<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 000-24809
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FINGER LAKES FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
UNITED STATES 16-1551047
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
(incorporation or organization) Identification Number)
470 EXCHANGE STREET, GENEVA, NEW YORK 14456
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (315) 789-3838
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Number of shares of common stock outstanding
as of March 31, 2000
COMMON STOCK, $.01 PAR VALUE 3,570,000
---------------------------- ---------
Class Outstanding
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FINGER LAKES FINANCIAL CORP.
Form 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited):
Consolidated Statements of Financial Condition
at March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income
for the three month periods ended
March 31, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 2000 and March 31, 1999 5, 6
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for the three month
period ended March 31, 2000 7
Notes to Consolidated Financial Statements 8, 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 12
Item 3 - Quantitative & Qualitative Disclosure about
Market Risk 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities and Use of Proceeds 14
Item 3 - Defaults Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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Item 1 - Financial Statements
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Financial Condition
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------- ------------
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,243 6,095
Securities available for sale, at fair value 117,910 118,750
Securities held to maturity, fair value
of $1,570 at March 31, 2000 and
$1,567 at December 31, 1999 1,593 1,593
Loans 164,318 160,204
Less allowance for loan losses 1,389 1,349
--------- ---------
Net loans 162,929 158,855
Accrued interest receivable 2,262 2,180
Federal Home Loan Bank Stock, at cost 3,523 3,523
Premises and equipment, net 4,408 4,149
Other assets 6,724 6,096
--------- ---------
Total assets $ 303,592 301,241
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 210,998 208,132
Advances from Federal Home Loan Bank 69,811 69,960
Other liabilities 3,405 3,770
--------- ---------
Total liabilities 284,214 281,862
--------- ---------
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
issued and outstanding 36 36
Additional paid-in capital 4,791 4,787
Retained earnings 18,355 18,262
Accumulated other comprehensive income (loss) (3,632) (3,525)
Unallocated shares of ESOP (172) (181)
--------- ---------
Total stockholders' equity 19,378 19,379
--------- ---------
Total liabilities and stockholders' equity $ 303,592 301,241
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
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<S> <C> <C>
Interest income:
Loans $3,214 2,918
Securities 2,113 1,952
Other 8 1
------ ------
5,335 4,871
------ ------
Interest expense:
Deposits 2,195 2,172
Borrowings 980 738
------ ------
3,175 2,910
------ ------
Net interest income 2,160 1,961
Provision for loan losses 60 75
------ ------
Net interest income after provision
for loan losses 2,100 1,886
------ ------
Other operating income:
Service charges 220 215
Net gain on sale of securities -- 6
Net gain on sale of loans 30 82
------ ------
250 303
------ ------
Operating expenses:
Salaries and employee benefits 952 879
Office occupancy and equipment 382 339
Deposit insurance premiums 11 31
Professional fees 103 84
Marketing and advertising 55 39
Data processing 45 37
Provision for environmental remediation 150 --
Real estate owned 18 21
Other 367 304
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2,083 1,734
------ ------
Income before income taxes 267 455
Income taxes 103 182
------ ------
Net income $ 164 273
====== ======
Earnings per common share - basic $ 0.05 0.08
====== ======
Earnings per common share - diluted $ 0.05 0.08
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
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FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 164 273
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 170 168
Amortization of loan fees,
discounts and premiums (150) 62
Provision for loan losses 60 75
Provision for environmental remediation 150 --
Net gain on sale of securities -- (6)
Net gain on sale of loans (30) (81)
Net loss from sale of real estate
owned 7 2
Proceeds from sale of loans held for sale 1,615 6,205
Loans originated for sale (1,143) (6,681)
Decrease/(increase) in accrued
interest receivable (82) 122
Increase in other assets (239) (390)
Decrease in other liabilities (512) (300)
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Net cash provided (used) by operating activities 10 (551)
------- -------
Cash flows from investing activities:
Proceeds from maturities of and principal
collected on securities available for
sale 2,444 11,015
Proceeds from maturities of and
principal collected on securities
held to maturity -- 2,000
Proceeds from sales of securities
available for sale -- 3,013
Purchases of securities available for
sale (1,774) (19,011)
Loans originated and purchased (8,225) (13,845)
Principal collected on loans 3,445 8,626
Proceeds from sale of real estate owned 21 57
Purchases of FHLB stock -- (153)
Purchases of premise and equipment, net (428) (95)
------- -------
Net cash used in investing activities (4,517) (8,393)
------- -------
</TABLE>
(continued)
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FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings
and demand accounts $ (746) 1,225
Net increase in time deposits 3,611 1,608
Net short term advance/(repayment) from FHLB (14,900) 5,100
Long term advances from FHLB 15,000 --
Repayments of long term advances from FHLB (248) (233)
Release of unallocated ESOP common
stock 9 9
Dividends on common stock (71) (71)
-------- --------
Net cash provided by financing
activities 2,655 7,638
-------- --------
Net decrease in cash and cash equivalents
(1,852) (1,306)
Cash and cash equivalents at beginning of
period 6,095 4,375
-------- --------
Cash and cash equivalents at end of
period $ 4,243 3,069
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,276 2,921
Income taxes 40 --
Non-cash investing activities:
Change in net unrealized gain or loss on
securities available for sale, net of taxes (107) (548)
Transfer of loans to real estate owned $ 224 --
</TABLE>
See accompanying notes to consolidated financial statements
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FINGER LAKES FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED OTHER
COMMON PAID - IN RETAINED COMPREHENSIVE UNALLOCATED
STOCK CAPITAL EARNINGS INCOME/(LOSS) SHARES OF ESOP TOTAL
------- --------- -------- ----------------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 36 4,787 18,262 (3,525) (181) 19,379
Comprehensive income:
Net income -- -- 164 -- -- 164
Change in net unrealized losses on
securities, net of taxes -- -- -- (107) -- (107)
-------
Total comprehensive income
57
Allocation of shares under ESOP -- 4 -- -- 9 13
Cash dividends declared, $.06 per share*
-- -- (71) -- -- (71)
------- ------- ------- ------- ------- -------
Balance at March 31, 2000 $ 36 4,791 18,355 (3,632) (172) 19,378
======= ======= ======= ======= ======= =======
</TABLE>
*Finger Lakes Financial Corporation, M.H.C., which owns 2,389,948 shares of
stock in the Company, waived receipt of its dividend thereby reducing the actual
dividend payment to the amount shown above. The amount of dividends waived by
the mutual holding company was $143,400 for the three months ended March 31,
2000.
See accompanying notes to consolidated financial statements.
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FINGER LAKES FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, in
the opinion of management, all adjustments consisting of only normal
recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the
three months ended March 31, 2000 and 1999. The results of operations
for the three month period ended March 31, 2000 are not necessarily
indicative of the results which may be expected for an entire fiscal
year.
(2) PLAN OF REORGANIZATION
A reorganization into a two-tier mutual holding company structure (the
"Reorganization") was accomplished on August 17, 1998 under the
Agreement and Plan of Reorganization (the "Plan of Reorganization"),
which was unanimously adopted by the Board of Directors on December 15,
1997 and approved by the shareholders on April 23, 1998. Pursuant to
the Plan of Reorganization, Savings Bank of the Finger Lakes, FSB (the
"Savings Bank"), the prior reporting company, became a wholly-owned
subsidiary of Finger Lakes Financial Corp. (the "Company"), a newly
formed stock corporation which is majority owned by Finger Lakes
Financial Corp., M.H.C. (the "Mutual Holding Company"). All references
in this document to the Company include activities of both Finger Lakes
Financial Corp. and Savings Bank of the Finger Lakes. In the
Reorganization, each outstanding share of the Savings Bank Common Stock
was converted into one share of the common stock, par value $.01 per
share, of the Company ("Holding Company Common Stock"), and the holders
of Savings Bank Common Stock became the holders of all of the
outstanding shares of Holding Company Common Stock. The Company was
incorporated solely for the purpose of becoming a savings and loan
holding company and had no prior operating history. The Reorganization
had no impact on the operations of the Savings Bank or the Mutual
Holding Company. The Savings Bank has continued its operations at the
same locations, with the same management, and subject to all the
rights, obligations and liabilities of the Saving Bank existing
immediately prior to the Reorganization.
On January 31, 2000, the Mutual Holding Company adopted a Plan of
Conversion and Reorganization to convert from a federally chartered
mutual holding company to a state chartered capital stock holding
company. Contemporaneously with the Conversion and Reorganization, the
remaining 66.9% interest (2,389,948 common shares) in the Company will
be sold in a public stock offering. The proposed Plan of Conversion and
Reorganization is subject to approval by the OTS and by at least a
majority of the votes eligible to be cast either in person or by proxy
by members of the Mutual Holding Company at a meeting at which the Plan
of Conversion and Reorganization will be presented. December 31, 1998
has been established as the eligibility record date for determining the
eligible account holders entitled to receive nontransferable
subscription rights to subscribe for the conversion stock. The
Reorganization will be accounted for as a change in corporate form with
no resulting change in the historical basis of the Company's assets,
liabilities and equity. In the event that the Reorganization and
Offering are not successfully completed, the costs incurred in
connection with the Reorganization and Offering will be expensed at the
time that the unsuccessful completion is determined. As of March 31,
2000 the company had incurred approximately $125,000 of stock issuance
costs.
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On May 2, 2000, the Board of Directors of the Company and the Mutual
Holding Company jointly announced their decision to postpone the second
step conversion of the Mutual Holding Company. The decision to postpone
the conversion and the simultaneous offering of common stock was made
after considering the uncertainty as to the timing of the Department of
Environmental Conservation's (the "DEC") final approval of the Bank's
Design and Construction Plan relating to foreclosed property requiring
environmental remediation, as previously disclosed, and to a lesser
extent the weakness in the conversion market.
(3) EARNINGS PER SHARE
Basic earnings per share for the three month period ended March 31,
2000 and 1999 was computed by dividing net income by the weighted
average number of total common shares outstanding during the period and
contingently issuable shares. Diluted earnings per share reflects the
effects of common stock issuable upon exercise of dilutive options and
stock grants.
(4) DIVIDENDS
On December 31, 1999 the Mutual Holding Company notified the Office of
Thrift Supervision (OTS) of its intention to waive the right to receive
dividends on its shares of the Company's common stock for the
four-quarter period beginning with the quarter ended December 31, 1999.
The Company declared a regular cash dividend of $.06 per share on
January 18, 2000, payable February 14, 2000 to stockholders of record
January 31, 2000.
(5) EARNINGS PER SHARE RECONCILIATION
The following table is a reconciliation of the numerator and
denominator used in calculating the Company's basic and diluted
earnings per share, (in thousands, except earnings per share):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, 2000
------------------------
Basic Diluted
------ -------
<S> <C> <C>
Net Income $ 164 164
------ ------
Weighted average shares 3,539 3,539
Stock options -- 1
------ ------
Total weighted average shares,
options and grants 3,539 3,540
====== ======
Earnings Per Share $ 0.05 0.05
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, 1999
--------------------
Basic Diluted
----- -------
<S> <C> <C>
Net Income $ 273 273
------ ------
Weighted average shares 3,532 3,532
Stock options -- 33
------ ------
Total weighted average shares,
options and grants 3,532 3,565
====== ======
Earnings Per Share $ 0.08 0.08
====== ======
</TABLE>
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
On March 28, 2000, Finger Lakes Financial Corp., M.H.C., the Company's M.H.C.
parent, filed an application with the Office of Thrift Supervision to convert
from mutual to stock form. As part of this transaction, a new holding company
parent, Finger Lakes Bancorp, Inc. was incorporated and would raise
approximately $12 million in additional capital in a public offering. Existing
shareholders would receive shares in the new company pursuant to an exchange
ratio established by an independent appraiser. There can be no assurance that
the second step conversion will be completed, however the company expects to
receive the required regulatory approvals during the third calendar quarter of
2000.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND DECEMBER 31, 1999
Total assets as of March 31, 2000 were $303.6 million, an increase of $2.4
million or .8% from December 31, 1999. The increase was due primarily to a $4.1
million or 2.6% increase in the loan portfolio, partially offset by a decrease
in cash and cash equivalents of $1.9 million. With continued emphasis on lending
activities, residential and commercial mortgage loans increased by $1.7 million,
home equity loans increased by $319,000, and commercial business loans increased
by $1.9 million. Securities classified as available for sale at March 31, 2000
were $117.9 million, a decrease of $840,000 from December 31, 1999, while
securities classified as held to maturity at March 31, 2000 were $1.6 million,
having no change from December 31, 1999. The decrease in securities available
for sale is a result of amortizations and prepayments of $2.4 million, partially
offset by purchases of $1.8 million. Unrealized losses on securities available
for sale increased $107,000 to $3.6 million, net of deferred taxes. The decrease
of $1.9 million in cash and cash equivalents is the direct result of the higher
level of funds at December 31, 1999, which was deemed prudent as part of Year
2000 contingency planning.
The growth in assets during the first quarter of 2000 was funded by a $2.9
million increase in total deposits. Savings and demand deposits decreased by
$746,000 while certificates of deposit increased by $3.6 million. Consequently,
our cost of funds increased to $4.23 from $4.15. Advances from the Federal Home
Loan Bank of New York ("FHLB") remained essentially flat during the first
quarter of 2000, though the composition of advances has moved towards longer
term borrowings to positively affect our interest rate risk profile.
Stockholders' equity totaled $19.4 million as of March 31, 2000, essentially
flat compared to December 31, 1999. Changes in stockholders' equity included net
income of $164,000, offset by an increase of $107,000 in unrealized losses on
securities available for sale, net of related deferred income taxes, and a
dividend distribution of $71,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
1999
GENERAL
Net income for the quarter ended March 31, 2000 amounted to $164,000 or $.05 per
diluted share, compared to net income of $273,000, or $.08 per diluted share for
the quarter ended March 31, 1999. The decline in net income is primarily
attributable to a $150,000 provision on a foreclosed property requiring
environmental remediation. In December 1999, the Bank received approval for a
Voluntary Cleanup Agreement and Work Plan for the former laundry and dry
cleaning property from the Department of Environmental Conservation (DEC). While
negotiations are continuing with the DEC on the final Design and Construction
Plan for this project, the reserve covers projected costs associated with design
changes expected to be completed in response to recent comments from the DEC. At
March 31, 2000, the Company had a total of $775,000
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accrued in other liabilities for the estimated remediation costs. Management
believes that the recorded liability is adequate to cover known costs in
connection with this matter. A final review and determination from DEC is still
pending.
NET INTEREST INCOME
Net interest income is determined by our interest rate spread (i.e., the
difference between yields earned on our interest-earning assets and
interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities. Net interest income amounted to $2.2
million for the three month period ended March 31, 2000, an increase of $199,000
from the same period last year. The average interest rate spread for the three
month period ended March 31, 2000 was 2.72% versus 2.60% during the same period
in 1999. The average yield on interest-earning assets increased 18 basis points,
while average interest expense increased 6 basis points.
INTEREST INCOME
Total interest income for the three month period ended March 31, 2000 amounted
to $5.3 million, an increase of $464,000 from the same period in 1999. The
average yield on earning assets increased to 7.32% during the first three months
of 2000 compared to 7.14% in the same period of 1999. Interest income on loans
for the three months ended March 31, 2000 amounted to $3.2 million, an increase
of $296,000 from the same period in 1999. The improvement was attributable to
loan growth, as the average total outstanding loan balance increased by $13.0
million to $159.9 million for the three months ended March 31, 2000. Interest
income on securities for the three months ended March 31, 2000 amounted to $2.1
million, an increase of $168,000 from the same period last year. This increase
was attributed to both the growth in the portfolio, as the average outstanding
securities balance increased by $5.4 million to $130.5 million (at amortized
cost), and an increase in the yield, as the yield increased 26 basis points to
6.50%.
INTEREST EXPENSE
Total interest expense for the three months ended March 31, 2000 was $3.2
million, an increase of $265,000 from the same period in 1999. For the first
quarter of 2000, interest expense on deposits amounted to $2.2 million while
interest expense on borrowed funds amounted to $980,000. Interest expense on
deposits remained essentially flat year over year, as an increase of $23,000
attributed to the growth in the average outstanding deposit base was offset by
the decline in the average cost of deposits of 8 basis points. However, interest
expense on borrowings increased $242,000, from $738,000 to $980,000 during the
first quarter of 1999, due to an $11.6 million increase in average outstanding
borrowings and a 49 basis point increase in the average cost of borrowed funds
for the three months ended March 31, 2000 to 5.72% versus 5.23% for the same
period last year.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $60,000 for the three months ended
March 31, 2000, a decrease of $15,000 from the prior year. The allowance for
loan losses amounted to $1.4 million as of March 31, 2000 or 0.85% of total
loans outstanding and 270.23% of non-performing loans. The reduction in the
provision reflects the continued trend of improvement in the credit quality of
the loan portfolio. Net chargeoffs for the three month period ended March 31,
2000 were $20,000 versus net recoveries of $22,000 during the same period last
year. Net recoveries from last year included $20,000 in recoveries on two
federally insured loans on which claims had been made. Non-performing loans
decreased from $587,000 as of December 31, 1999 to $514,000 as of March 31,
2000. 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.
NONINTEREST INCOME
Noninterest income, consisting primarily of service charges on deposit accounts,
loan servicing fees, income from the sale of annuities and mutual funds, and
gains and losses on loans and securities sold, was $250,000 for the three months
ended March 31, 2000, a decrease of $53,000 or 17.5% compared to
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the first quarter of 1999. Service charges on deposit accounts were $221,000 for
the three months ended March 31, 2000, an increase of $6,000 over the same
period in 1999. There were no gains on sales of securities during the first
quarter of 2000, as compared to $6,000 in 1999. Net gains on sales of loans were
$30,000 for the three months ended March 31, 2000, as compared to $82,000 in for
the same period in 1999, reflecting our lower levels of loan sales.
NONINTEREST EXPENSE
Noninterest expense amounted to $2.1 million for the three months ended March
31, 2000, an increase of $349,000 or 20.1% from the same period last year. The
current quarter includes a $150,000 provision for environmental remediation
which reflects additional costs associated with design change expected to be
completed in response to recent comments from the DEC. Increases of $73,000 in
salaries and employee benefits expense were primarily the result of annual
salary increases for employees of our Company, and the hiring of staff for our
newest branch office in Auburn, scheduled to open in April, 2000. An increase of
$43,000 in office occupancy and equipment expense was primarily the result of
occupancy costs relating to the new branch office in Auburn, as well as
expansion into a temporary operations center to meet the growing needs of our
company. Deposit insurance premiums were $11,000, as compared to $31,000 for the
same period last year, reflecting the change in federal deposit insurance rates
that took effect January 1, 2000 for thrifts. Professional fees increased
$19,000 or 22.6% from the same period last year, due to increased professional
support of our information technology infrastructure. Marketing expenses
increased from $39,000 during the first three months of 1999 to $55,000 for the
same period this year, primarily due to strategic marketing campaigns directed
at our new branch office in Auburn. Data processing expense amounted to $45,000,
an increase of $8,000 or 21.6%. This increase is primarily the result of
additional data communications costs associated with our new branch office, and
data communications upgraded at two branches in Ithaca, New York. Other
noninterest expenses, which includes primarily travel and entertainment,
training, office supplies, telecommunications, loan servicing expenses, and
contributions, increased $63,000 or 20.7% from the same period last year. This
increase is primarily related to higher costs associated with telephone usage,
an increase in retainer fees paid to our board directors, increases in ATM
processing costs, and additional expenditures in travel and mileage costs as
they relate to the new branch in Auburn.
INCOME TAXES
We recorded income tax expense of $103,000 for the three months ended March 31,
2000 on income before tax for the period of $267,000, reflecting an effective
tax rate of 38.6%. For the same period in 1999, the effective rate was 40.0%.
FORWARD-LOOKING STATEMENTS
This report and the documents incorporated herein by reference may contain
forward-looking statements based on current expectations, estimates and
projections about the Company's industry, management's beliefs and assumptions
made by management. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seems", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to forecast. Therefore,
actual results may differ materially from those expressed or forecast in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information
or otherwise.
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ITEM 3 - QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. The Company does not
currently have a trading portfolio nor does it use derivatives to manage market
and interest rate risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. The committee, comprised of senior management, has developed policies
to measure, manage, and monitor interest rate risk. Interest rate risk arises
from a variety of factors, including differences in the timing between the
contractual maturity or repricing of the Company's assets and liabilities. For
example, the Company's net interest income is affected by changes in the level
of market interest rates as the repricing characteristics of its loans and other
assets do not necessarily match those of its deposits, other borrowings and
capital.
The OTS requires the Company to measure interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on NPV
of sudden and sustained 1% to 3% increases and decreases in market interest
rates. The Company's board of directors has adopted an interest rate risk policy
which establishes minimum NPV ratios (i.e. the ratio of NPV to the preset value
of assets) in the event of 1%, 2% and 3% increases and decreases in market
interest rates, respectively. The following table sets forth those policy
guidelines 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, 1999 (date of latest available data):
<TABLE>
<CAPTION>
ESTIMATED NET PORTFOLIO VALUE NPV A % OF PV OF ASSETS
BASIS POINT ----------------------------- -----------------------
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BP CHANGE
----------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 $ 5,753 (16,765) (74)% 2.05% (538) bp
+200 11,628 (10,890) (48) 4.04 (339) bp
+100 17,410 (5,108) (23) 5.89 (155) bp
NC 22,518 7.43
-100 27,732 5,214 23 8.94 150 bp
-200 28,594 6,076 27 9.12 169 bp
-300 28,801 6,283 28 9.11 168 bp
</TABLE>
As shown by the table, increases in interest rates will significantly decrease
our NPV, while decreases in interest rates will result in smaller net increases
in our NPV. The table suggests that in the event of a 200 basis point change in
interest rates we would experience a decrease in NPV as a percentage of assets
to 4.04% from 7.43% in a rising interest rate environment and an increase in NPV
as a percentage of assets to 9.12% from 7.43% in a decreasing interest rate
environment.
In order to offset some of the interest rate risk, maturities of $15 million of
FHLB advances were extended during the first quarter of 2000, while shorter
duration assets were added, including shorter term commercial business loans.
The 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 out asset and liability goals and strategies.
-13-
<PAGE> 14
PART II: OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
None
Item 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits
(b) Reports on Form 8-K
None
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 2000 By: /s/ G. Thomas Bowers
------------ -------------------
G. Thomas Bowers
Chairman, President and Chief
Executive Officer
Date: May 11, 2000 By: /s/ Terry L. Hammond
------------ -------------------
Terry L. Hammond
Executive Vice President and
Chief Financial Officer
-15-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,243
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,910
<INVESTMENTS-CARRYING> 1,593
<INVESTMENTS-MARKET> 1,570
<LOANS> 164,318
<ALLOWANCE> 1,389
<TOTAL-ASSETS> 303,592
<DEPOSITS> 210,998
<SHORT-TERM> 4,200
<LIABILITIES-OTHER> 3,405
<LONG-TERM> 65,611
0
0
<COMMON> 36
<OTHER-SE> 19,342
<TOTAL-LIABILITIES-AND-EQUITY> 303,592
<INTEREST-LOAN> 3,214
<INTEREST-INVEST> 2,113
<INTEREST-OTHER> 8
<INTEREST-TOTAL> 5,335
<INTEREST-DEPOSIT> 2,195
<INTEREST-EXPENSE> 3,175
<INTEREST-INCOME-NET> 2,160
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,083
<INCOME-PRETAX> 267
<INCOME-PRE-EXTRAORDINARY> 267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164
<EPS-BASIC> .05
<EPS-DILUTED> .05
<YIELD-ACTUAL> 7.32
<LOANS-NON> 514
<LOANS-PAST> 0
<LOANS-TROUBLED> 288
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,349
<CHARGE-OFFS> 35
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 1,389
<ALLOWANCE-DOMESTIC> 1,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278
</TABLE>
