As filed with the Securities and Exchange Commission on March 28, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINGER LAKES BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6712 (To be applied for)
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification) Identification Number)
470 Exchange Street
Geneva, New York 14456
(315) 789-3838
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
G. Thomas Bowers
Chairman, President and Chief Executive Officer
Finger Lakes Bancorp, Inc.
470 Exchange Street
Geneva, New York 14456
(315) 789-3838
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
John J. Gorman, Esq.
Alan Schick, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
===============================================================================================================================
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share 2,440,945 shares $7.00 $17,086,615 $4,511
===============================================================================================================================
- ----------
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS
FINGER LAKES BANCORP, INC.
(Proposed holding company for Savings Bank of the Finger Lakes)
Up to 2,122,545 shares of common stock
Finger Lakes Bancorp, Inc. is offering common stock. The shares we are
offering represent the 66.9% ownership interest in Finger Lakes Financial Corp.
now owned by Finger Lakes Financial Corporation, MHC, the mutual holding company
of Finger Lakes Financial Corp. Finger Lakes Financial Corp. is the mid-tier
stock holding company parent of Savings Bank of the Finger Lakes, FSB. The
remaining 33.1% ownership interest in Finger Lakes Financial is owned by the
public, and will be exchanged for new common stock in Finger Lakes Bancorp, Inc.
- --------------------------------------------------------------------------------
If you are a current or former depositor of Savings Bank of the Finger Lakes-
o You may have priority rights to purchase shares at $7.00 per share.
o You may purchase up to 106,127 shares (at the maximum), which is equal to
5% of the shares offered in the offering but may purchase no fewer than 25
shares.
o You will not pay a commission to buy any shares or to exchange existing
shares.
o Our offering will end at _____.m., Eastern Time on ____________, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 at $7.00 per share 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.
o You will not pay a commission to buy any shares or to exchange existing
shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you fit none of the above categories, but are interested in purchasing shares
of our common stock -
o You may purchase shares at $7.00 per share after priorit orders are filled.
o You may purchase the lesser of up to 106,127 shares (at the maximum), or 5%
of the shares offered in the offering. You may purchase no fewer than 25
shares.
o You will not pay a commission to buy any shares.
- --------------------------------------------------------------------------------
OFFERING SUMMARY
MINIMUM MAXIMUM
------- -------
Number of Shares: 1,568,863 2,122,545
Gross offering proceeds: $10,982,041 $14,857,815
Estimated offering expenses: 750,000 750,000
Estimated net proceeds: $10,232,041 $14,107,815
Estimated net proceeds per share: $6.52 $6.65
The maximum number of shares offered may be increased to 2,440,945. We will
terminate the offering of new stock, and the exchange of existing shares if we
do not sell the minimum number of shares. We have applied to the Nasdaq Stock
Market for approval to list our common stock on the Nasdaq National Market under
the symbol "FLBC".
For a discussion of risks that you should consider, see "Risk Factors"
beginning on page __.
For more information, please call the stock information center at
(315) ___-____.
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 & CO., INC.
The date of this prospectus is May __, 2000
[INSERT MAP SHOWING FINGER LAKES FINANCIAL'S MARKET AREA]
TABLE OF CONTENTS
Page
----
SUMMARY .......................................................................1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FINGER LAKES FINANCIAL AND SUBSIDIARY.............................13
FINGER LAKES BANCORP..........................................................15
SAVINGS BANK OF THE FINGER LAKES..............................................15
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE...................................16
USE OF PROCEEDS...............................................................18
DIVIDEND POLICY...............................................................19
MARKET FOR THE COMMON STOCK...................................................20
CAPITALIZATION................................................................22
PRO FORMA TABLES..............................................................23
FINGER LAKES FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME....................................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................27
BUSINESS OF SAVINGS BANK OF THE FINGER LAKES..................................36
REGULATION....................................................................53
TAXATION .....................................................................58
MANAGEMENT OF FINGER LAKES BANCORP............................................59
MANAGEMENT OF FINGER LAKES FINANCIAL..........................................59
EXECUTIVE COMPENSATION........................................................62
BENEFICIAL OWNERSHIP OF COMMON STOCK..........................................67
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS.............................67
THE CONVERSION................................................................68
COMPARISON OF STOCKHOLDERS' RIGHTS............................................92
RESTRICTIONS ON ACQUISITION OF FINGER LAKES BANCORP...........................99
DESCRIPTION OF CAPITAL STOCK OF FINGER LAKES BANCORP.........................100
EXPERTS ....................................................................102
LEGAL MATTERS................................................................102
ADDITIONAL INFORMATION.......................................................102
Questions and Answers about the Stock Offering
If you are interested in general information about the offering the following
questions and answers apply to you.
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 the 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 Lakes Financial 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: Why are we utilizing the stock holding company corporate structure?
A: The stock holding company form of ownership is used by many business
corporations including banks and savings institutions. As a result of the
conversion, we will have additional capital which will allow us to continue
to expand our banking franchise throughout the Finger Lakes Region. This
increased capital will enhance our ability to continue to increase and
diversify our income earning assets. As a holding company for a fully
converted institution, we will have greater flexibility in connection with
mergers and acquisitions. In addition, by selling new shares and listing
the stock on the Nasdaq National Market, we believe it will be easier to
establish a liquid and active trading market which will make it easier for
you to buy and sell our common stock.
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. We are setting up a
new holding company which will have the same Board of Directors as we
currently have at the bank. Prior to the reorganization, public
shareholders constituted only 33.1% ownership, whereas after the
reorganization, the public will own 100% of the stock company.
If you are a current or former depositor of Savings Bank of the Finger Lakes,
the following questions and answers apply to you.
Q: Will this reorganization affect any of my deposit accounts or loans at
Savings Bank of the Finger Lakes?
A: No. The terms and balance of all of your deposit and loan accounts will not
be affected.
Q: Will my deposit accounts still be insured by the FDIC?
A: Yes. Your deposit accounts will still be insured by the Federal Deposit
Insurance Corporation up to the maximum legal limit.
(i)
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 order form and certification form found in your packet of
information and returning it to the stock information 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.
Q: Why am I asked to vote on the reorganization and stock offering of the
bank?
A: We are required by our government regulators to allow ou depositors to vote
on our proposed reorganization and stock offering. If you were a depositor
on ____, 2000, we have attached one or more proxy cards to the stock order
forms found in the front pocket of the outer mailing envelope.
Q: How do I vote on the conversion and stock offering?
A: You vote by properly completing the proxy cards attached to the order form
that we sent in your packet of information. You should vote and sign all
your proxy cards and return them in the mail today in the blue envelope
marked PROXY RETURN ENVELOPE. The Board of Directors of the bank recommends
that you vote "FOR" the conversion.
Q: When do I have to vote?
A: We will need your properly executed proxy cards to tally at the special
meeting of members to be held on June __, 2000 at the main office of the
bank located at 470 Exchange Street in Geneva, New York. Therefore, we
recommend that you mail your proxy cards at least five days prior to the
meeting to allow time for delivery and processing. You may also drop off
your proxy cards at any branch of the bank, or you may vote in person at
the special meeting of members.
Q: Who can help answer any other questions I may have?
A: For answers to other questions, we encourage you to read this prospectus in
its entirety. Questions may also be directed to our stock information
center at (315) ___-____ Monday through Friday between the hours of 9:00
a.m. and 5:00 p.m. You may also visit the stock information center located
on the ____ floor of the main office of the bank at 470 Exchange Street in
Geneva, New York.
If you are interested in purchasing stock in Finger Lakes Bancorp, the following
questions and answers apply to you.
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 information center
at (315) ___-____ 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.
(ii)
Q: How many shares of stock are being offered and at what price?
A: We are offering for sale up to 2,122,545 shares of common stock at a
subscription price of $7.00 per share. We must sell at least 1,568,863
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
2,440,945 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 at a rate of __% based on a per share
price of $7.00. We expect to begin paying dividends in September of 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 information 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 106,127 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
reorganization and stock offering is complete?
A: We will pay interest at the bank's passbook deposit rate 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 CD's which you use to purchase stock in our offering. Any remaining
portion of your CD will remain at the bank. However, if you reduce your CD
to less than the required minimum, the remaining balance may be converted
to a regular deposit account.
(iii)
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 information 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 June __,
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 ________,
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
June __, 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 June __, 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 reorganization 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: How do I sell my shares of common stock?
A: When you decide you want to sell your shares on the Nasdaq National Market,
you will need to sell your shares through a registered broker dealer. You
may sell these shares either through an existing account or by setting up a
new account with a registered broker dealer.
Q: Who can help answer any other questions I may have about the stock
offering?
A: For answers to other questions, we encourage you to read this prospectus in
its entirety. Questions may also be directed to our stock information
center at (315) ___-____ Monday through Friday between the
(iv)
hours of 9:00 a.m. and 5:00 p.m. You may also visit the stock information
center located on the ____ floor of the main office of the bank at 470
Exchange Street in Geneva, New York.
If you are currently a shareholder of Finger Lakes Financial, the following
questions and answers apply to you.
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.
Q: How many new shares will I receive in exchange for my ol ones?
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 0.8881. As an example, if you currently own 100 shares, we will
issue you 88.81 shares in Finger Lakes Bancorp. If we sell the minimum
number of shares, the exchange ratio will be 0.6564, and you would receive
65.64 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: What do I need to do in order to receive my new shares?
A: At this point, you do not need to do anything with your current shares of
Finger Lakes Financial common stock. Promptly after the closing of the
reorganization and stock offering, we will send you a letter of transmittal
from our exchange agent if you have the shares of Finger Lakes Financial in
your possession. The letter of transmittal will require you to send in your
old stock certificate in order for us to send you back your new certificate
of stock in Finger Lakes Bancorp. If you currently have your shares in a
brokerage account, you own your shares in "street name" and the exchange
will occur automatically.
Q: 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 additio 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. For more information about purchasing shares of Finger Lakes Bancorp,
please refer to the section above.
Q: Do I have to vote on the reorganization and stock offering?
A: Enclosed in your packet of information is a proxy card used to vote at the
Special Meeting of Shareholders to be held at ___ _.m. on ____ 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 information
center at (315) ___-____ Monday through Friday between the hours of 9:00
a.m. and 5:00 p.m. You may also visit the stock information center located
on the ____ floor of the main office of the bank at 470 Exchange Street in
Geneva, New York.
(v)
To ensure that each person receives a prospectus at least 48 hours prior to the
expiration date of June __, 2000 in accordance with federal law, no prospectus
will be mailed any later than five days prior to June __, 2000 or hand delivered
any later than two days prior to June __, 2000.
(vi)
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
of Finger Lakes Financial. As of December 31, 1999, 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 $201,000 in cash.
Finger Lakes Financial Corp.
470 Exchange Street, Geneva, New York 14456
(315) 789-3838
Finger Lakes Financial is currently the mid-tier stock holding company of
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 are
held by the public. At December 31, 1999 Finger Lakes Financial had consolidated
assets totaling $301.2 million, deposits of $208.1 million and consolidated
stockholders' equity of $19.4 million.
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. Savings Bank of the Fingers Lakes
opened its seventh full-service office in Auburn, New York in the spring of
2000. A full description of its products and services begins on page _____ of
this prospectus. Savings Bank of the Finger Lakes' primary market area is in the
Finger Lakes region of New York state.
Business Strategy
We have several 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 estate 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 __ of the
prospectus.
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 125,509 to 169,803 shares of
common stock.
(3) Depositors with $50 or more on deposit as of March 31, 2000 get third
priority.
(4) Depositors as of __________, 2000, get fourth priority.
We are selling between 1,568,863 and 2,122,545 shares of common stock, all
at a price of $7.00 per share. The number of shares to be sold may be increased
to 2,440,945. 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 _____ p.m., Eastern Time, on June ___,
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
June ___, 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. 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.
2
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 _____ of
this prospectus.
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
- -------------------------- |
33.1% of -----------------------------------------------------
Public Shareholders ---------------- Finger Lakes Financial Corp.
Common -----------------------------------------------------
Stock |
- -------------------------- | 100% of Common Stock
|
-----------------------------------------------------
Savings Bank of the Finger Lakes
-----------------------------------------------------
Following the conversion, our ownership structure will be as follows:
- ------------------------------------- ----------------------------------
100% of
Finger Lakes Bancorp, Inc. ------------------ Public Stockholders
Common Stock
- ------------------------------------- ----------------------------------
| 100% of
| Common Stock
- ------------------------------------
Savings Bank of the Finger Lakes
- ------------------------------------
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. 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.
3
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
----------- ----------- ----------- ----------- ------------ ----------- -------------
Minimum............. 1,568,863 66.9% 774,587 33.1% 2,343,450 0.6564 65.64
Midpoint............ 1,845,645 66.9% 911,355 33.1% 2,757,000 0.7723 77.23
Maximum............. 2,122,545 66.9% 1,048,005 33.1% 3,170,550 0.8881 88.81
15% above maximum... 2,440,945 66.9% 1,205,188 33.1% 3,646,133 1.0213 102.13
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 Lake 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.
Conditions to Completion of Conversion
We cannot complete our conversion and our offering unless:
(1) It is approved by at least a majority of votes eligible to be cast by
members of Finger Lakes Financial Corp., MHC;
4
(2) It is approved by at least two-thirds of the outstanding shares of
Finger Lakes Financial common stock; and
(3) 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 December 31, 1999,
directors and executive officers of Finger Lakes Financial and their associates
beneficially own 189,218 shares of Finger Lakes Financial, or 5.3% of the
outstanding shares. They intend to vote those shares in favor of the conversion.
$7.00 per Share Stock Pricing, Exchange Ratio 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, this market value was between $16.4
million and $22.2 million, with a midpoint of $19.3 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 1,568,863 to 2,122,545 shares. This offering range means the $7.00 per
share purchase price for our shares will range from 58.0% to 70.1% of our
estimated post-conversion stockholders' equity per share, using December 31,
1999 financial data. See "The Conversion--Stock Pricing and Number of Shares to
be Issued" on page _____.
The independent appraisal will be updated prior to the completion of the
conversion. If the market value changes to either below $16.4 million or above
$25.5 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 stockholder -
You may not purchase more than 5% of the shares offered, or 106,127 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 stockholder -
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
158,527 shares at the maximum of the offering range. For example, if you are to
receive 77,230 shares in the exchange, you may only purchase up to an additional
81,297 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 _____.
5
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 also must 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 _____% 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 information
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."
Use of Proceeds
We will use the proceeds of this offering as follows:
o Net proceeds estimated to be between $5.1 million and $7.1 million,
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.
o Finger Lakes Bancorp will retain approximately 50% of the net proceeds
(between $5.1 million and $7.1 million), a portion of which may be
used to fund a loan to the employee stock 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."
6
Purchases by Officers and Directors
We expect our directors and executive officers, together with their
families, to subscribe for 77,714 shares, which equals approximately 4.21% of
the shares sold at the midpoint 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 169,803 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 169,803
shares in the offering, Finger Lakes Bancorp will recognize additional
compensation expense of $1,188,621 over a period of 15 years, or approximately
$79,200 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 reserve 4% of the shares sold in the offering, or
84,901 shares at the maximum of the offering range, for awards to key employees
and directors, at no cost to the recipients. In the event the 2001 recognition
plan is adopted more than one year following the completion of the conversion,
it would reserve up to 5% of the shares sold in the offering for awards to key
employees and directors. The second plan, the 2001 stock option plan, will
reserve 10% of the shares sold in this offering, or 212,254 shares at the
maximum of the offering range, to be issued when options to be granted to key
employees and directors are exercised. 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
an employment agreement 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 December 31, 1999, the
aggregate value of the severance benefits payable to Mr. Bowers and Mr. Hammond
under the proposed employment agreements would have been approximately $567,000
and $282,000, respectively.
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 expect to
establish a dividend rate of ___% (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 conditions 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 by July 2000, the first dividend is expected to be
declared for the quarter ending September 2000.
7
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.
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
-------------- -------------- -------------- -------------- -------------
Employee stock ownership plan ................... 125,509 169,803 $ 878,563 $1,188,621 8%
2001 recognition plan ........................... 62,754 84,901 439,278 594,307 4%
2001 stock option plan .......................... 156,886 212,254 -- -- 10%
Aggregate value of severance benefits under
employment agreements ........................ -- -- -- -- --
Total ........................................... 345,149 466,958 $1,317,841 $1,782,928 22%
As of the date of this prospectus, management of Finger Lakes Financial
owned, or had the right to acquire, __________ 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
__________ and __________ shares of Finger Lake Bancorp at the minimum and
maximum, respectively, of the offering range. That would amount to _____% and
_____%, 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.
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 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 ___.
8
RISK FACTORS
- --------------------------------------------------------------------------------
You should consider carefully the following risk factors before deciding
whether to invest in 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") and DEC has approved our work plan to perform
the remediation. At December 31, 1999, we had a $684,000 accrued liability on
our financial statements for the estimated remediation costs. 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.
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 December
31, 1999, our deposit accounts consist of time deposit accounts, of which $98.3
million, or 47.2% of total deposits have remaining terms to maturity of less
than one year, as well as demand deposits such as NOW and passbook 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 December
31, 1999, our mortgage-backed securities and investment securities which were
classified as available for sale had a fair value of $118.8 million, which is
$5.8 million less than the $124.6 million amortized cost of such securities. The
$5.8 million unrealized loss on such securities ($3.5 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 return on equity for the fiscal years ended December 31,
1999 and 1998 was 6.19% and 3.29%, respectively. These ratios are below the
industry averages. Moreover, we will not be able to deploy the increased capital
from this offering immediately. 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
generally have lower yields than mortgage and non-mortgage loans. Until we can
leverage
9
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.
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.
Our stock price may decline.
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.
The implementation of stock-based benefits will increase our future compensation
expense and reduce our earnings.
We intend to adopt a stock option plan that will provide for the granting
of options to purchase common stock, a recognition and retention plan that will
provide for awards of restricted stock to our eligible officers, employees and
directors and an employee stock ownership plan that will distribute stock to all
of our qualifying employees over a period of time. The recognition and retention
plan and the ESOP will increase our future costs of compensating our directors
and employees. The cost of the ESOP will vary based on our stock price over
time, while the cost of the Recognition and Retention Plan will be based on our
stock price when the awards are first granted.
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.
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.
10
There are many factors beyond our control that affect the demand for loans.
There are many factors beyond our control that can affect the demand for
loans. Because making loans is our primary business and primary source of
profits, 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, and our goal is to continue to increase this portfolio because
of the higher yields these loans provide. At December 31, 1999 multi-family and
commercial real estate loans totaled $28.5 million or 17.82% of total loans
compared to $20.5 million or 14.05% of total loans at December 31, 1998. At
December 31, 1999 loans that were not secured by real estate totaled $38.2
million or 23.89% of total loans compared to $29.3 million or 20.03% 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.
Our investment of the proceeds of the offering affords our management
significant discretion and they may not be able to achieve acceptable returns on
the proceeds.
We intend to contribute approximately 50% of the net proceeds to Savings
Bank of the Finger Lakes. We will use a portion of the net proceeds to fund the
ESOP and may use the remaining net proceeds as a possible source of funds to
finance the acquisition of other financial institutions and other businesses,
pay dividends to stockholders, repurchase common stock, purchase mortgage-backed
and investment securities, or for other general corporate purposes. Savings Bank
of the Finger Lakes may use the proceeds it receives to establish or acquire
additional branch offices, fund new loans, purchase mortgage-backed and
investment securities, fund the recognition and retention plan or for general
corporate purposes. We have not, however, allocated specific amounts of proceeds
for any of these purposes and we will have significant flexibility in
determining the amounts of net proceeds we apply to different uses and the
timing of such applications. Our failure to apply these funds effectively could
hurt our profits.
Irrevocability of orders; potential delay in completion of offering.
Orders submitted in the offering are irrevocable. Funds submitted in
connection with any purchase of common stock in the offering will be held by us
until the completion or termination of the conversion, including any extension
of the expiration date. Because, among other factors, completion of the
conversion will be subject to an update of the independent appraisal prepared by
FinPro, there may be one or more delays in the completion of the conversion.
Subscribers will have no access to subscription funds and/or shares of
conversion stock until the conversion is completed or terminated.
Recent market volatility--impact on common stock price.
In recent months, stock markets in the United States and worldwide have
been extremely volatile. The securities of individual companies have, in many
instances, experienced significant fluctuations in price for reasons unrelated
to the specific company's financial condition, results of operations or business
prospects. In particular, the value of all financial institution securities has
been adversely affected by weakening economies worldwide, even though local
community-based financial institutions may not have any credit exposure outside
the
11
United States. 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.
Banking reform legislation may increase competition.
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.
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.
12
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 the 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.
At December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
Selected Financial Condition Data:
Total assets .................................... $ 301,241 $ 282,376 $ 247,708 $ 200,429 $ 167,773
Cash and cash equivalents ....................... 6,095 4,375 4,394 6,366 6,823
Securities available for sale ................... 118,750 115,333 99,880 83,830 61,719
Securities held to maturity ..................... 1,593 4,640 14,096 13,347 4,705
Loans, net ...................................... 158,854 145,136 118,439 88,682 86,050
Deposits ........................................ 208,132 202,434 186,534 153,832 144,846
Advances from Federal Home Loan Bank ............ 69,960 54,815 36,721 23,800 --
Stockholders' equity ............................ 19,379 21,964 21,679 20,350 20,734
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995(1)
--------- --------- --------- --------- ---------
(In Thousands, except per share amounts)
Selected Operating Data:
Total interest income ........................... $ 20,317 $ 18,645 $ 15,840 $ 13,560 $ 8,187
Total interest expense .......................... 12,021 11,201 9,197 7,370 4,426
--------- --------- --------- --------- ---------
Net interest income ............................ 8,296 7,444 6,643 6,190 3,761
Provision for loan losses ....................... 200 240 120 483 290
--------- --------- --------- --------- ---------
Net interest income after provision for
loan losses .................................... 8,096 7,204 6,523 5,707 3,471
Noninterest income .............................. 1,328 1,202 721 1,093 123
Noninterest expense ............................. 7,259 7,213 5,835 6,741 5,068
--------- --------- --------- --------- ---------
Income (loss) before income tax
expense (benefit) .............................. 2,165 1,193 1,409 59 (1,474)
Income tax expense (benefit) .................... 860 469 562 23 (571)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 1,305 $ 724 $ 847 $ 36 $ (903)
========= ========= ========= ========= =========
Net income (loss) per share- basic .............. $ .37 $ .20 $ .24 $ .01 $ (.25)
========= ========= ========= ========= =========
Net income (loss) per share - dilute ............ $ .36 $ .20 $ .24 $ .01 $ (.25)
========= ========= ========= ========= =========
Dividends per share ............................. $ .24 $ .23 $ .20 $ .20 $ .15
========= ========= ========= ========= =========
- ----------
(1) Reflects eight months of operations insofar as the Savings Bank of Finger
Lakes converted its fiscal year end from April 30 to December 31 in 1995.
13
Eight Months
Ended
At or For the Year Ended December 31, December 31,
------------------------------------------------ -------------
1999 1998 1997 1996 1995 (1)
------ ------ ------ ------ -------------
Selected Ratios:
Performance Ratios:
Return on assets (ratio of net income to
average total assets)(3) ................................ 0.44% 0.27% 0.40% 0.02% (0.79)%
Return on stockholders' equity (ratio of net
income to average equity)(3) ............................ 6.19 3.29 4.05 0.18 (6.44)
Interest rate spread information (2):
Average during period ................................... 2.74 2.71 2.82 3.17 3.27
End of period ........................................... 2.77 2.73 2.84 2.79 3.24
Net interest margin
(net interest income divided by
average interest-earning assets) ....................... 2.93 2.96 3.14 3.48 3.56
Operating expenses to average total
assets(3) .............................................. 2.47 2.74 2.66 3.60 4.45
Average interest-earning assets to
average interest-bearing liabilities .................... 104.65 105.39 107.29 106.68 106.95
Dividend Payout ratio .................................... 67 115 87 2000 n/a
Asset Quality Ratios:
Non-performing assets to total assets(4) ................. 0.32% 0.43% 0.50% 0.93% 1.78%
Allowance for loan losses to
non-performing loans(4) ................................. 230.38% 115.75% 203.72% 118.52% 78.39%
Allowance for loan losses to
loans, net .............................................. 0.84% 0.80% 0.96% 1.21% 0.93%
Capital Ratios:
Stockholders' equity to total assets
at end of period ........................................ 6.43% 7.78% 8.75% 10.15% 12.36%
Average stockholders' equity to
average assets .......................................... 7.17% 8.36% 9.54% 10.85% 12.31%
Other Data:
Number of full service customer facilities
at end of period ........................................ 6 6 5 4 3
- ----------
(1) Reflects eight months of operations insofar as Savings Bank of Finger Lakes
converted its fiscal year end from April 30 to December 31 in 1995.
(2) 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.
(3) For purposes of computing these rates, the eight month period ended December
31, 1995 has been annualized.
(4) Nonperforming loans consist of non-accrual loans and non-performing assets
consist of non-performing loans, troubled debt restructuring and real estate
owned.
14
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. Upon consummation of 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 and 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 $5.1 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 the 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 its assets and liabilities, including all of its
deposit-taking, lending and other banking functions and its corporate name to
the newly created stock savings bank called the Savings Bank of the Finger
Lakes.
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 the Savings Bank of the Finger Lakes. The reorganization into
the two-tier structure had no impact on the operations of the 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 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
15
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
December 31, 1999, we were servicing $39.1 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 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 December 31, 1999, 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 December 31, 1999 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 December 31, 1999. 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.
16
Savings Bank of the Finger Lakes Pro Forma at December 31, 1999
Historical at ---------------------------------------------------------------
December 31, 1999 1,568,863 Shares 1,845,645 Shares
-------------------------------- ---------------------------- ----------------------------
Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2)
---------- ----------- -------- ---------- -------- ----------
(Dollars in Thousands)
GAAP capital ....... $ 19,238 6.38% $ 23,177 7.60% $ 23,913 7.82%
Tangible capital:
Capital level ... $ 22,597 7.41% 26,395 8.55% $ 27,131 8.76%
Requirement ..... 4,576 1.50 4,633 1.50 4,644 1.50
-------- ------ -------- -------- -------- ------
Excess ........ $ 18,021 5.91% $ 21,762 7.05% $ 22,487 7.26%
======== ====== ======== ======== ======== ======
Core capital:
Capital level ... $ 22,597 7.41% $ 26,395 8.55% $ 27,131 8.76%
Requirement(3) .. 12,202 4.00 12,354 4.00 12,384 4.00
-------- ------ -------- -------- -------- ------
Excess ........ $ 10,395 3.41% $ 14,041 4.55% $ 14,474 4.76%
======== ====== ======== ======== ======== ======
Risk-based capital:
Capital level(4) $ 23,034 16.66% $ 26,832 19.15% $ 27,568 19.62%
Requirement ..... 11,059 8.00 11,211 8.00 11,240 8.00
-------- ------ -------- -------- -------- ------
Excess ........ $ 11,975 8.66% $ 15,621 11.15% $ 16,328 11.62%
======== ====== ======== ======== ======== ======
Assets ............. $301,241 $305,039 $305,775
Tangible Assets .... $305,062 $308,860 $309,596
Core Assets ........ $305,062 $308,860 $309,596
Risk Weighted Assets $138,235 $140,134 $140,502
Pro Forma at December 31, 1999
---------------------------------------------------------------
2,122,545 Shares 2,440,945 Shares(1)
-------------------------- ------------------------------
Percent of Percent of
Amount Assets(2) Amount Assets(2)(3)
-------- ---------- -------- ------------
(Dollars in Thousands)
>
GAAP capital ....... $ 24,650 8.04% $ 25,498 8.30%
Tangible capital:
Capital level ... $ 27,868 8.98% $ 28,716 9.23%
Requirement ..... 4,655 1.50 4,668 1.50
-------- ------- -------- -------
Excess ........ $ 23,213 7.48 $ 24,048 7.73%
======== ======= ======== =======
Core capital:
Capital level ... $ 27,868 8.98% $ 28,716 9.23%
Requirement(3) .. 12,413 4.00 12,447 4.00
-------- ------- -------- -------
Excess ........ $ 15,455 4.98% $ 16,269 5.23%
======== ======= ======== =======
Risk-based capital:
Capital level(4) $ 28,305 20.09% $ 29,153 20.63%
Requirement ..... 11,270 8.00 11,304 8.00
-------- ------- -------- -------
Excess ........ $ 17,035 12.09% $ 17,849 12.63%
======== ======= ======== =======
Assets ............. $306,512 $307,360
Tangible Assets .... $310,333 $311,181
Core Assets ........ $310,333 $311,181
Risk Weighted Assets $140,871 $141,294
- ----------
(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. Pro forma total adjusted assets were $308.9 million,
$309.6 million, $310.3 million and $311.2 million, respectively, at the
minimum, midpoint, maximum and maximum, as adjusted, of the offering range.
Pro forma risk-weighted assets were $140.1 million, $140.5 million, $140.9
million and $141.3 million, respectively, at the minimum, midpoint,
maximum, and maximum, as adjusted, of the offering range.
(3) The current Office of Thrift Supervision core capital requirement for
savings banks is 4% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements which would require a
core capital ratio of 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. See
"Regulation--Federal Regulation of Savings Institutions--Capital
Requirements."
(4) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
17
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 $10.2 million and $14.1
million, or $16.3 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 $5.1 million and
$7.1 million, or $8.2 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 Lake 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
1,568,863 Shares 2,122,545 Shares
---------------- ----------------
Net proceeds ....................................................... $10,232,041 $14,107,815
=========== ===========
Purchase of Savings Bank of the Finger Lakes common stock .......... 5,116,021 7,053,908
Funds loaned to ESOP ............................................... 878,563 1,188,621
----------- -----------
Funds retained for general corporate purposes ...................... $ 4,237,458 $ 5,865,287
=========== ===========
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. Office of Thrift Supervision regulations generally do
not permit Finger Lakes Bancorp to repurchase any shares of its common stock
without regulatory approval for three years except that beginning one year
following completion of the conversion, Finger Lakes Bancorp may repurchase its
common stock so long as:
(1) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period;
(2) the repurchases do not cause Savings Bank of the Finger Lakes to become
"undercapitalized" within the meaning of the Office of Thrift Supervision prompt
corrective action regulation; and
(3) Finger Lakes Bancorp provides to the Regional Director of the Office of
Thrift Supervision no later than ten days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and the program is not disapproved by the Regional Director.
18
Under current Office of Thrift Supervision policies, repurchases may be
allowed in the first year following the conversion and in amounts greater than
5% in the second and third years following the conversion provided there are
valid and compelling business reasons for the repurchases and the Office of
Thrift Supervision does not object to the repurchases. Such repurchases may not
exceed 25% of the total shares outstanding during the three years following the
conversion.
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
(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
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. Such 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, including investment 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 now pays a cash dividend of $0.06 per share per
quarter, or $0.24 per share per year. After the conversion, we expect to
establish a dividend rate of ___% (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 by July 2000, the first dividend is expected to be
declared for the quarter ending September 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
19
"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 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 December 31, 1999 Finger Lakes Financial had ______ 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
the 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 December 31, 1999 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.
20
Cash Dividend
Fiscal 2000 High Bid(1) Low Bid(1) Declared
-------------- ------------- ------------
Quarter Ended March 31, 2000................ $ $ $
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................ $ 24.750 $ 14.750 $ 0.05
- ----------
(1)Common stock prices and dividends have been adjusted to reflect two for one
stock split effective March 2, 1998.
At January 31, 2000, the business day immediately preceding the public
announcement of the conversion, and at __________, 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 $_____ per share, respectively. At December 31,
1999, 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."
21
CAPITALIZATION
The following table presents the historical consolidated capitalization of
Finger Lakes Financial at December 31, 1999, 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.
Pro Forma at December 31, 1999
------------------------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted(1)
1,568,863 1,845,645 2,122,545 2,440,945
Finger Lakes Financial shares at shares at shares at shares at
Historical at $7.00 $7.00 $7.00 $7.00
December 31, 1999 per share per share per share per share
---------------------- --------- --------- --------- -------------
(Dollars in Thousands)
Deposits(2) ................... $ 208,132 $ 208,132 $ 208,132 $ 208,132 $ 208,132
Borrowed funds ................ 69,960 69,960 69,960 69,960 69,960
--------- --------- --------- --------- ---------
Total deposits and borrowed
funds ....................... $ 278,092 $ 278,092 $ 278,092 $ 278,092 $ 278,092
========= ========= ========= ========= =========
Stockholders' equity:
Preferred stock, $.01 par
value, _____ shares
authorized; none to be
issued(3) .................. -- -- -- -- --
Common Stock, $.01 par value
(post-conversion), _____
shares authorized;
shares to be issued as
reflected(3) ................ 36 23 28 32 36
Additional paid-in
capital(3)(4) ............... 4,787 15,032 16,965 18,899 21,124
Retained income(5) ............ 18,262 18,262 18,262 18,262 18,262
Accumulated other
comprehensive
income (loss) ............... (3,525) (3,525) (3,525) (3,525) (3,525)
Less:
Common Stock held by
existing Employee Stock
Ownership Plan .............. (181) (181) (181) (181) (181)
Common Stock to be acquired
by ESOP ................. -- (879) (1,034) (1,189) (1,367)
Common Stock to be acquired
by Recognition Plan(7) ...... -- (439) (517) (594) (683)
--------- --------- --------- --------- ---------
Total stockholders' equity .... $ 19,379 $ 28,293 $ 29,998 $ 31,704 $ 33,666
========= ========= ========= ========= =========
Total stockholders' equity as a
percentage of total assets .. 6.43% 9.12% 9.62% 10.11% 10.67%
========= ========= ========= ========= =========
- ----------
(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 $.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.
(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 issued 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, 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) Pro forma retained earnings does not reflect consolidation of $201,000 of
capital from Finger Lakes Financial Corp., MHC. The 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 issued 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
22
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, midpoint, maximum and the maximum, as adjusted, of the
offering range, the number of outstanding shares would be 2,406,204,
2,830,825, 3,255,451 and 3,743,770, respectively, and total stockholders'
equity would be $28.7 million, $30.5 million, $32.3 million and $34.3
million, respectively, at December 31, 1999. 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 3.83%.
PRO FORMA TABLES
The following table summarizes historical data of Finger Lakes Financial
and pro forma data of Finger Lakes Bancorp at or for 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, the 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 twelve
months ended December 31, 1999 has been calculated as if Finger Lakes Financial
has 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 5.98% for 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 3.59% for 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.
23
At or for the Year Ended December 31, 1999
Based upon the Sale for $7.00 of
-----------------------------------------------------------------------------
1,568,863 1,845,645 2,122,545 2,440,945
Shares Shares Shares Shares(1)
----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
Gross proceeds ............................. $ 10,982 $ 12,920 $ 14,858 $ 17,087
Expenses ................................... (750) (750) (750) (750)
----------- ----------- ----------- -----------
Estimated net proceeds ................... $ 10,232 $ 12,170 $ 14,108 $ 16,337
Common stock purchased by Employee Stock
Ownership Plan(2) ...................... (879) (1,034) (1,189) (1,367)
Common stock purchased by 2001
Recognition Plan(3) ................... (439) (517) (594) (683)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ...... $ 8,914 $ 10,619 $ 12,325 $ 14,287
=========== =========== =========== ===========
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 ......... 320 381 442 513
Employee Stock Ownership Plan(2) ........ (35) (41) (48) (55)
2001 Recognition Plan(3) ................ (53) (62) (71) (82)
----------- ----------- ----------- -----------
Pro forma net income .................. $ 1,537 $ 1,583 $ 1,628 $ 1,681
=========== =========== =========== ===========
Net income per share(4):
Historical combined(8) ................... $ .59 $ .50 $ .44 $ .38
Pro forma adjustments:
Income on net proceeds ................... .15 .15 .15 .15
Employee Stock Ownership Plan(2) ......... (.02) (.02) (.02) (.02)
2001 Recognition Plan(3) ................. (.02) (.02) (.02) (.02)
----------- ----------- ----------- -----------
Pro forma net income per share(4)(5) .... $ .70 $ .61 $ .55 $ .49
=========== =========== =========== ===========
Pro forma price to earnings ................ 10.00x 11.48x 12.73x 14.29x
=========== =========== =========== ===========
Number of shares used in price-to-earnings
ratio calculations ....................... 2,193,781 2,580,921 2,968,059 3,413,266
At December 31, 1999:
Stockholders' equity:
Historical combined(8) ................... $ 19,379 $ 19,379 $ 19,379 $ 19,379
Estimated net proceeds ................... 10,232 12,170 14,108 16,337
Less: Common stock acquired by
Employee Stock Ownership Plan(2) ......... (879) (1,034) (1,189) (1,367)
Common Stock acquired by 2001
Recognition Plan(3) .................. (439) (517) (594) (683)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(6) .......... 28,293 29,998 31,704 33,666
Intangible assets ........................ -- -- -- --
----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity .. $ 28,293 $ 29,998 $ 31,704 $ 33,666
=========== =========== =========== ===========
Stockholders' equity per share(7):
Historical combined ...................... $ 8.27 $ 7.03 $ 6.11 $ 5.31
Estimated net proceeds ................... 4.37 4.41 4.45 4.48
Less: Common stock acquired by Employee
Stock Ownership Plan(2) .................. (.38) (.38) (.38) (.37)
Common Stock acquired by 2001
Recognition Plan(3) .................. (.19) (.19) (.19) (.19)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per
share(6)(7) ............................ $ 12.07 $ 10.87 $ 9.99 $ 9.23
=========== =========== =========== ===========
Pro forma tangible stockholders'
equity per share ....................... $ 12.07 $ 10.87 $ 9.99 $ 9.23
=========== =========== =========== ===========
Offering price as a percentage of pro
forma stockholders' equity per share ..... 58.00% 64.40% 70.07% 75.84%
=========== =========== =========== ===========
Offering price as a percentage of pro
forma tangible stockholders'
equity per share ......................... 58.00% 64.40% 70.07% 75.84%
=========== =========== =========== ===========
Number of shares used in book value
per share calculations ................... 2,327,300 2,738,000 3,148,700 3,621,005
- ----------
(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.
(footnotes continued on next page)
24
(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. 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 8,367, 9,843, 11,320 and 13,018 shares were committed to
be released with respect to December 31, 1999 at the minimum, midpoint,
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 respective 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 issued in the offering. 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
3.83%.
(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
offerings 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.
Assuming stockholder approval of the plan, that all the options were
exercised at the end of the period at an exercise price equal to the
subscription price, and that the 2001 Recognition Plan purchases shares in
the open market at the subscription price, pro forma net income per share
for the fiscal year ended December 31, 1999 would be $.63, $.55, $.50 and
$.44, and the pro forma stockholders' equity per share at December 31, 1999
would be $11.61, $10.53, $9.73 and $9.03, in each case at the minimum,
midpoint, maximum and adjusted maximum of the offering range, respectively.
(6) The retained income 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,
midpoint, maximum and adjusted maximum of the offering range, respectively.
The exchange shares reflect an exchange ratio of 0.6564, 0.7723, 0.8881 and
1.0213, respectively, at the minimum, midpoint, 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.
25
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 have been audited by
KPMG LLP, independent certified public accountants, whose report thereon appears
elsewhere herein. These Statements should be read in conjunction with the
consolidated financial statements of Finger Lakes Financial and notes thereto
included elsewhere in this prospectus.
1999 1998 1997
----------- ----------- -----------
Interest income:
Loans ............................................................ $12,137,138 10,821,304 8,587,760
Securities ....................................................... 8,173,120 7,810,063 7,204,518
Federal funds sold and other short-term investments .............. 6,187 14,085 47,503
----------- ----------- -----------
Total interest income .......................................... 20,316,445 18,645,452 15,839,781
----------- ----------- -----------
Interest expense:
Deposits ......................................................... 8,660,307 8,678,198 7,738,344
Borrowings ....................................................... 3,360,357 2,523,136 1,458,051
----------- ----------- -----------
Total interest expense ......................................... 12,020,664 11,201,334 9,196,395
----------- ----------- -----------
Net interest income ............................................ 8,295,781 7,444,118 6,643,386
Provision for loan losses ........................................... 200,000 240,000 120,000
----------- ----------- -----------
Net interest income after provision for loan losses .............. 8,095,781 7,204,118 6,523,386
----------- ----------- -----------
Noninterest income:
Service charges .................................................. 1,026,636 803,134 507,537
Net gain on sales of loans ....................................... 224,351 276,612 26,695
Net gain on sales of securities .................................. 77,137 106,231 142,160
Other ............................................................ -- 15,722 44,963
----------- ----------- -----------
Total noninterest income ....................................... 1,328,124 1,201,699 721,355
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits ................................... 3,591,839 3,322,895 2,868,536
Office occupancy and equipment ................................... 1,387,261 1,209,563 859,561
Provision for environmental remediation of real estate owned ..... 90,000 620,000 150,400
Deposit insurance premiums ....................................... 119,947 112,400 100,524
Professional fees ................................................ 347,007 342,144 315,430
Marketing and advertising ........................................ 247,907 264,185 243,049
Data processing .................................................. 158,934 119,188 176,032
Real estate owned ................................................ 72,150 8,650 53,651
Other ............................................................ 1,243,493 1,214,198 1,068,445
----------- ----------- -----------
Total noninterest expense ...................................... 7,258,538 7,213,223 5,835,628
----------- ----------- -----------
Income before income tax expense ............................... 2,165,367 1,192,594 1,409,113
Income tax expense .................................................. 860,426 468,565 561,616
----------- ----------- -----------
Net income ................................................... $ 1,304,941 724,029 847,497
=========== =========== ===========
Net income per common share:
Basic ...................................................... $ 0.37 0.20 0.24
=========== =========== ===========
Diluted .................................................... $ 0.36 0.20 0.24
=========== =========== ===========
26
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 $301.2 million at December 31, 1999, from $167.8 million at
December 31, 1995, an increase of 79.5%. 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.
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 December 31, 1999, our multi-family and
commercial real estate loans totaled $28.5 million, or 17.82% of total loans. At
December 31, 1999, non-mortgage loans, consisting of commercial business,
consumer, mobile home and home equity and property improvement loans totaled
$38.2 million, or 23.89% of total loans. Management
27
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 December 31, 1999, our ratio of non-
performing assets and troubled debt restructurings to total assets was 0.32%,
and our ratio of non-performing loans and troubled debt restructurings to total
loans was 0.54%.
Increasing fee and servicing income. We have sought to increase our income
by increasing our sources of fee income. During the year ended December 31,
1999, service charges and other fee income totaled $1.0 million 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 December 31, 1999 residential mortgage loans
serviced for others totaled $39.1 million. 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
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, 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.
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.
28
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.
At December 31, 1999 Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------- ------------------------------ ------------------------------
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate Balance Interest Rate
-------- --------- --------- --------- -------- -------- -------- --------
(Dollars In Thousands)
Interest-earning assets:
Loans(1)......................... $160,204 8.00% $ 153,783 $ 12,137 7.89% $132,324 $10,821 8.18%
Securities (2)................... 123,866 6.42 128,761 8,173 6.35 119,256 7,810 6.55
Money market investments......... 200 4.75 114 6 5.26 293 14 4.78
-------- ------ --------- --------- ------ -------- ------ ------
Total interest-earning assets.... 282,920 7.31 282,658 20,316 7.19 251,873 18,645 7.40
------ --------- ------ ------ ------
Non-interest-earning assets...... 18,321 11,101 11,519
-------- --------- --------
Total assets..................... $301,241 $ 293,759 $263,392
======== ========= ========
Interest-bearing liabilities:
Deposits(3)...................... $208,132 4.15 208,166 $ 8,660 4.16 $193,227 $8,678 4.49
Borrowed funds................... 69,960 5.64 61,923 3,360 5.43 45,771 2,523 5.51
-------- ------ --------- --------- ------ -------- ------ ------
Total interest-bearing
liabilities 278,092 4.53 270,089 12,020 4.45 238,998 11,201 4.69
------ --------- ------ ------ ------
Non-interest-bearing liabilities. 3,770 2,601 2,369
-------- --------- --------
Total liabilities................ 281,862 272,690 241,367
Stockholders' equity............. 19,379 21,069 22,025
-------- --------- --------
Total liabilities and
stockholders' equity $301,241 $ 293,759 $263,392
======== ========= ========
Net interest income.............. $ 8,296 $7,444
========= ======
Interest rate spread(4).......... 2.78% 2.74% 2.71%
====== ====== ======
Net interest margin(5)........... 2.93% 2.96%
====== ======
Average interest-earning assets
to average interest-bearing
liabilities 104.65% 105.39%
====== ======
Year Ended December 31, 1997
-----------------------------
Average Yield/
Balance Interest Rate
-------- -------- ------
(Dollars In Thousands)
Interest-earning assets:
Loans(1)......................... $ 99,939 $ 8,588 8.59%
Securities (2)................... 110,762 7,204 6.50
Money market investments......... 788 47 5.96
-------- -------- ------
Total interest-earning assets.... 211,489 15,839 7.49
-------- ------
Non-interest-earning assets...... 7,820
--------
Total assets..................... $219,309
========
Interest-bearing liabilities:
Deposits(3)...................... $171,993 $ 7,738 4.50
Borrowed funds................... 25,127 1,458 5.80
-------- -------- ------
Total interest-bearing
liabilities 197,120 9,196 4.67
-------- ------
Non-interest-bearing liabilities. 1,260
--------
Total liabilities................ 198,380
Stockholders' equity............. 20,929
--------
Total liabilities and
stockholders' equity $219,309
========
Net interest income.............. $ 6,643
========
Interest rate spread(4).......... 2.82%
======
Net interest margin(5)........... 3.14%
======
Average interest-earning assets
to average interest-bearing
liabilities 107.29%
======
- ----------
(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 costs of average
interest-bearing liabilities.
(5)Net interest income divided by interest-earning assets.
29
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.
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------------- ----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Increase/ Due to Total Increase/
---------------------- ----------------------
Rate Volume (Decrease) Rate Volume (Decrease)
------- ------- ---------- ------- ------- ----------
(In Thousands)
Interest-earning assets:
Loans .................................... $ (439) $ 1,755 $ 1,316 $ (550) $ 2,783 $ 2,233
Securities ............................... (259) 622 363 (54) 552 606
Money market investments ................. 1 (9) (8) (3) (30) (33)
------- ------- ------- ------- ------- -------
Total interest-earning assets ......... (697) 2,368 1,671 (499) 3,305 2,806
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits ................................. (689) 671 (18) (15) 955 940
Borrowed funds ........................... (53) 890 837 (133) 1,198 1,065
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ... (742) 1,561 819 (148) 2,153 2,005
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 45 $ 807 $ 852 $ (351) $ 1,152 $ 801
======= ======= ======= ======= ======= =======
Results of Operations
Comparison of the years ended December 31, 1999 and 1998
Net Interest Income. Our net interest income is determined by its 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 interest-earning assets and interest-bearing liabilities. 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
$807,000 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 $45,000
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.
30
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
0.33% 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 0.08% 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 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, 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 $1.3 million in 1999, an increase of $126,000 or 10.5% compared to 1998.
Service charges 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 is comprised of expenses such as postage, office
supplies, telephone charges, loan servicing expenses, directors fees, and third
party check processing charges and 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%.
31
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 $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. 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. 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.
Non-performing loans increased from $564,000 as of December 31, 1997 to
$1,016,000 as of December 31, 1998.
Noninterest Income. Noninterest income was $1.2 million in 1998, an
increase of $480,000 or 66.7% from 1997. Service charge 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 $1.3 million from $5.8 million in 1997. However, excluding
provisions for environmental remediation, expenses increased $908,000 or 16.7%.
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 $47,000,
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."
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%.
32
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 December
31, 1999. 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.
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)
Mortgage loans(2) ......................... $ 5,733 $ 26,463 $ 37,259 $ 32,330 $ 19,625 $ 121,410
Other loans(2) ............................ 14,758 3,103 8,213 7,490 4,480 38,044
Securities available for sale(3) ......... 18,767 14,353 23,074 13,309 49,247 118,750
Securities held to maturity(3) ............ -- 30 67 75 1,421 1,593
--------- --------- --------- --------- --------- ---------
Federal Home Loan Bank Stock .............. -- -- -- -- 3,523 3,523
Total interest-earning assets .......... 39,258 43,949 68,613 53,204 78,296 283,320
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Deposits:(4)
NOW accounts ........................... 734 2,203 4,112 1,645 1,096 9,790
Savings accounts ....................... 3,457 10,371 19,359 7,744 5,162 46,093
Money market accounts .................. 377 1,129 2,109 843 562 5,020
Certificates of deposit ................ 26,492 71,816 28,521 5,642 73 132,544
Borrowings ............................. 17,100 27,000 8,860 15,000 2,000 69,960
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ... 48,160 112,519 62,961 30,874 8,893 263,407
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (8,902) $ (68,570) $ 5,652 $ 22,330 $ 69,403 $ 19,913
========= ========= ========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........... $ (8,902) $ (77,472) $ (71,820) $ (49,490) $ 19,913
========= ========= ========= ========= =========
Cumulative excess (deficiency)
of interest-earning liabilities as a
percentage of total assets ............. (2.96)% (25.72)% (23.84)% (16.43)% 6.61%
========= ========= ========= ========= =========
- ----------
(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
$587,000 at December 31, 1999.
(3) Amounts shown are at carrying amounts.
(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
$120.1 million or 39.9% of total assets.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
The OTS requires the 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
33
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 the Savings
Bank of the Finger Lakes by the OTS, with respect to the sensitivity of NPV to
changes in market interest rates at December 31, 1999.
Basis Point Estimated Net Portfolio Value NPV as % of PV of Assets
Change ------------------------------------------- ------------------------------
in Rates $ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
+300 $ 5,753 $(16,765) (74)% 2.05% (538) bp
+200 11,628 (10,890) (48) 4.04 (339) bp
+100 17,410 (5,108) (23) 5.89 (155) bp
NC 22,518 7.43
-100 27,732 5,214 23 8.94 150 bp
-200 28,594 6,076 27 9.12 169 bp
-300 28,801 6,283 28 9.11 168 bp
As shown by the table, increases in interest rates will significantly
decrease our NPV, while decreases in interest rates will result in smaller net
increases in our NPV The table suggests that in the event of a 200 basis point
change in interest rates we would experience a decrease in NPV as a percentage
of assets to 4.04% from 7.43% in a rising interest rate environment and a
increase in NPV as a percentage of assets to 9.12% from 7.43% in a decreasing
interest rate environment.
In order to offset some of our interest rate risk we are seeking to extend
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.
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 December 31, 1999, 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 $5.1 million at the minimum of the
offering range and $7.1 million at the maximum of the offering
34
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 December 31, 1999, we had loan commitments of $3.1 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 December 31, 1999, approximately $98.3 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 No. 137, 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 certain reclassifications of securities from the held-to-maturity to the
available-for-sale classification. We have no current intention to reclassify
any securities pursuant to SFAS No. 133.
Year 2000
We developed and implemented a plan to resolve issues associated with
computer systems and related embedded technology with respect to the rollover of
the two digit year value to 00 ("Year 2000"). The issue was whether computer
systems would properly recognize the date sensitive information when the year
changed to 2000.
We have not experienced any significant issues associated with the Year
2000 problem as a result of the date change to January 1, 2000 or any date
subsequent thereto. The incremental costs related to the Year 2000 compliance
were approximately $137,800 in 1999 and $51,500 in 1998, respectively. Any
additional incremental costs associated with Year 2000 issues are not expected
to be material. Management will continue to monitor operations through the year
2000 and although no assurances can be given, it is not expected that any future
adverse developments will arise with respect to Year 2000.
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.
35
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. The 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
the 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
The 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 December 1999. 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, 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. 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
December 31, 1999, loans totaled $160.0 million, of which $90.6 million, or
56.60%, were secured by one-to four-family real estate, $28.5 million, or 17.82%
were secured by multi-family and commercial real estate, $2.7 million, or 1.69%,
were construction loans, and $38.2 million or 23.89% were non-mortgage loans. At
December 31, 1999, commercial business loans were $9.5 million, or 5.96% of
total loans, consumer loans were $6.0 million, or 3.73% of total loans, mobile
home loans were $4.5 million, or 2.81% of total loans and home equity and
property improvement loans were $18.2 million, or 11.39% of total loans.
36
Loan Portfolio Composition. The following table sets forth the composition
of our loan portfolio by type of loan at the dates indicated.
At December 31,
--------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars In Thousands)
Mortgage Loans:
One-to-four-family real estate ........ $ 90,587 56.60% $ 89,456 61.19% $ 75,679 63.42%
Multi-family and commercial real estate 28,520 17.82 20,534 14.05 19,243 16.13
Construction .......................... 2,695 1.69 6,912 4.73 2,103 1.75
--------- ------ --------- ====== --------- ------
Total mortgage loans .................. 121,802 76.11 116,902 79.97 97,025 81.30
--------- ------ --------- ------ --------- ------
Non-Mortgage Loans:
Commercial business ................... 9,536 5.96% 5,413 3.70% 3,392 2.84%
Home equity and property improvement .. 18,235 11.39 12,874 8.81 9,184 7.70
Mobile home ........................... 4,501 2.81 4,074 2.79 4,916 4.12
Consumer .............................. 5,966 3.73 6,920 4.73 4,819 4.04
--------- ------ --------- ------ --------- ------
Total non-mortgage loans .............. 38,238 23.89 29,281 20.03 22,311 18.70
--------- ------ --------- ------ --------- ------
Total loans ........................... 160,040 100.00% 146,183 100.00% 119,336 100.00%
====== ====== ======
Premiums, net of deferred fees ........ 163 129 252
Allowance for loan losses ............. (1,349) (1,176) (1,149)
--------- --------- ---------
Net loans ............................. $ 158,854 $ 145,136 $ 118,439
========= ========= =========
At December 31,
----------------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars In Thousands)
Mortgage Loans:
One-to-four-family real estate ........ $ 57,932 64.60% $ 54,483 62.76%
Multi-family and commercial real estate 11,176 12.46 11,843 13.64
Construction .......................... 1,296 1.44 373 0.43
--------- ------ --------- ------
Total mortgage loans .................. 70,404 78.50 66,699 76.83
--------- ------ --------- ------
Non-Mortgage Loans:
Commercial business ................... 3,290 3.67% 3,074 3.54%
Home equity and property improvement .. 6,137 6.84 5,779 6.66
Mobile home ........................... 5,703 6.36 6,654 7.66
Consumer .............................. 4,155 4.63 4,613 5.31
--------- ------ --------- ------
Total non-mortgage loans .............. 19,285 21.50 20,120 23.17
--------- ------ --------- ------
Total loans ........................... 89,689 100.00% 86,819 100.00%
====== ======
Premiums, net of deferred fees ........ 81 40
Allowance for loan losses ............. (1,088) (809)
--------- ---------
Net loans ............................. $ 88,682 $ 86,050
========= =========
37
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.
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)
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
======== ======== ======== ======== ======== ======== ========
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.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(Dollars In Thousands)
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%
------- -------- --------
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.
38
Originations, Purchases and Sales of Loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(In Thousands)
Loan originations:
One-to four-family real estate.............................. $ 21,869 $ 42,138 $ 22,587
Multi-family and commercial real estate..................... 7,924 4,582 5,469
Construction................................................ 5,257 8,844 1,894
Commercial business loans................................... 10,936 4,087 916
Home equity and property improvement loans.................. 10,234 7,806 4,782
Mobile home loans........................................... 1,388 132 127
Consumer loans.............................................. 3,030 6,040 3,659
-------- -------- --------
Total loans originated...................................... 60,638 73,629 39,434
Purchases................................................... 51 770 11,026
-------- -------- --------
Total loans originated and purchased........................ 60,689 74,399 50,460
-------- -------- --------
Sales and principal reductions:
Loans sold.................................................. 14,000 21,135 4,533
Loan principal payments and other reductions................ 32,832 26,417 16,280
-------- -------- --------
Total sold and principal reductions......................... 46,832 47,552 20,813
Increase (decrease) due to other items, net................. (139) (150) 110
-------- -------- --------
Net increase in net loan portfolio.......................... $ 13,718 $ 26,697 $ 29,757
======== ======== ========
One-to Four-Family Real Estate Loans. Our primary lending activity is the
origination of loans secured by first mortgage liens on single-family
residences. At December 31, 1999, $90.6 million, or 56.6%, 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 December 31, 1999, 58.0% 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 December 31, 1999, 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 in 1999 totaled $21.9
million. The decrease in one-to four-family real estate loan originations from
the $42.1 million originated in 1998 reflects 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" 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 December 31, 1999, $28.5
million, or 17.82%, of our total loan portfolio consisted of loans secured by
existing multi-family and commercial real estate. Our multi-family
39
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 business 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 December 31, 1999, construction loans totaled $2.7 million, or 1.69%, of the
total loan portfolio. Of this amount, residential construction loans amounted to
$1.1 million or 0.71% 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 December 31, 1999, commercial construction loans amounted to $1.6
million or 0.98% 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 December 31, 1999, $9.5 million, or 5.96%, 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 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
1999, we originated $10.9 million in commercial business loans compared to $4.1
million and $916,000 during 1998 and 1997, respectively.
40
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
$18.2 million, or 11.39%, of the total loan portfolio as of December 31, 1999.
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 December 31, 1999, we had $4.5
million, or 2.81%, 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 December 31, 1999, $6.0 million, or 3.73%, 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 and
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 multi-family 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 the 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 December 31,
1999, our lending limit to one borrower was $2.0 million. On that date, there
were no borrowers in excess of our lending limits.
41
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1999, 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.
Multi-family and
One- to Four-family Commercial Real Commercial
Real Estate Estate Construction Business Mobile Home
---------------- ---------------- ---------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------ ---- ------ ---- ---- ---- ------ ---- ------ ----
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days ........ $ 724 0.45% $ -- --% $ -- --% $ 9 0.01% $ 58 0.04%
60 - 89 days ........ 206 0.13 152 0.09 -- -- -- -- 18 0.01
90 days and over..... 393 0.25 -- -- -- -- 181 0.11 13 0.01
------ ---- ------ ---- ---- ---- ------ ---- ------ ----
Total delinquent
loans ............... $1,323 0.83% $ 152 0.09% $ -- --% $ 190 0.12% $ 89 0.06%
====== ==== ====== ==== ==== ==== ====== ==== ====== ====
Home Equity and
Property
Improvement Consumer Total
--------------- --------------- ---------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days ........ $ 116 0.07% $ 52 0.03% $ 959 0.60%
60 - 89 days ........ -- -- 14 0.01 390 0.24
90 days and over..... -- -- -- -- 587 0.37
------ ---- ------ ---- ------ ----
Total delinquent
loans ............... $ 116 0.07% $ 66 0.04% $1,936 1.21%
====== ==== ====== ==== ====== ====
42
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 December 31, 1999, our total nonaccrual loans amounted to $587,000,
or 0.37% of total loans, compared to $1,016,000, or 0.69% of total loans, at
December 31, 1998. The largest non-performing loan at December 31, 1999,
consisted of a one-to four-family mortgage on which $224,000 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 December 31,
1999, we had $282,000 of troubled debt restructurings, compared to $121,000 as
of December 31, 1998. All troubled debt restructurings were performing in
accordance with modified or restructured terms at December 31, 1999.
Real Estate Owned. Real estate owned consists of property acquired through
formal foreclosures or by deed in lieu of foreclosure and is recorded at the
lower of recorded investment or fair value. Write-downs from recorded investment
to fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After transfer, the property is carried at the lower
of recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of such properties that result from subsequent
declines in value are charged to operations in the period in which the declines
occur. As of December 31, 1999, we held three parcels of real estate owned with
an aggregate carrying value of $93,000.
43
The following table sets forth the amounts and categories of our
non-performing assets and troubled debt restructurings at the dates indicated.
December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- -------
(Dollars in Thousands)
Non-accruing loans:
One-to-four-family real estate................. $ 393 $ 673 $ 403 $ 194 $ 549
Multi-family and commercial real estate........ -- -- 3 407 73
Construction................................... -- -- -- -- --
Commercial business............................ 181 268 6 133 90
Home equity and property improvement........... -- 17 38 83 95
Mobile home.................................... 13 20 58 60 36
Consumer....................................... -- 38 56 41 189
-------- -------- -------- -------- -------
Total non-performing loans.................... 587 1,016 564 918 1,032
Real estate owned................................ 93 90 150 275 453
-------- -------- -------- -------- -------
Total non-performing assets................... $ 680 $ 1,106 $ 714 $ 1,193 $ 1,485
======== ======== ======== ======== =======
Troubled debt restructurings..................... $ 282 $ 121 $ 520 $ 669 $ 1,506
Total non-performing loans and troubled debt
restructurings as a percentage of total loans.. 0.54% 0.78% 0.91% 1.77% 2.92%
Total non-performing assets and troubled debt
restructurings as a percentage of total assets. 0.32% 0.43% 0.50% 0.93% 1.78%
We had no accruing loans greater than 90 days delinquent at December 31,
1999, 1998 and 1997. The additional interest income that would have been
recorded during 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 $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 December 31, 1999, we had $885,000 of assets categorized as special
mention, $1.5 million of assets classified as substandard and $152,000 of assets
classified as doubtful or loss. As of December 31, 1999, total classified
assets, including real estate owned and special mention assets, amounted to
0.87% of total assets.
44
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 December 31, 1999, our allowance for loan losses amounted to $1,349,000
compared to $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.
At or for
At or for the Eight Months
the Year Ended December 31, Ended
--------------------------------------------------------- December 31,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars In Thousands)
Total loans outstanding ......................... $ 160,040 $ 146,183 $ 119,336 $ 89,689 $ 86,819
========= ========= ========= ========= =========
Average loans outstanding ....................... $ 153,783 $ 132,324 $ 99,939 $ 87,058 $ 85,547
========= ========= ========= ========= =========
Balance at beginning of period .................. $ 1,176 $ 1,149 $ 1,088 $ 809 $ 771
--------- --------- --------- --------- ---------
Charge-offs:
One- to four-family real estate .............. (93) (38) (9) (35) (66)
Multi-family and commercial real estate ...... -- -- -- -- --
Construction ................................. -- -- -- -- --
Consumer ..................................... (113) (141) (137) (183) (75)
Commercial business .......................... (6) (114) (1) (48) (182)
Home equity and property improvement ......... -- -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs: .............................. (212) (293) (147) (266) (323)
Recoveries ...................................... 185 80 88 62 71
--------- --------- --------- --------- ---------
Net charge-offs ................................. (27) (213) (59) (204) (252)
Provision for loan losses ....................... 200 240 120 483 290
--------- --------- --------- --------- ---------
Balance at end of period ........................ $ 1,349 $ 1,176 $ 1,149 $ 1,088 $ 809
========= ========= ========= ========= =========
Allowance for loan losses as a percentage of
total loans outstanding ...................... 0.84% 0.80% 0.96% 1.21% 0.93%
========= ========= ========= ========= =========
Net charge-offs as a percentage of average
loans outstanding(1) ......................... 0.02% 0.16% 0.06% 0.24% 0.29%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing loans 229.81% 115.75% 203.72% 118.52% 78.49%
========= ========= ========= ========= =========
- ----------
(1) This rate has been annualized for the eight months ended December 31, 1995.
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.
45
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.
At December 31,
---------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ----------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
Balance at end of period applicable to:
One-to-four-family real estate ........ $ 314 56.60% $ 315 61.19% $ 320 63.42%
Multi-family and commercial
real estate ........................ 360 17.82 325 14.05 314 16.13
Construction .......................... 6 1.69 3 4.73 1 1.75
Commercial business ................... 194 5.96 160 3.70 85 2.84
Consumer .............................. 119 3.73 91 4.73 94 4.04
Mobile home ........................... 10 2.81 7 2.79 29 4.12
Home equity and property
improvement ........................ 76 11.39 40 8.81 76 7.70
------ ------ ------
Unallocated ........................... 270 -- 235 -- 230 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses ....... $1,349 100.00% $1,176 100.00% $1,149 100.00%
====== ====== ====== ====== ====== ======
At December 31,
-------------------------------------------------
1996 1995
-------------------- ----------------------
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars In Thousands)
Balance at end of period applicable to:
One-to-four-family real estate ........ $ 257 64.60% $ 275 62.76%
Multi-family and commercial
real estate ........................ 254 12.46 122 13.64
Construction .......................... 3 1.44 1 0.43
Commercial business ................... 114 3.67 125 3.54
Consumer .............................. 115 4.63 58 5.31
Mobile home ........................... 38 6.36 44 7.66
Home equity and property
improvement ........................ 45 6.84 43 6.66
------ ------
Unallocated ........................... 262 -- 141 --
------ ------ ------ ------
Total allowance for loan losses ....... $1,088 100.00% $ 809 100.00%
====== ====== ====== ======
46
Investment Activities
General. 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.
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 $31.8 million or 63.4% are backed by Freddie Mac, Ginnie Mae
and Fannie Mae securities, and $18.3 million or 36.6% 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 December 31, 1999, 35.8% 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 December 31, 1999,
$50.2 million consisted of CMOs, $4.5 million consisted of Freddie Mac
certificates, $11.8 million consisted of Fannie Mae certificates and $3.8
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.
At or for the Year Ended
December 31,
--------------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars In Thousands)
Mortgage-backed securities at beginning of period ...... $ 86,612 $ 71,824 $ 67,589
Purchases .............................................. 14,636 62,821 44,818
Sales .................................................. (5,738) (25,856) (32,009)
Repayments ............................................. (22,396) (21,669) (9,468)
Unrealized gain (loss) ................................. (2,812) (415) 998
Net accretion/amortization ............................. (37) (93) (104)
-------- -------- --------
Mortgage-backed securities at end of period ............ $ 70,265 $ 86,612 $ 71,824
======== ======== ========
Weighted average yield at end of period ................ 6.57% 6.49% 6.55%
======== ======== ========
At December 31, 1999, all of the $70.3 million 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.
At December 31, 1999, fixed rate mortgage-backed securities amounted to
$45.1 million and adjustable rate mortgage-backed securities amounted to $25.2
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
47
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 December 31, 1999, 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 $118.7 million, of which $42.5 million was
securities issued by the U.S. Government and Federal Government agencies, $70.3
million was mortgage-backed securities, $4.6 million was corporate debt
securities and $1.4 million was mutual funds and common stock.
48
The following table sets forth certain information relating to Savings Bank of
the Finger Lakes' investment securities portfolio at the dates indicated.
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- --------- --------- ---------
(In Thousands)
Securities available for sale:
Debt securities:
U.S. Government and agency bonds...... $ 45,401 $ 42,546 $ 25,962 $ 26,064 $ 26,344 $ 26,462
Mortgage-backed securities:
Collateralized mortgage obligations. 51,996 50,142 59,063 59,044 21,580 21,730
Fannie Mae.......................... 12,307 11,818 16,436 16,597 19,750 20,015
Freddie Mac......................... 4,585 4,495 6,115 6,188 15,272 15,484
Ginnie Mae.......................... 3,949 3,810 4,760 4,784 14,567 14,594
--------- -------- --------- --------- --------- ---------
Total mortgage-backed securities...... 72,837 70,265 86,374 86,613 71,169 71,823
Corporate and municipal bonds......... 4,729 4,559 -- -- -- --
--------- -------- --------- --------- --------- ---------
Total debt securities.................. 122,967 117,370 112,336 112,677 97,513 98,285
Equity securities...................... 1,657 1,380 2,738 2,656 1,645 1,595
--------- -------- --------- --------- --------- ---------
Total securities available for sale.... $ 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 municipal bonds......... 1,593 1,567 640 640 -- --
--------- -------- --------- --------- --------- ---------
Total debt securities................. 1,593 1,567 4,640 4,662 14,096 14,136
--------- -------- --------- --------- --------- ---------
Total securities held to maturity..... $ 1,593 $ 1,567 4,640 4,662 14,096 14,136
--------- -------- --------- --------- --------- ---------
Total securities...................... $ 126,217 $120,317 $ 119,714 $ 119,995 $ 113,254 $ 114,016
========= ======== ========= ========= ========= =========
At December 31, 1999, the contractual maturities of debt securities is as
follows:
Available for Sale Held to Maturity
---------------------- ---------------------
Fair Amortized
Cost Yield Cost Yield
---------- -------- ---------- --------
(Dollars in Thousands)
One year or less................. $ -- --% 30 5.50%
After one year through five years 5,063 6.31 142 5.50
After five years through ten years 45,550 6.52 929 4.91
After ten years.................. 66,757 6.57 492 4.99
---------- -------- ---------- --------
Total............................ $ 117,370 6.54% $ 1,593 5.00%
========== ======== ========== ========
49
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.
December 31, 1999 December 31, 1998 December 31, 1997
-------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- -------- ---------- ---------
(Dollars In Thousands)
Certificates of deposit.......... $ 132,544 63.68% $ 127,852 63.16% $ 112,702 60.42%
--------- ------- --------- -------- ---------- ---------
Transaction Accounts:
Savings accounts................. 46,093 22.15 47,259 23.34 48,285 25.88
Money market accounts ........... 5,020 2.41 3,196 1.58 2,198 1.18
Demand deposits and NOW accounts 24,475 11.76 24,127 11.92 23,349 12.52
--------- ------- --------- -------- ---------- ---------
Total transaction accounts.... 75,588 36.32 74,582 36.84 73,832 39.58
--------- ------- --------- -------- ---------- ---------
Total deposits................ $ 208,132 100.00% $ 202,434 100.00% $ 186,534 100.00%
========= ======= ========= ======== ========== =========
The following table sets forth the deposit activities of Savings Bank of
the Finger Lakes during the periods indicated.
Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Deposits.................................................. $ 619,483 $ 500,594 $ 360,637
Withdrawals............................................... (622,445) (493,372) (335,673)
---------- ---------- ----------
Net increase (decrease) before interest credited.......... (2,962) 7,222 24,964
Interest credited......................................... 8,660 8,678 7,738
---------- ---------- ----------
Net increase in deposits.................................. $ 5,698 $ 15,900 $ 32,702
========== ========== ==========
50
The following table sets forth the maturities of our certificates of
deposit having principal amounts of $100,000 or more as of December 31, 1999.
Maturity Period Amount Percent
--------------- ------ -------
(In Thousands)
Three months or less............................... $ 4,335 17.6%
Over three through six months...................... 6,408 26.0
Over six through twelve months..................... 8,334 33.9
Over twelve months................................. 5,523 22.5
-------- ----
Total certificates of deposit with
balances of $100,000 or more.................. $ 24,600 100%
======== ===
The following table shows the interest rate and maturity information for
our certificates of deposit as of December 31, 1999.
Maturity Date
----------------------------------------------------------------------------------
Interest Rate 1 Year or Less Over 1 to 2 Years Over 2 to 3 Years Over 3 Years Total
------------- -------------- ----------------- ----------------- ------------ -----
(In Thousands)
2.00% - 4.00% $ 1,704 $ -- $ -- $ -- $ 1,704
4.01% - 6.00% 86,817 23,586 1,869 4,522 116,794
6.01% - 8.00% 9,788 1,192 1,873 1,193 14,046
-------- -------- ------- -------- --------
Total $ 98,309 $ 24,778 $ 3,742 $ 5,715 $132,544
======== ======== ======= ======== ========
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.
The following table sets forth the maximum month-end balance and average
balance of our FHLB advances during the periods indicated.
For Year Ended December 31,
----------------------------------
1999 1998 1997
------- -------- --------
(Dollars In Thousands)
Maximum balance........................................ $ 69,960 $ 54,892 $ 36,721
Average balance........................................ 61,923 45,532 24,656
Weighted average interest rate on FHLB advances........ 5.43% 5.51% 5.70%
The following table sets forth certain information as to our FHLB advances
at the dates indicated.
At December 31,
----------------------------------
1999 1998 1997
------- -------- --------
(In Thousands)
FHLB advances.......................................... $ 69,960 $ 54,815 $ 36,721
Weighted average interest rate on FHLB advances........ 5.64% 5.51% 5.76%
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 December 31, 1999 SBFL Agency, Inc. offered mutual funds,
financial planning services and insurance annuity products.
Employees. We have 85 full-time employees and 23 part-time employees at
December 31, 1999. None of these employees is represented by a collective
bargaining agreement, and we believe that we enjoy good relations with our
personnel.
51
Properties
At December 31, 1999, 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 the Savings Bank of the Finger Lakes at December
31, 1999.
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
52
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. The Federal Deposit Insurance
Corporation also examines Savings Bank of the Finger Lakes in its role as the
administrator of the Savings Association Insurance Fund. 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 December 31, 1999, 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 December 31, 1999, Savings Bank of the Finger Lakes
maintained 87.72% 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.
53
Under new regulations effective April 1, 1999, a savings institution must file
an 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
December 31, 1999 was 41.98%, 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 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
54
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 December 31, 1999, 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.
Capital Requirements. Office of Thrift Supervision capital regulations
require savings institutions to meet three capital standards: a 1.5% tangible
capital standard, a 4.0% leverage or core capital ratio and an 8.0% risk-based
capital standard. Core capital is defined as common stockholders' equity,
including retained earnings, certain non- cumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights. Tangible capital is defined as core
capital less all intangible assets, including supervisory goodwill, plus a
specified amount of mortgage servicing rights. Office of Thrift Supervision
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must deduct investments in and loans to
subsidiaries engaged in activities not permissible for a national bank, and
unrealized gains or losses on certain available for sale securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 core and total capital, which is defined as core capital
and supplementary capital, to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the Office of Thrift Supervision capital regulation
based on the risks the Office of Thrift Supervision believes are inherent in the
type of asset. The components of Tier 1 core capital are equivalent to those
discussed earlier under the 4.0% leverage ratio standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-
55
weighted assets. Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.
Office of Thrift Supervision regulatory capital rules also incorporate an
interest rate risk component. Savings associations with "above normal" interest
rate risk exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets, i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts, that would result from
a hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
with a measured interest rate risk exposure exceeding 2%, must deduct an
interest rate component equal to one-half of the excess change. The Office of
Thrift Supervision has deferred, for the present time, the date on which the
interest rate component is to be deducted from total capital. The rule also
provides that the Director of the Office of Thrift Supervision may waive or
defer an institution's interest rate risk component on a case-by-case basis.
At December 31, 1999, Savings Bank of the Finger Lakes exceeded each of the
three Office of Thrift Supervision capital requirements. See "Historical and Pro
Forma Capital Compliance" for a table which sets forth in terms of dollars and
percentages the Office of Thrift Supervision tangible, leverage and risk-based
capital requirements, Savings Bank of the Finger Lakes' historical amounts and
percentages at December 31, 1999, and pro forma amounts and percentages based
upon the issuance of the shares within the offering range and assuming that a
portion of the net proceeds are retained by Finger Lakes Bancorp.
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 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
56
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, as a federal association, is required to
be 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 December 31, 1999, 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 December 31,
1999, 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.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as Savings Bank of the Finger Lakes, to convert
their charters to national or state bank charters. Savings Bank of the Finger
Lakes cannot determine whether, or in what form, legislation may eventually be
enacted and there can be no assurance that any legislation that is enacted would
not adversely affect Finger Lakes Bancorp and Savings Bank of the Finger Lakes.
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.
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.
57
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. Any post-1987 reserves must be recaptured, regardless of whether
or not a particular thrift intends to convert its charter, be acquired, or
diversify its activities. The recapture tax on post-1987 reserves is assessed in
equal installments over the six taxable years beginning in 1996. However, if a
thrift met the residential loan requirement included in the federal legislation,
then the thrift could suspend its tax bad debt recapture for the 1996 and 1997
tax years. At December 31, 1999, Finger Lakes Financial had a balance of
approximately $3.0 million of bad debt reserves that would be recaptured under
this legislation.
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.
58
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. Alternative entire net income is equal to entire net
income without 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."
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.
59
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 December 31, 1999 including
their terms of office.
Position Held at Current Term
Name Age Finger Lakes Financial Director Since (1) to Expire
- ------------------ --------- ---------------------- ------------------ ------------
G. Thomas Bowers 56 Chairman of the Board, President 1995 2001
and Chief Executive Officer
Michael J. Hanna 54 Director 1994 2000
Chris M. Hansen 64 Director 1983 2002
Richard J. Harrison 54 Director 1997 2001
James E. Hunter 64 Director 1990 2000
Ronald C. Long 63 Director 1994 2000
Bernard G. Lynch 69 Director 1962 2001
Arthur W. Pearce 57 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 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 is retired from the position as President of C.M. Hansen
Farms, Inc., located in Hall, New York, which owns a citrus operation in
LaBelle, Florida.
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 a professor at Cornell University and the Director of
the New York State Agricultural Experiment Station, Geneva, New York.
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, where he served full-time in the position until 1992.
60
Arthur W. Pearce retired in July 1997 after over 20 years in 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 President of Citizens Savings Bank, FSB, Ithaca,
New York.
Joan C. Rogers is retired from her position as Vice President of BJR
Broadcasting, Seneca Falls, New York, where she served in such capacity for more
than the past five years.
Terry L. Hammond has served as the Company'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 the Company'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.
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 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.
61
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.
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 $100,000
in 1999.
====================================================================================================================================
Annual Compensation Long-Term Compensation
------------------------------------------------ -----------------------------------------
Other Restricted All Other
Name and Annual Stock Option Compensation
Principal Position Year Salary($)(1) Bonus($) Compensation ($)(2) Awards ($)(3) Grants(#)(4) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
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 and Chief 1998 86,100 8,320 0 0 0 6,693
Financial Officer 1997 83,203 0 0 35,750 8,600 7,776
====================================================================================================================================
(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 are 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 Company's 1996 Management Recognition Plan (the
"Recognition Plan") is to enable the Company to provide certain of its officers
and other employees with a proprietary interest in the Company, through
restricted stock awards which vest at subsequent dates, as compensation for
their contributions to the Company as well as an incentive to make such
contributions in the future by continuing their employment with the
62
Company. The Recognition Plan has been funded with 47,200 shares of common stock
(purchased on the open market in 1996 with funds provided by the Company), 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 are 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 has
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 Company's 1996 Stock Option Plan (the "Option Plan") is designated to
improve the growth and profitability of the Company by providing its employees
with a proprietary interest in the Company as an incentive to contribute to the
success of the Company 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, 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 Salary and Personnel Committee,
which determines, among other things, the employees 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).
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 the Company. However, if an
optionee's employment is terminated due to death, disability or retirement, or
in the event of a change in control of Finger Lakes Financial, the optionee or
his or her estate has one year following termination in which to exercise an
otherwise exercisable option. Options are non-transferable except by will or the
laws of descent and distribution. 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.
63
At December 31, 1999, options to purchase an aggregate of 109,000 shares of
common stock, at prices ranging from $6.75 to $14.50 per share, were outstanding
and held by an aggregate of 10 employees, including the Chief Executive Officer
and the three other current executive officers.
Shown below is information with respect to the total unexercised options to
purchase common stock held by the executives at December 31, 1999. No options
were granted to or exercised by the executives during 1999.
Aggregated Option Exercises in 1999 and Year-End Option Values
Value of All Unexercised
Unexercised Option Held In-the-Money Options at
at Year End(#) Year End($)(1)
Shares Acquired Value -------------------------- --------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- ----------- ------------- ----------- -------------
G. Thomas Bowers 0 0 17,700 11,800 None None
Terry L. Hammond 0 0 12,320 9,880 2,700 1,800
- ----------
(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. 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.
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 Lake 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
64
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 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.
Pursuant to the Employment Agreement, Mr. Bowers is also 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. Bower's 62nd
birthday. Such payments will be provided in part by premiums paid under an
insurance policy on Mr. Bower's life maintained for Finger Lakes Financial's
benefit. The Retirement Agreement vests at the rate of 20% per year on June 30
of each year. The Retirement Agreements is currently 80% vested, and would pay
Mr. Bowers, were his employment to terminate currently, $24,000 per year upon
his reaching age 62.
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 the 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 156,886 shares, 184,564 shares,
212,254 shares or 244,094 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.
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 the 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 the
Savings Bank of the Finger Lakes or the 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.
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 the Savings Bank of the Finger Lakes
by giving them an
65
ownership interest in the Finger Lakes Bancorp. If approved by shareholders, the
2001 recognition plan will reserve 4% of the shares sold in the offering or
62,754 shares, 73,825 shares, 84,901 or 97,637 shares at the minimum, midpoint,
maximum and adjusted maximum of the offering range, respectively. In the event
the 2001 recognition plan is adopted more than one year following the completion
of the conversion, it would reserve up to 5% of the shares sold in the offering
for awards to officers and directors. 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.
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 the 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 the Savings Bank of the Finger Lakes or the 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 the 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.
Employment Agreements. Upon completion of the offering, Finger Lakes
Bancorp intends to enter into an employment agreements with G. Thomas Bowers,
President and Chief Executive Officer and Terry L. Hammond, Executive Vice
President and Chief Financial 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 agreement, the current base salary for G. Thomas
Bowers will be $____________ and for Terry L. Hammond, $______________. 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
Revenue Code Section 280G, the payments would be reduced by the amount necessary
in order to avoid having an excess parachute payment.
At retirement, the executives will be entitled to all benefits available
under any retirement or other benefit plan maintained by Savings Bank of the
Finger Lakes. If an executive is disabled for a period of six months, Finger
Lakes Bancorp may terminate the agreement but must pay him his base salary for
the remaining term of the agreement or one year, whichever is longer, reduced by
any benefits paid under any disability insurance policy or similar arrangement.
If the executive dies, his beneficiaries will receive his base salary for one
year following his
66
death and will also receive continued medical, dental, and other benefits for
one year. If the executive is terminated for reasons unrelated to a change in
control, the executive will not compete with Savings Bank of the Finger Lakes
for one year.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Finger Lakes Financial Common Stock as of December 31,
1999.
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) 85,865 2.4% 7.3%
Michael J. Hanna(4) 200 0.0% 0.0%
Chris M. Hansen(5) 9,083 0.3% 0.8%
Richard J. Harrison 7,158 0.2% 0.6%
James E. Hunter 3,008 0.1% 0.3%
Ronald C. Long(6) 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(7) 27,145 0.8% 2.3%
Thomas A. Mayfield(8) 21,702 0.6% 1.8%
Leslie J. Zornow(9) 9,067 0.3% 0.8%
All directors and executive officers
as a group (12 persons) 189,218 5.3% 16.0%
- ----------
(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 17,700 shares; and (iv) 4,094 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 3,980 shares held in a benefit plan of C.M. Hansen Farms, Inc., of
which Mr. Hansen is a trustee and beneficiary.
(6) Included 1,289 shares owned by Mr. Long's wife.
(7) 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) 333 shares
which will vest within 60 days under the 1996 Management Recognition Plan;
(iii) presently exercisable options to purchase 12,320 shares; and (iv)
4,650 shares held in the ESOP for Mr. Hammond's account, as to which shares
he had indirect voting power only. See "Executive Compensation" below.
(8) 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) 333 shares
which will vest within 60 days under the 1996 Management Recognition Plan;
(iii) presently exercisable options to purchase 11,160 shares; and (iv)
1,389 shares held in the ESOP for Mr. Mayfield's account, as to which
shares he has indirect voting power only. See "Executive Compensation"
below.
(9) 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) 200 shares which
will vest within 60 days under the 1996 Management Recognition Plan; (iii)
presently exercisable options to purchase 5,340 shares; and (iv) 1,442
shares held in the ESOP for Ms. Zornow's account, as to which shares she
has indirect voting power only. See "Executive Compensation" below.
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 December 31, 1999;
(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 midpoint of
the offering range. Because of limitations on the purchase of subscription
shares, directors and executive officers may be precluded from
67
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."
Proposed Purchases of Total Common Stock
Number of Conversion Stock(1) To Be Held
Exchange Shares ----------------------------- ------------------------------------------
to be Held(2)(3) Number of Shares Amount Number of Shares Percentage of Total
---------------- ---------------- ------ ---------------- -------------------
G. Thomas Bowers $250,000
Michael J. Hanna 1,000
Chris M. Hansen 10,000
Richard J. Harrison 25,000
James E. Hunter 20,000
Ronald C. Long 18,000
Bernard G. Lynch 75,000
Arthur W. Pearce 50,000
Joan C. Rogers 10,000
Terry L. Hammond 25,000
Thomas A. Mayfield 50,000
Leslie J. Zornow 10,000
- ----------
(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 CONVERSION
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.
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:
68
(1) Savings Bank of the Finger Lakes will organize Finger Lakes Bancorp as
a direct subsidiary of Savings Bank of the Finger Lakes;
(2) Finger Lakes Bancorp will organize an interim savings bank (the
"Interim Savings Bank") as a wholly-owned federal stock savings bank subsidiary
of Finger Lakes Bancorp;
(3) Finger Lakes Financial Corp., MHC will merge with and into Finger Lakes
Financial pursuant to the Agreement of Merger between Finger Lakes Financial
Corp., MHC and Finger Lakes Financial. Each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in the liquidation
account established in Finger Lakes Financial pursuant to regulations of the
Office of Thrift Supervision in exchange for such member's ownership interest in
Finger Lakes Financial Corp., MHC, and Finger Lakes Financial's common stock
held by Finger Lakes Financial Corp., MHC will be canceled;
(4) Finger Lakes Financial will convert into or exchange its charter for an
interim federal stock savings bank and will merge with and into Savings Bank of
the Finger Lakes (the "Mid-Tier Merger") with Savings Bank of the Finger Lakes
as the resulting entity pursuant to the Agreement of Merger between Finger Lakes
Financial and Savings Bank of the Finger Lakes, whereby (i) Finger Lakes
Financial stockholders other than the mutual holding company will constructively
receive shares of Savings Bank of the Finger Lakes common stock in exchange for
their Mid-Tier Holding Company common stock and (ii) 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.
(5) Contemporaneously with the Mid-Tier Merger, Interim will merge with and
into Savings Bank of the Finger Lakes with Savings Bank of the Finger Lakes as
the surviving entity (the "Bank Merger") pursuant to the Agreement of Merger
between Savings Bank of the Finger Lakes and Interim. Constructive shareholders
of Savings Bank of the Finger Lakes (i.e., minority stockholders immediately
prior to the conversion) will exchange the shares of Bank common stock that they
constructively received in the Mid-Tier Merger for Finger Lakes Bancorp common
stock.
(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 $____ million of the net proceeds 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."
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.
69
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 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 the 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 midpoint, 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, price-to-earnings multiples and price-to-asset ratios.
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."
Purposes of Conversion
The 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, the 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.
70
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 $19.2 million, or
6.38% of assets at December 31, 1999. Assuming that $12.9 million, the mid-point
of the $11.0 million to $14.9 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 all
except $5.1 million of the net proceeds are contributed to Savings Bank of the
Finger Lakes as additional capital, Savings Bank of the Finger Lakes' ratio of
capital to adjusted assets, calculated under generally accepted accounting
principles, will increase to 8.29%. 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 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. 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 also would be affected by any purchases by these persons in
the offering and by the receipt of cash in lieu of fractional shares. At
December 31, 1999, 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
0.6564 exchange shares for each publicly-held share of Finger Lakes Financial at
the minimum of the offering range to 1.0213 exchange shares for each
publicly-held share of Finger Lakes Financial at the adjusted maximum of the
offering range.
71
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, midpoint, 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.
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
----------- ----------- ----------- ----------- ------------ ----------- -------------
Minimum............. 1,568,863 66.9% 774,587 33.1% 2,343,450 0.6564 65.64
Midpoint............ 1,845,645 66.9% 911,355 33.1% 2,757,000 0.7723 77.23
Maximum............. 2,122,545 66.9% 1,048,005 33.1% 3,170,550 0.8881 88.81
15% above maximum... 2,440,945 66.9% 1,205,188 33.1% 3,646,133 1.0213 102.13
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 December 31, 1999, there were outstanding options to purchase 109,000
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 December 31, 1999, options to
purchase 58,400 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:
(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 .6414, .7546, .8678, and .9980 at
the minimum, midpoint, 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. Finger Lakes Financial has no
plans to grant additional stock 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 December 31, 1999, the stockholders'
equity per share of Finger Lakes Financial common stock was $5.43, including
shares held by Finger Lakes Financial Corp., MHC. As adjusted at that date for
the exchange ratio, stockholders' equity per share would be $8.27, $7.03, $6.11
and $5.31 at the minimum, midpoint, maximum, and adjusted maximum, of the
offering range. Based on the pro forma information set forth for December 31,
1999, in "Pro Forma Data," pro forma stockholders' equity per share following
the conversion will be $12.07, $10.87, $9.99, and $9.23 at the minimum,
midpoint, 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 year ended December 31, 1999, basic earnings
per share of Finger Lakes Financial common stock was $0.37, respectively,
including shares held by Finger Lakes Financial Corp., MHC. As adjusted at these
dates for the exchange ratio, such earnings per share amounts would range from
$0.55 to $0.41, respectively, for the minimum to the adjusted maximum of the
offering range. Based on the pro forma information set forth for the fiscal year
ended December
72
31, 1999 in "Pro Forma Data", earnings per share of common stock following the
conversion will range from $0.70 to $0.49, 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 $5.4
million, $6.4 million, $7.3 million, and $8.4 million at the minimum, midpoint,
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
________________, was $_____ 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 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.
73
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.
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, 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 $18,000. 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
74
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.
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.
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:
15% above maximum....................... 14.29 75.84 75.84 8.09
Maximum................................. 12.73 70.07 70.07 7.08
Midpoint................................ 11.48 64.40 64.40 6.19
Minimum................................. 10.00 58.00 58.00 5.29
All Fully Converted Thrifts Publicly
Traded on the NYSE, NASDAQ & AMEX
Exchanges as of 03/13/00:
Averages................................ 13.02 93.84 98.75 9.98
Medians................................. 10.55 85.37 90.47 8.77
Valuation peer group institutions as of
03/13/00
Averages................................ 9.83 96.75 103.90 7.34
Medians................................. 8.70 91.24 97.43 6.40
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 March 13, 2000, the estimated pro forma market value, or valuation range,
of Finger Lakes Bancorp ranged from a minimum of $16.4 million to a maximum of
$22.2 million with a midpoint of $19.3 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 1,568,863
subscription shares, the midpoint of the offering range will be 1,845,645
subscription shares, and the maximum of the offering range will be 2,122,545
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 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
75
Bancorp to less than $16,404,150 or more than $25,522,931, the appraisal will be
filed with the Securities and Exchange Commission by posteffective 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 $16,695,203, which will
result in a corresponding increase of up to 15% in the maximum of the offering
range to up to 2,385,029 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 $16,695,203 and a corresponding increase in the offering range to more than
2,385,029 shares, or a decrease in the minimum of the valuation range to less
than $10,730,692 and a corresponding decrease in the offering range to fewer
than 1,532,956 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 _________, 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."
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."
76
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
information 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 June 30, 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 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.
77
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
midpoint of the offering range, 5% of the shares issued in the offering is equal
to approximately 92,282 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.
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 March 31, 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 March
78
31, 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 June ___, 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, midpoint, 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 1,568,863 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 __________, 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:
(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
79
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. 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, midpoint, 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 1,568,863 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 __________, 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.
80
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 106,127 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.
Alternatively, if a syndicated community offering is not held, Finger Lakes
Bancorp shall have the right to sell any subscription shares remaining following
the subscription and community offerings in an underwritten firm commitment
public offering. 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.
If for any reason a syndicated community offering or an underwritten firm
commitment public 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 and Selling Commissions
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 are
broker/dealers 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 the 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.
81
For these services, Friedman, Billings, Ramsey & Co., Inc. and Investment
Bank Services 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 $25,000.
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 rely on Rule 3a41 under the Securities Exchange Act of 1934,
and sales of common stock will be conducted within the requirements of Rule
3a41, 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 ______.m., Eastern time, on
________, 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 Office of
Thrift Supervision 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 15c28 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 15c28. Order forms will be distributed only with a
prospectus.
82
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 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 the Savings Bank of the Finger Lakes prior to _____.m, Eastern time on
____________, 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 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
83
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 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 "bluesky" 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.
84
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 125,509 shares at the minimum
of the offering range and 169,803 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. 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;
85
(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
(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.
86
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 each 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 March 31, 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 proportion
that the balance of each such deposit account on December 31, 1998, or March 31,
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 March 31, 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 charter Finger Lakes Bancorp as a
first tier Delaware chartered stock holding company;
(2) Finger Lakes Bancorp will charter an interim federal association
("Interim Savings Bank");
(3) Finger Lakes Financial Corp., MHC will exchange its charter for an
interim stock savings association charter and simultaneous merger into Finger
Lakes Financial in a tax-free reorganization under Section 368(a)(1)(A) of the
Internal Revenue Code;
(4) Finger Lakes Financial will exchange its charter for a federal interim
savings bank charter and
87
simultaneously merge into Savings Bank of the Finger Lakes with Finger Lakes
Financial's shareholders constructively receiving shares of Savings Bank of the
Finger Lakes;
(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 common stock of
Finger Lakes Bancorp in a tax-free reorganization under Internal Revenue Code
Section 368(a)(1)(A) by reason of Internal Revenue Code Section 368(a)(2)(E).
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.
Pursuant to Revenue Procedure 00-3, the Internal Revenue Service has stated
that it will not rule on whether a transaction qualifies as a tax-free
reorganization under Internal Revenue Code Section 368(a)(1)(A), including a
transaction that qualifies under Internal Revenue Code Section 368(a)(1)(A) by
reason of Internal Revenue Code Section 368(a)(2)(E), or whether the taxpayer
qualifies under those sections for nonrecognition of income treatment but that
it would rule on significant sub-issues that must be resolved to determine
whether the transaction qualifies under the above sections. In several
instances, the Internal Revenue Service has ruled favorably on certain
significant sub-issues associated with downstream mergers of mutual holding
companies into their less than 80 percent owned subsidiary savings associations
in a second step conversion. In these cases, the Internal Revenue Service has
ruled that:
(1) the exchange of the member's equity interests in the mutual holding
company for interests in a liquidation account established at the savings
association will satisfy the continuity of interest requirement with respect to
the merger of the mutual holding company into the savings association;
(2) pursuant to the merger of an interim savings association into the
savings association, the stock holding company will acquire "control," as
defined in Internal Revenue Code Section 368(c), of the savings association as
the interests in the liquidation account and the shares of savings association
stock previously held by the mutual holding company will be disregarded; and
(3) the continuity of interest requirement will not be violated by the
exchange of stock holding company stock for savings association stock in the
merger of an interim savings association into the savings association.
In December 1994, the Internal Revenue Service issued Revenue Procedure
94-76 which states that the Internal Revenue Service will not issue private
letter rulings with respect to downstream mergers of a corporation into a "less
than 80 percent distributee", i.e., a corporation, such as Finger Lakes
Financial, in which the merging corporation, i.e., Finger Lakes Financial Corp.,
MHC, possesses less than 80 percent of the total voting power of the stock of
the corporation and less than 80 percent of the total value of the stock of the
corporation. The Internal Revenue Service assumed this "no-rule" position to
study whether these downstream mergers circumvent the purpose behind the repeal
of General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935). In
Notice 96-6, the Internal Revenue Service indicated that it intended to close
its study project on this issue, however, Rev. Proc. 96-22 made permanent the
Internal Revenue Service decision not to issue advance rulings on these
downstream mergers. Counsel to Finger Lakes Bancorp is of a view that the
downstream merger to effect the conversion of Finger Lakes Financial Corp., MHC
to stock form, where after consummation of the conversion,
88
Finger Lakes Bancorp holds 100% of the shares of Finger Lakes Financial and the
untaxed appreciation of Finger Lakes Financial remains in corporate solution, is
not the type of downstream merger that can be considered as circumventing the
repeal of General Utilities.
Prior to the effective date of the conversion, Finger Lakes Financial
Corp., MHC and Finger Lakes Financial will receive an opinion of counsel, Luse
Lehman Gorman Pomerenk & Schick, A Professional Corporation, which will indicate
that the federal income tax consequences of the conversion will be as follows:
(1) The conversion of Finger Lakes Financial Corp., MHC from mutual to
stock form will constitute a mere change in identity, form or place of
reorganization within the meaning of Internal Revenue Code Section 368(a)(1)(F);
(2) The merger of Finger Lakes Financial Corp., MHC with and into Finger
Lakes Financial will qualify as a reorganization within the meaning of Internal
Revenue Code Section 368(a)(1)(A);
(3) The exchange of the members' equity interests in Finger Lakes Financial
Corp., MHC for interests in a liquidation account established at Finger Lakes
Financial will satisfy the continuity of interest requirement with respect to
the merger of Finger Lakes Financial Corp., MHC into Finger Lakes Financial;
(4) Finger Lakes Financial Corp., MHC will not recognize any gain or loss
on the transfer of its assets to Finger Lakes Financial in exchange for a
liquidation account in Finger Lakes Financial;
(5) No gain or loss will be recognized by Finger Lakes Financial upon the
receipt of the assets of Finger Lakes Financial Corp., MHC in exchange for a
liquidation account in Finger Lakes Financial;
(6) The basis of the assets of Finger Lakes Financial Corp., MHC, other
than Finger Lakes Financial common stock, to be received by Finger Lakes
Financial will be the same as the basis of those assets in the hands of Finger
Lakes Financial Corp., MHC immediately prior to the transfer, the basis of
Finger Lakes Financial common stock will be zero;
(7) The holding period of the assets of Finger Lakes Financial Corp., MHC
to be received by Finger Lakes Financial will include the holding period of
those assets in the hands of Finger Lakes Financial Corp., MHC immediately prior
to the transfer;
(8) Finger Lakes Financial Corp., MHC members will recognize no gain or
loss upon the receipt of an interest in the liquidation account in Finger Lakes
Financial in exchange for their membership interest in Finger Lakes Financial
Corp., MHC;
(9) The conversion of the Finger Lakes Financial to a federally chartered
interim stock savings association will constitute a mere change in identity,
form or place of organization within the meaning of Section 368(a)(1)(F) of the
Code.
(10) The Mid-Tier Merger qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
(11) The exchange of the members equity interest in the Finger Lakes
Financial's liquidation account for interests in a Liquidation Account
established at the Savings Bank of the Finger Lakes in the Mid-Tier Merger will
satisfy the continuity of interest requirement of the income tax regulations.
(12) The Finger Lakes Financial will not recognize any gain or loss on the
transfer of its assets to the Savings Bank of the Finger Lakes in exchange for
an interest in a Liquidation Account established in Savings
89
Bank of the Finger Lakes for the benefit of those persons who remain depositors
of Savings Bank of the Finger Lakes and Savings Bank of the Finger Lakes
assumption of the Finger Lakes Financial 's liabilities, if any.
(13) No gain or loss will be recognized by Savings Bank of the Finger Lakes
upon the receipt of the assets of the Finger Lakes Financial in the Mid-Tier
Merger.
(14) The basis of the assets of the Finger Lakes Financial (other than
stock in Savings Bank of the Finger Lakes) to be received by Savings Bank of the
Finger Lakes will be the same as the basis of such assets in the hands of the
Finger Lakes Financial immediately prior to the transfer.
(15) The holding period of the assets of the Finger Lakes Financial (other
than stock in Savings Bank of the Finger Lakes) to be received by Savings Bank
of the Finger Lakes will include the holding period of those assets in the hands
of the Finger Lakes Financial immediately prior to the transfer.
(16) The merger of the Interim Savings Bank into Savings Bank of the Finger
Lakes with Savings Bank of the Finger Lakes as the surviving institution ("Bank
Merger") qualifies as a reorganization within the meaning of Internal Revenue
Code Section 368(a)(1)(A), pursuant to Internal Revenue Code Section
368(a)(2)(E);
(17) Persons who have an interest in the liquidation account established in
Finger Lakes Financial (i.e., former members of 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
interest in Finger Lakes Financial liquidation account.
(18) The exchange of shares of Finger lakes Bancorp common stock for common
stock of Savings Bank of the Finger Lakes in the Bank Merger, following the
Mid-Tier Merger will not violate the continuity of interest requirement of the
income tax regulations.
(19) Finger Lakes Financial shareholders will not recognize any gain or
loss upon their constructive exchange of Finger Lakes Financial Common Stock for
Savings Bank of the Finger Lakes Common Stock.
(20) The Interim Savings Bank will not recognize any gain or loss on the
transfer of its assets to Savings Bank of the Finger Lakes in exchange for
Savings Bank of the Finger Lakes stock and the assumption by Savings Bank of the
Finger Lakes of the liabilities, if any, of the Interim Savings Bank;
(21) Savings Bank of the Finger Lakes will not recognize any gain or loss
on the receipt of the assets of the Interim Savings Bank in exchange for Savings
Bank of the Finger Lakes stock;
(22) Savings Bank of the Finger Lakes's basis in the assets received from
the Interim Savings Bank in the proposed transaction will, in each case, be the
same as the basis of those assets in the hands of the Interim Savings Bank
immediately prior to the transaction;
(23) Finger Lakes Bancorp will not recognize any gain or loss upon its
receipt of Savings Bank of the Finger Lakes stock solely in exchange for Finger
Lakes Bancorp stock;
(24) Savings Bank of the Finger Lakes's holding period for the assets
received from the Interim Savings Bank in the proposed transaction will, in each
instance, include the period during which those assets were held by the Interim
Savings Bank;
(25) Savings Bank of the Finger Lakes stockholders will not recognize any
gain or loss upon their exchange of Savings Bank of the Finger Lakes stock
solely for shares of Finger Lakes Bancorp common stock;
90
(26) Cash received in the merger of the Interim Savings Bank into Savings
Bank of the Finger Lakes by a Savings Bank of the Finger Lakes stockholder 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 Savings Bank of the Finger Lakes common stock
which the stockholders would otherwise be entitled to receive, and will qualify
as capital gain or loss, assuming Savings Bank of the Finger Lakes common stock
surrendered in exchange therefor was held as a capital asset by the stockholder;
(27) Each Savings Bank of the Finger Lakes stockholder's aggregate basis in
his or her Finger Lakes Bancorp common stock received in the exchange, including
fractional shares which Savings Bank of the Finger Lakes stockholder's otherwise
would be entitled to receive, will be the same as the basis of Savings Bank of
the Finger Lakes common stock surrendered in exchange therefor;
(28) Each Savings Bank of the Finger Lakes stockholder's holding period in
his or her Finger Lakes Bancorp common stock received in the exchange, including
fractional shares which Savings Bank of the Finger Lakes stockholder's otherwise
would be entitled to receive, 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 Savings Bank of the Finger Lakes stockholder on the date of the
exchange;
(29) Finger Lakes Bancorp's basis in Savings Bank of the Finger Lakes
common stock which it receives would be the same as the basis of the property
exchanged for the Savings Bank of the Finger Lakes common stock;
(30) No gain or loss will be recognized by Finger Lakes Bancorp on the
receipt of money in exchange for Finger Lakes Bancorp common stock in the
offering; and
(31) The Eligible Account Holders and Supplemental Eligible Account Holders
will recognize gain, if any, upon issuance to them of nontransferable
subscription rights to purchase Finger Lakes Bancorp common stock, but only to
the extent of the value, if any, of the subscription rights.
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 counsel 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 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.
91
The form of this 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
shares of its common stock for three years, except for an offer to all
stockholders on a pro rata basis, or the repurchase of qualifying shares of a
Director. Notwithstanding the foregoing and except as provided below, beginning
one year following completion of the conversion, Finger Lakes Bancorp may
repurchase its common stock so long as:
(1) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period;
(2) the repurchases do not cause Savings Bank of the Finger Lakes to become
"undercapitalized" within the meaning of the Office of Thrift Supervision prompt
corrective action regulation; and
(3) Finger Lakes Bancorp provides to the Regional Director of the Office of
Thrift Supervision no later than ten days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation--Prompt Corrective Regulatory Action."
In addition, under current Office of Thrift Supervision policies, repurchases
may be allowed in the first year following the conversion and in amounts greater
than 5% in the second and third years following the conversion provided there
are valid and compelling business reasons for such repurchases and the Office of
Thrift Supervision does not object to such repurchases.
92
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.
Authorized Capital Stock. Finger Lakes Bancorp's authorized capital stock
consists of 5,000,0000 shares of common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share. Finger Lakes
Financial's authorized capital stock consists of __________ shares of Finger
Lakes Financial common stock and __________ 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 issuance 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.
93
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 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.
94
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.
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.
95
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 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
96
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.
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
97
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 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 acquirors 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 prices, 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.
98
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.
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 __% 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 __% of
the outstanding shares or voting rights of a converting or converted institution
or its holding company.
As permitted by Office of Thrift Supervision regulations, Savings Bank of
the Finger Lakes' charter contains a provision whereby the acquisition or offer
to acquire ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Savings Bank of the Finger Lakes by any
person, either directly or through an affiliate of such person, will be
prohibited for a period of five years following the date of
99
consummation of the conversion. Any stock in excess of 10% acquired in violation
of the charter provision will not be counted as outstanding for voting purposes.
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 ___% 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 ____% 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 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
___% 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 $.01 per share and
1,000,000 shares of preferred stock. Finger Lakes Bancorp currently expects to
issue in the conversion up to 2,440,945, subject to adjustment, shares of common
stock in the offering, and up to 1,205,188 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
100
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 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
101
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 included in this prospectus have been
audited by KPMG LLP, independent auditors and in reliance upon their report
appearing elsewhere herein in the registration statement, and have been so
included in reliance upon the report of such firm given upon their authority 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.
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.
102
Finger Lakes Financial Corp.
and Subsidiary
Consolidated Financial Statements
Contents
Independent Auditors' Report F-2
Consolidated Statement of Financial Condition F-3
(as of December 31, 1999 and 1998)
Consolidated Statements of Income F-4
(for the years ended December 31, 1999, 1998 and 1997)
Consolidated Statements of Stockholders' Equity F-5
and Comprehensive Income (loss)
(for the years ended December 31, 1999, 1998 and 1997)
Consolidated Statements of Cash Flows F-6
(for the years ended December 31, 1999, 1998 and 1997)
Notes to Consolidated Financial Statements F-8
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
comprehensive income (loss), 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
Rochester, New York
January 24, 2000, except for note 1
which is as of January 31, 2000
F-2
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
Assets 1999 1998
------------- -------------
Cash and cash equivalents $ 6,094,962 4,374,734
Securities available for sale, at fair value 118,750,207 115,332,807
Securities held to maturity, fair value of $1,567,273
in 1999 and $4,662,530 in 1998 1,592,795 4,639,772
Loans 160,203,637 146,311,360
Less allowance for loan losses 1,349,477 1,175,758
------------- -------------
Net loans 158,854,160 145,135,602
Accrued interest receivable 2,180,211 1,907,702
Federal Home Loan Bank stock, at cost 3,523,000 2,940,800
Premises and equipment, net 4,149,400 4,555,914
Other assets 6,096,471 3,488,735
------------- -------------
Total assets $ 301,241,206 282,376,066
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 208,132,284 202,433,971
Advances from Federal Home Loan Bank 69,959,730 54,815,261
Other liabilities 3,770,292 3,163,238
------------- -------------
Total liabilities 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
Additional paid-in capital 4,786,957 4,749,256
Retained earnings 18,261,689 17,239,959
Accumulated other comprehensive income (loss) (3,524,843) 155,405
Unallocated shares of ESOP (180,603) (216,724)
------------- -------------
Total stockholders' equity 19,378,900 21,963,596
------------- -------------
Total liabilities and stockholders' equity $ 301,241,206 282,376,066
============= =============
See accompanying notes to consolidated financial statements.
F-3
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Interest income:
Loans $12,137,138 10,821,304 8,587,760
Securities 8,173,120 7,810,063 7,204,518
Federal funds sold and other
short-term investments 6,187 14,085 47,503
----------- ----------- -----------
Total interest income 20,316,445 18,645,452 15,839,781
----------- ----------- -----------
Interest expense:
Deposits 8,660,307 8,678,198 7,738,344
Borrowings 3,360,357 2,523,136 1,458,051
----------- ----------- -----------
Total interest expense 12,020,664 11,201,334 9,196,395
----------- ----------- -----------
Net interest income 8,295,781 7,444,118 6,643,386
Provision for loan losses 200,000 240,000 120,000
----------- ----------- -----------
Net interest income after
provision for loan losses 8,095,781 7,204,118 6,523,386
----------- ----------- -----------
Noninterest income:
Service charges 1,026,636 803,134 507,537
Net gain on sales of loans 224,351 276,612 26,695
Net gain on sales of securities 77,137 106,231 142,160
Other -- 15,722 44,963
----------- ----------- -----------
Total noninterest income 1,328,124 1,201,699 721,355
----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 3,591,839 3,322,895 2,868,536
Office occupancy and equipment 1,387,261 1,209,563 859,561
Provision for environmental remediation
of real estate owned 90,000 620,000 150,400
Deposit insurance premiums 119,947 112,400 100,524
Professional fees 347,007 342,144
315,430
Marketing and advertising 247,907 264,185 243,049
Data processing 158,934 119,188 176,032
Real estate owned 72,150 8,650 53,651
Other 1,243,493 1,214,198 1,068,445
----------- ----------- -----------
Total noninterest expense 7,258,538 7,213,223 5,835,628
----------- ----------- -----------
Income before income tax
expense 2,165,367 1,192,594 1,409,113
Income tax expense 860,426 468,565 561,616
----------- ----------- -----------
Net income $ 1,304,941 724,029 847,497
=========== =========== ===========
Net income per common share:
Basic $ 0.37 0.20 0.24
=========== =========== ===========
Diluted $ 0.36 0.20 0.24
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
For the Years Ended December 31, 1999, 1998 and 1997
Unallo-
Accumulated cated
Additional other shares
Common paid-in Retained comprehensive of
stock capital earnings income(loss) ESOP Total
----------- ----------- ----------- ------------ ----------- -----------
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 -- -- (236,010) -- -- (236,010)
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
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,304,941 724,029 847,497
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 668,929 597,548 371,910
Amortization of loan fees and other, net (171,724) 283,635 32,929
Provision for loan losses 200,000 240,000 120,000
Provision for environmental remediation 90,000 620,000 150,400
Proceeds from sales of loans 14,224,557 21,411,559 4,559,531
Loans originated for sale (15,262,000) (15,221,497) (4,532,836)
Net gain on sales of loans (224,351) (276,612) (26,695)
Net gain on sales of securities (77,137) (106,231) (142,160)
Net loss (gain) from sale of real
estate owned 15,311 (33,333) 9,030
Deferred income taxes (65,993) (199,081) (3,174)
Increase in accrued interest
receivable (272,509) (101,550) (466,550)
Decrease (increase) in other assets 25,257 113,906 (296,991)
Increase in other liabilities 590,878 122,560 347,164
------------ ------------ ------------
Net cash provided by
operating activities 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 25,395,980 35,669,146 13,427,056
Proceeds from maturities of and principal
collected on securities held to maturity 4,021,823 10,100,000 3,250,000
Proceeds from sales of securities
available for sale 18,413,431 51,605,954 46,318,299
Purchases of securities available for sale (53,261,255) (103,170,611) (74,815,294)
Purchases of securities held to maturity (969,395) (640,000) (3,996,665)
Loans originated and purchased (45,427,221) (59,177,514) (45,927,586)
Principal collected on loans 32,528,962 26,044,180 16,167,373
Proceeds from sales of real estate owned 256,788 277,784 169,237
Purchases of FHLB stock (582,200) (869,700) (701,100)
Purchases of premises and equipment, net (262,415) (1,503,334) (2,153,687)
------------ ------------ ------------
Net cash used in
investing activities (19,885,502) (41,664,095) (48,262,367)
------------ ------------ ------------
(Continued)
F-6
FINGER LAKES FINANCIAL CORP.
Consolidated Statements of Cash Flows, Continued
1999 1998 1997
------------ ------------ ------------
Cash flows from financing activities:
Net increase in savings
and demand accounts $ 1,005,839 749,899 13,545,519
Net increase in time deposits 4,692,474 15,149,726 19,157,142
Net increase (decrease) in short term
FHLB advances 3,100,000 (16,008,000) 8,208,000
Long term advances from FHLB 23,000,000 35,000,000 5,000,000
Repayments of long term advances
from FHLB (10,955,531) (897,730) (287,009)
Principal payments on ESOP debt -- (252,844) (67,426)
Common stock dividends paid (283,211) (271,412) (236,011)
------------ ------------ ------------
Net cash provided by
financing activities 20,559,571 33,469,639 45,320,215
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,720,228 (19,523) (1,972,097)
Cash and cash equivalents at beginning
of year 4,374,734 4,394,257 6,366,354
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,094,962 4,374,734 4,394,257
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 11,843,376 10,994,155 9,116,530
============ ============ ============
Income taxes $ 545,000 582,011 420,500
============ ============ ============
Non-cash investing activities:
Transfer of loans to real estate
owned $ 289,786 233,448 53,368
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(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. 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
common stock immediately prior to the conversion. The Bank will organize
Bancorp as a direct subsidiary of the Bank and the Company will merge with
and into the Bank. 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.
The Reorganization will be accounted for as a change in corporate form with
no resulting change in the historical basis of the Company's assets,
liabilities and equity. In the event that the Reorganization and Offering
are not successfully completed, the costs incurred in connection with the
Reorganization and Offering will be expensed at the time that the
unsuccessful completion is determined. The Company has not incurred any
such costs as of December 31, 1999.
F-8
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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 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.
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.
F-9
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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. 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.
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 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.
F-10
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Real Estate Owned, Continued
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 provided
over the estimated service lives of the respective assets on the
straight-line method.
Federal Home Loan Bank (FHLB) Stock
As a member of the FHLB system, the Company is required to maintain 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.
F-11
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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 and contingently issuable shares. Diluted net income per common
share reflects the effects of common stock issuable upon exercise of
dilutive stock options and other stock grants.
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.
Reclassifications
Certain items in the 1998 and 1997 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.
F-12
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(2) Securities
The aggregate amortized cost and fair value of securities are as follows:
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
December 31, 1999
Securities Available for Sale
Debt securities:
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
F-13
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
December 31, 1998, Continued
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 -- -- --
------------ ------------ ------------ ------------
Total securities held
to maturity $ 4,639,772 22,758 -- 4,662,530
============ ============ ============ ============
Proceeds from the sale of securities available for sale for the years ended
December 31, 1999, 1998 and 1997 were $18,413,431, $51,605,954 and $46,318,299,
respectively. Gross gains and losses realized on those sales follow:
1999 1998 1997
-------- -------- --------
Gross realized gains $ 81,423 313,068 327,812
Gross realized losses (4,286) (206,837) (185,652)
-------- -------- --------
Net gains realized $ 77,137 106,231 142,160
======== ======== ========
The contractual maturities of debt securities at December 31, 1999 are as
follows:
Available for Sale Held to Maturity
---------------------------------- ----------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
One year or less $ -- -- 30,000 30,000
After one year through
five years 5,234,246 5,063,437 141,666 141,666
After five years through
ten years 48,478,231 45,549,857 928,890 913,149
After ten years 69,255,865 66,756,875 492,239 482,458
------------ ------------ ------------ ------------
Total $122,968,342 117,370,169 1,592,795 1,567,273
============ ============ ============ ============
F-14
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 December 31, 1999 and 1998, securities carried at $46,119,705 and
$26,385,000, respectively, were pledged to secure advances from the FHLB of
New York.
(3) Loans
Loans consist of the following at December 31, 1999 and 1998:
1999 1998
------------- -------------
Mortgage loans:
One to four family $ 90,587,529 89,455,464
Multi-family and commercial 28,519,656 20,533,704
Construction 2,695,125 6,912,383
------------- -------------
Total mortgage loans 121,802,310 116,901,551
Commercial business 9,536,216 5,412,658
Home equity and property improvement loans 18,234,697 12,873,693
Mobile home loans 4,500,533 4,073,837
Consumer loans 5,966,557 6,920,387
------------- -------------
Total loans 160,040,313 146,182,126
Premiums, net of deferred fees 163,324 129,234
Allowance for loan losses (1,349,477) (1,175,758)
------------- -------------
Net loans $ 158,854,160 145,135,602
============= =============
The following table summarizes activity in the allowance for loan losses:
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year $ 1,175,758 1,148,786 1,087,637
Provision for loan losses 200,000 240,000 120,000
Loans charged-off (211,984) (293,134) (146,886)
Recoveries 185,703 80,106 88,035
----------- ----------- -----------
Balance, end of year $ 1,349,477 1,175,758 1,148,786
=========== =========== ===========
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.
F-15
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(3) Loans, Net, Continued
The principal balance of all loans not accruing interest amounted to
approximately $586,700 and $1,016,000 at December 31, 1999 and 1998,
respectively. The interest income forgone for non-accruing loans was
$64,744, $78,166 and $59,400 for the years ended December 31, 1999, 1998,
and 1997, respectively. At December 31, 1999 and 1998, the recorded
investment in loans that are considered impaired was $169,924 and $268,236,
respectively. The Company has provided an allowance for loan losses of
$50,977 and $88,518 at December 31, 1999 and 1998, respectively, for these
loans. The average recorded investment in such impaired loans was
approximately $206,500 in 1999, $331,700 in 1998 and $74,900 in 1997 and
interest income on impaired loans of $0 in 1999, $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 $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 $224,351, $276,612 and $26,695
for the years ended December 31, 1999, 1998, and 1997 respectively. Loans
serviced for others, amounting to $39,081,954 and $26,770,611 at December
31, 1999 and 1998, respectively, are not included in the consolidated
financial statements. Originated mortgage servicing rights of $253,785 and
$143,276 are included in other assets at December 31, 1999 and 1998,
respectively. The net carrying value of these servicing rights approximated
fair value. Residential mortgage loans held for sale were $454,700 and
$1,204,000 at December 31, 1999 and 1998, respectively.
(4) Premises and Equipment
Premises and equipment consist of the following:
1999 1998
---------- ----------
Land $ 113,000 113,000
Building 3,328,317 3,294,248
Furniture, fixtures and equipment 2,958,367 2,759,238
---------- ----------
6,399,684 6,166,486
Less accumulated depreciation and
amortization 2,250,284 1,610,572
---------- ----------
Premises and equipment, net $4,149,400 4,555,914
========== ==========
Depreciation and amortization expense for the years ended December 31,
1999, 1998, and 1997 was $668,929, $597,548 and $371,910, respectively.
F-16
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(5) Deposits
Deposits and the applicable weighted average interest rates at December 31,
1999 and 1998 are summarized as follows:
1999 1998
---------------------------------- -----------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------------ ------------- ------------ -------------
Demand deposits and NOW
accounts $ 24,474,602 1.17% 24,127,812 1.17%
------------ ------------ ------------ ------------
Savings accounts 46,093,326 2.40% 47,258,689 2.74%
Money market accounts 5,020,227 3.07% 3,195,816 2.89%
------------ ------------
51,113,553 2.46% 50,454,505 2.75%
------------ ------------ ------------ ------------
Certificates of deposit maturing:
12 months or less 98,308,695 88,404,748
13-24 months 24,778,136 28,829,883
25-36 months 3,742,491 4,279,881
37-48 months 4,007,255 2,032,335
49-60 months 1,634,750 4,196,753
61 months or longer 72,802 108,054
------------ ------------
132,544,129 5.34% 127,851,654 5.56%
------------ ------------ ------------ ------------
$208,132,284 4.15% 202,433,971 4.34%
============ ============ ============ ============
Certificates of deposit equal to or greater than $100,000 amounted to
$24,599,864 and $22,609,407 at December 31, 1999 and 1998, respectively.
Interest on deposits is summarized as follows:
1999 1998 1997
---------- ---------- ----------
NOW accounts $ 279,365 394,664 341,458
Savings accounts 1,280,547 1,365,558 1,390,960
Money market accounts 106,266 38,124 57,470
Certificates of deposit 6,994,129 6,879,852 5,948,456
---------- ---------- ----------
$8,660,307 8,678,198 7,738,344
========== ========== ==========
F-17
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(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.
Total outstanding advances from the FHLB at December 31, 1999 and 1998 are
as follows:
1999 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
Overnight line of credit $ 2,100,000 5.10% 6,000,000 5.13%
Due in:
1999 -- -- 10,000,000 5.63%
2000 17,000,000 5.79% -- --
2001 5,000,000 5.88% 3,000,000 5.45%
2002 3,859,730 6.36% 3,815,261 6.26%
2003 20,000,000 5.52% 20,000,000 5.52%
2004 10,000,000 6.01% --
2007 2,000,000 5.65% 2,000,000 5.65%
2008 -- -- 10,000,000 4.75%
2009 10,000,000 5.01% -- --
----------- ---- ----------- ----
$69,959,730 5.64% 54,815,261 5.41%
=========== ==== =========== ====
Advances of $37,000,000 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 1999 and 1998 advances from the FHLB had an average outstanding
balance of approximately $61,923,000 and $45,532,000, respectively, with
the maximum amount outstanding at any month end of $69,959,730 in 1999 and
$54,892,000 in 1998. Such borrowings had a weighted-average borrowing rate
of 5.43% for 1999 and 5.41% for 1998.
(7) Income Taxes
Total income taxes for the years ended December 31, 1999, 1998 and 1997
were allocated as follows:
1999 1998 1997
----------- ----------- -----------
Income from operations $ 860,426 468,565 561,616
Stockholders' equity, for
unrealized gain/loss on
securities (2,453,498) (185,264) 378,599
----------- ----------- -----------
$(1,593,072) 283,301 940,215
=========== =========== ===========
F-18
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 follow:
Current Deferred Total
--------- --------- ---------
Year ended December 31, 1999:
Federal $ 782,650 (114,246) 668,404
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
========= ========= =========
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:
Years Ended December 31,
1999 1998 1997
--------- --------- ---------
Computed "expected" tax
expense $ 736,225 405,482 479,098
Increase (decrease) in taxes resulting from:
State income tax expense,
net of federal
income tax benefit 125,005 69,277 83,368
Other, net (804) (6,194) (850)
--------- --------- ---------
$ 860,426 468,565 561,616
========= ========= =========
F-19
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
1999 1998
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 428,547 387,804
Net unrealized loss on securities
available for sale 2,349,895 --
Supplemental retirement benefits 76,480 81,873
Postretirement benefits 133,910 99,940
Deferred compensation 65,562 40,467
Accrued environmental remediation costs 266,373 275,809
New York State credits 77,761 75,087
Other 25,463 36,323
---------- ----------
Total deferred tax assets 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 155,777 166,212
Mortgage servicing rights 98,849 57,225
Other -- 20,389
---------- ----------
Total deferred tax liabilities 254,626 347,313
---------- ----------
Net deferred tax assets included
in other assets $3,169,365 649,990
========== ==========
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.
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.
F-20
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, Continued
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
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 December 31, 1999 with respect to
the Federal base-year reserve was $1,030,000. The unrecognized deferred tax
liability at 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 $190,000 (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 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:
Pension Benefits Postretirement Benefits
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Change in benefit obligation:
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 -- --
----------- ----------- ----------- -----------
F-21
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(8) Retirement Plans, Continued
Pension Benefits Postretirement Benefits
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
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 -- 485 -- (19,068)
--------- --------- --------- ---------
Prepaid (accrued) benefit cost at
year-end $ 183,091 194,000 (343,799) (235,964)
========= ========= ========= =========
Pension Plan
Pension plan expense (benefit) consists of the following in 1999, 1998 and
1997:
1999 1998 1997
--------- --------- ---------
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%
========= ========= =========
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.
Postretirement Plan
Net periodic postretirement benefit cost included the following in 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 17,033 15,847
-------- -------- --------
Net periodic postretirement
benefit cost $123,991 79,973 65,092
======== ======== ========
F-22
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(8) Retirement Plans, Continued
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.
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.
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
$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 change in benefit obligation and
change in 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 -- --
--------- ---------
F-23
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(8) Retirement Plans, Continued
Supplemental Employee Retirement Plan (SERP), Continued
1999 1998
--------- ---------
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)
========= =========
Annual expense related to the SERP consists of the following in 1999, 1998
and 1997:
1999 1998 1997
-------- -------- --------
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%
======== ======== ========
(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 December 31, 1999, 44,324 shares have been
allocated to employees with the remaining unallocated shares held in trust.
Compensation expense amounted to $69,441, $105,028 and $141,059 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 December 31, 1999, there were 9,000 shares available for grant under the
SOP. The per share weighted-average fair value of stock options granted was
$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 with the following weighted-average
assumptions: 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.
F-24
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(10) Stock Option and Management Recognition Plans, continued
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 option under SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income As reported $1,304,941 724,029 847,497
Pro forma 1,278,257 693,497 820,817
Net income per share - basic As reported $ 0.37 0.20 0.24
Pro forma 0.36 0.19 0.24
Stock option activity for the years ended December 31, 1999, 1998 and 1997
follows:
Weighted-
Number of average
shares exercise price
------ --------------
Balance at January 1, 1997 80,700 $ 7.93
Granted 28,600 11.63
-------- ------
Balance at December 31, 1997 109,300 8.89
Granted 8,700 17.21
Forfeited (2,000) (8.00)
-------- ------
Balance at December 31, 1998 116,000 9.53
Granted 1,000 9.00
Forfeited (2,000) (19.88)
Cancelled (6,000) (17.98)
-------- ------
Balance at December 31, 1999 109,000 $ 8.87
======== ======
The range of exercise prices and weighted-average remaining contractual
life of outstanding options was $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 December 31, 1999 and 1998, the number of options
exercisable was 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 $106,000 in each of 1999 and 1998 and $70,000 in
1997.
F-25
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 for the
years ended December 31, 1999, 1998 and 1997:
1999 1998
---- ----
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net income per share - basic
Weighted average shares 3,570,000 3,570,000
---------- ---------
Income available
to common
shareholders $1,304,941 3,570,000 $0.37 $ 724,029 3,570,000 $0.20
---------- ---------- ===== ---------- ---------- =====
Effect of dilutive securities:
Common stock options 18,447 43,982
---------- ----------
Net income per share - diluted $1,304,941 3,588,447 $0.36 $ 724,029 3,613,982 $0.20
========== ========== ===== ========== ========== =====
1999
----
Weighted
Average Per-Share
Income Shares Amount
------ ------ ------
Net income per share - basic
Weighted average shares 3,570,000
----------
Income available
to common
shareholders $ 847,497 3,570,000 $0.24
---------- ---------- =====
Effect of dilutive securities:
Common stock options 23,574
----------
Net Income per share - diluted $ 847,497 3,593,594 $0.24
========== ========== =====
(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 December 31, 1999 and 1998 are not reflected
in the consolidated statements of financial condition.
The following is a summary of the maximum credit exposure of each class of
lending related off-balance sheet financial instruments outstanding at
December 31:
1999 1998
---------- ----------
Commitments to originate loans:
Fixed rate mortgage loans $1,108,450 2,251,161
Adjustable rate mortgage loans 144,000 1,182,000
Commercial real estate loans 1,223,000 2,243,000
Commercial loans 300,000 --
Consumer home equity loans 324,100 511,400
---------- ----------
$3,099,550 6,187,561
========== ==========
F-26
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(11) Commitments and Contingencies - continued
1999 1998
----------- -----------
Unused lines of credit:
Construction loans $ 994,955 1,282,439
Commercial lines of credit 5,355,963 2,001,192
Home equity lines of credit 7,859,186 5,386,745
Other 503,219 489,531
----------- -----------
$14,713,323 9,159,907
=========== ===========
Outstanding letters of credit $ 90,000 12,000
=========== ===========
Commitments to sell loans:
Fixed rate mortgage loans $ 666,720 1,867,000
=========== ===========
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. 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 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.
At December 31, 1999, the Company occupies branch facilities under
noncancelable operating leases. Office occupancy and equipment expense
includes rental expense of $272,251, $243,420 and $199,382 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.
F-27
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(12) Environmental Matter
In April 1989, the Company foreclosed on property that had been a dry
cleaning and laundry facility. Environmental investigations revealed ground
water 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 anticipates approval
of the final design work plan from the DEC by June 2000. When the final
design work plan has been approved by the DEC, the Company intends to
purchase a cleanup cost CAP insurance policy with a coverage limit of $1
million for a 2 year term. The Company has purchased a pollution legal
liability insurance policy with a coverage limit of $2 million and a policy
term of 5 years, which provides coverage against third party liability
claims that could arise from any off-site migration of the contamination.
At December 31, 1999, the Company had a $684,000 accrual in other
liabilities for the estimated remediation costs. Management for the Company
believes 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.
(13) Stockholders' Equity and Regulatory Capital Requirements
Other Comprehensive Income
The components of other comprehensive income (loss) for 1999, 1998 and 1997
are as follows:
1999 1998 1997
----------- ----------- -----------
Unrealized holding gains (loss)
arising during year $(3,633,966) (213,868) 653,869
Less: reclassification adjustment for gains
included in net income 46,282 63,739 85,296
----------- ----------- -----------
Change in unrealized gains on securities,
available for sale, net of taxes $(3,680,248) (277,607) 568,573
=========== =========== ===========
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 $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.
F-28
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(14) Stockholders' Equity and Regulatory Capital Requirements, continued
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors. Under the OTS capital regulations in effect
at December 31, 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 total adjusted tangible 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 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 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.
Minimum
Actual Requirement Well Capitalized
----------------------- ----------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999
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% -- --
1999 Adjusted Tangible Assets were $305,062,000. 1999 Risk Weighted Assets
were $138,235,000.
F-29
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(14) Stockholders' Equity and Regulatory Capital Requirements, continued
Minimum
Actual Requirement Well Capitalized
----------------------- ----------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1998
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% -- --
1998 Adjusted Tangible Assets were $282,505,000. 1998 Risk Weighted Assets
were $119,407,000.
Regulatory capital ratios of the Company at December 31, 1999, computed on
a consolidated basis are summarized below:
1999 1998
---- ----
Total capital (to risk weighted assets) 16.81% 17.45%
Tier 1 capital (to risk weighted assets) 16.50% 18.27%
Tier 1 capital (to average assets) 7.46% 7.71%
Tangible capital 7.46% 7.71%
(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.
F-30
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(15) Fair Value of Financial Instruments, Continued
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.
The estimated fair value of the Company's financial instruments is as
follows:
December 31, 1999 December 31, 1998
-------------------------------- -------------------------------
Carrying Carrying
amount Fair value amount Fair value
------------ ----------- ----------- -----------
Financial assets:
Securities $120,343,002 120,317,480 119,972,579 119,995,337
Loans 158,854,160 158,867,205 145,135,602 149,089,220
Financial liabilities:
Deposits:
Demand deposit accounts,
savings and money
market accounts 75,588,155 75,588,155 74,582,317 74,582,317
Time deposits 132,544,129 132,598,680 127,851,654 127,952,986
Advances from FHLB 69,595,730 70,897,337 54,815,261 55,066,529
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.
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.
F-31
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(16) Condensed Parent Company Only Financial Information
The following condensed statements of condition of Finger Lakes Financial
Corp. as of December 31, 1999 and 1998 and the condensed statements of
income and condensed statements of cash flows for 1999 and 1998 should be
read in conjunction with the Consolidated Financial Statements and related
notes:
December 31,
--------------------------------
1999 1998
----------- -----------
Condensed Statement of Condition
Assets:
Cash $ 210,690 $ 441,823
Notes receivable from
subsidiary 180,603 216,724
Other assets 49,746 59,344
Investment in subsidiary 19,237,662 21,535,356
----------- -----------
$19,678,701 $22,253,247
=========== ===========
Liabilities and stockholders' equity:
Note payable to subsidiary $ 299,801 $ 289,651
Stockholders' equity 19,378,900 21,963,596
----------- -----------
$19,678,701 $22,253,247
=========== ===========
Condensed Statement of Income
1999 1998
----------- -----------
Income $ 15,958 $ 3,596
Expense 22,340 4,553
----------- -----------
Loss before income taxes and
equity in earnings of subsidiary (6,382) (957)
Income tax benefit 2,591 --
----------- -----------
Loss before equity in earnings
of subsidiary (3,791) (957)
Equity in earnings of subsidiary 1,308,732 724,986
----------- -----------
Net income $ 1,304,941 $ 724,029
=========== ===========
F-32
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
(16) Condensed Parent Company Only Financial Information, Continued
Condensed Statements of Cash Flows
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 1,304,941 $ 724,029
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in earnings of subsidiary (1,308,732) (724,985)
Other, net 9,598 (59,345)
Net cash provided by
(used in) operating
activities 5,807 (60,301)
----------- -----------
Cash flows from investing activities:
Note receivable originated to subsidiary -- (225,754)
Principal collected on note receivable 36,121 9,030
----------- -----------
Net cash provided by (used in)
investing activities 36,121 (216,724)
----------- -----------
Cash flows from financing activities:
Increase in note payable to subsidiary 10,150 289,651
Capitalization of Company -- 500,000
Cash dividends paid (283,211) (70,803)
----------- -----------
Net cash (used in) provided by
financing activities (273,061) 718,848
----------- -----------
Net (decrease) increase in cash and
cash equivalents (231,133) 441,823
Cash and cash equivalents at beginning
of period 441,823 --
----------- -----------
Cash and cash equivalents at end
of period $ 210,690 $ 441,823
=========== ===========
F-33
FINGER LAKES FINANCIAL CORP.
Notes to Consolidated Financial Statements, Continued
Quarterly Summarized Financial Information (Unaudited)
Selected quarterly financial data for fiscal 1999 and 1998 follows (in
thousands, except per share data):
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 0.10 0.11 0.36
Diluted $ 0.08 0.08 0.10 0.10 0.36
====== ====== ====== ====== ======
1998
-----------------------------------------------------------------------
By Quarter 1 2 3 4 Year
------ ------ ------ ------ ------
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 before income
taxes 442 460 372 (81) 1,193
Income taxes 176 184 142 (33) 469
------ ------ ------ ------ ------
Net income $ 266 276 230 (48) 724
====== ====== ====== ====== ======
Net income per common share:
Basic $ 0.07 0.08 0.06 (0.01) 0.20
Diluted $ 0.07 0.08 0.06 (0.01) 0.20
====== ====== ====== ====== ======
F-34
- --------------------------------------------------------------------------------
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 __________ Shares
(Anticipated Maximum)
Finger Lakes Bancorp, Inc.
(Proposed Holding Company for
Savings Bank of the Finger Lakes)
COMMON STOCK
Par Value $.01 per share
------------------
PROSPECTUS
------------------
Friedman, Billings, Ramsey Co., Inc.
May __, 2000
----------------
These securities are not deposits or accounts and
are not federally insured or guaranteed.
----------------
Until ________, 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.
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Amount
------
* Legal Fees and Expenses................................. $ 150,000
* Printing, Postage and Mailing........................... 150,000
* Appraisal and Business Plan Fees and Expenses........... 30,000
* Accounting Fees and Expenses............................ 85,000
* Conversion Data Processing.............................. 15,000
** Marketing Fees and Expenses............................. 265,000
* Filing Fees (NASD, OTS and SEC)......................... 20,000
* Other Expenses.......................................... 35,000
---------
* Total .................................................. $ 750,000
=========
- ----------
* Estimated
** Savings Bank of the Finger Lakes, FSB and Finger Lakes Bancorp, Inc. have
retained Friedman, Billings, Ramsey & Co., Inc ("FBR") to assist in the
sale of common stock on a best efforts basis in the Subscription and
Community Offerings. For purposes of computing estimated expenses, it has
been assumed that FBR will receive fees of approximately $215,000,
exclusive of attorneys' fees of $25,000. FBR estimates that its expenses
shall not exceed $15,000.
Item 14. Indemnification of Directors and Officers
Indemnification of Directors and Officers of Finger Lakes Bancorp, Inc.
Article TENTH of the Certificate of Incorporation of Finger Lakes Bancorp,
Inc. (the "Corporation") sets forth circumstances under which directors,
officers, employees and agents of the Corporation may be insured or indemnified
against liability which they incur in their capacities as such:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation
Law requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a Director or Officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Section or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections A
and B of this Article TENTH shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) List of Exhibits
1.1 Engagement Letter between Finger Lakes Bancorp, Inc. and Friedman,
Billings, Ramsey & Co., Inc.
1.2 Form of Agency Agreement among Finger Lakes Bancorp, Inc., Savings
Bank of the Finger Lakes and Friedman, Billings, Ramsey & Co., Inc.*
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Finger Lakes Bancorp, Inc.
3.2 Bylaws of Finger Lakes Bancorp, Inc.
4 Form of Common Stock Certificate of Finger Lakes Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 State Tax Opinion of KPMG LLP*
8.3 Letter from FinPro, Inc. with respect to Subscription Rights
10.1 Form of Employment Agreement
10.2 1996 Stock Option Plan
10.3 1996 Management Recognition Plan
10.4 Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG LLP
23.3 Consent of FinPro, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Finger Lakes Bancorp, Inc. and FinPro,
Inc.
99.2 Appraisal Report of FinPro, Inc.**
99.3 Marketing Materials*
99.4 Order and Acknowledgment Form*
99.5 Proxy Statement
- ----------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T
(b) Financial Statement Schedules
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post- effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Geneva, state of New York
on March 27, 2000.
FINGER LAKES BANCORP, INC.
By: /s/ G. Thomas Bowers
--------------------------------------
G. Thomas Bowers
Chairman of the Board, President
and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Finger Lakes Bancorp, Inc.
(the "Company") hereby severally constitute and appoint G. Thomas Bowers as our
true and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said G. Thomas Bowers may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said G. Thomas Bowers shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ G. Thomas Bowers Chairman of the Board, March 27, 2000
- ------------------------------ President, Chief Executive
G. Thomas Bowers Officer and Director (Principal
Executive Officer)
/s/ Terry L. Hammond Executive Vice President and March 27, 2000
- ------------------------------ Chief Financial Officer
Terry L. Hammond (Principal Financial and
Accounting Officer
/s/ Michael J. Hanna Director March 27, 2000
- ------------------------------
Michael J. Hanna
/s/ Chris M. Hansen Director March 27, 2000
- ------------------------------
Chris M. Hansen
/s/ Richard J. Harrison Director March 27, 2000
- ------------------------------
Richard J. Harrison
/s/ James E. Hunter Director March 27, 2000
- ------------------------------
James E. Hunter
/s/ Ronald C. Long Director March 27, 2000
- ------------------------------
Ronald C. Long
/s/ Bernard G. Lynch Director March 27, 2000
- ------------------------------
Bernard G. Lynch
/s/ Arthur W. Pearce Director March 27, 2000
- ------------------------------
Arthur W. Pearce
/s/ Joan C. Rogers Director March 27, 2000
- ------------------------------
Joan C. Rogers
/s/ Ralph E. Springstead Director March 27, 2000
- ------------------------------
Ralph E. Springstead
As filed with the Securities and Exchange Commission on March 28, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
------------------------------------
FINGER LAKES BANCORP, INC.
================================================================================
EXHIBIT INDEX
1.1 Engagement Letter between Finger Lakes Bancorp, Inc. and Friedman,
Billings, Ramsey & Co., Inc.
1.2 Form of Agency Agreement among Finger Lakes Bancorp, Inc., Savings
Bank of the Finger Lake, FSB and Friedman, Billings, Ramsey & Co.,
Inc.*
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Finger Lakes Bancorp, Inc.
3.2 Bylaws of Finger Lakes Bancorp, Inc.
4 Form of Common Stock Certificate of Finger Lakes Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 Form of State Tax Opinion of KPMG LLP**
8.3 Letter from FinPro, Inc. with respect to Subscription Rights
10.1 Form of Employment Agreement
10.2 1996 Stock Option Plan
10.3 1996 Management Recognition Plan
10.4 Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG LLP
23.3 Consent of FinPro, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Finger Lakes Bancorp, Inc. and FinPro,
Inc.
99.2 Appraisal Report of FinPro, Inc.**
99.3 Marketing Materials*
99.4 Order and Acknowledgment Form*
99.5 Proxy Statement
- ----------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T