PROSPECTUS
FINGER LAKES BANCORP, INC.
(Proposed holding company for Savings Bank of the Finger Lakes)
Up to 2,156,655 shares of common stock
Finger Lakes Bancorp, Inc. is offering common stock for sale. The shares we
are offering represent the ownership interest in Finger Lakes Financial Corp.
now owned by Finger Lakes Financial Corporation, MHC. The publicly held shares
in Finger Lakes Financial will be exchanged for new common stock in Finger Lakes
Bancorp. Finger Lakes Bancorp has been organized to replace Finger Lakes
Financial as the holding company of Savings Bank of the Finger Lakes. All shares
being offered for sale will be offered at a price of $7.00 per share. If you
purchase common stock in this offering you will not have to pay any sales
commissions.
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If you are a current or former depositor of Savings Bank of the Finger Lakes -
o You may have priority rights to purchase shares.
o You may purchase up to 107,832 shares (at the maximum),
which is equal to 5% of the shares offered in the
offering. You purchase no fewer than 25 shares.
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If you are currently a shareholder of Finger Lakes Financial -
o Your shares will be exchanged automatically for new shares of Finger
Lakes Bancorp.
o After the exchange of shares, your percentage ownership interest in
Finger Lakes Bancorp will be equivalent to your current percentage
ownership interest in Finger Lakes Financial.
o You may also purchase additional shares if shares are left after the sale
to the current and former depositors of Savings Bank of the Finger Lakes,
provided any new shares you buy are not greater than 5% of the shares
offered and which, when added to the shares you will get in the exchange,
do not exceed 5% of the shares outstanding immediately following the
offering.
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If you fit none of the above categories, but are interested in purchasing shares
of our common stock -
o You may purchase shares after priority orders are filled
o You may purchase the lesser of up to 107,832 shares (at
the maximum), or 5% of the shares offered in the offering. You may
purchase no fewer than 25 shares.
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OFFERING SUMMARY
MINIMUM MAXIMUM
------- -------
Number of Shares: 1,594,085 2,156,655
Gross offering proceeds: $11,158,595 $15,096,585
Estimated offering expenses: $850,000 $850,000
Estimated net proceeds: $10,308,595 $14,246,585
Estimated net proceeds per share: $6.47 $6.61
The maximum number of shares offered may be increased to 2,480,112. We will
terminate the offering of new stock and the exchange of existing shares if we do
not sell the minimum number of shares. Friedman, Billings, Ramsey & Co., Inc. is
not required to purchase any of the common stock that is being offered. However,
they will assist Finger Lakes Bancorp in the sale of the common stock on a best
efforts basis. Until the completion of the offering, subscription funds will be
placed in an interest bearing escrow account at Savings Bank of the Finger Lakes
earning interest at a rate of 2.20% per annum. We have applied to the Nasdaq
Stock Market for approval to list our common stock on the Nasdaq National Market
under the symbol "FLBC". The offering will end at 12 noon, eastern time, on
November 2, 2000, unless extended in accordance with our Plan of Conversion and
Reorganization.
For a discussion of risks that you should consider, see "Risk Factors"
beginning on page 13. For more information, please call the stock center at
(315) 789-4498.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved of
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
FRIEDMAN BILLINGS RAMSEY
The date of this prospectus is September 29, 2000
<PAGE>
[INSERT MAP SHOWING FINGER LAKES FINANCIAL'S MARKET AREA]
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY .....................................................................5
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FINGER LAKES FINANCIAL AND SUBSIDIARY............................16
FINGER LAKES BANCORP.........................................................18
SAVINGS BANK OF THE FINGER LAKES.............................................18
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE..................................19
USE OF PROCEEDS..............................................................21
DIVIDEND POLICY..............................................................22
MARKET FOR THE COMMON STOCK..................................................23
CAPITALIZATION...............................................................24
PRO FORMA TABLES.............................................................25
FINGER LAKES FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME...................................30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................31
BUSINESS OF SAVINGS BANK OF THE FINGER LAKES.................................44
REGULATION...................................................................62
TAXATION ....................................................................66
MANAGEMENT OF FINGER LAKES BANCORP...........................................67
MANAGEMENT OF FINGER LAKES FINANCIAL.........................................68
EXECUTIVE COMPENSATION.......................................................71
BENEFICIAL OWNERSHIP OF COMMON STOCK.........................................78
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS............................78
THE CONVERSION...............................................................79
COMPARISON OF STOCKHOLDERS' RIGHTS..........................................103
RESTRICTIONS ON ACQUISITION OF FINGER LAKES BANCORP.........................110
DESCRIPTION OF CAPITAL STOCK OF FINGER LAKES BANCORP........................111
TRANSFER AGENT..............................................................112
EXPERTS ...................................................................112
LEGAL MATTERS...............................................................113
ADDITIONAL INFORMATION......................................................113
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Questions and Answers about the Stock Offering
Q: Why did I receive this prospectus and packet of information from Finger
Lakes Bancorp?
A: Finger Lakes Bancorp is the proposed holding company for Savings Bank
of the Finger Lakes. We are providing this prospectus and packet of
information to provide information about the conversion of Finger Lakes
Financial Corp., MHC, the mutual holding company parent of Finger Lakes
Financial Corp. and the offering of common stock in Finger Lakes
Bancorp. We have sent packets of information to all depositors of
Savings Bank of the Finger Lakes and shareholders of Finger Lakes
Financial as well as certain people of the general public who request
information on our stock offering.
Q: What is meant by the "conversion"?
A: The current corporate structure of Savings Bank of the Finger Lakes
involves three entities: Finger LakesFinancial Corp., MHC, which owns
66.9% of Finger Lakes Financial Corp., which in turn is the stock
holding company of Savings Bank of the Finger Lakes. We are
reorganizing our corporate structure by offering to depositors and
possibly the public the 66.9% ownership interest in common stock and
creating Finger Lakes Bancorp. Additionally, the 33.1% interest in
Finger Lakes Financial, which is owned by the general public, will be
exchanged for new shares in Finger Lakes Bancorp. As a result, Finger
Lakes Bancorp will be 100% owned by public shareholders and will be the
parent holding company of Savings Bank of the Finger Lakes.
Q: Is Savings Bank of the Finger Lakes being purchased by another company
in any sort of a merger or acquisition?
A: No. We are simply reorganizing our corporate structure.
Q: Can I place an order to purchase any of the shares being offered in the
stock offering?
A: Yes. You may place an order to purchase shares in the offering by
completing the stock order form and certification form found in your
packet of information and returning it to the stock center or to any
branch of the bank. If you are not interested in purchasing stock, you
do not need to send in your stock order form. Subscription funds will
be held in an interest bearing escrow account until the completion of
the stock offering.
Q: What particular factors should I consider when deciding whether to
purchase the stock?
A: There are many important factors to consider before making an
investment decision. Therefore, you should read this entire prospectus
before making an investment decision. Additionally, we invite you to
attend one of our informational community meetings where officers of
the bank as well as investment banking professionals will make
presentations regarding the offering. Enclosed in your packet of
information is a card detailing the place and times of these meetings.
Please call our stock center at (315) 789-4498 to reserve a place
today.
Q: Will the stock be insured or guaranteed?
A: No. Unlike deposit accounts at Savings Bank of the Finger Lakes, our
stock will not be insured or guaranteed by the Federal Deposit
Insurance Corporation, or any other government agency.
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Q: How many shares of stock are being offered and at what price?
A: We are offering for sale up to 2,156,655 shares of common stock at a
subscription price of $7.00 per share. We must sell at least 1,594,085
shares. If the appraised market value of the common stock changes due
to market or financial conditions, then we may be required to sell up
to 2,480,112 shares without notice to you.
Q: Do I pay a commission in order to purchase the shares of stock?
A: No. You will not be charged a commission or fee to purchase our stock.
Q: Will dividends be paid on the stock?
A: We intend to pay quarterly cash dividends on our common stock. We
anticipate paying an initial dividend of $0.06 per share per quarter,
which represents a dividend rate of 3.43% based on a per share price of
$7.00. We expect to begin paying dividends following the quarter ended
December 2000. However, there can be no assurance that dividends will
be paid or will continue in the future.
Q: How do I purchase the stock?
A: First, you should read this prospectus carefully. Then, complete and
return the enclosed stock order form and certification form together
with your payment. You may return your order to any branch of the bank
or to the stock center located at the main office of the bank, or by
mail in the enclosed white envelope marked STOCK ORDER RETURN.
Q: How many shares of stock may I place an order for?
A: If you want to place an order for stock, you must purchase at least 25
shares, or $175 worth. You may purchase up to 107,832 shares (at the
maximum), which is equal to 5% of the shares offered in the offering.
However, you may not own more than 5% of the shares outstanding
immediately following the conversion when added to shares owned by you
and your associates or people acting in concert with you.
Q: How do I pay for the stock?
A: You may pay with a personal check or money order, or by cash in person
at any branch of the bank. If you bring in cash, we will convert it
into a certified bank check and forward it to the stock center for
processing. You may also authorize us to make a direct withdrawal from
one or more of your deposit accounts at the bank. Simply fill out the
payment section of the order form appropriately. We will not actually
withdraw the money from your account or accounts until the offering is
complete.
Q: Will I receive any interest on my payment up until the time that the
conversion and stock offering is complete?
A: We will pay interest at the bank's passbook deposit rate of 2.20% from
the day we receive your check, money order or cash payment until the
completion of the offering. If you are paying for your stock by
authorizing us to withdraw money out of one or more of your accounts at
Savings Bank of the Finger Lakes, we will place a hold on the funds for
the amounts you indicated when we receive your order form. We will not
actually withdraw the money until the offering is complete.
Q: Will I be penalized by paying for stock with my certificate of deposit
at the bank?
A: No. Any early withdrawal penalties will be waived for any portion of
your CD or CDs' which you use to purchase stock in our offering.
Any remaining portion of your CD will remain at the bank. However, if
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you reduce your CD to less than the required minimum, the remaining
balance may be converted to a regular deposit account.
Q: I currently have an IRA at Savings Bank of the Finger Lakes. May I use
this to purchase stock in the Offering?
A: You may use an IRA to purchase shares in the offering. However, Savings
Bank of the Finger Lakes is not a registered broker dealer and is
unable to purchase shares through your IRA. We can assist you in
setting up a brokerage account at a registered broker dealer and
transferring over your funds in order to place an order for stock. This
process does take extra time, however. We encourage you to contact the
stock center as soon as possible but no later than one week before the
close of the offering.
Q: When is the deadline to subscribe for stock?
A: We must receive a properly signed order form and certification form
with the required payment on or before 12:00 noon, eastern time, on
November 2, 2000.
Q: Can I change my mind after I place an order to subscribe for stock?
A: No. After we receive your order form and payment, you may not cancel or
modify your order. However, if we extend the offering beyond
December 17, 2000, you will be able to change or cancel your order. If
you cancel your order, you will receive a prompt refund plus interest.
Q: Can the offering be extended?
A: If we do not receive sufficient orders, we can extend the offering
beyond November 2, 2000. We must complete any offering to general
members of the public within 45 days after the close of the offering,
unless we receive regulatory approval to further extend the offering.
No single extension can exceed 45 days, and the extensions may not go
beyond November 8, 2002.
Q: What happens if there are not enough shares of stock to fill all
orders?
A: If there is an oversubscription, you may not receive any or all of the
shares you want to purchase.
Q: When will I receive my shares of common stock?
A: We will mail you your stock certificate promptly after the completion
of the conversion and the offering. We are unable to transfer any
shares directly into an existing brokerage account which you may have.
Q: Will I be able to sell my shares after I purchase them?
A: Yes. We anticipate having our stock quoted on the Nasdaq National
Market under the symbol "FLBC." Friedman, Billings, Ramsey & Co., Inc.,
or FBR, is a registered broker dealer and has indicated that they plan
on making a market in our common stock. However, there can be no
assurance that an active and liquid trading market will develop and
that someone will want to buy your shares or that you will be able to
sell them for the same or more money than you originally paid.
Q: What will happen to the shares I currently own of Finger Lakes
Financial?
A: You will receive shares in Finger Lakes Bancorp in exchange for shares
you currently own in Finger Lakes Financial.
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Q: How many new shares of Finger Lakes Bancorp will I receive in exchange
for my shares of Finger Lakes Financial?
A: The number of shares you receive will depend on how many shares we sell
in the offering. The exchange ratio is calculated to preserve your
percentage, after certain adjustments, of the total shares outstanding
after the offering as your percentage of the total minority shares
outstanding before the offering. If we sell the maximum number of
shares, the exchange ratio will be 0.9011. As an example, if you
currently own 100 shares, we will issue you 90 shares in Finger Lakes
Bancorp. If we sell the minimum number of shares, the exchange ratio
will be 0.6660, and you would receive 66 shares in the above example.
No fractional shares of Finger Lakes Bancorp common stock will be
issued to any public shareholders of Finger Lakes Financial upon
consummation of the conversion. The holder of a fractional share shall
receive a check in an amount equal to the product obtained by
multiplying the fractional share interest to which the holder would be
entitled by $7.00.
Q: If I own shares of Finger Lakes Financial, may I purchase any of the
new shares being offered by Finger Lakes Bancorp?
A: You may place an order to purchase new shares in addition to your old
ones. However, you may not own more than 5% of the shares outstanding
following the offering when combined with shares you receive in the
exchange as well as any shares owned by your associates or persons
acting in concert with you.
Q: If I am a shareholder of Finger Lakes Financial, do I have to vote on
the conversion and stock offering?
A: Yes. Enclosed in your packet of information is a proxy card used to
vote at the Special Meeting of Shareholders to be held at 3:00 p.m. on
November 8th at our main offices located at 470 Exchange Street in
Geneva, New York. You will need to return your proxy cards in the
enclosed envelope before the special meeting in order for them to be
tallied. You may also vote in person at the Special Meeting of
Shareholders.
Q: Who can help answer any other questions I may have about the exchange
of my shares?
A: For answers to other questions, we encourage you to read this
prospectus in its entirety. Questions may also be directed to our stock
center at (315) 789-4498 Monday through Friday between the hours of
9:00 a.m. and 5:00 p.m. You may also visit the stock center located on
the first floor of the main office of the bank at 470 Exchange Street
in Geneva, New York.
To ensure that each person receives a prospectus at least 48 hours prior to the
expiration date of November 2, 2000 in accordance with federal law, no
prospectus will be mailed any later than five days prior to November 2, 2000 or
hand delivered any later than two days prior to November 2, 2000.
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SUMMARY
The following summary explains the significant aspects of the conversion
and the exchange offering. It may not contain all the information that is
important to you. For additional information, you should read this entire
document carefully, including the consolidated financial statements and the
notes to the consolidated financial statements.
The Companies
Finger Lakes Bancorp, Inc.
470 Exchange Street, Geneva, New York 14456
(315) 789-3838
Savings Bank of the Finger Lakes formed Finger Lakes Bancorp as a
Delaware-chartered corporation to own all of its capital stock following the
conversion. Finger Lakes Bancorp has applied to the Office of Thrift Supervision
for approval to become a savings and loan holding company.
Finger Lakes Financial Corp., MHC
470 Exchange Street, Geneva, New York 14456
(315) 789-3838
Finger Lakes Financial Corp., MHC is currently the mutual holding company
parent of Finger Lakes Financial. As of June 30, 2000, Finger Lakes Financial
Corp., MHC's sole business activity consists of its ownership of 2,389,948
shares of Finger Lakes Financial's common stock, which represents 66.9% of its
outstanding shares, as well as the holding of approximately $185,000 in cash.
Following the conversion, Finger Lakes Financial Corp., MHC will cease to exist.
Finger Lakes Financial Corp.
470 Exchange Street, Geneva, New York 14456
(315) 789-3838
Finger Lakes Financial is currently the stock holding company for Savings
Bank of the Finger Lakes. Finger Lakes Financial owns all of the outstanding
common stock of Savings Bank of the Finger Lakes. Finger Lakes Financial Corp.,
MHC owns 2,389,948 shares of Finger Lakes Financial's outstanding common stock.
The remaining 1,180,052 shares of common stock of Finger Lakes Financial Corp.
are held by the public. At June 30, 2000, Finger Lakes Financial had
consolidated assets totaling $307.0 million, deposits of $219.7 million and
consolidated stockholders' equity of $19.7 million. Following the conversion,
Finger Lakes Financial Corp. will cease to exist.
Savings Bank of the Finger Lakes
470 Exchange Street, Geneva, New York 14456
(315) 789-3838
Savings Bank of the Finger Lakes is a federally chartered savings bank
headquartered in Geneva, New York. Savings Bank of the Finger Lakes is a
community-oriented financial institution offering traditional financial services
to its local community. It conducts operations through its main office in
Geneva, New York, and its six branch offices. A full description of its products
and services begins on page 44 of this prospectus. Savings Bank of the Finger
Lakes' primary market area is in the Finger Lakes region of New York State.
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The following chart shows our current ownership structure which is commonly
referred to as the "two- tier" mutual holding company structure:
----------------------------------------------
Finger Lakes Financial Corp., MHC
----------------------------------------------
66.9% of Common ----------------------
Stock Public Shareholders
------------------------------------------- ----------------------
Finger Lakes Financial Corp. 33.1% of
------------------------------------------- Common
Stock
100% of Common
Stock
----------------------------------------------
Savings Bank of the Finger Lakes
----------------------------------------------
Following the conversion, our ownership structure will be as follows:
-----------------------------------------------
Public Stockholders
-----------------------------------------------
100% of
Common Stock
-----------------------------------------------
Finger Lakes Bancorp, Inc.
-----------------------------------------------
100% of
Common Stock
-----------------------------------------------
Savings Bank of the Finger Lakes
-----------------------------------------------
Business Strategies
We have several business strategies designed to improve our profitability
and enhance our franchise in the Finger Lakes region of New York State. These
strategies include:
o Controlled growth while expanding our market area;
o Complementing our traditional mortgage lending by increasing multi-
family and commercial real state lending as well as non-mortgage lending;
o Maintaining our asset quality; and
o Increasing our fee and service income.
These strategies are discussed in detail beginning on page 31 of the
prospectus.
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The Conversion
The Offering
We are selling in this offering common stock which represents the 66.9%
ownership interest in Finger Lakes Financial now owned by Finger Lakes Financial
Corp., MHC. Under the plan of conversion, current and former depositors of
Savings Bank of the Finger Lakes and Finger Lakes Financial's employee stock
ownership plan have priority rights to subscribe for shares in Finger Lakes
Bancorp. The priorities are as follows:
(1) Depositors with $50 or more on deposit as of December 31, 1998, get
first priority.
(2) Finger Lakes Financial's employee stock benefit plans,
including the employee stock ownership plan, get second
priority. The employee stock ownership plan expects to
purchase from 127,526 to 172,532 shares of common stock.
(3) Depositors with $50 or more on deposit as of June 30, 2000, get third
priority.
(4) Depositors as of September 25, 2000, get fourth priority.
We are selling between 1,594,085 and 2,156,655 shares of common stock, all
at a price of $7.00 per share. The number of shares to be sold may be increased
to 2,480,112. The actual amount of shares we sell will depend on an independent
appraisal of Finger Lakes Financial Corp., MHC and Finger Lakes Financial
performed by FinPro, Inc., an independent appraisal firm. The factors that went
into the appraisal are discussed below under "$7.00 Per Share Stock Pricing,
Exchange Ratio and Number of Shares to Be Issued in the Conversion."
The priority offering expires at 12 noon, eastern time, on November 2,
2000, unless extended by Finger Lakes Bancorp. You cannot transfer your
subscription rights. If you attempt to transfer your rights, you may lose the
right to purchase shares and may be subject to criminal prosecution and/or other
sanctions.
During the priority offering, we will also offer shares of common stock to
the general public. In this part of the offering, current stockholders of Finger
Lakes Financial will have first preference and people who reside in our
community will have second preference. This part of the offering will end on
November 2, 2000, unless extended with the approval of the Office of Thrift
Supervision, if necessary.
You will not pay a commission to buy any shares in the offering.
Friedman, Billings, Ramsey & Co., Inc. is managing the offering on a best
efforts basis. Friedman, Billings, Ramsey & Co., Inc. is a registered broker
dealer and member of the National Association of Securities Dealers, Inc. It is
not obligated to purchase any shares of common stock in our offering.
Shares not sold in the offering may be offered for sale in a syndicated
offering, which would be an offering to the general public on a best efforts
basis by a selling group of broker-dealers managed by Friedman, Billings, Ramsey
& Co., Inc.
We have described the offering in greater detail beginning at page 79 of
this prospectus.
The Exchange of Finger Lakes Financial Common Stock
If you are now a stockholder of Finger Lakes Financial, your shares will be
cancelled and exchanged for new shares in Finger Lakes Bancorp. The number of
shares you will get will be based on an exchange ratio. The actual number of
shares you receive will depend upon the number of shares we sell in our
offering, which in turn will depend upon the final appraised value of Finger
Lakes Financial and Finger Lakes Financial Corp., MHC.
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The following table shows how the exchange ratio will adjust based on the
number of shares sold in our offering. The table also shows how many shares a
hypothetical owner of Finger Lakes Financial common stock would receive in the
exchange, adjusted for the number of shares sold in the offering.
<TABLE>
<CAPTION>
Shares to be exchanged Total shares 100 shares of
Shares to be sold for Finger Lakes Bancorp of Finger Lakes
in this offering common stock common stock Financial
------------------------- ------------------------ to be Exchange would be
Amount Percent Amount Percent outstanding ratio exchanged for
----------- ----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum............. 1,594,085 66.9% 785,915 33.1% 2,380,000 0.6660 66
Mid-point........... 1,875,311 66.9% 924,689 33.1% 2,800,000 0.7836 78
Maximum............. 2,156,655 66.9% 1,063,345 33.1% 3,220,000 0.9011 90
15% above maximum... 2,480,112 66.9% 1,222,888 33.1% 3,703,000 1.0363 103
</TABLE>
If you own your shares of Finger Lakes Financial in "street name," the
exchange will occur automatically and you need take no action. If you have
certificated shares, you will receive a transmittal form with instructions to
surrender your stock certificates after the offering is completed. You will
receive new certificates of Finger Lakes Bancorp common stock within five
business days after we receive properly executed transmittal forms.
No fractional shares of Finger Lakes Bancorp common stock will be issued to
any public stockholder of Finger Lakes Financial upon consummation of the
conversion. For each fractional share that would otherwise be issued, Finger
Lakes Bancorp will pay by check an amount equal to the product obtained by
multiplying the fractional share interest to which the holder would otherwise be
entitled by the subscription price. Payment for fractional shares will be made
as soon as practicable after the receipt by the exchange agent of surrendered
Finger Lakes Financial stock certificates.
Under federal regulations, current stockholders of Finger Lakes Financial
do not have dissenters' rights or appraisal rights.
Reasons for the Conversion
We are pursuing the conversion for the following reasons:
o As a result of the conversion, we will have more capital which
will enable us to continue to expand our banking franchise
through de novo branching, and offering new products and
banking services. We will thereby be in a better position to
increase our market presence in the Finger Lakes region of New
York.
o The larger capital base resulting from the conversion will
allow us to increase our income earning assets, which in turn
should permit us to continue to increase our earnings.
o After the conversion, our common stock will be listed on the
Nasdaq National Market. We believe this listing and the larger
number of outstanding shares will provide additional liquidity
and visibility for our common stock. We believe that as a
result, it will be easier for you to buy and sell our common
stock.
o As a holding company for a fully converted stock institution,
we will have greater strategic flexibility in connection with
merger and acquisition transactions. Unlike a mutual holding
company, we can merge with and into any other stock
institution or its holding company.
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Conditions to Completion of Conversion
We cannot complete our conversion and our offering unless:
o It is approved by at least a majority of votes eligible to be
cast by members of Finger Lakes Financial Corp., MHC;
o It is approved by at least two-thirds of the outstanding
shares of Finger Lakes Financial common stock; and
o It is approved by at least a majority of the votes cast by
shareholders of Finger Lakes Financial common stock, not
including those shares held by Finger Lakes Financial Corp.,
MHC.
Finger Lakes Financial Corp., MHC intends to vote its 66.9% ownership
interest in favor of the conversion. In addition, as of June 30, 2000, directors
and executive officers of Finger Lakes Financial and their associates
beneficially owned 202,254 shares of Finger Lakes Financial, or 5.7% of the
outstanding shares. They intend to vote those shares in favor of the conversion.
$7.00 per Share Stock Pricing and Number of Shares to be Issued in the
Conversion
We are offering each share of stock at $7.00 per share. The amount of
common stock we are offering in the conversion is based on an independent
appraisal of the estimated market value of Finger Lakes Financial Corp., MHC and
Finger Lakes Financial, assuming Finger Lakes Financial Corp., MHC has already
completed the conversion. FinPro, Inc., the independent appraiser, has estimated
that, in its opinion, as of March 13, 2000, as updated on August 25, 2000, this
market value was between $16.7 million and $22.5 million, with a mid-point of
$19.6 million. The appraisal was based in part on Finger Lakes Financial's
financial condition and results of operations and the effect of the additional
capital raised by the sale of common stock in this offering. Based on this
valuation and the approximate 66.9% ownership interest being sold in this
offering, the Board of Directors of Finger Lakes Financial, MHC and Finger Lakes
Financial established an offering range between 1,594,085 and 2,156,655 shares.
This offering range means the $7.00 per share purchase price for our shares will
range from 57.71% to 69.72% of our estimated post-conversion stockholders'
equity per share, using June 30, 2000, financial data. See "The
Conversion--Stock Pricing and Number of Shares to be Issued" on page 86.
The independent appraisal will be updated prior to the completion of the
conversion. If the market value changes to either below $16.7 million or above
$25.9 million, subscribers will be notified and provided with the opportunity to
modify or cancel their orders. See "The Conversion--Stock Pricing and Number of
Shares to be Issued" for additional details.
Purchase Limitations
The minimum number of shares that may be purchased is 25.
If you are not now a Finger Lakes Financial shareholder -
You may not purchase more than 5% of the shares offered, or 107,832 shares
at the maximum of the offering range, either alone or together with associates
or persons acting in concert with you.
If you are now a Finger Lakes Financial shareholder -
You may not, either alone or together with associates or persons acting in
concert, purchase shares greater than 5% of the shares offered or, when combined
with shares you receive in the exchange, may not make purchases which will
exceed 5% of the shares outstanding immediately following the offering, or
161,000 shares
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at the maximum of the offering range. For example, if you are to receive 78,000
shares in the exchange, you may only purchase up to an additional 83,000 shares
in the offering.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "The Conversion--Limitations on Common
Stock Purchases" on page 97.
How Investors can Purchase Common Stock
You can subscribe for shares of common stock in the offering, by sending or
delivering an original, signed stock order form together with full payment to us
in the postage-paid envelope provided so that we receive the stock order form
before the end of the offering. The certification that is on the back of the
stock order form must also be signed. Payment for shares may be made in cash if
made in person, or by check or money order. Savings Bank of the Finger Lakes
will pay interest at the rate of 2.20% from the date funds are received until
completion or termination of the conversion. Subscribers who have deposit
accounts with Savings Bank of the Finger Lakes may include instructions on the
stock order form requesting withdrawal from those deposit account(s) to purchase
shares. Withdrawals from certificates of deposit may be made without incurring
an early withdrawal penalty. All funds authorized for withdrawal from deposit
accounts with Savings Bank of the Finger Lakes will earn interest at the
applicable deposit account rate. However, a hold will be placed on those funds
making them unavailable until the completion of the conversion. After we receive
an order, the order cannot be withdrawn or changed, except with our consent.
IMPORTANT: To ensure the proper identification of subscription rights,
list all qualifying deposit accounts, as of the respective qualifying
dates, on the stock order form. Persons who do not list all qualifying
deposit accounts may be subject to reduction or rejection of their
subscription.
Except for those with priority rights to purchase shares, we have the
discretion to accept or reject orders received in the offering. If an order is
rejected in part, there is no right to cancel the remainder of the order.
Owners of self-directed individual retirement accounts who are eligible to
purchase common stock may use the assets of their individual retirement accounts
to purchase shares of common stock in the conversion. However, they may not do
so if their accounts are maintained on deposit with Savings Bank of the Finger
Lakes. If you want to use funds in a self-directed individual retirement account
maintained by Savings Bank of the Finger Lakes to purchase shares of common
stock, you must transfer your account to an unaffiliated institution or broker.
If you are interested in doing so, you should contact the stock center as soon
as possible, and in any event at least one week before the expiration date.
For further information on how to purchase stock, see "The
Conversion--Procedure for Purchasing Shares on page 95."
Use of Proceeds
We will use the proceeds of this offering as follows:
o Net proceeds are estimated to be between $10.3 million and
$14.2 million. A portion of the net proceeds will be
contributed to Savings Bank of the Finger Lakes. Funds infused
into the Savings Bank of Finger Lakes will be used to expand
our branch network through de novo branching and offering new
products and banking services. The net proceeds will be used
to support asset growth, including consumer and commercial
loan growth. In the short term, net proceeds will be invested
in short term assets.
o Finger Lakes Bancorp will retain approximately 50% of the net
proceeds (between $5.2 million and $7.1 million), a portion of
which may be used to fund a loan to the employee stock
10
<PAGE>
ownership plan to fund its purchase of common stock. The
balance of the funds retained by us will be used for general
corporate purposes. These purposes may include paying
dividends or buying back shares of common stock. In addition,
these funds may be used for future diversification or
acquisition activities, although we do not have plans to do so
now.
For further discussion, see "Use of Proceeds."
Purchases by Officers and Directors
We expect our directors and executive officers, together with their
families, to subscribe for 92,000 shares, which equals approximately 4.9% of the
shares sold at the mid-point of the offering range. The purchase price paid by
them will be the same $7.00 per share price as that paid by all other persons
who purchase shares in the conversion. See "Subscriptions by Executive Officers
and Directors."
Benefits of the Conversion to Management
Savings Bank of the Finger Lakes' employee stock ownership plan expects to
purchase up to 8% of the shares we sell in this offering, or 172,532 shares,
assuming we sell the maximum of the shares proposed to be sold. If we sell more
shares than the maximum of the offering range, this plan will have first
priority to purchase shares over this maximum, up to the total of 8%. We reserve
the right to purchase common stock in the open market following the offering in
order to fund the employee stock ownership plan. This plan is a tax-qualified
retirement plan for all eligible employees. Assuming the plan purchases 172,532
shares in the offering, Finger Lakes Bancorp will recognize additional
compensation expense of $1,207,724 over a period of 15 years, or approximately
$80,515 per year, from the consummation of the conversion, assuming the shares
have a fair market value of $7.00 per share for the full 15-year period. If, in
the future, the shares have a fair market value greater or less than $7.00, the
compensation expenses will increase or decrease accordingly.
We also intend to implement two stock-based incentive plans. Neither plan
will be implemented earlier than six months after the conversion. One plan, the
2001 recognition plan would, if implemented within one year of the conversion,
reserve 4% of the shares sold in the offering, or 86,266 shares at the maximum
of the offering range, for awards to key employees and directors, at no cost to
the recipients. If the shares awarded under the 2001 recognition plan come from
authorized but unissued shares, shareholders would experience dilution of
approximately 2.68% in their ownership interest in Finger Lakes Bancorp. In the
event that the tangible capital of Savings Bank of the Finger Lakes fails to
exceed 10% of assets, the 2001 recognition plan will only reserve 3% of the
shares sold in the offering. The second plan, the 2001 stock option plan, will
reserve 10% of the shares sold in this offering, or 215,665 shares at the
maximum of the offering range, to be issued when options to be granted to key
employees and directors are exercised. If the shares underlying options come
from authorized by unissued shares, shareholders would experience dilution of
approximately 6.69% in their ownership interest in Finger Lakes Bancorp. Awards
made under these plans would be subject to a vesting schedule.
We also will convert options previously awarded in the Savings Bank of the
Finger Lakes stock option plans into options to purchase our common stock, with
the number and exercise price to be adjusted based on the exchange ratio, and
the term and vesting period will remain unchanged.
In connection with the conversion, Finger Lakes Bancorp plans to enter into
employment agreements with G. Thomas Bowers, President and Chief Executive
Officer, and Terry L. Hammond, Executive Vice President and Chief Financial
Officer. The employment agreements will provide cash payments to Mr. Bowers and
Mr. Hammond if their employment is terminated following a change in control of
Finger Lakes Bancorp. Each executive will be entitled to a package of cash
and/or benefits with a maximum value equal to up to three times his average
annual compensation during the three-year period preceding the change in
control. If a change in control had occurred as of June 30, 2000, the aggregate
value of the severance benefits payable to Mr. Bowers and Mr. Hammond under the
proposed employment agreements would have been approximately $600,000 and
$303,000, respectively.
11
<PAGE>
The following table summarizes these plans. The value of shares shown in
the table assumes a value of $7.00 per share, the price at which shares in the
offering will be sold. No value is given for options because their exercise
price will be equal to the fair market value of the common stock on the day the
options are granted. As a result, value can be received under an option only if
the market price of common stock increases after the option grant.
<TABLE>
<CAPTION>
Number of Shares Value of Grants
to be Granted or Agreements Percentage of
-------------------------------- ------------------------------ Common Stock
At Minimum At Maximum At Minimum At Maximum to be Sold
of of of of in the
Offering Range Offering Range Offering Range Offering Range Offering
-------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Employee stock ownership plan........ 127,526 172,532 $ 892,682 $1,207,724 8%
2001 recognition plan(1)............. 63,763 86,266 446,341 603,862 4%
2001 stock option plan............... 159,408 215,665 -- -- 10%
Aggregate value of severance benefits
under employment agreements.......... -- -- 903,000 903,000
Total................................ 350,697 474,463 $2,242,023 $2,714,586 22%
--------------------
</TABLE>
(1) Assuming Savings Bank of the Finger Lakes has a tangible capital to assets
ratio in excess of 10%.
As of the date of this prospectus, management of Finger Lakes Financial
owned, or had the right to acquire, 202,254 shares of Finger Lakes Financial.
After the exchange and assuming the grant of the additional shares shown in the
above table, management and the employee stock ownership plan would own 485,398
and 656,714 shares of Finger Lakes Bancorp at the minimum and maximum,
respectively, of the offering range. That would amount to 20.4% and 20.4%,
respectively, of the shares of our common stock outstanding after the offering
at the minimum and maximum of the offering range.
Market for Common Stock
We have applied to the Nasdaq Stock Market to list the common stock on the
Nasdaq National Market under the symbol FLBC. The common stock of Finger Lakes
Financial is currently listed on the Nasdaq SmallCap Market under the symbol
SBFL. While it is expected that Finger Lakes Bancorp common stock will be more
easily tradeable because there will be significantly more outstanding shares
than Finger Lakes Financial's common stock, there can be no assurance of this.
Friedman, Billings, Ramsey & Co., Inc. has advised us that it intends to be
a market maker in the common stock and will assist us in obtaining additional
market makers.
Dividend Policy
Finger Lakes Financial now pays a cash dividend of $0.06 per share per
quarter, or $0.24 per share per year. After the conversion, we intend to pay a
dividend of $0.06 per share per quarter, which represents a dividend rate of
3.43% based upon a price of $7.00 per share. The dividend rate and the continued
payment of dividends will depend on a number of factors including our capital
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future. Assuming the offering is completed
in November 2000, the first dividend is expected to be declared for the quarter
ending December 2000.
Comparison of Stockholders' Rights
After the conversion, the stockholders of Finger Lakes Financial will
become stockholders of Finger Lakes Bancorp and their rights as stockholders
will be governed by Finger Lakes Bancorp's certificate of
12
<PAGE>
incorporation and bylaws and Delaware law, rather than Finger Lakes Financial's
federal charter and bylaws and federal law and regulations. For a discussion of
material differences in the rights of stockholders of Finger Lakes Bancorp and
Finger Lakes Financial and an explanation of possible anti-takeover effects of
provisions in Finger Lakes Bancorp's certificate of incorporation and bylaws,
see "Comparison of Stockholders' Rights" on page 103.
[GRAPHIC OMITTED]
RISK FACTORS
You should consider carefully thefollowing risk factors before
deciding whether to invest in our common stock.
Increases in interest rates may cause earnings to decline and decrease the value
of our mortgage-backed securities and investment securities classified as
available for sale.
To be profitable, we have to earn more money in interest and other income
than we pay as interest and other expenses. Our loan portfolio primarily
consists of loans which either mature or reprice after five years. At June 30,
2000, our deposit accounts consisted of time deposit accounts, of which $80.3
million, or 36.6% of total deposits have remaining terms to maturity of less
than one year, as well as demand deposits such as NOW accounts. If interest
rates rise, the amount of interest we pay on deposits is likely to increase more
quickly than the amount of interest we receive on our loans, mortgage-backed
securities and investment securities. This could cause our profits to decrease.
If interest rates fall, many borrowers may refinance more quickly, and interest
rates on interest earning assets could fall, perhaps faster than the interest
rates on our liabilities. This could also cause our profits to decrease. For
additional information on our exposure to interest rates, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Market Risk."
In addition, when interest rates rise, it causes a reduction in the fair
value of our mortgage-backed securities and investment securities. At June 30,
2000, our mortgage-backed securities and investment securities which were
classified as available for sale had a fair value of $120.0 million, which is
$5.7 million less than the $125.7 million amortized cost of such securities. The
$5.7 million unrealized loss on such securities ($3.4 million, net of taxes) is
shown on our consolidated statement of financial condition as a reduction of
stockholders' equity but does not affect our income statement unless we sell
these securities and realize the loss.
Our low return on equity after the stock offering may cause our common stock
price to decline.
Our annualized returns on equity for the six months ended June 30, 2000 and
1999, and the fiscal years ended December 31, 1999 and 1998, were 3.89%, 5.31%,
6.19% and 3.29%, respectively. These ratios are below the industry averages. We
will not be able to deploy the increased capital from this offering immediately
which will cause our historically low returns on equity to decrease further and
our ability to profitably leverage our new capital will be significantly
affected by competition for loans and deposits. Initially, we intend to invest
the net proceeds in short-term investments which have lower yields than mortgage
and non-mortgage loans. Until we can leverage our increased capital by growing
interest-earning assets and interest-bearing liabilities, we expect our return
on equity to continue to be below the industry average, which may negatively
impact the value of our common stock.
We own property that has environmental liability.
In 1989, we foreclosed on property in Geneva, New York, that was the site
of a laundry and dry-cleaning business. We performed an environmental
investigation and remediation of soil contaminated at the site, but subsequent
testing indicated the need for additional groundwater and soil remediation. We
have entered into a Voluntary Remediation Agreement with the New York Department
of Environmental Conservation ("DEC"). In May 2000, the DEC approved our work
plan to perform the remediation. At June 30, 2000, we had a $782,000 accrued
liability in our financial statements for the estimated remediation costs. We
began remediation in accordance with our work plan in August and it is expected
that this work will be completed in October 2000.
13
<PAGE>
Once the remediation work plan has been completed to DEC's satisfaction, DEC
will release us from liability of the on-site environmental contamination, but
that could take a number of years to accomplish. In addition, we have obtained
environmental liability insurance against third party liability claims that
could arise from any off-site migration of the contamination, and we intend to
obtain additional insurance against cost overruns in the remediation. We believe
that the recorded liability, together with the insurance coverage, should be
adequate to cover reasonably anticipated liabilities in connection with this
matter. However, it is possible that our liability exposure for the site will
exceed the amounts reserved and insured. For additional information on this
environmental liability, see Note 13 to the consolidated financial statements.
You may not be able to sell your shares when you desire, or for $7.00 or more
per share.
We expect that the common stock will trade on the Nasdaq National Market
System. We cannot predict whether a liquid trading market in shares of our
common stock will develop or how liquid that market might become. Persons
purchasing shares may not be able to sell their shares when they desire if a
liquid trading market does not develop or sell them at a price equal to or above
the initial offering price of $7.00 per share even if a liquid trading market
develops. In several cases, common stock issued by recently converted financial
institutions has traded at a price that is below the price at which such shares
were sold in the initial offerings of those companies. The purchase price of our
common stock in the offering is based on the independent appraisal by FinPro.
After our shares begin trading, the trading price of our common stock will be
determined by the marketplace, and may be influenced by many factors, including
prevailing interest rates, investor perceptions and general industry and
economic conditions. For example, an investor should understand that, in the
short-term, the value of an investment in the common stock is subject to
fluctuation, including loss, due to volatility in stock markets generally.
Strong competition within our market area makes it difficult to achieve the
desired level of profitability.
Competition in the banking and financial services industry is intense. We
have competed for customers by offering excellent service and competitive rates
on our loans and deposit products. We compete with commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms. Many of
these competitors, such as regional banks, have greater resources than we do and
offer services that we do not provide. Moreover, many of our competitors offer
services through the Internet, which we do not offer, and many larger
institutions that do not have a physical presence in our market area compete
with us through the use of the Internet. Our profitability depends upon our
continued ability to successfully compete in our market area.
In addition, in November 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999. This
legislation is intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. To the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve. This
could adversely impact our profitability.
Our loans are concentrated in a small geographic area, increasing our
susceptibility to a deterioration in asset quality if the local economy falters.
Our loan portfolio is primarily secured by real estate located in the
Finger Lakes region of New York State. Accordingly, the asset quality of our
loan portfolio is largely dependent upon the economy and unemployment rate in
this area. A downturn in our primary lending area could adversely affect our
operations and profitability. Moreover, a downturn in the local economy may
affect us more severely than some of our larger competitors whose lending
operations are more geographically diverse.
14
<PAGE>
Factors beyond our control affect the demand for loans which could cause our
profitability to decline.
There are many factors beyond our control that can affect the demand for
loans. Making loans is our primary business and primary source of profits and
our inability to insure a demand for loans is a continuing risk to our results
of operations. The economy in our market area has not grown significantly in
recent years. Consequently, loan originations have decreased during the past
year. Customer demand for loans could be reduced further by a weaker economy, an
increase in unemployment, a decrease in real estate values, an increase in
interest rates or increased competition from other institutions. If customer
demand for loans decreases, our profits may decrease because our alternative
investments, such as mortgage-backed securities and investment securities, have
lower yields than loans.
The increase in multi-family and commercial real estate lending and non-mortgage
related lending increases the risk that some of our loans will not be repaid.
Our portfolio of loans that are not one- to four-family mortgage loans has
been increasing. Our goal is to continue to increase this portfolio because of
the higher yields these loans provide. At June 30, 2000, multi- family and
commercial real estate loans totaled $32.0 million or 19.4% of total loans,
compared to $20.5 million or 14.05% of total loans at December 31, 1998. At June
30, 2000, loans that were not secured by real estate totaled $42.5 million or
25.8% of total loans, compared to $29.3 million or 20.0% of total loans at
December 31, 1998. These types of loans generally expose a lender to greater
credit risks than loans secured by one- to four- family real estate. We intend
to continue emphasizing the origination of loans that are not secured by real
estate, in particular, the origination of commercial business loans. As we
increase our portfolio of these loans we may begin to experience higher levels
of nonperforming loans and credit losses.
Anti-takeover provisions in our charter and bylaws and voting control of
management may discourage takeover proposals that may offer a premium above the
trading price of our common stock.
Provisions in Savings Bank of the Finger Lakes' and Finger Lakes Bancorp's
charters and bylaws. Provisions in our charters and bylaws may discourage
potential proxy contests and other potential takeover attempts, particularly
those that have not been negotiated with our Board of Directors. As a result,
these provisions generally may serve to perpetuate existing management. Examples
of these provisions include a limitation on the voting of shares held by a
single beneficial owner in excess of 10% of our outstanding shares and the
election of directors for three-year terms so that only approximately one-third
of our directors are elected annually. For a more detailed discussion of these
provisions, see "Comparison of Stockholders' Rights" and "Restrictions on
Acquisitions of Finger Lakes Bancorp."
Voting control of officers and directors. Our employees and directors over
time may obtain a large number of shares through their purchases in the
conversion, their interests in the employee stock ownership plan, and the
proposed stock-based benefit plans. This share ownership will give our employees
and directors a significant vote on matters important to shareholders. Further,
this possible ownership level could discourage takeover attempts that
shareholders might like to see happen. In addition, the total ownership or
voting level by employees and directors from these sources could reach in excess
of 20% of our outstanding stock. That level would enable our employees and
directors as a group to defeat any stockholder matter that required an 80% vote.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FINGER LAKES FINANCIAL AND SUBSIDIARY
The following tables set forth selected consolidated historical financial
and other data of Finger Lakes Financial and Savings Bank of the Finger Lakes
for the periods and at the dates indicated. The information is derived in part
from, and should be read together with, the Consolidated Financial Statements
and Notes thereto of Finger Lakes Financial contained elsewhere in this
prospectus.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------- --------- -------
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............................ $307,002 $291,396 $301,241 $282,376 $ 247,708 $ 200,429 $ 167,773
Cash and cash equivalents............... 4,964 3,352 6,095 4,375 4,394 6,366 6,823
Securities available for sale........... 120,025 120,802 118,750 115,333 99,880 83,830 61,719
Securities held to maturity............. 1,593 904 1,593 4,640 14,096 13,347 4,705
Loans, net.............................. 163,551 151,737 158,854 145,136 118,439 88,682 86,050
Deposits................................ 219,749 207,013 208,132 202,434 186,534 153,832 144,846
Advances from Federal Home Loan Bank.... 63,759 60,845 69,960 54,815 36,721 23,800 --
Stockholders' equity.................... 19,737 20,388 19,379 21,964 21,679 20,350 20,734
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------- ---------------------------------------------------
2000 1999 1999 1998 1997 1996 1995(1)
-------- -------- -------- -------- --------- --------- ---------
(In Thousands, except per share amounts)
Selected Operating Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income..................... $ 10,821 $ 9,858 $ 20,317 $ 18,645 $ 15,840 $ 13,560 $ 8,187
Total interest expense.................... 6,505 5,860 12,021 11,201 9,197 7,370 4,426
-------- -------- -------- -------- --------- --------- ---------
Net interest income...................... 4,316 3,998 8,296 7,444 6,643 6,190 3,761
Provision for loan losses................. 90 125 200 240 120 483 290
-------- -------- -------- -------- --------- --------- ---------
Net interest income after provision for 4,226 3,873 8,096 7,204 6,523 5,707 3,471
loan losses
Noninterest income........................ 511 666 1,328 1,202 721 1,093 123
Noninterest expense....................... 4,129 3,584 7,259 7,213 5,835 6,741 5,068
-------- -------- -------- -------- --------- --------- ---------
Income (loss) before income tax
expense (benefit)........................ 608 955 2,165 1,193 1,409 59 (1,474)
Income tax expense (benefit).............. 230 382 860 469 562 23 (571)
-------- -------- -------- -------- --------- --------- ---------
Net income (loss)......................... $ 378 $ 573 $ 1,305 $ 724 $ 847 $ 36 $ (903)
======== ======== ======== ======== ========= ========= =========
Net income (loss) per share- basic........ $ .11 $ .16 $ .37 $ .21 $ .24 $ .01 $ (.25)
======== ======== ======== ======== ========= ========= =========
Net income (loss) per share - diluted..... $ .11 $ .16 $ .37 $ .20 $ .24 $ .01 $ (.25)
======== ======== ======== ======== ========= ========= =========
Dividends per share....................... $ .12 $ .12 $ .24 $ .23 $ .20 $ .20 $ .15
======== ======== ======== ======== ========= ========= =========
</TABLE>
---------------------------
(1) Reflects eight months of operations insofar as Savings Bank of the Finger
Lakes converted its fiscal year end from April 30 to December 31 in 1995.
16
<PAGE>
<TABLE>
<CAPTION>
At or For
the Six Months
Ended June 30 At or For the Year Ended December 31, December 31,
------------------- ---------------------------------------- ------------
2000 1999 1999 1998 1997 1996 1995(1)
-------- -------- -------- -------- --------- -------- ------------
Selected Ratios:
Performance Ratios:
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets (ratio of net income to
average total assets)(2)................. 0.25% 0.40% 0.44% 0.27% 0.40% 0.02% (0.79)%
Return on stockholders' equity (ratio of net
income to average equity)(2)............. 3.89 5.31 6.19 3.29 4.05 0.18 (6.44)
Interest rate spread information (3):
Average during period (2)................ 2.75 2.72 2.74 2.71 2.82 3.17 3.27
End of period............................ 2.64 2.76 2.77 2.73 2.84 2.79 3.24
Net interest margin (net interest income divided by
average interest-earning assets)(2)...... 2.95 2.92 2.93 2.96 3.14 3.48 3.56
Noninterest expenses to average total assets(2) 2.74 2.51 2.47 2.74 2.66 3.60 4.45
Average interest-earning assets to
average interest-bearing liabilities..... 104.47 104.62 104.65 105.39 107.29 106.68 106.95
Dividend payout ratio(4).................. 109 75 65 115 83 2000 n/a
Asset Quality Ratios:
Non-performing assets to total assets(5).. 0.23 0.34 0.32 0.43 0.50 0.93 1.78
Allowance for loan losses to non-performing loans(5) 337.35 197.47 229.81 115.75 203.72 118.52 78.39
Allowance for loan losses to loans........ 0.85 0.87 0.84 0.80 0.96 1.21 0.93
Capital Ratios:
Stockholders' equity to total assets at end of period 6.43 7.00 6.43 7.78 8.75 10.15 12.36
Average stockholders' equity to average assets 6.44 7.56 7.17 8.36 9.54 10.85 12.33
Other Data:
Number of full service customer facilities
at end of period......................... 7 6 6 6 5 4 3
</TABLE>
---------------------------------
(1) Reflects eight months of operations insofar as Savings Bank of the Finger
Lakes converted its fiscal year end from April 30 to December 31 in 1995.
(2) For purposes of computing these rates, the six-month periods ended June 30,
2000 and 1999, and the eight-month period ended December 31, 1995, have been
annualized.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities.
(4) Ratio does not reflect the waiver of dividends by Finger Lakes Financial
Corp., MHC on all of its shares.
(5) Nonperforming loans consist of non-accrual loans and non-performing assets
consist of non-performing loans, troubled debt restructuring and real
estate owned.
17
<PAGE>
FINGER LAKES BANCORP
Finger Lakes Bancorp was organized under Delaware law in March 2000 for the
purpose of acquiring all of the outstanding shares of capital stock of Savings
Bank of the Finger Lakes. Finger Lakes Bancorp has applied to the Office of
Thrift Supervision to become a savings and loan holding company and will be
regulated by that agency. After completion of the conversion, Finger Lakes
Bancorp will conduct business initially as a unitary savings and loan holding
company. After the conversion, Finger Lakes Bancorp's assets will consist
primarily of the shares of Savings Bank of the Finger Lakes capital stock
acquired in the conversion, that portion of the net proceeds of the conversion
permitted by the Office of Thrift Supervision to be retained by Finger Lakes
Bancorp and the loan to the Employee Stock Ownership Plan. Finger Lakes Bancorp
expects to retain $5.2 million of the net proceeds of the offering (at the
minimum). Finger Lakes Bancorp initially will have no significant liabilities.
Initially, Finger Lakes Bancorp will neither own nor lease any property, but
instead will use the premises, equipment and furniture of Savings Bank of the
Finger Lakes. At the present time, Finger Lakes Bancorp does not intend to
employ any persons other than officers but will use the support staff of Savings
Bank of the Finger Lakes from time to time. Additional employees will be hired
as appropriate to the extent Finger Lakes Bancorp expands its business. The
management of Finger Lakes Bancorp is set forth under "Management of Finger
Lakes Bancorp."
The conversion will provide Finger Lakes Bancorp with additional capital to
support future growth. Management believes that the holding company structure
will provide Finger Lakes Bancorp with additional flexibility to diversify its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies or for other business or investment purposes.
Although there are no current arrangements, understandings or agreements,
written or oral, regarding any such opportunities or transactions, Finger Lakes
Bancorp will be in a position after the conversion to take advantage of any such
acquisition and expansion opportunities that may arise, as restricted by
regulatory limitations and Finger Lakes Bancorp's financial position. The
initial activities of Finger Lakes Bancorp are anticipated to be funded
primarily by the conversion proceeds retained by Finger Lakes Bancorp and
earnings thereon or, alternatively, through dividends received from Savings Bank
of the Finger Lakes.
Finger Lakes Bancorp's executive office is located at 470 Exchange Street,
Geneva, New York, and its telephone number is (315) 789-3838.
SAVINGS BANK OF THE FINGER LAKES
We were formed as the result of a merger consummated in 1984 in which
Geneva Savings Bank, a New York-chartered mutual savings bank, acquired Geneva
Federal Savings and Loan Association, a federal mutual savings and loan
association, and converted to a federal mutual savings bank known as Savings
Bank of the Finger Lakes. Both institutions had conducted their business
primarily in the Geneva, New York area.
On November 10, 1994, we completed a reorganization from a federally
chartered, mutual savings bank to a federally chartered mutual holding company
known as Finger Lakes Financial Corporation, MHC. As part of the reorganization,
we organized a federally chartered stock savings bank and transferred
substantially all of our 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 Savings Bank of the Finger Lakes.
On August 17, 1998, we reorganized into the two-tier mutual holding company
structure with Finger Lakes Financial Corp. as the mid-tier stock holding
company parent of Savings Bank of the Finger Lakes. The reorganization into the
two-tier structure had no impact on the operations of Savings Bank of the Finger
Lakes or Finger Lakes Financial Corp., MHC.
We are a community-oriented financial institution offering traditional
financial services to our local community. Our primary lending area includes the
Finger Lakes region of New York State. We will continue to
18
<PAGE>
seek opportunities to increase our presence in our market area by expanding our
branch franchise and emphasizing a variety of loan products. Our primary lending
activity involves the origination of fixed rate and adjustable rate mortgage
loans secured by one- to four- family residential real estate. To a lesser
extent, we make loans secured by commercial real estate and multi-family
properties, and single family residential construction loans. In addition, we
originate loans that are not secured by real estate, and purchase mobile home
loans. Management anticipates that commercial and multi-family loans, as well as
loans that are not secured by real estate, in particular commercial business
loans, will increase as a percentage of overall loans.
We are currently selling substantially all newly originated fixed-rate
residential mortgage loans and retaining the servicing on such loans. At June
30, 2000, we were servicing $40.1 million in loans for others. We generally
limit our lending activities, except with respect to mobile home loans, to the
Finger Lakes region of New York State. We believe that we have a substantial
market share in Ontario County and competitive market shares in the other
counties in our primary market area, both with respect to deposits and loans. We
generally limit our non-residential real estate loans to the western New York
market area and generally do not lend outside New York and New Jersey with
respect to mobile home loans. We do not engage in securities trading and limit
our investments to primarily U.S. Treasury and Federal Government agency
obligations, corporate and municipal bonds, mortgage-backed securities, which
are insured by federal agencies, collateralized mortgage obligations, and equity
securities.
We currently conduct operations through our main office in Geneva, New
York, and six full service branch offices in western and central New York. We
opened our sixth full service branch office in Auburn, New York in the spring of
2000.
Our principal executive office is located at 470 Exchange Street, Geneva,
New York 14456, and our telephone number at that address is (315) 789-3838.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At June 30, 2000, Savings Bank of the Finger Lakes exceeded all of the
applicable regulatory capital requirements. The table on the following pages
sets forth the historical regulatory capital of Savings Bank of the Finger Lakes
at June 30, 2000, and the pro forma regulatory capital of Savings Bank of the
Finger Lakes after giving effect to the conversion, based upon the sale at $7.00
per share of the number of shares shown in the table. The pro forma regulatory
capital amounts reflect the receipt by Savings Bank of the Finger Lakes of 50%
of the net conversion proceeds, which will be retained by Finger Lakes Bancorp
and funding of the employee stock ownership plan and the 2001 recognition plan.
The pro forma risk-based capital amounts assume the investment of the net
proceeds received by Savings Bank of the Finger Lakes in assets which have a
risk-weight of 20% under applicable regulations, as if the net proceeds had been
received and so applied at June 30, 2000. See "Pro Forma Data" for the
assumptions used to determine the net proceeds of the offering. For purposes of
the table below, the entire amount expected to be borrowed by the employee stock
ownership plan and the entire cost of the shares expected to be acquired by the
2001 recognition plan are deducted from pro forma regulatory capital.
19
<PAGE>
<TABLE>
<CAPTION>
Savings Bank of the Finger Lakes
Historical at Pro Forma at June 30, 2000
------------------------------------------------------------------------------
June 30, 2000 1,594,085 Shares 1,875,311 Shares 2,156,655 Shares 2,480,112 Shares(1)
---------------------- ---------------- ---------------- ---------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
-------- ---------- -------- --------- -------- --------- -------- ---------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $ 19,737 6.43% $ 23,553 7.58% $24,301 7.80% $ 25,049 8.02% $ 25,910 8.27%
Tangible capital:
Capital level......... $ 22,998 7.40% $ 26,814 8.52% $27,562 8.74% $ 28,310 8.96% $ 29,171 9.20%
Requirement........... 4,661 1.50% 4,718 1.50% 4,730 1.50% 4,741 1.50% 4,754 1.50
-------- ----- -------- ----- ------- ------ -------- ------ -------- -----
Excess.............. $ 18,337 5.90% $ 22,096 7.02% $22,832 7.24% $ 23,569 7.46% $ 24,417 7.70%
======== ===== ======== ===== ======= ====== ======== ====== ======== =====
Core capital:
Capital level......... $ 22,998 7.40% $ 26,814 8.52% $27,562 8.74% $ 28,310 8.96% $ 29,171 9.20%
Requirement(3)........ 12,430 4.00% 12,582 4.00% 12,612 4.00% 12,642 4.00% 12,677 4.00
-------- ----- -------- ----- ------- ------ -------- ------ -------- -----
Excess.............. $ 10,568 3.40% $ 14,232 4.52% $14,950 4.74% $ 15,668 4.96% $ 16,494 5.20%
======== ===== ======== ===== ======= ====== ======== ====== ======== =====
Risk-based capital:......
Capital level(4)...... $ 23,502 15.68% $ 27,318 18.13% $28,066 18.61% $ 28,814 19.09% $ 29,675 19.63%
Requirement........... 11,991 8.00% 12,052 8.00% 12,064 8.00% 12,076 8.00% 12,090 8.00
-------- ----- -------- ----- ------- ------ -------- ------ -------- -----
Excess.............. $ 11,511 7.68% $ 15,266 10.13% $16,002 10.61% $ 16,738 11.09% $ 17,585 11.63%
======== ===== ======== ===== ======= ====== ======== ====== ======== =====
Assets................... $307,002 $310,818 $311,566 $312,314 $313,175
Tangible Assets.......... $310,742 $314,558 $315,306 $316,054 $ 316,915
Core Assets.............. $310,742 $314,558 $315,306 $316,054 $ 316,915
Risk Weighted Assets..... $149,888 $150,651 $150,801 $150,950 $151,123
</TABLE>
--------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk- weighted assets
used for the capital calculations include the proceeds of the employee
stock ownership plan's purchase of 8% of the Finger Lakes Bancorp common
stock in the offering.
(3) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets for savings banks that receive
the highest supervisory rating for safety and soundness, and a 4% to 5%
core capital ratio requirement for all other savings banks.
(4) Pro forma amounts and percentages assume net proceeds are invested in assets
that carry a 20% risk-weighting.
20
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the common stock in the
offering cannot be determined until the offering is completed, it is presently
anticipated that the net proceeds will be between $10.3 million and $14.2
million, or $16.5 million if the offering range is increased by 15%. See "Pro
Forma Data" and "The Conversion--Share Exchange Ratio" and "--Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at these
amounts. Finger Lakes Bancorp will be unable to use any of the net proceeds of
the offering until the consummation of the conversion.
Finger Lakes Bancorp estimates that it will use between $5.2 million and
$7.1 million, or $8.3 million if the offering range is increased by 15%, to
purchase all of the capital stock of Savings Bank of the Finger Lakes to be
issued upon conversion. Finger Lakes Bancorp will retain approximately 50% of
the net proceeds, a portion of which is expected to be used to fund the loan to
the employee stock ownership plan. The balance of funds retained by Finger Lakes
Bancorp will be used for general corporate purposes. These purposes may include
investment in federal funds, short-term investment grade marketable securities
and mortgage-backed securities.
The loan to the employee stock ownership plan will enable it to purchase up
to 8% of the shares of Finger Lakes Bancorp common stock issued in the offering.
Finger Lakes Bancorp and Savings Bank of the Finger Lakes may also elect to fund
the employee stock ownership plan's stock purchases through a loan by a third
party financial institution. We may also determine to fund the employee stock
ownership plan through open market purchases of common stock following
completion of the offering. See "Management of Finger Lakes
Financial--Benefits." The net proceeds retained by Finger Lakes Bancorp may also
be used to support the future expansion by offering new products and banking
services of operations through branch acquisitions, the establishment of new
branch offices, and the acquisition of other financial institutions or
diversification into other banking related businesses. Neither Finger Lakes
Bancorp nor Savings Bank of the Finger Lakes has any current specific plans,
arrangements or understandings regarding any additional expansions or
acquisitions at this time, nor have criteria been established to identify
potential candidates for acquisition.
A tabular presentation of Finger Lakes Bancorp's expected use of proceeds
is set forth below:
Minimum Maximum
Shares Shares
------- --------
(In Thousands)
Net proceeds..................... $ 10,309 $ 14,247
============ =============
Purchase of Savings Bank of the Finger 5,155 7,124
Lakes common stock
Funds loaned to ESOP............. 893 1,208
------------ -------------
Funds retained for general
corporate purposes............... $ 4,261 $ 5,915
============ =============
Upon completion of the conversion, the Board of Directors of Finger Lakes
Bancorp will have the authority to repurchase stock, as permitted by statutory
and regulatory authority. The Office of Thrift Supervision may permit Finger
Lakes Bancorp to repurchase up to 5% of its common stock during the first year
following completion of the conversion and Finger Lakes Bancorp may repurchase
shares without restriction thereafter.
Based upon facts and circumstances following the conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. These facts and circumstances may include but
are not be limited to:
(1) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the opportunity to improve Finger Lakes
Bancorp's return on equity;
(2) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and
21
<PAGE>
(3) any other circumstances in which repurchases would be in the best
interests of Finger Lakes Bancorp and its shareholders.
In the event Finger Lakes Bancorp determines to repurchase stock,
repurchases may be made at market prices which may be in excess of the $7.00
subscription price in the offering. To the extent that Finger Lakes Bancorp
repurchases stock at market prices in excess of the per share book value,
repurchases may have a dilutive effect upon the interests of existing
stockholders.
The portion of the net proceeds not retained by Finger Lakes Bancorp,
estimated to be $7.1 million at the maximum of the valuation range, will be
contributed to Savings Bank of the Finger Lakes. The proceeds received by
Savings Bank of the Finger Lakes will increase Savings Bank of the Finger Lakes'
capital. Funds will be added to Savings Bank of the Finger Lakes' general funds
to be used for general corporate purposes and to support asset growth, including
consumer and commercial loan growth. Net proceeds will also be used to make
investments in one-to four-family residential mortgage loans, investment in
federal funds, short-term investment grade marketable securities and
mortgage-backed securities. Savings Bank of the Finger Lakes may also use such
funds for the expansion of its facilities, and to expand operations through
acquisitions of other financial institutions, branch offices, or other financial
services companies. Savings Bank of the Finger Lakes and Finger Lakes Bancorp
have not determined the approximate amount of net proceeds to be used for each
of the purposes mentioned above.
DIVIDEND POLICY
Finger Lakes Financial currently pays a cash dividend of $0.06 per share
per quarter, or $0.24 per share per year. After the conversion, we intend to pay
a dividend of $0.06 per share per quarter, which represents a dividend rate of
3.43% based upon a price of $7.00 per share. The dividend rate and the continued
payment of dividends will depend on a number of factors including our capital
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future. Assuming the offering is completed
in November 2000, the first dividend is expected to be declared for the quarter
ending December 2000.
Savings Bank of the Finger Lakes will not be permitted to pay dividends on
its capital stock to Finger Lakes Bancorp if Savings Bank of the Finger Lakes'
stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Conversion--Liquidation Rights." For information
concerning federal and state law and regulations which apply to Savings Bank of
the Finger Lakes in determining the amount of proceeds which may be retained by
Finger Lakes Bancorp and regarding a savings institution's ability to make
capital distributions, including payment of dividends to its holding company,
see "Taxation--Federal Taxation" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
Unlike Savings Bank of the Finger Lakes, Finger Lakes Bancorp is not
restricted by Office of Thrift Supervision regulations on the payment of
dividends to its stockholders, although the source of dividends will depend on
the net proceeds retained by Finger Lakes Bancorp and earnings thereon and may
depend, in part, upon dividends from Savings Bank of the Finger Lakes. Finger
Lakes Bancorp is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets of
Finger Lakes Bancorp over its statutory capital or, if there is no excess, to
its net profits for the current and/or immediately preceding fiscal year. For
these purposes, net assets means the amount by which total assets exceed total
liabilities, and statutory capital generally means the aggregate par value of
the outstanding shares of Finger Lakes Bancorp's capital stock.
Additionally, in connection with the conversion, Finger Lakes Bancorp and
Savings Bank of the Finger Lakes have committed to the Office of Thrift
Supervision that during the one-year period following the consummation of the
conversion, Finger Lakes Bancorp will not take any action to declare an
extraordinary
22
<PAGE>
dividend to stockholders that would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the Office of Thrift Supervision.
MARKET FOR THE COMMON STOCK
There is an established market for Finger Lakes Financial common stock,
which is currently listed on the Nasdaq SmallCap Market under the symbol,
"SBFL." At June 30, 2000, Finger Lakes Financial had eight market makers,
including Friedman, Billings, Ramsey & Co., Inc. As a newly formed company,
however, Finger Lakes Bancorp has not issued capital stock. It is expected that
Finger Lakes Bancorp common stock will be more liquid than Finger Lakes
Financial common stock since there will be significantly more outstanding shares
owned by the public. Finger Lakes Bancorp has applied to have its common stock
listed on the Nasdaq National Market under the symbol "FLBC." However, there can
be no assurance that an active and liquid trading market for the common stock
will develop or, if developed, will be maintained. The shares of Finger Lakes
Financial common stock owned by the public will automatically, without further
action by those holders, be converted into and become a right to receive a
number of shares of Finger Lakes Bancorp common stock that is determined
pursuant to the exchange ratio. See "The Conversion--Share Exchange Ratio."
The development of a public market having the desirable characteristics of
depth, liquidity and orderliness depends on the existence of willing buyers and
sellers, the presence of which is not within the control of Finger Lakes
Bancorp, Finger Lakes Financial or any market maker. In the event that
institutional investors buy a relatively large proportion of the offering, the
number of active buyers and sellers of the common stock at any particular time
may be limited. There can be no assurance that persons purchasing the common
stock will be able to sell their shares at or above the subscription price of
$7.00 per share. Therefore, purchasers of the common stock should have a
long-term investment intent and should recognize that there may be a limited
trading market in the common stock. This may make it difficult to sell the
common stock after the conversion and may have an adverse effect on the price at
which the common stock can be sold.
The following table sets forth the high and low bid quotes for Finger Lakes
Financial common stock and the adjusted cash dividends per share declared for
the periods indicated. These quotations represent prices between dealers and do
not include retail markups, markdowns, or commissions and do not reflect actual
transactions. This information has been obtained from monthly statistical
summaries provided by the Nasdaq Stock Market. As of June 30, 2000, there were
1,180,052 publicly held shares of Finger Lakes Financial common stock
outstanding. In connection with the conversion, each share of Finger Lakes
Financial's common stock will be converted into shares of Finger Lakes Bancorp
common stock, based upon the exchange ratio that is described in other parts of
this prospectus. Accordingly, the information in this table should be reviewed
in conjunction with the exchange ratio at various levels of the offering range.
<TABLE>
<CAPTION>
Cash Dividend
Fiscal 2000 High Bid Low Bid Declared
----------------- ----------------- ------------
<S> <C> <C> <C>
Quarter Ended June 30, 2000................. $ 8.375 $ 5.500 $ 0.06
Quarter Ended March 31, 2000................ $ 8.250 $ 5.750 $ 0.06
Fiscal 1999
Quarter Ended December 31, 1999............. $ 9.750 $ 7.000 $ 0.06
Quarter Ended September 30, 1999............ $ 11.000 $ 8.125 $ 0.06
Quarter Ended June 30, 1999................. $ 11.750 $ 10.500 $ 0.06
Quarter Ended March 31, 1999................ $ 15.750 $ 11.375 $ 0.06
Fiscal 1998
Quarter Ended December 31, 1998............. $ 13.250 $ 9.00 $ 0.06
Quarter Ended September 30, 1998............ $ 19.375 $ 11.000 $ 0.06
Quarter Ended June 30, 1998................. $ 21.500 $ 18.625 $ 0.06
Quarter Ended March 31, 1998(1)............. $ 24.750 $ 14.750 $ 0.05
--------------------
</TABLE>
(1)Common stock prices and dividends have been adjusted to reflect two-for-one
stock split effective March 2, 1998.
23
<PAGE>
At January 31, 2000, the business day immediately preceding the public
announcement of the conversion, and at September 25, 2000, the last sale of
Finger Lakes Financial common stock as reported on the Nasdaq SmallCap Market
was at a price of $7.50 per share and $6.81 per share, respectively. At June 30,
2000, Finger Lakes Financial had approximately 197 stockholders of record. All
publicly held shares of Finger Lakes Financial common stock, including shares
held by Finger Lakes Financial's officers and directors, will on the effective
date of the conversion be automatically converted into and become the right to
receive a number of shares of Finger Lakes Bancorp common stock determined
pursuant to the exchange ratio, and options to purchase shares of Finger Lakes
Financial common stock will be converted into options to purchase a number of
shares of Finger Lakes Bancorp common stock determined pursuant to the exchange
ratio, for the same aggregate exercise price. See "Beneficial Ownership of
Common Stock."
CAPITALIZATION
The following table presents the historical consolidated capitalization of
Finger Lakes Financial at June 30, 2000, and the pro forma consolidated
capitalization of Finger Lakes Bancorp after giving effect to the conversion,
based upon the assumptions set forth in the "Pro Forma Data" section.
<TABLE>
<CAPTION>
Pro Forma at June 30, 2000
Maximum
Minimum Mid-point Maximum as adjusted(1)
1,594,085 1,875,311 2,156,655 2,480,112
Finger Lakes Finashares at shares at shares at shares at
Historical at $7.00 $7.00 $7.00 $7.00
June 30, 2000 per share per share per share per share
------------- ----------- ----------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2)......................... $ 219,749 $ 219,749 $ 219,749 $ 219,749 $ 219,749
Borrowed funds...................... 63,759 63,759 63,759 63,759 63,759
--------- --------- ---------- ---------- ----------
Total deposits and borrowed funds... $ 283,508 $ 283,508 $ 283,508 $ 283,508 $ 283,508
========= ========= ========== ========== ==========
Stockholders' equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized;
none to be issued(3)............ -- -- -- -- --
Common Stock, $0.01 par value (post-
conversion),5,000,000 shares authorized;
shares to be issued as reflected(3) 36 24 28 32 37
Additional paid-in capital(3)(4).... 4,794 15,300 17,264 19,230 21,489
Retained earnings(5)................ 18,498 18,498 18,498 18,498 18,498
Accumulated other comprehensive
income (loss)..................... (3,428) (3,428) (3,428) (3,428) (3,428)
Less:
Common Stock held by existing
Employee Stock Ownership Plan.... (163) (163) (163) (163) (163)
ESOP(6)....................... -- (893) (1,050) (1,208) (1,389)
Common Stock to be acquired by
Recognition Plan(7)............... -- (446) (525) (604) (694)
--------- ---------- ----------- ----------- -----------
Total stockholders' equity.......... $ 19,737 $ 28,892 $ 30,624 $ 32,357 $ 34,350
========= ========= ========== ========== ==========
Total stockholders' equity as a percentage of
total assets...................... 6.43% 9.14% 9.63% 10.12% 10.68%
========= ========= ========== ========== ==========
</TABLE>
------------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. These withdrawals would reduce
pro forma deposits by the amount of the withdrawals.
(3) Finger Lakes Financial has 10,000,000 authorized shares of
preferred stock. Finger Lakes Financial has 20,000,000 authorized
shares of Finger Lakes Financial common stock, par value $0.01 per
share. Finger Lakes Financial common stock and additional paid-in
capital have been reclassified to reflect the number of shares of
Finger Lakes Bancorp common stock to be outstanding. Pro forma
additional paid-in capital reflects consolidation of $185,000 of
capital from Finger Lakes Financial Corp., MHC.
(4) No effect has been given to the issuance of additional shares of
Finger Lakes Bancorp common stock pursuant to the 2001 stock
option plan and 2001 recognition plan expected to be adopted by
Finger Lakes Bancorp. If these plans are approved by stockholders,
an amount equal to 10% of the shares of Finger Lakes Bancorp
common stock sold in the offering will be reserved for issuance
upon the exercise of options under the 2001 stock option plan, and
the 2001 recognition plan will acquire an amount of common stock
equal to 4% of the number of shares sold in the offering (or 3% of
the number of shares sold in the offering if Savings Bank of the
Finger Lakes tangible capital to assets
24
<PAGE>
ratio does not exceed 10%), either through open market purchases
or from authorized but unissued shares. No effect has been given
to the exercise of options currently outstanding. See "Management
of Finger Lakes Financial--Benefits."
(5) The retained earnings of Savings Bank of the Finger Lakes will be
substantially restricted after the conversion, see "The
Conversion--Liquidation Rights" and "Regulation --Federal
Regulation of Savings Institutions--Limitation on Capital
Distributions."
(6) Assumes that 8% of the shares sold in the offering will be acquired
by the employee stock ownership plan financed by a loan from Finger
Lakes Bancorp. The loan will be repaid principally from Savings Bank
of the Finger Lakes' contributions to the employee stock ownership
plan. Since Finger Lakes Bancorp will finance the employee stock
ownership plan debt, this debt will be eliminated through consolidation
and no liability will be reflected on Finger Lakes Bancorp's consolidated
financial statements. Accordingly, the amount of stock acquired by
the employee stock ownership plan is shown in this table as a reduction
of total stockholders' equity.
(7) Assumes a number of shares of common stock equal to 4% of the
common stock to be sold in the offering will be purchased by the
2001 recognition plan in open market purchases. The dollar amount
of common stock to be purchased is based on the $7.00 per share
subscription price in the offering and represents unearned
compensation and is reflected as a reduction of capital. This
amount does not reflect possible increases or decreases in the
value of stock relative to the subscription price in the offering.
As Finger Lakes Bancorp accrues compensation expense to reflect
the vesting of shares pursuant to the 2001 recognition plan, the
deferred charge against capital will be reduced through a charge
to operations. Implementation of the 2001 recognition plan will
require stockholder approval. If the shares to fund the plan are
assumed to come from authorized but unissued shares purchased by
the 2001 Recognition Plan from Finger Lakes Bancorp at the
subscription price, at the minimum, mid-point, maximum and the
maximum, as adjusted, of the offering range, the number of
outstanding shares would be 2,443,763, 2,875,012, 3,306,266 and
3,802,204, respectively, and total stockholders' equity would be
$29.3 million, $31.1 million, $33.0 million and $35.0 million,
respectively, at June 30, 2000. As a result of the plan acquiring
authorized but unissued shares from Finger Lakes Bancorp,
stockholders' ownership in Finger Lakes Bancorp would be diluted
by approximately 2.68%.
PRO FORMA TABLES
The following tables summarize historical data of Finger Lakes Financial
and pro forma data of Finger Lakes Bancorp at or for the six months ended June
30, 2000, and the fiscal year ended December 31, 1999, based on assumptions set
forth below and in the table, and should not be used as a basis for projections
of market value of the common stock following the conversion. No effect has been
given in the tables to the possible issuance of additional shares reserved for
future issuance pursuant to currently outstanding stock options or the 2001
stock option plan, nor does book value give effect to the liquidation account to
be established in the conversion, or to the tax bad debt reserve on liquidation.
See "The Conversion--Liquidation Rights," and "Management of Savings Bank of the
Finger Lakes--Directors' Compensation," and "--Executive Compensation."
Pro forma consolidated net income of Finger Lakes Financial for the six
months ended June 30, 2000, and the twelve months ended December 31, 1999, has
been calculated as if Finger Lakes Financial had been in existence and estimated
net proceeds received by Finger Lakes Financial and Savings Bank of the Finger
Lakes had been invested at an assumed interest rate of 6.13%, for the six months
ended June 30, 2000, and the twelve months ended December 31, 1999. The
reinvestment rate was calculated based on the one-year U.S. Treasury bill rate
(which, in light of changes in interest rates in recent periods is deemed by
Finger Lakes Financial and Savings Bank of the Finger Lakes to more accurately
reflect the pro forma reinvestment rate in recent periods than the arithmetic
average method). The effect of withdrawals from deposit accounts for the
purchase of common stock has not been reflected. The pro forma after-tax yield
on the estimated net proceeds is assumed to be 3.68% for the six months ended
June 30, 2000, and the twelve months ended December 31, 1999, based on the an
effective tax rate of 40%. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of common stock. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
It is assumed that Finger Lakes Financial will retain 50% of the estimated
adjusted net conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between stated amount of assets and liabilities of Finger Lakes
Financial computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the common stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
25
<PAGE>
<TABLE>
<CAPTION>
At or for the Six Months Ended June 30, 2000
Based upon the Sale for $7.00 of
-----------------------------------------------------
1,594,085 1,875,311 2,156,655 2,480,112
Shares Shares Shares Shares(1)
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds....................................... $ 11,159 $ 13,127 $ 15,097 $ 17,361
Expenses............................................. 850 850 850 850
--------- --------- --------- ---------
Estimated net proceeds............................. $ 10,309 $ 12,277 $ 14,247 $ 16,511
Common stock purchased by Employee Stock Ownership Plan(2) (893) (1,050) (1,208) (1,389)
Common stock purchased by 2001 Recognition Plan(3). (446) (525) (604) (694)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted................ $ 8,970 $ 10,702 $ 12,435 $ 14,428
========= ========= ========= =========
For the six months ended June 30, 2000: Consolidated net income:
Historical combined................................ $ 378 $ 378 $ 378 $ 378
Pro forma adjustments:
Income on adjusted net proceeds................... 165 197 229 265
Employee Stock Ownership Plan(2).................. (18) (21) (24) (28)
2001 Recognition Plan(3).......................... (27) (32) (36) (42)
---------- ---------- ---------- ----------
Pro forma net income............................ $ 498 $ 522 $ 547 $ 573
========= ========= ========= =========
Net income per share(4):
Historical combined................................ $ 0.17 $ 0.14 $ 0.13 $ 0.11
Pro forma adjustments:
Income on net proceeds............................. 0.07 0.08 0.08 0.08
Employee Stock Ownership Plan(2)................... (0.01) (0.01) (0.01) (0.01)
2001 Recognition Plan(3)........................... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share(4)(5).............. $ 0.22 $ 0.20 $ 0.19 $ 0.17
========= ========= ========= =========
Pro forma price to earnings(8)(9).................... 15.91x 17.50x 18.42x 20.59x
========= ========= ========= =========
Number of shares used in net income per share calculations 2,230,005 2,623,540 3,017,068 3,469,630
At June 30, 2000:
Stockholders' equity:
Historical combined................................ $ 19,737 $ 19,737 $ 19,737 $ 19,737
Estimated net proceeds............................. 10,309 12,277 14,247 16,511
MHC Capital Consolidation.......................... 185 185 185 185
Less: Common stock acquired by Employee Stock
Ownership Plan(2).................................. (893) (1,050) (1,208) (1,389)
Common Stock acquired by 2001 Recognition Plan(3). (446) (525) (604) (694)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(6).................... 28,892 30,624 32,357 34,350
Intangible assets.................................. -- -- -- --
--------- --------- --------- ---------
Pro forma tangible stockholders' equity............ $ 28,892 $ 30,624 $ 32,357 $ 34,350
========= ========= ========= =========
Stockholders' equity per share(7):
Historical combined................................ $ 8.29 $ 7.05 $ 6.13 $ 5.33
Estimated net proceeds............................. 4.33 4.38 4.42 4.46
MHC Capital Consolidation.......................... 0.08 0.07 0.06 0.05
Less: Common stock acquired by Employee Stock
Ownership Plan(2).................................. (0.38) (0.38) (0.38) (0.38)
Common Stock acquired by 2001 Recognition Plan(3). (0.19) (0.19) (0.19) (0.19)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share(6)(7)..... $ 12.13 $ 10.93 $ 10.04 $ 9.27
========= ========= ========= =========
Pro forma tangible stockholders' equity per share.. $ 12.13 $ 10.93 $ 10.04 $ 9.27
========= ========= ========= =========
Offering price as a percentage of pro forma stockholders'
equity per share................................... 57.71% 64.04% 69.72% 75.51%
========= ========= ========= =========
Offering price as a percentage of pro forma tangible
stockholders' equity per share..................... 57.71% 64.04% 69.72% 75.51%
========= ========= ========= =========
Number of shares used in book value per share calculations 2,380,000 2,800,000 3,220,000 3,703,000
(footnotes on next page)
</TABLE>
26
<PAGE>
--------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(2) Assumes that 8% of shares of common stock sold in the offering will be
purchased by the Employee Stock Ownership Plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the Employee Stock Ownership Plan from the net proceeds of the offering
retained by Finger Lakes Bancorp. Savings Bank of the Finger Lakes intends
to make annual contributions to the Employee Stock Ownership Plan in an
amount at least equal to the principal of the debt. Savings Bank of the
Finger Lakes' total annual payments on the Employee Stock Ownership Plan
debt are based upon 15 equal annual installments of principal and interest.
Statement of Position 93-6 requires that an employer record compensation
expense in an amount equal to the fair value of the shares committed to be
released to employees. The pro forma adjustments assume that the Employee
Stock Ownership Plan shares are allocated in equal annual installments
based on the number of loan repayment installments assumed to be paid by
Savings Bank of the Finger Lakes, the fair value of the common stock
remains at the subscription price and the Employee Stock Ownership Plan
expense reflects an effective combined federal and state tax rate of 40%.
The unallocated Employee Stock Ownership Plan shares are reflected as a
reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the Employee Stock Ownership Plan. The pro forma net
income further assumes (i) that 4,251, 5,001, 5,751 and 6,614 shares were
committed to be released during the six months ended June 30, 2000, at the
minimum, mid-point, maximum, and adjusted maximum of the offering range,
respectively, and (ii) in accordance with Statement of Position 93-6, only
the Employee Stock Ownership Plan shares committed to be released during
the period were considered outstanding for purposes of net income per share
calculations.
(3) If approved by Finger Lakes Bancorp's stockholders, the 2001 Recognition
Plan intends to purchase an aggregate number of shares of common stock
equal to 4% of the shares to be sold in the offering (or 3% of the shares
sold in the offering in the event that Savings Bank of the Finger Lakes
tangible capital to assets ratio does not exceed 10%). Stockholder approval
of the 2001 Recognition Plan and purchases by the plan may not occur
earlier than six months after the completion of the conversion. The shares
may be acquired directly from Finger Lakes Bancorp, or through open market
purchases. The funds to be used by the 2001 Recognition Plan to purchase
the shares will be provided by Finger Lakes Bancorp or Savings Bank of the
Finger Lakes. The table assumes that the 2001 Recognition Plan acquires the
shares through open market purchases at the subscription price with funds
contributed by Finger Lakes Bancorp, and that 10% of the amount contributed
to the 2001 Recognition Plan is amortized as an expense during the six
months ended June 30, 2000, and the 2001 Recognition Plan expense reflects
an effective combined federal and state tax rate of 40%. Assuming
stockholder approval of the plan and that the plan shares are awarded
through the use of authorized but unissued shares of common stock,
stockholders would have their voting interests diluted by approximately
2.68%.
(4) Per share figures include shares of Finger Lakes Bancorp common stock that
will be exchanged for the publicly held shares of Finger Lakes Financial
common stock in the share exchange. Net income per share computations are
determined by taking the number of subscription shares assumed to be sold
in the offering and the number of exchange shares assumed to be issued in
the share exchange and, in accordance with Statement of Position 93-6,
subtracting the Employee Stock Ownership Plan shares which have not been
committed for release during the respective period. See Note 2 above. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the 2001 Stock Option Plan, which is expected to be
adopted by Finger Lakes Bancorp following the offering and presented to
stockholders for approval not earlier than six months after the completion
of the conversion. If the 2001 Stock Option Plan is approved by
stockholders, an amount equal to 10% of the common stock sold in the
offering will be reserved for future issuance upon the exercise of options
to be granted under the 2001 Stock Option Plan. The issuance of authorized
but previously unissued shares of common stock pursuant to the exercise of
options under such plan would dilute existing stockholders' interests by
approximately 6.69%.
(6) The retained earnings of Savings Bank of the Finger Lakes will be
substantially restricted after the conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Finger Lakes Bancorp common stock that
will be exchanged for publicly held shares of Finger Lakes Financial common
stock in the share exchange. Stockholders' equity per share calculations
are based upon the sum of (i) the number of subscription shares assumed to
be sold in the offering, and (ii) exchange shares equal to the minimum,
mid-point, maximum and adjusted maximum of the offering range,
respectively. The exchange shares reflect an exchange ratio of 0.6660,
0.7836, 0.9011 and 1.0363, respectively, at the minimum, mid-point,
maximum, and adjusted maximum of the offering range, respectively. The
number of subscription shares actually sold and the corresponding number of
exchange shares may be more or less than the assumed amounts.
(8) During the six months ended June 30, 2000, Finger Lakes Bancorp posted
$180,000 in provision for the environmental cleanup of a foreclosed
property. Excluding this one-time provision expense, tax impacted at 40%,
the Bank's pro forma price to earnings per share would be 12.96x, 14.00x,
15.91x and 17.50x at the minimum, midpoint, maximum and adjusted maximum,
respectively, for the six months ended June 30, 2000.
(9) Annualized.
27
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1999
Based upon the Sale for $7.00 of
-------------------------------------------------------
1,594,085 1,875,311 2,156,655 2,480,112
Shares Shares Shares Shares(1)
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds....................................... $ 11,159 $ 13,127 $ 15,097 $ 17,361
Expenses............................................. 850 850 850 850
--------- --------- --------- ---------
Estimated net proceeds............................. $ 10,309 $ 12,277 $ 14,247 $ 16,511
Common stock purchased by Employee Stock Ownership Plan(2) (893) (1,050) (1,208) (1,389)
Common stock purchased by 2001 Recognition Plan(3). (446) (525) (604) (694)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted................ $ 8,970 $ 10,702 $ 12,435 $ 14,428
========= ========= ========= =========
For the fiscal year ended December 31, 1999: Consolidated net income:
Historical combined................................ $ 1,305 $ 1,305 $ 1,305 $ 1,305
Pro forma adjustments:
Income on adjusted net proceeds................... 330 394 458 531
Employee Stock Ownership Plan(2).................. (36) (42) (48) (56)
2001 Recognition Plan(3).......................... (54) (63) (72) (83)
--------- --------- --------- ----------
Pro forma net income............................ $ 1,545 $ 1,594 $ 1,643 $ 1,697
========= ========= ========= =========
Net income per share(4):
Historical combined................................ $ 0.58 $ 0.50 $ 0.43 $ 0.37
Pro forma adjustments:
Income on net proceeds............................. 0.15 0.15 0.15 0.15
Employee Stock Ownership Plan(2)................... (0.02) (0.02) (0.02) (0.02)
2001 Recognition Plan(3)........................... (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net income per share(4)(5).............. $ 0.69 $ 0.61 $ 0.54 $ 0.48
========= ========= ========= =========
Pro forma price to earnings.......................... 10.14x 11.48x 12.96x 14.58x
========= ========= ========= =========
Number of shares used in price-to-earnings
ratio calculations................................... 2,237,400 2,632,239 3,027,072 3,481,134
At December 31, 1999:
Stockholders' equity:
Historical combined................................ $ 19,379 $ 19,379 $ 19,379 $ 19,379
Estimated net proceeds............................. 10,309 12,277 14,247 16,511
MHC Capital Consolidation ......................... 185 185 185 185
Less: Common stock acquired by Employee Stock
Ownership Plan(2).................................. (893) (1,050) (1,208) (1,389)
Common Stock acquired by 2001 Recognition Plan(3). (446) (525) (604) (694)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(6).................... 28,534 30,266 31,999 33,992
Intangible assets.................................. -- -- -- --
--------- --------- --------- ---------
Pro forma tangible stockholders' equity............ $ 28,534 $ 30,266 $ 31,999 $ 33,992
========= ========= ========= =========
Stockholders' equity per share(7):
Historical combined................................ $ 8.14 $ 6.92 $ 6.02 $ 5.23
Estimated net proceeds............................. 4.33 4.38 4.42 4.46
MHC Capital Consolidation.......................... 0.08 0.07 0.06 0.05
Less: Common stock acquired by Employee Stock
Ownership Plan(2).................................. (0.38) (0.38) (0.38) (0.38)
Common Stock acquired by 2001 Recognition Plan(3). (0.19) (0.19) (0.19) (0.19)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share(6)(7)..... $ 11.98 $ 10.80 $ 9.93 $ 9.17
========= ========= ========= =========
Pro forma tangible stockholders' equity per share.. $ 11.98 $ 10.80 $ 9.93 $ 9.17
========= ========= ========= =========
Offering price as a percentage of pro forma stockholders'
equity per share................................... 58.43% 64.81% 70.49% 76.34%
========= ========= ========= =========
Offering price as a percentage of pro forma tangible
stockholders' equity per share..................... 58.43% 64.81% 70.49% 76.34%
========= ========= ========= =========
Number of shares used in book value per share calculations 2,380,000 2,800,000 3,220,000 3,703,000
</TABLE>
(footnotes on next page)
28
<PAGE>
--------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(2) Assumes that 8% of shares of common stock sold in the offering will be
purchased by the Employee Stock Ownership Plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the Employee Stock Ownership Plan from the net proceeds of the offering
retained by Finger Lakes Bancorp. Savings Bank of the Finger Lakes intends
to make annual contributions to the Employee Stock Ownership Plan in an
amount at least equal to the principal and interest of the debt. Savings
Bank of the Finger Lakes' total annual payments on the Employee Stock
Ownership Plan debt are based upon 15 equal annual installments of
principal. Statement of Position 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released to employees. The pro forma adjustments assume
that the Employee Stock Ownership Plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by Savings Bank of the Finger Lakes, the fair value of the common
stock remains at the subscription price and the Employee Stock Ownership
Plan expense reflects an effective combined federal and state tax rate of
40%. The unallocated Employee Stock Ownership Plan shares are reflected as
a reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the Employee Stock Ownership Plan. The pro forma net
income further assumes (i) that 8,502, 10,002, 11,502, and 13,227 shares
were committed to be released during the year ended December 31, 1999, at
the minimum, mid-point, maximum, and adjusted maximum of the offering
range, respectively, and (ii) in accordance with Statement of Position
93-6, only the Employee Stock Ownership Plan shares committed to be
released during the period were considered outstanding for purposes of net
income per share calculations.
(3) If approved by Finger Lakes Bancorp's stockholders, the 2001 Recognition
Plan intends to purchase an aggregate number of shares of common stock
equal to 4% of the shares to be sold in the offering (or 3% of the shares
sold in the offering in the event that Savings Bank of the Finger Lakes
tangible capital to assets ratio does not exceed 10%). Stockholder approval
of the 2001 Recognition Plan and purchases by the plan may not occur
earlier than six months after the completion of the conversion. The shares
may be acquired directly from Finger Lakes Bancorp, or through open market
purchases. The funds to be used by the 2001 Recognition Plan to purchase
the shares will be provided by Finger Lakes Bancorp or Savings Bank of the
Finger Lakes. The table assumes that the 2001 Recognition Plan acquires the
shares through open market purchases at the subscription price with funds
contributed by Finger Lakes Bancorp, and that 20% of the amount contributed
to the 2001 Recognition Plan is amortized as an expense during the fiscal
year ended December 31, 1999, and the 2001 Recognition Plan expense
reflects an effective combined federal and state tax rate of 40%. Assuming
stockholder approval of the plan and that the plan shares are awarded
through the use of authorized but unissued shares of common stock,
stockholders would have their voting interests diluted by approximately
2.68%.
(4) Per share figures include shares of Finger Lakes Bancorp common stock that
will be exchanged for the publicly held shares of Finger Lakes Financial
common stock in the share exchange. Net income per share computations are
determined by taking the number of subscription shares assumed to be sold
in the offering and the number of exchange shares assumed to be issued in
the share exchange and, in accordance with Statement of Position 93-6,
subtracting the Employee Stock Ownership Plan shares which have not been
committed for release during the respective period. See Note 2 above. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the 2001 Stock Option Plan, which is expected to be
adopted by Finger Lakes Bancorp following the offering and presented to
stockholders for approval not earlier than six months after the completion
of the conversion. If the 2001 Stock Option Plan is approved by
stockholders, an amount equal to 10% of the common stock sold in the
offering will be reserved for future issuance upon the exercise of options
to be granted under the 2001 Stock Option Plan. The issuance of authorized
but previously unissued shares of common stock pursuant to the exercise of
options under such plan would dilute existing stockholders' interests by
approximately 6.69%.
(6) The retained earnings of Savings Bank of the Finger Lakes will be
substantially restricted after the conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Finger Lakes Bancorp common stock that
will be exchanged for publicly held shares of Finger Lakes Financial common
stock in the share exchange. Stockholders' equity per share calculations
are based upon the sum of (i) the number of subscription shares assumed to
be sold in the offering, and (ii) exchange shares equal to the minimum,
mid-point, maximum and adjusted maximum of the offering range,
respectively. The exchange shares reflect an exchange ratio of 0.6660,
0.7836, 0.9011 and 1.0363, respectively, at the minimum, mid-point,
maximum, and adjusted maximum of the offering range, respectively. The
number of subscription shares actually sold and the corresponding number of
exchange shares may be more or less than the assumed amounts.
29
<PAGE>
FINGER LAKES FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Finger Lakes Financial
for the fiscal years ended December 31, 1999, 1998, and 1997, are a part of the
audited consolidated financial statements which appear beginning on page F-1 of
this prospectus. The Consolidated Statements of Income for the six months ended
June 30, 2000, and 1999, are unaudited and have been prepared in accordance with
the requirements for a presentation of interim financial statements and are in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments consisting of normal recurring adjustments, that are
necessary for a fair presentation of the interim periods, have been reflected.
The results of operations for the six months ended June 30, 2000, are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2000. These Statements should be read in conjunction
with the consolidated financial statements of Finger Lakes Financial and notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
-------------------------- ------------------------------------
2000 1999 1999 1998 1997
----------- ---------- ---------- --------- ------
(unaudited)
Interest income:
<S> <C> <C> <C> <C> <C>
Loans ................................................ $ 6,559,840 $5,902,010 $12,137,138 $10,821,304 $8,587,760
Securities............................................ 4,242,140 3,954,312 8,173,120 7,810,063 7,204,518
Federal funds sold and other short-term investments... 18,597 2,094 6,187 14,085 47,503
----------- ---------- ----------- ----------- ----------
Total interest income............................... 10,820,577 9,858,416 20,316,445 18,645,452 15,839,781
----------- ---------- ----------- ----------- ----------
Interest expense:
Deposits.............................................. 4,525,934 4,336,665 8,660,307 8,678,198 7,738,344
Borrowings............................................ 1,978,729 1,523,211 3,360,357 2,523,136 1,458,051
----------- ---------- ----------- ----------- ----------
Total interest expense.............................. 6,504,663 5,859,876 12,020,664 11,201,334 9,196,395
----------- ---------- ----------- ----------- ----------
Net interest income................................. 4,315,914 3,998,540 8,295,781 7,444,118 6,643,386
Provision for loan losses................................ 90,000 125,000 200,000 240,000 120,000
----------- ---------- ----------- ----------- ----------
Net interest income after provision for loan losses... 4,225,914 3,873,540 8,095,781 7,204,118 6,523,386
----------- ---------- ----------- ----------- ----------
Noninterest income:
Service charges and other fee income.................. 464,981 475,395 1,026,636 803,134 507,537
Net gain on sales of loans............................ 46,169 117,871 224,351 276,612 26,695
Net gain on sales of securities available for sale.... 0 72,793 77,137 106,231 142,160
Other ................................................ -- -- -- 15,722 44,963
----------- ---------- ----------- ----------- ----------
Total noninterest income............................ 511,150 666,059 1,328,124 1,201,699 721,355
----------- ---------- --------- ----------- ----------
Noninterest expense:
Salaries and employee benefits........................ 1,898,069 1,754,582 3,591,839 3,322,895 2,868,536
Office occupancy and equipment........................ 790,719 683,149 1,387,261 1,209,563 859,561
Provision for environmental remediation of real estate owned 180,000 25,000 90,000 620,000 150,400
Deposit insurance premiums............................ 21,678 60,202 119,947 112,400 100,524
Professional fees..................................... 190,683 180,518 347,007 342,144 315,430
Marketing and advertising............................. 191,616 135,354 247,907 264,185 243,049
Data processing....................................... 93,534 67,502 158,934 119,188 176,032
Real estate owned..................................... 34,915 37,999 72,150 8,650 53,651
Other ................................................ 728,367 640,121 1,243,493 1,214,198 1,068,445
----------- ---------- ----------- ----------- ----------
Total noninterest expense........................... 4,129,581 3,584,427 7,258,538 7,213,223 5,835,628
----------- ---------- ----------- ----------- ----------
Income before income tax expense.................... 607,483 955,172 2,165,367 1,192,594 1,409,113
Income tax expense....................................... 229,804 381,714 860,426 468,565 561,616
----------- ---------- ----------- ----------- ----------
Net income........................................ $ 377,679 $ 573,458 $ 1,304,941 $ 724,029 $ 847,497
=========== ========== =========== ========== ==========
Net income per common share:
Basic........................................... $ 0.11 $ 0.16 $ 0.37 $ 0.21 $ 0.24
=========== ========== =========== ========== ==========
Diluted......................................... $ 0.11 $ 0.16 $ 0.37 $ 0.20 $ 0.24
=========== ========== =========== ========== ==========
30
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis reflects Finger Lakes Financial's consolidated
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Finger Lakes
Financial's consolidated financial statements and their notes beginning on page
F-1 of this prospectus, and the other statistical data provided in this
prospectus. This prospectus contains certain "forward-looking statements" which
may be identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing, products and services.
General
Our results of operations depend primarily upon the results of operations
of our wholly owned subsidiary, Savings Bank of the Finger Lakes, which depend
primarily on net interest income. Net interest income is the difference between
the interest income we earn on our interest-earning assets, consisting primarily
of loans and investment and mortgage-backed securities, and the interest we pay
on our interest- bearing liabilities, primarily savings accounts, time deposits
and other borrowings. Our results of operations are also affected by our
provision for loan losses, other income and other expense. Other expense
consists of non-interest expenses, including salaries and employee benefits,
occupancy, data processing fees, deposit insurance premiums, advertising and
other expenses. Other income consists of non-interest income, including service
charges and fees, gain (loss) on sale of loans and securities and other income.
Our results of operations may also be affected significantly by general and
local economic and competitive conditions, particularly those with respect to
changes in market interest rates, government policies and actions of regulatory
authorities.
Business Strategy
We have several strategies designed to improve our profitability and
enhance our franchise in our market area which comprises the Finger Lakes region
of New York State. We seek to implement these strategies in a manner that is
consistent with safety and soundness. These strategies are discussed below. You
should be aware that we are subject to intense competition, and there can be no
assurances that we will successfully implement these strategies:
Controlled growth while expanding our market area. We have sought to
increase our presence in the Finger Lakes region in New York by expanding our
branch network and emphasizing a variety of loan products in addition to
traditional one- to four-family mortgage loans. As a result, our assets have
increased to $307.0 million at June 30, 2000, from $167.8 million at December
31, 1995, an overall increase of 83.0%. During this period, we have increased
our total full-service offices from three to seven. Our growth has been targeted
to include those areas of the Finger Lakes region that have shown relative
economic strength. Management's goal is to develop an increased market presence
in the Finger Lakes region.
31
<PAGE>
Complementing our traditional mortgage lending by increasing multi-family
and commercial real estate lending as well as non-mortgage lending, particularly
commercial business lending. To complement our traditional emphasis on one- to
four-family mortgage lending, we have sought to increase our multi-family and
commercial real estate lending as well as our non-mortgage lending, particularly
commercial business lending. At June 30, 2000, our multi-family and commercial
real estate loans totaled $32.0 million, or 19.40% of total loans. At June 30,
2000, non-mortgage loans, consisting of commercial business, consumer, mobile
home and home equity and property improvement loans totaled $42.5 million, or
25.80% of total loans. Management has determined to emphasize its commercial
business lending activities, and in this regard, has added to its staff persons
who are charged with originating and servicing our commercial business loan
portfolio. Because the yields on these types of loans are generally higher than
the yields on one- to four- family mortgage loans, our goal over the next
several years is to increase the origination of these loans consistent with
safety and soundness considerations. Although these loans offer higher yields
than one- to four-family mortgage loans, they also involve greater risk.
Maintaining asset quality. Our high asset quality is a result of our
underwriting standards, the diligence of our loan collection department in
contacting delinquent borrowers and the stability of the local economy. We also
invest in mortgage-backed securities issued by Freddie Mac, Fannie Mae and
Ginnie Mae and other investment securities, primarily U.S. government and agency
obligations. We will only purchase investment securities rated "A" or higher by
Moodys Investment Rating Service. At June 30, 2000, our ratio of non-performing
assets and troubled debt restructurings to total assets was 0.23%, and our ratio
of non- performing loans and troubled debt restructurings to total loans was
0.43%.
Increasing fee and servicing income. We have sought to increase our income
by increasing our sources of fee income. During the six months ended June 30,
2000, and the year ended December 31, 1999, service charges and other fee income
totaled $467,000 and $1.0 million, respectively, as compared to $803,000 and
$508,000 during the years ended December 31, 1998, and 1997, respectively. We
receive fee income from the servicing of loans sold in the secondary market and
from fees on our deposit accounts. In recent periods we have sold fixed rate
mortgages into the secondary market without recourse and on a servicing retained
basis. At June 30, 2000, and December 31, 1999, mortgage loans serviced for
others totaled $40.1 million and $39.1 million, respectively. Our fee and
servicing income has also increased as a result of fees received from certain of
our deposit accounts. We also offer our customers mutual funds, financial
planning services and insurance and annuity products through our wholly owned
subsidiary SBFL Agency Inc., which is an additional source of fee income.
Financial Condition
Comparison of financial condition at June 30, 2000, and December 31, 1999.
Our total assets as of June 30, 2000, were $307.0 million, a net increase
of $5.8 million, or 1.9% from December 31, 1999. The increase was primarily due
to an increase of $4.7 million, or 3.0% in our loan portfolio, and an increase
of $1.3 million, or 1.1% in securities available for sale, partially offset by
decreases in cash and cash equivalents of $1.1 million, or 18.6%.
Our deposits increased to $219.7 million at June 30, 2000, from $208.1
million at December 31, 1999, representing an $11.6 million, or 5.6% increase in
deposits. The increase in deposits reflects the effect of the opening of our
Auburn branch facility in April 2000, as well as our continued efforts to expand
our deposit share in the Ithaca and Canandaigua markets. Our borrowings
decreased by $6.2 million, or 8.9%. The decrease in borrowings is due to our
ability to satisfy our funding needs through deposit growth.
Stockholders' equity totaled $19.7 million as of June 30, 2000, as compared
to $19.4 million as of December 31, 1999. Changes in stockholders' equity
included net income of $378,000, a decrease of $96,000
32
<PAGE>
in unrealized losses on securities available for sale, net of related deferred
income taxes and $142,000 in dividends paid.
Comparison of financial condition at December 31, 1999, and 1998.
Our total assets as of December 31, 1999, were $301.2 million, a net
increase of $18.8 million, or 6.7% from December 31, 1998. The increase was due
primarily to a $13.8 million, or 9.5% increase in our loan portfolio. Our loan
growth is a result of competitive expansion into other markets within the Finger
Lakes region in New York attracting new commercial and personal lending
customers. With management's continued emphasis on lending activities, total
mortgage loans increased by $4.9 million, home equity loans increased by $5.3
million, and commercial business loans increased by $4.1 million. Securities
classified as available for sale at December 31, 1999, were $118.8 million, an
increase of $3.5 million from December 31, 1998, while securities classified as
held to maturity at December 31, 1999, were $1.6 million, a decrease of $3.0
million from December 31, 1998. Other assets totaled $6.1 million at December
31, 1999, an increase of $2.6 million from 1998. This increase is primarily the
result of deferred tax assets attributed to the unrealized losses on securities
available for sale.
The growth in assets during 1999 was funded by a combination of a $5.7
million increase in total deposits and a $15.1 million increase in borrowed
funds. Certificates of deposit increased by $4.7 million and all other deposits
increased by $1.0 million in 1999. Total deposit growth of $5.7 million is
reflective of our expansion into the Ithaca and Canandaigua markets and
aggressively pricing deposits, particularly certificates of deposit. The
increase in borrowed funds reflects a continuation of our strategy of using
funding sources other than retail deposits to support asset growth, when
necessary.
Stockholders' equity totaled $19.4 million as of December 31, 1999, a
decrease of $2.6 million from December 31, 1998. Although net income of $1.3
million in 1999 represents an 80.2% increase over 1998, the decrease in
stockholders' equity results primarily from recognition of a $3.7 million
unrealized loss in the fair value of securities available for sale, net of
related deferred income taxes. The changes in unrealized loss in fair value of
securities available for sale is the only item effected as a change in other
comprehensive income.
As a result of the offering, stockholders' equity will increase by $10.3
million (at the minimum) and $14.2 million (at the maximum). For further
information, see "Capitalization."
33
<PAGE>
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. No
tax-equivalent adjustments have been made and all average balances are daily
average balances. Non-accruing loans have been included in the yield
calculations in this table and dividends received are included as interest
income.
<TABLE>
<CAPTION>
At June 30, 2000 Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
---------------------- ------------------------------ ------------------------------
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate Balance Interest Rate
------- ------ ------- -------- ------ ------- -------- -----
(Dollars In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1)......................... $164,951 8.26% $ 162,834 $ 6,560 8.10% $150,205 $5,902 7.92%
Securities (2)................... 130,855 6.53 130,057 4,242 6.56 126,108 3,954 6.32
Money market investments......... -- -- 653 19 5.85 50 2 6.05
-------- ------ --------- --------- ------ -------- ------ ------
Total interest-earning assets.... 295,806 7.49 293,544 10,821 7.41 276,363 9,858 7.19
------ --------- ------ ------ ------
Non-interest-earning assets...... 11,196 9,669 11,593
-------- --------- --------
Total assets..................... $307,002 $ 303,213 $287,956
========= ========= ========
Interest-bearing liabilities:
Deposits(3)...................... $219,749 4.48% $ 213,331 $ 4,526 4.26% $205,985 $4,337 4.25%
Borrowed funds................... 63,759 6.21 67,652 1,979 5.88 58,175 1,523 5.28
-------- ------ --------- --------- ------ -------- ------ ------
Total interest-bearing liabilities 283,508 4.85 280,983 6,505 4.66 264,160 5,860 4.47
------ --------- ------ ------ ------
Non-interest-bearing liabilities. 3,757 2,708 2,038
-------- --------- --------
Total liabilities................ 287,265 283,691 266,198
Stockholders' equity............. 19,737 19,522 21,758
-------- --------- --------
Total liabilities and stockholders'
equity $307,002 $ 303,213 $287,956
========= ========= ========
Net interest income.............. $ 4,316 $3,998
========= ======
Interest rate spread(4).......... 2.64% 2.75% 2.72%
====== ====== ======
Net interest margin(5)........... 2.95% 2.92%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 104.47% 104.62%
====== ======
</TABLE>
--------------------
(1) Includes premiums, net of deferred fees.
(2) Includes securities available for sale and held to maturity at amortized
cost and Federal Home Loan Bank stock.
(3) Includes noninterest-bearing deposits.
(4) Represents the difference between the weighted average yield on interest-
earning assets and the weighted average cost of interest-bearing
liabilities.
(5) Net interest income divided by interest-earning assets.
34
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997
----------------------------------- ------------------------------ -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------ ------- -------- -----
(Dollars In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1)....................... $153,783 $ 12,137 7.89% $132,324 $ 10,821 8.18% $ 99,939 $ 8,588 8.59%
Securities (2)................. 128,761 8,173 6.35 119,256 7,810 6.55 110,762 7,204 6.50
Money market investments....... 114 6 5.26 293 14 4.78 788 47 5.96
-------- --------- ------ ------- -------- ------ --------- ------- ------
Total interest-earning assets.. 282,658 20,316 7.19 251,873 18,645 7.40 211,489 15,839 7.49
--------- ------ -------- ------ ------- ------
Non-interest-earning assets.... 11,101 11,519 7,820
------- ------- ---------
Total assets................... $293,759 $263,392 $ 219,309
======== ======== =========
Interest-bearing liabilities:
Deposits(3).................... $208,166 $ 8,660 4.16% $193,227 $ 8,678 4.49% $ 171,993 $ 7,738 4.50%
Borrowed funds................. 61,923 3,360 5.43 45,771 2,523 5.51 25,127 1,458 5.80
-------- --------- ------ ------- -------- ------ --------- ------- ------
Total interest-bearing
liabilities.................... 270,089 12,020 4.45 238,998 11,201 4.69 197,120 9,196 4.67
--------- ------ -------- ------ ------- ------
Non-interest-bearing
liabilities.................... 2,601 2,369 1,260
-------- ------- ---------
Total liabilities.............. 272,690 241,367 198,380
Stockholders' equity........... 21,069 22,025 20,929
-------- ------- ---------
Total liabilities and
stockholders' equity.......... $293,759 $263,392 $ 219,309
======== ======== =========
Net interest income............ $ 8,296 $ 7,444 $ 6,643
========= ======== =======
Interest rate spread(4)........ 2.74% 2.71% 2.82%
====== ====== =====
Net interest margin(5)......... 2.93% 2.96% 3.14%
====== ====== ======
Average interest-earning assets to
average interest-bearing
liabilities............... 104.65% 105.39% 107.29%
====== ====== ======
</TABLE>
--------------------
(1) Includes premiums, net of deferred fees.
(2) Includes securities available for sale and held to maturity at amortized
cost and Federal Home Loan Bank stock.
(3) Includes noninterest-bearing deposits.
(4) Represents the difference between the weighted average yield on interest-
earning assets and the weighted average cost of interest-bearing
liabilities.
(5) Net interest income divided by interest-earning assets.
35
<PAGE>
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
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>
Six Months Ended June 30, Year Ended December 31,
------------------------------ --------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
----------------------------- -------------------------------- ----------------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total Due to Total
--------------- Increse/ ------------------ Increase/ -------------- Increase/
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
----- ------- -------- ------ ---------- ---------- ------- ----------- -----------
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans......................... $ 140 $ 518 $ 658 $ (394) $ 1,710 $ 1,316 $ (428) $ 2,661 $ 2,233
Securities.................... 158 130 288 (244) 607 363 55 551 606
Money market investments...... -- 17 17 1 (9) (8) (7) (26) (33)
------ ------- ------- -------- -------- --------- --------- --------- ---------
Total interest-earning assets. 298 665 963 (637) 2,308 1,671 (380) 3,186 2,806
------ ------- ------- -------- -------- --------- --------- --------- ---------
Interest-bearing liabilities:
Deposits..................... 19 170 189 (663) 645 (18) (17) 957 940
Borrowed funds............... 187 269 456 (37) 874 837 (76) 1,141 1,065
------ ------- ------- -------- -------- --------- --------- --------- ---------
Total interest-bearing
liabilities 206 439 645 (700) 1,519 819 (93) 2,098 2,005
------ ------- ------- -------- -------- --------- --------- --------- ---------
Increase (decrease) in net
interest income $ 92 $ 226 $ 318 $ 63 $ 789 $ 852 $ (287) $ 1,088 $ 801
====== ======= ======= ------- ======== ======= ======== ========= ========
</TABLE>
36
<PAGE>
Results of Operations
Comparison of the six months ended June 30, 2000, and 1999
Net Interest Income. Our net interest income is determined by the interest
rate spread (i.e., the difference between yields earned on interest-earning
assets and rates paid on interest bearing liabilities) and the relative amounts
of our interest-earning assets and interest bearing liabilities. Net interest
income was $4.3 million for the six months ended June 30, 2000, an increase of
$317,000 from the six months ended June 30, 1999. The increase was attributable
to a $17.2 million increase in the average balance of interest-earning assets
and an increase in the average yield of interest-earning assets to 7.41%, from
7.19%. Our interest rate spread improved to 2.75% for the six months ended June
30, 2000, from 2.72% for the comparable period in 1999.
Interest Income. Interest income for the six months ended June 30, 2000
totaled $10.8 million, an increase of $963,000 from the comparable period in
1999. The increase in interest income reflects the increase in the average
balance of all categories of interest-earning assets and is a result of the
higher interest rate environment during the six months ended June 30, 2000,
compared with the six months ended June 30, 1999.
Interest Expense. Interest expense for the six months ended June 30, 2000,
was $6.5 million, an increase of $645,000, or 11.0% from the comparable period
in 1999. The increase in interest expense reflects the increase in the average
balance in interest bearing liabilities to $281.0 million from $264.2 million,
as well as an increase in the average cost of funds to 4.66% from 4.47%.
Provision for Loan Losses. Our provision for loan losses for the six months
ended June 30, 2000 was $90,000, compared with a provision of $125,000 during
the six months ended June 30, 1999. Our allowance for loan losses totaled $1.4
million as of June 30, 2000, or 0.85% of total loans outstanding, as compared to
$1.3 million as of June 30, 1999, or 0.87% of total loans outstanding. Gross
charge-offs for the first six months of 2000 declined by $48,000 to $70,000,
versus $118,000 for the same period in 1999, as we devoted greater resources to
the monitoring and collection of delinquent loans. Non-performing loans totaled
$415,000 as of June 30, 2000, versus $673,000 as of June 30, 1999, reflecting
continued improvement in the asset quality of our loan portfolio, and greater
emphasis on our collection process.
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 $511,000 for the six months ended June 30, 2000, a decrease of $155,000 or
23.3%, from $666,000 for the six months ended June 30, 1999. The decrease in
noninterest income is primarily attributable to a $72,000 decrease in net gain
on sale of loans, and a $73,000 decrease in net gain on sale of securities
during the comparative periods. Service charges and other fee income remained
relatively stable during the comparative periods totaling $465,000 for the six
months ended June 30, 2000, and $475,000 for the six months ended June 30, 1999.
Noninterest Expense. Noninterest expense was $4.1 million for the six
months ended June 30, 2000, a $545,000, or 15.2% increase from the comparative
period in 1999. The increase in noninterest expense reflects expenses associated
with expansion of our branch network and promotion of the Savings Bank of the
Finger Lakes franchise, and costs associated with environmental remediation of a
property held as real estate owned. Salaries and benefits increased $143,000, or
8.2%, to $1.9 million. Office occupancy and equipment expense increased
$108,000, or 15.7%, to $791,000. Professional fees increased $10,000, or 5.6%,
to $191,000. Marketing and advertising costs increased $56,000, or 41.6%, to
$192,000. Data processing costs increased $26,000, or 38.6%, to $94,000. These
costs reflect management's strategy of growing our institution while expanding
our market area. Our provision for environmental remediation of real estate
owned increased $155,000 to $180,000 from $25,000. The increase in the provision
reflects management's estimate of the costs necessary to complete the
37
<PAGE>
environmental remediation of real estate owned pursuant to the remediation plan
approved by the DEC. See note 13 of the "Consolidated Financial Statements".
Other noninterest expense consisting primarily of postage, office supplies,
telephone charges, retainer fees and loan processing charges increased $88,000,
or 13.8%, to $728,000. The increase in other noninterest expenses reflect higher
costs associated with telephone usage, an increase in retainer fees paid,
increases in ATM processing costs and additional expenditures in travel and
mileage costs associated with the opening of the Auburn branch.
Income Taxes. Our income taxes were $230,000 for the six months ended June
30, 2000, as compared with $382,000 for the six months ended June 30, 1999. The
decrease in income taxes reflects the decrease in income before income tax
expense to $607,000, from $955,000 during the comparable periods. The effective
tax rate for the six months ended June 30, 2000, was 37.8% versus 40.0% for the
comparative 1999 period. The decrease in the effective tax rate reflects our
investment in tax advantaged municipal securities.
Comparison of the years ended December 31, 1999, and 1998
Net Interest Income. Net interest income amounted to $8.3 million in 1999,
an increase of $852,000 from 1998. The increase resulted from a $30.8 million
increase in the total average interest-earning assets, primarily from loan
growth, offset by a $31.1 million increase in average interest-bearing
liabilities, the net of which contributed to a $789,000 increase in net interest
income. The average interest rate spread in 1999 was 2.74% versus 2.71% in 1998.
The average yield on interest-earning assets decreased 21 basis points, while
the average cost of funds decreased 24 basis points from 1998 to 1999, the
benefits of which contributed to a $63,000 increase in net interest income in
1999. The decline in the average yield on interest earning assets was
attributable to a declining rate environment through the second quarter of 1999
and increased competitive pressures. The cost of funds, correspondingly,
declined as a result of the rate environment, as well as deposit pricing
strategies designed to lower the overall cost of deposits.
Interest Income. Total interest income in 1999 amounted to $20.3 million,
an increase of $1.7 million from 1998. Although the average yield on earning
assets declined to 7.19% in 1999, compared to 7.40% in 1998, interest income on
loans increased to $12.1 million in 1999, an increase of $1.3 million from 1998.
This improvement was attributable to loan growth, as the average total
outstanding loan balance increased by $21.5 million to $153.8 million for 1999.
Interest income on securities amounted to $8.2 million, an increase of $363,000
from the prior year. This increase was attributed to growth in the portfolio, as
the average outstanding securities balance increased by $9.5 million to $128.8
million for 1999.
Interest Expense. Total interest expense in 1999 was $12.0 million, an
increase of $819,000 from 1998. In 1999, interest expense on deposits amounted
to $8.7 million while interest expense on borrowed funds amounted to $3.4
million. Interest expense on deposits remained essentially flat year over year,
as an increase of $671,000 attributed to the growth in the average outstanding
deposit base was offset by a decrease of $689,000 attributed to the decline of
33 basis points in the average cost of deposits to 4.16%. However, interest
expense on borrowings increased $837,000, from $2.5 million in 1998, due to a
$16.1 million increase in average outstanding borrowings. The average cost of
borrowed funds decreased 8 basis points to 5.43% for the year ended December 31,
1999.
Provision for Loan Losses. Our provision for loan losses amounted to
$200,000 in 1999, a decrease of $40,000 from the prior year. Our allowance for
loan losses amounted to $1.3 million as of December 31, 1999, or 0.84% of total
loans outstanding, as compared to $1.2 million or 0.80% at December 31, 1998.
The reduction in the provision reflects an improvement in the credit quality of
the portfolio in 1999 as non-performing loans decreased $429,000 to $587,000 at
December 31, 1999, from $1.0 million at December 31, 1998. Net charge- offs in
1999 were $27,000 versus $213,000 in 1998, representing 0.02% and 0.16%,
respectively, of total average loans outstanding. The decrease in net
charge-offs was primarily a result of a significant 1999 recovery
38
<PAGE>
for $90,000 of a previously charged-off commercial business loan, bringing total
recoveries to $185,000 in 1999, as compared to $80,000 in 1998. Also, gross loan
charge-offs declined by $81,000 to $212,000 in 1999, from $293,000 in 1998, as
we devoted greater resources to monitoring of problem loans and collection
efforts. The slight 4 basis point increase in the allowance for loan losses as a
percentage of total loans outstanding is a result of qualitative factors
including, but not limited to, the substantial growth in multi-family and
commercial business loans and entry into new markets. 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 was $1.3 million in 1999, an
increase of $126,000, or 10.5%, compared to 1998. Service charges and other fee
income were $1.0 million in 1999, an increase of $224,000 over 1998. Net gains
on sales of securities in 1999 were $77,000, as compared to $106,000 in 1998.
Net gains on sales of loans were $224,000 in 1999, as compared to $277,000 in
1998.
Noninterest Expense. Noninterest expense amounted to $7.3 million in 1999,
comparable to 1998. However, excluding provisions for environmental remediation,
expenses increased $576,000 or 8.7%. This increase reflects our investment in
the future with increased staff, branch expansion, and upgrading technological
capabilities for data processing. Increases of $269,000 in salaries and employee
benefits expense and $177,000 in office occupancy and equipment expense were
primarily the result of a full year of expenses including depreciation expense
relating to a new branch office in Canandaigua, New York. Data processing
expense amounted to $159,000, an increase of $40,000 or 33.6%. This increase is
primarily the result of additional processing costs associated with the new
branch office, and data communications upgraded at two branches in Ithaca, New
York. We recorded provisions for environmental remediation of real estate owned
of $90,000 during 1999, as compared to $620,000 in 1998. This decrease is
primarily the result of management's determination of the provision required
each year to ensure that the accrual established for environmental remediation
as of December 31 is appropriate. See note 13 of the "Consolidated Financial
Statements." Professional fees of $347,000 in 1999, which includes legal,
consulting and accounting services, remained consistent in 1999, as compared to
1998, as did deposit insurance premiums, which totaled $120,000 for 1999.
Marketing and advertising expense decreased $16,000 to $248,000 in 1999,
reflecting larger media expenditures in 1998 relating to the new branch office
in Canandaigua. Real estate owned expenses increased $63,000 to $72,000 in 1999,
as compared to $9,000 in 1998, reflecting higher levels of foreclosure in 1999,
as well as fewer gains on sale of real estate owned. Other noninterest expense
of $1.2 million in 1999 remains consistent with the prior year.
Income Taxes. Our recorded income tax expense was $860,000 for the year
ended December 31, 1999, on income before taxes for the year of $2.2 million,
reflecting an effective tax rate of 39.7%. In 1998, the effective rate was
39.3%.
Comparison of the years ended December 31, 1998, and 1997
Net Interest Income. Net interest income amounted to $7.4 million in 1998,
an increase of $801,000 from the prior year. The average interest rate spread in
1998 was 2.71%, versus 2.82% in 1997. The average yield on interest-earning
assets decreased 9 basis points, while the average cost of funds increased 2
basis points from 1997 to 1998.
Interest Income. Total interest income in 1998 amounted to $18.6 million,
an increase of $2.8 million from 1997. Although the average yield on earning
assets declined to 7.40% in 1998, compared to 7.49% in 1997, interest income on
loans increased to $10.8 million in 1998, an increase of $2.2 million from $8.6
million in 1997. This improvement was attributable to loan growth, as average
total outstanding loans increased by $32.4 million to $132.3 million for 1998.
Interest income on securities amounted to $7.8 million, an increase of
39
<PAGE>
$606,000, from $7.2 million in 1997. This increase was attributed to growth in
the portfolio as the average outstanding securities balance increased by $8.5
million to $119.3 million for 1998.
Interest Expense. Total interest expense for 1998 increased $2.0 million to
$11.2 million, from $9.2 million in 1997. Interest expense on deposits increased
to $8.7 million in 1998, from $7.7 million in 1997, while interest expense on
borrowed funds increased $1.0 million to $2.5 million in 1998. The increase in
interest expense on deposits was attributed to the growth in the average
outstanding deposit base of $21.2 million to $193.2 million. The average cost of
deposits remained essentially flat at 4.49%, as compared to 4.50% in 1997. The
increase in interest expense on borrowed funds is attributable to an increase in
the average outstanding borrowings of $20.7 million, partially offset by the
average cost of borrowings decreasing in 1998 to 5.51%, from 5.80% in 1997. The
overall average cost of funds for the year ended December 31, 1998, was 4.69%,
increasing slightly from 4.67% in 1997.
Provision for Loan Losses. Our provision for loan losses increased to
$240,000 in 1998, from $120,000 in 1997. This increase reflects a higher level
of charge-offs experienced in 1998 as well as continued growth in the loan
portfolio. Our allowance for loan losses amounted to $1.2 million as of December
31, 1998, or 0.80% of total loans outstanding, as compared to $1.1 million as of
December 31, 1997, or 0.96% of total loans outstanding. This decrease in the
ratio of the allowance for loan losses to total loans outstanding resulted from
$26.8 million increase in loans; $19.9 million of this increase was in mortgage
loans which have a lower risk of loss than commercial or consumer loans. Net
charge-offs in 1998 were $213,000, versus $59,000 in 1997, representing 0.16%,
and 0.06%, respectively, of total average loans outstanding. The increase in net
charge-offs was due primarily to the charge-off of one commercial business loan
in the amount of $97,000, of which a recovery of $90,000 was made in the first
quarter of 1999. Non-performing loans increased by $452,000 to $1,016,000 as of
December 31, 1998, versus $564,000 as of December 31, 1997. The increase
consisted of a $270,000 increase in non-performing one-to-four family real
estate loans, representing nine additional loans, and an increase in
non-performing commercial and business loans of $262,000. At December 31, 1998
non- performing commercial business loans consisted of one loan in the amount of
$268,000.
Noninterest Income. Noninterest income was $1.2 million in 1998, an
increase of $480,000 or 66.7% from 1997. Service charge and other fee income for
1998 was $803,000, as compared to $508,000 for 1997, an increase of $295,000 or
58.1%. This increase reflects increased service charges on deposit accounts of
$128,000. Also, income from the sale of annuities and mutual funds from our
investment subsidiary increased from $62,500 in 1997 to $146,000 in 1998. Net
gains on sales of securities in 1998 were $106,000 as compared to $142,000 in
1997. Net gains on sales of loans were $276,000 in 1998, as compared to $27,000
in 1997.
Noninterest Expense. Noninterest expenses amounted to $7.2 million in 1998,
an increase of $1.4 million from $5.8 million in 1997. However, excluding
provisions for environmental remediation, expenses increased $908,000 or 16.0%.
Salaries and employee benefits increased $454,000 to $3.3 million in 1998, from
$2.9 million in 1997, and office occupancy and equipment expenses increased
$350,000 to $1.2 million in 1998, from $860,000 in 1997. These increases were
primarily the result of two new branch offices opened during 1997, and 1998.
Professional fees, which primarily include legal and audit fees, increased
$27,000 to $342,000 in 1998, from $315,000 in 1997. Data processing expenses
decreased by $57,000 to $119,000 in 1998 as a result of a system conversion in
October 1997 from a service bureau to an in-house system, thereby reducing
third-party support fees. We also reduced real estate owned expense by $45,000,
primarily from the disposal or sale of various properties in 1997 and fewer
properties held in 1998 as compared to 1997. Noninterest expense for 1998 also
includes a loss provision of $620,000 established for environmental remediation
costs associated with a former laundry site acquired through foreclosure in
1989, as compared to a loss provision of $150,000 in 1997. See note 13 of the
"Consolidated Financial Statements."
40
<PAGE>
Income Taxes. We recorded income tax expense of $469,000 for 1998 on income
before taxes of $1,193,000, reflecting an effective tax rate of 39.3%, which is
consistent with the effective tax rate in 1997 of 39.9%.
Quantitative and Qualitative Disclosures About Market Risk
The following table presents the difference between our interest-earning
assets and interest-bearing liabilities within specified maturities at June 30,
2000. This table does not necessarily indicate the impact that general interest
rate movements would have on our net interest income because the repricing of
certain assets and liabilities is subject to competitive pressure and certain
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 1 More Than 3
Within 3 4 to 12 Year to Years to Over
Months Months 3 Years 5 Years Five Years Total
----------- ----------- ----------- ----------- ----------- ---------
(Dollars In Thousands)
Interest-earning assets:(1)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans(2)................ $ 5,413 $20,199 $ 33,761 $ 26,530 $ 36,117 $122,020
Other loans(2)................... 17,212 3,311 8,804 7,539 5,481 42,347
Securities available for sale(3). 21,380 10,718 24,349 12,721 50,857 120,025
Securities held to maturity...... -- 30 67 75 1,421 1,593
Federal Home Loan Bank Stock..... -- -- -- -- 3,523 3,523
------- ------- -------- -------- -------- --------
Total interest-earning assets. 44,005 34,258 66,981 46,865 97,399 289,508
------- ------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:(4)
NOW accounts.................. 732 2,195 4,098 1,639 1,093 9,757
Savings accounts.............. 3,426 10,277 19,183 7,673 5,116 45,675
Money market accounts......... 579 1,737 3,242 1,297 865 7,720
Certificates of deposit....... 20,083 60,248 47,219 13,048 8 140,606
Borrowings.................... 11,400 2,000 8,359 30,000 12,000 63,759
------- ------- -------- -------- -------- --------
Total interest-bearing
liabilities................ 36,220 76,457 82,101 53,657 19,082 267,517
------ ------- -------- -------- -------- --------
Excess (deficiency) of interest-
earning assets over interest-bearing
liabilities................... $ 7,785 $(42,199) $(15,120) $ (6,792) 78,317 $ 21,991
======= ======== ======== ======== ========= ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities.. $ 7,785 $(34,414) $(49,534) $(56,326) $ 21,991
======= ======== ======== ======== ========
Cumulative excess (deficiency)
of interest-earning assets as a
percentage of total assets.... 2.54% (11.21)% (16.13)% (18.35)% 7.16%
====== ======== ========= ======== =======
</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 10.5%, 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
$415,000 at June 30, 2000.
(3) Amounts shown are at fair market value.
(4) Our 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 our 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 our NOW accounts, passbook
savings account and 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
$78.6 million or 25.6% of total assets.
41
<PAGE>
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 Savings Bank of the Finger Lakes 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 Savings Bank of the Finger Lakes' board of directors
has adopted an interest rate risk policy which establishes maximum decreases in
estimated NPV in the event of 1%, 2% and 3% increases and decreases in market
interest rates, respectively. The following tables set forth those limits and
certain calculations, based on information provided to Savings Bank of the
Finger Lakes by the OTS, with respect to the sensitivity of NPV to changes in
market interest rates at March 31, 2000.
Basis Point
Change
in Rates Estimated Net Portfolio Value NPV as % of PV of Assets
---------- --------------------------------- ---------------------------
$ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- --------- ---------
(Dollars in Thousands)
+300 $9,545 ($14,946) (61)% 3.37% (463)bp
+200 14,855 (9,636) (39) 5.10 (290)bp
+100 19,608 (4,883) (20) 6.59 (141)bp
NC 24,491 8.00
-100 27,513 3,022 12 8.82 82bp
-200 28,162 3,671 15 8.93 93bp
-300 27,549 3,058 12 8.67 67bp
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 5.10% from 8.00% in a rising interest rate environment and an
increase in NPV as a percentage of assets to 8.93% from 8.00% in a decreasing
interest rate environment.
In order to offset some of our interest rate risk we have extended the
maturities of our FHLB advances and other liabilities, while adding shorter
duration assets, 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 our asset and liability goals and
strategies.
42
<PAGE>
Liquidity and Capital Resources
Our liquidity management objective is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for expansion. Liquidity management addresses the ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise. Our
primary sources of internally generated funds are principal and interest
payments on loans receivable, cash flows generated from operations, and cash
flows generated by investments. External sources of funds include increases in
deposits and advances from the FHLB.
Savings Bank of the Finger Lakes is required under applicable federal
regulations to maintain specified levels of "liquid" investments in qualifying
types of United States Government, federal agency and other investments having
maturities of five years of less. Current OTS regulations require that a savings
association maintain liquid assets of not less than 4% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. Monetary penalties may be imposed for failure to meet applicable
liquidity requirements. At June 30, 2000, Savings Bank of the Finger Lakes'
liquidity, as measured for regulatory purposes, was in excess of the minimum OTS
requirement. Savings Bank of the Finger Lakes will receive 50% of the net
proceeds of the offering, or approximately $4.7 million at the minimum of the
offering range, and $6.4 million at the maximum of the offering range.
Management of Savings Bank of the Finger Lakes intends to initially invest a
substantial portion of these funds in shorter-term investments that are
considered "liquid" investments, and, as a result, Savings Bank of the Finger
Lakes' liquidity will be initially increased due to the proceeds received from
the stock offering. The effects of the stock offering on liquidity are likely to
decrease over time as the offering proceeds are deployed into other investments
and activities, such as establishing or acquiring additional branch offices,
funding new loans, and funding the recognition and retention plan or for general
corporate purposes.
At June 30, 2000, we had loan commitments of $4.2 million and unused lines
of credit of $14.7 million extended to borrowers. We believe that we have
adequate resources to fund loan commitments as they arise. If we require funds
beyond our internal funding capabilities, additional advances from the FHLB are
available, including a line of credit agreement with a maximum available limit
of $29.2 million. At June 30, 2000, approximately $80.3 million of time deposits
were scheduled to mature within a year, and we expect that a portion of these
time deposits will not be renewed upon maturity.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, as amended by
SFAS Nos. 137 and 138, establishes comprehensive accounting and reporting
requirements for derivative instruments and hedging activities. The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for gains and losses
resulting from changes in fair value of the derivative instrument depends on the
intended use of the derivative and the type of risk being hedged. This statement
is effective for all quarters of fiscal years beginning after June 15, 2000,
although earlier adoption is permitted. We do not currently invest in derivative
instruments, therefore the provisions of SFAS No. 133 are not expected to have a
significant effect on our consolidated financial statements. SFAS No. 133 also
permits a reclassification of securities from the held-to-maturity to the
available-for-sale classification at the time of adoption. We have no current
intention to reclassify any securities pursuant to SFAS No. 133.
43
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Finger Lakes
Financial have been prepared in accordance with generally accepted accounting
principles ("GAAP"). GAAP generally requires the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
BUSINESS OF SAVINGS BANK OF THE FINGER LAKES
Savings Bank of the Finger Lakes was formed as the result of the merger in
1984 of Geneva Savings Bank, a New York-chartered savings bank, and Geneva
Federal Savings and Loan Association. On November 10, 1994, Savings Bank of the
Finger Lakes completed its reorganization from a federally chartered, mutual
savings bank to a federally chartered mutual holding company known as Finger
Lakes Financial Corporation, MHC. As part of the reorganization, Savings Bank of
the Finger Lakes 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 Savings Bank of the Finger Lakes
in exchange for 2,389,948 shares of common stock. Concurrent with the
reorganization, Savings Bank of the Finger Lakes sold 1,180,052 shares of common
stock in a public offering. Savings Bank of the Finger Lakes reorganized into
the two-tier mutual holding company structure on August 17, 1998. The
reorganization into the two-tier structure had no impact on the operations of
Savings Bank of the Finger Lakes.
Savings Bank of the Finger Lakes has traditionally operated as a
community-oriented savings institution providing mortgage loans and other
traditional financial services to those in its local community. Savings Bank of
the Finger Lakes is primarily engaged in attracting deposits from the general
public through its offices and using those funds to originate loans secured by
real estate. Savings Bank of the Finger Lakes also originates commercial
business loans, consumer loans, mobile home loans and home equity loans and
lines of credit. Savings Bank of the Finger Lakes also has a securities
portfolio primarily consisting of mortgage-backed securities issued by federal
agencies, United States common stocks and corporate and municipal bonds.
Market Area
Savings Bank of the Finger Lakes currently conducts business through its
main office and branch offices located in the Finger Lakes region of New York
State. Geneva, New York, where Savings Bank of the Finger Lakes is
headquartered, is located in the eastern end of Ontario county and has a
population of approximately 14,000 as of June 30, 2000. We have sought to
increase our presence in the Finger Lakes region by expanding our branch network
and emphasizing a variety of loan and investment products. Our growth has been
targeted to include those areas of the Finger Lakes region that have shown
relative economic strength. Our market area is mainly rural with employment
based primarily in education, tourism, 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.
Lending Activities
General. Our loan portfolio is predominantly comprised of conventional real
estate mortgages, primarily on residences and one-to four-family dwellings, but
also on commercial real estate. Our primary emphasis in the past has been on the
origination of residential mortgages. From time to time we will purchase loans
to supplement our loan originations. In recent years we have sought to increase
our multi-family and commercial real estate lending as well as non-mortgage
lending, in particular home equity loans and commercial business lending. At
June 30, 2000, loans totaled $164.8 million, of which $88.0 million, or 53.41%,
were secured by one- to four- family real estate, $32.0 million, or 19.40% were
secured by multi-family and commercial real estate, $2.3 million, or 1.39%, were
construction loans, and $42.5 million, or 25.80%, were non-mortgage loans. At
June 30, 2000, commercial business loans were $12.4 million, or 7.54% of total
loans, consumer loans, were $5.4 million, or 3.31% of total loans, mobile home
loans were $5.6 million, or 3.39% of total loans, and home equity and property
improvement loans were $19.1 million, or 11.56% of total loans.
44
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of our loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998 1997 1996 1995
-------------------- ------------------ ------------------- ------------------- ----------- -----------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ---------------- -------- ------- -------- -------- -------- ---------------- ------ ------
(Dollars In Thousands)
Mortgage Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four-family real estate$88,017 53.41% $90,587 56.60% $89,456 61.19% $75,679 63.42% $57,932 64.60% $54,483 62.76%
Multi-family and commercial
real estate................... 31,964 19.40 28,520 17.82 20,534 14.05 19,243 16.13 11,176 12.46 11,843 13.64
Construction.................. 2,286 1.39 2,695 1.69 6,912 4.73 2,103 1.75 1,296 1.44 373 0.43
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Total mortgage loans..........122,267 74.20 121,802 76.11 116,902 79.97 97,025 81.30 70,404 78.50 66,699 76.83
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Non-Mortgage Loans:
Commercial business........... 12,425 7.54 9,536 5.96 5,413 3.70 3,392 2.84 3,290 3.67 3,074 3.54
Home equity and property
improvement................... 19,052 11.56 18,235 11.39 12,874 8.81 9,184 7.70 6,137 6.84 5,779 6.66
Mobile home................... 5,593 3.39 4,501 2.81 4,074 2.79 4,916 4.12 5,703 6.36 6,654 7.66
Consumer...................... 5,445 3.31 5,966 3.73 6,920 4.73 4,819 4.04 4,155 4.63 4,613 5.31
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Total non-mortgage loans...... 42,515 25.80 38,238 23.89 29,281 20.03 22,311 18.70 19,285 21.50 20,120 23.17
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Total loans...................164,782 100.00% 160,040 100.00% 146,183 100.00% 119,336 100.00% 89,689 100.00% 86,819 100.00%
====== ====== ====== ====== ====== =======
Premiums, net of deferred fees 169 163 129 252 81 40
Allowance for loan losses.... (1,400) (1,349) (1,176) (1,149) (1,088) (809)
------- ------- ------- ------- ------- -------
Net loans....................$163,551 $158,854 $145,136 $118,439 $88,682 $86,050
======== ======== ======== ======== ======= =======
</TABLE>
45
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information at December 31, 1999 regarding the dollar amount of loans maturing
in our portfolio, based on the contractual terms to maturity. 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..... $ 3,089 $ 6,908 $ 8,009 $25,593 $26,659 $20,329 $90,587
Multi-family and commercial real estate 2,095 4,765 5,651 13,525 2,484 -- 28,520
Construction........................ 2,695 -- -- -- -- -- 2,695
Commercial business................. 2,371 5,453 1,712 -- -- -- 9,536
Home equity and property improvement 1,725 3,943 298 -- -- -- 5,966
Mobile home......................... 234 548 674 2,439 606 -- 4,501
Consumer............................ 604 1,370 1,618 5,449 6,789 2,405 18,235
------- ------- ------- ------- ------- ------- -------
Total............................... $12,813 $22,987 $17,962 $47,006 $36,538 $22,734 $160,040
======= ======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
one year from December 31, 1999, which have fixed interest rates or which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
(Dollars In Thousands)
<S> <C> <C> <C>
One- to four-family real estate................................. $53,496 $ 34,002 $ 87,498
Multi-family and commercial real estate......................... 5,705 20,720 26,425
Commercial business............................................. 2,029 5,136 7,165
Home equity and property improvement............................ 4,241 -- 4,241
Mobile home..................................................... 4,267 -- 4,267
Consumer........................................................ 10,278 7,353 17,631
------- -------- --------
Total........................................................... $80,016 $ 67,211 $147,227
======= ======== ========
Percent of total................................................ 54.35% 45.65% 100.00%
========== ======== ========
</TABLE>
Scheduled contractual amortization of loans does not reflect the actual
term of the loan portfolio. The average life of loans is substantially less than
their contractual terms because of prepayments and due-on-sale clauses, which
give Savings Bank of the Finger Lakes 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.
46
<PAGE>
Originations, Purchases and Sales of Loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------------ -------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loan originations:
One- to four-family real estate............. $ 3,745 $ 13,014 $ 21,869 $ 42,138 $ 22,587
Multi-family and commercial real estate..... 4,314 5,294 7,924 4,582 5,469
Construction................................ 1,264 2,336 5,257 8,844 1,894
Commercial business loans................... 4,567 8,540 10,936 4,087 916
Home equity and property improvement loans.. 2,236 5,554 10,234 7,806 4,782
Mobile home loans........................... 1,635 463 1,388 132 127
Consumer loans.............................. 1,395 1,599 3,030 6,040 3,659
--------- --------- --------- --------- ---------
Total loans originated...................... 19,156 36,800 60,638 73,629 39,434
Purchases................................... -- 51 51 770 11,026
--------- --------- --------- --------- ---------
Total loans originated and purchased........ 19,156 36,851 60,689 74,399 50,460
--------- --------- --------- --------- ---------
Sales and principal reductions:
Loans sold.................................. 2,531 8,996 14,000 21,135 4,533
Loan principal payments and other reductions 11,883 21,114 32,832 26,417 16,280
--------- --------- --------- --------- ---------
Total sold and principal reductions......... 14,414 30,110 46,832 47,552 20,813
Increase (decrease) due to other items, net. (45) (140) (139) (150) 110
---------- ---------- --------- --------- ---------
Net increase in net loan portfolio.......... $ 4,697 $ 6,601 $ 13,718 $ 26,697 $ 29,757
========= ========= ========= ========= =========
</TABLE>
One- to Four-Family Real Estate Loans. Our primary lending activity has
historically been the origination of loans secured by first mortgage liens on
single-family residences. At June 30, 2000, $88.0 million, or 53.41%, of our
total loan portfolio consisted of one- to four-family real estate loans.
We offer 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
number of our originations of fixed-rate loans had terms of 15 years. Currently,
substantially all fixed-rate loans originated by us are sold to Fannie Mae on a
servicing retained basis. As of June 30, 2000, 59.8% of our one- to four-family
real estate loan portfolio had terms of between 16 and 30 years.
We offer adjustable-rate mortgages in order to decrease the vulnerability
of our operations to changes in interest rates. At June 30, 2000, 38.0% of the
one- to four-family real estate loans in our loan portfolio consisted of
adjustable-rate loans. Adjustable-rate mortgages are offered with initial rates
which are fixed for one, three and five years and adjust annually thereafter.
One-year adjustable rate loans have a 2% cap on the annual rate adjustment, with
a 6% rate adjustment cap over the life of the loan. Three- and five-year
adjustable rate mortgages have a 3% cap on the annual rate adjustment, with a 6%
rate adjustment cap over the life of the loan. Adjustable rate loans are priced
in accordance with the corresponding treasury security. 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 one- to four-family real estate loans during the six months
ended June 30, 2000, and the year ended December 31, 1999, totaled $3.7 million
and $21.9 million, respectively. The decrease in one- to four-family real estate
loan originations from the $13.0 million originated during the six months ended
June 30, 1999, and the $42.1 million originated in 1998 reflects the impact of
rising interest rates during the latter half of 1999 and the first half of 2000
and the significant refinancing activity that occurred in 1998. Generally, one-
to four-family mortgage loans are originated with loan-to-value ratios up to 95%
of the appraised value of the property or the purchase price of the property
with private mortgage insurance. Loans have "due on sale"
47
<PAGE>
clauses, which are provisions giving us the right to declare a loan immediately
due and payable in the event the borrower sells or otherwise disposes of the
property serving as collateral for the mortgage. We receive appraisals on all
one- to four-family loans. We also review and verify each loan applicant's
income and credit history.
Multi-Family and Commercial Real Estate Loans. At June 30, 2000, $32.0
million, or 19.40% of our total loan portfolio consisted of loans secured by
existing multi-family and commercial real estate. Our multi- family and
commercial real estate loans include loans secured by small office buildings,
retail establishments, light manufacturing and distribution facilities and
apartment buildings.
We originate both fixed- and adjustable-rate multi-family and commercial
real estate loans. We generally offer multi-family and commercial real estate
loans with amortization schedules of up to twenty years with no more than five
years at a fixed rate of interest. Multi-family and commercial real estate loans
are originated with loan-to-value ratios generally up to 80% of the lower of the
purchase price or an independent appraisal. In deciding to originate a
multi-family or commercial real estate loan, we will review the credit
worthiness of the borrower, the expected cash flow from the property securing
the loan, the cash flow from the property to debt service requirements of the
borrower, the value of the property and the quality of the management involved
with the property. Generally, we will obtain the personal guarantee of the
principals when originating multi-family and commercial real estate loans.
Multi-family and commercial real estate lending is generally considered to
involve a higher degree of credit risk than one- to four-family residential
lending. Such lending may involve large loan balances concentrated on a single
borrower or group of related borrowers. In addition, the payment experience on
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project. Consequently the
repayment of the loan may be subject to adverse conditions in the real estate
market or the economy generally.
Construction Loans. We make construction loans for residential and
commercial purposes. Construction loans are disbursed as construction is
completed. We generally will not make construction loans on a speculative basis.
At June 30, 2000, construction loans totaled $2.3 million, or 1.39% of the total
loan portfolio. Of this amount, residential construction loans amounted to
$586,000 million, or 0.36% of our total loan portfolio. Residential construction
lending is generally limited to our primary lending area. Residential
construction loans are generally to end owners and 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 us, 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. In addition, residential construction loans may be sold to
Fannie Mae on a servicing retained basis following its conversion to a permanent
loan following the construction period.
At June 30, 2000, commercial construction loans amounted to $1.7 million,
or 1.03% of our total loan portfolio. Commercial construction lending is
generally limited to our 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 financing by other financial institutions upon
completion of the construction period. Commercial construction loans are
underwritten pursuant to established policy guidelines. Construction financing
is generally considered to involve a higher degree of credit risk than long-term
financing on owner-occupied real estate because of the uncertainties of
construction, including the possibility of costs exceeding the initial
estimates.
Commercial Business Loans. At June 30, 2000, $12.4 million, or 7.54% of our
total loan portfolio consisted of commercial business loans. Commercial business
loans are generally provided to various types of closely held businesses located
principally in our primary market area. Our commercial business loans may be
48
<PAGE>
structured as short-term self-liquidating lines of credit and term loans.
Commercial business term loans generally have terms of five years or less (up to
seven years if guaranteed by the Small Business Administration) and interest
rates which float in accordance with the prime rate, although we also originate
commercial business loans with fixed rates of interest. Our commercial lines of
credit and commercial term loans generally are secured by equipment, machinery
or other corporate assets including real estate and receivables. In addition, we
generally obtain personal guarantees from the principals of the borrower with
respect to commercial business loans.
We have actively sought to increase our commercial business lending. We
established a commercial lending department in 1996. This department currently
has three dedicated lenders and three back office support staff. Our
originations of commercial business loans have increased substantially. During
the six months ended June 30, 2000, we originated $4.6 million in commercial
business loans. During 1999, we originated $10.9 million in commercial business
loans, compared to $4.1 million and $916,000 during 1998 and 1997, respectively.
Commercial business loans generally are deemed to entail significantly
greater credit risk than that which is involved with residential real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending.
Home Equity and Property Improvement Loans. We offer home equity loans and
lines of credit and property improvement loans, the total of which amounted to
$19.1 million, or 11.56% of the total loan portfolio as of June 30, 2000. Home
equity loans and lines of credit are generally made only for owner-occupied
homes. Home equity loans and lines of credit are secured by second mortgages on
residences, with the maximum loan to appraised value ratio permitted by Savings
Bank of the Finger Lakes (after inclusion of any senior liens on the property
thereto) being 100%. We intend to continue emphasizing the origination of home
equity and property improvement loans within our market area.
Mobile Home Loans. We purchase mobile home loans from a third-party loan
originator who specializes in such lending. As of June 30, 2000, we had $5.6
million, or 3.39% of our total loan portfolio secured by mobile homes owned by
individuals. While we generally lend throughout the states of New York and New
Jersey, the mobile home units are primarily located in what we believe to be
well-managed mobile home parks. Mobile home loans are made at fixed rates for
terms of up to 20 years, although most mobile home loans have terms of 15 years.
Consumer Loans. Subject to the restrictions contained in federal laws and
regulations, we also are authorized to make loans for a wide variety of personal
or consumer purposes. As of June 30, 2000, $5.4 million, or 3.31% of our total
loan portfolio consisted of consumer loans. We also offer unsecured personal
loans in amounts up to $5,000.
Loan Originations and Underwriting. Our lending activities are subject to
written, non-discriminatory underwriting standards and the loan origination
procedures adopted by management and the Board of Directors. Designated loan
officers have the authority to approve residential loans up to $240,000 and
consumer loans up to $100,000. Residential and consumer loans up to $350,000 may
be approved by a senior lending officer. Residential and consumer loans
exceeding these amounts and up to $500,000 may be approved by our President or
senior loan officer. Commercial business loans and commercial real estate loans
may be approved by designated loan officers up to $200,000. Commercial business
loans and commercial real estate loans in excess of $200,000 and up to $500,000
may be approved by a senior loan officer or President and Chief Executive
Officer. All loans in excess of the individual loan limits described above must
be approved by the loan committee which consists of officers of Savings Bank of
the Finger Lakes. This committee has the authority to approve loans up to
$750,000. If any loan or group of loans to one borrower exceeds $750,000, it
must be approved by the loan committee and subsequently approved by a committee
of the Board of Directors. At June 30, 2000, our lending limit to one borrower
was $2.0 million. On that date, there was one borrower with loans in excess of
our lending limits. At June 30, 2000, these loans totaled $2.1 million.
49
<PAGE>
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 2000, in dollar amount and as a percentage of our
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>
Multi-family and Home Equity and
One- to Four-family Commercial Real Commercial Property
Real Estate Estate Construction Business Mobile Home Improvement Consumer Total
------------- ---------- ---------- --------- ------------- ---------- -------- ------
Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amount %
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans delinquent
for:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 - 59 days..... $491 0.30% $15 0.01% -- -- $16 0.01% $67 0.04% $9 0.01% $56 0.03% $654 0.40%
60 - 89 days..... 134 0.08 -- -- -- -- -- -- 1 0.00 -- -- 19 0.01 154 0.09
90 days and over 208 0.13 39 0.02 -- -- 152 0.09 11 0.01 -- -- -- -- 410 0.25
--- ---- -- ---- --- ---- -- ---- --- ----
Total delinquent
loans............ $833 0.51% $54 0.03% -- -- $168 0.10% $79 0.05% $9 0.01% $75 0.04% $1,218 0.74%
==== ===== === ===== ==== ===== === ===== == ===== === ===== ====== =====
</TABLE>
50
<PAGE>
Loan Delinquencies and Collection Procedures. Our collection procedures
provide that if a loan is past due five days after expiration of the applicable
grace period, a telephone call is made to the borrower, stressing the need to
make the loan current and obtaining the reasons for delinquency. This process is
implemented by a special asset manager and a collector. If payment is not
promptly received, we will exercise our rights to debit the borrower's deposit
account (if a deposit relationship exists) or otherwise exercise our rights of
offset. If the loan becomes past due 60 days we will send the borrower a demand
letter and a notice of intent to foreclose or repossess the underlying
collateral. Loans that are written off at the conclusion of the process are
turned over to a collection agency for additional recovery efforts.
Non-Performing Loans. 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, we place
all loans 90 days or more past due on non-accrual status. In addition, we place
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 senior 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 before they become 120 days
delinquent.
As of June 30, 2000, our total nonaccrual loans amounted to $415,000, or
0.25% of total loans, compared to $587,000, or 0.37% of total loans at December
31, 1999, and $1,016,000, or 0.70% of total loans at December 31, 1998. The
largest non-performing loan at June 30, 2000, consisted of a commercial business
loan on which $152,000 was outstanding.
Troubled Debt Restructurings. A troubled debt restructuring occurs when we,
for economic or legal reasons related to a borrower's financial difficulties,
grant a concession to the borrower, either as a deferment or reduction of
interest or principal, that we would not otherwise consider. As of June 30,
2000, we had $288,000 of troubled debt restructurings, compared to $282,000 as
of December 31, 1999, and $121,000 as of December 31, 1998. All troubled debt
restructurings were performing in accordance with modified or restructured terms
at June 30, 2000.
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 June 30, 2000, we held no property that was classified as real
estate owned.
51
<PAGE>
The following table sets forth the amounts and categories of our
non-performing assets and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998 1997 1996 1995
----------- --------- --------- --------- --------- ------
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C> <C> <C>
One- to-four-family real estate...... $ 208 $ 393 $ 673 $ 403 $ 194 $ 549
Multi-family and commercial real estate 39 -- -- 3 407 73
Construction......................... -- -- -- -- -- --
Commercial business.................. 152 181 268 6 133 90
Home equity and property improvement. -- -- 17 38 83 95
Mobile home.......................... 16 13 20 58 60 36
Consumer............................. -- -- 38 56 41 189
------- -------- -------- -------- -------- -------
Total non-performing loans.......... 415 587 1,016 564 918 1,032
Real estate owned...................... -- 93 90 150 275 453
------- -------- -------- -------- -------- -------
Total non-performing assets......... $ 415 $ 680 $ 1,106 $ 714 $ 1,193 $ 1,485
======= ======== ======== ======== ======== =======
Troubled debt restructurings........... $ 288 $ 282 $ 121 $ 520 $ 669 $ 1,506
Total non-performing loans and troubled
debt restructurings as a percentage
of total loans.................... 0.43% 0.54% 0.78% 0.91% 1.77% 2.92%
Total non-performing assets and troubled
debt restructurings as a percentage
of total assets.................... 0.23% 0.32% 0.43% 0.50% 0.93% 1.78%
</TABLE>
We had no accruing loans greater than 90 days delinquent at June 30, 2000,
December 31, 1999, 1998 and 1997. The additional interest income that would have
been recorded during the six months ended June 30, 2000, and the years ended
December 31, 1999, December 31, 1998, and December 31, 1997, if our non-
performing loans at the end of such periods had been current in accordance with
their terms during such periods, was $18,000, $65,000, $78,000, and $59,000,
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.
At June 30, 2000, we had $494,000 of assets categorized as special mention,
$1.4 million of assets classified as substandard, and $150,000 of assets
classified as doubtful or loss. As of June 30, 2000, total classified assets,
including real estate owned and special mention assets, amounted to 0.65% of
total assets.
52
<PAGE>
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, 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; 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 June 30, 2000, our allowance for loan losses amounted to $ 1,400,000,
compared to $1,349,000 at December 31, 1999, and $1,176,000 at December 31,
1998.
The following table sets forth an analysis of our allowance for loan losses
during the periods indicated. See Notes 1 and 3 to the Notes to Consolidated
Financial Statements included herein.
<TABLE>
<CAPTION>
At or for
the Eight Months
At or for the At or for Ended
Six Months Ended June 30, the Year Ended December 31, December 31,
--------------------------------------------------------------- -----------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- ------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total loans outstanding................. $164,782 $152,957 $160,040 $146,183 $119,336 $ 89,689 $ 86,819
======== ======== ======== ======== ======== ======== ========
Average loans outstanding............... $162,834 $150,205 $153,783 $132,324 $ 99,939 $ 87,058 $ 85,547
======== ======== ======== ======== ======== ======== ========
Allowance at beginning of period........ $ 1,349 $ 1,176 $ 1,176 $ 1,149 $ 1,088 $ 809 $ 771
------- -------- -------- -------- -------- -------- --------
Charge-offs:
One- to four-family real estate...... (7) (42) (93) (38) (9) (35) (66)
Multi-family and commercial real estate -- -- -- -- -- -- --
Construction......................... -- -- -- -- -- -- --
Consumer............................. (52) (70) (113) (141) (137) (183) (75)
Commercial business.................. (11) (6) (6) (114) (1) (48) (182)
Home equity and property improvement. -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Total charge-offs:...................... (70) (118) (212) (293) (147) (266) (323)
Recoveries.............................. 31 146 185 80 88 62 71
------- -------- -------- -------- -------- -------- --------
Net (charge-offs) recoveries............ (39) 28 (27) (213) (59) (204) (252)
Provision for loan losses............... 90 125 200 240 120 483 290
------- -------- -------- -------- -------- -------- --------
Allowance at end of period.............. $ 1,400 $ 1,329 $ 1,349 $ 1,176 $ 1,149 $ 1,088 $ 809
======= ======== ======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
total loans outstanding.............. 0.85% 0.87% 0.84% 0.80% 0.96% 1.21% 0.93%
======== ========= ======== ======== ======== ===== ========
Net charge-offs as a percentage of average
loans outstanding.................... 0.02% n/a 0.02% 0.16% 0.06% 0.24% 0.29%
======== ======== ======== ======== ======== ===== ========
Allowance for loan losses to non-performing loans 337.35% 197.47% 229.81% 115.75% 203.72% 118.52% 78.39%
======== ========= ======== ======== ======== ====== ========
</TABLE>
Although we believe that we have established our allowance for loan losses
in accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing our loan portfolio, will not request us
to significantly increase the allowance for loan losses, thereby reducing our
retained earnings and income.
53
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the 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 June 30, At December 31,
2000 1999 1998 1997 1996 1995
---------------------- --------------------------------------------------------------------------------------
% of Loans % of Loans % of Loans % of Loans % of Loans % of Loans
in Each in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ---------- ------ ----------- ------- --------- ------ ---------- ----- ----------- ------ ---------
(Dollars In Thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to-four-family
real estate.......... $ 298 53.41% $ 314 56.60% $ 315 61.19% $ 320 63.42% $ 257 64.60% $ 275 62.76%
Multi-family and
commercial real
estate............... 379 19.40 360 17.82 325 14.05 314 16.13 254 12.46 122 13.64
Construction......... 5 1.39 6 1.69 3 4.73 1 1.75 3 1.44 1 0.43
Commercial business.. 221 7.54 194 5.96 160 3.70 85 2.84 114 3.67 125 3.54
Consumer............. 124 3.31 119 3.73 91 4.73 94 4.04 115 4.63 58 5.31
Mobile home.......... 13 3.39 10 2.81 7 2.79 29 4.12 38 6.36 44 7.66
Home equity and
property improvement. 80 11.56 76 11.39 40 8.81 76 7.70 45 6.84 43 6.66
Unallocated.......... 280 -- 270 -- 235 -- 230 -- 262 -- 141 --
------ ------ ------ ----- ------ ----- ------ ------ ----- ----- ------ ------
Total allowance for
loan losses.......... $1,400 100.00% $1,349 100.00% $1,176 100.00% $1,149 100.00% $1,088 100.00% $ 809 100.00%
====== ====== ====== ======= ====== ====== ====== ======= ====== ====== ====== ======
</TABLE>
54
<PAGE>
Investment Activities
Our investment securities policy is contained within our overall
asset/liability policy. The policy, which is established by senior management
and approved by the Board of Directors, is based upon our asset and liability
management goals and is designed to provide a portfolio of high quality,
diversified investments while seeking to optimize net interest income within
acceptable limits of safety and liquidity. Investment activities consist
primarily of investments in fixed and adjustable rate mortgage-backed
securities, including collateralized mortgage obligations ("CMOs") and U.S.
Government and Agency securities.
The Company invests a limited amount of its assets in corporate equity
securities. These investments are made to diversify the Company's investments
and provide opportunities for capital appreciation as well as dividend income.
All of the Company's corporate equity securities are classified as available for
sale. Investment in corporate equity securities exposes the Company to the risk
of loss of principal in the event of a sale of such securities.
We have invested in a portfolio of mortgage-backed securities which are
insured or guaranteed by the Freddie Mac, Ginnie Mae, or Fannie Mae, all of
which are agencies of the Federal Government or government- sponsored
corporations. The portfolio also includes collateralized mortgage obligations
("CMOs"), of which $30.3 million or 63.6% are backed by Freddie Mac, Ginnie Mae
and Fannie Mae securities, and $17.4 million or 36.4% are obligations of private
issuers. Mortgage-backed securities, including CMOs backed by U.S. Government
agencies, increase the liquidity and the quality of our assets by virtue of the
guarantees that back either the securities themselves or, in the case of the
CMOs, the underlying securities. In addition, at June 30, 2000, 36.8% of our
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.
Of our total investment in mortgage-backed securities at June 30, 2000,
$47.7 million consisted of CMOs, $4.3 million consisted of Freddie Mac
certificates, $11.2 million consisted of Fannie Mae certificates and $3.5
million consisted of Ginnie Mae certificates.
The following table sets forth the activity in our mortgage-backed
securities portfolio during the periods indicated. Our mortgage-backed
securities are classified as available for sale, and consequently are carried on
our financial statements at fair value.
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year Ended
June 30, December 31,
---------------------- ----------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- --------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities at beginning of period $ 70,265 $ 86,613 $ 86,613 $ 71,823 $67,589
Purchases........................................ 322 10,711 14,636 62,821 44,818
Sales............................................ -- (4,676) (5,738) (25,856) (32,009)
Repayments....................................... (4,116) (15,493) (22,396) (21,669) (9,468)
Unrealized gain (loss)........................... 141 (1,550) (2,812) (415) 998
Net accretion/amortization....................... (14) (23) (33) (91) (103)
---------- ---------- --------- --------- --------
Mortgage-backed securities at end of period...... $ 66,598 $ 75,583 $ 70,265 $ 86,612 $71,823
======== ========= ======== ======== =======
Weighted average yield at end of period.......... 6.80% 6.37% 6.57% 6.49% 6.55%
======== ========= ======== ======== =======
</TABLE>
At June 30, 2000, all of the $66.6 million of our mortgage-backed
securities was scheduled to mature after five years. Due to prepayments of the
underlying loans, the actual maturities of mortgage-backed securities generally
are substantially less than the scheduled maturities.
55
<PAGE>
At June 30, 2000, fixed rate mortgage-backed securities amounted to $42.1
million and adjustable rate mortgage-backed securities amounted to $24.5
million. All mortgage-backed securities qualify for regulatory liquidity.
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, we have
certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of our
conversion from state to federal charter.
Our 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. 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 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 our investment objectives, operational needs and intent. We maintain 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 June 30, 2000, our held to maturity investment securities portfolio
had an amortized cost of $1.6 million, consisting of securities issued by
municipal agencies. As of the same date, our securities available for sale
portfolio had a fair value of $120.0 million, of which $42.6 million was
securities issued by the U.S. Government and Federal Government agencies, $66.6
million was mortgage-backed securities, $9.5 million was corporate or other debt
securities and $1.3 million was mutual funds and common stock.
56
<PAGE>
The following table sets forth certain information relating to Savings Bank
of the Finger Lakes' investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998 December 31, 1997
-------------------- -------------------- -------------------- -------------------
Amortized Fair Amortized Fair AmortizedFair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- --------- --------- -------
(In Thousands)
Securities available for sale:
Debt securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency bonds... $ 45,425 $ 42,597 $ 45,401 $ 42,546 $ 25,962 $ 26,064 $ 26,344 $ 26,462
Mortgage-backed securities:
Collateralized mortgage obligations 49,349 47,655 51,996 50,142 59,063 59,044 21,580 21,730
Fannie Mae........................ 11,694 11,169 12,307 11,818 16,436 16,597 19,750 20,015
Freddie Mac....................... 4,378 4,283 4,585 4,495 6,115 6,188 15,272 15,484
Ginnie Mae........................ 3,610 3,491 3,949 3,810 4,760 4,784 14,567 14,594
--------- --------- --------- --------- --------- --------- --------- ---------
Total mortgage-backed securities... 69,031 66,598 72,837 70,265 86,374 86,613 71,169 71,823
Corporate and other debt securities. 9,677 9,501 4,729 4,559 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total debt securities............... 124,133 118,696 122,967 117,370 112,336 112,677 97,513 98,285
Equity securities................... 1,607 1,329 1,657 1,380 2,738 2,656 1,645 1,595
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities available for sale. $ 125,740 $ 120,025 $ 124,624 $ 118,750 $ 115,074 $ 115,333 $ 99,158 $ 99,880
========= ========= ========= ========= ========= ========= ========= =========
Securities held to maturity:
Debt securities:
U.S. Government and agency bonds... $ -- $ -- $ -- $ -- $ 4,000 $ 4,022 $ 14,096 $ 14,136
Corporate and other debt securities 1,593 1,573 1,593 1,567 640 640 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total debt securities.............. 1,593 1,573 1,593 1,567 4,640 4,662 14,096 14,136
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities held to maturity.. 1,593 1,573 1,593 1,567 4,640 4,662 14,096 14,136
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities................... $ 127,333 $ 121,598 $ 126,217 $ 120,317 $ 119,714 $ 119,995 $ 113,254 $ 114,016
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
At June 30, 2000, the contractual maturities of debt securities are as
follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Amortized
Cost Yield Cost Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One year or less....................... $ -- --% $ 30 5.50%
After one year through five years...... 8,469 6.39 142 5.50
After five years through ten years..... 48,366 6.37 1,193 4.83
After ten years........................ 67,298 6.75 228 5.50
--------- --------- --------- ---------
Total.................................. $ 124,133 6.58% $ 1,593 5.00%
======== ========= ========= =========
</TABLE>
57
<PAGE>
Sources of Funds
General. Deposits are the primary source of our funds for lending and other
investment purposes. In addition to deposits, we derive 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. Our deposits are attracted principally from within our 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 us 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.
We do not advertise for deposits outside our 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 us at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998 December 31, 1997
-------------------- ------------------ -------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- -------- --------- --------- --------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit.............. $ 140,605 63.98% $ 132,544 63.68% $ 127,852 63.16% $ 112,702 60.42%
--------- -------- --------- ------- --------- ------- --------- -------
Transaction Accounts:
Savings accounts..................... 45,675 20.79 46,093 22.15 47,259 23.34 48,285 25.88
Money market accounts ............... 7,720 3.51 5,020 2.41 3,196 1.58 2,198 1.18
Demand deposits and NOW accounts..... 25,749 11.72 24,475 11.76 24,127 11.92 23,349 12.52
--------- ------- --------- ------- --------- ------- --------- -------
Total transaction accounts........ 79,144 36.02 75,588 36.32 74,582 36.84 73,832 39.58
--------- ------- --------- ------- --------- ------- --------- -------
Total deposits.................... $ 219,749 100.00% $ 208,132 100.00% $ 202,434 100.00% $ 186,534 100.00%
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
The following table sets forth the deposit activities of Savings Bank of
the Finger Lakes during the periods indicated.
<TABLE>
<CAPTION>
Six months ended
June 30, Year Ended December 31,
------------------- ---------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits............................................. $331,228 $304,147 $619,483 $500,594 $360,637
Withdrawals.......................................... (324,137) (303,905) (622,445) (493,372) (335,673)
--------- --------- -------- -------- ---------
Net increase (decrease) before interest credited..... 7,091 242 (2,962) 7,222 24,964
Interest credited.................................... 4,526 4,337 8,660 8,678 7,738
-------- -------- -------- -------- --------
Net increase in deposits............................. $ 11,617 $ 4,579 $ 5,698 $ 15,900 $ 32,702
======== ======== ======== ======== ========
</TABLE>
58
<PAGE>
The following table sets forth the maturities of our certificates of
deposit having principal amounts of $100,000 or more as of June 30, 2000.
Maturity Period Amount Percent
---------------------- ------------------ ------------
(Dollars In Thousands)
Three months or less..................... $ 5,650 22.38%
Over three through six months............ 5,444 21.56
Over six through twelve months........... 3,727 14.76
Over twelve months....................... 10,427 41.30
-------- -----
Total certificates of deposit with
balances of $100,000 or more........ $ 25,248 100.00%
======== ======
The following table shows the interest rate and maturity information
for our certificates of deposit as of June 30, 2000.
<TABLE>
<CAPTION>
Maturity Date
Interest Rate 1 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% $271 $ -- $ -- $ 114 $ 385
4.01% - 6.00% 70,506 24,536 3,268 2,645 100,955
6.01% - 8.00% 9,554 17,070 2,345 10,296 39,265
----- ------ ----- ------ ------
Total $ 80,331 $ 41,606 $ 5,613 $ 13,055 $ 140,605
========= ========= ======== ========== =========
</TABLE>
Borrowings. We may obtain advances from the FHLB of New York secured by our
investment in FHLB of New York stock, our portfolio of investment securities and
certain of our 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. For further information, see note 6 of the "Consolidated Financial
Statements."
The following table sets forth the maximum month-end balance and average
balance of our FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, 2000 For Year Ended December 31,
--------------------- -------------------------------
2000 1999 1999 1998 1997
------ --------- --------- --------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum balance.................................. $69,811 $60,845 $ 69,960 $ 54,892 $ 36,721
Average balance.................................. 67,652 58,175 61,923 45,532 24,656
Weighted average interest rate on FHLB advances.. 5.88% 5.28% 5.43% 5.41% 5.70%
</TABLE>
The following table sets forth certain information as to our FHLB advances
at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------ -------------------------------
2000 1999 1998 1997
-------- --------- --------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FHLB advances........................................ $63,759 $69,960 $ 54,815 $ 36,721
Weighted average interest rate on FHLB advances...... 6.21% 5.64% 5.41% 5.76%
</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. At June 30, 2000, SBFL Agency, Inc. offered mutual funds, financial
planning services and insurance annuity products.
59
<PAGE>
Employees
We had 90 full-time employees and 18 part-time employees at June 30, 2000.
None of these employees is represented by a collective bargaining agreement, and
we believe that we enjoy good relations with our personnel.
Properties
At June 30, 2000, we conducted our business from our main office at 470
Exchange Street, Geneva, New York.
The following table sets forth certain information with respect to the
office and other properties of Savings Bank of the Finger Lakes at June 30,
2000.
Net Book
Value/Lease
Description/Address Leased/Owned Expiration Date
------------------- ---------------
(Dollars in Thousands)
Main Office Owned $ 631
470 Exchange Street
Geneva, New York
Branch Offices
Pyramid Mall Leased May 2014
Routes 5 and 20
Geneva, New York
Seaway Plaza Leased March 2011
Routes 5 and 20
Waterloo, New York
Commons Leased March 2001
301 E. State Street
Ithaca, New York
South Meadow Owned on Leased $ 776
702 South Meadow Street Land May 2017
Ithaca, New York
Canandaigua Owned on Leased $ 747
659 South Main Street Land September 2018
Canandaigua, New York
Auburn Leased December 2005
108 Genesee Street
Auburn, New York
60
<PAGE>
Legal Proceedings
There are various claims and lawsuits in which we are periodically involved
incident to our business. We believe that these routine legal proceedings, in
the aggregate, are not material to our financial condition and results of
operations.
REGULATION
Savings Bank of the Finger Lakes is examined and supervised extensively by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Savings Bank of the Finger Lakes is a member of and owns stock in the Federal
Home Loan Bank of New York, which is one of the twelve regional banks in the
Federal Home Loan Bank System. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors.
Savings Bank of the Finger Lakes also is regulated by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Savings Bank of the
Finger Lakes and prepares reports for the consideration of Savings Bank of the
Finger Lakes' Board of Directors on any deficiencies that they may find in
Savings Bank of the Finger Lakes' operations. Savings Bank of the Finger Lakes'
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in matters concerning the
ownership of savings accounts and the form and content of Savings Bank of the
Finger Lakes' mortgage documents. Any change in this regulation, whether by the
Federal Deposit Insurance Corporation, Office of Thrift Supervision, or
Congress, could have a material adverse impact on Finger Lakes Bancorp and
Savings Bank of the Finger Lakes and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings associations are
subject to extensive regulation including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of these statutes and regulations and their effect on Savings Bank
of the Finger Lakes.
Loans to One Borrower. Federal savings associations generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. As of June
30, 2000, Savings Bank of the Finger Lakes was in compliance with its loans-to-
one-borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Savings
Bank of the Finger Lakes is required to satisfy a qualified thrift lender test
whereby it must maintain at least 65% of its "portfolio assets" in "qualified
thrift investments" consisting primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. As of June 30, 2000, Savings Bank of the Finger Lakes maintained
85.04% of its portfolio assets in qualified thrift investments and, therefore,
met the qualified thrift lender test.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution to make
capital distributions. Under new regulations effective April 1, 1999, a savings
institution must file an
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<PAGE>
application for OTS approval of the capital distribution if either (1) the total
capital distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's retained
net income for the preceding two years, (2) the institution would not be at
least adequately capitalized following the distribution, (3) the distribution
would violate any applicable statute, regulation, agreement or OTS-imposed
condition, or (4) the institution is not eligible for expedited treatment of its
filings. If an application is not required to be filed, savings institutions
which are a subsidiary of a holding company, as well as certain other
institutions, must still file a notice with the OTS at least 30 days before the
board of directors declares a dividend or approves a capital distribution.
Any additional capital distributions would require prior regulatory
approval. In the event Savings Bank of the Finger Lakes' capital fell below its
fully phased-in requirement or the Office of Thrift Supervision notified it that
it was in need of more than normal supervision, Savings Bank of the Finger
Lakes' ability to make capital distributions could be restricted. In addition,
the Office of Thrift Supervision could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
Office of Thrift Supervision determines that the distribution would constitute
an unsafe or unsound practice.
Liquidity. Savings Bank of the Finger Lakes is required to maintain an
average daily balance of specified liquid assets equal to a quarterly average of
not less than a specified percentage of its net withdrawable deposit accounts
plus borrowings payable in one year or less. The current requirement is 4%.
Savings Bank of the Finger Lakes' average liquidity ratio for the quarter ended
June 30, 2000, was 41.78%, which exceeded the applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings associations have
a responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement
actions by the Office of Thrift Supervision, as well as other federal regulatory
agencies and the Department of Justice. Savings Bank of the Finger Lakes
received a satisfactory Community Reinvestment Act rating under the current
Community Reinvestment Act regulations in its most recent federal examination by
the Office of Thrift Supervision.
Transactions with Related Parties. Savings Bank of the Finger Lakes'
authority to engage in transactions with related parties or "affiliates" or to
make loans to specified insiders, is limited by Sections 23A and 23B of the
Federal Reserve Act. The term "affiliates" for these purposes generally means
any company that controls or is under common control with an institution,
including Finger Lakes Bancorp and its non-savings institution subsidiaries.
Section 23A limits the aggregate amount of certain "covered" transactions with
any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of covered transactions with
all affiliates to 20% of the savings institution's capital and surplus. Covered
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
covered transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Savings Bank of the Finger Lakes' authority to extend credit to executive
officers, directors and 10% stockholders, as well as entities controlled by
these persons, is currently governed by Sections 22(g) and 22(h) of
62
<PAGE>
the Federal Reserve Act, and also by Regulation O. Among other things, these
regulations generally require these loans to be made on terms substantially the
same as those offered to unaffiliated individuals and do not involve more than
the normal risk of repayment. However, recent regulations now permit executive
officers and directors to receive the same terms through benefit or compensation
plans that are widely available to other employees, as long as the director or
executive officer is not given preferential treatment compared to other
participating employees. Regulation O also places individual and aggregate
limits on the amount of loans Savings Bank of the Finger Lakes may make to these
persons based, in part, on Savings Bank of the Finger Lakes' capital position,
and requires approval procedures to be followed. At June 30, 2000, Savings Bank
of the Finger Lakes was in compliance with these regulations.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
Prompt Corrective Regulatory Action
Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has the total risk-based capital less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The
63
<PAGE>
Office of Thrift Supervision could also take any one of a number of
discretionary supervisory actions against undercapitalized institutions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of Savings Bank of the Finger
Lakes.
Federal Home Loan Bank System
Savings Bank of the Finger Lakes is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks. The Federal Home
Loan Bank System provides a central credit facility primarily for member
institutions. Savings Bank of the Finger Lakes, as a member of the Federal Home
Loan Bank of New York, is required to acquire and hold shares of capital stock
in that Federal Home Loan Bank in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of June 30, 2000, Savings Bank
of the Finger Lakes was in compliance with this requirement. The Federal Home
Loan Banks are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the Federal Home Loan Banks pay to
their members and could also result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At June 30,
2000, Savings Bank of the Finger Lakes was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the Office of Thrift Supervision.
Holding Company Regulation
Finger Lakes Bancorp will be a non-diversified unitary savings and loan
holding company, as those terms are defined under federal law, subject to
regulation and supervision by that agency. In addition, the Office of Thrift
Supervision has enforcement authority over Finger Lakes Bancorp and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a risk to the subsidiary savings institution. Savings Bank of
the Finger Lakes must notify the Office of Thrift Supervision 30 days before
declaring any dividend to Finger Lakes Bancorp.
64
<PAGE>
As a unitary savings and loan holding company, Finger Lakes Bancorp
generally will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that Savings Bank of the Finger
Lakes continues to be a qualified thrift lender. See "--Federal Regulation of
Savings Institutions --Qualified Thrift Lender Test" for a discussion of the
qualified thrift lender requirements. Upon any non- supervisory acquisition by
Finger Lakes Bancorp of another savings association, Finger Lakes Bancorp would
become a multiple savings and loan holding company if the acquired institution
is held as a separate subsidiary and would be subject to extensive limitations
on the types of business activities in which it could engage. Federal law limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under the Bank Holding Company Act of 1956.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified exceptions, more than 5% of a non-subsidiary savings institution,
a non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of Savings Bank of the Finger Lakes and institution involved, the
effect of the acquisition on the risk to the insurance fund, the convenience and
needs of the community and competitive factors.
Federal Securities Laws
Finger Lakes Bancorp has filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933, as amended, for the
registration of the common stock to be issued pursuant to the conversion. Upon
completion of the conversion, Finger Lakes Bancorp common stock will be
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Finger Lakes Bancorp will then be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the common
stock to be issued in the conversion does not cover the resale of the shares.
Shares of the common stock purchased by persons who are not affiliates of Finger
Lakes Bancorp may be resold without registration. Shares purchased by an
affiliate of Finger Lakes Bancorp will be subject to the resale restrictions of
Rule 144 under the Securities Act of 1933. If Finger Lakes Bancorp meets the
current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of Finger Lakes Bancorp who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of other persons, would be able to sell in the public
market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of Finger Lakes
Bancorp, or the average weekly volume of trading in the shares during the
preceding four calendar weeks. Provision may be made in the future by Finger
Lakes Bancorp to permit affiliates to have their shares registered for sale
under the Securities Act of 1933.
TAXATION
Federal Taxation
For federal income tax purposes, Finger Lakes Financial and its subsidiary
file a consolidated federal income tax return on a calendar year basis using the
accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions which would require recapture of the
pre-1988 tax bad debt reserve include redemption of the Bank's
65
<PAGE>
stock, payment of dividends or distributions in excess of earnings and profits,
or failure by the institution to qualify as a bank for federal income tax
purposes. At June 30, 2000, the Bank had a balance of approximately $3.0 million
of pre-1988 bad debt reserves. A deferred tax liability has not been provided on
this amount as management does not intend to make distributions, redeem stock or
fail certain bank tests that would result in recapture of the reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Finger Lakes Financial
accounts for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets are adjusted to reflect changes in
the tax laws.
Finger Lakes Financial is subject to the corporate alternative minimum tax
to the extent it exceeds Finger Lakes Financial's regular income tax for the
year. The alternative minimum tax will be imposed at the rate of 20% of a
specially computed tax base. Included in this base are a number of preference
items, including interest on certain tax-exempt bonds issued after August 7,
1986, and an "adjusted current earnings" computation which is similar to a tax
earnings and profits computation. In addition, for purposes of the alternative
minimum tax, the amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum taxable income.
In 1998, Finger Lakes Financial Corp., MHC and its subsidiaries were
audited by the Internal Revenue Service for tax years 1992 and 1995. Amended
returns were filed, and approximately $22,000 in additional taxes were assessed
and paid. For additional information regarding taxation, see Note 7 of Notes to
Consolidated Financial Statements.
State Taxation
New York State Taxation. Finger Lakes Bancorp and Savings Bank of the
Finger Lakes will report income on a combined calendar year basis to New York
State. New York State Franchise Tax on corporations is imposed in an amount
equal to the greater of (a) 9% of "entire net income" allocable to New York
State (b) 3% of "alternative entire net income" allocable to New York State (c)
0.01% of the average value of assets allocable to New York State or (d) nominal
minimum tax. Entire net income is based on federal taxable income, subject to
certain modifications.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Finger Lakes Bancorp is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
MANAGEMENT OF FINGER LAKES BANCORP
The Board of Directors of Finger Lakes Bancorp is divided into three
classes and will be elected by the stockholders of Finger Lakes Bancorp and
Finger Lakes Financial, respectively, for staggered three-year terms, or until
their successors are elected and qualified. One class of directors, consisting
of directors G. Thomas Bowers, Richard J. Harrison, Bernard G. Lynch and Arthur
W. Pearce have terms of office expiring in 2001; a second class, consisting of
directors Chris M. Hansen and Joan C. Rogers have terms of office expiring in
2002; and a third class, consisting of directors Michael J. Hanna, James E.
Hunter and Ronald C. Long have a term of office expiring in 2003. Their names
and biographical information are set forth under "Management of Finger Lakes
Financial--Directors."
66
<PAGE>
The following individuals hold positions as executive officers of Finger
Lakes Bancorp as is set forth below opposite their names:
Name Position
G. Thomas Bowers Chairman of the Board, President
and Chief Executive Officer
Terry L. Hammond Executive Vice President, Chief Financial Officer
and Secretary
Thomas A. Mayfield Senior Vice President and Senior Loan Officer
Leslie J. Zornow Senior Vice President-Retail Banking
The executive officers of Finger Lakes Bancorp are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
MANAGEMENT OF FINGER LAKES FINANCIAL
Directors
The Board of Directors of Finger Lakes Financial is composed of nine
members. Directors of Finger Lakes Financial are generally elected to serve for
a three-year term or until their respective successors shall have been elected
and shall qualify. The following table sets forth certain information regarding
the composition of the Board of Directors as of June 30, 2000, including their
terms of office.
Current
Position Held at Term
Name Age Finger Lakes Financial Director Since(1) to Expire
------- ---- ---------------------- ----------------- ---------
G. Thomas Bowers 57 Chairman of the Board, 1995 2001
President and Chief Executive Officer
Michael J. Hanna 54 Director 1994 2003
Chris M. Hansen 64 Director 1983 2002
Richard J. Harrison 54 Director 1997 2001
James E. Hunter 64 Director 1990 2003
Ronald C. Long 63 Director 1994 2003
Bernard G. Lynch 69 Director 1962 2001
Arthur W. Pearce 58 Director 1998 2001
Joan C. Rogers 66 Director 1993 2002
----------
(1) Reflects initial appointment to Finger Lakes Financial's predecessors.
The principal occupations of each director and executive officer of Finger
Lakes Financial during at least the past five years is set forth below.
G. Thomas Bowers has served as the Company's President and Chief Executive
Officer since July 1995. In 1998 Mr. Bowers was elected Chairman of the Board of
Directors. He was President and Chief Executive Officer of Citizens Savings
Bank, FSB, Ithaca, New York, from July 1992 until December 1994. Mr. Bowers was
employed by Columbia Banking Federal Savings and Loan Association, Rochester,
New York, from 1987 until June 1992, serving as President and Chief Executive
Officer from April 1991 until June 1992.
Michael J. Hanna has served as Director of Athletics at Hobart and William
Smith Colleges, Geneva, New York, since 1981.
Chris M. Hansen operates a citrus farm in LaBell, Florida. He is retired
from the position as President of C.M. Hansen Farms, Inc., located in Hall, New
York.
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Richard J. Harrison served as Executive Vice President and Director of
Dominion Capital Corporation, Fairport, New York, since 1994. Mr. Harrison is
President of Newwwdeal.com, an internet service company founded in 1999, as well
as principal in Atlantic Associates, a consulting organization. He was also
President of United Auto Finance, Inc., Fairport, New York, from 1994 to
December 1998. Prior to 1994, Mr. Harrison was employed by Rochester Community
Savings Bank, Rochester, New York, serving as President of its subsidiary,
American Credit Services, Inc.
James E. Hunter is Director of the New York State Agricultural Experiment
Station, Geneva, New York and a professor at Cornell University.
Ronald C. Long is President of Long Milk Haulers, Inc., Penn Yan, New York,
which owns and operates a milk hauling and trucking operation.
Bernard G. Lynch is retired from his position as President of the Lynch
Furniture Co., Inc., a retail furniture outlet with stores in Geneva and Auburn,
New York.
Arthur W. Pearce retired in July 1997 after over 20 years in banking and
mortgage banking. From December 1994 until July 1997 he was Senior Vice
President, Community Banking, of M&T Bank, Ithaca, New York, and from December
1992 until December 1994, he was Executive Vice President of Citizens Savings
Bank, FSB, Ithaca, New York. Currently he provides real estate consulting
services to corporations and government agencies as a senior consultant with
IDEAworks, LLC.
Joan C. Rogers is retired from her position as Vice President of BJR
Broadcasting, Seneca Falls, New York.
Terry L. Hammond has served as Finger Lakes Financial's Executive Vice
President, Chief Financial Officer and Secretary since January 1, 1999. Prior to
that, he served as Senior Vice President, Chief Financial Officer and Secretary
since joining the Company in 1990. Prior to that, Mr. Hammond was employed by
Monroe Savings Bank, Rochester, New York, in the same capacity.
Thomas A. Mayfield serves as Finger Lakes Financial's Senior Vice President
and Senior Loan Officer. He joined the Company in that capacity in April 1996.
For two years prior to that, Mr. Mayfield served in a similar capacity at
Savannah Bank, N.A., Savannah, New York. Prior to that, Mr. Mayfield was
employed by Central Trust Company, Rochester, New York, as a Vice President of
Commercial Lending.
Leslie J. Zornow has served as the Company's Senior Vice President, Retail
Banking, since January 1, 1999. Prior to that, she served as Vice President,
Branch Administration and Marketing from 1996 to 1998 and as Vice President,
Human Resources and Marketing since joining the Company in 1995. Prior to that,
Ms. Zornow was employed by Monroe County, New York, Department of Communications
as Deputy Director.
Board Meetings and Committees of the Board
Regular meetings of the Board of Directors of Finger Lakes Financial are
held on a monthly basis. The Board of Directors held a total of 14 meetings
during the 1999 calendar year. During 1999, each director attended at least 75%
of the total of such Board meetings and meetings of Board Committees on which he
or she served.
The Board of Directors has established various Committees, which are
described below.
The Executive Committee generally has the power and authority to act on
behalf of the Board of Directors between scheduled meetings of the Board unless
specific Board of Directors' action is required or unless otherwise restricted
by Finger Lakes Financial's Charter or Bylaws or the Board of Directors. The
Executive
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Committee also administers the investment policy adopted by the Board of
Directors. During 1999, the Executive Committee met seven times. The current
members of the Executive Committee are Mr. Bowers (Chairman) and Messrs. Hanna,
Harrison, Hunter, Lynch and Pearce.
The Audit/Community Reinvestment Act ("CRA") Committee reviews (i) reports
from the internal audit department, (ii) the independent auditors' reports and
the results of their examination, prior to review by and with the entire Board
of Directors and (iii) the Office of Thrift Supervision, Federal Deposit
Insurance Corporation and other regulatory reports, prior to review by and with
the entire Board of Directors. The Audit/CRA Committee also meets periodically
with Finger Lakes Financial's CRA Officer to review the Company's CRA
activities. During 1999, the Audit/CRA Committee met four times. The current
members of the Audit/CRA Committee are Mr. Lynch (Chairman), Messrs. Long and
Pearce and Mrs. Rogers.
The Salary and Personnel Committee oversees the compensation programs
provided our management, including basic salaries, bonuses and benefit plans. It
also administers the 1996 Stock Option Plan and the 1996 Management Recognition
Plan. See "Executive Compensation" below. During 1999, the Salary and Personnel
Committee met two times. The current members of the Salary and Personnel
Committee are Messrs. Hansen, Harrison and Hunter.
The Nominating Committee nominates persons to serve as directors of Finger
Lakes Financial. During 1999, the Nominating Committee met one time. The current
members of the Nominating Committee are Mr. Lynch (Chairman) and Messrs. Bowers
and Hunter.
Directors' Compensation
During 1999, Finger Lakes Financial paid directors' fees aggregating
$106,350 to the non-employee members of the Board of Directors, consisting of
(i) attendance fees of $300 for each meeting of the Board of Directors attended
and $200 for each meeting of a Board Committee attended, and (ii) a retainer of
$2,000 per calendar quarter. Mr. Bowers, who is the only employee director, is
paid no additional compensation for his services as a director.
Directors who are not employees of Finger Lakes Financial are entitled to
participate in the 1998 Restated Deferred Compensation Plan for Directors (the
"Restated Plan"). The Restated Plan allows participating outside directors to
defer up to 100% of their compensation from the Company into certain
"hypothetical" investment options designated by the Salary and Personnel
Committee, including Finger Lakes Financial common stock. The Restated Plan is
unfunded and may require the Company to issue common stock to the participating
directors at such time as the director has elected to receive a distribution, or
upon the death of the participating director. Of the $106,350 in fees paid to
non-employee directors in 1999, $65,500 was deferred in accordance with the
Restated Plan.
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EXECUTIVE COMPENSATION
Shown on the table below is information on the annual and long-term
compensation for services rendered to Finger Lakes Financial in all capacities,
for the years ended December 31, 1999, 1998 and 1997, paid by Finger Lakes
Financial to its Chief Executive Officer and Executive Vice President. No other
executive officer of the Company received salary and bonus in excess of $100,000
in 1999.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------------------- --------------------------------------------------
Other Restricted All Other
Name and Annual Stock Option Compensation
Principal Position Year Salary($)(1) Bonus($) Compensation($)2) Awards ($)(3) Grants(#)(4) (5)
--------------------------- ----- ------------ ----------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
G. Thomas Bowers, President 1999 $ 182,606 $ 20,947 $ 0 $ 0 0 $ 7,606
and Chief Executive Officer 1998 174,585 20,227 0 54,250 0 10,610
1997 168,562 0 0 128,469 0 24,160
--------------------------- ----- ------------ ----------- ---------------- ------------- ------------- ----------------
Terry L. Hammond, Executive 1999 $ 96,100 $ 8,610 $ 0 $ 0 0 $ 3,512
Vice President 1998 86,100 8,320 0 0 0 6,693
and Chief Financial Officer 1997 83,203 0 0 35,750 8,600 7,776
</TABLE>
(1) The amounts shown include cash compensation earned and paid during the year
indicated as well as cash compensation deferred at the executives' election
into the 401(k) Plan. The Company makes no contributions to the 401(k)
Plan.
(2) Does not reflect the value of perquisites and other personal benefits
because the aggregate amount of such compensation for any year did not
exceed 10% of the executives' annual salary and bonus for that year.
(3) The amounts shown reflect restricted awards of common stock under the
Company's 1996 Management Recognition Plan. See "Executive
Compensation--1996 Management Recognition Plan" below. The amounts shown
represent the aggregate market value of the shares awarded on the dates of
the awards (for Mr. Bowers 2,800 shares awarded in 1998; 9,500 shares
awarded in 1997, and for Mr. Hammond 3,000 shares awarded in 1997). The
awards vest and the shares are paid out over periods ranging from three to
five years, each commencing one year from the respective award date. The
total number and dollar value of shares credited to Mr. Bowers' award
account at 1999 year-end, based on the market value of the common stock on
December 31, 1999, ($8.00 per share) was 13,946 shares ($111,568). Mr.
Hammond's total number of shares and dollar value at 1999 year end was
5,720 shares and $45,763. Dividends are payable on such shares at the same
rate as dividends paid on other shares of common stock.
(4) See "Executive Compensation--1996 Stock Option Plan" below.
(5) The amounts shown reflect: (i) the aggregate market value, on the date of
allocation, of shares of common stock allocated during the referenced year
to Mr. Bowers' account under the ESOP ($4,376 at December 31, 1999; $7,481
at December 31, 1998; $23,066 at December 31, 1997 (see "Executive
Compensation--Employee Stock Ownership Plan" below); and (ii) the
compensatory value ($3,230 in 1999; $3,129 in 1998; $1,094 in 1997) of life
insurance premiums paid by Finger Lakes Financial on Mr. Bowers' behalf.
The amounts shown for Mr. Hammond reflect the aggregate market value, on
the date of allocation of shares of common stock allocated during the
referenced year to Mr. Hammond's account under the ESOP.
1996 Management Recognition Plan
The objective of the 1996 Management Recognition Plan (the "Recognition
Plan") is to enable Finger Lakes Financial to provide certain of its officers
and other employees with a proprietary interest in Finger Lakes Financial,
through restricted stock awards which vest at subsequent dates, as compensation
for their contributions to Finger Lakes Financial as well as an incentive to
make such contributions in the future by continuing their employment with Finger
Lakes Financial. The Recognition Plan has been funded with 47,200 shares of
common
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stock (purchased on the open market in 1996 with funds provided by Finger Lakes
Financial), which are held by a third-party trustee until they are awarded, and
thereafter vested and distributed, to recipient employees in accordance with the
terms of the Recognition Plan.
The Recognition Plan is administered by the Salary and Personnel Committee
of the Board of Directors (the "Committee"), which consists solely of
disinterested directors. The Committee determines, among other things, the
employees who are to receive restricted stock awards under the Recognition Plan,
the number of shares covered by each award, and the vesting schedule by which
awarded shares vest and are paid out by the trustee to each recipient. Under the
terms of the Recognition Plan, the trustee is authorized to vote, in its
discretion, all Recognition Plan shares which have not yet vested. Dividends are
payable on awarded shares, for the benefit of the respective recipients, at the
same rate as dividends paid on other shares of common stock. The Recognition
Plan also contains customary anti-dilution provisions. The Board of Directors of
Finger Lakes Financial can terminate the Recognition Plan at any time.
If an award recipient's employment with Finger Lakes Financial is
terminated by reason of his or her death, disability or retirement, or in the
event of a change in control of Finger Lakes Financial, all shares subject to
the award become immediately vested and payable to the recipient. However, upon
any other termination of an award recipient's employment, all rights to shares
not yet vested are forfeited.
At December 31, 1999, an aggregate of 47,200 shares of common stock had
been awarded under the Recognition Plan to an aggregate of ten employees,
including the Chief Executive Officer and Finger Lakes Financial's three other
current executive officers. Shares awarded under the Recognition Plan vest over
periods ranging from three to five years, each commencing one year from the
respective award date.
1996 Stock Option Plan
The 1996 Stock Option Plan, co-sponsored by Savings Bank of the Finger
Lakes and Finger Lakes Financial, (the "Option Plan") is designated to improve
the growth and profitability of Finger Lakes Financial by providing its
employees and directors with a proprietary interest in Finger Lakes Financial as
an incentive to contribute to the success of Finger Lakes Financial and to
reward employees for outstanding performance. The Option Plan is intended to be
qualified under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and provides for the grant of incentive stock options,
non-statutory stock options and stock appreciation rights. An aggregate of
118,000 shares of common stock are available for option grants under the Option
Plan. The Option Plan terminates in 2006.
The Option Plan is administered by the Committee, which determines, among
other things, the employees and outside directors who are to receive options
under the Option Plan, the types of options to be granted and the number of
shares covered by each option. The exercise price of each option must be at
least equal to the market value of the common stock on the option grant date (or
110% of such market value in the case of an incentive stock option granted to a
holder of 10% or more of the outstanding common stock).
Unless the Committee determines otherwise, options vest and become
exercisable at the rate of 20% per year, commencing one year from the option
grant date. Options are only exercisable upon vesting and until the earlier of
ten years after the option grant date (or five years after the option grant date
in the case of an incentive stock option granted to a holder of 10% or more of
the outstanding common stock) or three months after termination of the
optionee's employment with Finger Lakes Financial. Options granted to outside
directors are exercisable upon vesting and until the earlier of ten years after
the option grant date or one year after the outside director ceases to be a
director of Finger Lakes Financial or a subsidiary, unless the Committee, in its
discretion, decides at the time of grant or thereafter to extend such period of
exercise upon termination of service from one year to a period not exceeding
three years. In the event an optionee's employment or service as an outside
director is terminated due to death, disability or retirement, or upon a change
in control, the optionee or his or her
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<PAGE>
estate has one year following termination in which to exercise an otherwise
exercisable option. Awards of incentive stock options are non-transferable
except by will or the laws of descent and distribution. In the Board's
discretion, non-qualified options may be transferable by the optionee, provided
that the Board may limit the transferability of such options to a designated
class or classes of persons. The Option Plan also contains customary
anti-dilution provision.
Under the Option Plan, the Committee is also authorized to grant stock
appreciation rights, under which an optionee may surrender an exercisable option
in return for payment by Finger Lakes Financial of cash or common stock in an
amount equal to the excess of the then-current market value of the common stock
over the exercise price of the surrendered option.
At December 31, 1999, options to purchase an aggregate of 109,000 shares of
common stock, at prices ranging from $6.75 to $14.50 per share, were outstanding
and held by an aggregate of 10 employees, including the Chief Executive Officer
and the three other current executive officers.
Shown below is information with respect to the total unexercised options to
purchase common stock held by the executives at December 31, 1999. No options
were granted to or exercised by the executives during 1999.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1999 and Year-End Option Values
Value of All Unexercised
Unexercised Option Held In-the-Money Options at
at Year End(#) Year End($)(1)
------------------------------- -------------------------------
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
G. Thomas Bowers 0 0 17,700 11,800 None None
Terry L. Hammond 0 0 12,320 9,880 2,700 1,800
</TABLE>
----------
(1) Expressed as the excess of the per share market value of the common stock at
December 31, 1999 ($8.00) over the per share exercise price of the options.
Employee Stock Ownership Plan ("ESOP")
The purpose of the ESOP is to recognize and reward the contributions made
to Finger Lakes Financial by its employees. Employees who have at least one year
of credited service with Finger Lakes Financial (including Finger Lakes
Financial and Savings Bank of the Finger Lakes in its forms prior to the
reorganization) and who have attained age 21 are eligible to participate in the
ESOP.
The ESOP borrowed funds in 1994 from a third-party lender in order to fund
the purchase of 94,396 shares of common stock. Subsequent to the 1998
reorganization, the third-party loan was repaid with the proceeds of a loan from
Finger Lakes Financial. The loan to the ESOP, which bears interest at a fixed
rate of 7.75% per annum, will be repaid principally from Finger Lakes
Financial's contributions to the ESOP over ten years. In connection with
conversion of offering, the ESOP will borrow additional funds form the net
proceeds of the offering and will purchase up to 8% of the shares sold in the
offering. Savings Bank of the Finger Lakes intends to make annual contributions
to the ESOP in an amount equal to the principal and interest due on the loans,
which may be consolidated. The loan term is not expected to exceed 15 years.
Finger Lakes Financial may, in any years, make additional discretionary
contributions for the benefit of plan participants in either cash or shares of
common stock (which may be newly issued or acquired by the purchase of
outstanding shares). Such purchases, if made, may be funded through additional
borrowing by the ESOP or additional contributions from Finger Lakes Financial.
The timing, amount and manner of future contributions to the ESOP will be
affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
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<PAGE>
The shares purchased by the ESOP with the proceeds of the loan are held in
a suspense account and released on a pro rata basis as debt service payments are
made. Discretionary contributions to the ESOP, and the release of shares from
the suspense account, are allocated among participants on the basis of
compensation. Forfeitures are reallocated among remaining participants and may
reduce any amount Finger Lakes Financial might otherwise have contributed to the
ESOP. Allocations may be paid out to a participant, either in shares of common
stock or in cash, upon retirement, early retirement or separation from service.
Finger Lakes Financial's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated. Recipients of shares paid out under
the ESOP must give Finger Lakes Financial a right of first refusal when selling
the shares so acquired.
The trustees under the ESOP must vote all allocated shares held in the ESOP
in accordance with the instructions of the participating employees, and
unallocated shares, as well as allocated shares for which employees do not give
instructions, must be voted in the same ratio as the shares for which
instructions are given. The ESOP is subject to the Employee Retirement Income
Security Act of 1974, as amended, as well as the regulations of the Internal
Revenue Service and the Department of Labor.
Employment Agreements
During 1999, Mr. Bowers was compensated for his services as President,
Chief Executive Officer and a director of Finger Lakes Financial pursuant to an
employment agreement with Finger Lakes Financial dated January 26, 1995 (the
"Employment Agreement"). The Employment Agreement provides for an annual base
salary, subject to increases in the sole discretion of Finger Lakes Financial,
and customary fringe benefits. As an annual incentive, the Employment Agreements
also provides for the payment, in the sole discretion of the Board of Directors,
of an annual bonus. In 1999, Mr. Bowers received a bonus of $20,947.
The obligations of Finger Lakes Financial will be assumed by Finger Lakes
Bancorp, in connection with the conversion. The Employment Agreement may be
terminated by either Mr. Bowers or Finger Lakes Financial at any time upon ten
days' notice. However, if Finger Lakes Financial terminated the Employment
Agreement without cause or fails to comply with any material provision thereof,
or if Mr. Bowers terminates the Employment Agreement for good reason, Mr. Bowers
will be entitled to severance pay amounting to 2.99 times the average annual
compensation paid him during the last five years of his employment by Finger
Lakes Financial. In addition, Mr. Bowers may continue to participate in employee
benefit plans of Finger Lakes Financial (other than retirement and stock
compensation plans) for three years following his termination.
Upon completion of the offering, Finger Lakes Bancorp intends to enter into
an employment agreement with Terry L. Hammond, Executive Vice President and
Chief Financial Officer and intends to revise its employment agreement with G.
Thomas Bowers, President and Chief Executive Officer. The agreements will have a
term of 36 months. On each anniversary date, the agreements may be extended for
an additional twelve months, so that the remaining term is 36 months. If an
agreement is not renewed, the agreement will expire 36 months following the
anniversary date. Under the agreements, the base salary for G. Thomas Bowers
will be $200,000 and for Terry L. Hammond, $101,000. The base salary may be
increased but not decreased. In addition to the base salary, the agreements
provide for, among other things, participation in retirement plans and other
employee and fringe benefits. The agreements permit termination for cause at any
time. In the event of termination for reasons other than for cause, or in the
event the executive resigns because he has not been re- elected to his current
offices, there has been a material change in his functions, duties or
responsibilities, a relocation of his principal place of employment by more than
30 miles, a liquidation or dissolution of Savings Bank of the Finger Lakes, a
breach of the agreement by Finger Lakes Bancorp, or following a change in
control of Savings Bank of the Finger Lakes or Finger Lakes Bancorp, the
executive would be entitled to cash and/or benefits up to three times his
average annual compensation during the preceding three-year period. The
executive would also receive continued life, health, dental and disability
coverage for 36 months from the date of termination. If the payments to the
executive would include an "excess parachute payment" as defined by Internal
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Revenue Code Section 280G, the payments would be reduced by the amount necessary
in order to avoid having an excess parachute payment.
Defined Benefit Pension Plan. The Bank maintains the Retirement Plan of
Savings Bank of the Finger Lakes, FSB in RSI Retirement Trust ("Retirement
Plan") which is a qualified, tax-exempt defined benefit plan. Employees age 21
or older who have worked at the Bank for a period of one year and have been
credited with 1,000 or more hours of service with the Bank during the year are
eligible to participate in the Retirement Plan, provided, however, that leased
employees, employees paid on an hourly rate or contract basis and employees
regularly employed outside the Bank's offices in connection with the operation
and maintenance of buildings or other properties acquired through foreclosure or
deed are not eligible to participate. The Bank contributes each year, if
necessary, an amount to the Retirement Plan to satisfy the actuarially
determined minimum funding requirements in accordance with the ERISA. At June
30, 2000, the total market value of the assets in the Retirement Plan trust fund
was approximately $3.7 million.
In the event of retirement on or after the normal retirement date (i.e.,
the first day of the calendar month coincident with or next following the later
of age 65 or the 5th anniversary of participation in the Retirement Plan) or,
for a participant prior to October 1, 1988, age 65, the plan is designed to
provide a straight life annuity. For a married participant, the normal form of
benefit is an actuarially reduced joint and survivor annuity where, upon the
participant's death, the participant's spouse is entitled to receive a benefit
equal to 50% of the amount paid during the participant's lifetime.
Alternatively, a participant may elect (with proper spousal consent, if
necessary) from various other options, including a 100% joint and survivor
benefit, period certain and life benefit, rollover or direct transfer to an
individual retirement account. The normal retirement benefit provided is an
amount equal to 2% of a participant's average annual earnings, multiplied by the
years of a participant's credited service, up to a maximum of 30 years, reduced
by the participant's primary Social Security benefit offset (i.e., 1.667 x
primary Social Security benefit x credited service up to 30 years). Retirement
benefits are also payable upon early retirement, postponed retirement,
disability or death. A reduced benefit is payable upon early retirement after
completion of five years of service and (i) attainment of age 60 or (ii) once
the sum of the participant's age and years of vested service totals 75 or more.
In the event a participant dies prior to his termination of service and (i) has
attained age 60 or (ii) the sum of the participant's age and years of vested
service (including service with any other employer participating in the RSI
Retirement Trust) equals or exceeds 65, the participant's beneficiary is
entitled to a special pre-retirement survivor benefit equal to the benefit the
participant would have received if he had retired on the date of his death and
had elected a 100% joint and survivor benefit. In the event of a participant's
death prior to satisfaction of the requirements for the special pre-retirement
survivor benefit, but after satisfaction of the requirements for a vested
retirement benefit, the retirement benefit will be equal to the amount the
beneficiary would have received if the participant had retired and elected a 50%
joint and survivor benefit. Upon termination of employment other than as
specified above, a participant who has five years of vested service is eligible
to receive his or her accrued benefit commencing, generally, on his normal
retirement date, or, if elected, on or after his early retirement date. In
certain cases, a participant who had attained age 55, had completed 30 years of
vested service and terminated service on January 31, 1998, was also eligible for
early retirement benefit.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
2000, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
Average Annual Years of Service and Benefit Payable at Retirement
-------------------------------------------------------------
Earnings 15 20 25 30 35
-------- ----------- ----------- ----------- ---------- ---------
$50,000 $ 11,099 $ 14,799 $ 18,499 $ 22,198 $ 22,198
$75,000 18,200 16,767 15,334 13,900 13,900
$100,000 25,700 24,267 22,834 21,400 21,400
$125,000 33,200 31,767 30,334 28,900 28,900
$160,000 and above 43,700 42,267 40,834 39,400 39,400
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For plan years beginning in 2000, the maximum annual compensation which may
be taken into account under the Code for calculating contributions under
qualified defined benefit plans such as the Retirement Plan is currently
$170,000.
Supplemental Executive Retirement Plan. Mr. Bowers is the beneficiary of a
non-qualified, unfunded Supplemental Retirement Agreement with Finger Lakes
Financial dated February 28, 1995, and amended June 22, 1998 (the "Retirement
Agreement"), which provides that, upon his reaching age 62, Finger Lakes
Financial will pay Mr. Bowers or his surviving spouse $30,000 per year for 20
years (or, upon their earlier deaths, a lump sum payment to their estates),
subject to a downward adjustment equal to 6% of the total cash value in all
policies subject to any split-dollar agreement in effect as of Mr. Bowers' 62nd
birthday. Such payments will be provided in part by premiums paid under an
insurance policy on Mr. Bowers' life maintained for Finger Lakes Financial's
benefit. Finger Lakes Financial has approved an increase in the supplemental
retirement benefit to be provided to Mr. Bowers following his retirement. The
increased benefit is intended to provide Mr. Bowers with annual income in the
form of a life annuity equal to 60% of his highest average annual base salary
and bonus (over the consecutive 36-month period within the last 120 consecutive
calendar months of employment) reduced by the sum of the benefits provided under
the existing Retirement Agreement (increased by the social security offset
amount), the annuitized value of his tax-qualified pension benefits payable from
Savings Bank of the Finger Lakes and the annuitized value of his social security
benefits attributable to employer contributions.
Benefits to be considered following completion of the Conversion
2001 Stock Option Plan. We intend to submit for shareholder approval, no
earlier than six months after the completion of the conversion, the 2001 Stock
Option Plan for directors and officers of Savings Bank of the Finger Lakes and
of Finger Lakes Bancorp. If approved by the shareholders, the 2001 Stock Option
Plan will reserve 10% of the shares sold in the offering to be issued when
options granted to officers and directors are exercised. Ten percent of the
shares issued in the offering would amount to 159,408 shares, 187,531 shares,
215,665 shares or 248,011 shares at the minimum, mid-point, maximum and adjusted
maximum of the offering range, respectively. No options would be granted under
the 2001 Stock Option Plan until the date on which shareholder approval is
received. In the event that shares underlying options come from authorized but
unissued shares, shareholders would experience dilution of approximately 6.69%
in their ownership interest in Finger Lakes Bancorp.
The exercise price of the options granted under the 2001 Stock Option Plan
will be equal to the fair market value of the shares on the date of grant of the
stock options. If the 2001 Stock Option Plan is adopted within one year
following the offering, options will vest at a rate of 20% at the end of each 12
months of service with Savings Bank of the Finger Lakes after the date of grant.
Options granted under the 2001 Stock Option Plan would be adjusted for capital
changes such as stock splits and stock dividends. Awards will be 100% vested
upon termination of employment due to death or disability, and if the 2001 Stock
Option Plan is adopted more than one year after the conversion, awards would be
100% vested upon normal retirement or a change in control of Savings Bank of the
Finger Lakes or Finger Lakes Bancorp. Under OTS rules, if the 2001 Stock Option
Plan is adopted within one year of the conversion, no individual officer may
receive more than 25% of the awards under the plan, no non-employee director may
receive more than 5% of the awards under the plan, and all non-employee
directors as a group can receive no more than 30% of the awards under the plan
in the aggregate.
The 2001 Stock Option Plan would be administered by a committee of
non-employee members of the Finger Lakes Bancorp's board of directors. Options
granted under the 2001 Stock Option Plan to employees may be "incentive" stock
options, designed to result in a beneficial tax treatment to the employee but no
tax deduction to Finger Lakes Bancorp. Non-qualified stock options may also be
granted to employees under the 2001 Stock Option Plan, and will be granted to
the non-employee directors who receive stock options. In the event an option
recipient terminated his employment or service as an employee or director, the
options would terminate during certain specified periods.
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2001 Recognition Plan. We also intend to submit for shareholder approval,
no earlier than six months after the completion of the conversion, the 2001
Recognition Plan. The 2001 Recognition Plan is designed to encourage directors
and officers to continue their service with Savings Bank of the Finger Lakes by
giving them an ownership interest in the Finger Lakes Bancorp. If approved by
shareholders, the 2001 Recognition Plan will, if implemented within one year of
conversion, reserve 4% of the shares sold in the offering or 63,763 shares,
75,012 shares, 86,266 or 99,204 shares at the minimum, mid-point, maximum and
adjusted maximum of the offering range, respectively. In the event that Savings
Bank of the Finger Lakes does not have a tangible capital to assets ratio in
excess of 10% the 2001 Recognition Plan will reserve only 3% of the shares to be
sold in the offering. The officers and directors will be awarded common stock
under the 2001 Recognition Plan without having to pay cash for the shares. No
awards would be made under the 2001 Recognition Plan until the date on which
shareholder approval is received. If the shares awarded under the 2001
Recognition Plan come from authorized but unissued shares totaling 4% of the
shares sold in the offering, shareholders would experience dilution of
approximately 2.68% in their ownership interest in Finger Lakes Bancorp.
Awards under the 2001 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. Under OTS rules, if the 2001 Recognition Plan is adopted within one year
following the conversion, the shares which are subject to an award would vest at
a rate of 20% at the end of each full 12 months of service with Savings Bank of
the Finger Lakes after the date of grant of the award. Awards would be adjusted
for capital changes such as stock dividends and stock splits. Awards would be
100% vested upon termination of employment or service due to death or
disability, and if the 2001 Recognition Plan is adopted more than one year after
the conversion, awards would be 100% vested upon normal retirement or a change
in control of Savings Bank of the Finger Lakes or Finger Lakes Bancorp. If
employment or service were to terminate for other reasons, the award recipient
would forfeit any nonvested award. If employment or service is terminated for
cause (as defined in the 2001 Recognition Plan), shares not already delivered
would be forfeited. Under OTS rules, if the 2001 Recognition Plan is adopted
within one year of the conversion, no individual officer may receive more than
25% of the awards under the plan, no non-employee director may receive more than
5% of the awards under the plan, and all non-employee directors as a group may
receive no more than 30% of the awards under the plan in the aggregate.
The recipient of an award will recognize income equal to the fair market
value of the stock earned, determined as of the date of vesting, unless the
recipient makes an election under ss. 83(b) of the Code to be taxed earlier. The
amount of income recognized by the recipient would be a deductible expense for
tax purposes for Finger Lakes Bancorp. If the 2001 Recognition Plan is adopted
within one year following the conversion, dividends and other earnings will
accrue and be payable to the award recipient when the shares vest. If the 2001
Recognition Plan is adopted within one year following the conversion, shares not
yet vested will be voted by the trustee of the 2001 Recognition Plan, taking
into account the best interests of the award recipients. If the 2001 Recognition
Plan is adopted more than one year following the conversion, dividends declared
on unvested shares will be distributed to the recipient when paid, and the
recipient will be entitled to vote the unvested shares.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Finger Lakes Financial Common Stock as of June 30, 2000.
Number of Shares Percent of All Percent of
Name of of Common Stock Common Stock Publicly Held
Beneficial Owner Beneficially Owned(1) Outstanding(1) Common Stock(2)
--------------------- ---------------------- -------------- ---------------
G. Thomas Bowers(3) 91,830 2.6% 7.8%
Michael J. Hanna(4) 200 0.0% 0.0%
Chris M. Hansen(5) 7,971 0.2% 0.7%
Richard J. Harrison 7,158 0.2% 0.6%
James E. Hunter 3,008 0.1% 0.3%
Ronald C. Long 8,640 0.2% 0.7%
Bernard G. Lynch 7,250 0.2% 0.6%
Arthur W. Pearce 5,000 0.1% 0.4%
Joan C. Rogers 5,100 0.1% 0.4%
Terry L. Hammond(6) 31,218 0.9% 2.7%
Thomas A. Mayfield(7) 25,007 0.7% 2.1%
Leslie J. Zornow(8) 9,872 0.3% 0.8%
All directors and executive officers
as a group (12 persons) 202,254 5.7% 17.1%
------------------------------
(1) Based on 3,570,000 shares outstanding.
(2) Based on 1,180,052 shares held by persons other than Finger Lakes Financial
Corp., MHC.
(3) Includes (i) 4,000 shares owned by Mr. Bowers' wife; (ii) 3,790 shares held
in the 401(k) plan for Mr. Bowers' account; (iii) presently exercisable
options to purchase 23,600 shares; and (iv) 4,159 shares held in the ESOP
for Mr. Bowers' account, as to which shares he only indirect voting
power only. See "Executive Compensation" below.
(4) Shares held jointly by Mr. Hanna and his daughter.
(5) Includes 259 shares owned by Mr. Hansen's wife.
(6) Includes (i) 8,421 shares held in the 401(k) Plan for Mr. Hammond's
account, as to which shares he has investment power only; (ii) 1,240 shares
which will vest within 60 days under the 1996 Management Recognition Plan;
(iii) presently exercisable options to purchase 15,040 shares; and (iv)
4,763 shares held in the ESOP for Mr. Hammond's account, as to which shares
he had indirect voting power only. See "Executive Compensation" below.
(7) Includes (i) 2,085 shares held in the 401(k) Plan for Mr. Mayfield's
account, as to which shares he has investment power only; (ii) 800 shares
which will vest within 60 days under the 1996 Management Recognition Plan;
(iii) presently exercisable options to purchase 13,880 shares; and (iv)
1,375 shares held in the ESOP for Mr. Mayfield's account, as to which
shares he has indirect voting power only. See "Executive Compensation"
below.
(8) Includes (i) 185 shares held in the 401(k) Plan for Ms. Zornow's account,
as to which shares she has investment power only; (ii) presently
exercisable options to purchase 6,140 shares; and (iii) 1,447 shares held
in the ESOP for Ms. Zornow's account, as to which shares she has indirect
voting power only.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, for each of Finger Lakes Bancorp's Directors
and executive officers and for all of the Directors and executive officers as a
group, the following information:
(1) the number of exchange shares to be held upon consummation of the
conversion, based upon their beneficial ownership of Finger Lakes Financial
common stock as of June 30, 2000;
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<PAGE>
(2) the proposed purchases of subscription shares, assuming sufficient
shares are available to satisfy their subscriptions; and
(3) the total amount of Finger Lakes Bancorp common stock to be held upon
consummation of the conversion.
In each case, it is assumed that subscription shares are sold at the
mid-point of the offering range. Because of limitations on the purchase of
subscription shares, directors and executive officers may be precluded from
purchasing subscription shares if the offering is sold at the maximum or the
maximum, as adjusted, of the offering range. See "The Conversion--Limitations on
Common Stock Purchases."
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion Stock (1) to be Held
Number of -------------------- ------------------------
Exchange Shares Number Number Percentage
to be Held(2)(3) of Shares Amount of Shares of Total
----------------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
G. Thomas Bowers 71,958 42,857 $300,000 114,815 4.10%
Michael J. Hanna 157 143 1,000 300 0.01%
Chris M. Hansen 6,246 1,429 10,000 7,675 0.27%
Richard J. Harrison 5,609 3,571 25,000 9,180 0.33%
James E. Hunter 2,357 3,571 25,000 5,928 0.21%
Ronald C. Long 6,770 2,571 18,000 9,341 0.33%
Bernard G. Lynch 5,681 10,714 75,000 16,395 0.59%
Arthur W. Pearce 3,918 7,143 50,000 11,061 0.40%
Joan C. Rogers 3,996 2,857 20,000 6,853 0.24%
Terry L. Hammond 24,462 8,572 60,000 33,034 1.18%
Thomas A. Mayfield 19,595 7,143 50,000 26,738 0.95%
Leslie J. Zornow 7,736 1,429 10,000 9,165 0.33%
All Directors, Officers 158,486 92,000 $644,000 250,486 8.95%
</TABLE>
-----------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
the subscription order by the Employee Stock Ownership Plan. Purchases by
the Employee Stock Ownership Plan are expected to be 8% of the shares
issued in the offering.
(2) Includes shares underlying options that may be exercised within 60 days of
the date as of which ownership is being determined, and vested shares of
restricted stock. See "Beneficial Ownership of Common Stock."
(3) Does not include stock options and awards that may be granted under Finger
Lakes Bancorp's 2001 Stock Option Plan and 2001 Recognition Plan if these
plans are approved by stockholders at an annual meeting or special meeting
of shareholders at least six months following the conversion. See
"Management of Finger Lakes Financial--Benefits."
The Board of Directors of Finger Lakes Financial and Finger Lakes Financial
Corp., MHC and the Office of Thrift Supervision have approved the plan of
conversion, subject to approval by the members of Finger Lakes Financial Corp.,
MHC entitled to vote on the matter, the stockholders of Finger Lakes Financial
entitled to vote on the matter and the satisfaction of other conditions. Office
of Thrift Supervision approval, however, does not constitute a recommendation or
endorsement of the Plan by that agency.
General
On January 31, 2000, the Board of Directors of Finger Lakes Financial
Corp., MHC adopted the plan of conversion pursuant to which Finger Lakes
Financial Corp., MHC will be converted from a federally chartered mutual holding
company to a Delaware stock corporation to be named "Finger Lakes Bancorp." It
is currently intended that all of the capital stock of Savings Bank of the
Finger Lakes be held by Finger Lakes Bancorp after the conversion. The plan of
conversion was approved by the Office of Thrift Supervision, subject to, among
other things, approval of the plan of conversion by Finger Lakes Financial
Corp., MHC's members and the stockholders of Finger Lakes Financial. The special
meeting of members and the special meeting of stockholders have been called for
this purpose.
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As part of the conversion, each of the minority shares will automatically,
without further action by their holders, be converted into and become a right to
receive a number of shares of Finger Lakes Bancorp common stock determined
pursuant to the exchange ratio, which ensures that immediately after the
conversion and the share exchange, the public shareholders of Finger Lakes
Financial common stock will own the same aggregate percentage of Finger Lakes
Bancorp common stock as they owned of Finger Lakes Financial's common stock
immediately prior to the conversion, with adjustments discussed below. Pursuant
to the plan of conversion, the conversion will be effected as follows or in any
other manner that is consistent with applicable federal law and regulations and
the intent of the plan of conversion. Except for step (1), each of the following
steps in the conversion will be completed contemporaneously on the effective
date:
(1) Savings Bank of the Finger Lakes will organize Finger Lakes Bancorp as
a first-tier Delaware-chartered stock holding company;
(2) Finger Lakes Bancorp will charter an interim federal savings bank
("Interim Savings Bank");
(3) Finger Lakes Financial will exchange its charter for a federal interim
savings bank charter and simultaneously merge into Savings Bank of the Finger
Lakes, with Finger Lakes Financial's shareholders (including Finger Lakes
Financial Corp., MHC) constructively receiving shares of Savings Bank of the
Finger Lakes;
(4) Finger Lakes Financial Corp., MHC will exchange its charter for an
interim stock savings bank charter and simultaneous merge into Savings Bank of
the Finger Lakes. Shares of Savings Bank of the Finger Lakes constructively held
by Finger Lakes Financial Corp., MHC will be cancelled and each eligible account
holder and supplemental eligible account holder will receive an interest in a
liquidation account of Savings Bank of the Finger Lakes in exchange for such
person's interest in Finger Lakes Financial Corp., MHC; and
(5) a merger of the Interim Savings Bank into Savings Bank of the Finger
Lakes, with Savings Bank of the Finger Lakes stockholders (formerly stockholders
of Finger Lakes Financial) exchanging their common stock for voting common stock
of Finger Lakes Bancorp.
(6) Contemporaneously with the Bank Merger, Finger Lakes Bancorp will sell
the subscription shares in the offering.
Finger Lakes Bancorp expects to receive the approval of the Office of
Thrift Supervision to become a savings and loan holding company and to own all
of the common stock of Savings Bank of the Finger Lakes. Finger Lakes Bancorp
intends to retain $5.2 million of the net proceeds (at the minimum) of the
offering and to contribute the balance of the net proceeds of the offering to
Savings Bank of the Finger Lakes. The conversion will be effected only upon
completion of the sale of all of the shares of common stock of Finger Lakes
Bancorp to be issued pursuant to the plan of conversion.
The plan of conversion provides generally that Finger Lakes Bancorp will
offer shares of common stock for sale in the subscription offering to Eligible
Account Holders, Finger Lakes Financial's tax-qualified plans including the
employee stock ownership plan, supplemental eligible account holders and other
members. Subject to the prior rights of these holders of subscription rights,
Finger Lakes Bancorp will offer common stock for sale in a concurrent community
offering to members of the general public, with a preference given to the public
shareholders of Finger Lakes Financial common stock, and then to persons
residing in Savings Bank of the Finger Lakes' community. Finger Lakes Bancorp
has the right to accept or reject, in whole or in part, any orders to purchase
shares of the common stock received in the community offering. The community
offering must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision. See "--Community Offering."
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<PAGE>
The number of shares of common stock to be issued in the offering will be
determined based upon an independent appraisal of the estimated pro forma market
value of the common stock of Finger Lakes Bancorp. All shares of common stock to
be issued and sold in the offering will be sold at the same price. The
independent valuation will be updated and the final number of the shares to be
issued in the offering will be determined at the completion of the offering. See
"--Stock Pricing and Number of Shares to be Issued" for more information as to
the determination of the estimated pro forma market value of the common stock.
The appraisal was prepared pursuant to written guidelines promulgated by
the Office of Thrift Supervision. The Office of Thrift Supervision appraisal
guidelines specify the market value approach, including:
(1) selection of a peer group of publicly traded institutions that share
characteristics with the company;
(2) analysis of the company's financial condition, operating results and
other financial and nonfinancial characteristics in comparison to the peer
group; and
(3) application of certain market value ratios of the peer group to the
company.
The appraisal considered the pro forma impacts of the offering. Consistent
with the Office of Thrift Supervision appraisal guidelines, the appraisal
applied three primary methodologies: the pro forma price-to-book value approach
applied to both reported book value and tangible book value; the pro forma
price-to-earnings approach applied to reported and core earnings; and the pro
forma price-to-asset approach. The market value ratios applied in the three
methodologies were based upon the current market valuations of the peer group
companies, subject to valuation adjustments applied by FinPro to account for
differences between Finger Lakes Bancorp and the peer group. FinPro applied a
slight downward adjustment in the valuation for balance sheet strength. The
adjustment for balance sheet strength was based upon Savings Bank of the Finger
Lakes' lower loan levels, slower loan and asset growth rates and interest rate
risk position which were partially mitigated by the Savings Bank of the Finger
Lakes' expected post conversion capital levels, which is expected to improve the
interest rate risk position and fund future growth. The valuation was adjusted
downward for Savings Bank of the Finger Lakes' earnings quality, predictability
and growth based upon Savings Bank of the Finger Lakes' lower return on average
assets and lower return on average equity relative to the Comparable Group,
among other things. FinPro also adjusted the market value slightly downward
relative to the Comparable Group, citing that Savings Bank of the Finger Lakes
will need time to properly invest the proceeds raised in the conversion.
Furthermore, FinPro adjusted the market value downward based upon the weakness
of pricing multiples of thrifts that performed a second-step conversion relative
to the overall thrift market and due to the weak subscription interest
experienced in recent second-step conversions. FinPro did not adjust the market
value for market area, management, dividends, liquidity of the issue, recent
regulatory matters or the acquisition market. At the mid- point, based on the
valuation adjustments applied in the appraisal, the pro forma value of Finger
Lakes Bancorp was at a discount to the peer group averages as measured by
price-to-book ratios and price-to-asset ratios, but was priced at a premium on a
price-to-core earnings ratio.
The following is a brief summary of the conversion. The summary is
qualified in its entirety by reference to the provisions of the plan of
conversion. A copy of the plan of conversion is available for inspection at each
branch of Savings Bank of the Finger Lakes and at the Northeast Regional and
Washington, D.C. offices of the Office of Thrift Supervision. The plan of
conversion is also filed as an exhibit to the application to convert from mutual
to stock form of which this prospectus is a part, copies of which may be
obtained from the Office of Thrift Supervision. See "Additional Information."
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<PAGE>
Purposes of Conversion
Finger Lakes Financial Corp., MHC, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the conversion, Finger Lakes Financial Corp., MHC will be
restructured into the form used by holding companies of commercial banks, many
business entities and a growing number of savings institutions. An important
distinction between the mutual holding company form of organization and the
fully public form is that, by federal law, a mutual holding company must always
own over 50.1% of the common stock of its savings institution subsidiary. Only a
minority of the subsidiary's outstanding stock can be sold to investors. If
Savings Bank of the Finger Lakes had undertaken a full conversion to public
ownership in 1994, a much greater amount of Finger Lakes Financial common stock
would have been offered, resulting in more stock offering proceeds than
management believes could have been effectively deployed at that time. High
levels of capital might, in the opinion of management, have exceeded the
available opportunities in Savings Bank of the Finger Lakes' market area in
1994. Management determined, therefore, that the amount of capital raised in the
1994 mutual holding company reorganization was consistent with its capabilities
and loan demand in its market at that time.
Through the conversion, Finger Lakes Bancorp will become the stock holding
company of Savings Bank of the Finger Lakes, which will complete the transition
to full public ownership. The stock holding company form of organization will
provide Finger Lakes Bancorp with the ability to diversify Finger Lakes Bancorp
and Savings Bank of the Finger Lakes' business activities through the
acquisition of or mergers with both stock savings institutions and commercial
banks, as well as other companies.
The potential impact of the conversion upon Savings Bank of the Finger
Lakes' capital base is significant. Savings Bank of the Finger Lakes had equity
in accordance with generally accepted accounting principles of $19.7 million, or
6.43% of assets at June 30, 2000. Assuming that $13.1 million, the mid-point of
the $11.2 million to $15.1 million offering range established by the Board of
Directors based on the estimated pro forma market value of the common stock, of
gross proceeds are realized from the sale of common stock, and assuming that
$6.1 million of the net proceeds less the entire amount expected to be borrowed
by the employee stock ownership plan and the entire cost of the shares expected
to be acquired by the 2001 Recognition Plan are contributed to Savings Bank of
the Finger Lakes as additional capital, Savings Bank of the Finger Lakes' ratio
of capital to pro forma assets, calculated under generally accepted accounting
principles, will increase to 7.80%. The investment of the net proceeds from the
sale of the common stock will provide Savings Bank of the Finger Lakes with
additional income to further increase its capital position. The additional
capital may also assist Savings Bank of the Finger Lakes in offering new
programs and expanded services to its customers.
After completion of the conversion and depending on market conditions, the
unissued common and preferred stock authorized by Finger Lakes Bancorp's
certificate of incorporation will permit Finger Lakes Bancorp to raise
additional equity capital through further sales of securities, and to issue
securities in connection with possible acquisitions. At the present time, Finger
Lakes Bancorp has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options or
the possible issuance of authorized but unissued shares to Finger Lakes
Bancorp's stock benefit programs.
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of Finger Lakes Financial Corp., MHC at the special meeting of members
is required to approve the plan of conversion. By their approval of the plan of
conversion, the members of Finger Lakes Financial Corp., MHC will also be deemed
to approve the merger of Finger Lakes Financial Corp., MHC into Finger Lakes
Financial and the merger of the Interim Savings Bank into Savings Bank of the
Finger Lakes. The affirmative vote of the holders of at least two-thirds of the
outstanding common stock of Finger Lakes Financial and a majority of the
publicly held shares of Finger Lakes
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Financial common stock voted at the special meeting of stockholders is required
to approve the plan of conversion. The conversion must also be approved by the
Office of Thrift Supervision.
Share Exchange Ratio
Office of Thrift Supervision regulations provide that in a conversion of a
mutual holding company to stock form, the minority stockholders will be entitled
to exchange their shares of subsidiary savings bank common stock for common
stock of the converted holding company, provided that the bank and the mutual
holding company demonstrate to the satisfaction of the Office of Thrift
Supervision that the basis for the exchange is fair and reasonable. The Boards
of Directors of Finger Lakes Financial and of Finger Lakes Bancorp have
determined that each publicly held share of Finger Lakes Financial common stock
will on the effective date of the conversion be automatically converted into and
become the right to receive a number of exchange shares determined pursuant to
the exchange ratio. We are not required to adjust the share exchange ratio to
reflect the waiver of dividends by Finger Lakes Financial Corp., MHC.
Consequently, the public stockholders of Finger Lakes Financial common stock
will own the same percentage of common stock in Finger Lakes Bancorp after the
conversion as they hold in Finger Lakes Financial, subject to additional
purchase, or the receipt of cash in lieu of fractional shares. The total number
of shares held by the public shareholders of Finger Lakes Financial common stock
after the conversion would also be affected by any purchases by these persons in
the offering and by the receipt of cash in lieu of fractional shares. At June
30, 2000, there were 3,570,000 shares of Finger Lakes Financial common stock
outstanding, 1,180,052, or 33.1% of which were publicly held. Based on the
percentage of Finger Lakes Financial common stock held by the public and the
offering range, the exchange ratio is expected to range from approximately
0.6660 exchange shares for each publicly held share of Finger Lakes Financial at
the minimum of the offering range to 1.0363 exchange shares for each publicly
held share of Finger Lakes Financial at the adjusted maximum of the offering
range.
Based on the independent valuation, the 66.9% of the outstanding shares of
Finger Lakes Financial common stock held by Finger Lakes Financial Corp., MHC as
of the date of the independent valuation, and Finger Lakes Financial Corp., the
following table sets forth, at the minimum, mid-point, maximum, and adjusted
maximum of the Offering Range: (1) the total number of subscription shares and
exchange shares to be issued in the conversion; (2) the percentage of common
stock outstanding after the conversion that will be sold in the offering and
issued in the share exchange; and (3) the exchange ratio.
<TABLE>
<CAPTION>
Total shares 100 shares of
Shares to be exchanged of Finger Lakes
Shares to be sold for Finger Lakes Bancorp common stock Financial
in this offering common stock to be Exchange would be
------------------------- ------------------------
Amount Percent Amount Percent outstanding ratio exchanged for
----------- ----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum............. 1,594,085 66.9% 785,915 33.1% 2,380,000 0.6660 66
Mid-point........... 1,875,311 66.9% 924,689 33.1% 2,800,000 0.7836 78
Maximum............. 2,156,655 66.9% 1,063,345 33.1% 3,220,000 0.9011 90
15% above maximum... 2,480,112 66.9% 1,222,888 33.1% 3,703,000 1.0363 103
</TABLE>
Options to purchase shares of Finger Lakes Financial common stock also will
be converted into and become options to purchase Finger Lakes Bancorp common
stock. At June 30, 2000, there were outstanding options to purchase 102,000
shares of Finger Lakes Financial common stock. The number of shares of common
stock to be received upon exercise of these options will be determined pursuant
to the exchange ratio. The aggregate exercise price, duration, and vesting
schedule of these options will not be affected. At June 30, 2000, options to
purchase 70,660 shares were vested. If all of these options to purchase shares
of Finger Lakes Financial common stock are exercised prior to the effective
date, then there will be:
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(1) an increase in the percentage of Finger Lakes Financial common stock
held by the public shareholders of Finger Lakes Financial common stock to 34.1%;
(2) an increase in the number of shares of common stock issued to the
public shareholders of Finger Lakes Financial common stock in the share
exchange; and
(3) a decrease in the exchange ratio to 0.6463, 0.7604, 0.8745, and 1.0056
at the minimum, mid- point, maximum and adjusted maximum, respectively, of the
offering range.
Executive officers and directors of Finger Lakes Financial do not intend to
exercise options prior to the effective date.
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
conversion will increase the stockholders' equity of the public shareholders of
Finger Lakes Financial common stock. At June 30, 2000, the stockholders' equity
per share of Finger Lakes Financial common stock was $5.53, including shares
held by Finger Lakes Financial Corp., MHC. As adjusted at that date for the
exchange ratio, stockholders' equity per share would be $3.68, $4.33, $4.98 and
$5.73 at the minimum, mid-point, maximum, and adjusted maximum, of the offering
range. Based on the pro forma information set forth for June 30, 2000, in "Pro
Forma Data," pro forma stockholders' equity per share following the conversion
will be $12.13, $10.93, $10.04, and $9.27 at the minimum, mid-point, maximum and
adjusted maximum, respectively, of the offering range.
Effect on Earnings per Share of the Shares Exchanged. The conversion will
also affect the public shareholders of Finger Lakes Financial common stock pro
forma earnings per share. For the six months ended June 30, 2000, basic earnings
per share of Finger Lakes Financial common stock was $0.11, including shares
held by Finger Lakes Financial Corp., MHC. As adjusted for the exchange ratio,
earnings per share would range from $0.07 to $0.10, respectively, for the
minimum to the adjusted maximum of the offering range. Based on the pro forma
information set forth for the six months ended June 30, 2000, in "Pro Forma
Data," earnings per share of common stock following the conversion will range
from $0.22 to $0.17, respectively, for the minimum to the adjusted maximum of
the offering range.
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate subscription price of the shares of common stock received in exchange
for the publicly held shares of Finger Lakes Financial common stock is $5.5
million, $6.5 million, $7.4 million, and $8.6 million at the minimum, mid-point,
maximum and adjusted maximum, respectively, of the offering range. The last
trade of Finger Lakes Financial common stock on January 31, 2000, the last
trading day preceding the announcement of the conversion, was $7.50 per share,
and the price at which Finger Lakes Financial common stock last traded on
September 25, 2000 was $6.81 per share.
Dissenters' and Appraisal Rights. Under Office of Thrift Supervision
regulations, the public shareholders of Finger Lakes Financial common stock will
not have dissenters' rights or appraisal rights in connection with the exchange
of publicly held shares of Finger Lakes Financial common stock for shares of
common stock of Finger Lakes Bancorp.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in Savings Bank of the Finger Lakes has both a
deposit account in Savings Bank of the Finger Lakes and a pro rata ownership
interest in the net worth of Finger Lakes Financial Corp., MHC based upon the
balance in his or her account. This interest may only be realized in the event
of a liquidation of
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<PAGE>
Finger Lakes Financial Corp., MHC and Savings Bank of the Finger Lakes. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from the deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in Finger Lakes Financial
Corp., MHC without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of Finger Lakes Financial Corp., MHC, which is lost to the extent that the
balance in the account is reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding company
normally have no way of realizing the value of their ownership interest, which
has realizable value only in the unlikely event that Finger Lakes Financial
Corp., MHC and Savings Bank of the Finger Lakes are liquidated. If this occurs,
the depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of Finger Lakes Financial Corp., MHC after other
claims, including claims of depositors to the amounts of their deposits, are
paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. The common
stock is separate and apart from deposit accounts and cannot be and is not
insured by the Federal Deposit Insurance Corporation or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable, and therefore the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in Savings Bank of the Finger Lakes.
Continuity. While the conversion is being accomplished, the normal business
of Savings Bank of the Finger Lakes of accepting deposits and making loans will
continue without interruption. Savings Bank of the Finger Lakes will continue to
be regulated by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. After the conversion, Savings Bank of the Finger Lakes
will continue to provide services for depositors and borrowers under current
policies by its present management and staff. The Directors serving Finger Lakes
Financial at the time of the conversion will serve as Directors of Finger Lakes
Bancorp after the conversion. The Directors of Finger Lakes Bancorp will consist
of individuals currently serving on the Board of Directors of Finger Lakes
Financial.
Effect on Deposit Accounts. Under the plan of conversion, each depositor in
Savings Bank of the Finger Lakes at the time of the conversion will
automatically continue as a depositor after the conversion, and each of the
deposit accounts will remain the same with respect to deposit balance, interest
rate and other terms. Each such account will be insured by the Federal Deposit
Insurance Corporation to the same extent as before the conversion. Depositors
will continue to hold their existing certificates, passbooks and other evidences
of their accounts.
Effect on Loans. No loan outstanding from Savings Bank of the Finger Lakes
will be affected by the conversion, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
conversion.
Effect on Voting Rights of Members. At present, all depositors of Savings
Bank of the Finger Lakes are members of, and have voting rights in, Finger Lakes
Financial Corp., MHC as to all matters requiring membership action. Upon
completion of the conversion, depositors and borrowers will cease to be members
of Finger Lakes Financial Corp., MHC and will no longer be entitled to vote at
meetings of Finger Lakes Financial Corp., MHC. Upon completion of the
conversion, all voting rights in Savings Bank of the Finger Lakes will be vested
in Finger Lakes Bancorp as the sole shareholder of Savings Bank of the Finger
Lakes. Exclusive voting rights with respect to Finger Lakes Bancorp will be
vested in the holders of common stock. Depositors of Savings Bank of the Finger
Lakes will not have voting rights after the conversion except to the extent that
they become stockholders of Finger Lakes Bancorp through the purchase of common
stock.
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Tax Effects. Finger Lakes Financial will receive an opinion of counsel or
tax advisor with regard to federal and state income taxation to the effect that
the adoption and implementation of the plan of conversion will not be taxable
for federal or state income tax purposes to Finger Lakes Financial, Finger Lakes
Financial Corp., MHC, the minority stockholders, the Interim Savings Bank,
members of Finger Lakes Financial Corp., MHC, eligible account holders or
Savings Bank of the Finger Lakes. See "--Tax Aspects."
Effect on Liquidation Rights. If Savings Bank of the Finger Lakes were to
liquidate prior to the conversion, all claims of creditors of Savings Bank of
the Finger Lakes, including those of depositors to the extent of their deposit
balances, would be paid first. Thereafter, if there were any assets of Savings
Bank of the Finger Lakes remaining, these assets would be distributed to Finger
Lakes Financial Corp., MHC, to the extent of its stock ownership interest in
Finger Lakes Financial. Were Finger Lakes Financial Corp., MHC to liquidate, all
claims of creditors would be paid first. Thereafter, if there were any assets of
Finger Lakes Financial Corp., MHC remaining, members of Finger Lakes Financial,
Corp., MHC would receive the remaining assets, pro rata, based upon the deposit
balances in their deposit account in Savings Bank of the Finger Lakes
immediately prior to liquidation. In the unlikely event that Savings Bank of the
Finger Lakes were to liquidate after the conversion, all claims of creditors,
including those of depositors, would also be paid first, followed by
distribution of the "liquidation account" to depositors as of December 31, 1998,
and June 30, 2000, with any assets remaining thereafter distributed to Finger
Lakes Bancorp as the holder of Savings Bank of the Finger Lakes' capital stock.
Pursuant to the rules and regulations of the Office of Thrift Supervision, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
Stock Pricing and Number of Shares to be Issued
The plan of conversion and federal regulations require that the aggregate
purchase price of the common stock in the offering must be based on the
appraised pro forma market value of the common stock, as determined by the
independent valuation. Savings Bank of the Finger Lakes and Finger Lakes Bancorp
have retained FinPro to make the valuation. For its services in making the
valuation, FinPro will receive a fee of $30,000. This amount does not include a
fee of $14,000 to be paid to FinPro for assistance in preparation of a business
plan. Savings Bank of the Finger Lakes and Finger Lakes Bancorp have agreed to
indemnify FinPro and its employees and affiliates against specified losses,
including any losses in connection with claims under the federal securities laws
arising out of its services as appraiser, except where FinPro's liability
results from its negligence or bad faith.
The independent valuation was prepared by FinPro in reliance upon the
information contained in this prospectus, including the consolidated financial
statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of Finger Lakes
Bancorp and Savings Bank of the Finger Lakes; the economic and demographic
conditions in Savings Bank of the Finger Lakes' existing marketing area; certain
historical, financial and other information relating to Savings Bank of the
Finger Lakes; a comparative evaluation of the operating and financial statistics
of Savings Bank of the Finger Lakes with those of other publicly traded savings
institutions located in Savings Bank of the Finger Lakes' region and on a
national basis; the aggregate size of the offering of the common stock; the
impact of the conversion on Savings Bank of the Finger Lakes' stockholders'
equity and earnings potential; the proposed dividend policy of Finger Lakes
Bancorp and Savings Bank of the Finger Lakes; and the trading market for
securities of comparable institutions and general conditions in the market for
the securities.
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The following table presents a summary of selected pricing ratios for
comparable public thrift institutions used by FinPro to help establish the
market value of Finger Lakes Bancorp and the resulting pricing ratios for Finger
Lakes Bancorp.
<TABLE>
<CAPTION>
Pro Forma Pro forma Pro forma Pro forma
price to core earnings price to book price to tangible price to assets
multiple value ratio book value ratio
---------------- ----------------- ------------------ ----------------
Finger Lakes Bancorp:
<S> <C> <C> <C> <C>
15% above maximum 14.89x 75.51% 75.51% 8.06%
Maximum 13.21x 69.72% 69.72% 7.05%
Mid-point 11.86x 64.04% 64.04% 6.17%
Minimum 10.29x 57.71% 57.71% 5.27%
All fully converted thrifts publicly traded on the NYSE, NASDAQ & AMEX Exchanges
as of 08/15/00:
Averages 12.39x 100.46% 106.86% 9.95%
Medians 10.51x 87.72% 90.95% 8.95%
Valuation peer group institutions as of
08/15/00
Averages 9.06x 96.29% 103.77% 6.90%
Medians 8.39x 91.83% 106.17% 6.06%
</TABLE>
The independent valuation was prepared based on the assumption that the
aggregate amount of common stock sold in the offering would be equal to the
estimated pro forma market value of Finger Lakes Bancorp multiplied by the
percentage of Finger Lakes Financial common stock owned by Finger Lakes
Financial Corp., MHC as adjusted to reflect certain waived dividends and assets
held by Finger Lakes Financial Corp., MHC. The independent valuation states that
as of August 25, 2000, the estimated pro forma market value, or valuation range,
of Finger Lakes Bancorp ranged from a minimum of $16.7 million to a maximum of
$22.5 million, with a mid- point of $19.6 million. The Board of Directors
determined to offer the subscription shares for a $7.00 per share subscription
price. The aggregate offering price of the subscription shares offered in the
offering will be equal to the valuation range multiplied by the percentage of
Finger Lakes Financial common stock owned by Finger Lakes Financial Corp., MHC,
as adjusted. The number of subscription shares offered in the offering will be
equal to the aggregate offering price of the subscription shares divided by the
subscription price. Based on the valuation range, the percentage of Finger Lakes
Financial common stock owned by Finger Lakes Financial Corp., MHC, as adjusted,
and the subscription price, the minimum of the offering range will be 1,594,085
subscription shares, the mid-point of the offering range will be 1,875,311
subscription shares, and the maximum of the offering range will be 2,156,655
subscription shares.
The Board of Directors reviewed the independent valuation and, in
particular, considered the following:
(1) Savings Bank of the Finger Lakes' financial condition and results of
operations;
(2) financial comparisons of Savings Bank of the Finger Lakes in relation
to financial institutions of similar size and asset quality;
(3) stock market conditions generally and in particular for financial
institutions; and
(4) the historical trading price of the publicly held shares of Finger
Lakes Financial common stock.
All of these factors are set forth in the independent valuation. The Board
also reviewed the methodology and the assumptions used by FinPro in preparing
the independent valuation. The offering range may be amended
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with the approval of the Office of Thrift Supervision, if required, if
necessitated by subsequent developments in the financial condition of Finger
Lakes Bancorp or Savings Bank of the Finger Lakes or market conditions
generally. In the event the independent valuation is updated to amend the pro
forma market value of Finger Lakes Bancorp to less than $16,660,000 or more than
$25,921,000, the appraisal will be filed with the Securities and Exchange
Commission by post-effective amendment.
The independent valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
shares. FinPro did not independently verify the Consolidated Financial
Statements and other information provided by Finger Lakes Financial, nor did
FinPro value independently the assets or liabilities of Savings Bank of the
Finger Lakes. The independent valuation considers Savings Bank of the Finger
Lakes as a going concern and should not be considered as an indication of the
liquidation value of Savings Bank of the Finger Lakes. Moreover, because the
valuation is necessarily based upon estimates and projections of a number of
matters, all of which may change from time to time, no assurance can be given
that persons purchasing shares in the offering will thereafter be able to sell
their shares at prices at or above the subscription price.
Following commencement of the subscription offering, the maximum of the
valuation range may be increased by up to 15% to up to $25,921,000, which will
result in a corresponding increase of up to 15% in the maximum of the offering
range to up to 2,480,112 shares, to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
valuation range and of the offering range may not be decreased without a
resolicitation of subscribers. The subscription price of $7.00 per share will
remain fixed. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the offering range to fill unfilled orders in the subscription
and community offerings.
If the update to the independent valuation at the conclusion of the
offering results in an increase in the maximum of the valuation range to more
than $25,921,000 and a corresponding increase in the offering range to more than
2,480,112 shares, or a decrease in the minimum of the valuation range to less
than $16,660,000 and a corresponding decrease in the offering range to fewer
than 1,594,085 shares, then Finger Lakes Bancorp, after consulting with the
Office of Thrift Supervision, may terminate the plan of conversion and return by
check all funds promptly with interest at Savings Bank of the Finger Lakes'
passbook rate of interest on payments made by check, certified or teller's
check, bank draft or money order. Alternatively, Finger Lakes Bancorp may extend
or hold a new subscription offering, community offering, or both, establish a
new offering range, commence a resolicitation of subscribers or take other
actions as permitted by the Office of Thrift Supervision in order to complete
the conversion. In the event that a resolicitation is commenced, unless an
affirmative response is received within a reasonable period of time, all funds
will be promptly returned to investors as described above. A resolicitation, if
any, following the conclusion of the subscription and community offerings would
not exceed 45 days unless further extended by the Office of Thrift Supervision
for periods of up to 90 days, not to extend beyond November 8, 2002, which is
two years after the special meeting of members of Finger Lakes Financial Corp.,
MHC to approve the conversion.
An increase in the number of shares to be issued in the offering would
decrease both a subscriber's ownership interest and Finger Lakes Bancorp's pro
forma earnings and stockholders' equity on a per share basis while increasing
pro forma earnings and stockholders' equity on an aggregate basis. A decrease in
the number of shares to be issued in the offering would increase both a
subscriber's ownership interest and Finger Lakes Bancorp's pro forma earnings
and stockholders' equity on a per share basis while decreasing pro forma
earnings and stockholders' equity on an aggregate basis. For a presentation of
the effects of these changes, see "Pro Forma Data."
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Copies of the appraisal report of FinPro, Inc. and the detailed memorandum
of the appraiser setting forth the method and assumptions for the appraisal are
available for inspection at the main office of Savings Bank of the Finger Lakes
and the other locations specified under "Additional Information."
Exchange of Stock Certificates
Until the effective date of the conversion, publicly held shares of Finger
Lakes Financial common stock will continue to be available for trading on the
Nasdaq SmallCap Market. The conversion of Finger Lakes Financial common stock
into Finger Lakes Bancorp common stock will occur automatically on the effective
date of the conversion. After the effective date of the conversion, former
holders of Finger Lakes Financial common stock will have no further equity
interest in Finger Lakes Financial, other than as stockholders of Finger Lakes
Bancorp, and there will be no further transfers of Finger Lakes Financial common
stock on the stock transfer records of Finger Lakes Financial.
As soon as practicable after the effective date of the conversion, Finger
Lakes Bancorp, or a bank or trust company designated by Finger Lakes Bancorp, in
the capacity of exchange agent, will send a transmittal form to each public
shareholder of Finger Lakes Financial. The transmittal forms are expected to be
mailed within five business days after the effective date of the conversion and
will contain instructions with respect to the surrender of certificates
representing Finger Lakes Financial common stock to be exchanged into Finger
Lakes Bancorp common stock. It is expected that certificates for shares of
Finger Lakes Bancorp common stock will be distributed within five business days
after the receipt of properly executed transmittal forms and other required
documents.
Finger Lakes Financial stockholders should not forward Finger Lakes
Financial Corp. stock certificates to Finger Lakes Financial, the stock center,
or the exchange agent until they have received transmittal forms.
Until the certificates representing Finger Lakes Financial common stock are
surrendered for exchange after consummation of the conversion, upon compliance
with the terms of the transmittal form, holders of such certificates will not
receive the shares of Finger Lakes Bancorp common stock and will not be paid
dividends on Finger Lakes Bancorp common stock into which these shares have been
converted. When certificates are surrendered, any unpaid dividends will be paid
without interest. For all other purposes, however, each certificate which
represents shares of Finger Lakes Financial common stock outstanding at the
effective date of the conversion will be deemed to evidence ownership of the
shares of Finger Lakes Bancorp common stock into which those shares have been
converted by virtue of the conversion.
All shares of Finger Lakes Bancorp common stock issued upon exchange of
shares of Finger Lakes Financial common stock shall be deemed to have been
issued in full satisfaction of all rights pertaining to these shares of Finger
Lakes Financial common stock, subject, however, to Finger Lakes Bancorp's
obligation to pay any dividends or make any other distributions with a record
date prior to the effective date which may have been declared or made by Finger
Lakes Financial on shares of Finger Lakes Financial common stock on or prior to
the effective date and which remain unpaid at the effective date. Finger Lakes
Financial intends to continue to pay a quarterly cash dividend of $0.06 per
share through the fiscal quarter ending September 2000. Subject to the receipt
of any required regulatory approval, the Mutual Holding Company may decide to
waive the receipt of any dividend.
No fractional shares of Finger Lakes Bancorp common stock will be issued to
any public shareholder of Finger Lakes Financial upon consummation of the
conversion. For each fractional share that would otherwise be issued, Finger
Lakes Bancorp will pay by check an amount equal to the product obtained by
multiplying the fractional share interest to which the holder would otherwise be
entitled by the subscription price. Payment for
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fractional shares will be made as soon as practicable after the receipt by the
exchange agent of surrendered Finger Lakes Financial stock certificates.
If a certificate for Finger Lakes Financial common stock has been lost,
stolen or destroyed, the exchange agent will issue the consideration properly
payable upon receipt of appropriate evidence as to the loss, theft or
destruction, appropriate evidence as to the ownership of the certificate by the
claimant, and appropriate and customary indemnification.
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, rights to subscribe for the
purchase of common stock in the subscription offering have been granted under
the plan of conversion in the following order of descending priority. All
subscriptions received will depend on the availability of common stock after
satisfaction of all subscriptions of all persons having prior rights in the
subscription offering and to the maximum, minimum, and overall purchase
limitations set forth in the plan of conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate deposit
account balances, including demand deposit accounts, of $50 or more (a
"Qualifying Deposit") at December 31, 1998, ("Eligible Account Holders") will
receive, without payment therefor, nontransferable subscription rights to
subscribe in the subscription offering for 5% of the shares issued in the
offering, subject to the overall purchase limitations and exclusive of shares
purchased by the employee stock ownership plan from any increase in the shares
offered pursuant to an increase in the maximum of the offering range. At the
mid-point of the offering range, 5% of the shares issued in the offering is
equal to approximately 107,832 shares. See "--Limitations on Common Stock
Purchases." If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares for
which he subscribed. Thereafter, unallocated shares, except for additional
shares issued to the Employee Stock Ownership Plan upon an increase in the
maximum of the offering range, will be allocated to each subscribing Eligible
Account Holder whose subscription remains unfilled in the proportion that the
amount of his aggregate Qualifying Deposit bears to the total amount of
Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. If an amount so allocated exceeds the amount
subscribed for by any one or more Eligible Account Holders, the excess shall be
reallocated among those Eligible Account Holders whose subscriptions are not
fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form and certification form all deposit accounts
in which he has an ownership interest on December 31, 1998. Failure to list an
account could result in fewer shares being allocated than if all accounts had
been disclosed. The subscription rights of Eligible Account Holders who are also
directors or officers of Finger Lakes Financial or their associates will be
subordinated to the subscription rights of other Eligible Account Holders to the
extent attributable to increased deposits in the twelve months preceding
December 31, 1998.
Priority 2: Tax-qualified Plans. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the tax-qualified employee stock benefit plans of Finger Lakes Bancorp
and Savings Bank of the Finger Lakes, including the employee stock ownership
plan, will receive, without payment therefor, nontransferable subscription
rights to purchase in the aggregate up to 8% of the common stock offered in the
subscription offering, including any shares to be issued in the subscription
offering as a result of an increase in the valuation range after commencement of
the subscription offering and prior to completion of the conversion.
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Priority 3: Supplemental Eligible Account Holders. To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the tax-qualified employee stock benefit plans, each
depositor with a Qualifying Deposit at June 30, 2000, who is not an Eligible
Account Holder ("Supplemental Eligible Account Holder") will receive, without
payment therefor, nontransferable subscription rights to subscribe in the
subscription offering for 5% of the shares offered in the offering, subject to
the overall purchase limitations. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares will be allocated so as to permit each subscribing Supplemental Eligible
Account Holder to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares for which
he subscribed. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the proportion that the amount of his Qualifying Deposit bears to
the total amount of Qualifying Deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form and certification form all
deposit accounts in which he has an ownership interest at June 30, 2000. Failure
to list an account could result in less shares being allocated than if all
accounts had been disclosed.
Priority 4: Other Members. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each member of Finger Lakes Financial Corp., MHC on the voting record
date who is not an Eligible Account Holder or Supplemental Eligible Account
Holder ("Other Members") will receive, without payment therefor, nontransferable
subscription rights to subscribe in the Subscription Offering for 5% of the
shares offered in the offering, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, available shares will be allocated on a
pro rata basis based on the size of the order of each Other Member.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on November 2, 2000 unless extended for up to 45 days or such
additional periods by Savings Bank of the Finger Lakes with the approval of the
Office of Thrift Supervision, if necessary. Savings Bank of the Finger Lakes and
Finger Lakes Bancorp may determine to extend the subscription offering and/or
the community offering for any reason, whether or not subscriptions have been
received for shares at the minimum, mid-point, or maximum of the offering range,
and are not required to give subscribers notice of any such extension.
Subscription rights which have not been exercised prior to the expiration date
will become void.
Finger Lakes Bancorp will not execute orders until all shares of common
stock have been subscribed for or otherwise sold. If 1,594,085 shares have not
been subscribed for or sold within 45 days after the expiration date, unless the
period is extended with the consent of the Office of Thrift Supervision, all
funds delivered to Savings Bank of the Finger Lakes pursuant to the subscription
offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45 day
period following the expiration date granted, Finger Lakes Bancorp will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions. Extensions may not go beyond November 8, 2002,
which is two years after the special meeting of members of the Finger Lakes
Financial Corp., MHC to approve the conversion.
Persons in Nonqualified States or Foreign Countries. Finger Lakes Bancorp
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the plan of conversion reside. However, Finger Lakes Bancorp is not required to
offer stock in the offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which:
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(1) a small number of persons otherwise eligible to subscribe for shares of
common stock reside; or
(2) Finger Lakes Bancorp determines that compliance with the securities
laws of a state would be impracticable for reasons of cost or otherwise,
including but not limited to a request that Finger Lakes Bancorp or its officers
or directors, under the securities laws of a state, register as a broker,
dealer, salesman or selling agent or register or otherwise qualify the
subscription rights or common stock for sale in a state. Where the number of
persons eligible to subscribe for shares in one state is small, Finger Lakes
Bancorp will base its decision as to whether or not to offer the common stock in
a state on a number of factors, including the size of accounts being held by
account holders in the state, the cost of registering or qualifying the shares
or the need to register Finger Lakes Bancorp, its officers, directors or
employees as brokers, dealers or salesmen.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the tax-qualified employee
stock benefit plans, Supplemental Eligible Account Holders, and Other Members,
Finger Lakes Bancorp has determined to offer shares pursuant to the plan of
conversion to certain members of the general public in a direct community
offering, with preference given first to the public shareholders of Finger Lakes
Financial common stock and then to natural persons residing in Savings Bank of
the Finger Lakes' community. Savings Bank of the Finger Lakes' community means
the New York counties of Ontario, Seneca, Tompkins and Cayuga. These persons,
together with associates of and persons acting in concert with such persons, may
subscribe for up to 5% of the shares issued in the offering, subject to the
overall purchase limitations. See "--Limitations on Common Stock Purchases." The
minimum purchase is 25 shares. The opportunity to subscribe for shares of common
stock in the community offering category is subject to the right of Finger Lakes
Bancorp, in its sole discretion, to accept or reject any such orders in whole or
in part either at the time of receipt of an order or as soon as practicable
following the expiration date. If Finger Lakes Bancorp, with the approval of the
Office of Thrift Supervision, increases the maximum purchase limitation, Finger
Lakes Bancorp is only required to resolicit persons who subscribed for the
maximum purchase amount and may, in the sole discretion of Finger Lakes Bancorp,
resolicit certain other large subscribers. The limitation may be increased to
9.99%, provided that orders for common stock exceeding 5% of the subscription
shares issued in the offering shall not exceed in the aggregate 10% of the total
subscription shares issued in the offering. Requests to purchase additional
shares of the common stock in the event that the purchase limitation is so
increased will be determined by the Board of Directors of Finger Lakes Bancorp
in its sole discretion.
If the amount of stock remaining is insufficient to fill the orders of
natural persons residing in Savings Bank of the Finger Lakes' community, the
remaining stock will be allocated among those persons in the manner that permits
each of these persons, to the extent possible, to purchase the number of shares
necessary to make his total allocation of common stock equal to the lesser of
100 shares or the number of shares subscribed for by each such person. However,
if there are insufficient shares available for this allocation, then shares will
be allocated among natural persons residing in the community whose orders remain
unsatisfied in the proportion that the unfilled subscription of each bears to
the total unfilled subscriptions of all those persons whose subscriptions remain
unsatisfied. Similar allocation procedures will be used for orders of the public
shareholders of Finger Lakes Financial common stock. If all orders of natural
persons residing in Savings Bank of the Finger Lakes' community are filled, any
shares remaining will be allocated to other persons who purchase in the
community offering applying the same allocation described above for natural
persons residing in the community.
The term "resided" or "residing" as used herein shall mean any person who
occupies a dwelling within Savings Bank of the Finger Lakes' community, has a
present intent to remain within the community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the community together with an indication that this presence
within Savings Bank of the Finger Lakes' community is something other than
merely transitory in nature. To the extent the person is a corporation or other
business entity, the principal place of business or headquarters shall be in
Savings Bank of the Finger Lakes' community.
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To the extent a person is a personal benefit plan, the circumstances of the
beneficiary shall apply with respect to this definition. In the case of all
other benefit plans, circumstances of the trustee shall be examined for purposes
of this definition. Savings Bank of the Finger Lakes may utilize deposit or loan
records or other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, the determination shall be in the
sole discretion of Savings Bank of the Finger Lakes.
The community offering will terminate no more than 45 days following the
expiration date, unless extended by Savings Bank of the Finger Lakes and Finger
Lakes Bancorp with the approval of the Office of Thrift Supervision, if
necessary. Savings Bank of the Finger Lakes and Finger Lakes Bancorp may
determine to extend the subscription offering and/or the community offering for
any reason, whether or not subscriptions have been received for shares at the
minimum, mid-point, or maximum of the offering range, and are not required to
give subscribers notice of any such extension. Finger Lakes Bancorp will not
execute orders until all shares of common stock have been subscribed for or
otherwise sold. If 1,594,085 shares have not been subscribed for or sold within
45 days after the expiration date, unless this period is extended with the
consent of the Office of Thrift Supervision, all funds delivered to Savings Bank
of the Finger Lakes pursuant to the subscription offering will be returned
promptly to the subscribers with interest and all withdrawal authorizations will
be cancelled. If an extension beyond the 45 day period following the expiration
date is granted, Savings Bank of the Finger Lakes will notify subscribers of the
extension of time and of any rights of subscribers to modify or rescind their
subscriptions. These extensions may not go beyond November 8, 2002, which is two
years after the special meeting of members of Finger Lakes Financial Corp., MHC
to approve the conversion.
The Board of Directors has the right to reject any order submitted in the
offering by a person whose representations the Board of Directors believes to be
false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the plan of conversion.
Syndicated Community Offering
If feasible, the Board of Directors may determine to offer all subscription
shares not subscribed for in the subscription and community offerings in a
syndicated community offering, subject to such terms, conditions and procedures
as may be determined by Finger Lakes Bancorp, in a manner that will achieve the
widest distribution of the common stock. However, Finger Lakes Bancorp retains
the right to accept or reject in whole or in part any subscriptions in the
syndicated community offering. In the syndicated community offering, any person
together with any associate or group of persons acting in concert may purchase a
number of subscription shares that when combined with exchange shares received
by the person, together with any associate or group of persons acting in concert
is equal to 161,000 shares at the maximum, subject to the overall maximum
purchase limitations. The shares purchased by any person together with an
associate or group of persons acting in concert in the community offering shall
be counted toward meeting the overall purchase limitations. Provided that the
subscription offering has commenced, Finger Lakes Bancorp may commence the
syndicated community offering at any time after the mailing to the members of
the proxy statement to be used in connection with the special meeting of members
of Finger Lakes Financial Corp., MHC. The completion of the offer and sale of
the subscription shares shall be conditioned upon the approval of the plan of
conversion by the members. If the syndicated community offering is not sooner
commenced pursuant to the provisions of the preceding sentence, the syndicated
community offering will be commenced as soon as practicable following the date
upon which the subscription and community offerings terminate.
The overall purchase limitations shall not be applicable to sales to
underwriters for purposes of such an offering but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the subscription price less
an underwriting discount to be negotiated among the underwriters and Finger
Lakes Bancorp, which will in no event exceed an amount deemed to be acceptable
by the Office of Thrift Supervision.
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If for any reason a syndicated community offering of shares of subscription
shares not sold in the subscription and community offerings cannot be effected,
or in the event that any insignificant residue of shares of subscription shares
is not sold in the subscription and community offerings or in the syndicated
community or underwritten firm commitment public offering, other arrangements
will be made for the disposition of unsubscribed shares by Finger Lakes Bancorp,
if possible. The Office of Thrift Supervision must approve these other purchase
arrangements.
Plan of Distribution; Selling Agent Compensation
Offering materials for the offering initially have been distributed by
mail, with additional copies made available at Savings Bank of the Finger Lakes'
office and by Friedman, Billings, Ramsey & Co., Inc. All prospective purchasers
are to send payment along with a completed order form and certification form
directly to Savings Bank of the Finger Lakes, where funds will be held in a
segregated special escrow account and not released until the offering is
completed or terminated.
To assist in the marketing of the common stock, Savings Bank of the Finger
Lakes has retained Friedman, Billings, Ramsey & Co., Inc., which is a
broker/dealer registered with the National Association of Securities Dealers,
Inc. Friedman, Billings, Ramsey & Co., Inc. will assist Savings Bank of the
Finger Lakes in the offering as follows:
(1) act as the financial advisor to Savings Bank of the Finger Lakes;
(2) create marketing materials and formulate a marketing plan;
(3) conduct training for all directors and employees concerning the
reorganization and stock offerings; and
(4) manage the stock center and staff it with Friedman, Billings, Ramsey &
Co., Inc. personnel.
For these services, Friedman, Billings, Ramsey & Co., Inc., will receive a
marketing fee of $215,000. Friedman, Billings, Ramsey & Co., Inc. will also be
reimbursed for allocable expenses, including their attorney's fees of $35,000.
Savings Bank of the Finger Lakes has made an advance payment to Friedman,
Billings, Ramsey & Co., Inc. in the amount of $25,000. Savings Bank of the
Finger Lakes will indemnify Friedman, Billings, Ramsey & Co., Inc. against
liabilities and expenses, including legal fees, incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
Some directors and executive officers of Finger Lakes Bancorp and Savings
Bank of the Finger Lakes may participate in the solicitation of offers to
purchase common stock. These persons will be reimbursed for their reasonable
out-of-pocket expenses, including, but not limited to, de minimis telephone and
postage expenses, incurred in connection with the solicitation. Other regular,
full-time employees of Savings Bank of the Finger Lakes may participate in the
offering but only in ministerial capacities, providing clerical work in
effecting a sales transaction or answering questions of a potential purchaser,
provided that the content of the employee's responses is limited to information
contained in the prospectus or other offering documents, and no offers or sales
may be made by tellers or at the teller counter. All sales activity will be
conducted in a segregated or separately identifiable area of Savings Bank of the
Finger Lakes's offices apart from the area accessible to the general public for
the purpose of making deposits or withdrawals. Other questions of prospective
purchasers will be directed to executive officers or registered representatives.
These other employees have been instructed not to solicit offers to purchase
common stock or provide advice regarding the purchase of common stock. Finger
Lakes Bancorp will
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rely on Rule 3a4-1 under the Securities Exchange Act of 1934, and sales of
common stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of common
stock. No officer, director or employee of Finger Lakes Bancorp or Savings Bank
of the Finger Lakes will be compensated in connection with his participation by
the payment of commissions or other remuneration based either directly or
indirectly on the transactions in the common stock.
Procedure for Purchasing Shares
Expiration Date. The offering will terminate at 12 noon, eastern time, on
November 2, 2000, unless extended by Savings Bank of the Finger Lakes and Finger
Lakes Bancorp, with the approval of the Office of Thrift Supervision, if
required. This extension may be approved by Savings Bank of the Finger Lakes and
Finger Lakes Bancorp, in their sole discretion, without further approval or
additional notice to purchasers in the offering. Any extension of the offering
beyond 45 days after the expiration date of the offering would require the
Office of Thrift Supervision's approval and potential purchasers would be given
the right to increase, decrease, or rescind their orders for common stock. If
the minimum number of shares offered in the offering is not sold by the
expiration date, Finger Lakes Bancorp may terminate the offering and promptly
refund all orders for common stock. A reduction in the number of shares below
the minimum of the offering range will not require the approval of Finger Lakes
Financial Corp., MHC's members or Finger Lakes Financial's stockholders, or an
amendment to the independent valuation. If the number of shares is reduced below
the minimum of the offering range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this date. Execution of an order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. Subscription funds will be maintained in a special escrow account at
Savings Bank of the Finger Lakes.
Finger Lakes Bancorp reserves the right in its sole discretion to terminate
the offering at any time and for any reason, in which case Finger Lakes Bancorp
will cancel any withdrawal orders, and return all purchase orders, plus interest
at 2.20%, which is Savings Bank of the Finger Lakes' current passbook rate from
the date of receipt.
Use of Order and Certification Forms. In order to purchase shares of the
common stock, each purchaser must complete an order form and a certification
form. Incomplete order forms, or order forms that are not accompanied by a
signed certification form, will not be accepted. Finger Lakes Bancorp will not
be required to accept orders submitted on photocopied or facsimilied stock order
forms. Any person receiving an order form who desires to purchase shares of
common stock must do so by delivering, by mail or in person, to Finger Lakes
Bancorp a properly executed and completed order form and a certification form,
together with full payment for the shares purchased. All order forms with
properly executed certification forms must be received at the stock center or a
branch of Savings Bank of the Finger Lakes prior to 12 noon, eastern time on
November 2, 2000. Once tendered, an order form cannot be modified or revoked
without the consent of Finger Lakes Bancorp. Finger Lakes Bancorp reserves the
absolute right, in its sole discretion, to reject orders received in the
community offering, in whole or in part, at the time of receipt or at any time
prior to completion of the offering. Each person ordering shares is required to
represent that he is purchasing shares for his own account and that he has no
agreement or understanding with any person for the sale or transfer of the
shares. The interpretation by Finger Lakes Bancorp of the terms and conditions
of the plan of conversion and of the acceptability of the order forms and
certification forms will be final.
The order form includes a certification in which subscribers acknowledge
that the common stock is not a deposit or savings account that is federally
insured or otherwise guaranteed by Savings Bank of the Finger Lakes
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or the Federal Government and that the subscribers received a copy of this
prospectus describing the nature of the common stock and the risks involved in
an investment in the common stock, including the "Risk Factors" described in
this prospectus. The certification is required by federal regulation and is
intended to ensure that subscribers are aware of the Risk Factors before making
an investment decision. However, signing the order form and certification will
not result in investors waiving their rights under the Securities Act of 1933.
Payment for Shares. Payment for all shares will be required to accompany
all completed order forms for the purchase to be valid. Payment for shares may
be made by:
(1) cash, if delivered in person to a branch of Savings Bank of the Finger
Lakes;
(2) check, money order, certified or teller's check or bank draft made
payable to Savings Bank of the Finger Lakes; or
(3) authorization of withdrawal from savings accounts, including
certificates of deposit, maintained with Savings Bank of the Finger Lakes.
Appropriate means by which withdrawals may be authorized are provided in
the order forms. Once a withdrawal amount has been authorized, a hold will be
placed on these funds, making them unavailable to the depositor until the
offering has been completed or terminated. In the case of payments authorized to
be made through withdrawal from deposit accounts, all funds authorized for
withdrawal will continue to earn interest at the contract rate until the
offering is completed or terminated. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized for
the purchase of shares of common stock; however, if a withdrawal results in a
certificate account with a balance less than the applicable minimum balance
requirement, the certificate shall be cancelled at the time of withdrawal
without penalty, and the remaining balance will earn interest at the passbook
rate subsequent to the withdrawal. In the case of payments made by cash, check
or money order, these funds will be placed in a segregated savings account and
interest will be paid by Savings Bank of the Finger Lakes at the current
passbook rate per annum from the date payment is received until the offering is
completed or terminated. An executed order form, once received by Savings Bank
of the Finger Lakes, may not be modified, amended or rescinded without the
consent of Savings Bank of the Finger Lakes, unless the offering is not
completed by the expiration date, in which event purchasers may be given the
opportunity to increase, decrease, or rescind their orders for a specified
period of time.
A depositor interested in using his or her individual retirement account
funds to purchase common stock must do so through a self-directed individual
retirement account. There will be no early withdrawal or Internal Revenue
Service interest penalties for these transfers. Depositors interested in using
funds in a Savings Bank of the Finger Lakes individual retirement account to
purchase common stock should contact the stock center at Savings Bank of the
Finger Lakes as soon as possible but no later than one week prior to the
subscription deadline so that the necessary forms may be forwarded for execution
and returned prior to the expiration date.
The employee stock ownership plan will not be required to pay for shares
purchased until consummation of the offering, provided that there is in force
from the time the order is received a loan commitment from an unrelated
financial institution or Finger Lakes Bancorp to lend to the employee stock
ownership plan the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering and Savings Bank of the Finger Lakes checks representing
interest paid on subscriptions made by cash, check, or money order will be
mailed by Savings Bank of the Finger Lakes to the persons entitled thereto at
the address noted on the order form, as soon as practicable following
consummation of the offering and receipt of all necessary regulatory approvals.
Any certificates returned as undeliverable will be held by Savings Bank of the
Finger Lakes until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until
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certificates for the common stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.
Regulations prohibit Savings Bank of the Finger Lakes from lending funds or
extending credit to any persons to purchase common stock in the offering.
Other Restrictions. Notwithstanding any other provision of the plan of
conversion, no person is entitled to purchase any common stock to the extent the
purchase would be illegal under any federal or state law or regulation,
including state "blue sky" registrations, or would violate regulations or
policies of the National Association of Securities Dealers, Inc., particularly
those regarding free riding and withholding. Savings Bank of the Finger Lakes
and/or its agents may ask for an acceptable legal opinion from any purchaser as
to the legality of their purchase and may refuse to honor any purchase order if
an opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the conversion, Office of Thrift Supervision
conversion regulations prohibit any person with subscription rights, including
the Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members of Savings Bank of the Finger Lakes, from transferring or entering into
any agreement or understanding to transfer the legal or beneficial ownership of
the subscription rights issued under the plan of conversion or the shares of
common stock to be issued upon their exercise. These rights may be exercised
only by the person to whom they are granted and only for his account. Each
person exercising subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase subscription rights or shares of common
stock prior to the completion of the conversion.
Savings Bank of the Finger Lakes and Finger Lakes Bancorp will pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of subscription rights.
Limitations on Common Stock Purchases
The plan of conversion includes the following limitations on the number of
shares of common stock which may be purchased during the conversion:
(1) No person may purchase less than 25 shares of common stock;
(2) The tax-qualified employee stock benefit plans, including the employee
stock ownership plan, may purchase in the aggregate up to 8% of the subscription
shares issued in the offering, including shares issued in the event of an
increase in the offering range of up to 15%. The employee stock ownership plan
expects to subscribe for 8% of the shares sold, or 127,526 shares at the minimum
of the offering range and 172,532 shares at the maximum of the offering range;
(3) Except for the employee stock ownership plan, as described above, no
other individual or entity and their associates, and groups of persons acting in
concert, may purchase more than 5% of the shares offered in the offering. Finger
Lakes Financial's stockholders will be subject to an additional limitation upon
the number of shares he or she may purchase in the offering. As previously
described, Finger Lakes Financial's stockholders will receive shares of Finger
Lakes Bancorp common stock in exchange for their shares of Finger Lakes
Financial. The number of shares purchased by a Finger Lakes Financial
stockholder in the offering, when combined with the shares that he or she
receives in exchange for Finger Lakes Financial common stock, may not exceed 5%
of the shares outstanding at the completion of the offering. This limitation
also applies to associates and groups of persons acting in concert. In the
community offering, orders must first be filled up to a maximum of two percent
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of the subscription shares and thereafter remaining shares shall be allocated on
an equal number of shares basis until the orders are filled. This limitation
only limits the amount of stock that Finger Lakes Financial's stockholders may
purchase; and
(4) The maximum number of shares of common stock which may be purchased in
all categories of the offering by officers and Directors of Savings Bank of the
Finger Lakes and their associates, in the aggregate, shall not exceed 25% of the
subscription shares offered in the offering.
Depending upon market or financial conditions, the Board of Directors of
Finger Lakes Bancorp, with the approval of the Office of Thrift Supervision and
without further approval of members of Finger Lakes Financial Corp., MHC, may
decrease or further increase the purchase limitations. Savings Bank of the
Finger Lakes may need regulatory approval to increase the purchase limitations.
If this amount is increased, subscribers for the maximum amount will be, and
some other large subscribers who through their subscriptions evidence a desire
to purchase the maximum allowable number of shares, in the sole discretion of
Savings Bank of the Finger Lakes, may be given the opportunity to increase their
subscriptions up to the then applicable limit. The effect of this type of
resolicitation will be an increase in the number of shares owned by subscribers
who choose to increase their subscriptions. In addition, the Boards of Directors
of Finger Lakes Bancorp and Savings Bank of the Finger Lakes may, in their sole
discretion, increase the maximum purchase limitation referred to above up to
9.99%, provided that orders for shares exceeding 5% of the shares being offered
shall not exceed, in the aggregate, 10% of the total offering. Requests to
purchase additional shares under this provision will be determined by the
respective Boards of Directors in their sole discretion.
In the event of an increase in the total number of shares offered in the
offering due to an increase in the offering range of up to 15%, the maximum
number of shares that may be purchased as restricted by the purchase limitations
shall not be increased proportionately, except for the employee stock ownership
plan, and the additional shares sold will be allocated in the following order of
priority in accordance with the plan of conversion:
(1) to fill the employee stock ownership plan's subscription for 8% of the
total number of shares sold;
(2) in the event that there is an oversubscription at the Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member levels, to fill
unfulfilled subscriptions of these subscribers according to their respective
priorities; and
(3) to fill unfulfilled subscriptions in the community offering, with
preference given first to Finger Lakes Financial stockholders and then to
natural persons residing in Savings Bank of the Finger Lakes' community.
The term "associate" of a person is defined to mean:
(1) any corporation or organization, other than Finger Lakes Financial,
Savings Bank of the Finger Lakes, or a majority-owned subsidiary of Savings Bank
of the Finger Lakes, of which the person is an officer, partner or 10%
stockholder;
(2) any trust or other estate in which the person has a substantial
beneficial interest or serves as a director or in a similar fiduciary capacity;
provided, however, this term shall not include any employee stock benefit plan
in which the person has a substantial beneficial interest or serves as director
or in a similar fiduciary capacity; and
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(3) any relative or spouse of the persons, or any relative of the spouse,
who either has the same home as the person or who is a Director or officer of
Finger Lakes Financial, or Savings Bank of the Finger Lakes.
Directors are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of conversion and subsequent to
conversion, see "Certain Restrictions on Purchase or Transfer of Shares after
Conversion" and "Restrictions on Acquisition of Finger Lakes Bancorp."
Liquidation Rights
In the unlikely event of a complete liquidation of Finger Lakes Financial
prior to the conversion, all claims of creditors of Finger Lakes Financial,
including those of depositors to the extent of their deposit balances, would be
paid first. Thereafter, if there were any assets of Finger Lakes Financial
remaining, these assets would be distributed to stockholders, including Finger
Lakes Financial Corp., MHC. Were Finger Lakes Financial Corp., MHC and Finger
Lakes Financial to liquidate prior to the conversion, all claims of creditors
would be paid first. Then, if there were any assets of Finger Lakes Financial
Corp., MHC remaining, members of Finger Lakes Financial Corp., MHC would receive
these remaining assets, pro rata, based upon the deposit balances in their
deposit account in Savings Bank of the Finger Lakes immediately prior to
liquidation. In the unlikely event that Savings Bank of the Finger Lakes were to
liquidate after conversion, all claims of creditors, including those of
depositors, would also be paid first, followed by distribution of the
"liquidation account" to certain depositors, with any assets remaining
thereafter distributed to Finger Lakes Bancorp as the holder of Savings Bank of
the Finger Lakes capital stock. Pursuant to the rules and regulations of the
Office of Thrift Supervision, a postconversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in these types of
transactions, the liquidation account would be assumed by the surviving
institution.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in an amount
equal to the greater of:
(1) the sum of (a) Finger Lakes Financial Corp., MHC's ownership interest
in the surplus and reserves of Finger Lakes Financial as of the date of its
latest balance sheet contained in this prospectus, and (b) the restricted
retained income account that reflects dividends waived by Finger Lakes Financial
Corp., MHC; or
(2) the retained earnings of Savings Bank of the Finger Lakes at the time
that Savings Bank of the Finger Lakes reorganized into Finger Lakes Financial
Corp., MHC in 1994.
The purpose of the liquidation account is to provide Eligible Account
Holders and Supplemental Eligible Account Holders who maintain their deposit
accounts with Savings Bank of the Finger Lakes after the conversion with a
distribution upon complete liquidation of Savings Bank of the Finger Lakes after
the conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at Savings Bank
of the Finger Lakes, would be entitled, on a complete liquidation of Savings
Bank of the Finger Lakes after the conversion, to an interest in the liquidation
account prior to any payment to the stockholders of Finger Lakes Bancorp. Each
Eligible Account Holder and each Supplemental Eligible Account Holder would have
an initial interest in the liquidation account for each deposit account,
including regular accounts, transaction accounts such as negotiable order of
withdrawal accounts, money market deposit accounts, and certificates of deposit,
with a balance of $50 or more held in Savings Bank of the Finger Lakes on
December 31, 1998, or June 30, 2000, respectively. Each Eligible Account Holder
and Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account for each such deposit account based on the
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proportion that the balance of each such deposit account on December 31, 1998,
or June 30, 2000, respectively, bore to the balance of all deposit accounts in
Finger Lakes Financial on such dates.
If, however, on any December 31 annual closing date, commencing after
December 31, 2000, the amount in any such deposit account is less than the
amount in the deposit account on December 31, 1998, or June 30, 2000,
respectively, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced from time
to time by the proportion of any such reduction, and such interest will cease to
exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Payment pursuant to liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders would be separate and
apart from any insured deposit accounts to such depositor. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to Finger Lakes
Bancorp as the sole shareholder of Savings Bank of the Finger Lakes.
Tax Aspects
The conversion will be effected as follows:
(1) Savings Bank of the Finger Lakes will organize Finger Lakes Bancorp as
a first-tier Delaware- chartered corporation;
(2) Finger Lakes Bancorp will charter an interim federal savings bank
("Interim Savings Bank");
(3) Finger Lakes Financial will exchange its charter for a federal interim
savings bank charter and simultaneously merge into Savings Bank of the Finger
Lakes, with Finger Lakes Financial's shareholders (including Finger Lakes
Financial Corp., MHC) constructively receiving shares of Savings Bank of the
Finger Lakes;
(4) Finger Lakes Financial Corp., MHC will exchange its charter for an
interim stock savings bank charter and simultaneously merge into Savings Bank of
the Finger Lakes. Shares of Savings Bank of the Finger Lakes constructively held
by Finger Lakes Financial Corp., MHC will be cancelled and each Eligible Account
Holder and Supplemental Eligible Account Holder will receive an interest in a
liquidation account of Savings Bank of the Finger Lakes in exchange for such
person's interest in Finger Lakes Financial Corp., MHC; and
(5) Interim Savings Bank will merge into Savings Bank of the Finger Lakes,
with Savings Bank of the Finger Lakes stockholders (formerly stockholders of
Finger Lakes Financial) exchanging their common stock for voting common stock of
Finger Lakes Bancorp.
(6) Contemporaneously with the Bank Merger, Finger Lakes Bancorp will sell
the subscription shares in the offering.
Consummation of the conversion is expressly conditioned upon the prior
receipt of an opinion of counsel or tax advisor with respect to federal and
state income taxation that indicates that the conversion will not be a taxable
transaction to Finger Lakes Financial Corp., MHC, Finger Lakes Financial, Finger
Lakes Bancorp, the Interim Savings Bank, Eligible Account Holders, Supplemental
Eligible Account Holders, or members of Finger Lakes Financial Corp., MHC.
Unlike private letter rulings, opinions of counsel or tax advisors are not
binding on the IRS or the New York Division of Treasury, Department of Taxation
and Finance and either agency could disagree with such opinions. In the event of
such disagreement, there can be no assurance that the Company or the Bank would
prevail in a judicial proceeding.
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Finger Lakes Financial Corp., MHC and Finger Lakes Financial have received
an opinion of counsel, Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation, regarding the Federal income tax consequences of the conversion
which includes the following opinions:
1. The conversion of Finger Lakes Financial Corp., MHC to an interim
federal stock savings bank will constitute a mere change in identity, form or
place of organization within the meaning of Section 368(a)(1)(F) of the Code.
2. The conversion of Finger Lakes Financial to a federally chartered
interim stock savings bank will constitute a mere change in identity, form or
place of organization within the meaning of Section 368(a)(1)(F) of the Code.
3. The merger of Finger Lakes Financial with and into Savings Bank of the
Finger Lakes (the "Mid-Tier Merger") qualifies as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of
the Code.)
4. Finger Lakes Financial will not recognize any gain or loss on the
transfer of its assets to Savings Bank of the Finger Lakes in exchange for
shares of common stock in Savings Bank of the Finger Lakes which are
constructively received by minority stockholders and by Finger Lakes Financial
Corp., MHC. (Section 361 of the Code.)
5. No gain or loss will be recognized by Savings Bank of the Finger Lakes
upon the receipt of the assets of Finger Lakes Financial in the Mid-Tier Merger
(Section 1032(a) of the Code).
6. Finger Lakes Financial shareholders will not recognize any gain or loss
upon their constructive or actual exchange of Mid-Tier Holding Company common
stock for common stock in Savings Bank of the Finger Lakes.
7. The merger of Finger Lakes Financial Corp., MHC with and into Savings
Bank of the Finger Lakes (the "MHC Merger") qualifies as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section
368(a)(1)(A) of the Code.)
8. The exchange of the members' equity interests in Finger Lakes Financial
Corp., MHC for interests in a liquidation account established in Savings Bank of
the Finger Lakes in the MHC Merger will satisfy the continuity of interest
requirement of Section 1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul.
69-3, 1969-1 --- C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
9. Finger Lakes Financial Corp., MHC will not recognize any gain or loss on
the transfer of its assets to Savings Bank of the Finger Lakes in exchange for
an interest in a liquidation account established in Savings Bank of the Finger
Lakes for the benefit of Finger Lakes Financial Corp., MHC's members who remain
depositors of Savings Bank of the Finger Lakes. (Section 361 of the Code.)
10. No gain or loss will be recognized by Savings Bank of the Finger Lakes
upon the receipt of the assets of Finger Lakes Financial Corp., MHC in the MHC
Merger in exchange for the transfer to the members of Finger Lakes Financial
Corp., MHC of an interest in the liquidation account in Savings Bank of the
Finger Lakes. (Section 1032(a) of the Code.)
11. Persons who have an interest in Finger Lakes Financial Corp., MHC will
recognize no gain or loss upon the receipt of an interest in the liquidation
account in Savings Bank of the Finger Lakes in exchange for their interests in
Finger Lakes Financial Corp., MHC liquidation account. (Section 354(a) of the
Code).
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12. The merger of Interim Savings Bank into Savings Bank of the Finger
Lakes, with Savings Bank of the Finger Lakes as the surviving entity (the "Bank
Merger"), qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code. For
these purposes, each of Savings Bank of the Finger Lakes, Finger Lakes Bancorp
and Interim are "a party to the reorganization" within the meaning of Section
368(b) of the Code.
13. Finger Lakes Bancorp will not recognize any gain or loss upon its
receipt of Savings Bank of the Finger Lakes common stock in exchange for Interim
Savings Bank common stock. (Section 354(a) of the Code.)
14. Savings Bank of the Finger Lakes shareholders will not recognize any
gain or loss upon their exchange of Savings Bank of the Finger Lakes common
stock solely for shares of Finger Lakes Bancorp common stock. (Section 354(a) of
the Code.)
15. Cash received in the Bank Merger by any shareholder of Savings Bank of
the Finger Lakes in lieu of a fractional share interest of Finger Lakes Bancorp
common stock will be treated as having been received as a distribution in full
payment in exchange for a fractional share interest of Finger Lakes Bancorp
common stock, which such shareholder would otherwise be entitled to receive, and
will qualify as capital gain or loss, assuming common stock of Savings Bank of
the Finger Lakes surrendered in exchange therefor was held as a capital asset by
such stockholder at the Effective Time.
16. Each shareholder's aggregate basis in his or her Finger Lakes Bancorp
common stock received in the exchange will be the same as the aggregate basis of
Savings Bank of the Finger Lakes common stock surrendered in exchange therefor.
(Section 358(a) of the Code.)
17. Each shareholder's holding period in his or her Finger Lakes Bancorp
common stock received in the exchange will include the period during which
Savings Bank of the Finger Lakes common stock surrendered was held, provided
that Savings Bank of the Finger Lakes common stock surrendered is a capital
asset in the hands of the shareholder on the date of the exchange. (Section
1223(1) of the Code.)
18. No gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon distribution to them of subscription
rights to purchase shares of Finger Lakes Bancorp common stock, provided that
the amount to be paid for Finger Lakes Bancorp common stock is equal to the fair
market value of Finger Lakes Bancorp common stock.
19. No gain or loss will be recognized by Finger Lakes Bancorp on the
receipt of money in exchange for Finger Lakes Bancorp common stock sold in the
offering. (Section 1032 of the Code.)
In the view of FinPro, which view is not binding on the Internal Revenue
Service, the subscription rights do not have any value, based on the fact that
these rights are acquired by the recipients without cost, are nontransferable
and of short duration, and afford the recipients the right only to purchase the
common stock at a price equal to its estimated fair market value, which will be
the same price as the Subscription Price for the unsubscribed shares of common
stock. If the subscription rights granted to Eligible Account Holders and
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of these rights could result in taxable gain to those Eligible Account
Holders and Supplemental Eligible Account Holders who exercise the subscription
rights in an amount equal to the value and Finger Lakes Financial could
recognize gain on a distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisors
as to the tax consequences in the event that subscription rights are deemed to
have an ascertainable value.
Unlike private rulings, an opinion of FinPro is not binding on the Internal
Revenue Service and the Internal Revenue Service could disagree with the
conclusions reached therein. Depending on the conclusion or
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conclusions with which the Internal Revenue Service disagrees, the Internal
Revenue Service may take the position that the transaction is taxable to any one
or more of Finger Lakes Financial Corp., MHC and/or the members of Finger Lakes
Financial Corp., MHC, Finger Lakes Financial, the public stockholders of Finger
Lakes Financial, and/or the Eligible Account Holders and Supplemental Eligible
Account Holders who exercise their subscription rights. In the event of a
disagreement, there can be no assurance that the Internal Revenue Service would
not prevail in a judicial or administrative proceeding.
The form of federal tax opinion has been filed with the Securities and
Exchange Commission as an exhibit to Finger Lakes Bancorp's registration
statement. An opinion on the New York state income tax consequences which will
be consistent with the federal tax opinion will be issued prior to the
conversion by KPMG LLP, tax advisors to Finger Lakes Financial Corp., MHC and
Finger Lakes Financial.
Certain Restrictions on Purchase or Transfer of Shares after Conversion
All Subscription Shares purchased in the offering by a Director or an
executive officer of Savings Bank of the Finger Lakes generally may not be sold
for a period of one year following the conversion, except in the event of the
death of the Director or executive officer. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within this time
period of any certificate or record ownership of the shares other than as
provided above is a violation of the restriction. Any shares of common stock
issued at a later date as a stock dividend, stock split, or otherwise, with
respect to the restricted stock will be similarly restricted. The Directors and
executive officers of Savings Bank of the Finger Lakes will also be restricted
by the insider trading rules promulgated pursuant to the Securities Exchange Act
of 1934.
Purchases of outstanding shares of common stock of Finger Lakes Bancorp by
Directors, executive officers, or any person who was an executive officer after
adoption of the plan of conversion, and their associates, during the three-year
period following the conversion may be made only through a broker or dealer
registered with the Securities and Exchange Commission, except with the prior
written approval of the Office of Thrift Supervision. This restriction does not
apply, however, to negotiated transactions involving more than 1% of Finger
Lakes Bancorp's outstanding common stock or to the purchase of stock pursuant to
a stock option plan or any tax-qualified employee stock benefit plan or nontax
qualified employee stock benefit plan of Savings Bank of the Finger Lakes or
Finger Lakes Bancorp, including any employee plans, recognition plans or
restricted stock plans.
Office of Thrift Supervision regulations applicable to Finger Lakes Bancorp
as a result of the conversion prohibit Finger Lakes Bancorp from repurchasing
more than 5% of its outstanding shares of its common stock during the first year
following conversion. After one year the OTS does not impose any repurchase
restriction.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the conversion, holders of Finger Lakes Financial
common stock will become stockholders of Finger Lakes Bancorp, a Delaware
corporation. There are certain differences in stockholder rights arising from
distinctions between Finger Lakes Financial's federal stock charter and bylaws
and Finger Lakes Bancorp's certificate of incorporation and bylaws and from
distinctions between laws applicable to federally chartered savings institutions
and laws applicable to Delaware corporations.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. The
discussion herein is qualified in its entirety by reference to the certificate
of incorporation and bylaws of Finger Lakes Bancorp and the Delaware General
Corporate Law. See "Additional Information" for procedures for obtaining a copy
of Finger Lakes Bancorp' certificate of incorporation and bylaws.
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Authorized Capital Stock. Finger Lakes Bancorp's authorized capital stock
consists of 5,000,000 shares of common stock, par value $0.01 per share, and
1,000,000 shares of preferred stock, par value $0.01 per share. Finger Lakes
Financial's authorized capital stock consists of 20,000,000 shares of Finger
Lakes Financial common stock and 10,000,000 shares of preferred stock, par value
$1.00 per share. The shares of Finger Lakes Bancorp common stock and preferred
stock were authorized in an amount greater than that to be issued in the
conversion to provide Finger Lakes Bancorp' Board of Directors with flexibility
to effect, among other transactions, financing, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of Finger Lakes Bancorp. The Board
of Directors of Finger Lakes Bancorp also has sole authority to determine the
terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a post tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. Finger Lakes Bancorp's Board
currently has no plans for the issuance of additional shares, other than the
issuance of additional shares pursuant to stock benefit plans.
Issuance of Capital Stock. Pursuant to applicable laws and regulations,
Finger Lakes Financial Corp., MHC is required to own not less than a majority of
the outstanding Finger Lakes Financial common stock. There will be no such
restriction applicable to Finger Lakes Bancorp following consummation of the
conversion.
Finger Lakes Bancorp's certificate of incorporation does not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of Finger Lakes Bancorp, whereas Finger Lakes Financial's
federal stock charter restricts such issuances to general public offerings, or
if qualifying shares, to directors, unless the share issuance or the plan under
which they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal stockholders' meeting. Thus, stock related
compensation plans, such as stock option plans, could be adopted by Finger Lakes
Bancorp without stockholder approval and shares of Finger Lakes Bancorp capital
stock could be issued directly to directors or officers without stockholder
approval. The bylaws of the National Association of Securities Dealers, Inc.,
however, generally require corporations with securities which are quoted on the
Nasdaq National Market System to obtain stockholder approval of most stock
compensation plans for directors, officers and key employees of the corporation.
Moreover, although generally not required, stockholder approval of stock-related
compensation plans may be sought in certain instances in order to qualify such
plans for favorable federal income tax and securities law treatment under
current laws and regulations.
Voting Rights. Neither Finger Lakes Financial's federal stock charter or
bylaws nor Finger Lakes Bancorp's certificate of incorporation or bylaws
currently provide for cumulative voting in elections of directors. For
additional information regarding voting rights, see "--Limitations on
Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of Finger Lakes Financial to pay
dividends on its capital stock is restricted by Office of Thrift Supervision
regulations and by federal income tax considerations related to savings
institutions such as Finger Lakes Financial. See "Regulation--Limitation on
Capital Distributions." Although Finger Lakes Bancorp is not subject to these
restrictions as a Delaware corporation, such restrictions will indirectly affect
Finger Lakes Bancorp because dividends from Savings Bank of the Finger Lakes
will be a primary source of funds of Finger Lakes Bancorp for the payment of
dividends to stockholders of Finger Lakes Bancorp.
Certain restrictions generally imposed on Delaware corporations may also
have an impact on Finger Lakes Bancorp's ability to pay dividends. Delaware law
generally provides that Finger Lakes Bancorp is limited to paying dividends in
an amount equal to the excess of its net assets (total assets minus total
liabilities) over its
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statutory capital or, if no such excess exists, equal to its net profits for the
current year and/or the immediately preceding fiscal year.
Board of Directors. Finger Lakes Financial's federal stock charter and
bylaws and Finger Lakes Bancorp's certificate of incorporation and bylaws each
require the Board of Directors of Finger Lakes Financial and Finger Lakes
Bancorp to be divided into three classes as nearly equal in number as possible
and that the members of each class shall be elected for a term of three years
and until their successors are elected and qualified, with one class being
elected annually.
Under Finger Lakes Financial's bylaws, any vacancies in the Board of
Directors of Finger Lakes Financial may be filled by the affirmative vote of a
majority of the remaining directors although less than a quorum of the Board of
Directors. Persons elected by the directors of Finger Lakes Financial to fill
vacancies may only serve until the next annual meeting of stockholders. Under
Finger Lakes Bancorp's certificate of incorporation, any vacancy occurring in
the Board of Directors of Finger Lakes Bancorp, including any vacancy created by
reason of an increase in the number of directors, may be filled by the remaining
directors, and any director so chosen shall hold office for the remainder of the
term to which the director has been elected and until his or her successor is
elected and qualified.
Under Finger Lakes Financial's bylaws, any director may be removed for
cause by the holders of a majority of the outstanding voting shares. Finger
Lakes Bancorp's certificate of incorporation provides that any director may be
removed for cause by the holders of at least 80% of the outstanding voting
shares of Finger Lakes Bancorp.
Limitations on Liability. Finger Lakes Bancorp's certificate of
incorporation provides that the directors of Finger Lakes Bancorp shall not be
personally liable for monetary damages to Finger Lakes Bancorp for certain
actions as directors, except for liabilities that involve intentional misconduct
or a knowing violation of law by the director, the authorization or illegal
distributions or receipt of an improper personal benefit from their positions as
directors. This provision might, in certain instances, discourage or deter
shareholders or management from bringing a lawsuit against directors for a
breach of their duties even though such an action, if successful, might have
benefitted Finger Lakes Bancorp.
Currently, federal law does not permit federally chartered companies such
as Finger Lakes Financial to limit the personal liability of directors in the
manner provided by the Delaware law and the laws of many other states.
Indemnification of Directors, Officers, Employees and Agents. Finger Lakes
Financial's federal stock charter and bylaws do not contain any provision
relating to indemnification of directors and officers of Finger Lakes Financial.
Under current Office of Thrift Supervision regulations, however, Finger Lakes
Financial shall indemnify its directors, officers and employees for any costs
incurred in connection with any litigation involving any such person's
activities as a director, officer or employee if such person obtains a final
judgment on the merits in his or her favor. In addition, indemnification is
permitted in the case of a settlement, a final judgment against such person or
final judgment other than on the merits, if a majority of disinterested
directors determine that such person was acting in good faith within the scope
of his or her employment as he or she could reasonably have perceived it under
the circumstances and for a purpose he or she could reasonably have believed
under the circumstances was in the best interest of Finger Lakes Financial or
its stockholders. Finger Lakes Financial also is permitted to pay ongoing
expenses incurred by a director, officer or employee if a majority of
disinterested directors concludes that such person may ultimately be entitled to
indemnification. Before making any indemnification payment, Finger Lakes
Financial is required to notify the Office of Thrift Supervision of its
intention and such payment cannot be made if the Office of Thrift Supervision
objects thereto.
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The officers, directors, agents and employees of Finger Lakes Bancorp are
indemnified with respect to certain actions pursuant to Finger Lakes Bancorp's
certificate of incorporation, which complies with Delaware law regarding
indemnification. Delaware law allows Finger Lakes Bancorp to indemnify the
aforementioned persons for expenses, settlements, judgments and fines in suits
in which such person has been made a party by reason of the fact that he or she
is or was an agent of Finger Lakes Bancorp. No such indemnification may be given
if the acts or omissions of the person are adjudged to be in violation of law,
if such person is liable to the corporation for an unlawful distribution, or if
such person personally received a benefit to which he or she was not entitled.
Special Meetings of Stockholders. Finger Lakes Bancorp's certificate of
incorporation provides that special meetings of the stockholders of Finger Lakes
Bancorp may be called only by the board of directors. Finger Lakes Financial's
federal stock charter provides that special meetings of Finger Lakes Financial's
stockholders may be called by the Chairman, President, a majority of the Board
of Directors or the holders of not less than a majority of the outstanding
capital stock of Finger Lakes Financial entitled to vote at the meeting.
Stockholder Nominations and Proposals. Finger Lakes Financial's bylaws
generally provide that stockholders may submit nominations for election of
director at an annual meeting of stockholders and any new business to be taken
up at such a meeting by filing such in writing with Finger Lakes Financial at
least thirty days before the date of any such meeting.
Finger Lakes Bancorp's bylaws generally provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to Finger
Lakes Bancorp at least 90 days in advance of the meeting, together with certain
information relating to the nomination or new business. However, if less than
100 days notice or prior disclosure of the date of the meeting is given,
stockholders must submit such written notice no later than the tenth day
following the date on which notice of the meeting is mailed to stockholders or
such public disclosure was made. Failure to comply with these advance notice
requirements will preclude such nominations or new business from being
considered at the meeting. Management believes that it is in the best interests
of Finger Lakes Bancorp and its stockholders to provide sufficient time to
enable management to disclose to stockholders information about a dissident
slate of nominations for directors. This advance notice requirement may also
give management time to solicit its own proxies in an attempt to defeat any
dissident slate of nominations, should management determine that doing so is in
the best interest of stockholders generally. Similarly, adequate advance notice
of stockholder proposals will give management time to study such proposals and
to determine whether to recommend to the stockholders that such proposals be
adopted. In certain instances, such provisions could make it more difficult to
oppose management's nominees or proposals, even if stockholders believe such
nominees or proposals are in their best interests.
Stockholder Action Without a Meeting. The bylaws of Finger Lakes Financial
provide that any action to be taken or which may be taken at any annual or
special meeting of stockholders may be taken if a consent in writing, setting
forth the actions so taken, is given by the holders of all outstanding shares
entitled to vote. Finger Lakes Bancorp's certificate of incorporation
specifically denies the authority of stockholders to act without a meeting.
Stockholder's Right to Examine Books and Records. A federal regulation
which is applicable to Finger Lakes Financial provides that stockholders may
inspect and copy specified books and records of a federally chartered savings
institution after proper written notice for a proper purpose. Delaware law
similarly provides that a stockholder may inspect books and records upon written
demand stating the purpose of the inspection, if such purpose is reasonably
related to such person's interest as a stockholder.
Limitations on Acquisitions of Voting Stock and Voting Rights. Finger Lakes
Bancorp's certificate of incorporation provides that in no event shall any
record owner of any outstanding common stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
the then
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outstanding shares of common stock be entitled or permitted to any vote in
respect of the shares held in excess of such limit.
Mergers, Consolidations and Sales of Assets. A federal regulation requires
the approval of two-thirds of the Board of Directors of Finger Lakes Financial
and the holders of two-thirds of the outstanding stock of Finger Lakes Financial
entitled to vote thereon for mergers, consolidations and sales of all or
substantially all of Finger Lakes Financial's assets. Such regulation permits
Finger Lakes Financial to merge with another corporation without obtaining the
approval of its stockholders if:
(1) it does not involve an interim savings institution;
(2) Finger Lakes Financial's federal stock charter is not changed;
(3) each share of Finger Lakes Financial's stock outstanding immediately
prior to the effective date of the transaction is to be an identical outstanding
share or a treasury share of Finger Lakes Financial after such effective date;
and
(4) either:
(a) no shares of voting stock of Finger Lakes Financial and no securities
convertible into such stock are to be issued or delivered under the plan of
combination or
(b) the authorized unissued shares or the treasury shares of voting stock
of Finger Lakes Financial to be issued or delivered under the plan of
combination, plus those initially issuable upon conversion of any securities to
be issued or delivered under such plan, do not exceed 15% of the total shares of
voting stock of Finger Lakes Financial outstanding immediately prior to the
effective date of the transaction.
Finger Lakes Bancorp's certificate of incorporation requires the approval
of the holders of at least 80% of Finger Lakes Bancorp's outstanding shares of
voting stock to approve certain "Business Combinations" involving an "Interested
Stockholder" except in cases where the proposed transaction has been approved in
advance by two- thirds of those members of Finger Lakes Bancorp's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an Interested
Stockholder. The term "Interested Stockholder" is defined to include any
individual, corporation, partnership or other entity, other than Finger Lakes
Bancorp or its subsidiary, which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of Finger
Lakes Bancorp or an affiliate of such person or entity. This provision of the
certificate of incorporation applies to any "Business Combination," which is
defined to include, among other things:
(1) any merger or consolidation of Finger Lakes Bancorp with or into any
Interested Stockholder;
(2) any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of Finger Lakes Bancorp and its subsidiaries to an
Interested Stockholder;
(3) the issuance or transfer of any securities of Finger Lakes Bancorp or a
subsidiary of Finger Lakes Bancorp to an Interested Stockholder having a value
exceeding 25% of the combined fair market value of the outstanding sections of
Finger Lakes Bancorp; or
(4) any reclassification of common stock of Finger Lakes Bancorp or any
recapitalization involving the common stock of Finger Lakes Bancorp.
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Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of Finger Lakes
Bancorp and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years. Such
15% stockholder, in order to obtain approval of a business combination, must
obtain the approval of two- thirds of the outstanding stock, excluding the stock
owned by such 15% stockholder, or satisfy other requirements under Delaware law
relating to board of director approval of his or her acquisition of the shares
of Finger Lakes Bancorp. The increased stockholder vote required to approve a
business combination may have the effect of foreclosing mergers and other
business combinations which a majority of stockholders deem desirable and
placing the power to prevent such a merger or combination in the hands of a
minority of stockholders.
Finger Lakes Bancorp's certificate of incorporation requires the Finger
Lakes Bancorp's Board of Directors to consider certain factors in addition to
the amount of consideration to be paid when evaluating certain business
combinations or a tender or exchange offer. These additional factors include the
social and economic effects of the transaction on its customers and employees
and the communities served by Finger Lakes Bancorp.
Dissenters' Rights of Appraisal. Office of Thrift Supervision regulations
generally provide that a stockholder of a federally chartered savings
institution that engages in a merger, consolidation or sale of all or
substantially all of its assets shall have the right to demand from such
institution payment of the fair or appraised value of his or her stock in the
institution, subject to specified procedural requirements. This regulation also
provides, however, that the stockholders of a federally chartered savings
institution with stock which is listed on a national securities exchange or
quoted on The Nasdaq Stock Market are not entitled to dissenters' rights in
connection with a merger involving such savings institution if the stockholder
is required to accept only "qualified consideration" for his or her stock, which
is defined to include cash, shares of stock of any institution or corporation
which at the effective date of the merger will be listed on a national
securities exchange or quoted on the Nasdaq Stock Market or any combination of
such shares of stock and cash.
Under Delaware law, shareholders of Finger Lakes Bancorp generally will not
have dissenters' appraisal rights in connection with a plan of merger or
consolidation to which Finger Lakes Bancorp is a party because the common stock
is expected to be listed on The Nasdaq National System.
Amendment of Governing Instruments. No amendment of Finger Lakes
Financial's federal stock charter may be made unless it is first proposed by the
Board of Directors of Finger Lakes Financial, then preliminarily approved by the
Office of Thrift Supervision, and thereafter approved by the holders of a
majority of the total votes eligible to be cast at a legal meeting. Finger Lakes
Bancorp' certificate of incorporation may be amended by the vote of the holders
of a majority of the outstanding shares of Finger Lakes Bancorp common stock,
except that the provisions of the certificate of incorporation governing the
calling of meeting of stockholders, stockholders' nominations and proposals,
authorized capital stock, denial of preemptive rights, the number and staggered
terms of directors, removal of directors, approval of certain business
combinations, the evaluation of certain business combinations, elimination of
directors' liability, indemnification of officers and directors, and the manner
of amending the certificate of incorporation and bylaws, each may not be
repealed, altered, amended or rescinded except by the vote of the holders of at
least 80% of the outstanding shares of Finger Lakes Bancorp. This provision is
intended to prevent the holders of a lesser percentage of the outstanding stock
of Finger Lakes Bancorp from circumventing any of the foregoing provisions by
amending the certificate of incorporation to delete or modify one of such
provisions.
The bylaws of Finger Lakes Financial may be amended by a majority vote of
the full Board of Directors of Finger Lakes Financial or by a majority vote of
the votes cast by the stockholders of Finger Lakes Financial at any legal
meeting. Finger Lakes Bancorp's bylaws may only be amended by a two-thirds vote
of the Board of
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Directors of Finger Lakes Bancorp or by the holders of at least 80% of the
outstanding stock of Finger Lakes Bancorp.
Purpose and Takeover Defensive Effects of Finger Lakes Bancorp's
Certificate of Incorporation and Bylaws. The Board of Directors of Finger Lakes
Financial believes that the provisions described above are prudent and will
reduce Finger Lakes Bancorp vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by its Board of
Directors. These provisions will also assist Finger Lakes Financial in the
orderly deployment of the conversion proceeds into productive assets during the
initial period after the conversion. The Board of Directors believes these
provisions are in the best interest of Finger Lakes Financial, Finger Lakes
Bancorp and its stockholders. In the judgment of the Board of Directors, Finger
Lakes Bancorp's Board will be in the best position to determine the true value
of Finger Lakes Bancorp and to negotiate more effectively for what may be in the
best interests of its stockholders. Accordingly, the Board of Directors believes
that it is in the best interest of Finger Lakes Bancorp and its stockholders to
encourage potential acquirer to negotiate directly with the Board of Directors
of Finger Lakes Bancorp and that these provisions will encourage such
negotiations and discourage hostile takeover attempts. It is also the view of
the Board of Directors that these provisions should not discourage persons from
proposing a merger or other transaction at a price reflective of the true value
of Finger Lakes Bancorp and that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of Finger Lakes
Bancorp for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of Finger Lakes Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market price, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive Finger
Lakes Bancorp's remaining stockholders of benefits of certain protective
provisions of the Securities Exchange Act of 1934, if the number of beneficial
owners became less than 300, thereby allowing for deregistration under the
Securities Exchange Act of 1934.
Despite the belief of Finger Lakes Financial and Finger Lakes Bancorp as to
the benefits to stockholders of these provisions of Finger Lakes Bancorp's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt that would not be approved by
Finger Lakes Bancorp's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of Finger Lakes Bancorp's Board of Directors and of management more difficult.
The Board of Directors of Finger Lakes Financial and Finger Lakes Bancorp,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, Finger Lakes Bancorp may adopt
additional anti-takeover charter provisions or other devices regarding the
acquisition of its equity securities that would be permitted for a Delaware
business corporation.
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The cumulative effect of the restriction on acquisition of Finger Lakes
Bancorp contained in the certificate of incorporation and bylaws of Finger Lakes
Bancorp and in federal and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of Finger Lakes Bancorp may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
RESTRICTIONS ON ACQUISITION OF FINGER LAKES BANCORP
The following discussion is a summary of certain provisions of federal law
and regulations and Delaware corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from making an
offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a
converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution or its holding company, for a period of three years from the date of
the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association or its holding company, or an underwriter or
member of a selling group acting on the converting institution's or its holding
company's behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 9.9% of
the outstanding shares or voting rights of a converting or converted institution
or its holding company.
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the
Office of Thrift Supervision has been given 60 days' prior written notice and
has not issued a notice disapproving the proposed acquisition. In addition,
Office of Thrift Supervision regulations provide that no company may acquire
control of a savings association without the prior approval of the Office of
Thrift Supervision. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 9.9% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquiror has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 9.9% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the Office of
Thrift Supervision, prior to the acquisition of stock or the occurrence of any
other circumstances giving rise to such determination, of a statement setting
forth facts and
109
<PAGE>
circumstances which would support a finding that no control relationship will
exist and containing certain undertakings. The regulations provide that persons
or companies which acquire beneficial ownership exceeding 9.9% or more of any
class of a savings association's stock must file with the Office of Thrift
Supervision a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the Office of Thrift
Supervision, as applicable. There are also rebuttable presumptions in the
regulations concerning whether a group"acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The Office of Thrift Supervision may prohibit an acquisition of control if
it finds, among other things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK OF FINGER LAKES BANCORP
General
At the effective date, Finger Lakes Bancorp will be authorized to issue
5,000,000 shares of common stock having a par value of $0.01 per share and
1,000,000 shares of preferred stock. Finger Lakes Bancorp currently expects to
issue in the conversion up to 2,156,655, subject to adjustment, shares of common
stock in the offering, and up to 1,063,345 shares, subject to adjustment, in
exchange for the publicly held shares of Finger Lakes Financial. Finger Lakes
Bancorp does not intend to issue shares of preferred stock in the conversion.
Each share of Finger Lakes Bancorp common stock will have the same relative
rights as, and will be identical in all respects with, each other share of
common stock. Upon payment of the Subscription Price for the common stock, in
accordance with the plan of conversion, all of the common stock will be duly
authorized, fully paid and nonassessable.
The common stock of Finger Lakes Bancorp will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the Federal Deposit Insurance Corporation or any other government agency.
Common Stock
Dividends. Finger Lakes Bancorp can pay dividends out of statutory surplus
or from net profits if, as and when declared by its Board of Directors. The
payment of dividends by Finger Lakes Bancorp is subject to limitations that are
imposed by law and applicable regulation. The holders of common stock of Finger
Lakes Bancorp will be entitled to receive and share equally in dividends as may
be declared by the Board of Directors of Finger Lakes Bancorp out of funds
legally available therefor. If Finger Lakes Bancorp issues preferred stock, the
holders thereof may have a priority over the holders of the common stock with
respect to dividends.
Voting Rights. Upon the conversion, the holders of common stock of Finger
Lakes Bancorp will possess exclusive voting rights in Finger Lakes Bancorp. They
will elect Finger Lakes Bancorp's Board of Directors and act on other matters as
are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Generally, each holder of common
stock will be entitled to one vote per share
110
<PAGE>
and will not have any right to cumulate votes in the election of Directors. If
Finger Lakes Bancorp issues preferred stock, holders of the preferred stock may
also possess voting rights. Certain matters require an 80% stockholder vote.
As a federal stock savings association, corporate powers and control of
Savings Bank of the Finger Lakes are vested in its Board of Directors, who elect
the officers of Savings Bank of the Finger Lakes and who fill any vacancies on
the Board of Directors as it exists upon the conversion. Voting rights of
Savings Bank of the Finger Lakes are vested exclusively in the owners of the
shares of capital stock of Savings Bank of the Finger Lakes, which will be
Finger Lakes Bancorp, and voted at the direction of Finger Lakes Bancorp's Board
of Directors. Consequently, the holders of the common stock will not have direct
control of Savings Bank of the Finger Lakes.
Liquidation. In the event of any liquidation, dissolution or winding up of
Finger Lakes Financial, Finger Lakes Bancorp, as holder of Savings Bank of the
Finger Lakes's capital stock, would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Savings Bank of the Finger
Lakes, including all deposit accounts and accrued interest thereon, and after
distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders, all assets of Savings
Bank of the Finger Lakes available for distribution. In the event of
liquidation, dissolution or winding up of Finger Lakes Bancorp, the holders of
its common stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of Finger Lakes
Bancorp available for distribution. If preferred stock is issued, the holders
thereof may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Finger Lakes Bancorp will
not be entitled to preemptive rights with respect to any shares which may be
issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Finger Lakes Bancorp's authorized preferred stock
will be issued in the conversion. Preferred stock may be issued with preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
TRANSFER AGENT
The transfer agent and registrar for Finger Lakes Bancorp common stock is
American Stock Transfer and Trust, New York, New York.
EXPERTS
The consolidated financial statements of Finger Lakes Financial Corp. and
Subsidiary as of December 31, 1999, and 1998, and for each of the years in the
three-year period ended December 31, 1999, have been included in this prospectus
and in the registration statement filed with the SEC in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
FinPro has consented to the publication herein of the summary of its report
to Finger Lakes Financial setting forth its opinion as to the estimated pro
forma market value of the common stock upon stock offering and its letter with
respect to subscription rights.
111
<PAGE>
LEGAL MATTERS
The legality of the common stock will be passed upon for Finger Lakes
Bancorp by Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special
counsel to Finger Lakes Bancorp and Finger Lakes Financial. Certain legal
matters will be passed upon for Friedman, Billings, Ramsey & Co., Inc. by Nixon
Peabody, LLP, Washington, D.C.
ADDITIONAL INFORMATION
Finger Lakes Bancorp has filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 with respect to the
common stock offered hereby. As permitted by the rules and regulations of the
Securities and Exchange Commission, this prospectus does not contain all the
information set forth in the registration statement. Such information, including
the appraisal report which is an exhibit to the registration statement, can be
examined without charge at the public reference facilities of the Securities and
Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including Finger Lakes
Bancorp. The statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions of the material terms of, and should be
read in conjunction with, such contract or document.
Finger Lakes Financial Corp., MHC has filed an Application on Form AC with
respect to the conversion.
This prospectus omits certain information contained in the application. The
Application may be examined at the principal office of the Office of Thrift
Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and at the Northeast
Regional Office of the Office of Thrift Supervision, 10 Exchange Place, Jersey
City, New Jersey, 07302.
In connection with the stock offering, Finger Lakes Bancorp will register
its common stock with the SEC under Section 12 of the Securities Exchange Act of
1934, and, upon such registration, Finger Lakes Bancorp and the holders of its
stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Securities Exchange Act of 1934. Under the
stock issuance plan, Finger Lakes Bancorp has undertaken that it will not
terminate such registration for a period of at least three years following the
stock offering.
112
<PAGE>
Finger Lakes Financial Corp.
and Subsidiary
Consolidated Financial Statements
Contents
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition F-3
as of December 31, 1999 and 1998 (audited ) and June 30, 2000
(unaudited)
Consolidated Statements of Income 30
for the years ended December 31, 1999, 1998 and 1997 (audited) and
for the six months ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Stockholders' Equity F-4
for the years ended December 31, 1999, 1998 and 1997 (audited) and for the
six months ended June 30, 2000 (unaudited)
Consolidated Statements of Cash Flows F-5
for the years ended December 31, 1999, 1998 and 1997 (audited) and for
the six months ended June 30, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements F-7
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and Related
Notes.
F-1
<PAGE>
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, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
-----------------------
KPMG LLP
Rochester, New York
January 24, 2000, except for notes 1 and 13
which is as of August 22, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Financial Condition
At June 30, At December 31,
2000 1999 1998
---- ---- ----
Assets (Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 4,963,981 6,094,962 4,374,734
Securities available for sale, at fair value 120,025,225 118,750,207 115,332,807
Securities held to maturity, fair value of $1,573,383
(unaudited) at June 30, 2000, $1,567,273 at
December 31, 1999 and $4,662,530 at December 31,
1998 1,592,789 1,592,795 4,639,772
Loans 164,951,341 160,203,637 146,311,360
Less allowance for loan losses 1,400,281 1,349,477 1,175,758
---------------- --------------- --------------
Net loans 163,551,060 158,854,160 145,135,602
Accrued interest receivable 2,238,356 2,180,211 1,907,702
Federal Home Loan Bank stock, at cost 3,523,000 3,523,000 2,940,800
Premises and equipment, net 4,487,000 4,149,400 4,555,914
Other assets 6,620,628 6,096,471 3,488,735
---------------- --------------- -------------
Total assets $ 307,002,039 301,241,206 282,376,066
================ ============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 219,748,989 208,13 ,284 202,433,971
Advances from Federal Home Loan Bank 63,759,136 69,959,730 54,815,261
Other liabilities 3,757,096 3,770,292 3,163,238
---------------- --------------- --------------
Total liabilities 287,265,221 281,862,306 260,412,470
---------------- --------------- --------------
Commitments and contingencies (notes 12 and 13)
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized; none
issued and outstanding - - -
Common stock, $.01 par value; 20,000,000 shares
authorized; 3,570,000 shares issued and
outstanding 35,700 35,700 35,700
Additional paid-in capital 4,794,348 4,786,957 4,749,256
Retained earnings 18,497,762 18,261,689 17,239,959
Accumulated other comprehensive income (loss) (3,428,449) (3,524,843) 155,405
Unallocated shares of ESOP (162,543) (180,603) (216,724)
---------------- ---------------- ---------------
Total stockholders' equity 19,736,818 19,378,900 21,963,596
--------------- -------------- ---------------
Total liabilities and stockholders' equity $ 307,002,039 301,241,206 282,376,066
=============== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Stockholders' Equity
Unallo-
Accumulated cated
Additional other shares
Common paid-in Retained comprehensive of
stock capital earnings income(loss) ESOP Total
----- ------- -------- ------------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
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
Unrealized gain on securities
available for sale, 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,
$0.20 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
Unrealized loss on securities
available for sale, 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,
$0.23 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
Comprehensive loss:
Net income - - 1,304,941 - - 1,304,941
Unrealized loss on securities
available for sale, net of taxes - - - (3,680,248) - (3,680,248)
------ ------------- ------------ ----------- ----------
Total comprehensive loss - - 1,304,941 (3,680,248) - (2,375,307)
------ ------------- ------------- ------------ ---------- -------------
Allocation of shares under ESOP - 37,701 - - 36,121 73,822
Cash dividends declared,
$0.24 per share - - (283,211) - - (283,211)
------- ------------- -------------- ------------- ----------- -------------
- 36,120 109,490
Balance, December 31, 1999 35,700 4,786,957 18,261,689 (3,524,843) (180,603) 19,378,900
Comprehensive income:
Net income (unaudited) - - 377,679 - - 377,679
Unrealized gain on securities available
for sale, net of taxes (unaudited - - - 96,394 - 96,394
------ ------------- ------------- ------------- ------------ ------------
Total comprehensive income
(unaudited) - - 377,679 96,394 - 474,073
------ ------------- ------------- ------------- ------------ ------------
Allocation of shares under ESOP
(unaudited) - 7,391 - - 18,060 25,451
Cash dividends declared,
$0.12 per share (unaudited) - - (141,606) - - (141,606)
----- ------------- -------------- ------------- ------------ -------------
- 36,120 109,490
Balance, June 30, 2000 (unaudited) $35,700 4,794,348 18,497,762 (3,428,449) (162,543) 19,736,818
======= ============= ============= ============== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements. F-4
<PAGE>
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
-------- ------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net income $ 377,679 573,458 1,304,941 724,029 847,497
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 355,826 332,372 668,929 597,548 371,910
Amortization of loan fees and other, net (289,462) 19,800 (171,724) 283,635 32,929
Provision for loan losses 90,000 125,000 200,000 240,000 120,000
Provision for environmental remediation 180,000 25,000 90,000 620,000 150,400
Proceeds from sales of loans 2,576,794 9,113,745 14,224,557 21,411,559 4,559,531
Loans originated for sale (2,731,806) (8,822,854) (15,262,000) (15,221,497) (4,532,836)
Net gain on sales of loans (46,169) (117,871) (224,351) (276,612) (26,695)
Net gain on sales of securities available
for sale - (72,793) (77,137) (106,231) (142,160)
Net loss (gain) from sale of real
estate owned 23,098 2,201 15,311 (33,333) 9,030
Deferred income taxes (54,080) 15,130 (65,993) (199,081) (3,174)
Increase in accrued interest
receivable (58,145) (129,325) (272,509) (101,550) (466,550)
Decrease (increase) in other assets (360,474) (13,358) 25,257 113,906 (296,991)
Increase (decrease) in other liabilities (167,744) 3,533 590,878 122,560 347,164
------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating activities (104,483) 1,054,038 1,046,159 8,174,933 970,055
------------- ------------ ----------- ------------- ------------
Cash flows from investing activities:
Proceeds from maturities of and principal
collected on securities available for sale 4,902,073 18,492,945 25,395,980 35,669,146 13,427,056
Proceeds from maturities of and principal
collected on securities held to maturity - 2,000,000 4,021,823 10,100,000 3,250,000
Proceeds from sales of securities
available for sale 50,000 18,211,269 18,413,431 51,605,954 46,318,299
Purchases of securities available for sale (6,050,092) (43,515,717) (53,261,255) (103,170,611) (74,815,294)
Purchases of securities held to maturity - (263,860) (969,395) (640,000) (3,996,665)
Loans originated and purchased (16,331,353) (28,027,713) (45,427,221) (59,177,514) (45,927,586)
Principal collected on loans 11,538,159 20,904,309 32,528,962 26,044,180 16,167,373
Proceeds from sales of real estate owned 283,636 56,803 256,788 277,784 169,237
Purchases of FHLB stock - (265,500) (582,200) (869,700) (701,100)
Purchases of premises and equipment, net (693,426) (137,260) (262,415) (1,503,334) (2,153,687)
------------ ------------- ------------- -------------- ------------
Net cash used in
investing activities (6,301,003) (12,544,724) (19,885,502) (41,664,095) (48,262,367)
------------ ------------ ------------- -------------- ------------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements. F-5
<PAGE>
<TABLE>
<CAPTION>
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows, Continued
Six Months Ended
June 30, Years Ended December 31,
-------- ------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Unaudited)
Cash flows from financing activities:
<S> <C> <C> <C> <C> <C>
Net increase in savings
and demand accounts $ 3,555,207 1,490,450 1,005,839 749,899 13,545,519
Net increase in time deposits 8,061,498 3,089,031 4,692,474 15,149,726 19,157,142
Net increase (decrease) in short term
FHLB advances (700,000) (3,500,000) 3,100,000 (16,008,000) 8,208,000
Long term advances from FHLB 15,000,000 10,000,000 23,000,000 35,000,000 5,000,000
Repayments of long term advances
from FHLB (20,500,594) (470,313) (10,955,531) (897,730) (287,009)
Principal payments on ESOP debt - - - (252,844) (67,426)
Common stock dividends paid (141,606) (141,606) (283,211) (271,412) (236,011)
------------ ------------ ------------- -------------- -------------
Net cash provided by
financing activities 5,274,505 10,467,562 20,559,571 33,469,639 45,320,215
----------- ----------- ------------ ------------- ------------
Net increase (decrease) in cash and cash
equivalents (1,130,981) (1,023,124) 1,720,228 (19,523) (1,972,097)
Cash and cash equivalents at beginning
of period 6,094,962 4,374,734 4,374,734 4,394,257 6,366,354
------------ ------------- ----------- ------------ -------------
Cash and cash equivalents at end of period $ 4,963,981 3,351,610 6,094,962 4,374,734 4,394,257
============ =========== =========== ============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,582,750 5,831,169 11,843,376 10,994,155 9,116,530
============ =========== ============ ============= ============
Income taxes $ 305,000 240,000 545,000 582,011 420,500
============ =========== ============ ============= ============
Non-cash investing activities:
Transfer of loans to real estate
owned $ 213,487 210,140 289,786 233,448 53,368
============ =========== =========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements. F-6
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
Finger Lakes Financial Corp. (the Company), through its wholly- owned
subsidiary 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. The Company and Bank are 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 66.9% of the outstanding
common stock of the Company.
In August 1998, the Mutual Holding Company and the Bank reorganized into a
two-tier holding company. 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
accompanying consolidated financial statements, or on the operations of the Bank
or the Mutual Holding Company.
Reorganization and Second Step Conversion
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 charted capital stock holding company known as Finger
Lakes Bancorp, Inc. (the Bancorp). As part of the conversion, each of the
minority shares of the Company will automatically be converted into and become a
right to receive a number of shares of the Bancorp common stock determined
pursuant to an exchange ratio, which ensures that immediately after the
conversion and the share exchange, the public common stock shareholders of the
Company will own the same aggregate percentage of the Bancorp common stock as
they owned of Company common stock immediately prior to the conversion.
Contemporaneously with the Plan, Bancorp will sell the shares through a common
stock offering representing 66.9% ownership interest in the Company now owned by
the Mutual Holding Company.
The proposed Plan 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.
At the time of the conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the statement of
financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts at
the Bank after the conversion. The liquidation account will be reduced annually,
to the extent that eligible account holders and supplemental eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank, each eligible account holder
and supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
See accompanying notes to consolidated financial statements. F-7
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Reorganization and Second Step Conversion, Continued
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
The Reorganization will be accounted for as a change in corporat form with
no resulting change in the historical basis of the Company's assets, liabilities
and equity. Following the successful completion of the stock offering,
conversion costs will be netted against proceeds from the sale of stock and net
proceeds will be added to stockholders' 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 June 30, 2000, the Company
had incurred and deferred approximately $263,000 (unaudited) of costs related to
the Reorganization and Offering which are included in other assets.
On May 2, 2000, the Boards 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 (see
Note 13) and to a lesser extent the weakness in the conversion market.
On August 22, 2000, the Board of Directors of the Company and th Mutual
Holding Company jointly announced their decision to resume the second step
conversion of the Mutual Holding Company.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and the Bank (collectively referred to as "the Company" hereafter).
All intercompany accounts and transactions have been eliminated in
consolidation.
The statement of financial condition as of June 30, 2000 and the related
statements of income and cash flows for the six month periods ended June 30,
2000 and 1999 and stockholders' equity for the six month period ended June 30,
2000 are unaudited and, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation as
of June 30, 2000 and for the unaudited periods have been made.
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. Actual results could differ
from those estimates.
Cash and Cash Equivalents
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.
Securities
The Company classifies its debt securities as either available for sale
or held to maturity. Held to maturity securities are those securities that the
Company has the intent and the ability to hold until maturity. All other
securities are classified as available for sale.
See accompanying notes to consolidated financial statements. F-8
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Securities, Continued
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 accumulated other comprehensive income or loss
in stockholders' equity until realized. Realized gains or losses on securities
sold are recognized on the trade date using the specific identification method.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary is charged to earnings,
resulting in the establishment of a new cost basis for the security.
Interest income includes the amortization of premiums and accretion of
discounts as an adjustment to yield using the interest method.
Loans
Loans are reported at the principal amount outstanding, net of unearned
discount and net deferred fees or costs. 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-accrual status, any accrued
interest 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.
Allowance for Loan Losses
The allowance for loan losses is increased by loan loss provisions charged
to operations based upon management's evaluation of the loan portfolio,
historical loan loss experience, current economic conditions and such other
factors as management considers appropriate to estimate loan losses. Management
believes that the allowance for loan losses is adequate. Losses on loans
(including impaired loans) are charged to the allowance when all or a portion of
a loan is deemed to be uncollectible. Recoveries of loans previously charged off
are credited to the allowance when realized. While management uses available
information to identify 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.
See accompanying notes to consolidated financial statements. F-9
<PAGE>
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 at the present value of
future cash flows discounted using the loan's effective interest rate; or at the
loan's observable market price; or at 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.
Mortgage Servicing Rights
The Company recognizes, as separate assets, the rights to service mortgage
loans sold when those rights are retained by the Company. Servicing assets are
amortized in proportion to and over the estimated period of net servicing
income.
The Company stratifies its servicing assets by underlying loan type,
primarily 15 and 30 year amortizing loans. The estimated fair value of each
stratum is determined through a discounted cash flow analysis of future cash
flows, incorporating numerous assumptions, including servicing income, servicing
costs, market discount rates, and prepayment speeds.
The Company assesses impairment of servicing assets based on the fair value
of the related servicing rights on a stratum-by-stratum basis, with any
impairment recognized in earnings through a valuation allowance for each
impaired stratum. Individual allowances for each stratum are then adjusted in
subsequent periods to reflect changes in the measurement of impairment. There
was no allowance for impairment of servicing assets at June 30, 2000
(unaudited), or December 31, 1999 and 1998.
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
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 it is probable that remedial efforts will be required 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 calculated on
a straight-line basis over estimated useful lives of assets ranging from three
to forty years.
See accompanying notes to consolidated financial statements. F-10
<PAGE>
Federal Home Loan Bank (FHLB) Stock
As a member of the FHLB system, the Company is required to maintain an
investment in FHLB stock equal to the greater of 1% of the aggregate outstanding
mortgage loans held by the Company, or 5% of total outstanding advances. FHLB
stock is a non-marketable security and, accordingly, is carried at cost.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
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 amount required by
law. The Retirement System for Savings Institutions serves as Plan Trustee and
Administrator.
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 Statement of Financial
Accounting Standards (SFAS) No. 123 had been applied. Accordingly, no
compensation expense has been recorded for the stock option plan and
compensation expense for the management recognition plan is recognized on a
straight-line method over the vesting period.
Stock Split
In January 1998, the Board of Directors declared a two-for-one stock split
in the form of a 100% common stock dividend. All references in the consolidated
financial statements and notes thereto to share data (including 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.
Net Income Per Share
Basic net income per common share is computed by dividing net income by the
weighted average number of total common shares outstanding during the period.
Diluted net income per common share reflects the effects of common stock
issuable upon exercise of dilutive stock options.
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
financial condition upon funding.
Company Segments
The Company engages in the traditional operations of a community banking
enterprise, principally the delivery of loan and deposit products and other
financial services. Management makes operating decisions and assesses
performance based on an ongoing review of the Company's community banking
operations, which constitute the Company's only operating segment for financial
reporting purposes.
See accompanying notes to consolidated financial statements. F-11
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Reclassifications
Certain items in the financial statements have been reclassified in order
to be consistent with the current year's presentation.
New Accounting Standards
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 statement of financial
condition 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, 2000, 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 the
Company's financial position or results of operations. SFAS No. 133 also permits
reclassification of securities from the held to maturity to the available for
sale classification. The Company has no current intention to reclassify any
securities pursuant to the statement.
(2) Securities
The aggregate amortized cost and fair value of securities are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ----------- ----------- ----------
Securities Available for Sale
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and
agency bonds $ 45,424,696 - 2,827,563 42,597,133
Mortgage-backed securities:
Collateralized mortgage
obligations 49,348,605 30,029 1,723,955 47,654,679
FNMA 11,694,105 - 524,565 11,169,540
FHLMC 4,378,231 7,572 103,170 4,282,633
GNMA 3,609,559 - 118,389 3,491,170
Asset-backed securities 3,940,054 3,021 1,439 3,941,636
Debentures 1,005,034 - 2,534 1,002,500
Corporate bonds 4,732,418 - 175,388 4,557,030
----------- ----------- --------------- -------------
Total debt
securities 124,132,702 40,622 5,477,003 118,696,321
Equity securities 1,606,603 51 277,750 1,328,904
----------- ----------- --------------- -------------
Total securities
available for sale $125,739,305 40,673 5,754,753 120,025,225
============ ============ ============== ==============
Securities Held to Maturity
Municipal bonds $ 1,592,789 207 19,613 1,573,383
============= ============ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements. F-12
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
December 31, 1999
Securities Available for Sale
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and
agency bonds $ 45,400,944 - 2,854,708 42,546,236
Mortgage-backed securities:
Collateralized mortgage
obligations 51,996,360 1,658 1,856,404 50,141,614
FNMA 12,307,199 - 488,636 11,818,563
FHLMC 4,585,345 1,728 92,363 4,494,710
GNMA 3,949,078 - 138,987 3,810,091
Corporate bonds 4,729,416 - 170,461 4,558,955
----------- ---------- ------------- -------------
Total debt
securities 122,968,342 3,386 5,601,559 117,370,169
Equity securities 1,656,602 61 276,625 1,380,038
----------- ---------- -------------- -------------
Total securities
available for sale $124,624,944 3,447 5,878,184 118,750,207
============ ========== ============== ==============
Securities Held to Maturity
Municipal bonds $ 1,592,795 - 25,522 1,567,273
============ ========== ============== ==============
December 31, 1998
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:
Collateralized mortgage
obligations 59,062,754 178,478 196,868 59,044,364
FNMA 16,435,960 161,007 - 16,596,967
FHLMC 6,115,621 75,101 3,206 6,187,516
GNMA 4,759,638 24,461 - 4,784,099
------------- ----------- ----- ---------
Total debt
securities 112,335,694 555,580 214,194 112,677,080
Equity securities 2,738,105 3,203 85,582 655,727
-------------- ------------ ---------
Total securities
available for sale $ 115,073,799 558,783 299,775 115,332,807
============== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements. F-13
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- --------- ---------- ----------
December 31, 1999
Securities Available for Sale
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and
agency bonds $ 45,400,944 - 2,854,708 42,546,236
Mortgage-backed securities:
Collateralized mortgage
obligations 51,996,360 1,658 1,856,404 50,141,614
FNMA 12,307,199 - 488,636 11,818,563
FHLMC 4,585,345 1,728 92,363 4,494,710
GNMA 3,949,078 - 138,987 3,810,091
Corporate bonds 4,729,416 - 170,461 4,558,955
Total debt
securities 122,968,342 3,386 5,601,559 117,370,169
Equity securities 1,656,602 61 276,625 1,380,038
Total securities
available for sale $ 124,624,944 3,447 5,878,184 118,750,207
Securities Held to Maturity
Municipal bonds $ 1,592,795 - 25,522 1,567,273
December 31, 1998
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:
Collateralized mortgage
obligations 59,062,754 178,478 196,868 59,044,364
FNMA 16,435,960 161,007 - 16,596,967
FHLMC 6,115,621 75,101 3,206 6,187,516
GNMA 4,759,638 24,461 - 4,784,099
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
============= ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements. F-14
<PAGE>
Proceeds from the sale of securities available for sale for the six months
ended June 30, 2000 and 1999 and the years ended December 31, 1999, 1998 and
1997 were $50,000 (unaudited), $18,211,269 (unaudited), $18,413,431, $51,605,954
and $46,318,299, respectively. Gross gains and losses realized on those sales
follow:
<TABLE>
<CAPTION>
Six months ended June 30, Years ended December 31,
------------------------ -----------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Gross realized gains $ - 76,004 81,423 313,068 327,812
Gross realized losses - (3,211) (4,286) (206,837) (185,652)
------- ------- ------- --------- ----------
Net gains realized $ - 72,793 77,137 106,231 142,160
======= ======= ======= ========= ==========
</TABLE>
The contractual maturities of debt securities are as follows:
<TABLE>
<CAPTION>
At June 30, 2000 At December 31, 1999
---------------- --------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
(unaudited)
Available for Sale:
<S> <C> <C> <C> <C>
Due after one year
through five years $ 8,468,993 8,284,834 5,234,246 5,063,437
Due after five years
through ten years 48,366,188 45,427,616 48,478,231 45,549,857
Due after ten years 67,297,521 64,983,871 69,255,865 66,756,875
----------- ------------- ------------- ------------
Total $ 124,132,702 118,696,321 122,968,342 117,370,169
=============== ============= ============= ============
Held to Maturity:
Due in one year or less 30,000 30,000 30,000 30,000
Due after one year
through five years 141,666 141,666 141,666 141,666
Due after five years
through ten years 1,192,789 1,173,383 928,890 913,149
Due after ten years 228,334 228,334 492,239 482,458
------------- ------------- ------------ ------------
Total $ 1,592,789 1,573,383 1,592,795 1,567,273
============== ============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements. F-15
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
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 June 30, 2000, December 31, 1999 and 1998, securities carried at
$51,506,678 (unaudited), $46,119,705 and $26,385,000, respectively, were pledged
to secure advances from the FHLB of New York.
At June 30, 2000 and December 31, 1999, the Company has approximately 36%
(unaudited) and 37%, respectively of its collateralized mortgage obligation
(CMO) portfolio in private issues versus approximately 64% (unaudited) and 63%,
respectively, invested in government agency issues. Investing in private issue
CMO's involves a higher level of credit risk than investing in government agency
issued CMO's, however those issues in which the Company has invested have the
highest Standard & Poor's rating of AAA.
(3) Loans
Loans consist of the following:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998
---- ---- ----
(unaudited)
Mortgage loans:
<S> <C> <C> <C>
One to four family $ 88,016,982 90,587,529 89,455,464
Multi-family and commercial 31,964,022 28,519,656 20,533,704
Construction 2,285,677 2,695,125 6,912,383
-------------- ---------------- ---------------
Total mortgage loans 122,266,681 121,802,310 116,901,551
Commercial business 12,424,688 9,536,216 5,412,658
Home equity and property improvement loans 19,052,003 18,234,697 12,873,693
Mobile home loans 5,593,415 4,500,533 4,073,837
Consumer loans 5,445,216 5,966,557 6,920,387
-------------- ---------------- ---------------
Total loans 164,782,003 160,040,313 146,182,126
Premiums, net of deferred fees 169,338 163,324 129,234
Allowance for loan losses (1,400,281) (1,349,477) (1,175,758)
--------------- ---------------- ---------------
Net loans $ 163,551,060 158,854,160 145,135,602
============== =============== ===============
</TABLE>
The following table summarizes activity in the allowance for loan
losses:
<TABLE>
<CAPTION>
Six months
ended June 30, Years ended December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 1,349,477 1,175,758 1,175,758 1,148,786 1,087,637
Provision for loan losses 90,000 125,000 200,000 240,000 120,000
Loans charged-off (70,459) (117,560) (211,984) (293,134) (146,886)
Recoveries 31,263 146,209 185,703 80,106 88,035
----------- ---------- --------- --------- --------
Balance, end of period $ 1,400,281 1,329,407 1,349,477 1,175,758 1,148,786
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements. F-16
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued
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.
The principal balance of all loans not accruing interest amounted to
approximately $415,400 (unaudited), $586,700 and $1,016,000 at June 30, 2000,
December 31, 1999 and 1998, respectively. The interest income forgone for
non-accruing loans was $18,036 (unaudited), $36,759 (unaudited), $64,744,
$78,166 and $59,400 for the six months ended June 30, 2000 and 1999 and for the
years ended December 31, 1999, 1998, and 1997, respectively. At June 30, 2000,
December 31, 1999 and 1998, the recorded investment in loans that are considered
impaired was $152,356 (unaudited), $169,924 and $268,236, respectively. The
Company has provided an allowance for loan losses of $45,707 (unaudited),
$50,977 and $88,518 at June 30, 2000, December 31, 1999 and 1998, respectively,
for these loans. The average recorded investment in such impaired loans was
approximately $159,359 (unaudited) and $236,700 (unaudited) for the six months
ended June 30, 2000 and 1999, respectively, and $206,500 in 1999, $331,700 in
1998 and $74,900 in 1997. Interest income on impaired loans was $0 (unaudited)
for the six months ended June 30, 2000 and 1999 and the year ended December 31,
1999, and $12,912 in 1998, and $3,088 in 1997, was recognized.
Proceeds from the sale of residential and commercial mortgage loans to FNMA
and others were $2,576,794 (unaudited) and $9,113,745 (unaudited) for the six
months ended June 30, 2000 and 1999, respectively, and $14,224,557 in 1999,
$21,411,559 in 1998, and $4,559,531 in 1997. The net gain on sale of such loans
was $46,169 (unaudited), $117,871 (unaudited), $224,351, $276,612 and $26,695
for the six months ended June 30, 2000 and 1999, and for the years ended
December 31, 1999, 1998, and 1997 respectively. Loans serviced for others,
amounting to $40,148,177 (unaudited), $39,081,954 and $26,770,611 at June 30,
2000, and December 31, 1999 and 1998, respectively, are not included in the
consolidated financial statements. Originated mortgage servicing rights of
$257,241 (unaudited), $253,785 and $143,276 are included in other assets at June
30, 2000, and December 31, 1999 and 1998, respectively. The net carrying value
of these servicing rights approximated fair value. Residential mortgage loans
held for sale were $382,600 (unaudited), $454,700 and $1,204,000 at June 30,
2000, December 31, 1999 and 1998, respectively.
(4) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Land $ 113,000 113,000 113,000
Building 3,688,814 3,328,317 3,294,248
Furniture, fixtures and equipment 3,274,516 2,958,367 2,759,238
--------------- ------------ -----------
7,076,330 6,399,684 6,166,486
Less accumulated depreciation and
amortization 2,589,330 2,250,284 1,610,572
--------------- ------------ -----------
Premises and equipment, net $ 4,487,000 4,149,400 4,555,914
=============== ============ ===========
</TABLE>
Depreciation and amortization expense for the six months ended June 30,
2000 and 1999 was $355,826 (unaudited) and $332,372 (unaudited), respectively,
and for the years ended December 31, 1999, 1998, and 1997 was $668,929, $597,548
and $371,910, respectively.
See accompanying notes to consolidated financial statements. F-17
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(5) Deposits
Deposits and the applicable weighted average interest rates are summarized
as follows:
<TABLE>
<CAPTION>
At June 30 At December 31,
2000 1999 1998
-------- ---- ----
(unaudited)
Weighted Weighted Weighted
Average Average Average
Amount Interest Rate Amount Interest Rate Amount Interest Rate
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits and NOW
accounts 25,748,938 1.22% 24,474,602 1.17% 24,127,812 1.17%
------------ ------------
Savings accounts 45,674,797 2.49% 46,093,326 2.40% 47,258,689 2.74%
Money market accounts 7,719,629 4.08% 5,020,227 3.07% 3,195,816 2.89%
----------- ------------ -----------
53,394,426 2.72% 51,113,553 2.46% 50,454,505 2.75%
------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Certificates of deposit maturing:
<S> <C> <C> <C> <C> <C> <C>
12 months or less 80,331,418 98,308,695 88,404,748
13-24 months 41,606,269 24,778,136 28,829,883
25-36 months 5,612,438 3,742,491 4,279,881
37-48 months 2,256,976 4,007,255 2,032,335
49-60 months 10,790,590 1,634,750 4,196,753
61 months or longer 7,934 72,802 108,054
----------- ------------ -----------
140,605,625 5.74% 132,544,129 5.34% 127,851,654 5.56%
------------ ------------ -----------
$ 219,748,989 4.48% 208,132,284 4.15% 202,433,971 4.34%
============= ============ ===========
</TABLE>
Certificates of deposit equal to or greater than $100,000 amounted to
$25,247,958 (unaudited), $24,599,864 and $22,609,407 at June 30, 2000, December
31, 1999 and 1998, respectively. Deposit balances up to $100,000 are FDIC
insured.
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended
(unaudited) December 31,
----------- ------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NOW accounts $ 134,249 139,938 279,365 394,664 341,458
Savings accounts 565,982 666,899 1,280,547 1,365,558 1,390,960
Money market accounts 99,640 43,218 106,266 38,124 57,470
Certificates of deposit 3,726,063 3,486,610 6,994,129 6,879,852 5,948,456
------------ ------------- -------------- ------------- --------------
$4,525,934 4,336,665 8,660,307 8,678,198 7,738,344
============ ============= ============= ============ ===============
</TABLE>
See accompanying notes to consolidated financial statements. F-18
<PAGE>
(6) 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 $29,175,000. The agreement, which expires October 13, 2000,
is renewable on an annual basis. Advances are collateralized by a blanket lien
on the Bank's 1-4 family mortgage loans or investment securities.
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(6) Advances from Federal Home Loan Bank, Continued
Total outstanding advances from the FHLB are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
---- ---- ----
(unaudited)
Weighted Weighted Weighted
Average Average Average
Amount Interest Rate Amount Interest Rate Amount Interest Rate
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Overnight line of credit $ 1,400,000 7.23% 2,100,000 5.10% 6,000,000 5.13%
Due in:
1999 - - - - 10,000,000 5.63%
2000 2,000,000 6.37 17,000,000 5.79% - -
2001 5,000,000 5.88% 5,000,000 5.88% 3,000,000 5.45%
2002 3,359,136 6.37% 3,859,730 6.36% 3,815,261 6.26%
2003 15,000,000 5.55 20,000,000 5.52% 2,000,000 5.52%
2004 10,000,000 6.01 10,000,000 6.01% - -
2005 15,000,000 6.95% - - - -
2007 2,000,000 5.65% 2,000,000 5.65% 2,000,000 5.65%
2008 - - - - 10,000,000 4.75%
2009 - - 10,000,000 5.01% - -
2010 10,000,000 6.32% - - - -
------------ ----------- ----------- ---------- ----------- -------
63,759,136 6.21 69,959,730 5.64% 54,815,261 5.41%
============ ========== ============ ========= =========== ========
</TABLE>
Advances of $42,000,000 (unaudited) and $37,000,000 at June 30, 2000 and
December 31, 1999, respectively, are callable at the discretion of the FHLB in
or after 2000. Such advances have a weighted average interest rate of 5.48% and
mature from 2003 to 2009.
During the six months ended June 30, 2000, and for the years ended December
31, 1999 and 1998, advances from the FHLB had an average outstanding balance of
approximately $67,652,000 (unaudited), $61,923,000 and $45,532,000,
respectively. The maximum amount outstanding at any month end was $69,811,385
(unaudited) for the six months ended June 30, 2000, $69,959,730 in 1999 and
$54,892,000 in 1998. Such borrowings had a weighted-average interest rate of
5.88% (unaudited) for the six months ended June 30, 2000, 5.43% for 1999 and
5.41% for 1998.
(7) Income Taxes
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
June 30, December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Income from operations $ 229,804 381,714 860,426 468,565 561,616
Stockholders' equity, for
unrealized gain/(loss) on
securities available for sale 64,263 (1,366,351) (2,453,498) (185,264) 378,599
--------- ---------- ----------- --------- --------
Total income taxes $ 294,067 (984,637) (1,593,072) 283,301 940,215
========= ========== =========== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements. F-19
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, Continued
The components of income tax expense (benefit) attributable to income from
operations are as follows:
<TABLE>
<CAPTION>
Current Deferred Total
Six months ended June 30, 2000 (unaudited):
<S> <C> <C> <C>
Federal $ 250,282 (75,508) 174,774
State 33,602 21,428 55,030
------ ------- -------
$ 283,884 (54,080) 229,804
======= ======= =======
Six months ended June 30, 1999 (unaudited):
Federal $ 288,735 11,887 300,622
State 77,849 3,243 81,092
------- ------ -------
$ 366,584 15,130 381,714
======= ====== =======
Year ended December 31, 1999:
Federal $ 782,650 (114,246) 68,404
State 143,769 48,253 192,022
------- ------- -------
$ 926,419 (65,993) 860,426
======= ======= =======
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
======== ======= =======
</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:
Six Months Ended
<TABLE>
<CAPTION>
June 30, Year Ended December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense $ 206,544 324,758 736,225 405,482 479,098
Increase (decrease) in taxes resulting from:
State income tax expense,
net of federal
income tax benefit 36,320 53,521 125,005 69,277 83,368
Other, net (13,060) 3,435 (804) (6,194) (850)
Actual tax expense $ 229,804 381,714 860,426 468,565 561,616
Effective tax rate 37.8% 40.0% 39.7% 39.3% 39.9%
</TABLE>
See accompanying notes to consolidated financial statements. F-20
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, Continued
deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998
---- ---- ----
(unaudited)
Deferred tax assets:
<S> <C> <C> <C>
Allowance for loan losses $ 447,014 428,547 387,804
Net unrealized loss on securities
available for sale 2,285,632 2,349,895 - Supplemental
retirement benefits 72,872 76,480 81,873
Postretirement benefits 134,626 133,910 99,940
Deferred compensation 76,079 65,562 40,467
Accrued environmental remediation costs 304,411 266,373 275,809
New York State credits 65,966 77,761 75,087
Other 14,073 25,463 36,323
----------- ---------- --------
Total deferred tax assets 3,400,673 3,423,991 997,303
----------- ---------- --------
Deferred tax liabilities:
Net unrealized gain on securities available
for sale - - 103,487
Premises and equipment, principally due to
differences in depreciation 141,296 155,777 166,212 Mortgage
servicing rights 100,195 98,849 57,225
Other - - 20,389
---------- ---------- --------
Total deferred tax liabilities 241,491 254,626 347,313
---------- ---------- --------
Net deferred tax assets included
in other assets $ 3,159,182 3,169,365 649,990
========= ========== ========
</TABLE>
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. The Bank currently calculates its
Federal reserve using a loss experience method and its New York State reserve
using a percentage of taxable income method. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated after
the base year. The Bank's Federal base year reserve is designated as the tax bad
debt reserve at December 31, 1987. Recent amendments to the New York State tax
law redesignated the Bank's state tax bad debt reserves at December 31, 1995, as
the base-year amount.
See accompanying notes to consolidated financial statements. F-21
<PAGE>
SFAS No. 109 requires recognition of deferred tax liabilities with respect
to such excess reserves, as well as any portion of the base-year amount which is
expected to become taxable (or "recaptured") in the foreseeable future. For New
York State purposes, recognition of deferred tax liabilities is not required on
excess reserves resulting from use of the percentage of taxable income method
unless all or a portion is expected to become taxable in the forseeable future.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of approximately
$3,025,000, and the state base-year reserve of approximately $3,240,000 at June
30, 2000 (unaudited) and December 31, 1999, since the Bank does not expect that
these amounts will become taxable in the foreseeable future. Under Federal and
New York State tax law, as amended, events that would result in taxation of
these reserves include redemption of the Bank's stock, payment of dividends or
distributions in excess of earnings and profits, or failure by the institution
to qualify as a bank for Federal income tax purposes. The unrecognized deferred
tax liability at June 30, 2000 (unaudited) and December 31, 1999 with respect to
the Federal base-year reserve was $1,030,000. The unrecognized deferred tax
liability at June 30, 2000 (unaudited) and December 31, 1999 with respect to the
state base-year reserve and the excess reserve resulting from use of the
percentage of taxable income method was $160,000 (net of Federal benefit).
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 at June 30, 2000 (unaudited), December 31, 1999 and 1998.
(8) Retirement Plans
The following table sets forth the defined benefit pension and other
postretirement plan benefit obligations, fair value of plan assets and funded
status, as of and for the years ended December 31, 1999 and 1998, using the most
recent actuarial data measured at October 1, 1999 and 1998:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 2,338,585 2,010,012 666,771 488,372
Service cost 101,828 69,996 33,123 25,051
Interest cost 150,864 143,289 42,815 37,889
Curtailment - - (232,831) -
Termination benefits - 64,561 - -
Actuarial (gain)/loss (211,701) 189,231 (141,240) 129,721
Benefits paid (144,281) (138,504) (16,156) (14,262)
---------- ---------- --------- ---------
Benefit obligation at end of year 2,235,295 2,338,585 352,482 666,771
---------- ---------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning
of year 2,851,610 2,983,294 - -
Actual return on plan assets 505,687 6,820 - -
Employer contribution - - 16,156 14,262
Benefits paid (144,281) (138,504) (16,156) (14,262)
---------- --------- --------- ---------
Fair value of plan assets at end
of year 3,213,016 2,851,610 - -
---------- --------- --------- ---------
Funded status 977,721 513,025 (352,482) (666,771)
Unamortized net (asset) obligation at
transition - (19,826) 8,683 290,336
Unrecognized net (gain) loss subsequent
to transition (794,630) (299,684) - 159,539
Unamortized prior service cost
to transtion - 485 - (19,068)
--------- --------- -------- ----------
Prepaid (accrued) benefit cost at
year-end $ 183,091 194,000 (343,799) (235,964)
========= ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements. F-22
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements,
Continued Notes to Consolidated Financial Statements,
(8) Retirement Plans, Continued
Pension plan
Pension plan expense (benefit) consists of the following for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 101,828 69,996 57,229
Interest on projected benefit obligation 150,864 143,289 139,658
Expected return on plan assets (222,442) (233,416) (199,195)
Amortization of net transition asset (19,826) (22,283) (22,283)
Amortization of unrecognized gain - (32,979) (19,428)
Amortization of unrecognized
prior service cost 485 590 590
Termination benefits charge - 64,561 -
-------- -------- --------
Net periodic pension expense (benefit) $10,909 (10,242) (43,429)
======== ======== =========
Weighted average discount rate 7.75% 6.50% 7.25%
======== ======== =========
Expected long-term rate of return 8.00% 8.00% 8.00%
======== ======== =========
</TABLE>
The projected benefit obligation for the pension plan assumed a long-term
rate of increase in future compensation levels of 5.5%, 4.5% and 5.0% for 1999,
1998 and 1997, respectively.
Net periodic pension benefit expense was $4,508 (unaudited) for the six
months ended June 30, 2000. There was no net periodic expense or benefit
recorded for the six months ended June 30, 1999.
See accompanying notes to consolidated financial statements. F-23
<PAGE>
Postretirement Plan
Net periodic postretirement benefit cost included the following for the
years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Service cost $ 33,123 25,051 17,054
Interest cost 42,815 37,889 32,191
Net curtailment charge 26,672 - -
Net amortization and deferral 21,381 79,973 65,092
------- ------- -------
Net periodic postretirement
benefit cost $ 123,991 79,973 65,092
======== ======= =======
For measurement purposes, an annual rate of increase in the per capita cost
of average health care benefits for retirees of 6.5% and 7.0% at December 31,
1999 and 1998, 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, 1999 by $18,850, and the net periodic postretirement benefit cost
by $17,300 for the year then ended.
See accompanying notes to consolidated financial statements. F-24
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(8) Retirement Plans, Continued
The weighted average discount rate used in determining the accumulated
postretirement obligation was 7.75%, 6.50% and 7.50% for 1999, 1998 and 1997,
respectively.
During 1999, the Company curtailed the postretirement plan by discontinuing
to offer postretirement benefits to employees. As a result, the Company incurred
a $26,672 net curtailment charge which represented the accelerated amortization
of substantially all of the transition obligation less the reduction in the
projected benefit obligation.
Net periodic postretirement benefit cost was $12,600 (unaudited) and $5,964
(unaudited) for the six months ended June 30, 2000 and 1999, respectively.
401(k) Plan
The Company has a 401(k) plan covering substantially all employees. The
Company currently does not match employee contributions to the 401(k) plan.
Participants vest immediately in their own contributions and over a period of
six years in any Company contributions. Expense for this plan was $8,300
(unaudited), and $4,800 (unaudited) for the six months ended June 30, 2000 and
1999, and $7,900, $7,300 and $2,100 for the years ended December 31, 1999, 1998
and 1997, respectively.
Supplemental Employee Retirement Plan (SERP)
The Company maintains a nonqualified SERP for key executives. The following
table sets forth the changes the SERP's benefit obligation and plan assets for
1999 and 1998, using the most recent actuarial data measured at December 31,
1999 and 1998:
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 418,453 539,649
Interest cost 26,032 27,452
Amendments - (115,199)
Actuarial (gain)/loss 16,076 (1,955)
Benefits paid (45,019) (31,494)
------- --------
Benefit obligation at end of year 415,542 418,453
------- --------
Change in plan assets:
Fair value of plan assets at beginning of year - -
Employer contributions 45,019 31,494
Benefits paid (45,019) (31,494)
-------- --------
Fair value of plan assets at end of year - -
-------- --------
Funded status (415,542) (418,453)
Unamortized net obligation at
transition 303,200 322,150
Unrecognized net loss (gain) subsequent
to transition 14,121 (1,955)
Unrecognized prior service cost (98,271) (106,735)
-------- ---------
Accrued benefit cost at year end $(196,492) (204,993)
========= =========
See accompanying notes to consolidated financial statements. F-25
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(8) Supplemental Employee Retirement Plan (SERP), Continued
Annual expense related to the SERP consists of the following for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest cost $ 26,032 27,452 78,852
Amortization of net transition obligation 18,950 18,950 18,950
Unrecognized prior service cost (8,464) (8,464) -
----------- ---------- --------
Net periodic pension expense $ 36,518 37,938 97,802
=========== ========== ========
Weighted average discount rate 7.75% 6.50% 6.75%
===== ==== =====
</TABLE>
Net periodic pension expense related to the SERP was $19,998 (unaudited)
for both the six months ended June 30, 2000 and 1999.
(9) Employee Stock Ownership Plan
The Company has a noncontributory employee stock ownership plan (ESOP)
covering substantially all employees. The Company reports compensation expense
equal to the current market price of the shares released to participants each
year. As of June 30, 2000, and December 31, 1999, 45,605 (unaudited) and 44,324
shares, respectively, have been allocated to employees with the remaining
unallocated shares held in trust. Compensation expense amounted to $21,424
(unaudited), and $40,504 (unaudited), $69,441, $105,028 and $141,059 for the six
months ended June 30, 2000 and 1999 and for the years ended December 31, 1999,
1998 and 1997, respectively.
(10) Stock Option and Management Recognition Plans
In accordance with the 1996 Stock Option Plan (the "SOP"), the Company's
Board of Directors may grant stock options to officers and key employees to
purchase up to 118,000 shares of authorized but unissued common 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 June 30, 2000 and December 31, 1999, there were 16,000 (unaudited) and
9,000 shares available for grant under the SOP. The per share weighted-average
fair value of stock options granted was $0.88 (unaudited) in the six months
ended June 30, 2000, $1.43 in 1999, $3.71 in 1998 and $7.52 in 1997 on the date
of grant using the Black Scholes option-pricing model and the weighted-average
assumptions used were as follows: 2000 - expected dividend yield of 3.37%,
risk-free interest rate of 6.25%, assumed volitility of 38.23%, and an expected
life of 10 years; 1999 - expected dividend yield of 3.00%, risk-free interest
rate of 6.50%, assumed volitility of 37.01% and an expected life of 10 years;
1998 - expected dividend yield of 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 of 1.25%, risk-free interest rate of 5.75%, assumed
volitility of 26.30% and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its SOP and
accordingly, no compensation cost has been recognized for stock options in the
financial statements. Had the Company recognized compensation cost based on the
fair value at the grant date for its stock options 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:
See accompanying notes to consolidated financial statements. F-26
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(10) Stock Option and Management Recognition Plans, Continued
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income As reported $ 377,679 573,458 1,304,941 724,029 847,497
Pro forma 369,176 561,327 1,278,257 693,497 820,817
Net income per share - basic
As reported $ 0.11 0.16 0.37 0.21 0.24
Pro forma 0.10 0.16 0.36 0.20 0.24
</TABLE>
Stock option activity follows: Weighted-
Number of average
shares exercise price
------ --------------
At January 1, 1997 80,700 $ 7.93
Granted 28,600 11.63
-------- ------
At December 31, 1997 109,300 8.89
Granted 8,700 17.21
Forfeited (2,000) (8.00)
-------- -------
At December 31, 1998 116,000 9.53
Granted 1,000 9.00
Forfeited (2,000) (19.88)
Cancelled (6,000) (17.98)
-------- -------
At December 31, 1999 109,000 8.87
Granted (unaudited) 1,000 7.50
Forfeited (unaudited) (8,000) (9.31)
--------- -----
At June 30, 2000 (unaudited) 102,000 $ 8.82
========= =======
The range of exercise prices and weighted-average remaining contractual
life of outstanding options was $6.75 - $14.50 and 5.5 years at June 30, 2000
(unaudited), $6.75 - $14.50 and six years at December 31, 1999 and $6.75 -
$20.00 and seven years at December 31, 1998, respectively . At June 30, 2000,
December 31, 1999 and 1998, the number of options exercisable was 70,660
(unaudited), 58,400 and 37,200, respectively.
The Company also has a Management Recognition Plan (MRP) pursuant to which
the Company's Board of Directors may award shares of common stock to officers
and key employees. In 1996, the Company 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, 1999, all shares
had been granted to employees with original 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 vesting period. MRP expense included in salaries and employee benefits
in the consolidated statement of income was $53,000 (unaudited)for both the six
months ended June 30, 2000 and 1999, $106,000 for both 1999 and 1998, and
$70,000 in 1997.
See accompanying notes to consolidated financial statements. F-27
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(11) Net Income Per Share
The following is a summary of the net income per share calculation:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 (unaudited) 1999
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 3,539,148 3,531,773
--------- ---------
Income available
to common shareholders $ 377,679 3,539,148 $ 0.11 $ 573,458 3,531,773 $ 0.16
--------- --------- ======== --------- --------- ========
Effect of dilutive securities:
Common stock options 1,022 28,579
--------- ---------
Net income per share - diluted $ 377,679 3,540,170 $ 0.11 $ 573,458 3,560,352 $ 0.16
========= ========= ======== ========= ========= ========
Years Ended December 31,
1999 1998
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
------ ------- --------- ------ ------ ---------
Net income per share - basic
Weighted average shares 3,531,773 3,523,942
--------- ---------
Income available
to common shareholders $1,304,941 3,531,773 $ 0.37 $ 724,029 3,523,942 $ 0.21
---------- --------- ======== --------- --------- ========
Effect of dilutive securities:
Common stock options 18,447 43,982
-------- ---------
Net income per share - diluted $1,304,941 3,550,220 $ 0.37 $ 724,029 3,567,924 $ 0.20
========== ========= ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
1997
----
Weighted
Average Per-Share
Income Shares Amount
------ -------- ---------
<S> <C> <C> <C>
Net income per share - basic
Weighted average shares 3,509,908
---------
Income available
to common
shareholders $ 847,497 3,509,908 $ 0.24
---------- --------- =======
Effect of dilutive securities:
Common stock options 23,574
---------
Net Income per share - diluted $ 847,497 3,533,482 $ 0.24
========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements. F-28
<PAGE>
(12) 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 June 30, 2000, December 31, 1999 and 1998 are not
reflected in the consolidated statements of financial condition.
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial
Statements, Continued
(12) Commitments and Contingencies, Continued
The following is a summary of the maximum credit exposure of each class of
lending related off- balance sheet financial instruments outstanding:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998
(unaudited)
Commitments to originate loans:
<S> <C> <C> <C>
Fixed rate mortgage loans $ 594,800 1,108,450 2,251,161
Adjustable rate mortgage loans 102,407 144,000 1,182,000
Commercial real estate loans 3,017,000 1,223,000 2,243,000
Commercial loans 300,000 300,000 -
Consumer home equity loans 154,000 324,100 511,400
--------------- -------------- ---------------
$4,168,207 3,099,550 6,187,561
========= ============= ==========
At June 30, At December 31,
2000 1999 1998
---- ---- ----
(unaudited)
Unused lines of credit:
Construction loans $ 880,293 994,955 1,282,439
Commercial lines of credit 5,751,819 5,355,963 2,001,192
Home equity lines of credit 7,548,587 7,859,186 5,386,745
Other 536,875 503,219 489,531
------- ----------- -------------
$14,717,574 14,713,323 9,159,907
========== ========== =============
Outstanding letters of credit $ - 90,000 12,000
=============== ============= ==============
Commitments to sell loans:
Fixed rate mortgage loans $ 382,600 666,720 1,867,000
=============== ============== ==============
</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 certain commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. At June 30, 2000 (unaudited) and December
31, 1999, commitments to originate fixed rate mortgage loans have rates ranging
from 5.75% to 9.50%.
See accompanying notes to consolidated financial statements. F-29
<PAGE>
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 funded, will
represent loans secured by real estate. At June 30, 2000 (unaudited) and
December 31, 1999, 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.
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(12) Commitments and Contingencies, Continued
At June 30, 2000 and December 31, 1999, the Company occupied branch
facilities under noncancelable operating leases. Office occupancy and equipment
expense includes rental expense of $150,798 (unaudited), $133,230 (unaudited),
$272,251, $243,420 and $199,382 for the six months ended June 30, 2000 and 1999,
and for the years ended December 31, 1999, 1998 and 1997, respectively. The
approximate future minimum annual rental payments under the existing terms of
such leases at December 31, 1999 are as follows: $298,488, $258,018, $252,124,
$252,124 and $252,124 for the years ending December 31, 2000, 2001, 2002, 2003,
and 2004, respectively, and $2,200,408 in later years.
Environmental Matter
In April 1989, the Company foreclosed on property that had been a dry
cleaning and laundry facility. Environmental investigations revealed groundwater
and soil contamination and the Company incurred in excess of $500,000 in
remediation costs through 1992. During the period from 1993 to 1998 the Company
had discussions with the Department of Environmental Commission (DEC) and
performed periodic soil testing to determine if the property could be sold. In
October 1998, further testing revealed a new and more volatile contaminant in
the soil. As a result, the Company recorded a provision of $620,000 in December
1998 and $90,000 in 1999. At December 31, 1998, the Company had a $691,000
accrual in other liabilities for the estimated probable costs relating to the
remediation. In April 1999, the Company submitted an application for a voluntary
cleanup agreement and a proposed remediation plan to the DEC. In May 1999, the
Company received comments from the DEC regarding the proposed remediation plan
which included suggestions of alternative remediation methods. In response to
these comments, the Company completed a detailed evaluation of the alternative
remediation methodologies. In October 1999, the Company submitted a Focused
Feasibility Study and Remediation Work Plan for voluntary cleanup to the DEC. In
December 1999, the DEC approved the voluntary cleanup agreement and work plan.
The Company received approval from the DEC of a Design Report and Construction
Plan in May 2000, and subsequently executed a contract on July 21, 2000, for
Remedial Construction to begin in August 2000. Construction is scheduled to be
completed in October 2000. In December 1999, the Company purchased a Pollution
Legal Liability policy with coverage of up to $2 million and a term of 5 years,
which provides coverage against third party liability claims that could arise
from any off-site migration of the contamination. In August 2000, the Company
purchased a Cleanup Cost Cap Insurance policy with a coverage limit of $1
million and a term of 18 months.
At June 30, 2000 and December 31, 1999, the Company had accruals of
$781,500 (unaudited) and $684,000, respectively in other liabilities for the
estimated remediation costs. Management of the Company believes that the
recorded liability should be adequate to cover reasonably anticipated
liabilities in connection with this matter. However, it is possible that the
Company's liability exposure for the site will exceed the amounts reserved and
insured.
(14) Stockholders' Equity and Regulatory Capital Requirements
Other Comprehensive Income
The components of other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Unrealized net holding gains (loss)
arising during period $ 96,394 (2,005,850) (3,633,966) (213,868) 653,869
Less: reclassification adjustment for gains
included in net income - 43,676 46,282 63,739 85,296
----------- ----------- ------ ------ ------
Change in net unrealized gains (loss) on
securities available for sale, net of tax$s 96,394 (2,049,526) (3,680,248) (277,607) 568,573
= ======== ============ =========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements. F-30
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(14) Stockholders' Equity and Regulatory Capital Requirements, continued
Dividends
The Mutual Holding Company, which owns 2,389,948 shares of stock in Finger
Lakes Financial Corp., waived receipt of its dividend thereby reducing the
actual dividend payments. The amount of dividends waived by the Mutual Holding
Company was $286,800 (unaudited) for both the six months ended June 30, 2000 and
1999, $573,600 in 1999, $550,000 in 1998 and $478,000 in 1997.
Payment of dividends by the Bank is subject to non-objection by the OTS. As
of December 31, 1999, the amount of capital available for distribution was $5.7
million.
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
June 30, 2000 and December 31, 1999, 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 average assets of 4.0%; 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 at least 5.0%; 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 June 30, 2000, and December 31, 1999 and
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 June 30, 2000, and December 31, 1999 and 1998, compared to the
OTS requirements for minimum capital adequacy and for classification as a
well-capitalized institution. OTS capital regulations apply at only the Bank
level as the OTS does not impose capital requirements on the Holding Company.
See accompanying notes to consolidated financial statements. F-31
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(14)Stockholders' Equity and Regulatory Capital Requirements, continued
<TABLE>
<CAPTION>
Minimum
Actual Requirement Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 2000 (unaudited)
-------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets) $ 23,502,000 15.68% 11,991,040 8.00% 14,988,800 10.00%
Tier 1 capital (to risk
weighted assets) 22,998,000 15.34% 5,995,520 4.00% 8,993,280 6.00%
Tier 1 capital (to
average assets) 22,998,000 7.40% 12,429,680 4.00% 15,537,100 5.00%
Tangible capital 22,998,000 7.40% 4,661,130 1.50% - -
</TABLE>
June 30, 2000 adjusted tangible assets were $310,742,000 (unaudited). June
30, 2000 risk weighted assets were $149,888,000 (unaudited).
<TABLE>
<CAPTION>
Minimum
Actual Requirement Well Capitalized
------ ----------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets) $ 23,034,000 16.66% 11,058,800 8.00% 13,823,500 10.00%
Tier 1 capital (to risk
weighted assets) 22,597,000 16.35% 5,529,400 4.00% 8,294,100 6.00%
Tier 1 capital (to
average assets) 22,597,000 7.41% 12,202,480 4.00% 15,253,100 5.00%
Tangible capital 22,597,000 7.41% 4,575,930 1.50% - -
</TABLE>
1999 Adjusted Tangible Assets were $305,062,000.
1999 Risk Weighted Assets were $138,235,000.
<TABLE>
<CAPTION>
December 31, 1998
<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.
See accompanying notes to consolidated financial statements. F-32
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(14)Stockholders' Equity and Regulatory Capital Requirements, continued
The following is a reconciliation of Bank per generally accepted accounting
principals (GAAP) Capital to Regulatory Capital at June 30, 2000, December 31,
1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Tier 1 Total
Tangible Tier 1 Risk-Based Risk-Based
Capital Capital Capital Capital
June 30, 2000 (unaudited)
<S> <C> <C> <C> <C>
Bank GAAP Capital $ 19,737 $ 19,737 $ 19,737 $ 19,737
Accumulated losses on
certain available-for-sale securities 3,261 3,261 3,261 3,261
Allowance for loan losses -- -- -- 1,400
Equity investments required to be deducted -- -- -- (896)
Total Regulatory Capital $ 22,998 $ 22,998 $ 22,998 $ 23,502
December 31, 1999
Bank GAAP Capital $ 19,238 $ 19,238 $ 19,238 $ 19,238
Accumulated losses on
certain available-for-sale securities 3,359 3,359 3,359 3,359
Allowance for loan losses -- -- -- 1,350
Equity investments required to be deducted -- -- -- (913)
Total Regulatory Capital $ 22,597 $ 22,597 $ 22,597 $ 23,034
December 31, 1998
Bank GAAP Capital $ 21,535 $ 21,535 $ 21,535 $ 21,535
Accumulated gains on
certain available-for-sale securities (207) (207) (207) (207)
Allowance for loan losses -- -- -- 1,176
Equity investments required to be deducted -- -- -- (2,154)
Total Regulatory Capital $ 21,328 $ 21,328 $ 21,328 $ 20,350
</TABLE>
Regulatory capital ratios of the Company, computed on a consolidated basis,
are summarized below:
At June 30, At December 31,
2000 1999 1998
---- ---- ----
(unaudited)
Total capital (to risk weighted assets) 15.73% 16.81% 17.45%
Tier 1 capital (to risk weighted assets) 15.39% 16.50% 18.27%
Tier 1 capital (to average assets) 7.41% 7.46% 7.71%
Tangible capital 7.41% 7.46% 7.71%
See accompanying notes to consolidated financial statements. F-33
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(15) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Securities
Fair values for securities are based on quoted market prices. Where quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments.
Loans
The fair values of variable rate loans that reprice frequently and have no
significant credit risk, approximates 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 values of loans delinquent more than 30 days are
reduced by an allocated amount of the general allowance for loan losses.
Deposits
The fair values of 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 of deposits to a schedule
of weighted average expected monthly maturities.
Advances from FHLB
The fair value of advances from the FHLB is estimated using a discounted
cash flow approach that applies interest rates currently being offered for
advances with similar terms.
Other Financial Instruments
Based on the characteristics of cash, cash equivalents, and 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.
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998
------------- ------------------- -----------------
(unaudited)
Carrying Carrying Carrying
amount Fair value amount Fair value amount Fair value
------ ---------- ------ ---------- ------ ----------
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Securities $ 121,618,014 121,598,608 120,343,002 120,317,480 119,972,579 119,995,337
Loans 163,551,060 161,548,577 158,854,160 158,867,205 145,135,602 149,089,220
Financial liabilities:
Deposits:
Demand deposit accounts,
savings and money
market accounts 79,143,364 9,143,364 75,588,155 75,588,155 74,582,317 74,582,317
Time deposits 140,605,625 140,632,617 132,544,129 132,598,680 127,851,654 127,952,986
Advances from FHLB 63,759,136 63,821,363 69,595,730 70,897,337 54,815,261 55,066,529
</TABLE>
See accompanying notes to consolidated financial statements. F-34
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
Fair Value of Financial Instruments, Continued
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.
(16) Condensed Parent Company Only Financial Information
The following condensed statements of condition of Finger Lakes Financial
Corp. and the condensed statements of income and condensed statements of cash
flows should be read in conjunction with the Consolidated Financial Statements
and related notes:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
(unaudited)
Condensed Statements of Condition
Assets:
<S> <C> <C> <C>
Cash $ 94,043 $ 210,690 $ 441,823
Notes receivable from
subsidiary 162,543 180,603 216,724
Other assets 306,377 49,746 59,344
Investment in subsidiary 19,736,877 19,237,662 21,535,356
$ 20,299,840 $ 19,678,701 $ 22,253,247
Liabilities and stockholders' equity:
Note payable to subsidiary $ 563,022 $ 299,801 $ 289,651
Stockholders' equity 19,736,818 19,378,900 21,963,596
$ 20,299,840 $ 19,678,701 $ 22,253,247
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
2000 1999 1999 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Income $ 6,899 $ 8,268 $ 15,958 $ 3,596
Expense 6,386 16,233 22,340 4,553
Income/(loss) before income taxes and
equity in earnings of subsidiary 513 (7,965) (6,382) (957)
Income tax benefit/(expense) (204) 3,191 2,591 --
Income/(loss) before equity in earnings
of subsidiary 309 (4,774) (3,791) (957)
Equity in earnings of subsidiary 377,370 578,232 1,308,732 724,986
Net income $ 377,679 $ 573,458 $ 1,304,941 $ 724,029
</TABLE>
See accompanying notes to consolidated financial statements. F-35
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(16)Condensed Parent Company Only Financial Information
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
2000 1999 1999 1998
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 377,679 $ 573,458 $ 1,304,941 $ 724,029
Adjustments to reconcile net income
to net cash provided by/(used in)
operating activities:
Equity in earnings of subsidiary (377,370) (578,232) (1,308,732) (724,985)
Other, net (256,631) 3,167 9,598 (59,345)
Net cash provided by
(used in) operating
activities (256,322) (1,607) 5,807 (60,301)
Cash flows from investing activities:
Note receivable originated to subsidiary - - - (225,754)
Principal collected on note receivable 18,060 18,060 36,121 9,030
Net cash provided by (used in)
investing activities 18,060 18,060 36,121 (216,724)
Cash flows from financing activities:
Increase in note payable to subsidiary 263,221 9,875 10,150 289,651
Capitalization of Company - - - 500,000
Cash dividends paid (141,606) (141,606) (283,211) (70,803)
Net cash (used in) provided by
financing activities 121,615 (131,731) (273,061) 718,848
Net (decrease) increase in cash and
cash equivalents (116,647) (115,278) (231,133) 441,823
Cash and cash equivalents at beginning
of period 210,690 441,823 441,823 -
Cash and cash equivalents at end
of period $ 94,043 $ 326,545 $ 210,690 $ 441,823
</TABLE>
See accompanying notes to consolidated financial statements. F-36
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
Quarterly Summarized Financial Information (Unaudited)
Selected quarterly financial data for fiscal 2000, 1999 and 1998 follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
2000
By Quarter 1 2 Six Months
<S> <C> <C> <C> <C> <C>
Interest income $ 5,335 5,486 10,821
Interest expense 3,175 3,330 6,505
Net interest income 2,160 2,156 4,316
Provision for loan
losses 60 30 90
Non-interest income 250 261 511
Non-interest expense 2,083 2,046 4,129
Income before income
taxes 267 341 608
Income taxes 103 127 230
Net income $ 164 214 378
Net income per common
share:
Basic $ 0.05 0.06 0.11
Diluted $ 0.05 0.06 0.11
1999
By Quarter 1 2 3 4 Year
Interest income $ 4,871 4,987 5,208 5,251 20,317
Interest expense 2,910 2,950 3,050 3,111 12,021
Net interest income 1,961 2,037 2,158 2,140 8,296
Provision for loan
losses 75 50 35 40 200
Non-interest income 303 363 307 355 1,328
Non-interest expense 1,734 1,850 1,797 1,878 7,259
Income before income
taxes 455 500 633 577 2,165
Income taxes 182 200 260 218 860
Net income $ 273 300 373 359 1,305
Net income per common
share:
Basic $ 0.08 0.08 0.11 0.10 0.37
Diluted $ 0.08 0.08 0.11 0.10 0.37
</TABLE>
See accompanying notes to consolidated financial statements. F-37
<PAGE>
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
Quarterly Summarized Financial Information (Unaudited), Continued
<TABLE>
<CAPTION>
1998
By Quarter 1 2 3 4 Year
- - - - ----
<S> <C> <C> <C> <C> <C>
Interest income $ 4,443 4,551 4,693 4,959 18,646
Interest expense 2,617 2,730 2,885 2,969 11,201
----- ----- ----- ----- ------
Net interest income 1,826 1,821 1,808 1,990 7,445
Provision for loan
losses 60 60 60 60 240
Non-interest income 238 322 285 356 1,201
Non-interest expense 1,562 1,623 1,661 2,367 7,213
------ ----- ------ ----- -----
Income/(loss) before income
taxes 442 460 372 (81) 1,193
Income taxes 176 184 142 (33) 469
--- --- --- ---- ---
Net income/(loss) $ 266 276 230 (48) 724
=== === === ==== ===
Net income/(loss)per common
share:
Basic $ 0.07 0.08 0.07 (0.01) 0.21
Diluted $ 0.07 0.08 0.06 (0.01) 0.20
==== ==== ==== ====== ====
</TABLE>
See accompanying notes to consolidated financial statements. F-38
<PAGE>
--------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus, and, if given or
made, such other information or representation must not be relied upon as having
been authorized by Finger Lakes Bancorp, or Savings Bank of the Finger Lakes.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of Finger Lakes Bancorp or Savings Bank of the Finger
Lakes since any of the dates as of which information is furnished herein or
since the date hereof.
Up to 2,156,655 Shares
(Anticipated Maximum)
Finger Lakes Bancorp, Inc.
(Proposed Holding Company for
Savings Bank of the Finger Lakes)
COMMON STOCK
Par Value $0.01 per share
------------------
PROSPECTUS
------------------
Friedman Billings Ramsey
September 29, 2000
----------------
These securities are not deposits or accounts and are not federally
insured or guaranteed.
----------------
Until November 27, 2000 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
--------------------------------------------------------------------------------
<PAGE>
