<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Year Ended December 31, 1998
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 I.D. No.)
incorporation or organization)
470 Exchange Street, Geneva, New York
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (315) 789-3838
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 $.01
---------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer, based upon the closing price of its Common Stock
on March 22, 1999, as quoted on the Nasdaq Stock Market, was approximately
$12,930,839. Solely for purposes of this calculation, the shares held by
directors and executive officers of the registrant are deemed to be shares held
by affiliates.
As of March 22, 1999, there were issued and outstanding 3,570,000 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
(Part III).
<PAGE> 2
INDEX
PART I PAGE
----
Item 1. Description of Business 1
Item 2. Description of Properties 28
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market for Common Equity and Related Stockholders
Matters 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk 37
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 67
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners
and Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 69
SIGNATURES 71
<PAGE> 3
PART I
Item 1. Description of Business
The Stock Holding Company and The Bank
The Savings Bank of the Finger Lakes, FSB (the "Bank") was formed as the
result of a merger consummated in 1984 in which Geneva Savings Bank, a New
York-chartered savings bank, acquired Geneva Federal Savings and Loan
Association, a federal savings and loan association, and converted to a federal
savings bank known as the Savings Bank of the Finger Lakes, FSB. Both
institutions had conducted their business primarily in the Geneva, New York
area.
On November 10, 1994, the Bank completed a reorganization from a federally
chartered, mutual savings bank to a federally chartered mutual holding company
known as Finger Lakes Financial Corporation, M.H.C. (the "Mutual Holding
Company"). As part of the reorganization, the Bank organized a federally
chartered stock savings bank and transferred substantially all of its assets and
liabilities, including all of its deposit-taking, lending and other banking
functions and its corporate name to the newly created stock savings bank called
the Savings Bank of the Finger Lakes, FSB in exchange for 2,389,948 shares of
common stock. Concurrent with the reorganization, the Bank sold 1,180,052 shares
of common stock, in a public offering.
A reorganization into a two-tier holding company structure (the
"Reorganization") was accomplished on August 17, 1998 under the Agreement and
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. In the
Reorganization, the 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 the Mutual Holding Company. In the
Reorganization, each outstanding share of the Bank Common Stock was converted
into one share of the common stock, par value $.01 per share, of the Company
("Company Common Stock"), and the holders of Bank Common Stock became the
holders of all of the outstanding shares of Company Common Stock. The Company
was incorporated solely for the purpose of becoming a savings and loan holding
company and had no prior operating history. The Reorganization had no impact on
the operations of the Bank or the Mutual Holding Company. The Bank has continued
its operations at the same locations, with the same management, and subject to
all the rights, obligations and liabilities of the Bank existing immediately
prior to the Reorganization.
All references in this document to the Company include activities of both
Finger Lakes Financial Corp. and Savings Bank of the Finger Lakes.
The Company's executive offices are located at 470 Exchange Street,
Geneva, New York 14456. Its telephone number is (315) 789-3838.
The Mutual Holding Company
The Company is a majority-owned subsidiary of the Mutual Holding Company.
Pursuant to OTS regulations governing mutual holding companies, the Mutual
Holding Company must at all times own more than 50% of the outstanding voting
stock of the Company. As the majority owner of the Company, the Mutual Holding
Company elects directors who oversee the affairs and operations of the Company.
The Mutual Holding Company currently does not engage in any business activity
other than to hold the majority of Company Common Stock and to invest a small
amount of funds retained at the Mutual Holding Company. At December 31, 1998,
the Mutual
1
<PAGE> 4
Holding Company's assets consisted of a majority ownership interest in the
Company and $213,255 in cash. The Mutual Holding Company had no liabilities at
December 31, 1998.
Business Strategy
The Company is a community-oriented savings association providing mortgage
loans and other traditional financial services to its local community. The
Company is primarily engaged in attracting deposits from the general public
through its offices and using those and other available sources of funds to
originate loans secured by single-family residences (one-to-four family units)
primarily located in Ontario, Seneca and Tompkins counties, where the Company's
offices are located, as well as the neighboring counties of Yates and Wayne. The
Company also originates other loans secured by multi-family and commercial real
estate, single-family residential construction loans, home equity and property
improvement loans, consumer loans, commercial business loans and mobile home
loans.
The Company's primary lending emphasis has been the origination for
portfolio of single-family residential mortgage loans and home equity and
property improvement loans secured by single-family residences. The Company is
currently selling substantially all newly originated fixed rate residential
mortgage loans and retaining the servicing of such loans. 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 of 1998 the Company sold substantially all existing
fixed rate residential mortgage loans with maturities greater than twenty years.
The Company generally limits its lending activities, except with respect to
mobile home loans, to western New York with an emphasis on lending in Ontario,
Seneca, Tompkins and Wayne counties. The Company believes that it has a
substantial market share in Ontario County and competitive market shares in the
other counties in its primary market area, both with respect to deposits and
loans. The Company generally limits its non-residential real estate loans to the
western New York market area and generally does not lend outside New York with
respect to mobile home loans. The Company does not engage in securities trading
and limits its investments to U.S. Treasury and federal government agency
obligations, mortgage-backed securities, which are insured by federal agencies,
collateralized mortgage obligations, and equity securities.
Market Area
The Company currently conducts business through its six offices located in
the western and central New York State counties of Ontario, Seneca and Tompkins.
In June 1998, the Company established a branch office location in Canandaigua,
New York. Geneva, New York, where the Company is headquartered, is located in
the eastern end of Ontario County and has a population of approximately 14,000.
The Company's market area is mainly rural with employment based primarily in
service industries, and small manufacturing concerns, which have experienced
little growth in recent years, and agricultural operations. Approximately 50% of
the market area's labor force is employed in traditional white collar jobs. The
two largest employers in Geneva are Hobart and William Smith Colleges and Geneva
General Hospital. The largest employer in Seneca County is ITT Fluid Technology.
The largest employer in Tompkins County is Cornell University.
2
<PAGE> 5
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollar and rates, and the net interest margin. Dividends
received are included as interest income. All average balances are based on
month-end balances.
<TABLE>
<CAPTION>
At December 31, 1998 Year Ended December 31, 1998 Year Ended December 31, 1997
-------------------- ---------------------------- ----------------------------
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate Balance Interest Rate
------- ---- ------- -------- ---- ------- -------- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net (1) $145,136 7.98% $131,124 $10,821 8.25% $98,842 $8,587 8.69%
Securities (2) 122,913 6.54% 119,939 7,810 6.51% 110,106 7,205 6.54%
Money market investments -- -- 293 14 4.78% 788 47 5.96%
-------- -------- ------- -------- ------
Total interest-earning
assets 268,049 7.32% 251,356 18,645 7.42% 209,736 15,839 7.55%
-------- -------- ------- -------- ------
Non-interest-earning assets 14,327 12,036 9,625
-------- -------- --------
Total assets $282,376 $263,392 $219,361
======== ======== ========
Interest-bearing
liabilities:
Deposits $202,434 4.36% $193,227 $8,678 4.49% $171,993 $7,738 4.50%
Borrowed funds 54,815 5.41% 45,771 2,523 5.51% 25,127 1,458 5.80%
-------- -------- ------- -------- ------
Total interest-bearing
Liabilities 257,249 4.59% 238,998 11,201 4.69% 197,120 9,196 4.67%
-------- -------- ------- -------- ------
Non-interest-bearing
Liabilities 3,163 2,369 1,312
-------- -------- --------
Total liabilities 260,412 241,367 198,432
-------- -------- --------
Stockholders' equity 21,964 22,025 20,929
-------- -------- --------
Total liabilities and
stockholders' equity $282,376 $263,392 $219,361
======== ======== ========
Net interest income $7,444 $6,643
======= ======
Interest rate spread 2.73% 2.73% 2.88%
Net interest margin (3) 2.96% 3.17%
Average interest-earning
assets to average interest-
bearing liabilities 104.20% 105.12% 106.40%
<CAPTION>
Year Ended December 31, 1996
----------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
(In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans, net (1) $86,069 $7,765 9.02%
Securities (2) 88,704 5,703 6.43%
Money market investments 1,619 92 5.68%
-------- ------
Total interest-earning
assets 176,392 13,560 7.69%
-------- ------
Non-interest-earning assets 10,945
--------
Total assets $187,337
========
Interest-bearing
liabilities:
Deposits $147,800 $6,452 4.37%
Borrowed funds 17,552 917 5.22%
-------- ------
Total interest-bearing
Liabilities 165,352 7,369 4.46%
-------- ------
Non-interest-bearing
Liabilities 1,651
--------
Total liabilities 167,003
--------
Stockholders' equity 20,334
--------
Total liabilities and
stockholders' equity $187,337
========
Net interest income $6,191
======
Interest rate spread 3.23%
Net interest margin (3) 3.51%
Average interest-earning
assets to average interest-
bearing liabilities 106.68%
</TABLE>
(1) Includes non-performing loans.
(2) Includes securities available for sale and held to maturity.
(3) Net interest income divided by interest-earning assets.
3
<PAGE> 6
Rate/Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
--------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due To Total Increase Due To Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net $ (571) $ 2,805 $ 2,234 $ (329) $ 1,152 $ 823
Securities (38) 643 605 126 1,376 1,502
Money market investments (3) (30) (33) 2 (47) (45)
Total interest-earning -------- ---------- ---------- -------- ----------- --------
assets $ (612) $ 3,418 $ 2,806 $ (201) $ 2,481 $ 2,280
======== ========== ========== ======== =========== ========
Interest-bearing
liabilities:
Deposits $ (15) $ 955 $ 940 $ 230 $ 1,057 $ 1,287
Borrowed funds (133) 1,198 1,065 145 395 540
-------- ---------- ---------- -------- ----------- --------
Total interest-bearing
liabilities $ (148) $ 2,153 $ 2,005 $ 375 $ 1,452 $ 1,827
======== ========== ========== ======== =========== ========
Increase (decrease) in net
interest income $ (464) $ 1,265 $ 801 $ (576) $ 1,029 $ 453
======== ========== ========== ======== =========== ========
<CAPTION>
Year Ended December 31,
1996 vs. 1995
----------------------------------------
Increase/(Decrease)
Due To Total Increase
Rate Volume (Decrease)
---- ------ ----------
(In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans, net $ 66 $ 104 $ 170
Securities 176 1,094 1,270
Money market investments (4) (95) (99)
Total interest-earning ------ -------- -------
assets $ 238 $ 1,103 $ 1,341
====== ======== =======
Interest-bearing
liabilities:
Deposits $ 107 $ 173 $ 280
Borrowed funds (180) 814 634
------ -------- -------
Total interest-bearing
liabilities $ (73) $ 987 $ 914
====== ======== =======
Increase (decrease) in net
interest income $ 311 $ 116 $ 427
====== ======== =======
</TABLE>
4
<PAGE> 7
Lending Activities
General. The Company's loan portfolio is predominantly comprised of
conventional real estate mortgages, primarily on residences and
one-to-four-family dwellings, but also includes commercial real estate. The
Company's primary emphasis in the past has been on the origination of
residential mortgages.
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December31, December 31, December 31,
1998 1997 1996
---------------------- ---------------------- ---------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family real estate $ 89,456 61.19% $ 75,679 63.42% $ 57,932 64.60%
Multi-family and commercial real
estate 20,534 14.05 19,243 16.13 11,176 12.46
Construction 6,912 4.73 2,103 1.76 1,296 1.44
--------- ------ --------- ------ -------- ------
Total mortgage loans 116,902 79.97 97,025 81.30 70,404 78.50
--------- ------ --------- ------ -------- ------
Non-Mortgage Loans:
Commercial business 5,413 3.70 3,392 2.84 3,290 3.67
Consumer loans 6,920 4.73 4,819 4.04 4,155 4.63
Mobile home loans 4,074 2.79 4,916 4.12 5,703 6.36
Home equity and property
improvement loans 12,874 8.81 9,184 7.70 6,137 6.84
--------- ------ --------- ------ -------- ------
Total non-mortgage loans 29,281 20.03 22,311 18.70 19,285 21.50
--------- ------ --------- ------ -------- ------
Total loans 146,183 100.00% 119,336 100.00% 89,689 100.00%
--------- ====== --------- ====== -------- ======
Less:
Net discounts and deferred fees 129 252 81
Allowance for loan losses (1,176) (1,149) (1,088)
--------- --------- --------
Net loans $ 145,136 $ 118,439 $ 88,682
========= ========= ========
</TABLE>
Contractual Principal Repayments, Repricings and Interest Rates. The
following table sets forth certain information at December 31, 1998 regarding
the dollar amount of loans maturing or repricing in the Company's portfolio,
based on the contractual terms to maturity or the date of repricing. Demand
loans, loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due under one year.
<TABLE>
<CAPTION>
Due Under Due 1-3 Due 3-5 Due 5-10 Due 10-20 Due 20+
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
One-to-four family real
estate $ 15,136 $ 6,349 $ 4,590 $ 21,270 $ 28,940 $ 13,171 $ 89,456
Multi-family and
commercial real
Estate 3,979 2,427 7,460 4,318 2,350 -- 20,534
Construction 6,912 -- -- -- -- -- 6,912
Commercial business 3,334 453 1,180 387 59 -- 5,413
Consumer loans 1,137 1,716 3,019 355 590 103 6,920
Mobile home loans 6 193 668 1,110 1,485 612 4,074
Home equity and
property
Improvement loans 5,474 259 1,895 1,642 2,325 1,279 12,874
-------- -------- -------- -------- -------- -------- ---------
Total $ 35,978 $ 11,397 $ 18,812 $ 29,082 $ 35,749 $ 15,165 $ 146,183
======== ======== ======== ======== ======== ======== =========
</TABLE>
5
<PAGE> 8
The following table sets forth the dollar amount of all loans due or
repricing after one year from December 31, 1998, which have fixed interest rates
or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One-to-four family real estate $ 57,855 $ 16,465 $ 74,320
Multi-family and commercial
real estate 8,065 8,490 16,555
Commercial business 1,451 628 2,079
Consumer loans 5,783 -- 5,783
Mobile home loans 4,068 -- 4,068
Home equity and property
improvement loans 7,400 -- 7,400
-------- -------- ---------
Total $ 84,622 $ 25,583 $ 110,205
======== ======== =========
</TABLE>
Scheduled contractual amortization of loans does not reflect the actual
term of the Company's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Company the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage.
Originations, Purchases and Sales of Loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loan originations:
One-to-four family real estate $ 42,138 $ 22,587 $ 13,904
Multi-family and commercial real estate 4,582 5,469 2,281
Construction 8,844 1,894 1,827
Commercial business loans 4,087 916 825
Consumer loans 6,040 3,659 2,525
Mobile home loans 132 127 327
Home equity and property improvement loans 7,806 4,782 1,812
-------- --------- ---------
Total loans originated 73,629 39,434 23,501
Purchases 770 11,026 --
-------- --------- ---------
Total loans originated and purchased 74,399 50,460 23,501
-------- --------- ---------
Sales and principal reductions:
Loans sold 21,135 4,533 2,821
Loan principal payments and other
reductions 26,567 16,169 18,048
-------- --------- ---------
Total sold and principal reductions 47,702 20,702 20,869
-------- --------- ---------
Net increase in net loan portfolio $ 26,697 $ 29,758 $ 2,632
======== ========= =========
</TABLE>
One-to-Four Family Real Estate Loans. The primary lending activity of the
Company is the origination of loans secured by first mortgage liens on
single-family residences. At December 31, 1998, $89.5 million, or 61.2%, of the
Company's total loan portfolio consisted of one-to-four family real estate
loans.
6
<PAGE> 9
While the Company offers both fixed-rate and adjustable-rate one-to-four
family real estate loans with various terms up to 30 years, in recent periods a
substantial amount of the Company's originations of fixed-rate loans had a term
of 15 years or less. As of December 31, 1998, 42.4% of the Company's one-to-four
family real estate loan portfolio had terms of between 16 and 30 years.
The Company offers adjustable-rate mortgages in order to decrease the
vulnerability of its operations to changes in interest rates. At December 31,
1998, 35.3%, of the one-to-four family real estate loans in the Company's loan
portfolio consisted of adjustable-rate loans. Adjustable-rate mortgage loans
decrease the risks associated with changes in interest rates but involve other
risks, primarily because as interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the marketability of the property
securing the loan may be adversely affected by higher interest rates.
Originations of 1-4 family real estate loans in 1998 totaled $42.1
million, a significant increase over the previous year. This is the result of
the focus on capturing a dominant share of mortgage originations in the
Company's market area. In support of this strategy, the Company has hired
experienced, commissioned mortgage originators, equipped them with laptop
computers and developed an extensive mortgage product line. Mortgage Account
Executives are available to our customers 24 hours a day, 7 days a week to take
applications and move them through the mortgage application process.
Multi-Family and Commercial Real Estate Loans. At December 31, 1998, $20.5
million, or 14.1%, of the Company's total loan portfolio consisted of loans
secured by existing multi-family and commercial real estate. The Company's
multi-family and commercial real estate loans include primarily loans secured by
small office buildings, retail establishments, and apartment buildings.
The Company originates both fixed- and adjustable-rate multi-family and
commercial real estate loans. The Company generally offers multi-family and
commercial real estate loans with amortization schedules up to twenty years with
no more than five years at a fixed rate of interest.
Construction Loans. The Company makes construction loans for residential
and commercial purposes. At December 31, 1998, residential construction loans
amounted to $2.3 million or 1.6% of the Company's total loan portfolio.
Residential construction lending is generally limited to the Company's primary
lending area. Residential construction loans are structured to be converted to
permanent loans at the end of the construction phase, which typically is no more
than nine months. Residential construction loans have terms which generally
match the non-construction loans then offered by the Company, except that during
the construction phase the borrower only pays interest on the loan. The interest
rates charged on such loans are generally 0.25% higher than those charged on
other single-family residential loans. Residential construction loans are
underwritten pursuant to the same general guidelines used for originating
permanent loans.
7
<PAGE> 10
At December 31, 1998, commercial construction loans amounted to $4.6
million or 3.1% of the Company's total loan portfolio. Commercial construction
lending is limited to the Company's primary lending areas. These loans are
generally structured to convert to permanent financing at the end of the
construction phase, which typically is no more than twenty four months,
including a "lease up period" of up to twelve months. Commercial construction
loans may also be structured for permanent take out by other financial
institutions upon completion of the construction period. Commercial construction
loans are underwritten pursuant to established policy guidelines.
Home Equity and Property Improvement Loans. The Company offers home equity
loans and lines of credit and property improvement loans, the total of which
amounted to $12.9 million, or 8.8%, of the total loan portfolio as of December
31, 1998. Home equity loans and lines of credit are secured by second mortgages
on residences with the maximum loan to appraised value ratio permitted by the
Company (after inclusion of the Company's mortgage and any liens senior thereto)
being 90%.
Mobile Home Loans. The Company has been engaged in mobile home lending for
over ten years and, as of December 31, 1998, the Company had $4.1 million, or
2.8%, of its total loan portfolio secured by mobile homes owned by individuals.
While the Company generally lends throughout the State of New York with respect
to mobile homes, the mobile home units are primarily located in what the Company
believes to be well-managed mobile home parks, reviewed by the Company's
management as part of its underwriting process.
Consumer Loans. Subject to the restrictions contained in federal laws and
regulations, the Company also is authorized to make loans for a wide variety of
personal or consumer purposes. As of December 31, 1998, $6.9 million, or 4.7%,
of the Company's total loan portfolio consisted of consumer loans. The primary
component of the Company's consumer loan portfolio was $5.6 million of
installment loans.
Commercial Business Loans. At December 31, 1998, $5.4 million, or 3.7%, of
the Company's total loan portfolio consisted of commercial business loans.
Commercial business loans are generally provided to various types of closely
held businesses located principally in the Company's primary market area in
western New York. The Company's commercial business loans may be structured as
short-term self-liquidating time notes and term loans. Time notes generally have
terms of less than one year to accommodate seasonal peaks and valleys in the
borrower's business cycle. Commercial business term loans generally have terms
of seven years or less and interest rates which float in accordance with the
prime rate, although the Company also originates commercial business loans with
fixed rates of interest. The Company's commercial time notes and commercial term
loans generally are secured by equipment, machinery or other corporate assets
including real estate and receivables. In addition, the Company generally
obtains personal guarantees from the principals of the borrower with respect to
commercial business loans.
8
<PAGE> 11
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1998, in dollar amount and as a percentage of
the Company's total loan portfolio. The amounts presented represent principal
balances of the related loans, rather than the actual payment amounts which are
past due.
<TABLE>
<CAPTION>
One to Four Family Multi-family and
Real Estate Commercial Real Estate Construction Commercial Business Mobile Home
----------- ---------------------- ------------ ------------------- -----------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days $ 605 0.41% $ -- --% $ -- --% $ 34 0.02% $ 104 0.07%
60 - 89 days 423 0.29 80 0.05 -- -- -- -- 8 0.01
90 days and over 673 0.46 -- -- -- -- 268 0.18 20 0.01
------ ----- ------ ----- ----- ----- ------ ----- ------ -----
Total delinquent
Loans $1,701 1.16% $ 80 0.05% $ -- --% $ 302 0.21% $ 132 0.09%
====== ===== ====== ===== ===== ===== ====== ===== ====== =====
<CAPTION>
Home Equity and
Property Improvement Consumer Total
-------------------- -------- -----
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days $ 48 0.03% $ 110 0.08% $ 901 0.61%
60 - 89 days 100 0.07 14 0.01 625 0.43
90 days and over 17 0.01 38 0.03 1,016 0.69
------ ----- ------ ----- ------ -----
Total delinquent
Loans $ 165 0.11% $ 162 0.11% $2,542 1.73%
====== ===== ====== ===== ====== =====
</TABLE>
9
<PAGE> 12
Non-Performing Assets. All loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss of principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, the
Company places all loans 90 days or more past due, on non-accrual status. In
addition, the Company places any loan on non-accrual if any part of it is
classified as doubtful or loss or if any part has been charged-off. When a loan
is placed on non-accruing status, total interest accrued and unpaid to date is
reversed. Application of cash payments received while a loan is on non-accrual
is determined by the chief financial officer and the chief loan officer.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. Generally, consumer loans are charged-off when they
are more than 120 days delinquent.
As of December 31, 1998, the Company's total non-performing loans amounted
to $1,016,000, or .69% of total loans, compared to $564,000, or 0.47% of total
loans, at December 31, 1997.
Troubled Debt Restructurings. As of December 31, 1998, the Company had
$121,000 of troubled debt restructurings, compared to $520,000 and $669,000 as
of December 31, 1997 and December 31, 1996, respectively.
Real Estate Owned. Real estate owned consists of property acquired through
formal foreclosures or by deed in lieu of foreclosure and is recorded at the
lower of recorded investment or fair value. Write-downs from recorded investment
to fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After transfer, the property is carried at the lower
of recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of such properties that result from subsequent
declines in value are charged to operations in the period in which the declines
occur. As of December 31, 1998, the Company held 4 parcels of real estate owned
with an aggregate carrying value of $90,000.
10
<PAGE> 13
The following table sets forth the amounts and categories of the Company's
non-performing assets and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family real estate $ 673 $ 403 $ 194
Multi-family and commercial real estate -- 3 407
Construction -- -- --
Commercial business 268 6 133
Home equity and property improvement loans 17 38 83
Mobile home loans 20 58 60
Consumer loans 38 56 41
----- ------ ------
Total non-performing loans 1,016 564 918
Real estate owned 90 150 275
------ ------ ------
Total non-performing assets $1,106 $ 714 $1,193
====== ====== ======
Troubled debt restructurings $ 121 $ 520 $ 669
====== ====== ======
Total non-performing loans and troubled debt
restructurings as a percentage of total loans 0.78% 0.91% 1.77%
Total non-performing assets and troubled debt
restructurings as a percentage of total
assets 0.43% 0.50% 0.93%
</TABLE>
The Company had no accruing loans greater than 90 days delinquent at
December 31, 1998, 1997 and 1996. The additional interest income that would have
been recorded during the years ended December 31, 1998 and December 31, 1997 and
December 31, 1996 if the Company's non-performing loans at the end of such
periods had been current in accordance with their terms during such periods was
$78,000, $59,000, and $110,000, respectively.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, a specific valuation allowance will be established to cover 100% of the
portion of the asset classified loss, or such amount will be charged-off.
General loss allowances related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances do not qualify as regulatory capital. Federal examiners may
disagree with an insured institution's classifications and amounts reserved and
have the authority to require a savings association to classify additional
assets, or to change the classification of existing classified assets, and, if
appropriate, to establish reserves.
11
<PAGE> 14
At December 31, 1998, the Company had $674,000 of assets categorized as
special mention, $1.9 million of assets classified as substandard and no assets
classified as doubtful or loss. As of December 31, 1998, total classified
assets, including real estate owned and special mention assets, amounted to .96%
of total assets.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based upon (1) in the case of residential
loans, of management's review of delinquent loans, loans in foreclosure and
market conditions, (2) in the case of commercial business loans and commercial
real estate loans, identification of a significant decline in value can be
identified and (3) in the case of consumer loans, an assessment of risks
inherent in the loan portfolio. Although management uses available information
to make such determinations, future adjustments to allowances may be necessary
based on economic and market conditions and as a result of future examinations
by regulatory authorities, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations.
At December 31, 1998, the Company's allowance for loan losses amounted to
$1,176,000 compared to $1,149,000 at December 31, 1997.
The following table sets forth an analysis of the Company's allowance for
loan losses during the periods indicated. See Notes 1 and 3 to the Notes to
Financial Statements included in Item 8 herein.
<TABLE>
<CAPTION>
At Or For the Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Total loans outstanding $ 146,183 $ 119,336 $ 89,689
========= ========= =========
Average loans outstanding $ 132,159 $ 99,992 $ 86,069
========= ========= =========
Balance at beginning of period $ 1,149 $ 1,088 $ 809
Charge-offs:
Mortgage loans (38) (9) (35)
Consumer loans (141) (137) (183)
Commercial loans (114) (1) (48)
Recoveries 80 88 62
--------- --------- ---------
Net charge-offs (213) (59) (204)
Provision for loan losses 240 120 483
--------- --------- ---------
Balance at end of period $ 1,176 $ 1,149 $ 1,088
========= ========= =========
Allowance for loan losses as a percentage of
total loans outstanding 0.80% 0.96% 1.21%
========= ========= =========
Net charge-offs as a percentage of average
loans outstanding 0.16% 0.06% 0.24%
========= ========= =========
Allowance for loan losses to non-performing
loans 115.75% 203.72% 118.52%
========= ========= =========
</TABLE>
Although the Company believes that it has established its allowance for
loan losses in accordance with Generally Accepted Accounting Principles, there
can be no assurance that regulators, in reviewing the Company's loan portfolio,
will not request the Company to significantly increase its allowance for loan
losses, thereby reducing the Company's retained earnings and income.
12
<PAGE> 15
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category at the dates
indicated. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
---- ---- ----
% of Loan % of Loan % of Loan
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Residential real estate loans $ 318 63% $ 321 65% $ 260 61%
Commercial real estate loans 325 17% 314 16% 254 17%
Consumer and other loans 298 20% 284 19% 312 22%
------ ------ ------
Unallocated 235 230 262
------ ------ ------
Total allowance for loan losses $1,176 100% $1,149 100% $1,088 100%
====== ====== ====== ====== ====== ======
</TABLE>
Investment Activities
The Company has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA") or the Federal
National Mortgage Association ("FNMA"). The portfolio also includes
collateralized mortgage obligations ("CMOs"), of which $32.1 million or 54.4%
are backed by FHLMC, GNMA and FNMA securities, and $26.9 million or 45.6% are
obligations of private issuers. Mortgage-backed securities, including CMOs
backed by US Government agencies, increase the liquidity and the quality of the
Company's assets by virtue of the guarantees that back either the securities
themselves or, in the case of the CMOs, the underlying securities, that are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company including repurchase agreements.
In addition, at December 31, 1998, 33.7% of the Company's mortgage-backed
securities portfolio consisted of pools of adjustable-rate mortgages.
Mortgage-backed securities of this type serve to reduce the interest rate risk
associated with changes in interest rates.
13
<PAGE> 16
The following table sets forth the activity in the Company's
mortgage-backed securities portfolio, including mortgage-backed securities in
the securities available for sale category during the periods indicated.
<TABLE>
<CAPTION>
At or For the At or For the At or For the
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of
period $ 71,824 $ 67,589 $ 27,615
Purchases 62,821 44,818 46,830
Sales (25,856) (32,009) --
Repayments (21,669) (9,468) (6,443)
Unrealized gain (loss) (415) 998 (369)
Net accretion/amortization (93) (104) (44)
-------- -------- --------
Mortgage-backed securities at end of period $ 86,612 $ 71,824 $ 67,589
======== ======== ========
Weighted average yield at end of period 6.49% 6.55% 6.30%
======== ======== ========
</TABLE>
Of the $86.6 million portfolio at December 31, 1998, $2.5 million was
scheduled to mature in five years or less and $75.7 million was scheduled to
mature after ten years. Due to prepayments of the underlying loans, the actual
maturities of mortgage-backed securities generally are substantially less than
the scheduled maturities.
At December 31, 1997, fixed rate mortgage-backed securities amounted to
$57.4 million and adjustable rate mortgage-backed securities amounted to $29.2
million. All mortgage-backed securities qualify for regulatory liquidity.
Of the Company's total investment in mortgage-backed securities at
December 31, 1998, $59.0 million consisted of CMOs, $6.2 million consisted of
FHLMC certificates, $16.6 million consisted of FNMA certificates and $4.8
million consisted of GNMA certificates.
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings and loan
associations, certain bankers' acceptances and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. In addition, the Company
has certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of its
conversion from state to federal charter.
The Company's investment securities portfolio is managed in accordance
with a written investment policy adopted by the Board of Directors and
administered by the Executive Committee which consists of five Board members,
including the chief executive officer and the chief financial officer. An
investment officer is authorized to purchase and sell investments up to certain
limits set forth in the investment policy. All other investment transactions
must receive
14
<PAGE> 17
prior approval of the Executive Committee. At the time of purchase of an
investment or mortgage-backed security, management designates the security as
either held to maturity or available for sale based on the Company's investment
objectives, operational needs and intent. The Company maintains no trading
account securities. Investment activities are monitored to ensure that they are
consistent with the investment policy's established guidelines and objectives.
As of December 31, 1998, the Company's held to maturity investment
securities portfolio had an amortized cost of $4.6 million, consisting of
securities issued by the U.S. Government, Federal Government agencies, and
municipal agencies. As of the same date, the Company's securities available for
sale portfolio had a fair value of $115.3 million, of which $26.1 million was
securities issued by the U.S. Government and Federal Government agencies, $2.6
million was mutual funds and common stock, and $86.6 million was mortgage-backed
securities.
The following table sets forth certain information relating to the
Company's investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
----------------------------- ------------------------------ -------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ---------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. Government and
agency bonds $ 4,000 $ 4,022 $ 14,096 $ 14,136 $ 13,347 $ 13,357
Corporate and
municipal bonds 640 640 -- -- -- --
Total securities ------ ------ ------ ------ ------ ------
held to maturity 4,640 4,662 14,096 14,136 13,347 13,357
------ ------ ------ ------ ------ ------
Securities available for
sale:
U.S. Government and
agency bonds 25,962 26,064 26,344 26,462 15,615 15,731
Corporate and
municipal bonds -- -- -- -- 507 508
Mutual funds and
common stock 2,738 2,656 1,645 1,595 1 3
------ ------ ------ ------ ------ ------
Total 28,700 28,720 27,989 28,057 16,123 16,242
------ ------ ------ ------ ------ ------
Mortgage-backed
securities:
FHLMC 6,115 6,188 15,272 15,484 23,812 23,932
FNMA 16,436 16,597 19,750 20,015 21,011 20,878
GNMA 4,760 4,784 14,567 14,594 4,747 4,793
CMOs 59,063 59,044 21,580 21,730 18,362 17,986
------ ------ ------ ------ ------ ------
Total 86,374 86,613 71,169 71,823 67,932 67,589
Total securities ------ ------ ------ ------ ------ ------
available for
Sale $ 115,074 $ 115,333 $ 99,158 $ 99,880 $ 84,055 $ 83,830
Total security ------- ------- ------- ------- ------- -------
portfolio $ 119,714 $ 119,995 $ 113,254 $ 114,016 $ 97,402 $ 97,187
======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1998, held to maturity securities scheduled to mature
within one year totaled $16,667. For other securities held to maturity, $30,000,
$2.1 million and $2.0 million were scheduled to mature in 2000, 2001 and 2002,
respectively. At December 31, 1998, there were no securities available for sale
by the Company scheduled to mature within one year. For other securities
available for sale, other than $1.2 million and $2.4 million were scheduled to
mature in 2001 and 2002, respectively. There were no securities available for
sale scheduled to mature in 2000.
15
<PAGE> 18
Sources of Funds
General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings are
used on a short-term basis to compensate for reductions in the availability of
funds from other sources and are also used on a longer term basis for general
business purposes.
Deposits. The Company's deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts, and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Company on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals and federal regulations.
The Company does not advertise for deposits outside its primary market
area or utilize the services of deposit brokers.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Company at the dates indicated.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $127,852 63.16% $112,702 60.42% $ 93,545 60.81%
-------- ------ -------- ------ -------- ------
Transaction Accounts:
Passbook, statement and club
accounts 47,259 23.34 48,285 25.88 46,374 30.14
Money market accounts 3,196 1.58 2,198 1.18 2,737 1.78
Demand deposits and NOW accounts 24,127 11.92 23,349 12.52 11,176 7.27
-------- ------ -------- ------ -------- ------
Total transaction accounts $ 74,582 36.84 $ 73,832 39.58% $ 60,287 39.19%
======== ====== ======== ====== ======== ======
Total deposits $202,434 100.00% $186,534 100.00% $153,832 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
16
<PAGE> 19
The following table sets forth the deposit activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits $ 500,594 $ 360,637 $ 279,286
Withdrawals (493,372) (335,673) (276,752)
Net increase before interest --------- --------- ---------
credited 7,222 24,964 2,534
Interest credited 8,678 7,738 6,452
--------- --------- ---------
Net increase in deposits $ 15,900 $ 32,702 $ 8,986
========= ========= =========
</TABLE>
The following table sets forth the maturities of the Company's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1998.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ------
(In Thousands)
<S> <C>
Three months or less $ 2,869
Over three through six months 3,664
Over six through twelve months 9,166
Over twelve months 6,910
Total certificates of deposit with --------
balances of $100,000 or more $ 22,609
========
</TABLE>
The following table shows the interest rate and maturity information for
the Company's certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Maturity Date
---------------------------------------------------------------------------------------
Interest Rate One Year or Less Over 1 to 2 Years Over 2 to 3 Years Over 3 Years Total
- ------------- ---------------- ----------------- ----------------- ------------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00% - 4.00% $ 1,271 $ 123 $ -- $ -- $ 1,394
4.01% - 6.00% 81,051 20,131 4,214 4,521 109,917
6.01% - 8.00% 6,083 8,576 66 1,816 6,541
-------- -------- --------- --------- ---------
Total $ 88,405 $ 28,830 $ 4,280 $ 6,337 $ 127,852
======== ======== ========= ========= =========
</TABLE>
Borrowings. The Company may obtain advances from the FHLB of New York
secured by its investment in FHLB of New York stock and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities.
17
<PAGE> 20
The following table sets forth the maximum month-end balance and average
balance of the Company's FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
For Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum balance $54,892 $36,721 $27,400
Average balance 45,531 24,656 17,192
Weighted average interest
rate on FHLB advances 5.51% 5.70% 5.22%
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
For Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
FHLB advances $ 54,815 $ 36,721 $ 23,800
Weighted average interest
rate on FHLB advances 5.41% 5.76% 6.63%
</TABLE>
Subsidiary. SBFL Agency, Inc. is a wholly owned subsidiary of the Bank.
SBFL Agency, Inc. was established in November 1995 to sell a line of fixed rate
annuity products.
Employees. The Company had 80 full-time employees and 22 part-time
employees at December 31, 1998. None of these employees is represented by a
collective bargaining agreement, and the Company believes that it enjoys good
relations with its personnel.
18
<PAGE> 21
REGULATION
Set forth below is a brief description of certain laws and regulations
which currently relate to the regulation of the Company. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
General
The Company, as a federally chartered savings association, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Company also is subject to regulation and examination by the
FDIC, which insures the deposits of the Company to the maximum extent permitted
by law, and requirements established by the Federal Reserve Board. The laws and
regulations governing the Company generally have been promulgated to protect
depositors and the deposit insurance funds and not for the purpose of protecting
stockholders.
Federal Savings Association Regulation
The investment and lending authority of a federally chartered savings
association is prescribed by federal laws and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations.
These laws and regulations generally are applicable to all federally chartered
savings associations and many also apply to state-chartered savings
associations.
Among other things, OTS regulations provide that no savings association
may invest in corporate debt securities not rated in one of the four highest
rating categories by a nationally recognized rating organization. In addition,
the Home Owners Loan Act (HOLA) provides that loans secured by non-residential
real property may not exceed 400% of regulatory capital, subject to increase by
the OTS on a case-by-case basis.
The Company is subject to limitations on the aggregate amount of loans
that it can make to any one borrower, including related entities. Applicable
regulations generally do not permit loans-to-one borrower to exceed 15% of
unimpaired capital and surplus, provided that loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. The OTS by
regulation has amended the loans-to-one borrower rule to permit savings
associations meeting certain requirements, including fully phased-in capital
requirements, to extend loans-to-one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At December 31, 1998, the Company was in compliance with
applicable loans-to-one-borrower limitations.
19
<PAGE> 22
Regulation of the Company as a Mid-tier Stock Holding Company
The Company is a mid-tier stock holding company. Under OTS rules
permitting a mutual holding company to establish a subsidiary stock holding
company, a mid-tier stock holding company will "stand in the shoes" of the
parent mutual holding company, or in certain circumstances, the subsidiary
savings association. Thus, the mid-tier stock holding company is generally
subject to the same restrictions and limitations that are currently applicable
to the mutual holding company and its savings association subsidiary. The
Company is therefore subject to the following provisions, among others:
(i) A mid-tier stock holding company is treated as a multiple savings
and loan holding company and not as a unitary savings and loan
holding company.
(ii) A mid-tier stock holding company is subject to the same restrictions
as the mutual holding company on pledges of stock of the savings
association subsidiary, and the proceeds of any loan secured by the
savings association's stock must be infused into the savings
association.
(iii) A mid-tier stock holding company is subject to the same dividend
waiver restrictions as those imposed on the savings association;
accordingly, in waiving any dividend paid by the mid-tier stock
holding company, the mutual holding company is required to follow
the same procedures it currently follows in waiving dividends paid
by the savings association.
(iv) A mid-tier stock holding company is subject to the same restrictions
on indemnification and employment contracts as those imposed on the
mutual holding company.
(v) A mid-tier stock holding company is permitted to engage in stock
repurchase programs provided the mid-tier stock holding company
complies with OTS regulations relating to repurchases by subsidiary
savings associations. Absent unusual circumstances, for purposes for
the three-year restriction on repurchases, the OTS will generally
permit a mid-tier stock holding company to "tack on" or include the
period that the shares initially issued by the savings association
were outstanding.
Regulation of the Company in General
The Company is regulated as a multiple savings and loan holding company
within the meaning of the HOLA. As such, the Company is registered with and
subject to OTS examination and supervision as well as certain reporting
requirements. In addition, the operations of the Company are subject to
regulations promulgated by the OTS from time to time. As an FDIC-insured
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in dealing with the Company and with other persons affiliated with
the Company, and is subject to examination and supervision by the OTS and the
FDIC.
20
<PAGE> 23
The HOLA prohibits a savings and loan holding company, directly or indirectly,
from (i) acquiring control (as defined) of another insured institution (or
holding company thereof) without prior OTS approval; (ii) acquiring more than 5%
of the voting shares of another insured institution (or holding company thereof
) which is not a subsidiary, subject to certain exceptions; (iii) acquiring
through merger, consolidation or the purchase of assets, another asset of such
institution (or holding company thereof) without prior OTS approval; or (iv)
acquiring control of a bank that is not a "savings association" (as defined),
except through a merger with and into the holding company's savings institution
subsidiary that is approved by the OTS. A savings and loan holding company may
acquire up to 15% of the voting shares of an undercapitalized savings
institution. A savings and loan company may not acquire as a separate subsidiary
an insured institution that has principal offices outside of the state where the
principal offices of its subsidiary institution is located, except (i) in the
case of certain emergency acquisitions approved by the FDIC, (ii) if the holding
company controlled (as defined) such insured institution as of March 5, 1987, or
(iii) if the laws of the institution chartered by the state to be acquired by a
savings institution chartered by the state where the acquiring savings
institution or savings and loan holding company is located, or by a holding
company that controls such a state chartered institution. No director or officer
of a holding company's voting shares may, except with the prior approval of the
OTS, acquire OTS approves such an acquisition, any holding company controlled by
such officer, director or person is subject to the activities limitations that
apply to multiple savings and loan holding companies, unless certain supervisory
exceptions apply.
Insurance of Accounts
The deposits of the Company are insured to the maximum extent permitted by
the Savings Association Insurance Fund (SAIF), which is administered by the FDIC
and is backed by the full faith and credit of the U.S. Government. At December
31, 1998 the Company held $191.5 million in deposits which are insured by SAIF.
The Company paid $112,000 in federal deposit insurance premiums for the year
ended December 31, 1998, as compared to $101,000 for the prior year. As insurer,
the FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. Management is aware of no
existing circumstances which could result in termination of the deposit
insurance of the Company. At December 31, 1998, the Bank's capital exceeded the
capital requirements imposed by the FDIC.
21
<PAGE> 24
Regulatory Capital Requirements
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to FIRREA, the OTS has established
capital standards applicable to all savings institutions. Current OTS capital
standards require savings institutions to satisfy several different capital
requirements. Under these standards, savings institutions must maintain Tier 1
or "core" capital equal to 3% of adjusted total assets (or, if a bank does not
have sufficiently strong managerial and financial condition, 3% plus an
additional 100 to 200 basis points). A bank must also maintain "total" capital
(a combination of core and "supplementary" capital) equal to 8.0% of
"risk-weighted" assets. For purposes of the regulation, core capital generally
consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, less
intangible assets except qualifying servicing rights.
A savings institution is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan and lease losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics, with the
categories ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for repossessed assets or loans more than 90 days past due.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
The following table sets forth the Company's compliance with its capital
requirements at December 31, 1998.
<TABLE>
<CAPTION>
Core Capital Risk-Based Capital
------------ ------------------
(In Thousands)
<S> <C> <C>
GAAP Capital $ 21,535 $ 21,535
Add back unrealized loss(gains)
on avail. for sale of
securities, net of taxes (207) (207)
General valuation allowance -- 1,176
Equity investments required to be
deducted -- (2,154)
Actual regulatory capital $ 21,328 $ 20,350
Amount currently required 8,475 9,553
-------- --------
Excess regulatory capital $ 12,853 $ 10,797
Actual regulatory capital ======== ========
as a percentage (1) 7.55% 17.04%
Percentage currently required 3.00% 8.00%
Excess regulatory capital as a -------- --------
percentage in excess of requirement 4.55% 9.04%
======== ========
</TABLE>
(1) Core capital is computed as a percentage of adjusted total assets of
$282.5 million. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $119.4 million.
22
<PAGE> 25
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. Certain actions are required by law. See "Regulation - Prompt
Corrective Action." The OTS' capital regulation provides that such actions,
through enforcement proceedings or otherwise, could require one or more of a
variety of corrective actions.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency is
required to implement by regulation a system of prompt corrective action for
institutions which it regulates. Under the regulations, an institution is deemed
to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I
leverage capital ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure. Other criteria define institutions which are "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized".
At December 31, 1998, the Company was a "well capitalized" institution
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDICIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
compensation standards would prohibit employment contracts, compensation or
benefit arrangements, stock options plans, fee arrangements or other
compensatory arrangements that would provide excessive compensation, fees or
benefits or could lead to material financial loss. In addition, the federal
banking regulatory agencies would be required to prescribe by regulation
standards specifying: (i) maximum classified assets to capital ratios; (ii)
minimum earnings sufficient to absorb losses without impairing capital; and
(iii) to the extent feasible, a minimum ratio of market value to book value for
publicly traded shares of depository institutions and depository institution
holding companies.
Liquidity Requirements
All savings associations are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the required liquid asset ratio is 4%.
Monetary penalties may be imposed upon associations for violations of liquidity
requirements. The Company's average liquidity ratio at December 31, 1998 was
57.24% which exceeded the then applicable requirements.
23
<PAGE> 26
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in Section 10(m) of the HOLA and regulations of the OTS
thereunder to avoid certain restrictions on their operations. A savings
association that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
certain restrictions on its operations.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Portfolio assets consist
of total assets minus the sum of (i) goodwill and other intangible assets, (ii)
property used by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets. At December 31, 1998,
the qualified thrift investments of the Company were approximately 97.27% of its
portfolio assets.
Restrictions on Capital Distributions
An OTS regulation governs capital distributions by savings associations,
which include cash dividends, stock redemptions or repurchases, cash-out
mergers, interest payments on certain convertible debt and other transactions
charged to the capital account of a savings association to make capital
distributions. Generally, the regulation creates a safe harbor for specified
levels of capital distributions from associations meeting at least their minimum
capital requirements, so long as such associations notify the OTS and receive no
objection to the distribution from the OTS. Associations and distributions that
do not qualify for the safe harbor are required to obtain prior OTS approval
before making any capital distributions.
Generally, a savings association that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (a "Tier
1 institution") may make capital distributions during any calendar year up to
the higher of (a) 100% of net income for the calendar year-to-date plus 50% of
its surplus capital ratio (as defined) at the beginning of the calendar year or
(b) 75% of net income over the most recent four-quarter period. Failure to meet
fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition of capital
distributions without specific OTS approval. At December 31, 1998, the Company
was a Tier 1 association under the OTS capital distribution regulation.
In order to make distributions under safe harbor, Tier 1 associations must
submit 30 days written notice to the OTS prior to making the distribution. The
OTS may object to the distribution during that 30-day period based on safety and
soundness concerns. In addition, a Tier 1 association deemed to be in need of
more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination.
24
<PAGE> 27
Federal Home Loan Bank System
The Company is a member of the FHLB of New York, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. At December 31, 1998, the Company had
outstanding advances of $54,815,000 from the FHLB of New York.
As a member, the Company is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of outstanding advances. At December 31, 1998,
the Company had $2,940,800 in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. Dividends paid by the FHLB of New York to the
Company for the year ended December 31, 1998 totaled $177,305.
Branching by Federal Savings Institutions
Generally, HOLA prohibits federal savings institutions from establishing,
retaining or operating a branch outside the state in which the federal
institution has its home office unless the institution meets the Internal
Revenue Service's ("IRS") domestic building and loan test (generally, 60% of a
thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (i) the branch(es) result(s) from an emergency acquisition of
a troubled savings institution (however, if the troubled savings institution is
acquired by a bank holding company, does not have its home office in the state
of the bank holding company's bank subsidiary and does not qualify under the IRS
Test, its branching is limited to the branching laws for state-chartered banks
in the state where the savings institution is located); (ii) the branch was
authorized for the federal savings association prior to October 15, 1982; (iii)
the law of the state where the branch would be located would permit the branch
to be established if the federal savings institution were chartered by the state
in which its home office is located; or (iv) the branch was operated lawfully as
a branch under state law prior to the savings institution's conversion to a
federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
25
<PAGE> 28
Federal Reserve System
The Company 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, total net transaction accounts
(transaction accounts, primarily NOW and regular checking accounts, less certain
permitted deductions) in the amount of $46.5 million or less are subject to a
reserve requirement of 3%. Total 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
Company was in compliance with its reserve requirements at December 31, 1998.
Community Reinvestment Laws
As is discussed above, under the CRA the Company is subject to Federal
provisions designed to insure that a savings institution meets the credit needs
of its entire community, including low and moderate income neighborhoods.
Transactions with Affiliates
The Company is subject to certain restrictions on loans to the Mutual
Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Mutual Holding Company or its non-bank subsidiaries. The Company
is subject to certain restrictions on most types of transactions with the Mutual
Holding Company or its non-bank subsidiaries, requiring that the terms of such
transactions be substantially equivalent to terms of similar transactions with
non-affiliated firms. In addition, the Company is subject to restrictions on
loans to its executive officers, directors and principal stockholders.
Miscellaneous
In addition to requiring a new system of risk-based insurance assessments
and a system of prompt corrective action with respect to undercapitalized banks,
as discussed above, recent legislation requires federal banking regulators to
adopt regulations in a number of areas to ensure bank safety and soundness,
including: internal controls; credit underwriting; asset growth; management
compensation; ratios of classified assets to capital; and earnings. Recent
legislation also contains provisions which are intended to enhance independent
auditing requirements; restrict the activities of state-chartered insured banks;
amend various consumer banking laws; limit the ability of "undercapitalized
banks" to borrow from the Federal Reserve Board's discount window; and require
regulators to perform annual on-site bank examinations and set standards for
real estate lending.
26
<PAGE> 29
Regulatory Enforcement Authority
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
TAXATION
Provision for Income Taxes
The provision for income taxes as a percentage of pretax income or loss
was 39.3%, 39.9% and 40.0% for the years ended December 31, 1998, 1997 and 1996,
respectively.
A more comprehensive analysis of the Company's income tax expense is
included in Note 9 to the financial statements included in Item 8 of this
Report.
27
<PAGE> 30
Item 2. Description of Properties
At December 31, 1998, the Company conducted its business from its main
office at 470 Exchange Street, Geneva, New York and five other full-service
branches in western New York.
The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value/Lease
Description/Address Leased/Owned Expiration Date Deposits
------------------- ------------ --------------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Main Office
470 Exchange Street
Geneva, New York Owned $636 $ 91,523
Branch Offices
Pyramid Mall
Routes 5 and 20
Geneva, New York Leased May 2014 $ 32,584
Seaway Plaza
Routes 5 and 20
Waterloo, New York Leased March 2011 $ 27,905
Commons
301 E. State Street
Ithaca, New York Leased March 2001 $ 26,860
South Meadow
702 South Meadow Street $788
Ithaca, New York Owned on Leased Land May 2017 $ 12,793
Canandaigua
659 South Main Street $778
Canandaigua, New York Owned on Leased Land September 2018 $ 10,769
</TABLE>
28
<PAGE> 31
Item 3. Legal Proceedings
The Company is a defendant in a legal action arising out of the fact that
the Company hired two loan officers from another bank located in the Finger
Lakes region. The claims allege the use of trade secrets by the Bank's former
employees, solicitation of their customers and violation of restrictive employee
covenants among other claims. The action requests compensatory damages in the
total amount of $17 million and punitive damages of $34 million. The claim was
dismissed during 1998 by the court; however, an appeal has been filed. 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 effect on the consolidated financial statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
29
<PAGE> 32
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
At December 31, 1998, 3,570,000 shares of the Company's outstanding common
stock was held of record by approximately 205 persons or entities, not including
the number of persons or entities holding stock in nominee or street name
through various brokers or banks. Of those shares outstanding, 2,389,948 shares
of common stock are currently held by Finger Lakes Financial Corporation,
M.H.C., the Company's mutual holding company.
During 1998 the Company issued the following securities which were not
registered under the Securities Act of 1933, as amended (the "Act"). Each of
such issuances was made by private offering in reliance on the exemption from
the registration provisions of the Act provided by Section 4(2) of the Act: (i)
on March 16, 1998 the Company issued two of its employees, for no additional
consideration, options under the Company's 1996 Stock Option Plan to purchase an
aggregate of 4,000 shares of Common Stock at an exercise price of $19.88 per
share; and (ii) on May 18, 1998, the Company issued to one of its employees, for
no additional consideration, options under the Company's 1996 Stock Option Plan
to purchase 1,000 shares of Common Stock at an exercise price of $20.00 per
share, and (iii) on June 15, 1998 the Company issued to one of its employees,
for no additional consideration, options under the Company's 1996 Stock Option
Plan to purchase 1,000 shares of Common Stock at an exercise price of $19.13 per
share, and (iv) on December 11, 1998 the Company issued to one of its employees,
for no additional consideration, options under the Company's 1996 Stock Option
Plan to purchase 2,700 shares of Common Stock at an exercise price of $11.50 per
share.
The following table sets forth the high and low sales prices per share of the
Company's Common Stock, together with the cash dividends declared.
<TABLE>
<CAPTION>
Cash
Period Dividends
Ending: High(1) Low(1) Declared(1)
<S> <C> <C> <C>
3-31-97 $ 7.875 $ 6.625 $ 0.05
6-30-97 8.625 7.375 0.05
9-30-97 12.750 8.500 0.05
12-31-97 16.000 12.000 0.05
3-31-98 24.750 15.250 0.05
6-30-98 20.625 19.250 0.06
9-30-98 19.375 12.375 0.06
12-31-98 13.250 9.000 0.06
</TABLE>
(1) Stock prices and cash dividends are retroactively adjusted for the 2 for 1
stock split effective March 2, 1998.
30
<PAGE> 33
Item 6. Selected Financial Data
Selected Financial and Other Data
(dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, April 30,
1998 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $282,376 $ 247,708 $ 200,429 $ 167,773 $ 171,129
Cash and cash equivalents 4,375 4,394 6,366 6,823 4,448
Securities available for sale 115,333 99,880 83,830 61,719 45,150
Securities held to maturity 4,640 14,096 13,347 4,705 27,268
Loans, net 145,136 118,439 88,683 86,050 84,364
Deposits 202,434 186,534 153,832 144,846 143,063
Advances from Federal Home Loan Bank 54,815 36,721 23,800 -- 5,100
Stockholders' Equity 21,964 21,679 20,350 20,734 20,845
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eight Month
Year Ended Period Ended Year Ended
December 31, Year Ended December 31, December 31, April 30,
1998 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income $ 18,645 $ 15,840 $ 13,560 $ 8,187 $ 11,862
Total interest expense 11,201 9,197 7,370 4,426 5,977
Net interest income 7,444 6,643 6,190 3,761 5,885
Provision for loan losses 240 120 483 290 292
Net interest income after
provision for loan losses 7,204 6,523 5,707 3,471 5,593
Other income (expense) 593 592 1,107 (639) 240
Operating expenses 6,605 5,706 6,755 4,306 4,562
Income (loss) before income taxes 1,192 1,409 59 (1,474) 1,271
Income tax expense (benefit) 468 562 23 (571) 534
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 724 $ 847 $ 36 $ (903) $ 737
===========================================================================================================================
Net income (loss) per share - basic (1) $ .20 $ .24 $ .01 $ (.25) $ .10(2)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - diluted (1) $ .20 $ .23 $ .01 $ (.25) $ .10(2)
===========================================================================================================================
Dividends per share (1)(3) $ .23 $ .20 $ .20 $ .15 $ .05
===========================================================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
At or For the
At or For the Eight Month At or For the
Year Ended At or For the Year Ended Period Ended Year Ended
December 31, December 31, December 31, April 30,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Return on average assets .27 % .40% .02% (.79)% .44%
Return on average Stockholders' equity 3.29 % 4.05 .18 (6.44) 4.02
Average Stockholders' equity to
average assets 8.36 % 9.54 10.85 12.33 10.85
Stockholders' equity to total assets 7.78 % 8.75 10.15 12.36 12.17
</TABLE>
(1) Per share data retroactively adjusted for a 2 for 1 stock split effective
March 2, 1998.
(2) Net income per share is presented from November 10, 1994, the date of
conversion, based upon the number of shares issued and outstanding since
that date. The income included in the computation is based on the actual
operating results only for the post-conversion period.
(3) Finger Lakes Financial Corp. M.H.C., the mutual holding company of the
Bank, waived receipt of dividends for the 2,389,948 shares that it owns.
31
<PAGE> 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition
And Comparison of Operating Results
General
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 "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 Bank
Common Stock was converted into one share of the common stock, par value
$.01 per share, of the Company ("Company Common Stock"), and the holders
of Bank Common Stock became the holders of all of the outstanding shares
of 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 Bank or the Mutual Holding Company. The Bank has continued its
operations at the same locations, with the same management, and subject to
all the rights, obligations and liabilities of the Bank existing
immediately prior to the Reorganization.
The Company is a community-oriented savings bank providing mortgage and
commercial loans and other traditional financial services to its local
community. The profitability of the Company depends primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, principally loans, mortgage-backed securities and
securities, and interest expense on interest-bearing deposits and
borrowings. The Company's net income also is dependent, to a lesser
extent, on the level of its other operating income (including service
charges) and operating expenses, such as salaries and employee benefits,
office occupancy and equipment, deposit insurance premiums, professional
fees, data processing and miscellaneous other expenses, as well as federal
and state income tax expenses. The Company's results of operations are
also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
policies, and actions of regulatory authorities.
Business Strategy
The Company's goal is to continue to serve its market area as a
community-oriented financial institution dedicated to financing home
ownership and providing financial services to its customers in an
efficient manner. The principal components of its strategy are discussed
below.
The Company is a community-oriented savings bank operating in western New
York. The Company's primary lending emphasis has been the origination for
portfolio of single-family residential mortgage loans, home equity loans
and property improvement loans secured by single-family residences. The
Company's lending activities also include commercial real estate,
multi-family and commercial business loans. The Company generally limits
its lending activities to western New York with an emphasis on lending in
Ontario, Seneca and Tompkins counties. The Company believes that it has a
substantial market share in Ontario County and competitive market shares
in the other counties in its primary market area, both with respect to
deposits and loans. The Company does not engage in securities trading and
limits its investments to U.S. Treasury and federal government agency
obligations, mortgage-backed securities, which are insured by federal
agencies, collateralized mortgage obligations, and equity securities. The
Company has designated $115.3 million or 96.1% of its securities portfolio
as securities available for sale at December 31, 1998 in order to reduce
its exposure to interest rate risk. The Company anticipates that its
operations in the future will be conducted in a manner and scope which is
substantially consistent with its past practices.
Financial Condition
The Company's total assets as of December 31, 1998 were $282.4 million, a
net increase of $34.7 million or 14.0% from December 31, 1997. The net
increase of $34.7 million was due primarily to a $26.7 million or 22.3%
increase in the Company's loan portfolio and a $6.0 million or 5.3%
increase in the Company's securities portfolio. The $26.7 million increase
in the loan portfolio consisted primarily of a $19.9 million increase in
residential and commercial mortgage loans and a $3.7 million increase in
home equity loans. The substantial growth of the loan portfolio resulted
from total loan originations in 1998 of $73.6 million and loan purchases
of $770,000 partially offset by the sale of $21.4 million of fixed rate
mortgage loans. Securities classified as available for sale at December
31, 1998 were
32
<PAGE> 35
$115.3 million, an increase of $15.5 million from December 31, 1997, while
securities classified as held to maturity at December 31, 1998 were $4.6
million, a decrease of $9.5 million from December 31, 1997. Premises and
equipment increased by $906,000 during 1998 resulting from the
construction of a new full service branch facility in Canandaigua and a
renovation of the downtown Geneva branch.
The significant growth in assets during 1998 was funded by a combination
of a $15.9 million increase in total deposits which amounted to $202.4
million as of December 31, 1998 and an $18.1 million increase in borrowed
funds which amounted to $54.8 million as of December 31, 1998. Savings and
demand deposits increased by $750,000 while certificates of deposit
increased by $15.1 million. The increase in borrowed funds reflects a
continuation of the Company's strategy of using funding sources other than
retail deposits to support asset growth. Stockholders' equity totaled
$22.0 million as of December 31, 1998, an increase of $285,000 from the
year ended December 31, 1997. This increase consisted primarily of net
income for the period of $724,000 less $278,000 in the fair value of
securities available for sale, and dividends declared for the period of
$271,000.
The Company is currently selling substantially 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 of 1998 the Company sold substantially all
existing fixed rate residential mortgage loans with maturities greater
than twenty years.
Operating Results
For the year ended December 31, 1998
Interest Income
Total interest income for the year ended December 31, 1998 amounted to
$18.6 million, an increase of $2.8 million from the year ended December
31, 1997. The average yield on earning assets was 7.42%. Interest income
on loans amounted to $10.8 million, an increase of $2.2 million from the
year ended December 31, 1997. Interest income on securities amounted to
$7.8 million, an increase of $605,000 from the year ended December 31,
1997.
Interest Expense
Total interest expense for the year ended December 31, 1998 amounted to
$11.2 million, an increase of $2.0 million from the year ended December
31, 1997. Interest expense on deposits amounted to $8.7 million for the
year ended December 31, 1998 while interest expense on borrowed funds
amounted to $2.5 million. The average cost of funds for the year ended
December 31, 1998 was 4.69%.
Net Interest Income Before Provision for Loan Losses
The Company's net interest income is determined by its interest rate
spread (i.e., the difference between yields earned on its interest-earning
assets and interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities. Net interest
income amounted to $7.4 million for the year ended December 31, 1998, an
increase of $801,000 from the year ended December 31, 1997. The average
interest rate spread for the year ended December 31, 1998 was 2.73%.
Provision for Loan Losses
The Company's provision for loan losses amounted to $240,000 for the year
ended December 31, 1998, an increase of $120,000 from the year ended
December 31, 1997. The Company's total allowance for loan losses amounted
to $1.2 million as of December 31, 1998 or .80% of total loans
outstanding. Non-performing loans increased from $564,000 to $1,016,000 as
of December 31, 1998. Management reviews the adequacy of the allowance for
loan losses quarterly through an asset classification and review process
and an analysis of the level of loan delinquencies and general market and
economic conditions.
Other Income (Expense)
Other income was $593,000 for the year ended December 31, 1998, at the
same level as the year ended December 31, 1997. This amount includes
$106,000 of net gains on sales of securities as compared to $142,000 of
net gains on sales of securities for the year ended December 31, 1997 and
$276,000 of net gains on sales of loans as compared to $27,000 of net
gains on sales of loans for the year ended December 31, 1997. This also
includes additional reserves of $620,000 established for environmental
remediation costs associated with a former laundry site acquired through
foreclosure in 1989, as compared to additional reserves during 1997 of
$150,000. Service charge income for the year ended December 31, 1998 was
$803,000, as compared to $508,000 for the year ended December 31, 1997.
33
<PAGE> 36
Operating Expenses
Operating expenses amounted to $6.6 million for the year ended December
31, 1998, an increase of $900,000 from the year ended December 31, 1997.
Increases of $450,000 in salaries and employee benefits expense and
$350,000 in office occupancy and equipment expense were primarily the
result of new branch offices opened in 1997 and 1998.
Income Taxes
The Company recorded income tax expense of $469,000 for the year ended
December 31, 1998 on income before tax for the period of $1,193,000,
reflecting an effective tax rate of 39.3%.
Operating Results
For the year ended December 31, 1997
Interest Income
Total interest income for the year ended December 31, 1997 amounted to
$15.8 million, an increase of $2.3 million from the year ended December
31, 1996. The average yield on earning assets was 7.54%. Interest income
on loans amounted to $8.6 million, an increase of $800,000 from the year
ended December 31, 1996. Interest income on securities amounted to $7.2
million, an increase of $1.5 million from the year ended December 31,
1996.
Interest Expense
Total interest expense for the year ended December 31, 1997 amounted to
$9.2 million, an increase of $1.8 million from the year ended December 31,
1996. Interest expense on deposits amounted to $7.7 million for the year
ended December 31, 1997 while interest expense on borrowed funds amounted
to $1.5 million. The average cost of funds for the year ended December 31,
1997 was 4.67%.
Net Interest Income Before Provision for Loan Losses
The Company's net interest income is determined by its interest rate
spread (i.e., the difference between yields earned on its interest-earning
assets and interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities. Net interest
income amounted to $6.6 million for the year ended December 31, 1997, an
increase of $450,000 from the year ended December 31, 1996. The average
interest rate spread for the year ended December 31, 1997 was 2.87%.
Provision for Loan Losses
The Company's provision for loan losses amounted to $120,000 for the year
ended December 31, 1997, a decrease of $363,000 from the year ended
December 31, 1996. The Company's total allowance for loan losses amounted
to $1.1 million as of December 31, 1997 or .96% of total loans
outstanding. Non-performing loans decreased from $918,000 to $564,000 as
of December 31, 1997. Management reviews the adequacy of the allowance for
loan losses quarterly through an asset classification and review process
and an analysis of the level of loan delinquencies and general market and
economic conditions.
Other Income (Expense)
Other income was $592,000 for the year ended December 31, 1997, a decrease
of $515,000 from the year ended December 31, 1996. This amount includes
$142,000 of net gains on sales of securities as compared to $210,000 of
net losses on sales of securities for the year ended December 31, 1996.
Also, 1996 results included an $800,000 recovery of a reserve which had
been established for potential losses on Nationar.
Operating Expenses
Operating expenses amounted to $5.7 million for the year ended December
31, 1997, a decrease of $1.1 million from the year ended December 31,
1996. Increases of $295,000 in salaries and employee benefits expense and
$121,000 in office occupancy and equipment expense were primarily the
result of new branch offices opened in 1996 and 1997. Operating expenses
for the year ended December 31, 1996 included a one-time deposit insurance
premium of $739,000.
Income Taxes
The Company recorded income tax expense of $562,000 for the year ended
December 31, 1997 on income before tax for the period of $1,409,000,
reflecting an effective tax rate of 39.9%.
34
<PAGE> 37
Operating Results
For the year ended December 31, 1996
Interest Income
Total interest income for the year ended December 31, 1996 amounted to
$13.6 million. The average yield on interest earning assets was 7.70%.
Interest income on loans amounted to $7.8 million for the year ended
December 31, 1996 and the average yield on the loan portfolio was 9.02%.
Interest income on securities amount to $5.7 million for the year ended
December 31, 1996 and the average yield on the securities portfolio was
6.43%.
Interest Expense
Total interest expense on deposits and borrowed funds amounted to $7.4
million for the year ended December 31, 1996. Interest expense on deposits
amounted to $6.5 million for the period while interest expense on borrowed
funds amounted to $900,000. The average cost of funds for the year ended
December 31, 1996 was 4.46%. The Company utilized advances from the
Federal Home Loan Company of New York to fund growth in the securities
portfolio.
Net Interest Income Before Provision for Loan Losses
The Company's net interest income is determined by its interest rate
spread (i.e., the difference between yields earned on its interest-earning
assets and interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities. Net interest
income amounted to $6.2 million for the year ended December 31, 1996. The
average interest rate spread for the year ended December 31, 1996 was
3.24%.
Provision for Loan Losses
The Company's provision for loan losses amounted to $483,000 for the year
ended December 31, 1996. Non-performing loans totaled $918,000 as of
December 31, 1996. The Company's total allowance for loan losses amounted
to $1.1 million as of December 31, 1996 or 1.21% of total loans
outstanding. Management reviews the adequacy of the allowance for loan
losses quarterly through an asset classification and review process and an
analysis of the level of loan delinquencies and general market and
economic conditions.
Other Operating Income
Other operating income was $1.1 million for the year ended December 31,
1996. This amount included full recovery of the $800,000 reserve for
Nationar established in 1995 based on the Company's receipt of all funds
which had been frozen in the Nationar estate. It also includes $210,000 in
net losses recorded on the sale of investment securities, which consists
primarily of net losses on the sale of approximately $6.0 million in
adjustable rate mutual funds. Service charge income for the year ended
December 31, 1996 was $506,000.
Operating Expenses
Operating expenses amounted to $6.8 million for the year ended December
31, 1996. Salary and employee benefits expense represented $2.6 million of
that total. Operating expenses for the year ended December 31, 1996 also
included a one-time deposit insurance assessment of $739,000 to assist in
the recapitalization of the SAIF insurance fund as required by law. At
December 31, 1996, the Company recorded an expense of $100,000, which
represents an estimate of accelerated depreciation on computer equipment
associated with a data processing conversion scheduled for the third
quarter of 1997.
Income Taxes
Income tax amounted to $24,000 for the year ended December 31, 1996. The
Company's effective tax rate was 40.0% for the year ended December 31,
1996.
35
<PAGE> 38
Year 2000 Considerations
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". Mission critical is defined as a system that is vital to the
successful continuance of a core business activity. The assessment
included both information technology systems and non-information
technology systems. Examples of non-information technology systems include
utility and telephone companies, security systems, and financial
organizations. Also included in the assessment is the identification of
those systems and vendors whom the Company has control over and those that
Company does not. Examples of those vendors whom the Company has control
over include organizations which the Company has a material relationship
with. Vendors whom the Company has no control over include utility
companies.
The Company has identified 20 mission critical areas, and 72 non-mission
critical areas. Of the mission critical areas, 7 are Year 2000 compliant.
Of the non-mission critical areas, 16 are Year 2000 compliant. The Company
is continuing its efforts to concentrate on the mission critical elements,
and anticipates further progress by the first quarter of 1999.
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 $51,500, and was expensed as incurred. The incremental cost
to the Company of achieving Year 2000 compliance has been estimated to be
$100,000 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 included the
following:
o testing of mission critical internal and external systems to be
completed by March 31, 1999,
o commence testing of systems which the Company has a material interest in
by March 31, 1999 to be completed by June 30, 1999,
o prepare contingency plans as needed, based on results from systems which
the Company has control over 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 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.
36
<PAGE> 39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table presents the difference between the Company's
interest-earning assets and interest-bearing liabilities within specified
maturities at December 31, 1998. This table does not necessarily indicate
the impact of general interest rate movements on the Company's net
interest income because the repricing of certain assets and liabilities is
subject to competitive and other limitations. As a result, certain assets
and liabilities indicated as maturing or otherwise repricing within a
stated period may in fact mature or reprice at different times and at
different volumes.
<TABLE>
<CAPTION>
More than More than
Four to One Year Three Years
Within Twelve to Three to Five Over Five
Three Months Months Years Years Years Total
------------ ------ ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:(1)
Mortgage loans(2) $ 8,899 $ 32,428 $ 36,187 $ 30,531 $ 8,184 $116,229
Other loans(2) 9,138 2,746 7,074 6,341 3,638 28,937
Securities available for sale 25,833 27,850 34,464 11,129 16,057 115,333
Securities held to maturity 2,000 2,017 97 115 3,352 7,581
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 45,870 65,041 77,822 48,116 31,231 268,080
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:(3)
NOW accounts 718 2,154 4,021 1,608 1,072 9,573
Passbook accounts 3,544 10,633 19,849 7,940 5,293 47,259
Money market accounts 240 719 1,342 537 358 3,196
Certificates of deposit 15,418 72,987 33,110 6,337 -- 127,852
Borrowings 16,000 -- 3,000 23,815 12,000 54,815
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 35,920 86,493 61,322 40,237 18,723 242,695
-------- -------- -------- -------- -------- --------
Excess (deficiency) of interest-
earning assets over
interest-bearing liabilities $ 9,950 $(21,452) $ 16,500 $ 7,879 $ 12,508 $ 25,385
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $ 9,950 $(11,502) $ 4,998 $ 12,877 $ 25,385
======== ======== ======== ======== ========
Cumulative ratio of excess
(deficiency) of
interest-earning liabilities as
a percentage of total assets 3.52% (4.07)% 1.77% 4.56% 7.88%
======== ======== ======== ======== ========
</TABLE>
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments. For
fixed-rate mortgages and mortgage-backed securities, annual prepayment
rates ranging from 5% to 20.9%, based on the type of loan or mortgage
security and the coupon rate, were used.
(2) Balances have been reduced for non-performing loans, which amounted to
$1,016,000 at December 31, 1998.
(3) The Company's negotiable order of withdrawal ("NOW") accounts, passbook
savings accounts and money market deposit accounts are generally subject
to immediate withdrawal. However, management considers a certain portion
of these accounts to be core deposits having significantly longer
effective maturities based on the Company's retention of such deposits in
changing interest rate environments. NOW accounts, passbook savings
accounts and money market deposit accounts are assumed to be withdrawn at
annual rates of 30% of the declining balance of such accounts during the
period shown. Management believes these rates are indicative of expected
withdrawal rates in a rising interest rate environment. If all of the
Company's NOW accounts, passbook savings account and
37
<PAGE> 40
money market accounts had been assumed to be subject to repricing within
one year, the cumulative one-year deficiency of interest-earning assets to
interest-bearing liabilities would have been $53.5 million or 19.0%.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
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 December 31, 1998.
<TABLE>
<CAPTION>
Change in Change in NPV
Market Interest Rates Policy Limit Computation
------------ -----------
<S> <C> <C>
+4% -60% -44%
+3% -45 -30
+2% -30 -17
+1% -20 -6
0% 0 0
-1% -20 -1
-2% -30 -3
-3% -45 -5
-4% -60 -8
</TABLE>
The Company's Board of Directors is responsible for reviewing asset
liability management policies. On at least a quarterly basis, the Board reviews
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. Management is responsible for administering the policies and
determinations of the Board of Directors with respect to our asset and liability
goals and strategies.
38
<PAGE> 41
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplemental Data
Finger Lakes Financial Corp.
Consolidated Financial Statements: Page
----
- Independent Auditors' Report 40
- Consolidated Statements of Financial Condition - December 31,
1998 and 1997 41
- Consolidated Statements of Operations for years ended -
December 31, 1998, 1997 and 1996 42
- Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31, 1998,
1997 and 1996 43
- Consolidated Statements of Cash Flows for years ended
December 31, 1998, 1997 and 1996 44
- Notes to Consolidated Financial Statements 45-66
- Quarterly Summarized Financial Information (unaudited) 67
39
<PAGE> 42
independent auditors' report
The Board of Directors and Stockholders
Finger Lakes Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of Finger Lakes Financial Corp. and subsidiary as of December
31, 1998 and 1997, and the related consolidated statements of operations,
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 Finger
Lakes Financial Corp. 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
Rochester, New York
February 1, 1999
40
<PAGE> 43
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997 FINGER
LAKES FINANCIAL CORP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,374,734 4,394,257
Securities available for sale, at fair value 115,332,807 99,880,480
Securities held to maturity, fair value of $4,662,530 and
$14,136,245 at December 31, 1998 and 1997, respectively 4,639,772 14,095,982
Loans 146,311,360 119,588,152
Less allowance for loan losses 1,175,758 1,148,786
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 145,135,602 118,439,366
Accrued interest receivable 1,907,702 1,806,152
Federal Home Loan Bank stock, at cost 2,940,800 2,071,100
Premises and equipment, net 4,555,914 3,650,126
Other assets 3,488,735 3,370,482
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 282,376,066 247,707,945
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 202,433,971 186,534,346
Advances from Federal Home Loan Bank 54,815,261 36,720,991
Other borrowings -- 252,844
Other liabilities 3,163,238 2,520,668
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 260,412,470 226,028,849
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 14) 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 December 31, 1998
and 1997, issued and outstanding 35,700 35,700
Additional paid-in capital 4,749,256 4,675,886
Retained earnings 17,239,959 16,787,342
Accumulated other comprehensive income 155,405 433,012
Unallocated shares of ESOP (216,724) (252,844)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,963,596 21,679,096
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 282,376,066 247,707,945
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 44
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998,
1997 and 1996 FINGER LAKES FINANCIAL CORP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 10,821,304 8,587,760 7,764,852
Securities 7,810,063 7,204,518 5,702,543
Federal funds sold and other short-term investments 14,085 47,503 92,993
- ---------------------------------------------------------------------------------------------------------------------------
18,645,452 15,839,781 13,560,388
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 8,678,198 7,738,344 6,452,310
Borrowings 2,523,136 1,458,051 917,622
- ---------------------------------------------------------------------------------------------------------------------------
11,201,334 9,196,395 7,369,932
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 7,444,118 6,643,386 6,190,456
Provision for loan losses 240,000 120,000 483,204
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,204,118 6,523,386 5,707,252
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Service charges 803,134 507,537 505,806
Net gain (loss) on sale of loans 276,612 26,695 (2,771)
Net gain (loss) on sales of securities 106,231 142,160 (210,013)
Provision for Environmental Remediation (620,000) (150,400) --
Recovery on Nationar 9,500 45,540 800,000
Other 17,923 20,391 13,646
- ---------------------------------------------------------------------------------------------------------------------------
593,400 591,923 1,106,668
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 3,322,895 2,868,536 2,573,423
Office occupancy and equipment 1,209,563 859,561 738,119
Deposit insurance premiums 112,400 100,524 1,052,349
Professional fees 342,144 315,430 422,065
Marketing and advertising 264,185 243,049 261,810
Data processing 119,188 176,032 240,787
Real estate owned 24,330 74,619 138,394
Other 1,210,219 1,068,445 1,327,698
- ---------------------------------------------------------------------------------------------------------------------------
6,604,924 5,706,196 6,754,645
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,192,594 1,409,113 59,275
Income tax expense 468,565 561,616 23,710
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 724,029 847,497 35,565
===========================================================================================================================
Net income per common share - basic $ 0.20 0.24 0.01
===========================================================================================================================
Net income per commonshare - diluted $ 0.20 0.23 0.01
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 45
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME FOR THE
Years Ended December 31, 1998, 1997 and 1996
FINGER LAKES FINANCIAL CORP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated Unallocated
Additional other Shares
Common paid-in Retained comprehensive of
stock capital earnings income ESOP Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 17,850 4,561,051 16,394,151 148,194 (387,696) 20,733,550
Comprehensive Income:
Net income -- -- 35,565 -- -- 35,565
Change in net unrealized gains
on securities, net of taxes -- -- -- (283,755) -- (283,755)
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 35,565 (283,755) -- (248,190)
- ---------------------------------------------------------------------------------------------------------------------------
Allocation of shares under ESOP -- 33,503 -- -- 67,426 100,929
Cash dividends declared,
$.20 per share* -- -- (236,010) -- -- (236,010)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 17,850 4,594,554 16,193,706 (135,561) (320,270) 20,350,279
Comprehensive Income:
Net income -- -- 847,497 -- -- 847,497
Change in net unrealized gains (loss)
on securities, net of taxes -- -- -- 568,573 -- 568,573
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 847,497 568,573 -- 1,416,070
- ---------------------------------------------------------------------------------------------------------------------------
Allocation of shares under ESOP -- 81,332 -- -- 67,426 148,758
Cash dividends declared,
$.20 per share* -- -- (236,011) -- -- (236,011)
Two-for-one stock split 17,850 -- (17,850) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 35,700 4,675,886 16,787,342 433,012 (252,844) 21,679,096
Comprehensive Income:
Net income -- -- 724,029 -- -- 724,029
Change in net unrealized gains
on securities, net of taxes -- -- -- (277,607) -- (277,607)
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 724,029 (277,607) -- 446,422
- ---------------------------------------------------------------------------------------------------------------------------
Allocation of shares under ESOP -- 73,370 -- -- 36,120 109,490
Cash dividends declared,
$.23 per share* -- -- (271,412) -- -- (271,412)
Balance, December 31, 1998 35,700 4,749,256 17,239,959 155,405 (216,724) 21,963,596
===========================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISCLOSURE OF RECLASSIFICATION ADJUSTMENTS
Unrealized gains (loss) arising during year $ (213,868) 653,869 (409,763)
Less: reclassification adjustment for gains (loss) included
in net income, net of tax 63,739 85,296 (126,008)
- ---------------------------------------------------------------------------------------------------------------------------
Change in unrealized gains on securities available for sale $ (277,607) 568,573 (283,755)
===========================================================================================================================
</TABLE>
* Finger Lakes Financial Corporation, M.H.C., which owns 2,389,948 shares of
stock in Finger Lakes Financial Corp., 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:
$550,000 for the year ended December 31, 1998,and $478,000 for the years
ended December 31, 1997 and 1996.
See accompanying notes to consolidated financial statements.
43
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
FINGER LAKES FINANCIAL CORP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 724,029 847,497 35,565
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 597,548 371,910 256,391
Amortization of loan fees and other 283,635 32,929 75,163
Provision for loan losses 240,000 120,000 483,204
Recovery on Nationar (9,500) (45,540) (800,000)
Provision for Environmental Remediation 620,000 150,400 --
Provision for equipment disposal -- -- 100,000
Net loss (gain) from sale of loans (276,612) (26,695) 2,771
Net loss (gain) from sale of securities (106,231) (142,160) 210,013
Net loss (gain) from sale of real estate owned (33,333) 9,030 34,903
Deferred income taxes (199,081) (3,174) 66,991
Increase in accrued interest receivable (101,550) (466,550) (26,430)
Decrease (increase) in other assets 113,906 (296,991) 2,191,954
Increase in other liabilities 132,060 392,704 418,362
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,984,871 943,360 3,048,887
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and principal
collected on securities available for sale 35,669,146 13,427,056 16,593,475
Proceeds from maturities of and principal
collected on securities held to maturity 10,100,000 3,250,000 2,350,000
Proceeds from sales of securities available for sale 51,605,954 46,318,299 14,442,022
Purchase of securities available for sale (103,170,611) (74,815,294) (53,832,537)
Purchases of securities held to maturity (640,000) (3,996,665) (11,001,255)
Loans originated and purchased (74,399,011) (50,460,422) (23,500,364)
Proceeds from sales of loans 21,411,559 4,559,531 2,817,951
Principal collected on loans 26,044,180 16,167,373 17,368,693
Proceeds from sale of real estate owned 277,784 169,237 378,859
Purchase of FHLB stock (869,700) (701,100) (619,300)
Purchases of premises and equipment, net (1,503,334) (2,153,687) (985,408)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (35,474,033) (48,235,672) (35,987,864)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in savings and demand accounts $ 749,899 13,545,519 (2,597,276)
Net increase in time deposits 15,149,726 19,157,142 11,582,614
Net increase in FHLB advances 18,094,270 12,920,991 23,800,000
Principal payments on ESOP debt (252,844) (67,426) (67,426)
Common stock dividends (271,412) (236,011) (236,010)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 33,469,639 45,320,215 32,481,902
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (19,523) (1,972,097) (457,075)
Cash and cash equivalents at beginning of year 4,394,257 6,366,354 6,823,429
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,374,734 4,394,257 6,366,354
===========================================================================================================================
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest 10,994,155 9,116,530 7,365,986
Income taxes 582,011 420,500 168,500
Non-cash investing activities:
Transfer of loans to real estate owned $ 233,448 53,368 235,519
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997 FINGER
LAKES FINANCIAL CORP.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Finger Lakes Financial Corp. (the Company) through its wholly owned
subsidiary the Savings Bank of the Finger Lakes, FSB (the Bank) provides
financial services to individuals and businesses primarily in the Finger
Lakes region of Upstate New York, and is subject to regulation by certain
federal agencies including the Office of Thrift Supervision (OTS).
Finger Lakes Financial Corporation, M.H.C. (the Mutual Holding Company), a
mutual holding company whose activity is not included in the accompanying
consolidated financial statements, owns approximately 67% of the
outstanding common stock of the Company.
Effective August 17, 1998 the Mutual Holding Company and the Bank
reorganized into a two-tier holding company structure. The reorganization
included the formation of the Company, a federally chartered stock holding
company and was effected by the exchange of all outstanding common shares
of the Bank for an equal number of common shares of the Company. The
reorganization had no impact on the operations of the Bank or the Mutual
Holding Company. The Bank has continued its operations at the same
locations, with the same management, and subject to all the rights,
obligations and liabilities of the Bank existing immediately prior to the
reorganization.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and the Bank. All intercompany accounts and activity have been
eliminated in the consolidation.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could
differ from those estimates.
Securities
The Company classifies its debt securities as either available for sale or
held to maturity. Held to maturity securities are those debt securities
that the Company has the intent and the ability to hold until maturity.
All other securities not included in 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 holding gains and
losses, net of the related tax effect, on available for sale securities
are excluded from earnings and are reported as a component of accumulated
other comprehensive income in stockholders' equity until realized.
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 of the
security.
Interest income includes interest earned on the securities and the
amortization of premiums and accretion of discounts of the related
securities as an adjustment to yield using the interest method. Realized
gains or losses on securities sold are recognized on the trade date using
the specific identification method.
Loans
Loans are reported at the principal amount outstanding, net of unearned
discount and net deferred fees. Loan origination and commitment fees and
certain direct origination costs are deferred and amortized over the
contractual life of the related loans using the interest method. Mortgage
loans held for sale are reported at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or, in the
absence of such commitments the current investor yield requirements. The
Company generally retains the servicing rights to loans sold.
Generally, the Company places all loans 90 days or more past due on
non-accrual status. In addition, the Company places any loan on
non-accrual status if any part of it is classified as doubtful or loss or
if any part has been charged off. When a loan is placed on non-accruing
status, total interest accrued and unpaid to date is reversed. Subsequent
payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Allowance for Loan Losses
The allowance for loan losses consists of the provision charged to
operations based upon management's evaluation of the loan portfolio
considering such factors as historical loan loss experience, review of
specific loans, current economic conditions and such other factors as
management considers appropriate to estimate loan losses. Loan losses and
recoveries of loans previously charged off are charged or credited to the
allowance as incurred or realized, respectively.
Substantially all of the Company's loan portfolio is located in New York
State, with the greatest concentration in Ontario, Seneca and Tompkins
Counties. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio is susceptible to changes in
market conditions in these areas.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, 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. Such agencies may require the Company to recognize
additions to the allowance at the time of their examination.
Management considers a loan impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
principal and interest due under the original terms of the loan agreement.
Accordingly, the Company measures certain impaired commercial loans based
on the present value of future cash flows discounted at the loan's
effective interest rate, or at the loan's observable market price, or the
fair value of the collateral, if the loan is collateral dependent.
Impairment losses are included in the allowance for loan losses. In
considering loans for evaluation of impairment, management generally
excludes large groups of smaller balance, homogeneous loans, such as
residential mortgage loans, home equity loans and all consumer loans.
These loans are collectively evaluated for impairment. When a loan is
impaired and the future repayment of the recorded balance is doubtful,
interest payments received are applied to principal and no interest income
is recognized. If the recorded loan balance is expected to be paid,
interest income is recognized on a cash basis.
Real Estate Owned
Real estate owned consists of property acquired through, or by deed in
lieu of, foreclosure and is recorded at the lower of cost or fair value.
Write-downs from cost to fair value which are required at the time of
foreclosure are charged to the allowance for loan losses. After transfer,
the property is carried at the lower of cost or fair value, less estimated
selling expenses. Adjustments to the carrying value of such properties
that result from subsequent declines in value are charged to operations in
the period in which the declines occur.
Provisions for environmental remediation costs related to real estate
owned are recorded when remedial efforts are probable and the costs can be
reasonably estimated.
Premises and Equipment
Land is carried at cost and buildings, furniture, fixtures and equipment
are carried at cost less accumulated depreciation. Depreciation is
provided over the estimated service lives of the respective assets on the
straight-line method.
Federal Home Loan Bank (FHLB) Stock
As a member of the FHLB system, the Company is required to maintain a
specified investment in FHLB stock. This amount which is carried at cost,
is equal to 1% of the aggregate outstanding mortgage loans held by the
Company, or 5% of total outstanding advances.
46
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
Pension Plan
The Company has a defined benefit pension plan covering substantially all
employees. The plan provides pension benefits that are based on each
employee's years of service and average compensation prior to retirement.
The Company's funding policy is to contribute annually, at least the
minimum required by law. The Retirement System for Savings Institutions
serves as Plan Trustee and Administrator.
Postretirement Benefits
The Company sponsors a nonfunded defined benefit postretirement plan that
covers all of its full time employees. All employees who retire under the
Company's defined benefit pension plan who have attained age 60 with at
least 5 years of service are eligible. Employees are required to
contribute a portion of the premium based on their age and length of
service at retirement and spouses pay the full premium.
Stock Split
On January 20, 1998, the Board of Directors 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 consolidated financial statements and notes
thereto to number of shares, per-share amounts, 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.
Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income, presented
in the consolidated statements of stockholders' equity and comprehensive
income, consists of net income and the net unrealized holding gains and
losses on securities available for sale, net of the relaxed tax effect and
the reclassification adjustment for gains or losses included in net
income. Prior year financial statements have been reclassified to conform
to the requirements of the statement.
Per Share Data
Basic net income per common share is 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
common share reflects the effects of common stock issuable upon exercise
of dilutive stock options and stock grants.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, due from banks, federal funds sold and
other short-term investments with maturities of less than 90 days.
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Financial Instruments With Off-Balance Sheet Risk
The Company does not engage in the use of derivative financial instruments
and the Company's only financial instruments with off-balance sheet risk
are commercial letters of credit and mortgage and commercial loan
commitments. These off-balance sheet items are shown in the Company's
consolidated statement of condition upon funding.
Stock Option and Management Recognition Plans
The Company has a stock option plan and a management recognition plan for
officers and key employees. The Company has elected to continue to apply
the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations and
provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants as if the fair-value-based method defined
in SFAS No. 123 had been applied.
Reclassifications
Certain items in the 1997 and 1996 financial statements have been
reclassified in order to be consistent with the current year's
presentation.
Other Accounting Standards
Effective January 1, 1998, the Company adopted the remaining provisions of
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which relate 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 Company.
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in 1998. SFAS No. 131 requires the
Company to report financial and other information about key revenue
producing segments of the Company for which such information is available
and is utilized by the chief operating decision makers. Specific
information to be reported for individual segments includes profit or
loss, certain specific revenue and expense items, and total assets. The
Company did not identify any separate operating segments requiring
disclosure.
The Company adopted SFAS No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, in 1998. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or the recognition of these
plans. The statement did not impact the Company's financial position or
results of operations.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This statement requires that all
derivatives be recognized as either assets or liabilities in the balance
sheet and that those instruments be measured at fair value. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and resulting designation.
This statement is effective for fiscal years beginning after June 15,
1999, although earlier adoption is permitted. The Company anticipates,
based on current activities, that the adoption of SFAS No. 133 will not
have an effect on its financial position or results of operations. SFAS
No. 133 also permits certain reclassification of securities among the
available for sale and held to maturity classifications. The Company has
no current intention to reclassify any securities pursuant to SFAS No.
133.
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 accounting for such securities by a nonmortgage banking enterprise.
This statement is effective for the first quarter beginning January 1,
1999, and will not have any impact on the Company's financial position or
results of operations as the Company does not currently securitize
mortgage loans.
48
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(2) SECURITIES
The aggregate amortized cost and fair value of the securities are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1998
----------------------------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
U.S. Government and agency bonds $ 25,961,721 116,533 14,120 26,064,134
Mortgage-backed securities:
FHLMC 6,115,621 75,101 3,206 6,187,516
FNMA 16,435,960 161,007 -- 16,596,967
GNMA 4,759,638 24,461 -- 4,784,099
Collateralized mortgage obligations 59,062,754 178,478 196,868 59,044,364
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 112,335,694 555,580 214,194 112,677,080
Equity securities 2,738,105 3,203 85,581 2,655,727
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 115,073,799 558,783 299,775 115,332,807
===========================================================================================================================
Securities Held to Maturity
U.S. Government and agency bonds 3,999,772 22,758 -- 4,022,530
Corporate and municipal bonds 640,000 -- -- 640,000
- ---------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 4,639,772 22,758 -- 4,662,530
===========================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997
----------------------------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
U.S. Government and agency bonds $ 26,344,192 126,167 8,438 26,461,921
Mortgage-backed securities:
FHLMC 15,272,409 211,888 -- 15,484,297
FNMA 19,749,893 272,332 6,879 20,015,346
GNMA 14,567,005 46,217 18,859 14,594,363
Collateralized mortgage obligations 21,580,362 167,859 18,398 21,729,823
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 97,513,861 824,463 52,574 98,285,750
Equity securities 1,644,740 17,165 67,175 1,594,730
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 99,158,601 841,628 119,749 99,880,480
===========================================================================================================================
Securities Held to Maturity
Agency bonds - FNMA,
FHLMC and others $ 14,095,982 80,732 40,469 14,136,245
===========================================================================================================================
</TABLE>
49
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(2) SECURITIES, continued
Proceeds from the sale of securities available for sale for the years
ended December 31, 1998, 1997 and 1996 were $51,605,954, $46,318,299 and
$14,442,022, respectively. Gross gains (losses) realized on sales of
securities available for sale are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 313,068 327,812 24,403
Gross realized losses (206,837) (185,652) (234,416)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 106,231 142,160 (210,013)
===========================================================================================================================
</TABLE>
The contractual maturity of debt securities at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
--------------------------------- ----------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One year or less $ -- -- 16,667 16,667
After one year through five years 4,801,375 4,856,723 4,133,105 4,155,863
After five years through ten years 31,961,336 32,081,823 211,666 211,666
After ten years 75,572,983 75,738,534 278,334 278,334
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 112,335,694 112,677,080 4,639,772 4,662,530
===========================================================================================================================
</TABLE>
Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay the obligation with or
without prepayment penalties.
At December 31, 1998 and 1997, securities carried at $26,385,000 and
$10,789,000, respectively, were pledged to secure advances from the
Federal Home Loan Bank of New York.
(3) LOANS, NET
Loans consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One to four family real estate $ 89,455,464 75,679,293
Multi-family and commercial real estate 20,533,704 19,242,552
Construction 6,912,383 2,102,905
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 116,901,551 97,024,750
- ---------------------------------------------------------------------------------------------------------------------------
Commercial business 5,412,658 3,392,056
Home equity and property improvement loans 12,873,693 9,183,721
Mobile home loans 4,073,837 4,916,327
Consumer loans:
Installment 5,611,926 3,658,207
Loans secured by passbooks 955,742 760,663
Student loans and other 352,719 400,588
- ---------------------------------------------------------------------------------------------------------------------------
Total other loans 29,280,575 22,311,562
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 146,182,126 119,336,312
Less:
Net discounts and deferred fees 129,234 251,840
Allowance for loan losses (1,175,758) (1,148,786)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans $ 145,135,602 118,439,366
===========================================================================================================================
</TABLE>
50
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(3) LOANS, NET, continued
The following table summarizes activity in the allowance for loan losses:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 1,148,786 1,087,637 809,302
Provision for loan losses 240,000 120,000 483,204
Loans charged-off (293,134) (146,886) (266,899)
Recoveries 80,106 88,035 62,030
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,175,758 1,148,786 1,087,637
===========================================================================================================================
</TABLE>
The principal balance of all loans not accruing interest amounted to
approximately $1,016,000 and $564,000 at December 31, 1998 and 1997,
respectively. The interest income forgone for non-accruing loans was
$78,166, $59,400 and $110,336 for the years ended December 31, 1998, 1997,
and 1996, respectively. At December 31, 1998 and 1997, the recorded
investment in loans that are considered impaired was $268,236 and $6,344,
respectively. The Company has provided an allowance for loan losses of
$88,518 and $952 at December 31, 1998 and 1997, respectively, for these
loans. The average recorded investment in such impaired loans was
approximately $331,700 in 1998 and $74,900 in 1997 and interest income on
impaired loans of $12,912 in 1998, $3,088 in 1997, and $23,500 in 1996,
was recognized.
The Company has an agreement with a third party to assist in the
origination and servicing of mobile home loans. The Company's portfolio of
mobile home loans at December 31, 1998 and 1997 was originated under this
agreement. The Company paid a service fee at origination of 1.5% computed
on the simple interest method over the life of the loan. The fee is
deferred and amortized over the contractual life of the loans. A portion
of these fees is included in a reserve fund controlled by the Company for
the purpose of absorbing losses on such loans. In the event of default or
prepayment by the borrower, the Company receives a pro-rata refund of the
loan origination and service fees.
The activity of prepaid service fees follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 619,000 718,000 820,000
Additions 22,000 14,000 53,000
Amortization (123,000) (113,000) (155,000)
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $ 518,000 619,000 718,000
===========================================================================================================================
</TABLE>
The balance in the reserve fund, included in other liabilities on the
consolidated statements of financial condition, was $109,400 and $106,000
as of December 31, 1998 and 1997, respectively.
Proceeds from the sale of residential and commercial mortgage loans to
FNMA and others were $21,411,559 for the year ended December 31, 1998,
$4,559,531 for the year ended December 31, 1997, and $2,817,951 for the
year ended December 31, 1996. The net gain on sale of such loans was
$276,612 and $26,695 and a loss of $2,771 was recorded for the years ended
December 31, 1998, 1997, and 1996 respectively. Loans serviced for others,
amounting to $26,770,611 and $8,796,099 at December 31, 1998 and 1997,
respectively, are not included in the consolidated financial statements.
Originated mortgage servicing rights of $143,276 were recorded on the
consolidated statements of financial condition as of December 31, 1998. No
mortgage servicing rights were recorded as of December 31, 1997 due to
immateriality. Residential mortgage loans held for sale were $1,204,000
and $217,000 at December 31, 1998 and 1997, respectively.
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans $ 854,551 817,213
Securities 1,053,151 988,939
- ---------------------------------------------------------------------------------------------------------------------------
$ 1,907,702 1,806,152
===========================================================================================================================
</TABLE>
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 113,000 113,000
Building 3,294,248 2,331,571
Furniture, fixtures and equipment 2,759,238 2,297,331
- ---------------------------------------------------------------------------------------------------------------------------
6,166,486 4,741,902
Less accumulated depreciation and amortization 1,610,572 1,091,776
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 4,555,914 3,650,126
===========================================================================================================================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998, 1997, and 1996 was $597,548, $371,910 and $256,391, respectively.
The Company recorded a loss provision of $100,000 in the consolidated
statement of operations during 1996 for the obsolescence of computer
equipment.
(6) DEPOSITS
Deposits and the applicable weighted average interest rates at December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits and NOW accounts $ 24,127,812 1.17% 23,349,495 2.08%
- ---------------------------------------------------------------------------------------------------------------------------
Passbook, statement and club accounts 47,258,689 2.74% 48,284,687 2.93%
Money market accounts 3,195,816 2.89% 2,198,236 2.70%
- ---------------------------------------------------------------------------------------------------------------------------
50,454,505 2.75% 50,482,923 2.92%
- ---------------------------------------------------------------------------------------------------------------------------
Certificates of deposit maturing:
12 months or less 88,404,748 82,188,468
13-24 months 28,829,883 15,593,275
25-36 months 4,279,881 10,922,845
37-48 months 2,032,335 1,791,183
49 months or longer 4,304,807 2,206,157
- ---------------------------------------------------------------------------------------------------------------------------
127,851,654 5.56% 112,701,928 5.80%
- ---------------------------------------------------------------------------------------------------------------------------
$ 202,433,971 4.34% 186,534,346 4.55%
===========================================================================================================================
</TABLE>
Certificates of deposit equal to or greater than $100,000 amounted to
$22,609,407 and $17,975,487 at December 31, 1998 and 1997, respectively.
52
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(6) DEPOSITS, Continued
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 394,664 341,458 74,035
Passbook, statement and club accounts 1,365,558 1,390,960 1,348,579
Money market accounts 38,124 57,470 145,335
Certificates of deposit 6,879,852 5,948,456 4,884,361
- ---------------------------------------------------------------------------------------------------------------------------
$ 8,678,198 7,738,344 6,452,310
===========================================================================================================================
</TABLE>
In September 1996, the one-time special assessment to recapitalize the
SAIF insurance fund was enacted into law. The assessment based upon SAIF
insured deposits held as of March 31, 1995 totaled $738,700 and is
included in deposit insurance premiums on the consolidated statement of
operations for the year ended December 31, 1996.
(7) Advances from Federal Home Loan Bank
The Company utilizes advance programs offered by the Federal Home Loan
Bank of New York including a variable rate line of credit agreement with a
maximum available limit of $25,844,000 and various term loan advances. The
line of credit agreement, which expires October 13, 1999, is renewable on
an annual basis. Such advances are collateralized by a blanket lien on the
Bank's 1-4 family mortgages or in the case of convertible advances or
repurchase agreements, by securities.
Total outstanding advances from the FHLB at December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
Weighted Average Weighted Average
Maturity Date Amount Interest Rate Amount Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Overnight line of credit $ 6,000,000 5.13% 13,200,000 5.69%
1998 -- -- 16,808,000 5.68%
1999 10,000,000 5.63% -- --
2001 3,000,000 5.45% -- --
2002 3,815,261 6.26% 4,712,991 6.26%
2003 20,000,000 5.52% -- --
2007 2,000,000 5.65% 2,000,000 5.65%
2008 10,000,000 4.75% -- --
- ---------------------------------------------------------------------------------------------------------------------------
$ 54,815,261 5.41% 36,720,991 5.76%
===========================================================================================================================
</TABLE>
During 1998 and 1997 advances from the FHLB had an average outstanding
balance of approximately $45,532,000 and $24,656,000, respectively, with
the maximum amount outstanding at any month end of $54,892,000 in 1998 and
$36,721,000 in 1997. Such borrowings had a weighted-average borrowing rate
of 5.41% for 1998 and 5.70% for 1997.
(8) Other Borrowings
The Bank established an employee stock ownership plan (ESOP). The ESOP
borrowed $471,980 from a third party lender to acquire common stock of the
Bank. Subsequent to formation of the mid-tier stock holding company in
1998, the ESOP repaid the third party lender in full with the proceeds of
a loan from the Company.
53
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(9) INCOME TAXES
Total income taxes for the years ended December 31, 1998, 1997 and 1996
were allocated as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax expense $ 468,565 561,616 23,710
Stockholders' equity, for unrealized gain (loss) on securities (185,264) 378,599 (188,513)
- ---------------------------------------------------------------------------------------------------------------------------
$ 283,301 940,215 (164,803)
===========================================================================================================================
</TABLE>
The components of income tax expense (benefit) attributable to income from
operations follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Current Deferred Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Federal $ 492,296 (128,696) 363,600
State 175,350 (70,385) 104,965
- ---------------------------------------------------------------------------------------------------------------------------
$ 667,646 (199,081) 468,565
===========================================================================================================================
Year ended December 31, 1997:
Federal $ 437,999 (2,698) 435,301
State 126,791 (476) 126,315
- ---------------------------------------------------------------------------------------------------------------------------
$ 564,790 (3,174) 561,616
===========================================================================================================================
Year ended December 31, 1996:
Federal $ (43,794) 51,576 7,782
State 513 15,415 15,928
- ---------------------------------------------------------------------------------------------------------------------------
$ (43,281) 66,991 23,710
===========================================================================================================================
</TABLE>
The actual tax expense differs from the "expected" tax expense computed by
applying the U.S. Federal corporate income tax rate of 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Years Ended December 31,
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 405,482 479,098 20,153
Increase in taxes resulting from:
State income tax expense, net of federal
income tax benefit 69,277 83,368 10,512
Other, net (6,194) (850) (6,955)
- ---------------------------------------------------------------------------------------------------------------------------
$ 468,565 561,616 23,710
===========================================================================================================================
</TABLE>
54
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(9) INCOME TAXES, continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $ 387,804 377,100
Capital loss 1,517 62,679
Supplemental retirement benefits 81,873 79,300
Postretirement benefits 99,940 67,999
Deferred compensation 40,467 24,990
Reserve for environmental remediation 275,809 60,153
Other 109,893 11,195
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 997,303 683,416
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale 103,487 288,751
Premise and equipment, principally due to
differences in depreciation 166,212 117,047
Mortgage servicing rights 57,225 --
Other 20,389 11,857
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 347,313 417,655
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 649,990 265,761
===========================================================================================================================
</TABLE>
Included in equity at December 31, 1998 is $3,023,258 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 if the institution fails to qualify as a
savings bank for Federal income tax purposes, would result in taxable
income to the Company.
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
a loss carryback period. A valuation allowance is recognized 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. Based on its assessment,
management determined that no valuation allowance is necessary.
55
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(10) RETIREMENT PLANS
The following table sets forth the defined benefit pension plan's and
postretirement plan's change in benefit obligation and change in fair
value of the plans' assets and the plans' funded status for the years
ended December 31, 1998 and 1997, using the most recent actuarial data
measured at October 1, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Pension Benefits Post-retirement Benefits
--------------------------------- ----------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,010,012 1,761,100 488,372 571,600
Service cost 69,996 57,229 25,051 17,054
Interest cost 143,289 139,658 37,889 32,191
Termination benefits 64,561 -- -- --
Actuarial (gain)/loss 189,231 180,514 129,721 (116,106)
Benefits paid (138,504) (128,489) (14,262) (16,367)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,338,585 2,010,012 666,771 488,372
- ---------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,983,294 2,553,906 -- --
Actual return on plan assets 6,820 557,877 -- --
Employer contribution -- -- 14,262 16,367
Benefits paid (138,504) (128,489) (14,262) (16,367)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,851,610 2,983,294 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Funded status (deficit) 513,025 973,282 (666,771) (488,372)
Unamortized net (asset) obligation at transition (19,826) (42,109) 290,336 308,483
Unrecognized net (gain) loss subsequent
to transition (299,684) (748,490) 159,539 31,004
Unamortized prior service liability 485 1,075 (19,068) (21,368)
- ---------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 194,000 183,758 (235,964) (170,253)
===========================================================================================================================
</TABLE>
56
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(10) RETIREMENT PLANS, continued
Pension cost consists of the following components for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 69,996 57,229 45,695
Interest on projected benefit obligation 143,289 139,658 126,912
Expected return on plan assets (233,416) (199,195) (181,664)
Amortization of transition net asset (22,283) (22,283) (22,283)
Amortization of unrecognized loss (32,979) (19,428) (14,397)
Amortization of unrecognized prior service cost 590 590 590
Termination benefits charge 64,561 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension credit (10,242) (43,429) (45,147)
===========================================================================================================================
Weighted average discount rate $ 6.50% 7.25% 7.50%
===========================================================================================================================
Expected long-term rate of return 8.00% 8.00% 8.00%
===========================================================================================================================
</TABLE>
The projected benefit obligation assumed a long-term rate of increase in
future compensation levels of 4.5%, 5.0%, and 5.5% for 1998, 1997, and
1996. The amortized net asset at transition is being amortized over 11
years from inception.
Net periodic postretirement benefit cost included the following components
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits attributed to service during the period $ 25,051 17,054 16,980
Interest cost 37,889 32,191 41,723
Net amortization and deferral 17,033 15,847 23,542
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 79,973 65,092 82,245
===========================================================================================================================
</TABLE>
For measurement purposes, an annual rate of increase in the per capita
cost of average health care benefits for retirees of 7.0% and 8.0% at
December 31, 1998 and 1997, respectively, was assumed. The rate is assumed
to decrease gradually to 5.0% by 2005 and remain at that level thereafter.
The health care cost trend assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1% in each year would increase the accumulated
postretirement benefit obligation at December 31, 1998 by $110,000, and
the net periodic postretirement benefit cost by $13,400 for the year then
ended.
The weighted average discount rate used in determining the accumulated
postretirement obligation was 6.50% and 7.5% for 1998 and 1997,
respectively.
The Company has a noncontributory defined benefit retirement plan and a
401(k) plan covering substantially all employees. Contributions to the
retirement plan are based on the participant's age and compensation,
generally 3% of each covered employee's wages. The Company currently does
not match employee contributions to the 401(k) plan. Participants vest
immediately in their own contributions over a period of six years in the
Company's contribution. There was no expense for these plans for the years
ended December 31, 1998, 1997 and 1996.
57
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(10) RETIREMENT PLANS, continued
The Company maintains a nonqualified Supplemental Employee Retirement Plan
(SERP) for key executives. The following table sets forth the SERP's
change in benefit obligation and change in plan assets for the years ended
December 31, 1998 and 1997, using the most recent actuarial data measured
at 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 539,649 518,350
Interest Cost 27,452 --
Amendments (115,199) --
Actuarial (gain)/loss (1,955) 64,436
Benefits paid (31,494) (43,137)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 418,453 539,649
- ---------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ -- --
Employer contribution 31,494 43,137
Benefits paid (31,494) (43,137)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year -- --
- ---------------------------------------------------------------------------------------------------------------------------
Funded status (deficit) (418,453) (539,649)
Unamortized net obligation at transition 322,150 341,100
Unrecognized net gain subsequent to transition (1,955) --
Unrecognized prior service liability (106,735) --
- ---------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (204,993) (198,549)
===========================================================================================================================
</TABLE>
58
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(10) RETIREMENT PLANS, continued
The SERP's cost consists of the following components for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost $ 27,452 78,852 30,350
Amortization of transition net asset 18,950 18,950 18,950
Prior service cost (8,464) -- 109,000
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 37,938 97,802 158,300
===========================================================================================================================
Weighted average discount rate 6.50% 6.75% 8.00%
===========================================================================================================================
</TABLE>
(11) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a noncontributory employee stock ownership plan (ESOP)
covering substantially all employees. In connection with establishing the
ESOP, the ESOP borrowed $471,980 from a third party lender and used the
proceeds to purchase 94,396 shares of the Company's common stock. The
Company reports compensation expense equal to the current market price of
the shares released. Cash dividends received by the Plan on unallocated
shares will be used to pay down the Plan's debt. As of December 31, 1998,
36,949 shares have been allocated to employees with the remaining
unallocated shares held in trust. Compensation expense amounted to
$105,028, $141,059 and $90,178 for the years ended December 31, 1998, 1997
and 1996, respectively.
(12) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS
In 1996, the Company adopted the 1996 stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock options
to officers and key employees. The Plan authorized grants of options to
purchase up to 118,000 shares of authorized but unissued common stock.
Stock options are granted with an exercise price equal to the fair market
value at the date of grant. All stock options have ten-year terms and vest
and become fully exercisable after five years from the date of grant.
At December 31, 1998 and 1997, there were 2,000 and 8,700, respectively,
additional shares available for grant under the Plan. The per share
weighted-average fair value of stock options granted was $3.71 in 1998 and
$7.52 in 1997 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1998 - expected
dividend yield 2.09%, risk-free interest rate of 5.25%, assumed volitility
of 38.23%, and an expected life of 10 years and 1997 - expected dividend
yield 1.25%, risk-free interest rate of 5.75%, and an expected life of 10
years, and 1996 - expected dividend yield 2.9%, risk-free interest rate of
6.0% and an expected life of 10 years.
59
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(12) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS, continued
The Company applies APB Opinion No. 25 in accounting for its Plan and
accordingly, no compensation cost has been recognized for stock options in
the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock option under SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 724,029 847,497 35,565
Pro forma 632,216 759,599 35,190
Net income per share - basic As reported $ .20 .24 .01
Pro forma .18 .21 .01
</TABLE>
Stock option activity for the years ended December 31, 1998, 1997 and 1996
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-
Number of average
shares exercise price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1996 -- --
Granted 88,700 7.93
Forfeited 8,000 8.00
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 80,700 7.93
Granted 28,600 11.63
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 109,300 8.89
Granted 8,700 17.21
Forfeited 2,000 8.00
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 116,000 $ 9.53
===========================================================================================================================
</TABLE>
The range of exercise prices and weighted-average remaining contractual
life of outstanding options was $6.75 - $20.00 and seven years at December
31, 1998 and $6.75 - $14.50 and eight years at December 31, 1997,
respectively. At December 31, 1998 and 1997, the number of options
exercisable was 37,200 and 16,140, respectively.
In 1996, the Bank established a Management Recognition Plan (MRP) pursuant
to which the Bank's Board of Directors may award shares of common stock to
officers and key employees. Under this MRP the Bank contributed funds to
an irrevocable trust held by an independent third party, which purchased
47,200 issued and outstanding shares for $8.4375 per share. As of December
31, 1998, all shares had been granted to employees with vesting periods of
three to five years. Compensation expense in the amount of the fair market
value of the common stock at the date of the grant to the officer or
employee is recognized prorata over the three to five years during which
the shares are earned and payable. MRP expense included in salaries and
employee benefits in the accompanying consolidated statement of operations
was $106,000 for the year ended December 31, 1998 and $70,000 was incurred
for the year ended December 31, 1997.
60
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(13) NET INCOME PER SHARE
The following is a summary of the net income per share calculation for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended 1998 For the Year Ended 1997
-------------------------------------- -------------------------------------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income per share - basic
Weighted average shares 3,570,000 3,570,000
Contingently issuable shares 11,632 3,775
- ---------------------------------------------------------------------------------------------------------------------------
Income available to common
shareholders $ 724,029 3,581,632 $ 0.20 $ 847,497 3,573,775 $ 0.24
- ---------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Common stock options 43,982 23,574
Common stock grants 33,776 28,560
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 724,029 3,659,390 $ 0.20 $ 847,497 3,625,909 $ 0.23
===========================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended 1996
-------------------------------------------------
Weighted
Average Per-Share
Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income per share - basic
Weighted average shares 3,570,000
Contingently issuable shares --
- ---------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders $ 35,565 3,570,000 $ 0.01
- ---------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Common stock options 12,507
Common stock grants 17,375
- ---------------------------------------------------------------------------------------------------------------------------
Net Income per share - diluted $ 35,565 3,599,882 $ 0.01
===========================================================================================================================
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
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. These financial instruments are primarily commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk and at December 31, 1998 are not reflected in the
consolidated statement of financial condition.
61
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(14) COMMITMENTS AND CONTINGENCIES, continued
The following is a summary of the maximum credit exposure of each class
lending related off-balance sheet financial instruments outstanding at
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to originate credit:
Fixed rate mortgage loans $2,251,161 1,185,364
Adjustable rate mortgage loans 1,182,000 739,900
Commercial real estate loans 2,243,000 2,275,000
Commercial loans -- 190,000
Consumer home equity loans 511,400 200,000
- ---------------------------------------------------------------------------------------------------------------------------
6,187,561 4,590,264
Unused lines of credit:
Construction loans $ 1,282,439 2,037,146
Commercial lines of credit 2,001,192 1,186,638
Other 5,876,276 4,219,314
- ---------------------------------------------------------------------------------------------------------------------------
9,159,907 7,443,098
Outstanding Letters of Credit $ -- 12,000
Commitments to sell loans:
Fixed rate mortgage loans $ 1,867,000 669,700
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. 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 of the
customer. Substantially all commitments to extend credit, if exercised,
will represent loans secured by real estate. At December 31, 1998, the
Company had no significant concentrations of credit risk in the loan
portfolio outside the natural geographic concentration pertaining to the
communities that the Company serves.
The Company enters into forward contracts for future delivery of
residential mortgage loans at a specified yield to reduce the interest
rate risk associated with fixed rate residential mortgages held for sale
and commitments to fund residential mortgages. Credit risk arises from the
possible inability of the other parties to comply with the contract terms.
Substantially all of the Company's contracts are with FNMA, a U.S.
government-sponsored agency.
At December 31, 1998, the Company occupies branch facilities under
noncancelable operating leases. Office occupancy and equipment expense
includes rental expense of $243,420, $199,382 and $180,290 for the years
ended December 31, 1998, 1997 and 1996, respectively. The approximate
future minimum annual rental payments under the existing terms of such
leases at December 31, 1998 are as follows: $262,972, $262,972, $234,022,
$228,232 and $228,232 for the years ending December 31, 1999, 2000, 2001,
2002, and 2003, respectively, and $2,415,440 in later years.
The Company is a defendant in legal action arising out of the fact that
the Company hired two loan officers from another bank located in the
finger lakes region. The claims allege the use of trade secrets by the
Bank's former employees, solicitation of their customers and violation of
restrictive employee covenants among other claims. The action requests
compensatory damages in the total amount of $17 million and punitive
damages of $34 million. The claim was dismissed during 1998 by the court;
however, an appeal has been filed. 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 consolidated financial statements of the Company.
62
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(15) ENVIRONMENTAL MATTER
At December 31, 1998, the Company had a $691,000 accrual in other
liabilities for the estimated probable costs relating to environmental
remediation of a foreclosed real estate owned property. Management of the
Company believes the likelihood that it will be required to make payments
with respect to environmental remediation in excess of this liability is
remote.
(16) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors. Under the OTS capital regulations in effect
at December 31, 1998 and 1997, the Bank was required to maintain a minimum
ratio of tangible capital to tangible assets of 1.5%; a minimum leverage
ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0%;
and a minimum ratio of total capital (core capital and supplementary
capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier
1) capital.
The regulations establish a framework for the classification of savings
institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Generally, an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of a least 5.0% (based
on average total assets); a core (Tier 1) risk-based capital ratio of at
least 6.0%; and a total risk-based capital ratio of at least 10.0%.
Management believes that, as of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most
recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual regulatory capital amounts
and ratios as of December 31, 1998 and 1997, compared to the OTS minimum
bank capital adequacy requirements and the OTS requirements for
classification as a well-capitalized institution. OTS capital regulations
apply at only the Bank level as the OTS does not have holding company
capital requirements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Actual Minimum Requirement Well capitalized
-------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
1998 (Regulatory)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 20,350,000 17.04% 9,552,560 8.00% 11,940,700 10.00%
Tier 1 capital
(to risk weighted assets) 21,328,000 17.86% 4,776,280 4.00% 7,164,420 6.00%
Tier 1 capital
(to average assets) 21,328,000 7.55% 8,475,150 3.00% 14,125,250 5.00%
Tangible capital 21,328,000 7.55% 4,237,575 1.50% -- --
</TABLE>
* 1998 Adjusted Tangible Assets were $282,505,000. 1998 Risk Weighted Assets
were $119,407,000.
63
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(16) REGULATORY CAPITAL REQUIREMENTS, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Actual Minimum Requirement Well capitalized
-------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
1997 (Regulatory)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 20,720,000 21.12% 7,847,200 8.00% 9,809,000 10.00%
Tier 1 capital
(to risk weighted assets) 21,216,000 21.63% 3,923,600 4.00% 5,885,400 6.00%
Tier 1 capital
(to average assets) 21,216,000 8.57% 7,425,870 3.00% 12,376,450 5.00%
Tangible capital 21,216,000 8.57% 3,712,935 1.50% -- --
</TABLE>
* 1997 Adjusted Tangible Assets were $247,529,000. 1997 Risk Weighted Assets
were $98,090,000.
Regulatory capital ratios of the Company for 1998 are summarized below:
<TABLE>
<S> <C>
Total capital (to risk weighted assets) 17.45%
Tier 1 capital (to risk weighted assets) 18.27%
Tier 1 capital (to average assets) 7.71%
Tangible capital 7.71%
</TABLE>
(17) NATIONAR RECOVERY
In February 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of
Nationar's assets. Frozen assets of the Company included federal funds
sold to Nationar of $500,000 and demand accounts of approximately
$2,000,000. Based on information set forth in certain publicly available
documents, at that time, management believed that there was a reasonable
likelihood that the Company would not recover all amounts owed by
Nationar. Accordingly, management established a reserve of $800,000 for
the federal funds sold and demand accounts as of December 31, 1995. During
1996, the Company recovered all federal funds sold and demand accounts.
During 1998 and 1997, the Company recovered some funds related to its
charge off of Nationar capital debentures in 1995.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
its fair value disclosure for financial instruments:
Securities
Fair values for securities are based on quoted market prices, where
available. Where quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
64
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Loans
For variable rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. Fair values of
fixed rate residential mortgage loans are based on quoted market prices of
similar loans sold in the secondary market, adjusted for differences in
loan characteristics. The fair values of other loans are estimated through
discounted cash flow analyses using interest rates currently being offered
for loans with similar terms and credit quality.
Delinquent loans are valued using the discounted cash flow methods
described above. While credit risk is a component of the discount rate
used to value loans, delinquent loans are presumed to possess additional
risk. Therefore, the calculated fair value of loans delinquent more than
30 days are reduced by an allocated amount of the general allowance for
loan losses.
Deposits
The fair values disclosed for demand deposits, savings accounts and money
market accounts are, by definition, equal to the amounts payable on demand
at the reporting date (e.g., their carrying values). The fair value of
fixed maturity time deposits is estimated using a discounted cash flow
approach that applies interest rates currently being offered on
certificates to a schedule of weighted average expected monthly maturities
on time deposits.
Advances from Federal Home Loan Bank (FHLB)
The fair value of advances from FHLB is estimated using a discounted cash
flow approach that applies interest rates currently being offered for
advances with similar terms.
Other Borrowings
The carrying value of this variable rate instrument approximates fair
value.
The estimated fair value of the Bank's financial instruments is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
--------------------------------- ----------------------------------
Carrying Carrying
amount Fair value amount Fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Securities $ 119,972,579 119,995,337 113,976,462 114,016,725
Net loans 145,135,602 149,089,220 118,439,366 120,805,941
FINANCIAL LIABILITIES:
Deposits:
Demand deposit accounts, savings and
money market accounts 74,582,317 74,582,317 73,832,418 73,832,418
Time deposits 127,851,654 127,952,986 112,701,928 112,749,646
Advances from FHLB 54,815,261 55,066,529 36,720,991 36,798,809
Other borrowings -- -- 252,844 252,844
</TABLE>
Other Financial Instruments
Based on the characteristics of cash, cash equivalents, federal funds sold
and Federal Home Loan Bank (FHLB) stock, the carrying value approximates
the fair value. The fair value of commitments to extend credit are equal
to the deferred fees outstanding, as the contractual rates and fees
approximate those currently charged to originate similar commitments.
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.
65
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998 and 1997
FINGER LAKES FINANCIAL CORP.
(19) FINANCIAL CONDITION - PARENT COMPANY ONLY
On August 17, 1998, the Company reorganized through the formation of
Finger Lakes Financial Corp. a federally chartered stock holding company.
The following represents the condensed statement of condition of Finger
Lakes Financial Corp. at December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Statement of Condition
Assets:
Cash $ 441,823
Note receivable from subsidiary 216,724
Other assests 59,344
Investment in subsidiary 21,535,356
- ---------------------------------------------------------------------------------------------------------------------------
$ 22,253,247
===========================================================================================================================
Liabilities and stockholders' equity:
Other liabilities $ 289,651
Stockholders' equity 21,963,596
- ---------------------------------------------------------------------------------------------------------------------------
$ 22,253,247
===========================================================================================================================
</TABLE>
The statement of operations, excluding the income from investment in
subsidiary, was comprised of interest income of $3,600 and operating
expenses of $4,600 for the period from August 17, 1998 (date of inception)
to December 31, 1998.
66
<PAGE> 69
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)
FINGER LAKES FINANCIAL CORP.
Selected quarterly financial data for fiscal 1998 and 1997 follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998
------------------------------------------------------------------------
By Quarter 1 2 3 4 Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 4,443 4,551 4,693 4,958 18,645
Interest expense 2,617 2,730 2,885 2,969 11,201
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 1,826 1,821 1,808 1,989 7,444
Provision for loan losses 60 60 60 60 240
Other income (expense) 214 322 295 (238)(a) 593
Operating expenses 1,538 1,623 1,671 1,773 6,605
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense 442 460 372 (82) 1,192
Income tax expense (benefit) 176 184 142 (34) 468
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 266 276 230 (48) 724
===========================================================================================================================
Net income (loss) per common share: (1)
Basic $ 0.07 0.08 0.06 (0.01) 0.20
Diluted $ 0.07 0.08 0.06 (0.01) 0.20
===========================================================================================================================
</TABLE>
(a) Reflects a $600,000 provision for environmental remediation on a
foreclosed property.
(1) Per share data retroactively adjusted for the 2 for 1 stock split
effective March 2, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------------------
By Quarter 1 2 3 4 Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,645 3,863 3,992 4,340 15,840
Interest expense 2,063 2,236 2,337 2,561 9,197
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 1,582 1,627 1,655 1,779 6,643
Provision for loan losses 60 30 30 -- 120
Other income 134 191 167 100 592
Operating expenses 1,355 1,432 1,471 1,448 5,706
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 301 356 321 431 1,409
Income tax expense 121 142 128 171 562
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 180 214 193 260 847
===========================================================================================================================
Net income per common share: (1)
Basic $ 0.05 0.06 0.05 0.08 0.24
Diluted $ 0.05 0.06 0.05 0.07 0.23
===========================================================================================================================
</TABLE>
(1) Per share data retroactively adjusted for the 2 for 1 stock split
effective March 2, 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
67
<PAGE> 70
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
from pages 6 through 10 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
from pages 10 through 20 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
from pages 3 through 5 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
from pages 20 through 21 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
68
<PAGE> 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The Consolidated Financial Statements and Supplemental Data of
Finger Lakes Financial Corp. and Independent Auditors' Report on
such financial statements are filed under Part II, Item 8.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31,
1998 and December 31, 1997
Consolidated Statements of Operations for the Years Ended December
31, 1998, December 31, 1997 and December 31, 1996
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the Years Ended December 31, 1998, December
31, 1997 and December 31, 1996
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, December 31, 1997 and December 31, 1996
Notes to Consolidated Financial Statements
Quarterly Summarized Financial Information (unaudited)
(2) Financial Statement Schedules.
All schedules have been omitted because the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
69
<PAGE> 72
(3) Exhibits.
Number Description
- ------ --------------------------------------------------------
3.1 Federal Stock Charter of Finger Lakes Financial Corp.(1)
3.2 Bylaws of Finger Lakes Financial Corp.(1)
4 Stock Certificate of the Savings Bank of the Finger
Lakes, FSB(2)
10.1 Employee Stock Ownership Plan and Trust of the
Company(2)*
10.2 Employment Agreement between the Company and G.
Thomas Bowers*(2)
10.3 1996 Stock Option Plan of the Company and Amendment
No. 1 Thereto*(3)
10.4 1996 Management Recognition Plan*(3)
10.5 Modified Supplemental Pension Agreement, as amended,
between the Company and Ralph E. Springstead*(3)
10.6 Modified Supplemental Pension Agreement between the
Company and G. Thomas Bowers*(3)
10.7 Agreement between the Company and Terry L. Hammond*(3)
10.8 Agreement between the Company and Thomas A. Mayfield*(3)
10.9 Restated Deferred Compensation Plan for Directors* Filed Herein
10.10 Amendment dated June 22, 1998 to Supplemental
Retirement Agreement between the Company and G.
Thomas Bowers* Filed Herein
10.11 Split Dollar Agreement between the Company and G.
Thomas Bowers* Filed Herein
10.12 Amendment dated June 22, 1998 to Supplemental
Retirement Agreement between the Company and Ralph
E. Springstead* Filed Herein
10.13 Split Dollar Agreement between the Company and Ralph
E. Springstead* Filed Herein
21 Subsidiaries of the Registrant - Reference is made to
Item 1. "Business" for the required information
27 Financial Data Schedule Filed Herein
(1) Incorporated by reference to Exhibits B and C of the
Company's previously filed proxy statement relating to its
Annual Meeting of Shareholders' held on April 23, 1998.
(2) Incorporated by reference to the application for Approval
of a Minority Stock Issuance by a Savings Association
Subsidiary of a Mutual Holding Company on Form MIIC-2 filed
by the Bank with the Office of Thrift Supervision on
December 17, 1993, as amended.
(3) Incorporated by reference to the Bank's Annual Report on
Form 10-K for the year ended December 31, 1996.
* Management contract or compensatory plan or arrangement.
(b) Reports filed on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
70
<PAGE> 73
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.
Date: March 26, 1999 FINGER LAKES FINANCIAL CORP.
/s/ G. Thomas Bowers
-------------------------------------
G. Thomas Bowers
President and Chief Executive Officer
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 Registration and
in the capacities indicated.
Signature Title Date
- --------- ----- ----
/s/ G. Thomas Bowers President & Chief March 26, 1999
- -------------------------- Executive Officer
G. Thomas Bowers
/s/ Ralph E. Springstead Chairman of the March 26, 1999
- -------------------------- Board of Directors
Ralph E. Springstead
/s/ Michael J. Hanna Director March 26, 1999
- --------------------------
Michael J. Hanna
/s/ Chris M. Hansen Director March 26, 1999
- --------------------------
Chris M. Hansen
/s/ Richard J. Harrison Director March 26, 1999
- --------------------------
Richard J. Harrison
/s/ James E. Hunter Director March 26, 1999
- --------------------------
James E. Hunter
/s/ Ronald C. Long Director March 26, 1999
- --------------------------
Ronald C. Long
71
<PAGE> 74
/s/ Bernard G. Lynch Director March 26, 1999
- --------------------------
Bernard G. Lynch
/s/ Terry L. Hammond Executive Vice President March 26, 1999
- -------------------------- and Chief Financial Officer
Terry L. Hammond
72
<PAGE> 75
EXHIBIT INDEX
Number Description
- ------ --------------------------------------------------------
3.1 Federal Stock Charter of Finger Lakes Financial Corp.(1)
3.2 Bylaws of Finger Lakes Financial Corp.(1)
4 Stock Certificate of the Savings Bank of the Finger
Lakes, FSB(2)
10.1 Employee Stock Ownership Plan and Trust of the
Company(2)*
10.2 Employment Agreement between the Company and G.
Thomas Bowers*(2)
10.3 1996 Stock Option Plan of the Company and Amendment
No. 1 Thereto*(3)
10.4 1996 Management Recognition Plan*(3)
10.5 Modified Supplemental Pension Agreement, as amended,
between the Company and Ralph E. Springstead*(3)
10.6 Modified Supplemental Pension Agreement between the
Company and G. Thomas Bowers*(3)
10.7 Agreement between the Company and Terry L. Hammond*(3)
10.8 Agreement between the Company and Thomas A. Mayfield*(3)
10.9 Restated Deferred Compensation Plan for Directors* Filed Herein
10.10 Amendment dated June 22, 1998 to Supplemental
Retirement Agreement between the Company and G.
Thomas Bowers* Filed Herein
10.11 Split Dollar Agreement between the Company and G.
Thomas Bowers* Filed Herein
10.12 Amendment dated June 22, 1998 to Supplemental
Retirement Agreement between the Company and Ralph
E. Springstead* Filed Herein
10.13 Split Dollar Agreement between the Company and Ralph
E. Springstead* Filed Herein
21 Subsidiaries of the Registrant - Reference is made to
Item 1. "Business" for the required information
27 Financial Data Schedule Filed Herein
(1) Incorporated by reference to Exhibits B and C of the
Company's previously filed proxy statement relating to its
Annual Meeting of Shareholders' held on April 23, 1998.
(2) Incorporated by reference to the application for Approval
of a Minority Stock Issuance by a Savings Association
Subsidiary of a Mutual Holding Company on Form MIIC-2 filed
by the Bank with the Office of Thrift Supervision on
December 17, 1993, as amended.
(3) Incorporated by reference to the Bank's Annual Report on
Form 10-K for the year ended December 31, 1996.
* Management contract or compensatory plan or arrangement.
(b) Reports filed on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
73
<PAGE> 1
EXHIBIT 10.9
FINGER LAKES FINANCIAL CORPORATION AND
SAVINGS BANK OF THE FINGER LAKES, FSB
RESTATED DEFERRED COMPENSATION PLAN FOR DIRECTORS
Initial Effective Date February 12, 1996
Restatement Effective December 7, 1998
<PAGE> 2
FINGER LAKES FINANCIAL CORPORATION AND
SAVINGS BANK OF THE FINGER LAKES, FSB
RESTATED DEFERRED COMPENSATION PLAN FOR DIRECTORS
ARTICLE I
PURPOSE
The purpose of this Restated Deferred Compensation Plan for Directors (the
"Plan") is to provide current tax planning opportunities as well as supplemental
funds for retirement or death for eligible directors of Savings Bank of the
Finger Lakes, FSB (the "Bank") and Finger Lakes Financial Corporation (the
"Company"). This Plan was initially adopted by resolution of the Board of
Directors of the Bank on February 12, 1996. The Plan was restated, effective
December 7, 1998.
ARTICLE II
DEFINITIONS
For the purposes of this Plan, the following terms may have the meanings
indicated, unless the context clearly indicates otherwise:
2.1 Account. "Account" means the Account as maintained by the Bank and/or
the Company in accordance with Article IV with respect to any deferral of
Compensation pursuant to this Plan. A Director's Account shall be utilized
solely as a device for the determination and measurement of the amounts to be
paid to the Director pursuant to the Plan. A Director's Account shall not
constitute or be treated as a trust fund of any kind.
2.2 Bank. "Bank" means Savings Bank of the Finger Lakes, FSB, a federally
chartered savings bank, or any successor to the business thereof, and any
affiliated or subsidiary corporations designated by the Board. If the chief
executive officer of the Bank is a Director but he is not separately compensated
for serving as a Director then, for purposes of this Plan, his Compensation
shall be the remuneration he receives as chief executive officer.
2.3 Beneficiary. "Beneficiary" means the person or persons (and their
heirs) designated as Beneficiary in the Directors Beneficiary Designation
(attached as Exhibit B) to whom the deceased Director's legal representative.
The Beneficiary Designation shall be valid when filed with the Committee. If no
Beneficiary is so designated, "Beneficiary" means the Director's surviving
spouse, or if no spouse survives the Director then the Director will be deemed
the Beneficiary. The Director shall have the right to change any prior
Beneficiary
<PAGE> 3
Designation, without the consent of the prior Beneficiary, by filing a new
Beneficiary Designation with the Committee.
2.4 Board. "Board" means the Board of Directors of the Bank and/or the
Company, as applicable.
2.5 Change in Control. "Change of Control" shall mean a change in control
of a nature that: (i) would be required to be reported in response to Item 1(a)
of the current report on Form 8- K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a Change in Control of the Bank or the Company within the
meaning of the Home Owners Loan Act, as amended ("HOLA"), and applicable rules
and regulations promulgated thereunder, as in effect at the time of the Change
in Control; or (iii) without limitation such a Change in Control shall be deemed
to have occurred at such time as (a) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of Company's outstanding securities except for any
securities purchased by the Bank's employee stock ownership plan or trust; or
(b) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof,
provided, however, that this sub-section (b) shall not apply if the Incumbent
Board is replaced by the appointment by a Federal banking agency of a
conservator or receiver for the Bank provided further, that any person becoming
a director subsequent to the date hereof whose election was approved by a vote
of at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Company or similar
transaction in which the Bank or Company is not the surviving institution
occurs; or (d) a proxy statement soliciting proxies from stockholders of the
Company, by someone other than the current management of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company or similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then subject to the Plan
are to be exchanged for or converted into cash or property or securities not
issued by the Company; or (e) a tender offer is made for 25% or more of the
voting securities of the Company and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Company have tendered or
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
2.6 Committee. "Committee" means the Compensation Committee of the
Company's Board of Directors which shall appointed to administer the Plan
pursuant to Article VII.
2.7 Company. "Company" shall mean Finger Lakes Financial Corp., the
mid-tier holding company of the Bank. If the chief executive officer of the
Company is a Director but he
2
<PAGE> 4
is not separately compensated for serving as a Director then, for purposes of
this Plan, his Compensation shall be the remuneration he receives as chief
executive officer.
2.8 Compensation. "Compensation" means any Board or Committee fees or
retainer to which the Director becomes entitled during the Deferral Period.
2.9 Deferral Agreement. "Deferral Agreement" means the agreement filed by
a Director and in which the Director elects to defer the receipt of Compensation
during a Deferral Period. The Deferral Agreement must be filed with the
Committee prior to the beginning of the Deferral Period. A new Deferral
Agreement or Notice of Adjustment of Deferral may be submitted by the Director
for each Deferral Commitment. If the Director fails to submit a new Deferral
Agreement or Notice of Adjustment of Deferral prior to the beginning of a
Deferral Period, deferrals for such period shall be made in accordance with the
last submitted Deferral Agreement.
2.10 Deferral Commitment. "Deferral Commitment" means an election to defer
Compensation made by a Director pursuant to Article III and for which a separate
Deferral Agreement has been submitted by the Director to the Committee.
2.11 Deferral Period. "Deferral Period" means the period over which a
Director has elected to defer a portion of his Compensation.
2.12 Determination Date. "Determination Date" means the last day of each
calendar month.
2.13 Director. "Director" means a member of the Board.
2.14 Disability. "Disability" means the permanent and total inability by
reason of mental or physical infirmity, or both, of a Director to perform the
work customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board must advise the Committee that it is either not possible
to determine when such Disability will terminate or that it appears probable
that such Disability will be permanent during the remainder of such Director's
lifetime. In no event shall a Disability be deemed to occur or to continue after
a Director's Normal Retirement Date.
2.15 Investment Options. "Investment Options" means the investment options
designated by the Committee from which each Director may express a preference,
as described in Article IV, for the constructive investment of his Account.
Investment Options may include, for example, (i) equity markets (including the
stock of the Company or its successors), (ii) money market securities (i.e.,
Treasury bills or other obligations of the United States government or any state
government or municipality, certificates of deposit), or (iii) assets which can
be liquidated within sixty (60) days with no loss of principal. Investment
Options are subject to change from time to time as the Committee, in its
discretion, deems necessary or appropriate. Investment
3
<PAGE> 5
Options shall be used as earning indices as described in Section 4.4. No
provision of the Plan shall be construed as giving any Director an interest in
any of these Investment Options nor shall any provision require that the Company
make any investment in any option.
2.16 Notice of Adjustment of Deferral. "Notice of Adjustment of Deferral"
means the Notice which the Director may submit for Deferral Periods following
the initial Deferral Period in which the initial Deferral Agreement is
submitted. The Notice of Adjustment of Deferral shall set forth the Director's
elections with respect to deferrals for said period.
2.17 Plan Benefit. "Plan Benefit" means the benefit payable to a Director
as calculated in Article V.
2.18 Trustee. "Trustee" means the Trustee, if any, of any grantor trust
which may be established by the Bank and the Company to accumulate assets for
the purpose of funding the benefits promised under this Plan.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 Eligibility and Participation.
(a) Eligibility. Eligibility to participate in the Plan shall be
limited to members of the Board.
(b) Participation. A Director may elect to participate in the Plan
with respect to any Deferral Period by submitting, as to the initial
Deferral Period, a Deferral Agreement (as set forth at Exhibit A) or, as
to subsequent Deferral Periods, a Notice of Adjustment of Deferral (as set
forth at Exhibit C). Said Deferral Agreement or Notice of Adjustment of
Deferral shall be submitted to the Committee by December 15 of the
calendar year immediately preceding the Deferral Period. If a previously
eligible Director fails to submit a new Deferral Agreement or Notice of
Adjustment of Deferral for a Deferral Period, the Committee shall treat
the previously submitted Deferral Agreement or Notice of Adjustment of
Deferral as still in effect. Any election to defer entered into before the
restatement of the Plan shall remain effective until a Notice of
Adjustment of Deferral is submitted in the appropriate time period. In the
event that a Director first becomes eligible to participate during a
calendar year, a Deferral Agreement must be submitted to the Committee no
later than thirty (30) days following notification of the Director of
eligibility to participate, and such Deferral Agreement shall be effective
only with regard to Compensation earned or payable following the
submission of the Deferral Agreement to the Committee.
4
<PAGE> 6
3.2 Form of Deferral. Except as provided in Section 3.1(b) above, a
Director must elect in the Deferral Agreement to defer any portion of his
Compensation for the calendar year following the calendar year in which
the Deferral Agreement is submitted.
3.3 Modification of Deferral Commitment. A Deferral Commitment made
with respect to a Deferral Period shall be irrevocable except that the
Committee may permit a Director to reduce the amount to be deferred, or
waive the remainder of the Deferral Commitment upon a finding that the
Director has suffered a severe financial hardship, as set forth in Section
5.4 and except as provided in Section 5.7.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
4.1 Accounts. For record keeping purposes only, an Account shall be
maintained for each Director. Separate subaccounts shall be maintained to the
extent necessary to properly reflect the Director's total vested Account
balance.
4.2 Elective Deferred Compensation. The amount of Compensation that a
Director elects to defer shall be withheld from each payment of Compensation and
credited to the Director's Account as the nondeferred portion of the
Compensation becomes or would have become payable. Any withholding of taxes or
other amounts with respect to deferred Compensation which is required by state,
federal or local law shall be withheld from the Director's nondeferred
Compensation to the maximum extent possible with any excess being withheld from
the Director's Account.
4.3 Determination of Accounts. Each Director's Account as of each
Determination Date will consist of the balance of the Director's Account as of
the immediately preceding Determination Date, increased by Compensation deferred
pursuant to a Deferral Commitment and earnings, and decreased by distributions
and losses, since that Determination Date.
4.4 Determination of Earnings. Subject to such limitations as may from
time to time be required by law or imposed by the Committee, and subject to such
operating rules and procedures as may be imposed from time to time by the
Committee, each Director may express to the Committee a preference as to how the
Director's Account should be constructively invested among the Investment
Options. The Director's investment preference shall be set forth on an
Investment Election Form (attached as Exhibit D).
(a) Any initial or subsequent expression of investment preference
shall be in writing, on a form provided by and filed with the
Committee, and shall be subject to such rules and procedures as the
Committee may promulgate from time to time, including rules as to
when an expression of investment preference will be effective.
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<PAGE> 7
In the event a grantor trust has been established, the Committee may
choose to forward the Directors expression of investment preference
to the Trustee.
(b) The contributions and credits and other amounts added to a
Director's Account shall be constructively invested in accordance
with the then effective designation of investment preference and (i)
as of the effective date of any new investment preference, all or a
portion of the Director's Account at that date shall be
constructively reallocated among the designated Investment Options
according to the directions specified in the investment preferences
unless and until a subsequent investment preference shall be filed
and become effective. Unless otherwise announced by the Committee,
investment preferences may be changed no more than two times per
calendar year and must be received by the Committee no less than ten
(10) days before the effective date of the change. In the event the
Committee fails to honor a Directors expression of investment
preference, in whole or in part, the Committee shall so inform the
Director as soon as reasonably practicable.
(c) If the Committee receives an initial or revised investment
preference which it deems to be incomplete, unclear or improper, the
Director's investment preference then in effect shall remain in
effect (or, in the case of a deficiency in an initial investment
preference) until the next Determination Date, unless the Committee
provides for, and permits the application of, corrective action
prior to that time. The Committee shall announce to the Director a
default Investment Option, which shall be substituted for the
Director's investment preference for any portion of his Account from
which he fails to file an investment preference.
(d) All investment preferences shall be advisory only and shall not
bind the Company. The Company shall not be obligated to invest any
funds in connection with this Plan. If, however, the Company chooses
to establish a grantor trust in which to invest funds to provide for
its liabilities under this Plan, the Trustee shall have complete
discretion as to investment.
(e) Each Director's Account will be credited with earnings or losses
as if the Account were actually invested in accordance with the
Director's expression of investment preference, as follows. As of
each Determination Date, the net earnings or losses of each
Investment Option since the preceding Determination Date shall be
allocated among all Accounts in accordance with the preferences
indicated by each Director as though the Accounts had been invested
in the Investment Option in accordance with each Director's
indicated preference. For purposes of this allocation, the Account
of each Director will consist of the balance of the Account as of
the preceding Determination Date, adjusted (i) by adding to the
balance any elective deferred Compensation made since the preceding
Determination Date and (ii) by subtracting from such balance all
distributions made
6
<PAGE> 8
to the Director or to a Beneficiary. Each Account shall be further
adjusted to reflect any changes in investment preferences which have
become effective since the last Determination Date.
(f) If it is determined that the constructive value of an Account as
of any date on which distributions are to be made differs materially
from the constructive value of the Account on the prior
Determination Date upon which the distribution is to be based, the
Committee, in its discretion, shall have the right to designate any
date in the interim as a Determination Date for the purpose of
constructively revaluing the Account so that the Account from which
the distribution is being made will, prior to the distribution,
reflect its share of such material difference in value. Similarly,
the Committee may adopt a policy of providing for regular interim
valuations without regard to the materiality of changes in the value
of the Accounts.
4.5 Vesting of Accounts. A Director shall be one hundred percent (100%)
vested at all times in the amount of Compensation elected to be deferred under
this Plan and earnings thereon.
4.6 Statement of Accounts. The Committee shall submit to each Director
during the month of January, or as soon thereafter as is reasonably practicable,
a statement setting forth the balance to the credit of the Account maintained
for a Director as of the immediately preceding December.
ARTICLE V
PLAN BENEFITS
5.1 Plan Benefit. If a Director terminates service for reasons other than
death, the Bank shall pay to the Director a Plan Benefit equal to the Director's
vested Account, as determined in accordance with Article IV.
5.2 Death Benefit. Upon the death of a Director, the Bank and/or the
Company, as applicable, shall pay to the Director's Beneficiary an amount
determined as follows:
(a) If the Director dies after termination of service with the Bank
and/or the Company, as applicable, the remaining unpaid balance of the
Director's vested Account shall be paid in the same form that payments
were being made prior to the Director's death.
(b) If the Director dies prior to termination of service with the
Bank and/or the Company, as applicable, the amount payable shall be the
Director's Account balance. Payments shall be made in accordance with
Section 5.5.
7
<PAGE> 9
(3) Notwithstanding anything else herein, the Committee may, in its
sole discretion, pay the Director's Account to the Beneficiary in a lump
sum.
5.3 Accelerated Distribution. Notwithstanding any other provision of the
Plan, at any time after a Change in Control, upon written request to the
Committee and with the consent of the Committee, a Director shall be entitled to
receive a lump sum distribution of the Director's vested Account balance. The
Committee shall make a determination on distribution within thirty (30) days of
receipt of the written request from the Director. The amount payable under this
Section shall be paid in a lump sum within thirty (30) days following consent to
such payment by the Board which shall be the fair market value of the Account
balance on the date of distribution. In the event that a Director requesting an
accelerated distribution is a member of the Committee, the Director shall not
participate in any decision made with respect to such Directors request.
5.4 Hardship Distributions. Upon a finding that a Director has suffered an
unforeseeable emergency, the Committee may, in its sole discretion, make
distributions from the Director's Account prior to the time specified for
payment of benefits under the Plan. An unforeseeable emergency shall be defined
as a severe financial hardship to the Director resulting from a sudden and
unexpected illness or accident of the Director or of a dependent (as defined in
Internal Revenue Code section 152) of the Director, loss of the Director's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the Director.
The amount of such distribution shall be limited to the amount reasonably
necessary to meet the Director's requirements during the financial hardship. The
circumstances that shall constitute an unforeseeable emergency will depend upon
the facts of each case, but, in any case, payment shall not be made to the
extent that such hardships is or may be relieved (i) through reimbursement or
compensation by insurance or otherwise, (ii) by liquidation of the Director's
assets to the extent such liquidation would not itself cause severe financial
hardships, or (iii) by cessations of deferrals under the Plan. Examples of what
are not considered to be unforeseeable emergencies include the need to send the
Director's child to college or the decision to purchase a new home.
5.5 Form of Benefit Payment.
(a) All Plan Benefits other than Hardship Distributions shall be
paid in the form selected by the Director at the time of the Deferral
Commitment. A Director may specify a single period for payment of his
entire Account, or separate Deferral Periods with respect to each
separated Deferral Commitment. Distributions from a Director's Account
shall be made by the Bank and/or the Company, as applicable, in
substantially equal annual installments for a period specified by the
Director which generally may not be longer than fifteen years or less then
five years, subject to the alternative distribution elections of Section
5.3 and 5.4. Earnings and losses shall continue to be credited to the
Director's Account on the amounts remaining until the Account is fully
distributed.
8
<PAGE> 10
(b) If for any Deferral Commitment a Director fails to elect a form
of benefit payment, the form shall be the form of payment elected on the
most recent past Deferral Commitment.
(c) A Director's Account may be distributed in cash, or in the event
the Company has established a grantor trust and such trust holds
investments that include Investment Options selected by the Director for
the constructive investment of his Account, the Committee may, in its sole
discretion, direct the Trustee to distribute assets in kind from the trust
in satisfaction of all or part of the Company's obligation to make
distributions to the Director.
5.6 Commencement of Payments. Payments under the Plan shall commence and
shall be paid in accordance with the Director's elections under the Directors
Deferral Agreement and Notice of Adjustment of Deferral.
5.7 Modification of Deferral Period. In the event a Director desires to
modify his Deferral Period with respect to amounts accrued in his Account, the
Director may do so, provided that any such modification is made no later than
twenty-four (24) months prior to the date of the commencement of payments under
both (i) the Directors present Deferral Agreement and/or Notice of Adjustment of
Deferral, and (ii) the Directors Deferral Agreement as modified.
5.8 Determination of Annual Installments. Benefits payable in annual
installments hereunder shall be determined as follows. For example, in the event
of five (5) annual installments, the first annual installment shall equal
one-fifth of the Director's Account. The second annual installment shall equal
one-fourth of the Director's Account, as increased during the year by interest
and/or earnings on said Account. The third annual installment shall equal
one-third of the Director's Account, the fourth annual installment shall equal
one-half of the Director's Account and the final installment shall equal the
balance of the Director's Account. Each succeeding installment shall be paid on
the anniversary date of the immediate preceding installment.
ARTICLE VI
PLAN BENEFITS IN THE EVENT OF DEATH
6.1 Plan Benefits in the Event of Death. If the Director should die before
receiving said Plan Benefits payable hereunder, the Bank and/or the Company, as
applicable, shall pay the Director's Account to the Director's Beneficiary,
commencing within thirty (30) days of the Director's death and payable over the
period designated in the Directors Deferral Agreement and/or Notice of
Adjustment of Deferral. Upon the written request of the Beneficiary, and in the
sole discretion and approval of the Committee, the Director's Plan Benefits may
be paid to the Beneficiary in a lump sum.
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<PAGE> 11
6.2 Effect of Payment. The payment to the deemed Beneficiary shall
completely discharge Bank's and/or the Company's, as applicable, obligations
under this Plan.
ARTICLE VII
ADMINISTRATION
7.1 Committee; Duties. This Plan shall be administered by the Committee.
The Committee shall have the authority to make, amend, interpret, and enforce
all appropriate rules and regulations for the administration of this Plan and
decide or resolve any and all questions, including interpretations of this Plan,
as may arise in connection with the Plan. A majority vote of the Committee
members shall control any decision.
7.2 Agents. The Committee may, from time to time, employ other agents and
delegate to them such administrative duties as it sees fit, and may from time to
time consult with counsel who may be counsel to the Bank and/or the Company.
7.3 Binding Effect of Decisions. The decision or action of the Committee
in respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the rules of
regulations promulgated hereunder shall be final, conclusive and binding upon
all persons having any interest in the Plan.
7.4 Indemnity of Committee. The Company shall indemnify and hold harmless
the members of the Committee against any and all claims, loss, damage, expense
or liability arising from any action or failure to act with respect to this
Plan, except in the case of gross negligence or willful misconduct.
ARTICLE VIII
CLAIMS PROCEDURE
8.1 Claim. Any person claiming a benefit, requesting an interpretation or
ruling under the Plan, or requesting information under the Plan shall present
the request in writing to the Committee, which shall respond in writing within
ninety (90) days.
8.2 Denial of Claim. If the claim or request is denied, the written notice
of denial shall state:
(a) The reasons for denial, with specific reference to the Plan
provisions on which the denial is based.
(b) A description of any additional material or information required
and an explanation of why it is necessary.
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<PAGE> 12
(c) An explanation of the Plan's claim review procedure.
8.3 Review of Claim. Any person whose claim or request is denied or who
has not received a response within ninety (90) days may request review by notice
given in writing to the Committee. The claim or request shall be reviewed by the
Committee who may, but shall not be required to, grant the claimant a hearing.
On review, the claimant may have representation, examine pertinent documents,
and submit issues and comments in writing.
8.4 Final Decision. The decision on review shall normally be made within
sixty (60) days. If an extension of time is required for a hearing or other
special circumstances, the claimant shall be notified and the time limit shall
be one hundred twenty (120) days. The decision shall be in writing and shall
state the reasons and the relevant Plan provisions.
8.5 Arbitration. If a claimant continues to dispute the benefit denial
based upon completed performance of this Plan and the Deferral Agreement or the
meaning and effect of the terms and conditions thereof, then the claimant may
submit the dispute to mediation, administered by the American Arbitration
Association ("AAA") (or a mediator selected by the parties) in accordance with
the AAA's Commercial Mediation Rules. If mediation is not successful in
resolving the dispute, it shall be settled by arbitration administered by the
AAA under its Commercial Arbitration Rules, and judgment on the award rendered
by the arbitrator(s) may be entered in any court having jurisdiction thereof.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 Amendment. The Board may at any time amend the Plan in whole or in
part, provided, however, that no amendment shall be effective to decrease or
restrict the amount accrued to the date of Amendment in any Account maintained
under the Plan.
9.2 Bank's and Company's Right to Terminate. The Boards of the Bank and
the Company, acting jointly, may at any time partially or completely terminate
the Plan if, in its judgment, the tax, accounting, or other effects of the
continuance of the Plan, or potential payments thereunder, would not be in the
best interests of the Bank and the Company.
(a) Partial Termination. The Board of the Bank and the Company may
partially terminate the Plan by instructing the Committee not to accept
any additional Deferral Commitments. In the event of such a Partial
Termination, the Plan shall continue to operate and be effective with
regard to Deferral Commitments entered into prior to the effective date of
such Partial Termination.
(b) Complete Termination. The Board may completely terminate the
Plan by instructing the Committee not to accept any additional Deferral
Commitments, and by terminating all ongoing Deferral Commitments. In the
event of Complete Termination, the Plan shall cease to operate and the
Bank
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<PAGE> 13
and/or the Company, as applicable, shall pay out to each Director their
Account as if that Director had terminated service as of the effective
date of the Complete Termination. Payments shall be made in equal annual
installments over the period listed below, based on the Account balance:
<TABLE>
<CAPTION>
Appropriate Account Balance Payout Period
--------------------------- -------------
<S> <C>
Less than $10,000................................. 1 Year
$10,000 but less than $50,000..................... 3 Years
More than $50,000................................. 5 Years
</TABLE>
ARTICLE X
MISCELLANEOUS
10.1 Unfunded Plan. This Plan is intended to be an unfunded plan
maintained primarily to provide deferred compensation benefits for a select
group of management or highly compensated employees or directors. This Plan is
not intended to create an investment contract, but to provide tax planning
opportunities and retirement benefits to eligible individuals who have elected
to participate in the Plan. Eligible individuals are select members of
management who, by virtue of their position with the Bank and/or the Company,
are uniquely informed as to the Bank's and/or the Company's operations and have
the ability to materially affect the Bank's and/or the Company's profitability
and operations.
10.2 Unsecured General Creditor. Directors and their Beneficiaries, heirs,
successors and assigns shall have no legal or equitable rights, interest or
claims in any property or assets of Bank and/or the Company, nor shall they be
Beneficiaries of, or have any rights, claims or interests in any life insurance
policies, annuity contracts or the proceeds therefrom owned or which may be
acquired by Bank and/or the Company. Such policies or other assets of Bank
and/or the Company shall not be held under any trust for the benefit of
Directors, their Beneficiaries, heirs, successors or assigns, or held in any way
as collateral security for the fulfilling of the obligations of Bank and/or the
Company under this Plan. Any and all of Bank's and/or the Company's assets and
policies shall be, and remain, the general, unpledged, unrestricted assets of
Bank and/or the Company. Bank's and/or Company's obligation under the Plan shall
be that of an unfunded and unsecured promise of Bank and/or Company to pay money
in the future.
10.3 Trust Fund. The Bank and/or the Company, as applicable, shall be
responsible for the payment of all benefits provided under the Plan. At its
discretion, the Bank and/or the Company may establish one or more grantor
trusts, with such trustees as the Board may approve, for the purpose of
providing for the payment of such benefits. Such trust or trusts may be
irrevocable, but the assets thereof shall be subject to the claims of the Bank's
and/or the Company's creditors. To the extent any benefits provided under the
Plan are actually paid from any such trust, the Bank and/or the
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<PAGE> 14
Company shall have no further obligation with respect thereto, but to the extent
not so paid, such benefits shall remain the obligation of, and shall be paid by,
the Bank and/or the Company, as applicable.
10.4 Payment to Director, Legal Representative or Beneficiary. Any payment
to any Director or the legal representative, Beneficiary, or to any guardian or
committee appointed for such Director or Beneficiary in accordance with the
provisions hereof, shall, to the extent thereof, be in full satisfaction of all
claims hereunder, which may require the Director, legal representative,
Beneficiary, guardian or committee, as a condition precedent to such payment, to
execute a receipt and release thereof in such form as shall be determined by the
Bank and/or the Company, as applicable.
10.5 Minimum Regulatory Capital Requirement. Notwithstanding anything
herein to the contrary, to the extent required by applicable law, no benefits
hereunder shall be earned or distributed in any year in which the Bank is not
meeting its fully phased-in capital requirements.
10.6 Nonassignability. Neither a Director nor any other person shall have
any right to commute, sell, assign, transfer, hypothecate or convey in advance
of actual receipt the amounts, if any, payable hereunder, or any part thereof,
which are, and all rights to which are, expressly declared to be unassignable
and nontransferable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Director or any other
person, nor be transferable by operation of law in the event of a Director's or
any other person's bankruptcy or insolvency.
10.7 Terms. Whenever any words are used herein in the masculine, they
shall be construed as though they were used in the feminine in all cases where
they would so apply; and whenever any words are used herein in the singular or
in the plural, they shall be construed as though they were used in the plural or
the singular, as the case may be, in all cases where they would so apply.
10.8 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
10.9 Governing Law. The provisions of this Plan shall be construed and
interpreted according to the laws of the State of New York.
10.10 Validity. In case any provision of this Plan shall be held illegal
or invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if such
illegal and invalid provision had never been inserted herein.
10.11 Notice. Any notice or filing required or permitted to be given to
the Committee
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<PAGE> 15
under the Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, to any member of the Committee, the Plan
Administrator, or the Secretary of the Company. Such notice shall be deemed
given as of the date of delivery or, if delivery is made by mail, as of the date
shown on the postmark on the receipt for registration or certification.
10.12 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Savings Bank of the Finger Lakes, FSB, Finger Lakes Financial
Corporation and their successors and assigns. The term "successors" as used
herein shall include any corporate or other business entity which shall, whether
by merger, consolidation, purchase or otherwise acquire all or substantially all
of the business and assets of the Savings Bank of the Finger Lakes, FSB, or
Finger Lakes Financial Corporation and successors of any such corporation or
other business entity.
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<PAGE> 16
IN WITNESS WHEREOF, and pursuant to resolutions of the Board of Directors
of Savings Bank of the Finger Lakes, FSB, and Finger Lakes Financial Corporation
such corporations have caused this instrument to be executed by their duly
authorized officers effective as of the day and year first above written.
ATTEST: SAVINGS BANK OF THE FINGER
LAKES, FSB
By: /s/ Terry L. Hammond By: /s/ G. Thomas Bowers
--------------------------- -----------------------------------
Secretary President
ATTEST: FINGER LAKES FINANCIAL CORPORATION
By: /s/ Terry L. Hammond By: /s/ G. Thomas Bowers
--------------------------- -----------------------------------
Secretary President
15
<PAGE> 1
EXHIBIT 10.10
Amendment
To
Supplemental Retirement Agreement dated February 28, 1995
Agreement made this 22nd day of June, 1998, by and between SAVINGS BANK OF THE
FINGER LAKES, FSB, Federal Savings Association, having its head office at 470
Exchange Street, Geneva, New York, ("SBFL") and G. Thomas Bowers residing at
1045 Lochland Road, Geneva, New York, 14456 ("Bowers).
WHEREAS, Bowers and SBFL have entered into a Supplemental Retirement Agreement
dated February 28, 1995, and;
WHEREAS, under said Agreement, SBFL agreed to provide certain benefits to Bowers
upon his future retirement from SBFL, and;
WHEREAS, SBFL and Bowers desire to amend said Agreement,
NOW, THEREFORE, it is agreed by and between the Parties hereto as follows:
1. Section One of the Agreement dated February 28, 1995 is hereby amended by
adding the following thereto:
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<PAGE> 2
"Such benefits shall be reduced by an amount equal to six (6) percent of
total cash value in all Policies subject to any split dollar agreement in
effect as of the Executive's attainment of age sixty-two (62)."
2. Paragraph 3 of the Agreement dated February 28, 1995, is hereby deleted.
IN WITNESS WHEREOF, SBFL has caused this Agreement to be executed by its duly
authorized Officers, and Bowers has set his hand to this Agreement as of the
date first written.
SAVINGS BANK OF THE FINGER LAKES, FSB
By: /s/ Terry L. Hammond
--------------------------------------------
Terry L. Hammond
Sr. Vice President & Chief Financial Officer
/s/ G. Thomas Bowers
------------------------------
G. Thomas Bowers
2
<PAGE> 1
EXHIBIT 10.11
SPLIT-DOLLAR AGREEMENT
THIS AGREEMENT, made as of the 22 day of June, 1998 by and between SAVINGS BANK
OF THE FINGER LAKES, a New York corporation (hereinafter referred to as the
"Employer"), and G. THOMAS BOWERS of Geneva, New York (hereinafter referred to
as the "Employee").
WITNESSETH THAT:
WHEREAS, the Employee is employed by the Employer; and
WHEREAS, the Employer is desirous of retaining the services of the Employee and
of assisting the Employee in paying for life insurance on his own life; and
WHEREAS, the Employer has determined that this assistance can be provided under
a split dollar, life insurance arrangement; and
WHEREAS, the Employee has applied for, and is the owner of the insurance policy
or policies listed in the attached schedule hereto, hereinafter referred to as
the "Policy"; and
WHEREAS, the Employer and the Employee agree to make the Policy subject to this
Agreement; and
WHEREAS, the Employee -has assigned the Policy to the -Employer as collateral
for amounts to be advanced by the Employer under this agreement by an instrument
of assignment filed with the Insurer (hereinafter referred to as the
"Assignment");
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, the Parties hereto hereby agree as follows:
1. The Parties hereto agree that the Policy shall be subject to the terms and
conditions of this Agreement and of the Assignment filed with the Insurer
relating to the Policy. The Employee shall be the sole and absolute owner
of the Policy and may exercise all ownership rights granted to the owner
thereof by the terms of the Policy, except as may be otherwise provided
herein and in the Assignment.
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<PAGE> 2
2. The premium for the Policy will be paid by the Employer during the
Employee's employment and for any period of time that it may have an
obligation to provide continuing fringe benefits thereafter. The premium
will be allocated between the Employee and the Employer, The Employee's
share of the premium (term insurance allocation) shall be paid by the
Employer as agent for the Employee and shall be charged to the Employee as
cash compensation, and for all purposes, including the Assignment, shall
be deemed cash compensation and not Employer paid premium,
3. The Assignment shall not be terminated, altered or amended by the Employee
without the express written consent of the Employer, The Parties hereto
agree to take reasonable action to cause such Assignment to conform to the
provisions of this Agreement.
4. a. Except as otherwise provided herein, the Employee shall not sell,
assign, transfer, borrow against, surrender or cancel the Policy, change
the beneficiary designation provision thereof, in any such case, without
the express written consent of the Employer. Consent to change the
beneficiary designation shall not be unreasonably withheld.
Notwithstanding the forgoing, the Employee may borrow or withdraw cash
value of the Policy in excess of the collaterally assigned values of the
Employer without action of the Board of Trustees. However, Policy loan
interest, if any, that may accrue on any such transaction shall not reduce
the collaterally assigned values of the Employer, or if such may be the
case, Employee will pay such Policy loan interest in cash to the Insurer.
b. The Employer shall not borrow against the Policy without the express
written consent of the Employee.
c. Upon the Employee's termination of employment, the Employee shall have
the right to take any action with regard to the cash value of the policy
in excess of the collaterally assigned interest of the Employer.
5. a. Upon the death of the Employee, the Employer shall promptly take all
action necessary to obtain its share of the death benefit provided under
the Policy.
b. The Employer shall have the unqualified right to receive a portion of
such Death Benefit equal to the total amount of its share of the premiums
paid by it hereunder, (hereinafter referred to as the "Net Premium"). The
balance of the Death Benefit provided under the Policy, if any, shall be
paid directly by the Insurer to the beneficiary or beneficiaries and in
the manner designated by the Employee. No amount shall be paid from such
death benefit to
2
<PAGE> 3
the beneficiary or beneficiaries designated by the Employee until the
Employer or Insurer acknowledges in writing that the full amount due to
the Employer hereunder has been paid. The Parties hereto agree that the
beneficiary designation provision of the Policy shall conform to the
provisions hereof.
6. The Employer shall not merge or consolidate into or with another
organization, or reorganize, or sell substantially all of its assets to
another organization, firm or person unless and until such succeeding or
continuing organization, firm or person agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of
such event, the term "Employer" as used in this Agreement shall be deemed
to refer to such successor or survivor organization.
7. This Agreement shall terminate upon the Employee's death and the payment
of proceeds pursuant to Section 5 of this Agreement.
8. a. If the Employee ceases to be employed by the Employer for whatever
reason, the Employee has the right to continue to keep the Policy in force
either individually or through a subsequent Employer, subject to the
requirement that the Policy cash value not be reduced through loans,
premium payment options, or in any other manner below the amount needed to
repay the Employer the Net Premiums paid by it hereunder.
b. If the Employee continues to keep the Policy in force, termination of
this Agreement shall be pursuant to Section 7 of this Agreement.
c. If the Employee does not continue to keep the Policy in force, this
Agreement will terminate immediately and the Employer will be repaid an
amount equal to the lesser of Net Premiums paid by the Employer or the
cash surrender value as of the date of the Employee's termination of
Employment.
9. The Parties hereto agree that this Agreement shall take precedence over
any provisions of the Assignment. The Employer agrees not to exercise any
right possessed by it under the Assignment except in conformity with this
Agreement.
10. This Agreement may not be amended, altered or modified except by a written
instrument signed by both of the Parties hereto and may not be otherwise
terminated except as provided herein.
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<PAGE> 4
11. a. The split-dollar arrangement contemplated herein is an exempt welfare
plan under regulations promulgated under Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA").
b. For purposes of ERISA, the Employer will be the "named fiduciary" and
"plan administrator" of the split-dollar arrangement contemplated herein,
and this Agreement is hereby designated as the written plan instrument.
C. The Employee or any beneficiary of his may file a request for benefits
with the plan administrator. If a claim request is wholly or partially
denied, the plan administrator will furnish to the claimant a notice of
its decision within ninety (90) days in writing, and in a manner to be
understood by the claimant, which notice will contain the following
information:
(i) the specific reason or reasons for the denial;
(ii) specific reference to pertinent plan provisions upon which the
denial is based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation
as to why such material or information is necessary.
(iv) an explanation of the plan's claim-review procedure describing
the steps to be taken by a claimant who wishes to submit his claim
for review.
d. A claimant or his authorized representative may, with respect to any
denied claim,
(i) request a review upon written application filed within sixty
(60) days after receipt by the claimant of written notice of the
denial of his claim;
(ii) review pertinent documents; and
(iii) submit issues and comments in writing.
Any request or submission will be in writing and will be directed to the plan
administrator. The plan administrator will have the sole responsibility for the
review of any denied claim and will take all appropriate steps in light of its
findings. The plan administrator will render a
4
<PAGE> 5
decision upon review of a denied claim within sixty (60) days after receipt of a
request for review. If special circumstances warrant additional time, the
decision will be rendered as soon as possible, but not later than one hundred
twenty (120) days after receipt of request for review. Written notice of any
such extension will be furnished to the claimant prior to the commencement of
the extension. The decision on review will be in writing and will include
specific reasons for the decision written in a manner to be understood by the
claimant, as well as the specific references of the pertinent provisions of the
plan on which the decision is based. If the decision on review is not furnished
to the claimant within the time limits described above, the claim will be deemed
denied on review.
12. This Agreement shall be binding upon and inure to the benefit of the
Employer and its successors and assignees and the Employee and his
successors, assignees, heirs, executors, administrators and beneficiaries.
13. Except as may be preempted by ERISA, this Agreement, and the rights of the
Parties hereunder, shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its
officer thereunto duly authorized and the Employee has hereunto set his hand and
seal, all as of the day and year first above written.
SAVINGS BANK OF THE FINGER LAKES
/s/ Tyna L. Borrelli By: /s/ Terry L. Hammond
- --------------------------- -----------------------------
Witness Terry L. Hammond
Title: Sr. Vice President & CFO
/s/ Tyna L. Borrelli By: /s/ G. Thomas Bowers
- --------------------------- -----------------------------
Witness G. Thomas Bowers
5
<PAGE> 1
EXHIBIT 10.12
AMENDMENT
TO
SUPPLEMENTAL RETIREMENT AGREEMENT DATED DECEMBER 31, 1985
Agreement made this 22nd day of June, 1998, by and between SAVINGS BANK OF THE
FINGER LAKES, FSB, Federal Savings Association, having its head office at 470
Exchange Street, Geneva, New York, ("SBFL") and Ralph E. Springstead residing at
146 Maxwell Avenue, Geneva, New York, 14456 ("Springstead").
WHEREAS, Springstead and SBFL have entered into a Supplemental Retirement
Agreement dated December 31, 1985, and;
WHEREAS, under said Agreement, SBFL agreed to provide certain benefits to
Springstead upon his future retirement from SBFL, and;
WHEREAS, SBFL and Springstead desire to amend said Agreement,
NOW, THEREFORE, it is agreed by and between the Parties hereto as follows:
1. Section One of the Agreement dated December 31, 1985 is hereby amended by
adding the following thereto:
<PAGE> 2
"Such benefits shall be reduced by an amount equal to the annual dividend
payable on all Policies subject to any split dollar agreement in effect on
or after the Executive's attainment of age sixty-two (62)."
IN WITNESS WHEREOF, SBFL has caused this Agreement to be executed by its duly
authorized Officers, and Springstead has set his hand to this Agreement as of
the date first written.
SAVINGS BANK OF THE FINGER LAKES, FSB
By: /s/Terry L. Hammond
--------------------------------------
Terry L. Hammond
Sr. Vice President & Chief Financial Officer
/s/Ralph E. Springstead
--------------------------------------
Ralph E. Springstead
2
<PAGE> 1
EXHIBIT 10.13
SPLIT-DOLLAR AGREEMENT
----------------------
THIS AGREEMENT, made as of the 22 day of June, 1998 by and between SAVINGS BANK
OF THE FINGER LAKES, a New York corporation (hereinafter referred to as the
"Employer"), and RALPH E SPRINGSTEAD of Geneva, New York (hereinafter referred
to as the "Employee").
WINESSETH THAT:
WHEREAS, the Employee is employed by the Employer; and
WHEREAS, the Employer is desirous of retaining the services of the Employee and
of assisting the Employee in paying for life insurance on his own life; and
WHEREAS, the Employer has determined that this assistance can be provided under
a split dollar life insurance arrangement; and
WHEREAS, the Employee has applied for, and is the owner of the insurance policy
or policies listed in the attached schedule hereto, hereinafter referred to as
the "Policy"; and
WHEREAS, the Employer and the Employee agree to make the Policy subject to this
Agreement; and
WHEREAS, the Employee has assigned the Policy to the Employer as collateral for
amounts to be advanced by the Employer under this agreement by an instrument of
assignment filed with the Insurer (hereinafter referred to as the "Assignment");
1
<PAGE> 2
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, the Parties hereto hereby agree as follows:
1. The Parties hereto agree that the Policy shall be subject to the terms and
conditions of this Agreement and of the Assignment filed with the Insurer
relating to the Policy. The Employee shall be the sole and absolute owner
of the Policy and may exercise all ownership rights granted to the owner
thereof by the terms of the Policy, except as may be otherwise provided
herein and in the Assignment.
2. And dividend declared on the Policy shall be applied to purchase paid-up
additional insurance on the life of the Employee while the Employee is
employed. The Parties hereto agree that the dividend election provisions of
the Policy shall conform to the provisions hereof.
3. The premium for the Policy will be paid by the Employer during the
Employee's employment by the Employer and for any period of time that it
may have an obligation to pay such premiums thereafter. The premium will be
allocated between the Employee and the Employer. The Employee's share of
the premium (term insurance allocation) shall be paid by the Employer as
agent for the Employee and shall be charged to the Employee as cash
compensation, and for all purposes, including the Assignment, shall be
deemed cash compensation and not Employer paid premium.
4. The Assignment shall not be terminated, altered or amended by the Employee
without the express written consent of the Employer. The Parties hereto
agree to take responsible action to cause such Assignment to conform to the
provisions of this Agreement.
5. a. Except as otherwise provided herein, the Employee shall not sell,
assign, transfer, borrow against, surrender or cancel the Policy, change
the beneficiary designation provision thereof, or terminate the dividend
election thereof with, in any such case, the
2
<PAGE> 3
express written consent of the Employer. Notwithstanding the forgoing, the
Employee may borrow or withdraw cash value of the Policy in excess of the
collaterally assigned values of the Employer without action of the Board of
Trustees. However, Policy loan interest, if any, that may accrue on any
such transaction shall not reduce the collaterally assigned values of the
Employer, or if such may be the case, Employee will pay such Policy loan
interest in cash to the Insurer.
b. The Employee shall have the right to change the beneficiary or
beneficiaries and to borrow policy values only with regard to cash value
and death benefit in excess of the collaterally assigned interest of the
Employer as described under Sections 6 and 9.
c. The Employer shall not borrow against the Policy without the express
written consent of the Employee.
d. Upon termination of employment, the Employee shall have the right to
alter the dividend option, and the right to take any action with regard to
the cash value of the policy in excess of the collaterally assigned
interest of the Employer.
6. a. Upon the death of the Employee, the Employer shall promptly take all
action necessary to obtain its share of the death benefit provided under
the Policy.
b. The Employer shall have the unqualified right to receive a portion of
such Death Benefit equal to the total amount of its share of the premiums
paid by it hereunder (hereinafter referred to as the "Net Premiums")
without interest. The balance of the death benefit provided under the
Policy, if any, shall be paid directly by the Insurer to the beneficiary or
beneficiaries and in the manner designated by the Employee. No amount shall
be paid from such death benefit to the beneficiary or beneficiaries
designated by the Employee until the Employer or Insurer acknowledges in
writing that the full amount due to the Employer hereunder has been paid.
The Parties hereto agree that the beneficiary designation provision of the
Policy shall conform to the provisions hereof.
7. The Employer shall not merge or consolidate into or with another
organization, or reorganize, or sell substantially all of its assets to
another organization, fern or person unless and until such
3
<PAGE> 4
succeeding or continuing organization, firm or person agrees to assume and
discharge the obligations of the Employer under this Agreement. Upon the
occurrence of such event, the term "Employer" as used in this Agreement
shall be deemed to refer to such successor or survivor organization.
8. This Agreement shall terminate upon the Employee's death and the payment of
proceeds pursuant to Section 6 of this Agreement.
9. a. If the employee ceases to be employed by the employer for whatever
reason, the Employee has the right to continue to keep the Policy in force
either individually or through a subsequent Employer, subject to the
requirement that the Policy cash value not be reduced through loans,
premium payment options, or in any other manner below the amount needed to
repay the Employer the Net Premiums paid by it hereunder.
b. If the Employee continues to keep the Policy in force, termination of
this Agreement shall be pursuant to Section 8 of this Agreement.
c. If the Employee does not continue to keep the Policy in force, this
Agreement will terminate immediately and the Employer will be repaid an
amount equal to the lesser of (a) the Net Premiums paid by the Employer or
(b) the cash surrender value as of the date of the Employee's termination
of Employment.
10. The Parties hereto agree that this Agreement shall take precedence over any
provisions of the Assignment. The Employer agrees not to exercise any right
possessed by it under the Assignment except in conformity with this
Agreement.
11. This Agreement may not be amended, altered or modified except by a written
instrument signed by both of the Parties hereto and may not be otherwise
terminated except as provided herein.
a. The split-dollar arrangement contemplated herein is an exempt welfare
plan under regulations promulgated under Title I of the Employee Retirement
Income Security Act of 1974 ("ERISA").
b. For purposes of ERISA, the Employer will be the "named fiduciary" and
"plan administrator" of the split-dollar arrangement contemplated herein,
and this Agreement is hereby designated as the written plan instrument.
4
<PAGE> 5
c. The Employee or any beneficiary of his may file a request for benefits
with the plan administrator. If a claim request is wholly or partially
denied, the plan administrator will furnish to the claimant a notice of its
decision within ninety (90) days in writing, and in a manner to be
understood by the claimant, which notice will contain the following
information:
(i) the specific reason or reasons for the denial;
(ii) specific reference to pertinent plan provisions upon which the
denial is based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation as
to why such material or information is necessary.
(iv) an explanation of the plan's claim-review procedure describing
the steps to be taken by a claimant who wishes to submit his claim for
review.
d. A claimant or his authorized representative may, with respect to any
denied claim,
(i) request a review upon written application filed within sixty (60)
days after receipt by the claimant of written notice of the denial of
his claim;
(ii) review pertinent documents; and
(iii) submit issues and comments in writing.
Any request or submission will be in writing and will be directed to the
plan administrator. The plan administrator will have the sole
responsibility for the review of any denied claim and will take all
appropriate steps in light of its findings. The plan administrator will
render a decision upon review of a denied claim within sixty (60) days
after receipt of a request for review. If special circumstances warrant
additional time, the decision will be rendered as soon as possible, but not
later than one hundred twenty (120) days after receipt of request for
review. Written notice of any such extension will be furnished to the
claimant prior to the commencement of the extension. The decision on review
will be in writing and will include specific reasons for the decision
written in a manner to be understood by the claimant, as well as the
specific references of the pertinent provisions of the plan on which the
decision is based. If the decision on review is not furnished to the
claimant within the time limits described above, the claim will be deemed
denied on review.
5
<PAGE> 6
13. This Agreement shall be binding upon and inure to the benefit of the
Employer and its successors and assignees and the Employee and his
successors, assignees, heirs, executors, administrators and beneficiaries,
14. Except as may be preempted by ERISA, this Agreement, and the rights of the
Parties hereunder, shall be governed by and construed in accordance with,
the laws of the State of New York.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its
officer thereunto duly authorized and the Employee has hereunto set his hand and
seal, all as of the day and year first above written.
SAVINGS BANK OF THE FINGER LAKES
/s/Tyna L. Borrelli By: /s/Terry L. Hammond
- ---------------------------- ----------------------------
Witness Terry L. Hammond
Title: Sr. Vice President & CFO
/s/Tyna L. Borrelli By: /s/Ralph E. Springstead
- ---------------------------- ----------------------------
Witness Ralph E. Springstead
6
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,375
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,333
<INVESTMENTS-CARRYING> 4,640
<INVESTMENTS-MARKET> 4,662
<LOANS> 146,311
<ALLOWANCE> 1,176
<TOTAL-ASSETS> 282,376
<DEPOSITS> 202,434
<SHORT-TERM> 6,000
<LIABILITIES-OTHER> 3,163
<LONG-TERM> 48,815
0
0
<COMMON> 36
<OTHER-SE> 21,928
<TOTAL-LIABILITIES-AND-EQUITY> 282,376
<INTEREST-LOAN> 10,821
<INTEREST-INVEST> 7,810
<INTEREST-OTHER> 14
<INTEREST-TOTAL> 18,645
<INTEREST-DEPOSIT> 8,678
<INTEREST-EXPENSE> 11,201
<INTEREST-INCOME-NET> 7,444
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 106
<EXPENSE-OTHER> 6,605
<INCOME-PRETAX> 1,193
<INCOME-PRE-EXTRAORDINARY> 1,193
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 724
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 7.42
<LOANS-NON> 1,016
<LOANS-PAST> 0
<LOANS-TROUBLED> 121
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,149
<CHARGE-OFFS> 293
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 1,176
<ALLOWANCE-DOMESTIC> 941
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 235
</TABLE>
