement and the
transactions contemplated hereby, (iii) fails to oppose any third party proposal
that is inconsistent with the transactions contemplated by this Agreement or
(iv) violates Section 5.1(e) of this Agreement;
(h)
(1) by SKAN, if (either before or after its approval by the
shareholders of SKAN) both (A) its Board of Directors so determines by a vote of
at least two-thirds of the members of its entire Board, at any time during the
ten-day period commencing with the Determination Date, and (B) the BSB Bancorp
Common Stock Average Price on the Determination Date shall be less than the
lesser of $23.00, or $25.30 multiplied by the Index Ratio.
(2) Notwithstanding the foregoing, if SKAN elects to exercise its
termination right pursuant to subsection (h)(1), it shall give prompt written
notice to BSB Bancorp (provided that such notice of election to terminate may be
withdrawn at any time within the aforementioned ten-day period). During the
seven-day period commencing with its receipt of such notice, BSB Bancorp shall
have the option of increasing the consideration to be received by the holders of
SKAN Common Stock hereunder by increasing the Exchange Ratio to equal the lesser
of (A) a number (rounded to four decimals) equal to a quotient, the numerator of
which is $28.75 multiplied by the Exchange Ratio (as then in effect) and the
denominator of which is the BSB Bancorp Common Stock Average Price (defined
below), and (B) a number equal to a quotient, the numerator of which is the
Index Ratio multiplied by $28.75, and then multiplied by the Exchange Ratio (as
then in effect) and the denominator of which is the BSB Bancorp Common Stock
Average Price (defined below). If BSB Bancorp makes an election contemplated by
the preceding sentence, within such seven-day period, it shall give prompt
written notice to SKAN of such election and the revised Exchange Ratio,
whereupon no termination shall have occurred pursuant to subsection (h)(1) and
this Agreement shall remain in effect in accordance with its terms (except as
the Exchange Ratio shall have been so modified), and any references in this
Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted pursuant to this subsection (h)(2).
For purposes of this subsection (h), the following terms shall have the
meanings indicated:
"BSB Bancorp Common Stock Average Price" means the average of the daily
closing sales prices of BSB Bancorp Common Stock as reported on the Nasdaq Stock
Market's National Market Tier for the 20 consecutive full trading days in which
such shares are reported on the Nasdaq Stock Market ending at the close of
trading on the Determination Date.
"BSB Bancorp Ratio" means the number obtained by dividing the BSB
Bancorp Common Stock Average Price on the Determination Date by the closing
price on the Starting Date.
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"Determination Date" means the date on which the approval of the FDIC
required for consummation of the Merger shall be received or, if no FDIC
approval is required, then the date of the last federal or state bank regulatory
approval required of BSB Bancorp is received.
"Index Price" on a given date means the sum of the average closing sale
prices of the companies comprising the Index Group (as defined below) for the 15
trading days ending on such date, in each case, multiplied by the weighting
assigned to such company (weighted in accordance with the factors listed below).
If any company belonging to the Index Group or BSB Bancorp declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of share or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company or BSB
Bancorp will be appropriately adjusted for use in the Index.
"Starting Date" means the first Nasdaq Stock Market trading day
preceding the date of this Agreement.
"Index Ratio" means the number obtained by dividing the Index Price at
the close of business on the Determination Date by the Index Price at close of
business on the Starting Date.
"Index Group" means the 18 bank holding companies listed at Exhibit F
hereto, the common stock of all of which will be publicly traded and as to which
there will not have been, since the Starting Date and before the Determination
Date, any public announcement of a proposal for such company to be acquired or
for such company to acquire another company or companies in transactions with a
value exceeding 25% of the acquirors market capitalization as of the Starting
Date. In the event that the common stock of any such company ceases to be
publicly traded or such an announcement is made, such company will be removed
from the Index Group, and the weights (which were determined based on the number
of outstanding shares of common stock) redistributed proportionately for the
purposes of determining the Index Price. The 18 holding companies and the
weights attributed to them are as set forth at Exhibit F.
(i) by BSB Bancorp if SKAN has complied with Section 5.1(e) above, and
has given written notice to BSB Bancorp that SKAN has agreed to enter into an
Acquisition Transaction other than as contemplated hereby; provided, however,
that such termination under this Section 8.1(i) shall not be effective unless
and until SKAN shall have complied with the expense provisions of Section 9.3
below, and shall have acknowledged in the written notice to be provided in
accordance herewith that the Option granted pursuant to the Option Agreement
shall then be exercisable in accordance with terms thereof.
8.2 Effect of Termination.
In the event of termination of this Agreement by either BSB Bancorp or
SKAN as provided in Section 8.1 hereof, this Agreement shall forthwith become
void and have no effect except (i) the last sentences of Sections 6.2(a) and
6.2(b) and Sections 8.2, 9.2 and 9.3 hereof shall survive any termination of
this Agreement, and (ii) notwithstanding anything to the contrary contained in
this Agreement, no party shall be relieved or released from any liabilities or
damages arising out of its willful or intentional breach of any provision of
this Agreement.
8.3 Amendment.
Subject to compliance with applicable law, this Agreement may be
amended by the parties hereto, by action taken or authorized by their respective
Board of Directors, at any time before or after approval of the matters
presented in connection with the Merger by the shareholders of SKAN; provided,
however, that after any approval of the transactions contemplated by this
Agreement by SKAN's shareholders, there may not be, without further approval of
such shareholders, any amendment of this Agreement which reduces the amount or
changes the form of the consideration to be delivered to SKAN shareholders
hereunder other than as contemplated by this Agreement. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
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8.4 Extension; Waiver.
At any time prior to the Effective Time, the parties hereto, by action
taken or authorized by their respective Boards of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing.
Subject to the terms and conditions of this Agreement, the closing of
the Merger (the "Closing") will take place at 10:00 a.m. at the main offices of
BSB Bancorp on (i) the fifth day after the last Requisite Regulatory Approval
and shareholder approvals are received and all applicable waiting periods have
expired, or (ii) such other date, place and time as the parties may agree (the
"Closing Date").
9.2 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties, covenants and agreements in
this Agreement or in any instrument delivered pursuant to this Agreement (other
than pursuant to the Option Agreement, which shall terminate in accordance with
its terms) shall survive the Effective Time, except for those covenants and
agreements contained herein and therein which by their terms apply in whole or
in part after the Effective Time.
9.3 Expenses.
All costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
expense, except that all filing and other fees paid to the SEC and the New York
Superintendent in connection with this Agreement shall be borne by BSB Bancorp.
Except as set forth in the next sentence, in the event that this Agreement is
terminated by either BSB Bancorp or SKAN by reason of a material breach pursuant
to Sections 8.1(e) or (f) hereof or by BSB Bancorp or SKAN pursuant to Section
8.1(g) hereof, the other party shall pay all documented, reasonable costs and
expenses up to $250,000 incurred by the terminating party in connection with
this Agreement and the transactions contemplated hereby. In the event that this
Agreement is terminated by BSB Bancorp under Section 8.1(d) by reason of SKAN
shareholders not having given any required approval, or in the event this
Agreement is terminated by BSB Bancorp by reason of a willful material breach
pursuant to Sections 8.1(e) or (f) hereof, SKAN shall pay all documented,
reasonable costs and expenses up to $250,000 incurred by BSB Bancorp in
connection with this Agreement and the transactions contemplated hereby. In the
event that this Agreement is terminated by BSB Bancorp under Section 8.1(i) by
reason of SKAN having agreed to enter into an Acquisition Transaction other than
as contemplated hereby, SKAN shall pay all documented, reasonable costs and
expenses up to $250,000 incurred by BSB Bancorp in connection with this
Agreement and the transactions contemplated hereby.
9.4 Notices.
37
<PAGE> 43
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, mailed by registered or certified
mail (return receipt requested) or delivered by an express courier (with
confirmation) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to BSB Bancorp, to:
BSB Bancorp, Inc.
58-68 Exchange Street
Binghamton, NY 13902
Attn.: President and Chief Executive Officer
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Attn.: Stuart G. Stein, Esq.
and
(b) if to SKAN, to:
Skaneateles Bancorp, Inc.
33 East Genesee Street
P.O. Box 460
Skaneateles, NY 13152-0460
Attn.: President and Chief Executive Officer
with a copy (which shall not constitute notice) to:
Harter, Secrest & Emery LLP
700 Midtown Tower
Rochester, NY 14604
Attn.: Gary L. Karl, Esq.
9.5 Interpretation.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of or an Exhibit or Schedule to
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
9.6 Counterparts.
This Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
38
<PAGE> 44
9.7 Entire Agreement.
This Agreement (including the disclosure schedules, documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, other than the
Confidentiality Agreement, the Certificate of Merger, the Option Agreement and
the Stockholder Agreement.
9.8 Governing Law.
This Agreement shall be governed and construed in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law rules.
9.9 Enforcement of Agreement.
The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Agreement were not performed in accordance
with its specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
thereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
9.10 Severability.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
9.11 Publicity.
Except as otherwise required by law or the rules of the Nasdaq Stock
Market National Market System (or such other exchange on which the SKAN Common
Stock or BSB Bancorp Common Stock is or may become listed), so long as this
Agreement is in effect, neither BSB Bancorp nor SKAN shall, or shall permit any
of BSB Bancorp's or SKAN's Subsidiaries to, issue or cause the publication of
any press release or other public announcement with respect to, or otherwise
make any public statement concerning, the transactions contemplated by this
Agreement, the Certificate of Merger, the Option Agreement or the Stockholder
Agreement without the consent of the other party, which consent shall not be
unreasonably withheld.
9.12 Assignment; Limitation of Benefits.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns. Except as otherwise specifically provided in Section 6.7 hereof,
this Agreement (including the documents and instruments referred to herein) is
not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder, and the covenants, undertakings and
39
<PAGE> 45
agreements set out herein shall be solely for the benefit of, and shall be
enforceable only by, the parties hereto and their permitted assigns.
9.13 Additional Definitions.
In addition to any other definitions contained in this Agreement, the
following words, terms and phrases shall have the following meanings when used
in this Agreement.
"AFFILIATED PERSON": any director, officer or 5% or greater
shareholder, spouse or other person living in the same household of such
director, officer or shareholder, or any company, partnership or trust in which
any of the foregoing persons is an officer, 5% or greater shareholder, general
partner or 5% or greater trust beneficiary.
"KNOWLEDGE": with respect to SKAN, refers to the knowledge of both of
SKAN's and Skaneateles Bank's directors and officers in the ordinary course of
their duties in such positions.
"LAWS": any and all statutes, laws, ordinances, rules, regulations,
orders, permits, judgments, injunctions, decrees, case law and other rules of
law enacted, promulgated or issued by any Governmental Entity.
"MATERIAL ADVERSE EFFECT": with respect to BSB Bancorp or SKAN, as the
case may be, means a condition, event, change or occurrence that is reasonably
likely to have a material adverse effect upon (A) the financial condition,
results of operations, business or properties of BSB Bancorp or SKAN (other than
as a result of changes in laws or regulations or accounting rules of general
applicability or interpretations thereof), or (B) the ability of BSB Bancorp or
SKAN to perform its obligations under, and to consummate the transactions
contemplated by, this Agreement, the Certificate of Merger and, in the case of
SKAN, the Option Agreement.
"SUBSIDIARY": with respect to any party means any corporation,
partnership or other organization, whether incorporated or unincorporated, which
is consolidated with such party for financial reporting purposes.
[SIGNATURES PAGE FOLLOWS]
40
<PAGE> 46
IN WITNESS WHEREOF, BSB Bancorp and SKAN have caused this Agreement to
be executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
<TABLE>
<CAPTION>
BSB BANCORP, INC.
<S> <C>
ATTEST:
By: /s/ Larry G. Denniston By: /s/ Alex S. DePersis
------------------------------------- --------------------
Name: Larry G. Denniston Name: Alex S. DePersis
Title: Senior Vice President and Title: President and Chief Executive
Corporate Secretary Officer
SKANEATELES BANCORP, INC.
ATTEST:
By: /s/ J. David Hammond By: /s/ John P. Driscoll
------------------------------------- --------------------
Name: J. David Hammond Name: John P. Driscoll
Title: Executive Vice President Title: Chairman of the Board, President
and Secretary and Chief Executive Officer
</TABLE>
<PAGE> 47
Proposed Peer Group Index
=========================================================================
<TABLE>
<CAPTION>
Current
Institution Ticker Weighing
- ----------- ------ --------
<S> <C> <C>
Arrow Financial Corporation AROW 2.52%
BT Financial Corporation BTFC 5.25%
Chittenden Corporation CHZ 11.39%
CNB Financial Corp CNBF 3.06%
Community Bank Systems, Inc. CBU 2.95%
First Commonwealth Financial Corporation FCF 12.48%
Iroquois Bancorp, Inc. IROQ 0.97%
NBT Bancorp, Inc. NBTB 5.05%
Premier National Bancorp PNB 6.33%
S&T Bancorp, Inc. STBA 11.17%
State Bancorp, Inc. STBC 2.63%
Suffolk Bancorp SUBK 2.46%
Tompkins County Trustco, Inc. TMP 1.96%
TrustCo Bank Corp NY TRST 10.82%
U.S.B. Holding Company, Incorporated UBH 6.40%
USBANCORP, Inc. UBAN 5.51%
Vermont Financial Services Corp. VFSC 5.19%
York Financial Corp. YFED 3.86%
</TABLE>
<PAGE> 1
Exhibit 21
LIST OF REGISTRANT'S SUBSIDIARIES
2
<PAGE> 2
List of Registrant's Subsidiaries
Skaneateles Savings Bank, New York State-chartered.
Skaneateles Preferred Capital Corp., a New York state incorporated Real Estate
Investment Trust, subsidiary of Skaneateles Savings Bank.
3
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
4
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Skaneateles Bancorp, Inc.:
We consent to incorporation by reference in the registration statement Nos.
33-37281, 33-37282, 33-92198, 333-20445 and 333-52925 on Form S-8 and
333-18287 on Form S-3 of Skaneateles Bancorp, Inc. of our report dated
January 8, 1999, relating to the consolidated balance sheets of Skaneateles
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report has been incorporated by
reference in the December 31, 1998 annual report on Form 10-K of Skaneateles
Bancorp, Inc..
/s/ KPMG LLP
Syracuse, New York
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
INCLUDED WITHIN THE COMPANY'S 1998 ANNUAL REPORT TO STOCKHOLDERS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,338
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,799
<INVESTMENTS-CARRYING> 4,015
<INVESTMENTS-MARKET> 4,171
<LOANS> 215,440
<ALLOWANCE> 2,862
<TOTAL-ASSETS> 276,148
<DEPOSITS> 237,333
<SHORT-TERM> 10,773
<LIABILITIES-OTHER> 3,735
<LONG-TERM> 5,206
0
0
<COMMON> 15
<OTHER-SE> 19,086
<TOTAL-LIABILITIES-AND-EQUITY> 276,148
<INTEREST-LOAN> 18,041
<INTEREST-INVEST> 1,148
<INTEREST-OTHER> 866
<INTEREST-TOTAL> 20,055
<INTEREST-DEPOSIT> 8,399
<INTEREST-EXPENSE> 9,519
<INTEREST-INCOME-NET> 10,536
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,676
<INCOME-PRETAX> 2,523
<INCOME-PRE-EXTRAORDINARY> 2,523
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,649
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 4.23
<LOANS-NON> 3,180
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,154
<ALLOWANCE-OPEN> 2,560
<CHARGE-OFFS> 467
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 2,862
<ALLOWANCE-DOMESTIC> 2,862
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
OPTION AGREEMENT, DATED AS OF JANUARY 25, 1999, BY AND BETWEEN SKANEATELES
BANCORP, INC. AND BSB BANCORP, INC.
7
<PAGE> 2
OPTION AGREEMENT
THE TRANSFER OF THE OPTION GRANTED
BY THIS AGREEMENT IS SUBJECT TO RESALE RESTRICTIONS.
This OPTION AGREEMENT, dated as of January 25, 1999 (this
"Agreement"), is entered into by and between SKANEATELES BANCORP, INC., a
Delaware corporation ("Issuer") and BSB BANCORP, INC., a Delaware corporation
("Grantee").
WITNESSETH:
WHEREAS, concurrently herewith Grantee and Issuer have entered into an
Agreement and Plan of Merger, dated as of January 25, 1999 (the "Plan"); and
WHEREAS, as a condition and inducement to Grantee's entering into the
Plan and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Plan, the parties hereto
agree as follows:
SECTION 1. Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to 290,142 fully paid and nonassessable shares of common stock, par value $.01
per share of Issuer ("Issuer Common Stock") (which number of shares is equal to
19.99% of the total of the number of outstanding shares of Issuer Common Stock
on the date hereof), at a price per share equal to $15.00 (the "Initial Price");
provided, however, that in the event Issuer issues or agrees to issue any
additional shares of Issuer Common Stock (other than shares issued upon the
exercise of options outstanding as of the date of the Plan in accordance with
their terms pursuant to existing stock option plans and pursuant to the SKAN
DRIP and the Purchase Plan (both terms as defined in the Plan)), or grants one
or more options to purchase additional shares of Issuer Common Stock at a price
less than the Initial Price, as adjusted pursuant to Section 5(b) hereof, such
price shall be equal to such lesser price (such price, as adjusted, is
hereinafter referred to as the "Option Price"). The number of shares of Issuer
Common Stock that may be received upon the exercise of the Option and the Option
Price are subject to adjustment as herein set forth.
SECTION 2. (a) Grantee may exercise the Option, in whole or part, at
any time and from time to time following the occurrence of a Purchase Event (as
defined below); provided, however, that the Option shall terminate and be of no
further force and effect upon the earliest to occur of the following events
(which are collectively referred to as an "Exercise Termination Event"):
(i) The time immediately prior to the Effective Time;
(ii) 12 months after the first occurrence of a Purchase Event;
(iii) 12 months after the termination of the Plan following
the occurrence of a Preliminary Purchase Event (as defined below),
unless clause (vii) of this Section 2(a) is applicable;
(iv) upon the termination of the Plan, prior to the occurrence
of a Purchase Event or Preliminary Purchase Event, by Issuer pursuant
to Sections 8.1(d), (e), (f), (g) or (h)of the Plan, both parties
pursuant to Section 8.1(a) of the Plan, or by either party pursuant to
Section 8.1(b) or (c) of the Plan;
<PAGE> 3
(v) 12 months after the termination of the Plan, by either
party pursuant to Section 8.1(d) of the Plan based on the required vote
of Issuer's shareholders not being received, if no Purchase Event or
Preliminary Purchase Event has occurred prior to the meeting of
shareholders (or any adjournment or postponement thereof) held to vote
on the Plan;
(vi) 12 months after the termination of the Plan, by Grantee
pursuant to Section 8.1(e) or (f) thereof as a result of a breach by
Issuer, unless such breach was willful or intentional; or
(vii) 24 months after the termination of the Plan, by Grantee
pursuant to Section 8.1(e) or (f) thereof as a result of a willful or
intentional breach by Issuer, or by Grantee pursuant to Section 8.1(g)
or (i) of the Plan.
(b) The term "Preliminary Purchase Event" shall mean any of the
following events or transactions occurring on or after the date hereof and prior
to an Exercise Termination Event:
(i) Issuer without having received Grantee's prior written
consent, shall have entered into any letter of intent or definitive
agreement to engage in an Acquisition Transaction (as defined below)
with any Person (as defined below) other than Grantee or any of its
subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of
Issuer shall have recommended that the shareholders of Issuer approve
or accept any Acquisition Transaction with any Person (as the term
"person" is defined in Section 3(a)9 and 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations thereunder) other than Grantee or any Grantee Subsidiary.
For purposes of this Agreement "Acquisition Transaction" shall mean (x)
a merger, consolidation or other business combination involving Issuer,
(y) a purchase, lease or other acquisition of all or substantially all
of the assets of Issuer, (z) a purchase or other acquisition (including
by way of merger, consolidation, share exchange or otherwise) of
Beneficial Ownership (as the term "beneficial ownership" is defined in
Regulation 13d-3(a) of the Exchange Act) of securities representing
10.0% or more of the voting power of Issuer; provided, however, that
"Acquisition Transaction" shall not include a transaction entered into
after the termination of the Plan in which the Issuer is the surviving
entity, if in connection with such transaction, no person acquires
Beneficial Ownership of 10.0% or more of the total voting power of the
Issuer to be outstanding after giving effect to such transaction and in
which the aggregate voting power of Issuer acquired by all persons is
less than 15% of the total voting power of Issuer;
(ii) Any Person (other than Grantee, any Grantee Subsidiary or
any current affiliate of Issuer) shall have acquired Beneficial
Ownership of 10.0% or more of the outstanding shares of Issuer Common
Stock;
(iii) (a) Any Person (other than Grantee or any Grantee
Subsidiary) shall have made a bona fide proposal to Issuer or, by a
public announcement or written communication that is or becomes the
subject of public disclosure, to Issuer's shareholders to engage in an
Acquisition Transaction (including, without limitation, any situation
in which any Person other than Grantee or any Grantee Subsidiary shall
have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect
to a tender offer or exchange offer to purchase any shares of Issuer
Common Stock such that, upon consummation of such offer, such person
would have Beneficial Ownership of 10.0% or more of the then
outstanding shares of Issuer Common Stock (such an offer being referred
to herein as a "Tender Offer" or an "Exchange Offer", respectively)),
and (b) the shareholders of Issuer do not approve the Merger, as
defined in the Plan, at the Special Meeting, as defined in the Plan;
(iv) There shall exist a willful or intentional breach under
the Plan by Issuer and such breach would entitle Grantee to terminate
the Plan;
2
<PAGE> 4
(v) The special meeting of Issuers' shareholders held for the
purpose of voting on the Plan shall not have been held pursuant to the
Plan or shall have been canceled prior to termination of the Plan, or
for any reason whatsoever Issuer's Board of Directors shall have failed
to recommend, or shall have withdrawn or modified in a manner adverse
to Grantee the recommendation of Issuer's Board of Directors, that
Issuer's shareholders approve the Plan, or if Issuer or Issuer's Board
of Directors fails to oppose any proposal by any Person (other than
Grantee or any Grantee Subsidiary); or
(vi) Any Person (other than Grantee or any Grantee Subsidiary)
shall have filed an application or notice with the Board of Governors
of the Federal Reserve System (the "FRB"), the Federal Deposit
Insurance Corporation (the "FDIC"), the Superintendent of Banks of New
York State (the "New York Superintendent"), or other regulatory or
administrative agency or commission (each, a "Governmental Authority")
for approval to engage in an Acquisition Transaction.
(c) The term "Purchase Event" shall mean any of the following events or
transactions occurring on or after the date hereof and prior to an Exercise
Termination Event:
(i) The acquisition by any Person (other than Grantee or any
Grantee Subsidiary) of Beneficial Ownership (other than on behalf of
the Issuer) of 25% or more of the then outstanding Issuer Common Stock;
(ii) The occurrence of a Preliminary Purchase Event described
in Section 2(b)(i) except that the percentage referred to in clause (z)
thereof shall be 25%; or
(iii) The termination of the Plan by Grantee pursuant to
Section 8.1(e) or (f) thereof as a result of a willful or intentional
breach by Issuer, or by Grantee pursuant to Section 8.1(g) or (i) of
the Plan.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Preliminary Purchase Event or Purchase Event known to Issuer; provided,
however, that the giving of such notice by Issuer shall not be a condition to
the right of Grantee to exercise the Option.
(e) In the event that Grantee is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the "Option Notice," the date
of which being hereinafter referred to as the "Notice Date") specifying (i) the
total number of shares of Issuer Common Stock it will purchase pursuant to such
exercise and (ii) the time (which shall be on a business day that is not less
than three nor more than 10 business days from the Notice Date) on which the
closing of such purchase shall take place (the "Closing Date"); such closing to
take place at the principal office of the Issuer; provided, however, that, if
prior notification to or approval of the FDIC, the FRB, or the New York
Superintendent or any other Governmental Authority is required in connection
with such purchase (each, a "Notification" or an "Approval," as the case may
be), (a) Grantee shall promptly file the required notice, application or waiver
request for approval ("Notice/Application"), (b) Grantee shall expeditiously
process the Notice/Application and (c) for the purpose of determining the
Closing Date pursuant to clause (ii) of this sentence, the period of time that
otherwise would run from the Notice Date shall instead run from the later of (x)
in connection with any Notification, the date on which any required notification
periods have expired or been terminated and (y) in connection with any Approval,
the date on which such approval has been obtained and any requisite waiting
period or periods shall have expired. For purposes of Section 2(a) hereof, any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto. On or prior to the Closing Date, Grantee shall have the right to revoke
its exercise of the Option by written notice to the Issuer given not less than
three business days prior to the Closing Date.
(f) At the closing referred to in Section 2(e) hereof, Grantee shall pay
to Issuer the aggregate purchase price for the number of shares of Issuer Common
Stock specified in the Option Notice in immediately available funds by wire
transfer to a bank account designated by Issuer; provided, however, that failure
or refusal of Issuer to designate such a bank account shall not preclude Grantee
from exercising the Option.
3
<PAGE> 5
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in Section 2(f) hereof, Issuer shall deliver to
Grantee a certificate or certificates representing the number of shares of
Issuer Common Stock specified in the Option Notice and, if the Option should be
exercised in part only, a new Option evidencing the rights of Grantee thereof to
purchase the balance of the shares of Issuer Common Stock purchasable hereunder.
(h) Certificates for Issuer Common Stock delivered at a closing
hereunder shall be endorsed with a restrictive legend substantially as follows:
The transfer of the shares represented by this certificate is
subject to resale restrictions arising under the Securities Act of
1933, as amended, and applicable state securities laws and to certain
provisions of an agreement between BSB Bancorp, Inc. and Skaneateles
Bancorp, Inc. dated as of January 25, 1999. A copy of such agreement is
on file at the principal office of BSB Bancorp, Inc., and will be
provided to the holder hereof without charge upon receipt by BSB
Bancorp, Inc. of a written request therefor.
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have delivered
to Issuer a copy of a letter from the staff of the Securities and Exchange
Commission (the "SEC") or Governmental Authority responsible for administering
any applicable state securities laws or an opinion of counsel, in form and
substance satisfactory to Issuer's counsel, to the effect that such legend is
not required for purposes of the Securities Act or applicable state securities
laws; (ii) the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the shares have been sold or transferred in compliance with the provisions of
this Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In addition
such certificates shall bear any other legend as may be required by law.
(i) Upon the giving by Grantee to Issuer of an Option Notice and the
tender of the applicable purchase price in immediately available funds on the
Closing Date, unless prohibited by applicable law, Grantee shall be deemed to be
the holder of record of the number of shares of Issuer Common Stock specified in
the Option Notice, notwithstanding that the stock transfer books of Issuer shall
then be closed or that certificates representing such shares of Issuer Common
Stock shall not then actually be delivered to Grantee. Issuer shall pay all
expenses and other charges that may be payable in connection with the
preparation, issuance and delivery of stock certificates under this Section 2 in
the name of Grantee.
SECTION 3. Issuer agrees: (i) that it shall at all times until the
termination of this Agreement have reserved for issuance upon the exercise of
the Option that number of authorized and reserved shares of Issuer Common Stock
equal to the maximum number of shares of Issuer Common Stock at any time and
from time to time issuable hereunder, all of which shares will, upon issuance
pursuant hereto, be duly authorized, validly issued, fully paid, non-assessable,
and delivered free and clear of all claims, liens, encumbrances and security
interests and not subject to any preemptive rights; (ii) that it will not, by
amendment of its certificate of incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) promptly to take all reasonable action as may from time to time be
requested by the Grantee, at Grantee's expense (including (x) complying with all
premerger notification, reporting and waiting period requirements specified in
15 U.S.C. ss. 18a and regulations promulgated thereunder and (y) in the event
prior approval of or notice to the FDIC, the FRB, the New York Superintendent or
any other Governmental Authority, under the Change in Bank Control Act of 1978,
as amended, the Bank Holding Company Act, as amended, or any other applicable
federal or state banking law, is necessary before the Option may be exercised,
cooperating with Grantee in preparing such applications or notices and providing
such information to each such Governmental Authority as it may require in order
to permit Grantee to exercise the Option and Issuer duly and effectively to
issue shares of Issuer Common Stock pursuant hereto; and (iv) to take all action
provided herein to protect the rights of Grantee against dilution.
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<PAGE> 6
SECTION 4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Grantee, upon presentation and
surrender of this Agreement at the principal office of Issuer, for other
agreements providing for Options of different denominations entitling the holder
thereof to purchase, on the same terms and subject to the same conditions as are
set forth herein, in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any agreements and related options for which this Agreement (and the
Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date.
SECTION 5. The number of shares of Issuer Common Stock purchasable upon
the exercise of the Option shall be subject to adjustment from time to time as
follows:
(a) In the event of any change in the type or number of shares of
Issuer Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or other issuances of additional shares (other than pursuant to the exercise of
the Option), the type and number of shares of Issuer Common Stock purchasable
upon exercise hereof shall be appropriately adjusted and proper provision shall
be made so that, in the event that any additional shares of Issuer Common Stock
are to be issued or otherwise become outstanding as a result of any such change
(other than pursuant to an exercise of the Option), the number of shares of
Issuer Common Stock that remain subject to the Option shall be increased or
decreased (as applicable) so that, after such issuance and together with the
shares of Issuer Common Stock previously issued pursuant to the exercise of the
Option (as adjusted on account of any of the foregoing changes in the Issuer
Common Stock), the Option shall equal the sum of 19.99% of the total of the
number of shares of Issuer Common Stock then issued and outstanding.
(b) Whenever the number of shares of Issuer Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Issuer Common Stock
purchasable prior to the adjustment and the denominator of which shall be equal
to the number of shares of Issuer Common Stock purchasable after the adjustment.
SECTION 6. (a) Upon the occurrence of a Purchase Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of the Option
(or part thereof) or of any of the shares of Issuer Common Stock issued pursuant
hereto), promptly prepare, file and keep current a shelf registration statement
with the SEC, under the Securities Act covering any shares issued and issuable
pursuant to the Option and shall use its reasonable best efforts to cause such
registration statement to become effective, and to remain current and effective
for a period not in excess of 180 days from the day such registration statement
first becomes effective, in order to permit the sale or other disposition of any
shares of Issuer Common Stock issued upon total or partial exercise of the
Option ("Option Shares") in accordance with any plan of disposition requested by
Grantee. Grantee shall have the right to demand two such registrations which
right shall be transferable. Grantee shall provide all information reasonably
requested by Issuer for inclusion in any offering circular or, if applicable,
registration statement to be filed hereunder. In connection with any such
offering circular or, if applicable, registration statement, Issuer and Grantee
shall provide each other with representations, warranties, indemnities and other
agreements customarily given in connection with such registration. If requested
by Grantee in connection with such registration, Issuer and Grantee shall become
a party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating themselves in respect of representations,
warranties, indemnities and other agreements customarily included in such
underwriting agreements. Notwithstanding the foregoing, if Grantee revokes any
exercise notice or fails to exercise any Option with respect to any exercise
notice pursuant to Section 2(e) hereof, Issuer shall not be obligated to
continue any registration process with respect to the sale of Option Shares
issuable upon the exercise of such Option and Grantee shall not be deemed to
have demanded registration of Option Shares.
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<PAGE> 7
(b) In the event that Grantee requests Issuer to prepare an offering
circular or, if applicable, to file a registration statement following the
failure to obtain any approval required to exercise the Option as described in
Section 9 hereof, the closing of the sale or other disposition of the Issuer
Common Stock or other securities pursuant to such offering circular or, if
applicable, registration statement shall occur substantially simultaneously with
the exercise of the Option.
(c) Concurrently with the preparation and filing of a registration
statement under Section 6(a) hereof, Issuer shall also make all filings required
to comply with state securities laws in such number of states as Grantee may
reasonably request.
SECTION 7. (a) Upon the occurrence of a Purchase Event that occurs
prior to an Exercise Termination Event, (i) at the request (the date of such
request being the "Option Repurchase Request Date") of Grantee, Issuer shall
repurchase, subject to compliance with applicable law and out of funds legally
available therefor, the Option from Grantee at a price (the "Option Repurchase
Price") equal to the amount by which (A) the market/offer price (as defined
below) exceeds (B) the Option Price, multiplied by the number of shares for
which the Option may then be exercised and (ii) at the request (the date of such
request being the "Option Share Repurchase Request Date") of the owner of Option
Shares from time to time (the "Owner"), Issuer shall repurchase such number of
the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the market/offer price multiplied by
the number of Option Shares so designated. The term "market/offer price" shall
mean the highest of (i) the price per share of Issuer Common Stock at which a
tender offer or exchange offer therefor has been made after the date hereof and
on or prior to the Option Repurchase Request Date or the Option Share Repurchase
Request Date, as the case may be, (ii) the price per share of Issuer Common
Stock paid or to be paid by any third party pursuant to an agreement with Issuer
(whether by way of a merger, consolidation or otherwise), (iii) the average of
the 20 highest last sale prices for shares of Issuer Common Stock as reported
within the 90-day period ending on the Option Repurchase Request Date or the
Option Share Repurchase Request Date, as the case may be, and (iv) in the event
of a sale of all or substantially all of Issuer's assets, the sum of the price
paid in such sale for such assets and the current market value of the remaining
assets of Issuer as determined by an investment banking firm selected by Grantee
or the Owner, as the case may be, and reasonably acceptable to Issuer, divided
by the number of shares of Issuer Common Stock outstanding at the time of such
sale. In determining the market/offer price, the value of consideration other
than cash shall be the value determined by an investment banking firm selected
by Grantee or the Owner, as the case may be, and reasonably acceptable to
Issuer. The investment banking firm's determination shall be conclusive and
binding on all parties.
(b) Grantee or the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and/or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Grantee or
the Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this Section 7. As
promptly as practicable, and in any event within 30 business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto, Issuer shall deliver or
cause to be delivered to Grantee the Option Repurchase Price or to the Owner the
Option Share Repurchase Price.
(c) Issuer hereby undertakes to use its reasonable best efforts to
obtain all required regulatory, shareholder and legal approvals and to file any
required notices as promptly as practicable in order to accomplish any
repurchase contemplated by this Section 7. Nonetheless, to the extent that
Issuer is prohibited under applicable law or regulation from repurchasing any
Option and/or any Option Shares in full, Issuer shall promptly so notify Grantee
and/or the Owner and thereafter deliver or cause to be delivered, from time to
time, to Grantee and/or the Owner, as appropriate, the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that it is
no longer prohibited from delivering, within five business days after the date
on which Issuer is no longer so prohibited; provided, however, that if Issuer at
any time after delivery of a notice of repurchase pursuant to Section 7(b)
hereof is prohibited as referred to above, from delivering to Grantee and/or the
Owner, as appropriate, the Option Repurchase Price or the Option Share
Repurchase Price, respectively, in full, Grantee or the Owner, as appropriate,
may revoke its notice of repurchase of the Option or the Option
6
<PAGE> 8
Shares either in whole or in part whereupon, in the case of a revocation in
part, Issuer shall promptly (i) deliver to Grantee and/or the Owner, as
appropriate, that portion of the Option Purchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering after taking into
account any such revocation and (ii) deliver, as appropriate, either (A) to
Grantee, a new Agreement evidencing the right of Grantee to purchase that number
of shares of Issuer Common Stock equal to the number of shares of Issuer Common
Stock purchasable immediately prior to the delivery of the notice of repurchase
less the number of shares of Issuer Common Stock covered by the portion of the
Option repurchased or, (B) to the Owner, a certificate for the number of Option
Shares covered by the revocation.
(d) Issuer shall not enter into any agreement with any Person (other
than Grantee or a Grantee Subsidiary) for an Acquisition Transaction unless the
other Person assumes all the obligations of Issuer pursuant to this Section 7 in
the event that Grantee or the Owner elects, in its sole discretion, to require
such other Person to perform such obligations.
SECTION 8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into a letter of intent or definitive agreement (i) to
consolidate or merge with any Person (other than Grantee or a Grantee
Subsidiary), and Issuer shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any Person (other than Grantee or a
Grantee Subsidiary) to merge into Issuer, and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property or the then
outstanding shares of Issuer Common Stock shall after such merger represent less
than 50% of the outstanding shares and share equivalents of the merged company,
or (iii) to sell or otherwise transfer all or substantially all of its assets to
any Person (other than Grantee or a Grantee Subsidiary) then, and in each such
case, such letter of intent or definitive agreement governing such transaction
shall make proper provision so that the Option shall, upon the consummation of
such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at the
election of Grantee, of either (x) the Acquiring Corporation (as defined below)
or (y) any person that controls the Acquiring Corporation (the Acquiring
Corporation and any such controlling person being hereinafter referred to as the
"Substitute Option Issuer").
(b) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock (as is hereinafter defined) as is equal to the
market/offer price (as defined in Section 7 hereof) multiplied by the number of
shares of Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of the
Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Option Price multiplied by a
fraction in which the numerator is the number of shares of Issuer Common Stock
for which the Option was theretofore exercisable and the denominator is the
number of shares for which the Substitute Option is exercisable.
(c) The Substitute Option shall otherwise have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to Grantee, provided, further that the terms
of the Substitute Option shall include (by way of example and not limitation)
provisions for the repurchase of the Substitute Option and Substitute Common
Stock by the Substitute Option Issuer on the same terms and conditions as
provided in Section 7 hereof.
(d) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving corporation, and (iii) the transferee of all or
any substantial part of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock
issued by the Substitute Option Issuer upon exercise of the Substitute
Option.
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<PAGE> 9
(iii) "Average Price" shall mean the average closing price of
a share of Substitute Common Stock for the one-year period immediately
preceding the consolidation, merger or sale in question, but in no
event higher than the closing price of the shares of Substitute Common
Stock on the day preceding such consolidation, merger or sale;
provided, that if Issuer is the issuer of the Substitute Option, the
Average Price shall be computed with respect to a share of Issuer
Common Stock issued by Issuer, the corporation merging into Issuer or
by any company which controls or is controlled by such merging
corporation, as Grantee may elect.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.99% of the shares of
Substitute Common Stock outstanding immediately prior to the issuance of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than such number of shares of Substitute Common Stock but for this
clause (e), the Substitute Option Issuer shall make a cash payment to Grantee
equal to the excess of (i) the value of the Substitute Option without giving
effect to the limitation in this clause (e) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee and the Substitute Option Issuer. In addition,
the provisions of Section 5(a) hereof shall not apply to the issuance of any
Substitute Option and for purposes of applying Section 5(a) hereof thereafter to
any Substitute Option, the percentage referred to in Section 5(a) hereof shall
thereafter equal the percentage that the percentage of the shares of Substitute
Common Stock subject to the Substitute Option bears to the number of shares of
Substitute Common Stock outstanding.
SECTION 9. Notwithstanding Sections 2, 6 and 7 hereof, if Grantee has
given the notice referred to in one or more of such Sections, the exercise of
the rights specified in any such Section shall be extended (a) if the exercise
of such rights requires obtaining regulatory approvals (including any required
waiting periods) to the extent necessary to obtain all regulatory approvals for
the exercise of such rights, and (b) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise; provided,
that in no event shall any closing date occur more than 12 months after the
related notice date, and, if the closing date shall not have occurred within
such period due to the failure to obtain any required approval by the FRB, the
FDIC, the New York Superintendent or any other Governmental Authority despite
the best efforts of Issuer or the Substitute Option Issuer, as the case may be,
to obtain such approvals, the exercise of the rights shall be deemed to have
been rescinded as of the related notice date. In the event (a) Grantee receives
official notice that an approval of the FRB, the FDIC, the New York
Superintendent or any other Governmental Authority required for the purchase and
sale of the Option Shares will not be issued or granted or (b) a closing date
has not occurred within 12 months after the related notice date due to the
failure to obtain any such required approval, Grantee shall be entitled to
exercise the Option in connection with the concurrent resale of the Option
Shares pursuant to a registration statement as provided in Section 6 hereof.
Nothing contained in this Agreement shall restrict Grantee from specifying
alternative means of exercising rights pursuant to Sections 2, 6 or 7 hereof in
the event that the exercising of any such rights shall not have occurred due to
the failure to obtain any required approval referred to in this Section 9.
SECTION 10. Issuer hereby represents and warrants to Grantee as
follows:
(a) Issuer has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly approved by the Board of
Directors of Issuer and no other corporate proceedings on the part of Issuer are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Issuer, enforceable against
Issuer in accordance with its terms, subject to any required Governmental
Approval, and except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
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<PAGE> 10
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Issuer Common Stock equal to the maximum number of shares of Issuer Common Stock
at any time and from time to time issuable hereunder, and all such shares, upon
issuance pursuant hereto, will be duly authorized, validly issued, fully paid,
non-assessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
SECTION 11. (a) Neither of the parties hereto may assign any of its
rights or delegate any of its obligations under this Agreement or the Option
created hereunder to any other Person without the express written consent of the
other party, except that Grantee may assign this Agreement to a wholly owned
subsidiary of Grantee and Grantee may assign its rights hereunder in whole or in
part after the occurrence of a Preliminary Purchase Event. The term "Grantee" as
used in this Agreement shall also be deemed to refer to Grantee's permitted
assigns.
(b) Any assignment of rights of Grantee to any permitted assignee of
Grantee hereunder shall bear the restrictive legend at the beginning thereof
substantially as follows:
The transfer of the option represented by this assignment and
the related option agreement is subject to resale restrictions arising
under the Securities Act of 1933, as amended, and applicable state
securities laws and to certain provisions of an agreement between BSB
Bancorp, Inc. and Skaneateles Bancorp, Inc., dated as of January ___,
1999. A copy of such agreement is on file at the principal office of
BSB Bancorp, Inc., and will be provided to any permitted assignee of
the Option without charge upon receipt of a written request therefor.
SECTION 12. Each of Grantee and Issuer will use its reasonable efforts
to make all filings with, and to obtain consents of, all third parties and
Governmental Authorities necessary to the consummation of the transactions
contemplated by this Agreement, including, without limitation, applying to the
FDIC, the FRB, the New York Superintendent and any other Governmental Authority
for approval to acquire the shares issuable hereunder.
SECTION 13. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief. Both parties further agree
to waive any requirement for the securing or posting of any bond in connection
with the obtaining of any such equitable relief and that this provision is
without prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
SECTION 14. If any term, provision, covenant or restriction contained
in this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that Grantee is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7 hereof, the full number of shares of Issuer
Common Stock provided in Section 1 hereof (as adjusted pursuant hereto), it is
the express intention of Issuer to allow Grantee to acquire or to require Issuer
to repurchase such lesser number of shares as may be permissible without any
amendment or modification hereof.
SECTION 15. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in the manner and at the respective addresses of the parties set forth in the
Plan.
SECTION 16. This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto shall be governed by and
construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof).
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<PAGE> 11
SECTION 17. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement and shall be effective at the time of execution and
delivery.
SECTION 18. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder.
SECTION 19. Except as otherwise expressly provided herein or in the
Plan, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
SECTION 20. Capitalized terms used in this Agreement and not defined
herein but defined in the Plan shall have the meanings assigned thereto in the
Plan.
SECTION 21. Nothing contained in this Agreement shall be deemed to
authorize or require Issuer or Grantee to breach any provision of the Plan or
any provision of law applicable to the Grantee or Issuer.
SECTION 22. In the event that any selection or determination is to be
made by Grantee or the Owner hereunder and at the time of such selection or
determination there is more than one Grantee or Owner, such selection shall be
made by a majority in interest of such Grantees or Owners.
SECTION 23. In the event of any exercise of the option by Grantee,
Issuer and such Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
SECTION 24. Except to the extent Grantee exercises the Option, Grantee
shall have no rights to vote or receive dividends or have any other rights as a
shareholder with respect to shares of Issuer Common Stock covered hereby.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 12
IN WITNESS WHEREOF, each of the parties has caused this Option Agreement
to be executed and delivered on its behalf by their respective officers
thereunto duly authorized, all as of the date first above written.
SKANEATELES BANCORP, INC.
By: /s/ John P. Driscoll
------------------------------------
Name: John P. Driscoll
Title:Chairman, President & CEO
BSB BANCORP, INC.
By: /s/ Alex S. DePersis
------------------------------------
Name: Alex S. DePersis
Title: President & CEO
<PAGE> 1
Exhibit 99.2
STOCKHOLDER AGREEMENT, DATED AS OF JANUARY 25, 1999, BY AND BETWEEN BSB
BANCORP, INC. AND CERTAIN STOCKHOLDERS OF SKANEATELES BANCORP, INC.
2
<PAGE> 2
SKANEATELES BANCORP, INC.
STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT, dated as of January 25, 1999, is entered
into by and among BSB Bancorp, Inc., a Delaware corporation ("BSB Bancorp"), and
the stockholders of Skaneateles Bancorp, Inc., a Delaware corporation
("Skaneateles"), identified on Schedule I hereto (collectively, the
"Stockholders"), who are directors, executive officers or other affiliates of
Skaneateles (for purposes of Rule 145 under the Securities Act of 1933, as
amended, and for purposes of qualifying the Merger (defined below) for
"pooling-of-interests" accounting treatment).
WHEREAS, BSB Bancorp and Skaneateles have entered into an Agreement and
Plan of Merger, dated as of January 25, 1999 (the "Agreement"), which is
conditioned upon the execution of this Stockholder Agreement and which provides
for, among other things, the merger of Skaneateles with and into BSB Bancorp, in
a stock-for-stock transaction (the "Merger"); and
WHEREAS, in order to induce BSB Bancorp to enter into and consummate the
Agreement, each of the Stockholders agrees to, among other things, vote in favor
of the Agreement, the Merger and the other transactions contemplated by the
Agreement in his or her capacity as a stockholder of Skaneateles;
NOW, THEREFORE in consideration of the premises, the mutual covenants
and agreements set forth herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Ownership of Skaneateles Common Stock. Each Stockholder represents
and warrants that the number of shares of Skaneateles common stock, par value
$.01 per share ("Skaneateles Common Stock"), set forth opposite such
Stockholder's name on Schedule I hereto is the total number of shares of
Skaneateles Common Stock over which such person has "beneficial ownership"
within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, except that the provisions of Rule 13d-3(d)(1)(i) shall be considered
without any limit as to time.
2. Agreements of the Stockholders. Each Stockholder covenants and
agrees that:
(a) Such Stockholder shall, at any meeting of the holders of any or all
classes or series of Skaneateles Common Stock called for the purpose (or in
connection with any action taken by written consent), vote or cause to be voted
all shares of Skaneateles Common Stock with respect to which such Stockholder
has voting power (including the power to vote or to direct the voting of)
whether owned as of the date hereof or hereafter acquired (i) in favor of the
Agreement, the Merger and the other transactions contemplated by the Agreement
and (ii) against any plan or proposal pursuant to which Skaneateles is to be
acquired by or merged with, or pursuant to which Skaneateles proposes to sell
all or substantially all of its assets and liabilities to, any person, entity or
group (other than BSB Bancorp or any affiliate thereof) or any other action that
is inconsistent with the Agreement or the transactions contemplated thereby.
Notwithstanding the foregoing, or any other provision of this Stockholder
Agreement, BSB Bancorp shall have no agreement, arrangement or understanding
with any Stockholder as to directing the voting of any shares of Skaneateles
Common Stock to the extent it would result in BSB Bancorp, individually or with
any of its Affiliates (as defined in the next sentence) or Associates (as
defined in the next sentence) becoming the Beneficial Owner (as defined in the
next sentence) of five percent or more of the Voting Stock (as defined in the
next sentence) of Skaneateles. The terms "Affiliates," "Associates," "Beneficial
Owner," and "Voting Stock" are as defined or referenced in Article 12 of the
Skaneateles Certificate of Incorporation. In determining which, if any,
Stockholder that BSB Bancorp shall have no agreement, arrangement or
understanding with as to directing the voting of any shares of Skaneateles
Common Stock, reference shall be made to the Stockholders in order of the amount
of Skaneateles Common Stock set forth opposite such Stockholder's name on
Schedule I hereto, beginning with the Stockholder who reports the fewest number
of shares, and continuing in ascending order therefrom.
<PAGE> 3
(b) Except as otherwise expressly permitted hereby, such Stockholder
shall not sell, pledge, transfer or otherwise dispose of his or her shares of
Skaneateles Common Stock; provided, however, that this Section 2(b) shall not
apply to a pledge existing as of January 1, 1999.
(c) Such Stockholder shall not in his or her capacity as a stockholder
of Skaneateles directly or indirectly encourage or solicit, initiate or hold
discussions or negotiations with, or provide any information to, any person,
entity or group (other than BSB Bancorp or an affiliate thereof) concerning any
merger, sale of all or substantially all of the assets or liabilities not in the
ordinary course of business, sale of shares of capital stock or similar
transaction involving Skaneateles or otherwise inconsistent with the Agreement
or the transactions contemplated thereby. Nothing herein shall impair such
Stockholder's fiduciary obligations as a director of Skaneateles.
(d) Stockholder shall use his or her best efforts to take or cause to be
taken all action, and to do or cause to be done all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the Merger contemplated by the Agreement.
(e) Such Stockholder shall not, prior to the public release by BSB
Bancorp of an earnings report to its stockholders covering at least one month of
operations after consummation of the Merger (the "Restricted Period"), sell,
pledge (other than the replacement of a pledge existing on January 1, 1999 of
Skaneateles Common Stock), transfer or otherwise dispose of the shares of BSB
Bancorp common stock, par value $.01 per share (the "BSB Bancorp Common Stock"),
to be received by him or her for his or her shares of Skaneateles Common Stock
upon consummation of the Merger, it being agreed that BSB Bancorp shall use
commercially reasonable efforts to publish such earnings report within 45 days
after the end of the first month after the Merger becomes effective in which
there are at least 30 days of post-Merger combined operations..
(f) Such Stockholder shall comply with all applicable federal and state
securities laws in connection with any sale of BSB Bancorp Common Stock received
in exchange for Skaneateles Common Stock in the Merger, including the trading
and volume limitations as to sales by affiliates contained in Rule 145 under the
Securities Act of 1933, as amended.
3. Successors and Assigns. A Stockholder may sell, pledge, transfer or
otherwise dispose of his or her shares of Skaneateles Common Stock only with the
prior written consent of BSB Bancorp and if the acquirer of such Skaneateles
Common Stock agrees in writing to be bound by this Stockholder Agreement.
4. Termination. The parties agree and intend that this Stockholder
Agreement be a valid and binding agreement enforceable against the parties
hereto and that damages and other remedies at law for the breach of this
Stockholder Agreement are inadequate. This Stockholder Agreement may be
terminated at any time prior to the consummation of the Merger by the written
consent of the parties hereto and shall be automatically terminated in the event
that the Agreement is terminated in accordance with its terms; provided,
however, that if the holders of Skaneateles Common Stock fail to approve the
Agreement or Skaneateles fails to hold a stockholders' meeting to vote on the
Agreement, then (i) Section 2(a) clause (ii) hereof shall continue in effect as
to any plan or proposal received by Skaneateles from any person, entity or group
(other than BSB Bancorp or any affiliate thereof) prior to the termination of
the Agreement or within 240 days after such termination ("Plan or Proposal") and
(ii) Section 2(b) hereof shall continue in effect to preclude a sale (other than
pursuant to normal brokers transactions on the Nasdaq Stock Market), pledge
(other than to a bona fide financial institution or recognized securities
dealer), transfer or other disposition directly or indirectly to any such
person, entity or group in connection with any such Plan or Proposal, except
upon consummation of such Plan or Proposal.
5. Notices. Notices may be provided to BSB Bancorp and the Stockholders
in the manner specified in the Agreement, with all notices to the Stockholders
being provided to them at the addresses set forth at Schedule I.
6. Governing Law. This Stockholder Agreement shall be governed by the
laws of the State of Delaware, without giving effect to the principles of
conflicts of laws thereof.
2
<PAGE> 4
7. Counterparts. This Stockholder Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same and
each of which shall be deemed an original.
8. Headings. The Section headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Stockholder Agreement.
9. Regulatory Approval. If any provision of this Stockholder Agreement
requires the approval of any regulatory authority in order to be enforceable,
then such provision shall not be effective until such approval is obtained;
provided, however, that the foregoing shall not affect the enforceability of any
other provision of this Stockholder Agreement.
SIGNATURE PAGE FOLLOWS
IN WITNESS WHEREOF, BSB Bancorp, by a duly authorized officer, and each
of the Stockholders have caused this Stockholder Agreement to be executed and
delivered as of the day and year first above written.
BSB BANCORP, INC.
By: /s/ Alex S. DePersis
-------------------------------------------
Alex S DePersis
President and Chief Executive Officer
<TABLE>
<CAPTION>
STOCKHOLDERS:
<S> <C>
/s/ John P. Driscoll /s/ J. David Hammond
- --------------------------------------- -------------------------------
/s/ Raymond C. Traver, Jr. M.D. /s/ Anne E. O'Connor
- --------------------------------------- -------------------------------
/s/ Howard J. Miller /s/ David E. Blackwell
- --------------------------------------- -------------------------------
/s/ Israel Berkman /s/ Carl W. Gerst
- --------------------------------------- -------------------------------
/s/ Ann G. Higbee /s/ Walter D. Copeland
- --------------------------------------- -------------------------------
/s/ J. Daniel Mohr /s/ John Bernard Henry
- --------------------------------------- -------------------------------
/s/ Karen E. Lockwood /s/ William J. Welch
- --------------------------------------- -------------------------------
</TABLE>
<PAGE> 5
SCHEDULE I
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------- ---------------------------------------------------------------------
Number of Shares of Skaneateles Common Stock
Name and Address of Stockholder Beneficially Owned
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Direct Indirect Options/ Total
Warrants
Outstanding
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
John P. Driscoll 3,017 1,024.13 (ESOP) 49,400 53,441.13
4 West Lake Street
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
J. David Hammond 4,630.8987 732 (401k) 14,250 19,723.2287
231 Beach Road, RD #4 110.33 (ESOP)
Auburn, NY 13021
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Karen E. Lockwood 1,539 1,334.06 (ESOP) 6,000 8,873.06
RD#3, Route 326
Auburn, NY 13021
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
J. Daniel Mohr 231.9845 523.89 ESOP 5,400 6,318.3166
3427 Netherstone Ct. 162.4421 401(k)
Baldwinsville, NY 13027
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
William J. Welch 5,065.5326 2,501.97 9,675 17,242.5026
60 East Elizabeth Street
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Israel Berkman 3,434 0 3,000 6,434
101 Farmington Drive
Camillus, NY 13031
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
David E. Blackwell 3,071.0275 0 1,500 4,571.0275
80 West Lake Street
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Walter D. Copeland 0 1,987.7004 3,000 4,987.7004
223 Emann Drive (Revocable
Camillus, NY 13031 Living Trust)
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Carl W. Gerst, Jr. 6,507 0 3,000 9,507
115 East Genesee Street
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
John Bernard Henry, M.D. 3,943 0 3,000 6,943
4728 Amerman Road
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Ann G. Higbee 6,603.4526 0 3,000 9,603.4526
Sturdy Lane
3391 East Lake Road
Skaneateles, NY 13152
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Howard J. Miller 3,181 750 (by wife) 3,000 6,931
137 Northwood Way
Camillus, NY 13031
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Francis R. O'Connor 10,416 0 3,000 (*) 13,416
7646 Linkside Drive
Manlius, NY 13104
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
- --------------------------------------- ---------------- ----------------- ---------------- -----------------
Raymond C. Traver, Jr., M.D. 5,007.0104 6,075 (pension 3,000 14,868.0104
2637 East Lake Road plan)
Skaneateles, NY 13152 393 (for child)
393 (for child)
- --------------------------------------- ---------------- ----------------------------------------------------
Total 182,859.4288
---------------- -----------------
</TABLE>
(*) In name of Anne O'Connor.
