1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
- ---
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________ to ________
COMMISSION FILE NUMBER 000-31821
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FINGER LAKES BANCORP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1594819
- ------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
(Incorporation or organization) Identification Number)
470 EXCHANGE STREET, GENEVA, NEW YORK 14456
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (315) 789-3838
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares of common stock outstanding
as of June 30, 2001
COMMON STOCK, $.01 PAR VALUE 3,445,110
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Class Outstanding
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FINGER LAKES BANCORP, INC.
Form 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited):
Consolidated Statements of Financial Condition
at June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income
for the three and six month periods ended
June 30, 2001 and June 30, 2000 4
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 2001 and June 30, 2000 5, 6
Consolidated Statements of Changes in Stockholders' Equity
for the six month period ended June 30, 2001 7
Notes to Consolidated Financial Statements 8 - 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Item 3 - Quantitative & Qualitative Disclosure about
Market Risk 15, 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
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Item 1 - Financial Statements
FINGER LAKES BANCORP, INC.
--------------------------
Consolidated Statements of Financial Condition
(dollars in thousands, except per share data)
(unaudited)
June 30, December 31,
-------- ------------
2001 2000
--------- ---------
Assets
- ------
Cash and due from banks $ 4,295 4,496
Securities available for sale, at fair value 138,808 131,322
Securities held to maturity, fair value
of $1,563 at June 30, 2001 and
December 31, 2000 1,563 1,563
Loans 183,217 173,890
Less allowance for loan losses 1,552 1,468
--------- ---------
Net loans 181,665 172,422
Accrued interest receivable 2,248 2,479
Federal Home Loan Bank Stock, at cost 3,886 3,523
Premises and equipment, net 4,485 4,814
Bank owned life insurance 8,198 5,003
Other assets 3,700 3,574
--------- ---------
Total assets $ 348,848 329,196
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $ 235,248 228,462
Advances from Federal Home Loan Bank 73,133 60,243
Other liabilities 3,902 3,920
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Total liabilities 312,283 292,625
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Stockholders' Equity:
Preferred Stock; $.01 par value; authorized 1,000,000
shares; issued and outstanding-none -- --
Common Stock, $.01 par value; 5,000,000
shares authorized; 3,445,110 shares
issued and outstanding 35 35
Additional paid-in capital 20,067 20,068
Retained earnings 19,053 18,780
Accumulated other comprehensive income/(loss) (417) (898)
Unearned stock compensation (837) --
Unallocated shares of ESOP (1,336) (1,414)
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Total stockholders' equity 36,565 36,571
--------- ---------
Total liabilities and stockholders' equity $ 348,848 329,196
========= =========
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
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Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income:
Loans $ 3,590 3,346 7,134 6,560
Securities 2,328 2,129 4,694 4,242
Other 2 11 11 19
------- ------- ------- -------
5,920 5,486 11,839 10,821
------- ------- ------- -------
Interest expense:
Deposits 2,702 2,331 5,482 4,526
Borrowings 998 999 1,960 1,979
------- ------- ------- -------
3,700 3,330 7,442 6,505
------- ------- ------- -------
Net interest income 2,220 2,156 4,397 4,316
Provision for loan losses 75 30 135 90
------- ------- ------- -------
Net interest income after provision
for loan losses 2,145 2,126 4,262 4,226
------- ------- ------- -------
Non interest income:
Service charges and other fee
income 320 242 654 458
Net gain on sale of securities 203 0 321 0
Net gain on sale of loans 48 16 60 46
Other 123 4 202 7
------- ------- ------- -------
694 262 1,237 511
------- ------- ------- -------
Non interest expenses:
Salaries and employee benefits 1,026 947 2,068 1,898
Office occupancy and equipment 415 400 861 782
Deposit insurance premiums 11 11 22 22
Professional fees 169 87 282 191
Marketing and advertising 121 137 187 192
Data processing 54 48 113 93
Provision for environmental
remediation -- 30 -- 180
Real estate owned 1 17 (5) 35
Other 435 370 858 736
------- ------- ------- -------
2,232 2,047 4,386 4,129
------- ------- ------- -------
Income before income tax expense 607 341 1,113 608
Income tax expense 184 127 347 230
------- ------- ------- -------
Net income $ 423 214 766 378
======= ======= ======= =======
Net income per common share - basic $ 0.13 0.06 0.24 0.11
======= ======= ======= =======
Net income per common share-diluted $ 0.13 0.06 0.24 0.11
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months
Ended June 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 766 378
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 409 356
Amortization of fees, discounts
and premiums 75 49
Provision for loan losses 135 90
Provision for environmental remediation -- 180
Net gain on sale of securities available for sale (321) --
Net gain on sale of loans (60) (46)
Net loss/(gain) from sale of real estate owned (7) 23
Allocation of ESOP 101 25
Amortization of deferred stock compensation 22 --
Increase in cash value of BOLI (195) --
Proceeds from sale of loans held for sale 4,324 2,577
Loans originated for sale (4,257) (2,732)
Decrease/(increase) in accrued interest receivable 231 (58)
Increase in other assets (531) (754)
Decrease in other liabilities (18) (193)
-------- --------
Net cash provided/(used) by operating activities 674 (105)
-------- --------
Cash flows from investing activities:
Proceeds from maturities of and principal collected on
securities available for sale 9,713 4,902
Proceeds from sales of securities available for sale 70,662 50
Purchases of securities available for sale (86,732) (6,051)
Loans originated and purchased (26,170) (16,331)
Principal collected on loans 16,706 11,538
Purchase of bank owned life insurance (3,000) --
Proceeds from sale of real estate owned 89 284
Purchases of FHLB stock (363) --
Purchases of premises and equipment, net (80) (693)
-------- --------
Net cash used in investing activities (19,175) (6,301)
-------- --------
(continued)
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FINGER LAKES BANCORP, INC.
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Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
Six Months
Ended June 30,
--------------
2001 2000
-------- --------
Cash flows from financing activities:
Net increase in savings, demand and money market
accounts $ 11,243 3,555
Net increase/(decrease) in time deposits (4,457) 8,061
Net increase/(decrease) in short term advances from FHLB 8,300 (700)
Long term advances from FHLB 5,124 15,000
Repayments of long term advances from FHLB (534) (20,500)
Shares acquired for stock benefit plans (938) --
Stock issuance costs (24) --
-------- --------
Dividends on common stock (414) (141)
-------- --------
Net cash provided by financing activities 18,300 5,275
-------- --------
Net decrease in cash and cash equivalents (201) (1,131)
Cash and cash equivalents at beginning of period 4,496 6,095
-------- --------
Cash and cash equivalents at end of period $ 4,295 4,964
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,396 6,583
Income taxes 320 305
Non-cash investing activities:
Transfer of loans to real estate owned $ -- 213
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
(dollars in thousands, except per share data)
(unaudited)
Accumulated Unallocated
Additional Other Shares of Unallocated
Common Paid - in Retained Comprehensive Treasury Stock Shares of
Stock Capital Earnings Income/(Loss) Stock Compensation ESOP Total
----- ------- -------- ------------- ----- ------------ ---- -----
Balance at December 31, 2000 $ 35 20,068 18,780 (898) -- -- (1,414) 36,571
Comprehensive income:
Net income -- -- 766 -- -- -- -- 766
Change in net unrealized gains/losses
on securities available for
sale, net of taxes -- -- -- 481 -- -- -- 481
-------
Total comprehensive income 1,247
-------
Allocation of shares under ESOP -- 23 -- -- -- -- 78 101
Purchase of treasury shares -- -- -- -- (938) -- -- (938)
Issuance of deferred stock compensation -- -- (79) -- 938 (859) -- --
Amortization of deferred stock -- -- -- -- -- 22 -- 22
compensation
Stock issuance costs -- (24) -- -- -- -- -- (24)
Cash dividends declared, $.12 per share -- -- (414) -- -- -- -- (414)
------ ------- ------- ---- ---- ---- ------ -------
Balance at June 30, 2001 $ 35 20,067 19,053 (417) -- (837) (1,336) 36,565
====== ======= ======= ==== ==== ==== ====== =======
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, in
the opinion of management, all adjustments consisting of only normal
recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the
six months ended June 30, 2001 and 2000. The results of operations for
the three and six month periods ended June 30, 2001 are not necessarily
indicative of the results which may be expected for an entire fiscal
year or other interim periods.
(2) REORGANIZATION AND SECOND STEP CONVERSION
-----------------------------------------
On January 31, 2000, Finger Lakes Financial Corporation, M.H.C. (the
Mutual Holding Company) adopted a Plan of Conversion and Reorganization
to convert from a federally chartered mutual holding company to a state
chartered capital stock holding company known as Finger Lakes Bancorp,
Inc. (the Company).
The conversion to a full stock holding company was completed on
November 13, 2000. This resulted in the Company succeeding Finger Lakes
Financial Corp., a federally chartered stock holding company formed in
August 1998, as the stock holding company of Savings Bank of the Finger
Lakes (the Bank). The Company sold 2,307,325 of common stock for $7.00
per share in a public stock offering to the Bank's depositors. In
addition, 1,180,052 minority shares of Finger Lakes Financial Corp.
were exchanged into new shares of the Company's common stock at a ratio
of .9643, resulting in total new shares outstanding of 3,445,110.
The Reorganization was accounted for as a change in corporate form with
no resulting change in the historical basis of the Company's assets,
liabilities and equity. All references in the consolidated financial
statements and notes thereto to share data (including number of shares
and per-share amounts) have been restated giving retroactive
recognition to the exchange ratio.
(3) NET INCOME PER SHARE
--------------------
Basic net income per common share for the three-month and six-month
periods ended June 30, 2001 and 2000 was computed by dividing net
income by the weighted average number of total common shares
outstanding during the period, excluding unallocated ESOP shares and
deferred stock compensation shares. Diluted net income per common share
reflects the effects of incremental common shares (computed using the
treasury stock method) that would be issuable upon exercise of dilutive
stock options and unearned stock compensation.
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The following is a summary of the net income per share calculation (in
thousands, except net income per share):
For the three months For the six months
Ended June 30, 2001 Ended June 30, 2001
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 423 423 $ 766 766
------ ------ ------ ------
Weighted average shares 3,182 3,182 3,212 3,212
Common stock equivalents -- 16 -- 8
------ ------ ------ ------
Total weighted average shares 3,182 3,198 3,212 3,220
====== ====== ====== ======
Net income per share $ 0.13 0.13 $ 0.24 0.24
====== ====== ====== ======
For the three months For the six months
Ended June 30, 2000 Ended June 30, 2000
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 214 214 $ 378 378
------ ------ ------ ------
Weighted average shares 3,413 3,413 3,413 3,413
Common stock equivalents -- 1 -- 1
------ ------ ------ ------
Total weighted average shares 3,413 3,414 3,413 3,414
====== ====== ====== ======
Net income per share $ 0.06 0.06 $ 0.11 0.11
====== ====== ====== ======
(4) DIVIDENDS
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The Company declared a regular cash dividend of $.06 per share on April
16, 2001, payable May 14, 2001 to stockholders of record April 30,
2001.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, requires that all derivative instruments
(including certain derivative instruments embedded in other contracts)
be recognized as either assets or liabilities in the statements 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 the resulting designations. The Company adopted SFAS No.
133 on January 1, 2001. As of that date and throughout the first six
months of 2001, the Company did not have any derivative instruments or
derivative instruments embedded in other contracts. Therefore, the
adoption of SFAS No. 133 did not have a significant effect on the
Company's financial position or results of operations.
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In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually in accordance with the provision of SFAS No. 142. SFAS No. 142
will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of SAFS No. 141
immediately. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 20, 2001 will not be
amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS No. 142 accounting literature.
As of June 20, 2001, the Company has no unamortized goodwill;
therefore, there will be no impact of adopting these statements on the
Company's financial statements.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND DECEMBER 31, 2000
- ------------------------------------------------------------------------
Total assets as of June 30, 2001 were $348.8 million, an increase of $19.7
million or 6.0% from December 31, 2000. The increase was due primarily to a $9.2
million or 5.4% increase in total loans, an increase of $7.5 million or 5.7% in
securities available for sale, and an increase in bank owned life insurance of
$3.2 million. With continued emphasis on complementing our traditional mortgage
lending with increased commercial lending, commercial real estate and business
loans increased by $11.0 million, residential mortgage loans decreased by $4.4
million, home equity loans increased by $1.3 million, and other consumer loans
increased by $1.3 million. The increase in securities available for sale is a
result of purchases of $86.7 million, partially offset by amortizations and
prepayments of $9.7 million and sales of $70.7 million. As the Company
restructured its investment portfolio in a lower interest rate environment, net
unrealized losses on securities available for sale amounted to $417,000, net of
deferred taxes, representing an after-tax net increase of $481,000 in the market
value of securities available for sale since year end. Bank owned life insurance
increased $3.2 million, primarily due to an additional purchase in March 2001.
The growth in assets during the first six months of 2001 was funded in part by a
$6.8 million or 3.0% increase in total deposits. Savings deposits increased by
$8.8 million or 18.7% and demand deposits increased $2.4 million or 9.0%, while
certificate of deposits decreased $4.4 million. Advances from the Federal Home
Loan Bank of New York ("FHLB") increased by $12.9 million or 21.4% during the
first six months of 2001, as funding needs exceeded deposit growth.
Stockholders' equity totaled $36.6 million as of June 30, 2001, unchanged from
December 31, 2000. Changes within stockholders' equity resulted from net income
of $766,000, and an increase of $481,000 in unrealized gains on securities
available for sale, net of related deferred income taxes, partially offset by
dividend distributions of $414,000, and the purchase of shares used to fund an
Employee Recognition and Retention Plan of $938,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND
2000
GENERAL
Net income for the quarter ended June 30, 2001 amounted to $423,000 or $0.13 per
diluted share, compared to net income of $214,000, or $0.06 per diluted share
for the quarter ended June 30, 2000. The increase in net income is primarily
attributable to an increase of $432,000 in noninterest income, partially offset
by an increase of $185,000 in noninterest expenses, and an increase of $57,000
in income tax expense. Net interest income increased by $64,000 during the
comparative periods.
NET INTEREST INCOME
Net interest income is determined by our interest rate spread (i.e., the
difference between yields earned on our interest-earning assets and rates paid
on our interest-bearing liabilities) and the relative amounts of our
interest-earning assets and interest-bearing liabilities. Net interest income
amounted to $2.2 million for the three month period ended June 30, 2001, an
increase of $64,000 from the same period last year. The average interest rate
spread for the three-month period ended June 30, 2001 was 2.42% versus 2.70%
during the same period in 2000. Based on the maturity and repricing
characteristics of the Company's balance sheet, during the second half of 2000
when interest rates were rising, liabilities repriced at a faster rate than
assets, causing a decrease in net interest spread. The average yield on
interest-earning assets decreased 15 basis points from 7.45% to 7.30%, while the
average cost of interest-bearing liabilities increased 13 basis points from
4.75% to 4.88%.
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INTEREST INCOME
Total interest income for the three-month period ended June 30, 2001 amounted to
$5.9 million, an increase of $434,000 from the same period in 2000. The average
yield on earning assets decreased to 7.30% during the three months ended June
30, 2001 compared to 7.45% in the same period of 2000. Interest income on loans
for the three months ended June 30, 2001 amounted to $3.6 million, an increase
of $244,000 from the same period in 2000. The improvement was attributable to
loan growth, as the average total outstanding loan balance increased by $13.7
million to $178.9 million, offset by a decrease in the average yield to 8.05%
from 8.14% during the same period last year. Interest income on securities for
the three months ended June 30, 2001 amounted to $2.3 million, an increase of
$199,000 from the same period last year. This increase was attributed to an
increase in the average outstanding securities balance (at amortized cost),
which increased by $16.2 million to $146.4 million, offset by a decrease in the
yield on the portfolio, as the average yield decreased 20 basis points to 6.38%.
INTEREST EXPENSE
Total interest expense for the three months ended June 30, 2001 was $3.7
million, an increase of $370,000 from the same period in 2000. During the second
quarter of 2001, interest expense on deposits amounted to $2.7 million while
interest expense on borrowed funds amounted to $998,000. Interest expense on
deposits increased $371,000 as average deposits increased $21.1 million to
$235.6 million and the average cost of deposits increased 23 basis points to
4.60%. The average cost of borrowings decreased 12 basis points to 5.86% from
5.98% a year ago, while the average outstanding borrowings increased $1.1
million to $68.3 million.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $75,000 for the three months ended
June 30, 2001, an increase of $45,000 from the same period last year. 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. The allowance for loan
losses amounted to $1.6 million as of June 30, 2001 or 0.85% of total loans
outstanding and 263% of non-performing loans. Non-performing loans increased
from $229,000 as of December 31, 2000 to $591,000 as of June 30, 2001. This
increase primarily relates to one commercial relationship. The ratio of
non-performing assets (which include non-performing loans, real estate owned,
and troubled debt restructurings) to total loans was 0.48% at June 30, 2001, as
compared to 0.30% at December 31, 2000. The ratio of non-performing assets to
total assets was 0.25% at June 30, 2001 as compared to 0.18% at December 31,
2000. Net charge-offs during the second quarter of 2001 were $33,000, as
compared to $18,000 for the same period last year.
NONINTEREST INCOME
Noninterest income, consisting primarily of service charges on deposit accounts,
loan servicing fees, income from the sale of annuities and mutual funds,
increases in the value of bank owned life insurance, and gains and losses on
loans and securities sold, was $694,000 for the three months ended June 30,
2001, an increase of $432,000 or 164.9% compared to the second quarter of 2000.
Service charges and other fee income was $320,000 for the three months ended
June 30, 2001, an increase of $78,000 over the same period in 2000. This
improvement is primarily attributable to an increase of $64,000 in service
charges on deposit accounts. The increase of $203,000 in net gains from the sale
of securities resulted primarily from restructuring a portion of the securities
portfolio in a lower interest rate environment. The increase of $32,000 in net
gains from the sale of loans reflects higher levels of loan sales. Other
noninterest income was $123,000 for the three months ended June 30, 2001 as
compared to $4,000 during the same period last year. This increase is
attributable to an increase of $118,000 in value of bank owned life insurance.
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NONINTEREST EXPENSE
Noninterest expense amounted to $2.2 million for the three months ended June 30,
2001, an increase of $185,000 or 9.0% from the same period last year. An
increase of $79,000 in salaries and employee benefits expense was primarily the
result of annual salary increases and the cost of stock-based benefit plans. An
increase of $15,000 in office occupancy and equipment expense was primarily the
result of occupancy costs relating to our expansion into a new operations center
to meet the growing needs of our company. Deposit insurance premiums remained
flat at $11,000. Professional fees increased $82,000 or 94.3% from the same
period last year, primarily due to the hiring of consultants to assist in the
drafting of a five-year business plan, as well as a decision to outsource our
internal audit function, beginning in January 2001. Marketing expenses decreased
$16,000 during the second quarter of 2001 to $121,000, primarily due to expenses
relating to the opening of our Auburn branch in April 2000. In the second
quarter last year, we provided $30,000 for environmental remediation, relating
to a foreclosed dry cleaning and laundry facility. We have determined that the
recorded liability is currently adequate to cover reasonably anticipated costs;
therefore, no additional provision was recorded during the current quarter. Real
estate owned expense decreased $16,000 from the same quarter last year, due to a
lower number of foreclosures and a recovery from the sale of one property. Other
noninterest expense, which in part includes postage, office supplies, telephone
charges, director's fees, insurance, and third party check processing, increased
$65,000 or 17.6% from the same period last year. This is primarily due to
expenses relating to new checking products introduced in April 2000, and
Delaware state franchise taxes owed in conjunction with our newly formed
Delaware corporation.
INCOME TAXES
Income tax expense for the three months ended June 30, 2001 was $184,000 on
income before tax of $607,000, reflecting an effective tax rate of 30.3%. For
the same period in 2000, the effective rate was 37.2%. The decrease in our
effective tax rate is the result of our purchase of bank owned life insurance,
which is a tax-advantaged means of financing employee benefits, as well as our
investment in municipal bonds, which totaled $4.1 million at June 30, 2001.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
GENERAL
Net income for the six months ended June 30, 2001 amounted to $766,000 or $0.24
per diluted share, compared to net income of $378,000, or $0.11 per diluted
share for the six months ended June 30, 2000. The increase in net income is
primarily attributable to an increase of $726,000 in noninterest income,
partially offset by an increase of $257,000 in noninterest expenses, and an
increase of $117,000 in income tax expense. Net interest income increased by
$81,000 during the comparative periods.
NET INTEREST INCOME
Net interest income is determined by our interest rate spread (i.e., the
difference between yields earned on our interest-earning assets and rates paid
on our interest-bearing liabilities) and the relative amounts of our
interest-earning assets and interest-bearing liabilities. Net interest income
amounted to $4.4 million for the six month period ended June 30, 2001, an
increase of $81,000 from the same period last year. The average interest rate
spread for the six-month period ended June 30, 2001 was 2.40% versus 2.72%
during the same period in 2000. Based on the maturity and repricing
characteristics of the Company's balance sheet, during the second half of the
year 2000 when interest rates were rising, liabilities repriced at a faster rate
than assets. The average yield on interest-earning assets increased 1 basis
point from 7.40% to 7.41%, while the average cost of interest-bearing
liabilities increased 33 basis points from 4.68% to 5.01%.
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INTEREST INCOME
Total interest income for the six-month period ended June 30, 2001 amounted to
$11.8 million, an increase of $1.0 million from the same period in 2000. The
average yield on earning assets increased to 7.41% during the six months ended
June 30, 2001 compared to 7.40% in the same period of 2000. Interest income on
loans for the six months ended June 30, 2001 amounted to $7.1 million, an
increase of $574,000 from the same period in 2000. The improvement was
attributable loan growth, as the average total outstanding loan balance
increased by $13.2 million to $176.8 million, as well as an increase in the
average yield to 8.14% from 8.06% during the same period last year. Interest
income on securities for the six months ended June 30, 2001 amounted to $4.7
million, an increase of $452,000 from the same period last year. This increase
was attributed to an increase in the average outstanding securities balance (at
amortized cost), which increased by $14.9 million to $145.0 million, offset by a
decrease in the yield on the portfolio, as the average yield decreased 3 basis
points to 6.53%.
INTEREST EXPENSE
Total interest expense for the six months ended June 30, 2001 was $7.4 million,
an increase of $937,000 from the same period in 2000. For the first six months
of 2001, interest expense on deposits amounted to $5.5 million while interest
expense on borrowed funds amounted to $2.0 million. Interest expense on deposits
increased $956,000 as average deposits increased $21.1 million to $233.1 million
and the average cost of deposits increased 45 basis points to 4.74%. Interest
expense on borrowings decreased $19,000 from the same period last year. The
average cost of borrowings increased 8 basis points to 5.96% from 5.88% a year
ago, while the average outstanding borrowings decreased $1.3 million to $66.3
million.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $135,000 for the six months ended June
30, 2001, an increase of $45,000 from the same period last year. 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. The allowance for loan
losses amounted to $1.6 million as of June 30, 2001 or 0.85% of total loans
outstanding and 263% of non-performing loans. Non-performing loans increased
from $229,000 as of December 31, 2000 to $591,000 as of June 30, 2001. This
increase primarily relates to one commercial relationship. The ratio of
non-performing assets (which include non-performing loans, real estate owned,
and troubled debt restructurings) to total loans was 0.48% at June 30, 2001, as
compared to 0.30% at December 31, 2000. The ratio of non-performing assets to
total assets was 0.25% at June 30, 2001 as compared to 0.18% at December 31,
2000. Net charge-offs during the first six months of 2001 were $51,000, as
compared to $39,000 for the same period last year.
NONINTEREST INCOME
Noninterest income, consisting primarily of service charges on deposit accounts,
loan servicing fees, income from the sale of annuities and mutual funds,
increases in the value of bank owned life insurance, and gains and losses on
loans and securities sold, was $1.2 million for the six months ended June 30,
2001, an increase of $726,000 or 142.1% compared to the same period in 2000.
Service charges and other fee income was $654,000 for the six months ended June
30, 2001, an increase of $196,000 over the same period in 2000. This improvement
is primarily attributable to an increase of $119,000 in service charges on
deposit accounts. The increase of $321,000 in net gains from the sale of
securities resulted primarily from restructuring a portion of the securities
portfolio in a lower interest rate environment. The increase of $14,000 in net
gains from the sale of loans reflects higher levels of loan sales. Other
noninterest income was $202,000 for the six months ended June 30, 2001 as
compared to $7,000 during the same period last year. This increase is
attributable to an increase of $195,000 in value of bank owned life insurance.
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NONINTEREST EXPENSE
Noninterest expense amounted to $4.4 million for the six months ended June 30,
2001, an increase of $257,000 or 6.2% from the same period last year. An
increase of $170,000 in salaries and employee benefits expense was primarily the
result of annual salary increases and the rising cost of stock-based benefit
plans, as well as the April 2000 opening of our newest branch office in Auburn.
An increase of $79,000 in office occupancy and equipment expense was primarily
the result of occupancy costs relating to our expansion into a new operations
center to meet the growing needs of our company, and the opening of our Auburn
office. Deposit insurance premiums remained flat at $22,000. Professional fees
increased $91,000 or 47.6% from the same period last year, primarily due to the
hiring of consultants to assist in the drafting of a five-year business plan, as
well as a decision to outsource our internal audit function, beginning in
January 2001. Marketing expenses decreased $5,000 during the six-month period
ended June 30, 2001 to $187,000, primarily due to expenses relating to the
opening of our Auburn branch in April 2000. In the first six months of 2000, we
provided $180,000 for environmental remediation, relating to a foreclosed dry
cleaning and laundry facility. We have determined that the recorded liability is
currently adequate to cover reasonably anticipated costs; therefore, no
additional provision was recorded during 2001. Real estate owned expense
decreased $40,000 from the same period last year, due to a lower number of
foreclosures and a recovery from the sale of one property. Other noninterest
expense, which in part includes postage, office supplies, telephone charges,
director's fees, insurance, and third party check processing, increased $122,000
or 16.6% from the same period last year. This is primarily due to increased
costs on life insurance policies, expenses relating to new checking products
introduced in April 2000, Delaware state franchise taxes owed in conjunction
with our newly formed Delaware corporation, and increased Nasdaq fees.
INCOME TAXES
Income tax expense for the six months ended June 30, 2001 was $347,000 on income
before tax of $1.1 million, reflecting an effective tax rate of 31.2%. For the
same period in 2000, the effective rate was 37.8%. The decrease in our effective
tax rate is the result of our purchase of bank owned life insurance, which is a
tax-advantaged means of financing employee benefits, as well as our investment
in municipal bonds, which totaled $4.1 million at June 30, 2001.
ITEM 3 - QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. The Company does not
currently have a trading portfolio nor does it use derivatives to manage market
and interest rate risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. The committee, comprised of senior management, has developed policies
to measure, manage, and monitor interest rate risk. Interest rate risk arises
from a variety of factors, including differences in the timing between the
contractual maturity or repricing of the Company's assets and liabilities. For
example, the Company's net interest income is affected by changes in the level
of market interest rates as the repricing characteristics of its loans and other
assets do not necessarily match those of its deposits, borrowings and capital.
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The OTS requires the Company to measure interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on NPV
of sudden and sustained 100 to 300 basis point increases and decreases in market
interest rates. The Company's board of directors has adopted an interest rate
risk policy which establishes minimum NPV ratios (i.e. the ratio of NPV to the
present value of assets) in the event of 100, 200 and 300 basis point increases
and decreases in market interest rates. The following table sets forth those
policy guidelines and certain calculations, based on information provided to the
Company by the OTS, with respect to the sensitivity of NPV to changes in market
interest rates at March 31, 2001 (date of latest available data):
ESTIMATED NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
----------------------------- ------------------------
BASIS POINT
CHANGE BASIS POINTS
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+300 $21,921 (17,710) (45)% 6.57% (446)bp
+200 28,113 (11,518) (29) 8.21 (281)bp
+100 34,336 (5,295) (13) 9.78 (125)bp
- 39,631 - - 11.03 -
-100 40,754 1,123 3 11.20 17bp
-200 39,613 (18) 0 10.80 (23)bp
-300 38,532 (1,099) (3) 10.41 (62)bp
As shown by the table, increases in interest rates are estimated to
significantly decrease our NPV, while decreases in interest rates are estimated
to result in much smaller net changes 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 8.21% from 11.03% in a rising
interest rate environment and a decrease in NPV as a percentage of assets to
10.80% from 11.03% in a decreasing interest rate environment.
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.
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PART II: OTHER INFORMATION
Item 1 Legal Proceedings
-----------------
None
Item 2 Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) An annual meeting of shareholders of the Company was
held on May 15, 2001 ("Annual Meeting")
(b) Not applicable
(c) There were 3,292,647 shares of common stock of the
company represented either in person or by proxy at the
annual meeting, which constituted a quorum. There were
3,445,110 shares of common stock eligible to be voted on
each of the proposals.
(1) Election of directors for a three-year term
For Withheld
--- --------
Bernard G. Lynch 3,222,066 70,581
Arthur W. Pearce 3,222,316 70,331
In addition, the following directors are continuing in
office:
G. Thomas Bowers James E. Hunter
Michael J. Hanna Ronald C. Long
Chris M. Hansen Joan C. Rogers
(2) Proposal to approve the Company's 2001 Stock
Option Plan
For Against Abstain
--- ------- -------
2,347,570 142,176 29,548
(3) Proposal to approve the Company's 2001 Recognition
and Retention Plan
For Against Abstain
--- ------- -------
2,076,356 407,909 35,029
(4) Proposal to ratify the appointment of KPMG LLP as
the Company's independent auditors for the year
ending December 31, 2001
For Against Abstain
--- ------- -------
3,263,774 12,525 16,348
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Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) All required exhibits are included in Part I under
Consolidated Financial Statements pages 3 through 7,
Notes to Consolidated Financial Statements pages 8
through 9 and Management's Discussion and Analysis of
Financial Condition and Results of Operations pages
10 through 13 and are incorporated herein by
reference.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2001 By: /s/G. Thomas Bowers
-------------------
G. Thomas Bowers
Chairman, President and Chief
Executive Officer
Date: August 13, 2001 By: /s/Terry L. Hammond
-------------------
Terry L. Hammond
Executive Vice President and
Chief Financial Officer
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