<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
___
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 000-24809
--------------------------------
FINGER LAKES FINANCIAL CORP.
----------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 16-1551047
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
(incorporation or organization) Identification Number)
470 EXCHANGE STREET, GENEVA, NEW YORK 14456
- ------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (315) 789-3838
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 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
--- ---
Number of shares outstanding of common stock
as of September 30, 1998
COMMON STOCK, $.01 PAR VALUE 3,570,000
---------------------------- ---------
Class Outstanding
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FINGER LAKES FINANCIAL CORP.
Form 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flow 5, 6
Consolidated Statements of Changes in Stockholders' Equity 7
Notes of Financial Statements 8 - 10
Earnings per Share Reconciliation 11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Item 3 - Quantitative & Qualitative Disclosure about
Market Risk 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17,18
Signatures 19
Index to Exhibits 20, 21
</TABLE>
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<PAGE> 3
Item 1 - Financial Statements
FINGER LAKES FINANCIAL CORP.
----------------------------
Consolidated Statements of Financial Condition
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
- ------
Cash and due from banks $ 2,933 4,394
Securities available for sale, at fair value 115,361 99,880
Securities held to maturity, fair value
of $7,085 at September 30, 1998 and
$14,136 at December 31, 1997 7,039 14,096
Loans 139,281 119,589
Less allowance for loan losses 1,243 1,149
--------- -------
Net loans 138,038 118,440
Accrued interest receivable 1,774 1,806
Federal Home Loan Bank Stock, at cost 2,474 2,071
Premises and equipment, net 4,591 3,650
Other assets 3,231 3,371
--------- -------
Total assets $ 275,441 247,708
========= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $ 203,942 186,534
Advances from Federal Home Loan Bank 46,445 36,721
Other borrowings 226 253
Other liabilities 2,403 2,521
--------- -------
Total Liabilities 253,016 226,029
--------- -------
Stockholders' Equity:
Preferred Stock; authorized 10,000,000
shares; issued and outstanding - none -- --
Common Stock, $.01 par value; 20,000,000
shares authorized; 3,570,000 shares at
September 30, 1998 and December 31, 1997,
issued and outstanding 36 36
Additional paid-in capital 4,738 4,676
Retained earnings 17,359 16,787
Accumulated other comprehensive income 518 433
Less - Unallocated shares of ESOP (226) (253)
--------- -------
Total stockholders' equity 22,425 21,679
--------- -------
Total Liabilities and Stockholders' Equity $ 275,441 247,708
========= =======
</TABLE>
See accompanying notes to financial statements
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FINGER LAKES FINANCIAL CORP.
----------------------------
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,802 2,210 7,959 6,252
Securities 1,882 1,759 5,715 5,205
Other 9 23 12 43
------------ ----- ----- -----
4,693 3,992 13,686 11,500
------------ ----- ----- -----
Interest expense:
Deposits 2,272 2,025 6,429 5,590
Borrowings 613 312 1,803 1,046
------------ ----- ----- -----
2,885 2,337 8,232 6,636
------------ ----- ----- -----
Net Interest Income 1,808 1,655 5,454 4,864
Provision for loan losses 60 30 180 120
------------ ----- ----- -----
Net interest income after provision
for loan losses 1,748 1,625 5,274 4,744
------------ ----- ----- -----
Other operating income:
Service charges 200 117 560 378
Net gain from sales of
securities & other assets 84 65 269 120
Other 11 (15) 37 8
------------ ----- ----- -----
295 167 866 506
------------ ----- ----- -----
Operating expenses:
Salaries and employee benefits 850 741 2,450 2,114
Office occupancy and equipment 310 208 873 614
Deposit insurance premiums 28 24 85 73
Professional fees 97 63 277 275
Data processing 26 60 71 163
Real estate owned 9 22 37 82
Other 351 353 1,074 951
------------ ----- ----- -----
1,671 1,471 4,867 4,272
------------ ----- ----- -----
Income before income taxes 372 321 1,273 978
Income taxes 142 128 501 391
------------ ----- ----- -----
Net income $ 230 193 772 587
============ ===== ===== =====
Earnings per common share - basic $ 0.06 0.05 0.22 0.16
============ ===== ===== =====
Earnings per common share - diluted $ 0.06 0.05 0.21 0.16
============ ===== ===== =====
</TABLE>
See accompanying notes to financial statements
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FINGER LAKES FINANCIAL CORP.
----------------------------
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Cash flows for operating activities:
Net Income $ 231 193 772 587
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 154 90 431 256
Amortization of loan fees,
discounts and premiums 83 35 236 141
Provision for losses on loans 60 30 180 120
Net gain from sale of
securities & other assets (85) (65) (269) (120)
Net loss (gain) from sale of REO (10) 15 (20) 18
Decrease/(increase) in accrued
interest receivable 224 (509) 32 (302)
Decrease/(increase) in other assets 205 169 59 (122)
Increase/(decrease) in other
liabilities (115) (773) (59) 188
-------- ------- ------- -------
Net cash provided by operating activities 747 (815) 1,362 766
-------- ------- ------- -------
Cash flow from investing activities:
Proceeds from maturities of and
principal collected on securities
available for sale 6,616 3,688 21,266 9,482
Proceeds from maturities of and
principal collected on securities
held to maturity -- 1,000 7,700 3,050
Proceeds from sales of securities
available for sale 16,557 11,078 42,668 23,865
Purchase of securities available for
sale (34,941) (23,600) (79,915) (43,892)
Purchase of securities held to maturity -- -- -- (3,997)
Loans to customers (25,178) (9,093) (55,568) (28,002)
Loans purchased (216) (924) (385) (1,598)
Loans sold 10,384 1,170 14,134 2,573
Principal collected on loans 10,149 2,175 21,946 10,411
Proceeds from sale of real estate owned 14 9 175 137
Purchase of FHLB stock -- -- (403) (285)
Purchase of premise and equipment, net (440) (853) (1,372) (1,853)
-------- ------- ------- -------
Net cash used in investing activities (17,055) (15,350) (29,754) (30,109)
-------- ------- ------- -------
</TABLE>
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FINGER LAKES FINANCIAL CORP.
----------------------------
Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows for financing activities:
Net increase (decrease) in savings
and demand accounts $ 2,836 103 (202) 12,889
Net increase in time deposits 13,594 9,191 17,609 16,989
Net advances (repayments) from FHLB 174 1,329 9,724 (3,363)
Principal payments of ESOP debt (9) (17) (27) (50)
Release of unallocated ESOP common
stock 9 17 27 50
Common stock dividends (71) (59) (200) (177)
-------- ------- ------- -------
Net cash provided by financing
activities 16,533 10,564 26,931 26,338
-------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents 225 (5,601) (1,461) (3,005)
-------- ------- ------- -------
Cash and cash equivalents at beginning
of period 2,708 8,962 4,394 6,366
-------- ------- ------- -------
Cash and cash equivalents at end of
period $ 2,933 3,361 2,933 3,361
======== ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the
period for:
Interest 2,766 2,485 8,025 6,721
Income taxes 120 90 435 260
Non-cash investing activities:
Change in net unrealized gain
on securities available for (92) 61 85 429
sale
Transfer of loans to real estate owned 76 32 233 53
</TABLE>
See accompanying notes to financial statements
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FINGER LAKES FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional Accumulated Other
Common Paid - in Retained Comprehensive Unallocated
Stock Capital Earnings Income Shares of ESOP Total
------ ---------- -------- ------ -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $36 4,676 16,787 433 (253) 21,679
--- ----- ------ ---- ---- ------
Comprehensive:
Net income -- -- 772 -- -- 772
Other comprehensive income, net of tax
Unrealized gains
(losses) on securities, net of
reclassification adjustment -- -- -- 85 -- 85
--- ----- ------ ---- ---- ------
Total Comprehensive income -- -- 772 85 -- 857
--- ----- ------ ---- ---- ------
Allocation of shares under ESOP -- 62 -- -- 27 89
Cash dividends declared* -- -- (200) -- -- (200)
--- ----- ------ ---- ---- ------
Balance at September 30, 1998 $36 4,738 17,359 518 (226) 22,425
=== ===== ====== ==== ==== ======
Disclosure of reclassification adjustments
- ------------------------------------------
Unrealized holding gains arising during period $130
Less: reclassification adjustment for gains included in net income, net of tax (45)
----
Net unrealized gains (losses) on securities $ 85
=====
</TABLE>
*Finger Lakes Financial Corporation, M.H.C., which owned 2,389,948 shares of
stock in the Company, waived receipt of its dividend thereby reducing the actual
dividend payment to the amount shown above. The amount of dividends waived by
the mutual holding company were $406,300 for the nine months ended September 30,
1998.
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FINGER LAKES FINANCIAL CORP.
PART I: NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, in
the opinion of management, all adjustments consisting of only normal
recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the
three and nine months ended September 30, 1998 and 1997. The results of
operations for the nine month period ended September 30, 1998 are not
necessarily indicative of the results which may be expected for an
entire fiscal year.
(2) PLAN OF REORGANIZATION
----------------------
A reorganization into a two-tier mutual holding company structure (the
"Reorganization") was accomplished on August 17, 1998 under the
Agreement and Plan of Reorganization (the "Plan of Reorganization"),
which was unanimously adopted by the Board of Directors on December 15,
1997 and approved by the shareholders on April 23, 1998. Pursuant to
the Plan of Reorganization, Savings Bank of the Finger Lakes, FSB (the
"Savings Bank"), the prior reporting company, became a wholly-owned
subsidiary of Finger Lakes Financial Corp. (the "Company"), a newly
formed stock corporation which is majority owned by Finger Lakes
Financial Corp., M.H.C. (the "Mutual Holding Company"). All references
in this document to the Company include activities of both Finger Lakes
Financial Corp. and Savings Bank of the Finger Lakes. In the
Reorganization, each outstanding share of the Savings Bank Common Stock
was converted into one share of the common stock, par value $.01 per
share, of the Company ("Holding Company Common Stock"), and the holders
of Savings Bank Common Stock became the holders of all of the
outstanding shares of Holding Company Common Stock. The Company was
incorporated solely for the purpose of becoming a savings and loan
holding company and has no prior operating history. The Reorganization
had no impact on the operations of the Savings Bank or the Mutual
Holding Company. The Savings Bank has continued its operations at the
same locations, with the same management, and subject to all the
rights, obligations and liabilities of the Saving Bank existing
immediately prior to the Reorganization.
(3) EARNINGS PER SHARE
------------------
The Company adopted Statement of Financial Accounting Standards (SFAS
No. 128), Earnings Per Share in 1997. SFAS No. 128 supersedes APB
Opinion No. 15, Earnings Per Share (APB 15) and specifies the
computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock. SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS and fully diluted EPS with diluted
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Net income per share for
the prior periods was restated after the effective date of this
statement . The adoption of SFAS No. 128 did not have a material impact
on the Company's financial statements.
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<PAGE> 9
Basic net income per share for the three and nine month periods ended
September 30, 1998 and 1997 was computed by dividing net income by the
weighted average number of total common stock shares outstanding during
the period and contingently issuable shares. Diluted net income per
share reflects the effects of common stock issuable upon exercise of
dilutive options and stock grants.
(4) STOCK SPLIT
-----------
On January 20, 1998, the Board declared a two-for-one stock split in
the form of a 100% common stock dividend payable March 2, 1998 to
stockholders of record as of February 13, 1998. The stock split
increased the Company's outstanding common shares from 1,785,000 to
3,570,000 shares. All references in the financial statements and notes
thereto to number of shares, per-share amounts and stock option and
stock grant data and fair value of the Company's common stock have been
restated giving retroactive recognition to the stock split.
(5) DIVIDENDS
---------
On January 6, 1998, the Company notified the OTS of its intention to
make capital distributions to its stockholders in the form of cash
dividends of up to $.08 per share per quarter for the four-quarter
period beginning with the quarter ended December 31, 1997. On the same
date, Finger Lakes Financial Corporation, M.H.C. notified the OTS of
its intention to waive dividends on its shares of the Company's common
stock for the same four-quarter period. The Company declared a regular
cash dividend of $.06 per share on October 19, 1998 payable November
10, 1998 to stockholders of record October 31, 1998.
(6) IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
Effective January 1, 1998 the Savings Bank adopted the remaining
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which relates to
the accounting for securities lending, repurchase agreements, and other
secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, did not have a material impact on the
Savings Bank. In addition, the FASB is considering certain amendments
and interpretations of SFAS No. 125 which, if enacted in the future,
could affect the accounting for transactions within their scope.
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries
to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income represents
net income plus other comprehensive income, which consist of the net
change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of
the balance sheet dates. Comprehensive income for the three-month
periods ended September 30, 1998 and 1997 was $625,000 and $254,000,
respectively. Comprehensive income for the nine month periods ended
September 30, 1998 and 1997 was $857,000 and $1,016,000, respectively.
During the first quarter of 1998 the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which revises the requirements for
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<PAGE> 10
disclosing segment data. The new standard has not resulted in
significant changes in the Company's reporting.
The Financial Accounting Standards Board (FASB) issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement
Benefits" in February 1998. This statement revises employers'
disclosures about pension and other post retirement benefit plans. It
does not change the measurement or the recognition of these plans. The
statement is effective for the Company in 1998 and will not impact its
financial position or results of operations.
In June 1998, the FASB issued 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 the Company
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
beginning January 1, 2000 for calendar year companies. Earlier
adoption, however, is permitted. At the present time, the Company has
not fully analyzed the effect or timing of the adoption of SFAS 133 on
its consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", which
amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities". This statement conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a
mortgage banking enterprise with the subsequent accounting for
securities retained after securitization of other types of assets by a
non-mortgage banking enterprise. This statement is effective for the
first quarter beginning on January 1, 1999. This statement will not
have any impact on the Company's financial position or results of
operations as the Company does not currently securitize mortgage loans.
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(7) EARNINGS PER SHARE RECONCILIATION
---------------------------------
The following table is a reconciliation of the numerator and
denominator used in calculating the Company's basic and diluted
earnings per share, (unaudited/in thousands, except earnings per
share):
<TABLE>
<CAPTION>
-------------------------------------1998---------------------------------
3rd Quarter 3rd Quarter Year to Date Year to Date
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net Income $ 230 230 772 772
------ ----- ----- -----
Weighted average shares 3,570 3,570 3,570 3,570
Contingently issuable shares 7 7 7 7
Stock options --- 44 --- 48
Stock grants --- 40 --- 38
------ ----- ----- -----
Total weighted average shares,
options and grants 3,577 3,660 3,577 3,663
====== ===== ===== =====
Earnings Per Share $ 0.06 0.06 0.22 0.21
====== ===== ===== =====
-------------------------------------1997---------------------------------
3rd Quarter 3rd Quarter Year to Date Year to Date
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net Income $ 193 193 587 587
------ ----- ----- -----
Weighted average shares 3,570 3,570 3,570 3,570
Contingently issuable shares 5 5 3 3
Stock options --- 23 --- 11
Stock grants --- 25 --- 27
------ ----- ----- -----
Total weighted average shares,
options and grants 3,575 3,623 3,573 3,611
====== ===== ===== =====
Earnings Per Share $ 0.05 0.05 0.16 0.16
====== ===== ===== =====
</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
CHANGES IN FINANCIAL CONDITION
- ------------------------------
At September 30, 1998, the Company's total assets, liabilities and stockholders'
equity amounted to $275.4 million, $253.0 million, and $22.4 million,
respectively, compared to $247.7 million, $226.0 million and $21.7 million,
respectively, at December 31, 1997. Total assets increased $27.7 million or
11.2% during the nine month period ended September 30, 1998. This increase was
due primarily to a $19.7 million increase in the Company's loan portfolio and an
$8.4 million increase in investment securities. During the nine month period
ended September 30, 1998 the Company originated and
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<PAGE> 12
purchased $56.0 million in loans, offset by loan principal payments and loan
sales of $36.1 million. Investment securities amounted to $122.4 million at
September 30, 1998, an increase of $8.4 million or 7.4% from December 31, 1997.
The Company's mortgage backed securities portfolio is included in investment
securities and amounted to $79.9 million at September 30, 1998, a net increase
of $8.1 million from December 31, 1997.
The Company is currently selling all newly originated fixed rate residential
mortgage loans and retaining servicing. This represents a change in portfolio
strategy implemented during the third quarter of 1998. Previously the Company's
policy was to retain in portfolio fixed rate residential mortgage loans with
maturities of fifteen years or less. Also, during the third quarter the Company
sold all existing fixed rate residential mortgage loans with maturities greater
than twenty years.
At September 30, 1998, fixed assets amounted to $4.6 million, a net increase of
$941,000 from December 31, 1997. This reflects the Company's continuing
investment in new branch facilities and technology.
At September 30, 1998, the Company's allowance for loan losses amounted to
$1,243,000 as compared to $1,149,000 at December 31, 1997. The Company's
allowance for loan losses at September 30, 1998 represented approximately .89%
of the total gross loan portfolio. At September 30, 1998 non-performing loans
amounted to $1,054,000 as compared to $564,000 as of December 31, 1997. Real
estate owned amounted to $191,000 at September 30, 1998 as compared to $150,000
as of December 31, 1997.
Total liabilities increased $27.0 million or 11.9% during the nine-month period
ended September 30, 1998. Federal Home Loan Bank ("FHLB") advances at September
30, 1998 amounted to $46.4 million, an increase of $9.7 million or 26.5% from
December 31, 1997. This reflects a continuation of the Bank's strategy of using
funding sources other than retail deposits to support asset growth. Deposits
amounted to $203.9 million at September 30, 1998, an increase of $17.4 million,
reflecting the opening of a new branch office in Canandaigua, New York. Deposit
accounts subject to daily repricing (passbook, money market deposit and NOW
accounts) decreased by $202,000 while time deposit account balances increased by
$17.6 million during the nine month period ended September 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
- -------------------------------------
The Company recorded net income of $230,000 for the three month period ended
September 30, 1998 as compared to net income of $193,000 for the three month
period ended September 30, 1997.
The Company's net interest income is determined by its interest rate spread
(i.e. the difference between the yields earned on its interest-bearing assets
and the rates paid on its interest-bearing liabilities) and the relative amounts
of interest-earning assets and interest-bearing liabilities. Total interest
income increased by $701,000 or 17.6%, to $4.7 million for the three months
ended September 30, 1998 as compared to the three months ended September 30,
1997 and total interest expense increased by $548,000 or 23.4%, to $2.9 million
for the three months ended September 30, 1998 as compared to the three months
ended September 30, 1997, resulting in a net increase in net interest income of
$153,000 or 9.2%. This increase in net interest income is primarily the result
of the Company's current strategy of generating asset growth through increased
loan production while controlling funding costs.
Provision for loan losses was $60,000 and $30,000 for the three month periods
ended September 30, 1998 and September 30, 1997, respectively, reflecting
management's estimation of additions required to maintain an overall loan loss
allowance adequate for the risk in the loan portfolio.
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<PAGE> 13
Other operating income increased by $128,000 or 76.6%, to $295,000 for the three
month period ended September 30, 1998, as compared to the three month period
ended September 30, 1997. Service charges increased $83,000 or 70.9%, reflecting
increased income from the sale of investment products, as well as from new fee
structures within the automated teller machine activity. Gains on sale of
securities and other assets increased by $19,000.
Operating expenses increased by $200,000 or 13.6%, to $1.7 million for the three
month period ended September 30, 1998, as compared to the three-month period
ended September 30, 1997. This increase consisted primarily of an increase in
salaries and benefits expense of $109,000 and an increase in office occupancy
and equipment expense of $102,000. Increases in salaries and benefits expense
and office occupancy and equipment expense relate primarily to a new branch
office which opened in the second quarter of 1998.
Professional fees increased by $34,000 or 53.9%, to $97,000, relating primarily
to an increase in legal fees relating to ongoing collection efforts. Data
processing expenses decreased $34,000 or 56.7%. This decrease is due to the
Company's decision to convert its core-processing of all customer accounts from
a service bureau to a new in-house system during the third quarter of 1997.
Income tax expense of $142,000 was recorded for the three months ended September
30, 1998, based on net income before taxes of $372,000, and income tax expense
of $128,000 was recorded for the three months ended September 30, 1997, based on
net income before taxes of $321,000. The Company's effective rates amounted to
38.2% and 39.9% for the three months ended September 30, 1998 and 1997
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1998
- ------------------------------------
The Company recorded net income of $772,000 for the nine month period ended
September 30, 1998 as compared to net income of $587,000 for the nine month
period ended June 30, 1997. This represents an increase of 31.5% or $185,000.
The Savings Bank's total interest income for the nine month period ended
September 30, 1998 was $13.7 million, as compared to $11.5 million for the same
period last year. This increase of $2.2 million is due primarily to the
increased volumes in loan production during the first nine months of 1998.
Total interest expense for the nine month period ended September 30, 1998 was
$8.2 million, as compared to $6.6 million for the same period last year.
Interest expense for deposits increased $839,000 or 15.0%, while interest
expense for borrowed funds increased $757,000 or 72.4%. This increased interest
expense for borrowed funds relates directly to the increased levels of Federal
Home Loan Bank advances maintained by the Company.
Net interest income for the nine month period ended September 30, 1998 was $5.5
million, as compared to $4.9 million for the same period last year. This
increase of $600,000 is reflective of the Company's current strategy of
continued asset growth offset by lower cost funding sources.
Provision for loan losses was $180,000 and $120,000 for the nine months ended
September 30, 1998 and 1997 respectively, reflecting management's estimation of
additions required to maintain an overall loan loss allowance adequate for the
risk in the loan portfolio.
Other operating income was $866,000 for the nine months ended September 30,
1998, as compared to $506,000 for the same period last year, an increase of
$360,000 or 71.1%. Net gains on sale of securities were $75,000 for the first
nine months of 1998, a decrease of $5,000 from the same period in 1997.
-13-
<PAGE> 14
Service charges totaled $560,000 for the nine months ended September 30, 1998,
as compared to $378,000 for the same period last year. This increase reflects
increased service charges on deposit accounts and insufficient funds charges, as
well as an overall increase in the number of checking accounts serviced. Income
from the sale of investment products increased to $121,000, up $67,000 from the
same period last year.
Operating expenses for the nine month periods ended September 30, 1998 and
September 30, 1997 were $4.9 million and $4.3 million respectively. This
increase of $600,000 or 14.0% is primarily due to increased salary and employee
benefits costs of $336,000, relating to the opening of a new branch office in
Ithaca, New York during the third quarter 1997, and the opening of a new branch
office in Canandaigua, New York during the second quarter of 1998. Also related
to the new branch offices is increased office occupancy and equipment expenses
of $259,000. Data processing expenses for the nine month period ended September
30, 1998 were $71,000 as compared to $163,000 for the same period last year, a
decrease of 92,000 or 56.4%. This is due the Company's decision to convert its
core-processing of all customer accounts from a service bureau to a new in-house
system during the third quarter of 1997. Other operating expenses were $1.1
million for the nine month period ended September 30, 1998, as compared to
$951,000 for the same period last year, an increase of $123,000 or 12.9%. This
increase is due in part to an increase in loan servicing fees of $25,000,
relating to a bulk loan purchase in December 1997. In addition, the increase in
operating expenses can be attributed to an increase in training expenses of
$20,000, for the nine month period ended September 30, 1998 as compared to the
same period last year. The reflects the Company's commitment to a company wide
training initiative begun in the fourth quarter 1997.
Income tax expense of $501,000 was recorded for the nine months ended September
30, 1998, based on net income before taxes of $1.3 million, and income tax
expense of $391,000 was recorded for the nine months ended June 30, 1997, based
on net income before taxes of $978,000. The Savings Bank's effective tax rates
amounted to 39.4% and 40.0% for the nine months ended September 30, 1998 and
1997 respectively.
YEAR 2000 ISSUE - Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming changes in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
In September 1997, the Company converted its core processing for all customer
accounts to a new in-house system which is Year 2000 compliant. During 1997 a
project plan for dealing with Year 2000 issues was developed and presented to
the Board of Directors. This plan requires the assessment of all identifiable
Year 2000 risks to the Company, relating both to in-house systems and third
party relationships. The assessment phase of this plan has been completed.
During the assessment phase, the Company identified all in-house systems and
third party relationships, and assessed whether they were "mission-critical". A
Mission-critical System is defined as an application or a system that is vital
to the successful continuance of a core business activity. The assessment
includes both information technology systems and non-information technology
systems. Examples of non-information technology systems include utility and
telephone companies, security systems, and correspondent financial
organizations. Also included in the assessment is the identification of those
systems and vendors over whom the Company has control and those over whom the
Company does not. Examples of those vendors over whom the Company has control
include organizations which the Company has a contractual outsourcing
relationship with. For example, check processors. Utility companies represent
organizations outside company control.
-14-
<PAGE> 15
The Company has identified 22 mission-critical areas, and 67 non
mission-critical areas. Of the mission-critical vendors, ten appear to be Year
2000 compliant. Of the non mission-critical areas, eleven appear to be Year 2000
compliant. The Company is continuing its efforts to concentrate on the
mission-critical elements of its operations.
During 1998, the Company conducted an assessment of the computer hardware
currently in place in each of its locations. The assessment included testing of
all computers for Year 2000 compliance. All but a few of the computers tested
positive as being compliant, and those which did not have been replaced or
modified. The cost associated with this assessment was approximately $30,000,
and was expensed as incurred. The incremental cost to the Company of achieving
Year 2000 compliance has been estimated to be $110,000 for 1999.
The Company has a test plan in place, which identifies groups of systems
according to whether they are internal or external, mission-critical or not, and
whether the Company has control over the systems. This plan was presented to and
approved by the board of directors. The plan includes the following:
- - testing of mission-critical internal systems to be completed by
December 31, 1998,
- - commence testing of mission-critical external systems by January 1, 1999
to be completed by March 31, 1999,
- - commence testing of systems in which the Company has a material interest
by March 31, 1999 to be completed by June 30, 1999,
- - prepare contingency plans as needed, based on results from systems over
which the Company has control and that are deemed mission critical.
The estimated costs and the timing of achieving compliance are management's best
estimates based on current assessments, the cost and availability of trained
personnel, and of third party resources. The estimated costs and timing are also
dependent upon the success of suppliers in delivering compliant products and
services to the Company. There can be no guarantee that future results will not
be materially different from the plan.
FORWARD-LOOKING STATEMENTS - This report and the documents incorporated herein
by reference may contain forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and assumptions made by management. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seems", "estimates",
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to forecast. Therefore, actual results may differ materially from
those expressed or forecast in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information or otherwise.
-15-
<PAGE> 16
ITEM 3 - QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. The Company does not
currently have a trading portfolio or use derivatives to manage market and
interest rate risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. The committee, comprised of senior management, has developed policies
to measure, manage, and monitor interest rate risk. Interest rate risk arises
from a variety of factors, including differences in the timing between the
contractual maturity or repricing of the Company's assets and liabilities. For
example, the Company's net interest income is affected by changes in the level
of market interest rates as the repricing characteristics of its loans and other
assets do not necessarily match those of its deposits, other borrowings and
capital.
The OTS requires the Company to measure interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on NPV
of sudden and sustained 1% to 4% increases and decreases in market interest
rates. The Company's board of directors has adopted an interest rate risk policy
which establishes maximum decreases in estimated NPV in the event of 1%, 2%, 3%
and 4% increases and decreases in market interest rates, respectively. The
following tables set forth those limits and certain calculations, based on
information provided to the Company by the OTS, with respect to the sensitivity
of NPV to changes in market interest rates at June 30, 1998.
<TABLE>
<CAPTION>
CHANGE IN CHANGE IN NPV
MARKET INTEREST RATES Policy Limit Computation
------------ -----------
<S> <C> <C> <C>
+4% -60% -38%
+3% -45 -26
+2% -30 -15
+1% -20 -5
0% 0 0
-1% -20 +3
-2% -30 +5
-3% -45 +7
-4% -60 +10
</TABLE>
-16-
<PAGE> 17
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
-----------------
In December 1997, Savannah Bank, N.A. ("Savannah") commenced a
suit in New York State Supreme Court, Monroe County, against
the Company and the individual members of its Board of
Directors, relating to the fact that the Company hired two
loan officers from Savannah. The claims alleged the use of
trade secrets by Savannah's former employees, solicitation of
their customers and violation of restrictive employee
covenants among other claims. The action requested injunctive
relief of compensatory damages in the total amount of $17
million and punitive damages of $34 million. On September 2,
1998, the court granted the Company's motion for summary
judgment and dismissed Savannah Bank's compliant in its
entirety. Savannah Bank has filed an appeal with the Appellate
Division, Fourth Judicial Department. In the opinion of
management, after consultation with legal counsel, the claims
are without merit and the ultimate disposition of this matter
is not expected to have a material adverse effect on the
financial condition of the Company.
Item 2 Changes in Securities and Use of Proceeds
-----------------------------------------
Not Applicable
Item 3 Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
See Index to Exhibits.
b) Reports on Form 8-K
On July 16, 1998, the Company filed a current report on
Form 8-K, dated July 16, 1998, reporting, pursuant to item
5 of such report, a press release announcing second
quarter 1998 results.
On July 21, 1998, the Company filed a current report on
Form 8-K, dated July 21, 1998, reporting, pursuant to item
5 of such report, a press release announcing a dividend
declaration for the quarter ended June 30, 1998.
-17-
<PAGE> 18
On August 14, 1998, the Company filed a current report on
Form 8-K, dated August 14, 1998, reporting, pursuant to
item 1 of such report, the Reorganization described in
note (2) to the financial statements included in Part I,
item 1 of this report.
On August 17, 1998, as amended September 10, 1998, the
Company filed a current report on Form 8-K, dated
September 10, 1998, reporting, pursuant to item 5 of such
report, a press release announcing the completion of such
reorganization.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 1998 By: /s/ G. Thomas Bowers
---------------------------
G. Thomas Bowers
President and Chief
Executive Officer
Date: November 12, 1998 By: /s/ Terry L. Hammond
---------------------------
Terry L. Hammond
Sr. Vice President and
Chief Financial Officer
-19-
<PAGE> 20
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
(a) Agreement and Plan of Reorganization among Savings Bank of
the Finger Lakes, FSB, Finger Lakes Financial Corp., and
Finger Lakes Interim Savings Bank. (3)
(3) (I) ARTICLES OF INCORPORATION
(a) Stock Charter of Savings Bank of the Finger Lakes,
FSB (1)
(b) Federal Stock Charter of Finger Lakes Financial
Corp. (3)
(II) BY-LAWS
(a) Stock By-laws of Savings Bank of the Finger Lakes,
FSB (1)
(b) Bylaws of Finger Lakes Financial Corp.(3)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
(i) The documents listed under Items (2) and (3) of this Index
are incorporated herein by reference.
(ii) Stock Certificate of the Registrant. (3)
(10) MATERIAL CONTRACTS
(A) Employee Stock Ownership Plan and Trust of the Registrant. (1)
(B) Employment Agreement between the Registrant and G. Thomas
Bowers. (1)
(C) Savings Bank of the Finger Lakes, FSB 1996 Stock Option Plan
and Amendment No. 1 Thereto (2)
(D) Savings Bank of the Finger Lakes, FSB 1996 Management
Recognition Plan (2)
(E) Modified Supplemental Pension Agreement, as amended, between
the Registrant and Ralph E. Springstead (2)
(F) Modified Supplemental Pension Agreement between the
Registrant and G. Thomas Bowers (2)
(G) Agreement between the Registrant and Terry L. Hammond (2)
(H) Agreement between the Registrant and Thomas A. Mayfield (2)
-20-
<PAGE> 21
(11) STATEMENT RE-COMPUTATION OF PER SHARE EARNINGS
Not applicable
(15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Not applicable
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not applicable
(19) REPORT FURNISHED TO SECURITY HOLDERS
Not applicable
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY
HOLDERS
Not applicable
(23) CONSENTS OF EXPERTS AND COUNSEL
Not applicable
(24) POWER OF ATTORNEY
Not applicable
*(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS
Not applicable
* Exhibits Filed with this Report.
(1) Exhibit is incorporated herein by reference to the Application for
Approval of a Minority Stock Issuance by a Savings Association
Subsidiary of a Mutual Holding Company on Form MHC-2 filed by the
Registrant with the Office of Thrift Supervision on December 17, 1993,
as amended.
(2) Exhibit is incorporated by reference to the form 10-K for the year
ended December 31, 1997 filed by the Registrant with the Office of
Thrift Supervision on March 25, 1998.
(3) Exhibit is incorporated by reference to the form 8-K dated August 14,
1998 filed by the Registrant with the commission on August 14, 1998.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,933
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,361
<INVESTMENTS-CARRYING> 7,039
<INVESTMENTS-MARKET> 7,085
<LOANS> 139,281
<ALLOWANCE> 1,243
<TOTAL-ASSETS> 275,441
<DEPOSITS> 203,942
<SHORT-TERM> 7,400
<LIABILITIES-OTHER> 2,403
<LONG-TERM> 39,271
0
0
<COMMON> 36
<OTHER-SE> 22,389
<TOTAL-LIABILITIES-AND-EQUITY> 275,441
<INTEREST-LOAN> 2,802
<INTEREST-INVEST> 1,882
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 4,693
<INTEREST-DEPOSIT> 2,272
<INTEREST-EXPENSE> 2,885
<INTEREST-INCOME-NET> 1,808
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 84
<EXPENSE-OTHER> 1,671
<INCOME-PRETAX> 372
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<YIELD-ACTUAL> 7.37
<LOANS-NON> 1,054
<LOANS-PAST> 0
<LOANS-TROUBLED> 126
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,191
<CHARGE-OFFS> 43
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,243
<ALLOWANCE-DOMESTIC> 653
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 590
</TABLE>
