Exhibit 13
Finger Lakes Bancorp, Inc.
Annual Report, December 31, 2001
TABLE OF CONTENTS
Page
----
President's Message i
Selected Consolidated Financial Information 1
Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Independent Auditors' Report 12
Consolidated Financial Statements 13
Notes to Consolidated Financial Statements 19
Quarterly Summarized Financial Information (Unaudited) 49
Directors and Officers 50
Corporate Information 51
Dear Shareholder:
The year just concluded was an excellent one for our company. Net income was a
record $1.9 million or $.59 per diluted share. This represents a 138% increase
over the previous year's results. The fourth quarter was particularly strong
with net income of $634,000.
These excellent results are attributed to a number of factors. First was a
strategy implemented in early 2001 to shorten the maturities of our time deposit
accounts in anticipation of lower interest rates. Secondly, we determined to
position our deposit pricing at or below the mid-point of the market. Finally,
we continued to aggressively pursue quality commercial loan opportunities in our
market area in an effort to shift the mix in our loan portfolio away from
residential mortgages to higher yielding commercial loans.
[GRAPH]
ASSETS
'97 '98 '99 '00 '01
- ----- ----- ----- ----- -----
247.7 282.4 301.1 392.2 343.4
The result was a substantial improvement in net interest rate spread. At
December 31, 2001, our spread had increased to 3.27%, up 75 basis points from
the previous year-end. Asset quality continues to be a priority for us and we
maintained our excellent position in 2002. Our ratio of non-performing assets to
total assets was .20% as of December 31, 2001 while the allowance for loan
losses equaled 425% of non-performing loans.
[GRAPH]
DEPOSITS
'97 '98 '99 '00 '01
- ----- ----- ----- ----- -----
186.5 202.4 208.1 228.5 231.7
Additionally, our continued strategy of improving non-interest income began to
pay off in 2001. Non-interest income, consisting of fees on deposit products,
income from bank owned life insurance, gains on sale of loans and securities,
and loan servicing fees totaled $2.5 million in 2001, an increase of $1.4
million from the previous year.
Our share price improved in 2001 from $7.50 at the beginning of the year to
$10.75 at year-end. This amounts to an increase of 43%. Our share price
benefited substantially from the sector movement for smaller publicly traded
thrifts and our financial results justified the appreciation of share price.
LOANS
'97 '98 '99 '00 '01
- ----- ----- ----- ----- -----
119.1 145.7 159.5 172.4 180.2
With a focus on capital management, in November 2001 we announced a 5% share
repurchase program and in February 2002 we announced a second 5% buyback.
Of particular note during the year was the development of our Small Business
Banking Services program. Through this program we provide an excellent package
of business products including business checking with online banking, small
business loans, business credit cards, payroll services and lease security
accounts. In addition, we are committed to providing personal attention, quick
decisions, fast access to credit and a street level knowledge of the Finger
Lakes region to local businesses.
In 2002, we will continue the important initiatives established these past few
years. That is, to grow our bank in this wonderful Finger Lakes region by
offering convenient locations, competitive products and superior customer
service. We will work hard to increase deposits while continuing to expand our
customer relationships. We will grow our loan portfolios with an emphasis on
commercial lending and expanding our home equity loan portfolio. And we will
look for new and expanded sources of revenue through enhanced products, services
and delivery channels.
We are fortunate to be located in this area with well positioned offices in
Canandaigua, Geneva, Seneca Falls, Auburn and Ithaca. The staff, officers and
directors of our company are committed to build upon our solid foundation and to
deliver strong results to you, our shareholders.
Sincerely,
/s/ G. Thomas Bowers
G. Thomas Bowers
President & Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FINGER LAKES BANCORP, INC. AND SUBSIDIARY
The following tables set forth selected consolidated historical
financial and other data of Finger Lakes Bancorp, Inc. 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 Bancorp contained
elsewhere in this Annual Report.
AT DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- -------- ----------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets...................... $343,360 $329,196 $301,120 $282,376 $247,708
Cash and cash equivalents......... 3,875 4,496 6,095 4,375 4,394
Securities available for sale..... 135,599 131,322 118,750 115,333 99,880
Securities held to maturity....... 1,831 1,563 1,593 4,640 14,096
Loans, net........................ 180,223 172,422 159,482 145,654 119,058
Deposits.......................... 231,720 228,462 208,132 202,434 186,534
Advances from Federal Home Loan
Bank............................ 70,627 60,243 69,960 54,815 36,721
Stockholders' equity.............. 36,751 36,571 19,379 21,964 21,679
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED OPERATING DATA:
Total interest income............. $23,442 $ 22,445 $20,317 $ 18,645 $ 15,840
Total interest expense............ 13,981 13,749 12,021 11,201 9,197
------- -------- ------- -------- --------
Net interest income.............. 9,461 8,696 8,296 7,444 6,643
Provision for loan losses......... 375 260 200 240 120
------- -------- ------- -------- --------
Net interest income after provision for
loan losses...................... 9,086 8,436 8,096 7,204 6,523
Noninterest income................ 2,513 1,141 1,328 1,202 721
Noninterest expense............... 8,859 8,285 7,259 7,213 5,835
------- -------- ------- -------- --------
Income before income tax
expense.......................... 2,740 1,292 2,165 1,193 1,409
Income tax expense ............... 835 490 860 469 562
------- -------- ------- -------- --------
Net income ....................... $ 1,905 $ 802 $ 1,305 $ 724 $ 847
======= ======== ======= ======== ========
Net income per share- basic....... $ .59 $ .24 $ .38 $ .21 $ .24
======= ======== ======= ======== ========
Net income per share - diluted ... $ .59 $ .24 $ .38 $ .21 $ .24
======= ======== ======= ======== ========
Dividends per share............... $ .24 $ .24 $ .24 $ .23 $ .20
======= ======== ======= ======== ========
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
SELECTED RATIOS:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) ..................... 0.55% 0.26% 0.44% 0.27% 0.40%
Return on stockholders' equity (ratio of net
income to average equity) ................. 5.03% 3.76% 6.19% 3.29% 4.05%
Interest rate spread information (1):
Average during period ..................... 2.63% 2.65% 2.74% 2.71% 2.82%
End of period ............................. 3.27% 2.52% 2.77% 2.73% 2.84%
Net interest margin
(net interest income divided by
average interest-earning assets) ......... 2.92% 2.91% 2.93% 2.96% 3.14%
Noninterest expenses to average total
assets ................................... 2.57% 2.68% 2.47% 2.74% 2.66%
Average interest-earning assets to
average interest-bearing liabilities ...... 106.83% 105.60% 104.65% 105.39% 107.29%
Dividend payout ratio(2) ................... 41% 100% 63% 110% 83%
ASSET QUALITY RATIOS:
Non-performing assets to total assets(3) ... 0.20% 0.18% 0.32% 0.43% 0.50%
Allowance for loan losses to
non-performing loans(3) ................... 424.93% 641.05% 229.81% 115.75% 203.72%
Allowance for loan losses to loans ......... 0.84% 0.84% 0.84% 0.80% 0.96%
CAPITAL RATIOS:
Stockholders' equity to total assets
at end of period .......................... 10.70% 11.11% 6.43% 7.78% 8.75%
Average stockholders' equity to
average assets ............................ 10.99% 6.91% 7.17% 8.36% 9.54%
OTHER DATA:
Number of full service customer facilities
at end of period .......................... 7 7 6 6 5
- ---------------------------------
(1) 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.
(2) Ratio does not reflect the waiver of dividends by Finger Lakes Financial
Corp., M.H.C. on all of its shares prior to 2000.
(3) Nonperforming loans consist of non-accrual loans and non-performing assets
consist of non-performing loans, troubled debt restructurings and real estate
owned.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis reflects Finger Lakes Bancorp'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 Bancorp's consolidated financial statements and their notes and the
other statistical data provided in this Annual Report. This Annual Report
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 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, professional fees, data processing fees, deposit insurance
premiums, advertising and other expenses. Other income consists of non-interest
income, including service charges and fees, gain on sale of loans and
securities, income from bank owned life insurance, 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.
On November 11, 2000 we completed the "second-step" conversion and
reorganization of Finger Lakes Financial Corp., M.H.C., from a mutual holding
company into a full stock holding company, which resulted in Finger Lakes
Bancorp, Inc. succeeding as the stock holding company of Saving Bank of the
Finger Lakes. As part of this transaction, we sold 2,307,325 shares of common
stock for $7.00 per share in a public stock offering held in connection with the
reorganization. In addition, 1,180,052 minority shares were exchanged at a ratio
of .9643 resulting in total new shares outstanding of 3,445,110. The
accompanying consolidated financial statements include the accounts of Finger
Lakes Bancorp, Inc. (after the offering), Finger Lakes Financial Corp. (prior to
the offering) and the Savings Bank of the Finger Lakes.
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 by emphasizing a variety of loan products in addition to
traditional one- to four-family mortgage loans. As a result, our assets have
increased to $343.4 million at December 31, 2001, from $247.7 million at
December 31, 1997, an increase of 38.6%. During this period, we have increased
our total full-service offices from four 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 continue 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, 2001, our
multi-family and commercial real estate loans totaled $45.4 million, or 25.30%
of total loans. At December 31, 2001, non-mortgage loans, consisting of
commercial business, consumer, mobile home and home equity loans totaled $56.7
million, or 31.60% of total loans. Management has determined to emphasize its
commercial business lending
activities, and in this regard, has added to its staff experienced loan officers
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 backed by U.S. government
agencies. We only purchase investment securities rated "A" or higher by Moodys
Investment Rating Service. At December 31, 2001, our ratio of non-performing
assets to total assets was 0.20%, and our ratio of non-performing loans to total
loans was also 0.20%.
INCREASING FEE AND SERVICING INCOME. We have sought to increase and
diversify our sources of fee income. 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. During the years ended
December 31, 2001, 2000 and 1999 gains on the sale of loans amounted to
$170,000, $99,000 and $224,000 respectively. At December 31, 2001 residential
mortgage loans serviced for others totaled $49.3 million. Our fee and servicing
income has increased as a result of fees received from certain deposit accounts.
During the year ended December 31, 2001 service charges on deposit accounts
totaled $986,000 as compared to $741,000 and $653,000 during the years ended
December 31, 2000 and 1999, respectively. We also offer our customers mutual
funds, financial planning services and insurance and annuity products through
SBFL Agency Inc, a wholly-owned subsidiary of Savings Bank of the Finger Lakes,
generating additional sources of fee income.
FINANCIAL CONDITION
Our total assets as of December 31, 2001 were $343.4 million, a net
increase of $14.2 million, or 4.3% from December 31, 2000. The increase was due
primarily to a $7.8 million or 4.5% 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, home
equity loans increased by $3.0 million, mobile home loans increased by $2.7
million and commercial business loans increased by $2.2 million in 2001.
Securities classified as available for sale at December 31, 2001 were $135.6
million, an increase of $4.3 million from December 31, 2000, while securities
classified as held to maturity at December 31, 2001 were $1.8 million, as
compared to $1.6 million at December 31, 2000. In the first quarter of 2001 and
the fourth quarter of 2000, we purchased $3.0 million and $5.0 million
respectively of bank owned life insurance, as a tax advantaged means of
financing employee benefits. Other assets totaled $3.1 million at December 31,
2001, a decrease of $513,000 from 2000. This decrease is primarily due to a
reduction in our deferred tax position at year end.
The growth in assets during 2001 was funded by a combination of a $3.3
million increase in total deposits and an increase in borrowed funds of $10.4
million. Demand deposits, including NOW accounts, increased by $1.7 million and
savings and money market accounts increased by $12.5 million, while certificates
of deposit decreased $11.0 million or 7.1% in 2001. The decrease in certificates
of deposit resulted from a strategy to change our deposit mix in order to lower
our cost of funds. Total deposit growth of $7.0 million in our Auburn, Ithaca
and Canandaigua markets is reflective of our expansion into those markets and
competitively priced deposits, particularly certificates of deposit.
Stockholders' equity totaled $36.8 million as of December 31, 2001, an
increase of $180,000 from December 31, 2000. Net income of $1.9 million ($1.1
million after dividends) contributed to the increase in stockholders' equity,
offset by treasury stock purchases in the amount of $2.1 million. Changes in the
fair value of securities available for sale, net of related deferred income
taxes, also increased equity by $831,000.
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 dollars 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. Balance and yield/rate information as of December 31, 2001 is also
provided in the table.
AT DECEMBER 31, 2001 YEAR ENDED DECEMBER 31, 2001
-------------------- ----------------------------
YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE
--------- ------- ------- -------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans(1) ........................................ $ 180,223 7.86% $ 177,897 $ 14,268 8.02%
Securities(2) ................................... 141,868 6.16 145,578 9,161 6.29
Money market investments - - 242 13 5.37
---------- ---- --------- --------- ----
Total interest-earning assets .................... 322,091 7.11 323,717 23,442 7.24
Non-interest-earning assets ..................... 21,269 ---- 20,871 --------- ----
---------- ---------
Total assets ..................................... $ 343,360 $ 344,588
========== =========
Interest-bearing liabilities:
Deposits(3) ...................................... $ 231,720 3.35 232,861 $ 9,964 4.28
Borrowed funds ................................... 70,627 5.43 70,157 4,017 5.73
---- --------- --------- ----
Total interest-bearing liabilities .............. 302,347 3.84 303,018 13,981 4.61
Non-interest-bearing liabilities ................. 4,262 3,716 ---------
----- -----
Total liabilities ............................... 306,609 306,734
Stockholders' equity ............................ 36,751 37,854
---------- ---------
Total liabilities and stockholders' equity ...... $ 343,360 $ 344,588
========== =========
Net interest income ............................. $ 9,461
=========
Interest rate spread(4) ......................... 3.27% 2.63%
== ==== ====
Net interest margin(5) .......................... 2.92%
== ====
Average interest-earning assets to
average interest-bearing liabilities .......... 106.83%
======
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ -------- -------- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans(1) ........................................ $ 166,072 $13,637 8.21% $ 153,783 $ 12,137 7.89%
Securities(2) ................................... 132,125 8,756 6.63 128,761 8,173 6.35
Money market investments 760 52 6.84 114 6 5.26
--------- ------- ---- --------- -------- ----
Total interest-earning assets .................... 298,957 22,445 7.51 282,658 20,316 7.19
Non-interest-earning assets ..................... 9,977 ------- ---- 11,101 -------- ----
--------- ---------
Total assets ..................................... $ 308,934 $ 293,759
========= =========
Interest-bearing liabilities:
Deposits(3) ...................................... $ 219,748 $ 9,873 4.49 $ 208,166 $ 8,660 4.16
Borrowed funds ................................... 63,345 3,876 6.12 61,923 3,360 5.43
--------- ------- ---- --------- -------- ----
Total interest-bearing liabilities .............. 283,093 13,749 4.86 270,089 12,020 4.45
Non-interest-bearing liabilities ................. 4,491 ------- ---- 2,601 -------- ----
----- -----
Total liabilities ............................... 287,584 272,690
Stockholders' equity ............................ 21,350 21,069
--------- ---------
Total liabilities and stockholders' equity ...... $ 308,934 $ 293,759
========= =========
Net interest income ............................. $ 8,696 $ 8,296
======= ========
Interest rate spread(4) ......................... 2.65% 2.74%
== ==== ====
Net interest margin(5) .......................... 2.91% 2.93%
== ==== ====
Average interest-earning assets to
average interest-bearing liabilities .......... 105.60% 104.65%
====== ======
- --------------------
(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 at cost.
(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.
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,
-----------------------
2001 VS. 2000 2000 VS. 1999
------------- -------------
INCREASE/(DECREASE)
DUE TO INCREASE/(DECREASE)
---------------------- TOTAL INCREASE/ DUE TO TOTAL INCREASE/
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
---- ------ ---------- ---- ------ ----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ (321) $ 952 $ 631 $ 530 $ 970 $ 1,500
Securities.............................. (462) 867 405 369 214 583
Money market investments................ (9) (30) (39) 12 34 46
-------- -------- -------- ------ -- -------
Total interest-earning assets........ (792) 1,789 997 911 1,218 2,129
-------- ------- ------- ------ ------ -------
INTEREST-BEARING LIABILITIES:
Deposits................................ (477) 568 91 731 482 1,213
Borrowed funds.......................... (258) 399 141 439 77 516
-------- -------- -------- ------ -- -------
Total interest-bearing liabilities.. (735) 967 232 1,170 559 1,729
-------- ------- ------- ------ ------ -------
Increase (decrease) in net interest
income................................ $ (57) $ 822 $ 765 $ (259) $ 659 $ 400
======== ======= ======= ====== ====== =======
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 2001 and 2000
NET INTEREST INCOME. Our net interest income is determined by the
interest rate spread (i.e., the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities) and the
relative amounts of interest-earning assets and interest-bearing liabilities.
Net interest income amounted to $9.5 million in 2001, an increase of $765,000
from 2000. The increase resulted from a $24.8 million increase in total average
interest-earning assets, primarily from loan growth, offset by a $19.9 million
increase in average interest-bearing liabilities, the net of which contributed
to a $822,000 increase in net interest income. The average interest rate spread
in 2001 was 2.63% versus 2.65% in 2000. The average yield on interest-earning
assets decreased 27 basis points, while the average cost of funds decreased 25
basis points from 2000 to 2001, contributing to a $57,000 decrease in net
interest income in 2001. The decrease in the average yield on interest earning
assets was attributable to a falling rate environment throughout 2001. The cost
of funds, correspondingly, decreased as a result of the rate environment, while
a large portion of our certificate of deposit portfolio repriced in 2001.
INTEREST INCOME. Total interest income in 2001 amounted to $23.4
million, an increase of $1.0 million from 2000. Interest income on loans
increased to $14.3 million in 2001, an increase of 631,000 from 2000. This
improvement was attributable to loan growth as the average total outstanding
loan balance increased by $11.8 million to $177.9 million for 2001, offset as
the average yield on loans fell to 8.02% in 2001 compared to 8.21% in 2000. Our
strategy is to emphasize the origination of commercial real estate loans and
commercial business loans, which typically yield higher interest rates. Interest
income on securities amounted to $9.2 million, an increase of $405,000 from the
prior year. This increase was attributed to growth in the portfolio as the
average outstanding securities balance increased by $13.5 million to $145.6
million for 2001, offset by a decrease in the average yield to 6.29%, from 6.63%
in 2000.
INTEREST EXPENSE. Total interest expense in 2001 was $14.0 million, an
increase of $231,000 from 2000. In 2001, interest expense on deposits amounted
to $10.0 million while interest expense on borrowed funds amounted to $4.0
million. Interest expense on deposits increased due to growth in the average
outstanding deposit base of $13.1 million, offset by a decrease in the average
cost of funds of 21 basis points to 4.28%. Interest expense on borrowings
increased $140,000, from $3.9 million in 2000, due to a $6.8 million increase in
average outstanding borrowings, offset by a decrease in the average cost of
borrowed funds of 39 basis points to 5.73% for the year ended December 31, 2001.
PROVISION FOR LOAN LOSSES. Our provision for loan losses amounted to
$375,000 in 2001, an increase of $115,000 from the prior year. Our allowance for
loan losses amounted to $1.5 million as of December 31, 2001, or 0.84% of total
loans outstanding, unchanged from December 31, 2000. Net charge-offs in 2001
were $309,000 versus $142,000 in 2000, representing 0.17% and 0.09%,
respectively, of total average loans outstanding. The increase in net
charge-offs was primarily a result of losses on two commercial real estate
loans, which totaled $285,000. The increase in the provision for loan losses in
2001 also reflects management's consideration 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, increase in cash value of bank owned life insurance,
and gains on loans and securities sold, was $2.5 million in 2001, an increase of
$1.4 million or 120.2% compared to 2000. Service charges and other fee income
was $1.4 million in 2001, an increase of $439,000 or 45.4% compared to 2000. The
increase was primarily attributed to increases in fee income on deposit accounts
of $245,000 and an increase of $67,000 of fee income relating to loans. Net
gains on sales of securities in 2001 were $490,000, as compared to $50,000 in
2000. Net gains on sales of loans were $170,000 in 2001, as compared to $99,000
in 2000. During 2001, we originated $12.4 million of loans held for sale, versus
$5.2 million in 2000, resulting in increased gains. Loan originations were
higher in 2001 due to the declining interest rate environment, combined with our
loan department being fully staffed during 2001. The increase in cash value of
bank owned life insurance amounted to $429,000 compared to $3,000 the prior
year. This was due to purchasing the original policy late in 2000, and an
additional policy early in 2001. Other noninterest income, consisting primarily
of safe deposit box rental and gains on the sale of other assets, was $17,000 in
2001, compared to $21,000 in 2000. This was due primarily to the gain on sale of
a bank owned automobile in November 2000 of approximately $6,000.
NONINTEREST EXPENSE. Noninterest expense amounted to $8.9 million in
2001, compared to $8.3 million in 2000, an increase of 6.9%. Salaries and
employee benefits expense increased $547,000 or 14.3%, primarily the result of
annual salary increases and the cost of stock-based benefit plans approved and
implemented in 2001. Office occupancy and equipment expense increased $89,000 or
5.7%, due primarily to increased utility costs, as well as a full year of
expenses relating to our newest branch office in Auburn, New York, which opened
in April 2000. We recorded no provisions for environmental remediation of real
estate owned during 2001, as compared to $180,000 in 2000. This 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 $571,000 in 2001, which includes legal, consulting and
accounting services, increased $155,000 or 37.1%, due to legal and accounting
fees relating to the hiring of consultants to assist in the formation of a real
estate investment trust, as well as a decision to outsource our internal audit
function, beginning in January 2001. Deposit insurance premiums, which totaled
$44,000 for 2001, increased slightly from the same period last year, due to
higher deposit levels. Marketing and advertising expense increased $10,000 to
$330,000 in 2001. Data processing expense amounted to $225,000, an increase of
$27,000 or 13.9%. This increase is primarily the result of additional processing
costs associated with the new branch office, and data communications upgraded
throughout our operating network. Real estate owned expenses decreased $37,000
or 85.3% to $6,000 in 2001 as compared to $43,000 in 2000, reflecting lower
levels of foreclosures in 2001. Other noninterest expense of $1.7 million in
2001 and 2000 is comprised of expenses such as postage, office supplies,
telephone charges, loan servicing expenses, director's fees, insurance, and
third party check processing.
INCOME TAXES. Our recorded income tax expense was $835,000 for the year
ended December 31, 2001 on income before taxes for the year of $2.7 million,
reflecting an effective tax rate of 30.5%. In 2000, the effective rate was
37.9%. This reduction 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, the formation of a real estate investment trust in September 2001, as
well as our investment in municipal bonds, which totaled $4.6 million at
December 31, 2001.
Comparison of the years ended December 31, 2000 and 1999
NET INTEREST INCOME. Our net interest income is determined by the
interest rate spread (i.e., the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities) and the
relative amounts of interest-earning assets and interest-bearing liabilities.
Net interest income amounted to $8.7 million in 2000, an increase of $400,000
from 1999. The increase resulted from a $16.3 million increase in the total
average interest-earning assets, primarily from loan growth, offset by a $13.0
million increase in average interest-bearing liabilities, the net of which
contributed to a $659,000 increase in net interest income. The average interest
rate spread in 2000 was 2.65% versus 2.74% in 1999. The average yield on
interest-earning assets increased 32 basis points, while the average cost of
funds increased 41 basis points from 1999 to 2000, contributing to a $259,000
decrease in net interest income in 2000. The increase in the average yield on
interest earning assets was attributable to a rising rate environment throughout
2000. The cost of funds, correspondingly, increased as a result of the rate
environment, as well as deposit pricing strategies responding to increased
competitive pressures.
Our net interest income was also impacted by the $14.0 million, net of
expenses, raised in our public stock offering during the fourth quarter of 2000.
We were able to pay down short term borrowings, and invest the remainder in
interest bearing assets, resulting in additional net interest income earned of
approximately $140,000.
INTEREST INCOME. Total interest income in 2000 amounted to $22.4
million, an increase of $2.1 million from 1999. Interest income on loans
increased to $13.6 million in 2000, an increase of $1.5 million from 1999. This
improvement was primarily attributable to loan growth as the average total
outstanding loan balance increased by $12.3 million to $166.1 million for 2000.
In addition, the average yield on loans grew to 8.21% in 2000 compared to 7.89%
in 1999. Our strategy is to emphasize the origination of commercial real estate
loans and commercial business loans, which typically yield higher interest
rates. Interest income on securities amounted to $8.8 million, an increase of
$583,000 from the prior year. This increase was attributed to growth in the
portfolio as the average outstanding securities balance increased by $3.4
million to $132.1 million for 2000, as well as an increase in the yield to
6.63%, from 6.35% in 1999.
INTEREST EXPENSE. Total interest expense in 2000 was $13.7 million, an
increase of $1.7 million from 1999. In 2000, interest expense on deposits
amounted to $9.9 million while interest expense on borrowed funds amounted to
$3.8 million. Interest expense on deposits increased due to both growth in the
average outstanding deposit base of $11.6 million, as well as an increase in the
average cost of 33 basis points to 4.49%. Interest expense on borrowings
increased $516,000, from $3.4 million in 1999, due to a $1.4 million increase in
average outstanding borrowings, as well as an increase in the average cost of
borrowed funds of 69 basis points to 6.12% for the year ended December 31, 2000.
PROVISION FOR LOAN LOSSES. Our provision for loan losses amounted to
$260,000 in 2000, an increase of $60,000 from the prior year. Our allowance for
loan losses amounted to $1.5 million as of December 31, 2000, or 0.84% of total
loans outstanding, as compared to $1.3 million or 0.84% at December 31, 1999.
The increase in the provision reflects the increase in the total average
outstanding loan portfolio, as well as greater emphasis on building our
commercial real estate and commercial business portfolios, which typically have
greater credit risk. Net charge-offs in 2000 were $142,000 versus $26,000 in
1999, representing 0.09% and 0.02%, respectively, of total average loans
outstanding. The increase 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 $186,000 in 1999 as compared to
$47,000 in 2000. Also, gross loan charge-offs declined by $23,000 to $189,000 in
2000 from $212,000 in 1999 as we devoted greater resources to monitoring of
problem loans and collection efforts. The increase in the allowance for loan
losses in 2000 also reflects management's consideration 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 on loans and securities sold, was $1.1
million in 2000, a decrease of $187,000 or 14.1% compared to 1999. Service
charges and other fee income was $968,000 in 2000, a decrease of $45,000
compared to 1999. The decrease was due to a decision, through our wholly owned
subsidiary SBFL Agency, to change our broker/dealer relationship, in order to
provide a wider range of products for our customers. This decision resulted in a
reduction of $130,000 in fee income from our sales of annuities and mutual
funds. Net gains on sales of securities in 2000 were $50,000, as compared to
$77,000 in 1999. Net gains on sales of loans were $99,000 in 2000, as compared
to $224,000 in 1999. During 2000, we originated $5.2 million of loans held for
sale, versus $15.3 million in 1999, resulting in fewer sales, and reduced gains.
NONINTEREST EXPENSE. Noninterest expense amounted to $8.3 million in
2000, compared to $7.3 million in 1999, an increase of 14.1%. This increase
reflects our investment in the future with increased staff, branch expansion,
and upgrading technological capabilities for data processing. Relating to a new
branch office in Auburn, New York were increases of $145,000 in salaries and
employee benefits expense and $87,000 in office occupancy and equipment expense.
Data processing expense amounted to $197,000, an increase of $38,000 or 24.0%.
This increase is primarily the result of additional processing costs associated
with the new branch office, and data communications upgraded throughout our
operating network. We recorded provisions for environmental remediation of real
estate owned of $180,000 during 2000, as compared to $90,000 in 1999. This
increase 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 $417,000 in 2000, which includes
legal, consulting and accounting services, increased $70,000 or 20.1%, due to a
decision to outsource a portion of our technological requirements, such as
network and telecommunication management. Deposit insurance premiums, which
totaled $43,000 for 2000, decreased $77,000, reflecting a change in federal
deposit insurance rates that took effect January 1, 2000 for thrift
institutions. Marketing and advertising expense increased $72,000 to $320,000 in
2000, reflecting larger media expenditures in 2000 relating to the new branch
office in Auburn. Real estate owned expenses decreased $29,000 or 40.5% to
$43,000 in 2000 as compared to $72,000 in 1999, reflecting lower levels of
foreclosures in 2000. Other noninterest expense of $1.7 million in 2000 and $1.2
million in 1999 is comprised of expenses such as postage, office supplies,
telephone charges, loan servicing expenses, director's fees, insurance, and
third party check processing. The increase in other noninterest expense is
primarily due to the purchase of a Cleanup Cost Cap insurance policy relating to
the environmental remediation matter (see note 13 of the "Consolidated Financial
Statements), as well as increased costs on life insurance policies.
INCOME TAXES. Our recorded income tax expense was $490,000 for the year
ended December 31, 2000 on income before taxes for the year of $1.3 million,
reflecting an effective tax rate of 37.9%. In 1999, the effective rate was
39.7%.
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, 2001. 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)................ $ 8,466 $18,611 $ 37,086 $ 33,416 $ 24,980 $122,559
Other loans(2)................... 21,597 5,418 16,002 8,333 5,292 56,642
Securities available for sale(3). 8,255 24,829 46,413 32,341 23,761 135,599
Securities held to maturity(3)... -- 35 75 82 1,639 1,831
Federal Home Loan Bank Stock..... -- -- -- -- 4,327 4,327
------- ------- -------- -------- -------- --------
Total interest-earning assets. 38,318 48,893 99,576 74,172 59,999 320,958
------- ------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:(4)
NOW accounts.................. 941 2,822 5,268 2,107 1,405 12,543
Savings accounts.............. 3,059 9,178 17,132 6,853 4,569 40,791
Money market accounts......... 1,398 4,194 7,829 3,132 2,088 18,641
Certificates of deposit....... 25,116 75,349 26,987 15,715 180 143,347
Borrowings (5)................ 6,800 1,760 18,000 21,944 22,123 70,627
------- ------- -------- -------- -------- --------
Total interest-bearing
liabilities .............. 37,314 93,303 75,216 49,751 30,365 285,949
------- ------- -------- -------- -------- --------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities .......... $ 1,004 $(44,410) $ 24,360 $ 24,421 $ 29,634 $ 35,009
======= ======== ======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities.. $ 1,004 $(43,406) $(19,046) $ 5,375 $ 35,009
======= ======== ========= ======== ========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as
a percentage of total assets.. 0.29% (12.64)% (5.55)% 1.57% 10.20%
======= ======== ========= ======== ========
- --------------------
(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 25.5%, 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
$361,500 at December 31, 2001.
(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 $93.8 million or 27.3% of
total assets.
(5) Advances of $42 million are callable at the discretion of the FHLB in
or after 2002. Such advances have a weighted average interest rate of
5.88% and mature from 2004 to 2010, if not called earlier. If called,
we expect to replace the advances with alternate funding at
approximately market interest rates.
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 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 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, 2001.
Basis Point
Change
in Rates Estimated Net Portfolio Value NPV as % of PV of Assets
-------- ------------------------
------------------------------------------------
$ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- --------- ---------
+300 $ 16,156 $ (20,726) (56)% 4.95% (542) bp
+200 22,981 (13,900) (38) 6.85 (352) bp
+100 30,435 (6,447) (17) 8.80 (157) bp
NC 36,882 10.37
-100 39,313 2,431 7 10.87 50 bp
-200 - - - - - bp
-300 - - - - - bp
The table suggests that in the event of a 200 basis point increase in
interest rates we would experience a decrease in NPV as a percentage of assets
to 6.85% from 10.37%. Net portfolio values in a falling interest rate
environment of 200 basis points or more have not been calculated, due to the
abnormally low prevailing 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.
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. Other sources of funds include increases in
retail deposits and advances from the Federal Home Loan Bank of New York.
We can control our deposit levels, based on our liquidity needs, by
utilizing strategic pricing methods. In addition, as of December 31, 2001 we
have approximately $57 million in available borrowing capacity at the Federal
Home Loan Bank of New York, if we were in need of additional liquidity. At
December 31, 2001, we had loan commitments of $15.0 million and unused lines of
credit of $18.6 million extended to borrowers. We believe that we have adequate
resources to fund loan commitments as they arise, based on our ability to borrow
funds or control deposit levels. In addition, at December 31, 2001,
approximately $100.5 million of time deposits were scheduled to mature within a
year, and we expect that a substantial portion of these time deposits will be
renewed upon maturity, based on historical experience and the ability to price
deposits as necessary to maintain desired levels.
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. OTS regulations at December 31, 2001 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, 2001, 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 received approximately $11 million of
the net proceeds 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.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes of Finger Lakes
Bancorp have been prepared in accordance with accounting principles generally
accepted in the United States of America ("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.
NEW ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, 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 the resulting designations. The Company's adoption on January
1, 2001 did not have a significant effect on the Company's financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board (FASB) 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 estimatable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment.
The adoption of SFAS Nos. 141 and 142 will not materially affect the Company's
statements of financial condition and results of operations. The Company adopted
SFAS No. 141 on July 1, 2001 and the Company will adopt SFAS No. 142 on January
1, 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company does not believe that there will be a material impact
on the Company's financial condition or results of operations upon adoption of
SFAS No. 144.
MARKET FOR THE COMMON STOCK
There is an established market for Finger Lakes Bancorp common stock
which is currently listed on the Nasdaq National Market under the symbol,
"FLBC." At December 31, 2001 Finger Lakes Bancorp had 9 market makers.
The following table sets forth the high and low bid quotes for common
stock of Finger Lakes Bancorp and its predecessor prior to November 14, 2000,
Finger Lakes Financial Corp (SBFL) 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,
2001 there were 3,343,457 shares of Finger Lakes Bancorp common stock
outstanding which were held by approximately 309 holders of record.
Cash Dividend
High Bid Low Bid Declared
-------- ------- --------
FISCAL 2001
Quarter Ended December 31, 2001 $ 11.1700 $ 9.590 $ 0.06
Quarter Ended September 30, 2001 $ 11.4700 $ 9.490 $ 0.06
Quarter Ended June 30, 2001 $ 10.4500 $ 7.625 $ 0.06
Quarter Ended March 31, 2001 $ 7.9375 $ 7.000 $ 0.06
FISCAL 2000
Quarter Ended December 31, 2000 $ 7.5625 $ 6.500 $ 0.06
Quarter Ended September 30, 2000 $ 7.0625 $ 6.250 $ 0.06
Quarter Ended June 30, 2000 $ 8.3125 $ 5.500 $ 0.06
Quarter Ended March 31, 2000 $ 8.1875 $ 5.750 $ 0.06
- --------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Finger Lakes Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Finger Lakes Bancorp, Inc. and subsidiary as of December 31,
2001 and 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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 Bancorp, Inc. and subsidiary at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/KPMG LLP
Syracuse, New York
January 15, 2002
FINGER LAKES BANCORP, INC.
Consolidated Statements of Financial Condition
December 31, 2001 and 2000
ASSETS 2001 2000
------------- -------------
Cash and cash equivalents $ 3,875,315 4,495,699
Securities available for sale, at fair value 135,598,714 131,321,731
Securities held to maturity, fair value of $1,855,011
in 2001 and $1,563,333 in 2000 1,831,105 1,562,783
Loans 181,756,681 173,889,721
Less allowance for loan losses 1,533,732 1,467,524
------------- -------------
Net loans 180,222,949 172,422,197
Accrued interest receivable 1,878,037 2,479,077
Federal Home Loan Bank stock, at cost 4,327,000 3,523,000
Premises and equipment, net 4,134,336 4,813,729
Bank owned life insurance 8,432,249 5,003,333
Other assets 3,060,725 3,574,076
------------- -------------
Total assets $ 343,360,430 329,195,625
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 231,720,340 228,462,401
Advances from Federal Home Loan Bank 70,626,937 60,242,677
Other liabilities 4,262,412 3,919,686
------------- -------------
Total liabilities 306,609,689 292,624,764
------------- -------------
Commitments and contingencies (notes 12 and 13)
Stockholders' equity:
Preferred stock, $0.01 par value;1,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $0.01 par value; 5,000,000 shares
authorized; 3,451,257 and 3,445,110 issued
at December 31, 2001and 2000, respectively 34,513 34,451
Additional paid-in capital 20,167,385 20,068,434
Retained earnings 19,779,217 18,780,317
Treasury stock - at cost; 107,800 shares (1,154,120) --
Accumulated other comprehensive loss (66,527) (897,815)
Unearned compensation (751,040) --
Unallocated shares of ESOP (1,258,687) (1,414,526)
------------- -------------
Total stockholders' equity 36,750,741 36,570,861
------------- -------------
Total liabilities and stockholders' equity $ 343,360,430 329,195,625
============= =============
See accompanying notes to consolidated financial statements.
FINGER LAKES BANCORP, INC.
Consolidated Statements of Income
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Interest income:
Loans $14,267,778 13,636,565 12,137,138
Securities 9,161,043 8,756,166 8,173,120
Other 12,558 51,965 6,187
----------- ----------- -----------
Total interest income 23,441,379 22,444,696 20,316,445
----------- ----------- -----------
Interest expense:
Deposits 9,964,158 9,872,931 8,660,307
Borrowings 4,016,598 3,876,430 3,360,357
Total interest expense 13,980,756 13,749,361 12,020,664
----------- ----------- -----------
Net interest income 9,460,623 8,695,335 8,295,781
Provision for loan losses 375,000 260,000 200,000
----------- ----------- -----------
Net interest income after
provision for loan losses 9,085,623 8,435,335 8,095,781
Noninterest income:
Service charges and other fee income 1,406,969 967,868 1,012,913
Net gain on sales of loans 169,717 98,941 224,351
Net gain on sales of securities available
for sale 490,341 50,383 77,137
Increase in cash value of
Bank owned life insurance 428,916 3,333 --
Other 17,364 20,729 13,723
----------- ----------- -----------
Total noninterest income 2,513,307 1,141,254 1,328,124
----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 4,367,535 3,820,318 3,591,839
Office occupancy and equipment 1,665,406 1,575,984 1,387,261
Provision for environmental remediation
of real estate owned -- 180,000 90,000
Professional fees 571,386 416,790
347,007
Marketing and advertising 330,298 320,184 247,907
Data processing 224,512 197,134 158,934
Deposit insurance premiums 43,874 43,388 119,947
Real estate owned 6,321 42,944 72,150
Other 1,650,013 1,688,025 1,243,493
----------- ----------- -----------
Total noninterest expense 8,859,345 8,284,767 7,258,538
----------- ----------- -----------
Income before income tax
expense 2,739,585 1,291,822 2,165,367
Income tax expense 834,555 489,980 860,426
----------- ----------- -----------
Net income $ 1,905,030 801,842 1,304,941
Net income per common share:
Basic $ 0.59 0.24 0.38
=========== =========== ===========
Diluted $ 0.59 0.24 0.38
=========== =========== ===========
See accompanying notes to consolidated financial statements.
FINGER LAKES BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other
Common paid-in Retained Treasury Comprehensive
stock capital earnings Stock Income
----- ------- -------- ----- ------
Balance, December 31, 1998 $ 35,700 4,749,256 17,239,959 - 155,405
Comprehensive income/(loss):
Net income - - 1,304,941 - -
Unrealized loss on securities
available for sale, net of taxes - - - - (3,680,248)
Total comprehensive loss
(2,375,307)
Allocation of shares under ESOP - 37,701 - - -
Cash dividends declared,
$0.24 per share - - (283,211) - -
----------- ------------ ------------ ----------- ------------
Balance, December 31, 1999 35,700 4,786,957 18,261,689 - (3,524,843)
Comprehensive income:
Net income - - 801,842 - -
Unrealized gain on securities
available for sale, net of taxes - - - - 2,627,028
Total comprehensive income
Issuance of 2,307,325 shares (1,249) 15,265,146 - - -
Purchase of 184,586 shares by ESOP - - - - -
Allocation of shares under ESOP _ 16,331 - - -
Cash dividends declared,
$0.24 per share - - (283,214) - -
----------- ------------------------------- ----------- ------------
Balance, December 31, 2000 34,451 20,068,434 18,780,317 - (897,815)
Unallocated
Unearned Shares of
Compensation ESOP Total
------------ ---- -----
Balance, December 31, 1998 - (216,724) 21,963,596
Comprehensive income/(loss):
Net income - - 1,304,941
Unrealized loss on securities
available for sale, net of taxes - - (3,680,248)
-----------
Total comprehensive loss
Allocation of shares under ESOP - 36,121 73,822
Cash dividends declared,
$0.24 per share - - (283,211)
------------ ----------- ------------
Balance, December 31, 1999 - (180,603) 19,378,900
Comprehensive income:
Net income - - 801,842
Unrealized gain on securities
available for sale, net of taxes - - 2,627,028
-----------
Total comprehensive income 3,428,870
-----------
Issuance of 2,307,325 shares - - 15,263,897
Purchase of 184,586 shares by ESOP - (1,292,102) (1,292,102)
Allocation of shares under ESOP - 58,179 74,510
Cash dividends declared,
$0.24 per share - - (283,214)
------------ ----------- ------------
Balance, December 31, 2000 - (1,414,526) 36,570,861
(Continued)
FINGER LAKES BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other
Common paid-in Retained Treasury Comprehensive
stock capital earnings Stock Income
----- ------- -------- ----- ------
Balance, December 31, 2000 34,451 20,068,434 18,780,317 - (897,815)
Comprehensive income:
Net income - - 1,905,030 - -
Unrealized gains on securities
available for sale, net of taxes - - - - 831,288
Total comprehensive income
Allocation of shares under ESOP - 69,792 - - -
Purchase of 200,093 treasury shares - - - (2,091,629) -
Issuance of 92,293 shares under the
Recognition and Retention Plan - - (79,184) 937,509 -
Amortization of unearned
compensation - - - - -
Stock options exercised (6,147 shares) 62 53,554 - - -
Stock issuance costs - (24,395) - - -
Cash dividends declared,
$0.24 per share - - (826,946) - -
----------- ------------ ------------ ----------- ------------
Balance, December 31, 2001 $ 34,513 20,167,385 19,779,217 (1,154,120) (66,527)
============ ============ =========== ============ =============
Unallocated
Unearned Shares of
Compensation ESOP Total
------------ ---- -----
Balance, December 31, 2000 - (1,414,526) 36,570,861
Comprehensive income:
Net income - - 1,905,030
Unrealized gains on securities
available for sale, net of taxes - - 831,288
-----------
Total comprehensive income 2,736,318
Allocation of shares under ESOP - 155,839 225,631
Purchase of 200,093 treasury shares - - (2,091,629)
Issuance of 92,293 shares under the
Recognition and Retention Plan (858,325) - -
Amortization of unearned
compensation 107,285 - 107,285
Stock options exercised (6,147 shares) - - 53,616
Stock issuance costs - - (24,395)
Cash dividends declared,
$0.24 per share - - (826,946)
------------ ----------- ------------
Balance, December 31, 2001 (751,040) (1,258,687) 36,750,741
============= ============ ===========
See accompanying notes to consolidated financial statements.
FINGER LAKES BANCORP
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 1,905,030 801,842 1,304,941
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 800,457 739,869 668,929
Amortization of deferred loan costs
and premiums on securities 232,859 106,441 (171,724)
Provision for loan losses 375,000 260,000 200,000
Provision for environmental remediation -- 180,000 90,000
Proceeds from sales of loans 12,884,731 5,305,432 14,224,557
Loans originated for sale (12,387,504) (5,188,487) (15,262,000)
Net gain on sales of loans (169,717) (98,941) (224,351)
Net gain on sales of securities available
for sale (490,341) (50,383) (77,137)
Net (gain) loss on sales of real
estate owned (6,925) 23,097 15,311
Allocation of ESOP shares 225,631 74,510 73,822
Amortization of unearned compensation 107,285 -- --
Deferred income taxes (80,208) (1,872) (65,993)
Increase in cash value of
bank owned life insurance (428,916) (3,333) --
Decrease (increase) in accrued interest
receivable 601,040 (298,866) (272,509)
Decrease (increase) in other assets 13,445 (939,980) 25,257
Increase in other liabilities 342,726 90,455 517,056
------------- ------------- -------------
Net cash provided by
operating activities 3,924,593 999,784 1,046,159
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from maturities of and principal
collected on securities available for sale 45,521,518 9,845,925 25,395,980
Proceeds from maturities of and principal
collected on securities held to maturity 31,666 30,000 4,021,823
Proceeds from sales of securities
available for sale 110,316,144 5,162,044 18,413,431
Purchases of securities available for sale (158,306,390) (23,155,407) (53,261,255)
Purchases of securities held to maturity (300,000) -- (969,395)
Loans originated and purchased (49,571,129) (36,527,007) (45,427,221)
Principal collected on loans 40,823,184 23,864,315 32,528,962
Purchase of bank owned life insurance (3,000,000) (5,000,000) --
Proceeds from sales of real estate owned 112,249 283,636 256,788
Purchases of FHLB stock (804,000) -- (582,200)
Purchases of premises and equipment, net (121,064) (1,404,198) (262,415)
------------- ------------- -------------
Net cash used in
investing activities (15,297,822) (26,900,692) (19,885,502)
------------- ------------- -------------
(Continued)
FINGER LAKES BANCORP, INC.
Consolidated Statements of Cash Flows, Continued
2001 2000 1999
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in savings,
demand and money market accounts $ 14,224,534 (1,439,464) 1,005,839
Net (decrease) increase in time deposits (10,966,595) 21,769,581 4,692,474
Net increase in short term
FHLB advances 1,400,000 3,300,000 3,100,000
Long term advances from FHLB 15,124,000 10,000,000 23,000,000
Repayments of long term advances
from FHLB (6,139,740) (23,017,053) (10,955,531)
Purchase of treasury stock (2,091,629) -- --
Proceeds from exercise of stock options 53,616 -- --
Net proceeds from stock offering (24,395) 13,971,795 --
Common stock dividends paid (826,946) (283,214) (283,211)
------------ ------------ ------------
Net cash provided by
financing activities 10,752,845 24,301,645 20,559,571
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (620,384) (1,599,263) 1,720,228
Cash and cash equivalents at beginning
of year 4,495,699 6,094,962 4,374,734
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,875,315 4,495,699 6,094,962
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 13,920,721 13,933,874 11,843,376
============ ============ ============
Income taxes $ 739,515 612,508 688,109
============ ============ ============
Non-cash investing activities:
Transfer of loans to real estate
owned $ 79,400 330,325 289,786
============ ============ ============
See accompanying notes to consolidated financial statements.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Finger Lakes Bancorp, Inc. (the Bancorp), 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 Bancorp and Bank, which are subject
to regulation by certain federal agencies including the Office of Thrift
Supervision (OTS), are referred to herein as the Company.
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
(the Offering) to convert from a federally chartered mutual holding
company to a state chartered capital stock holding company known as
Finger Lakes Bancorp, Inc.
The conversion to a full stock holding company was completed on November
13, 2000. This resulted in Finger Lakes Bancorp, Inc. succeeding Finger
Lakes Financial Corp. (the Financial Corp.) (a federally chartered stock
holding company formed in August 1998 to hold all outstanding shares of
the Bank's common stock) as the stock holding company of Savings Bank of
the Finger Lakes. Finger Lakes Bancorp, Inc. sold 2,307,325 shares of
Company stock for $7.00 per share in a public stock offering to its
depositors. In addition, 1,180,052 minority shares of Finger Lakes
Financial Corp. were exchanged into new shares of Finger Lakes Bancorp,
Inc. 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,
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 exchange ratio.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Bancorp (after the offering), the Financial Corp. (prior to the
offering) and the Bank (for all periods presented). All intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, income and expense, and the
disclosure of contingent assets and liabilities. Actual results could
differ from management's current estimates and assumptions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, due from banks, federal
funds sold and other short-term investments with original maturities of
less than 90 days.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
Management conducts a periodic review and evaluation of the securities
portfolio. A decline in the fair value of any 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 fair value. The Company generally retains the servicing rights to
loans sold.
The Company generally places all loans 90 days or more past due on
non-accrual status. In addition, the Company places any loan on
non-accrual status if any part of it is classified as doubtful or loss or
if any part has been charged off. When a loan is placed on non-accrual
status, any accrued interest is reversed. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the
loan.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by loan loss provisions
charged to operations based upon management's evaluation of the loan
portfolio, historical loan loss experience, current economic conditions
and such other factors as management considers appropriate to estimate
loan losses. Management believes that the allowance for loan losses is
adequate. Losses on loans (including impaired loans) are charged to the
allowance when all or a portion of a loan is deemed to be uncollectible.
Recoveries of loans previously charged off are credited to the allowance
when realized. While management uses available information to identify
losses on loans, future additions to the allowance may be necessary based
on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may require
the Company to recognize additions to the allowance at the time of their
examination.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ALLOWANCE FOR LOAN LOSSES, CONTINUED
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 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. The valuation allowance is 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,
2001 and 2000.
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.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PREMISES AND EQUIPMENT
Land is carried at cost and buildings, furniture, fixtures and equipment
are carried at cost less accumulated depreciation. Depreciation is
calculated on a straight-line basis over estimated useful lives of assets
ranging from three to forty years.
BANK OWNED LIFE INSURANCE
The bank owned life insurance ("BOLI") was purchased as a financing tool
for employee benefits. The value of life insurance financing is the tax
preferred status of increases in life insurance cash values and death
benefits and the cash flow generated at the death of the insured. The
purchase of BOLI results in an interest sensitive asset on the Company's
consolidated statements of financial condition that provides monthly
tax-free income to the Company. The largest risk to the BOLI program is
credit risk of the insurance carriers. To mitigate this risk, annual
financial condition reviews are completed on all carriers. BOLI is
carried as an asset on the Company's consolidated statements of financial
condition at current cash surrender value. Increases in cash surrender
value are reported as other noninterest income in the Company's
consolidated income statements.
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 temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income tax expense 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.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 relating to restricted
stock issued under the management recognition plan is recognized on a
straight-line method over the vesting period.
NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by
the weighted average number of total common shares outstanding during the
period. Diluted net income per common share reflects the effects of
incremental common shares (computed using the treasury stock method) that
would be issuable upon exercise of dilutive stock options and unvested
stock grants.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is a party to certain
financial instruments with off-balance sheet risk such as commitments to
extend credit, unused lines of credit and standby letters of credit. The
Company's policy is to record such instruments when funded.
DERIVATIVES AND HEDGING ACTIVITIES
The Company adopted the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statements of financial condition and measure those instruments at fair
value. Changes in the fair value of the derivative financial instruments
are reported in either earnings or comprehensive income, depending on the
use of the derivative and whether or not it qualifies for hedge
accounting.
Special hedge accounting treatment is permitted only if specific criteria
are net, including a requirement that the hedging relationship be highly
effective both at inception and on an ongoing basis. Accounting for
hedges varies based on the type of edge - fair value or cash flow.
Results of effective hedges are recognized in current earnings for fair
value hedges and in other comprehensive income for cash flow hedges.
Ineffective portions of hedges are recognized immediately in earnings and
are not deferred.
The derivative instruments held by the Company as of and for the year
ended December 31, 2001 consisted solely of instruments used to hedge
interest rate risk related to the Company's commitments to sell fixed
rate residential mortgage loans. The adoption of Statement No. 133, as of
January 1, 2001, did not have a material effect on the Company's
consolidated financial statements. In addition, the Company did not
recognize a gain or loss related to changes in the fair value of the
derivatives during the year ended December 31, 2001, as the amount was
not material.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
BUSINESS 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 prior year financial statements have been
reclassified in order to be consistent with the current year's
presentation.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) 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 requires acquired intangible
assets (other than goodwill) to be amortized over their useful economic
life, while goodwill and any acquired intangible assets with an
indefinite useful economic life would not be amortized, but would be
reviewed for impairment on an annual basis based on guidelines specified
by SFAS No. 142.
The adoption of SFAS Nos. 141 and 142 will not materially affect the
Company's statements of financial condition and results of operations.
The Company adopted SFAS No. 141 on July 1, 2001 and the Company will
adopt SFAS No. 142 on January 1, 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets And For Long-Lived Assets To Be
Disposed Of. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Company does not believe
that there will be a material impact on the Company's financial condition
or results of operations upon adoption of SFAS No. 144.
FINGER LAKES BANCORP, INC.
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, 2001
Securities Available for Sale
Debt securities:
Mortgage-backed securities:
Collateralized mortgage
obligations $ 38,836,899 236,959 342,326 38,731,532
FNMA 44,084,803 250,074 196,133 44,138,744
FHLMC 26,736,316 102,076 124,189 26,714,203
GNMA 16,043,304 41,723 36,421 16,048,606
Corporate bonds 4,556,825 37,014 16,496 4,577,343
Municipal bonds 2,821,344 1,563 14,051 2,808,856
------------ ------------ ------------ ------------
Total debt
securities 133,079,491 669,409 729,616 133,019,284
Equity securities 2,630,102 12,328 63,000 2,579,430
------------ ------------ ------------ ------------
Total securities
available for sale $135,709,593 681,737 792,616 135,598,714
============ ============ ============ ============
Securities Held to Maturity
Municipal bonds $ 1,831,105 23,906 -- 1,855,011
============ ============ ============ ============
December 31, 2000
Securities Available for Sale
Debt securities:
U.S. Government and
agency bonds $ 45,447,864 -- 852,833 44,595,031
Mortgage-backed securities:
Collateralized mortgage
obligations 49,611,476 113,297 492,918 49,231,855
FNMA 11,614,485 21,379 158,750 11,477,114
FHLMC 3,906,309 13,588 25,307 3,894,590
GNMA 8,518,572 41,675 2,746 8,557,501
Corporate bonds 6,460,540 39,139 39,579 6,460,100
Asset-backed securities 5,652,240 14,285 1,236 5,665,289
------------ ------------ ------------ ------------
Total debt
securities 131,211,486 243,363 1,573,369 129,881,480
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) SECURITIES, CONTINUED
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
December 31, 2000, Continued
Equity securities 1,606,602 86 166,437 1,440,251
------------ ------------ ------------ ------------
Total securities
available for sale $132,818,088 243,449 1,739,806 131,321,731
============ ============ ============ ============
Securities Held to Maturity
Municipal bonds $ 1,562,783 1,491 941 1,563,333
============ ============ ============ ============
Proceeds from the sale of securities available for sale for the years
ended December 31, 2001, 2000, and 1999 were $110,316,144, $5,162,044, and
$18,413,431, respectively. Gross gains and losses realized on those sales
follow:
2001 2000 1999
--------- --------- ---------
Gross realized gains $ 651,261 50,383 81,423
Gross realized losses (160,920) -- (4,286)
--------- --------- ---------
Net gains realized $ 490,341 50,383 77,137
========= ========= =========
The contractual maturities of debt securities at December 31, 2001 are as
follows:
Available for Sale Held to Maturity
-------------------- ------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
One year or less $ - - 35,000 35,000
After one year through
five years 1,000,000 1,030,420 156,666 156,666
After five years through
ten years 5,898,894 5,932,468 1,219,438 1,243,344
After ten years 128,810,699 128,635,826 420,001 420,001
-------------- -------------- ------------- -------------
Total $ 135,709,593 135,598,714 1,831,105 1,855,011
============== ============== ============= =============
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) SECURITIES, CONTINUED
Actual 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, 2001 and 2000, securities carried at $44,180,048 and
$42,132,832, respectively, were pledged to secure advances from the FHLB
of New York.
At December 31, 2001, approximately 29% of the Company's collateralized
mortgage obligation (CMO) portfolio was invested in private issues versus
approximately 71% invested in government agency issues. Private issue
CMO's have greater risk associated with them; however those issues in
which the Company has invested have the highest Standard & Poor's rating
of AAA.
(3) LOANS
Loans consist of the following at December 31, 2001 and 2000:
2001 2000
------------- -------------
Mortgage loans:
One to four family $ 73,140,915 $ 84,489,638
Multi-family and commercial 45,422,110 35,723,197
Construction 4,261,766 2,754,775
------------- -------------
Total mortgage loans 122,824,791 122,967,610
Commercial business 16,157,954 13,987,167
Home equity and property improvement loans 24,002,311 21,042,842
Mobile home loans 11,177,339 8,429,048
Consumer loans 5,401,210 5,761,535
------------- -------------
Total loans 179,563,605 172,188,202
Premiums, net of deferred fees 2,193,076 1,701,519
Allowance for loan losses (1,533,732) (1,467,524)
------------- -------------
Net loans $ 180,222,949 $ 172,422,197
============= =============
The following table summarizes activity in the allowance for loan losses:
2001 2000 1999
---- ---- ----
Balance, beginning of year $ 1,467,524 1,349,477 1,175,758
Provision for loan losses 375,000 260,000 200,000
Loans charged-off (412,164) (188,579) (211,984)
Recoveries 103,372 46,626 185,703
-------------- ------------- ------------
Balance, end of year $ 1,533,732 1,467,524 1,349,477
============== ============= ============
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(3) LOANS, CONTINUED
Substantially all of the Company's loan portfolio is located in New York
State, with the greatest concentration in Ontario, Seneca and Tompkins
Counties. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio is susceptible to changes in
market conditions in these areas.
The principal balance of all loans not accruing interest amounted to
approximately $361,500 and $229,200 at December 31, 2001 and 2000,
respectively. The interest income forgone for non-accruing loans was
$49,175, $33,207 and $64,744 for the years ended December 31, 2001, 2000,
and 1999, respectively. At December 31, 2001 and 2000, the recorded
investment in loans that are considered impaired was $170,253 and
$133,339, respectively. The Company has provided an allowance for loan
losses of $80,909 and $55,381 at December 31, 2001 and 2000,
respectively, for these loans. The average recorded investment in such
impaired loans was approximately $334,284 in 2001, $126,300 in 2000 and
$206,500 in 1999. No interest income was recognized on impaired loans
(while such loans were considered impaired) in 2001, 2000 and 1999.
Proceeds from the sale of residential and commercial mortgage loans to
FNMA and others were $12,884,731 in 2001, $5,305,432 in 2000 and
$14,224,557 in 1999. The net gain on sale of such loans was $169,717,
$98,941 and $224,351 for the years ended December 31, 2001, 2000, and
1999 respectively. Loans serviced for others, amounting to $49,264,299
and $41,713,848 at December 31, 2001 and 2000, respectively, are not
included in the consolidated financial statements. Originated mortgage
servicing rights of $313,343 and $264,469 are included in other assets at
December 31, 2001 and 2000, respectively. The net carrying value of these
servicing rights approximated fair value. Residential mortgage loans held
for sale were $315,889 and $271,199 at December 31, 2001 and 2000,
respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
2001 2000
---------- ----------
Land $ 113,000 113,000
Building 4,043,050 4,026,208
Furniture, fixtures and equipment 3,732,784 3,628,562
---------- ----------
7,888,834 7,767,770
Less accumulated depreciation and
amortization 3,754,498 2,954,041
---------- ----------
Premises and equipment, net $4,134,336 4,813,729
========== ==========
Depreciation and amortization expense for the years ended December 31,
2001, 2000, and 1999 was $800,457, $739,869 and $668,929, respectively.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) DEPOSITS
Deposits and the applicable weighted average interest rates at December
31, 2001 and 2000 are summarized as follows:
2001 2000
---- ----
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
Demand deposits and NOW
accounts $ 28,941,362 0.97% 27,201,736 1.05%
------------ ------------ -------------- --------------
Savings accounts 40,791,229 1.64% 38,804,433 2.44%
Money market accounts 18,640,634 2.10% 8,142,522 4.13%
------------ ------------ -------------- --------------
59,431,863 1.78% 46,946,955 2.73%
------------ ------------ -------------- --------------
Certificates of deposit maturing:
12 months or less 100,464,560 117,025,990
13-24 months 19,353,383 18,358,133
25-36 months 7,634,127 5,227,714
37-48 months 12,191,538 1,314,876
49-60 months 3,523,737 12,215,703
61 months or longer 179,770 171,294
------------ --------------
143,347,115 4.55% 154,313,710 6.16%
------------ ------------ -------------- --------------
$231,720,340 3.35% 228,462,401 4.85%
============ ============ ============== ==============
Certificates of deposit equal to or greater than $100,000 amounted to
$29,775,802 and $26,725,418 at December 31, 2001 and 2000, respectively.
Deposit balances up to $100,000 are FDIC insured.
Interest expense on deposits is summarized as follows:
2001 2000 1999
---- ---- ----
NOW accounts $ 281,054 289,135 279,365
Savings accounts 866,006 1,115,551 1,280,547
Money market accounts 437,748 265,079 106,266
Certificates of deposit 8,379,350 8,203,166 6,994,129
-------------- -------------- --------------
$ 9,964,158 9,872,931 8,660,307
============== ============== ==============
.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
The Company utilizes advance programs offered by the FHLB of New York
including a variable rate line of credit agreement with a maximum
available limit of $35,078,900. The agreement, which expires October 13,
2002, is renewable on an annual basis. Advances are collateralized by the
Company's investment in FHLB stock, a blanket lien on the Bank's 1-4
family mortgage loans and investment securities.
Total outstanding advances from the FHLB at December 31, 2001 and 2000
are as follows:
2001 2000
------------------------- --------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
Overnight line of credit $ 6,800,000 1.85% 5,400,000 6.35%
Due in:
2001 - - 5,000,000 5.88%
2002 1,760,141 6.47% 2,842,677 6.39%
2003 5,000,000 5.78% 5,000,000 5.78%
2004 13,000,000 5.53% 10,000,000 6.01%
2005 15,000,000 6.95% 15,000,000 6.95%
2006 6,943,926 4.93% - -
2007 2,000,000 5.65% 2,000,000 5.65%
2010 15,000,000 5.81% 15,000,000 5.81%
2011 5,122,870 4.25% - -
------------- ---- ---------- ----
$ 70,626,937 5.43% 60,242,677 6.20%
============= ==== ========== ====
Advances of $42,000,000 at December 31, 2001 are callable at the
discretion of the FHLB in or after 2002. Such advances have a weighted
average interest rate of 5.88% and mature from 2004 to 2011, if not
called earlier. If called, the Company expects to replace the advances
with alternate funding at prevailing market interest rates.
During 2001 and 2000, advances from the FHLB had an average outstanding
balance of approximately $70,157,000 and $63,294,000, respectively, with
the maximum amount outstanding at any month end of $81,938,648 in 2001
and $69,811,385 in 2000. Such borrowings had a weighted-average borrowing
rate of 5.73% for 2001 and 6.12% for 2000.
(7) INCOME TAXES
Total income taxes for the years ended December 31, 2001, 2000 and 1999
were allocated as follows:
2001 2000 1999
---- ---- ----
Income from operations $ 834,555 489,980 860,426
Stockholders' equity, for
unrealized gain/(loss) on
securities available for sale (554,190) 1,751,352 (2,453,498)
---------- --------- ----------
Total income taxes $ 280,365 2,241,332 (1,593,072)
========== ========= ==========
FINGER LAKES BANCORP, INC.
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, 2001:
Federal $ 784,498 (56,856) 727,642
State 130,265 (23,352) 106,913
------------ ------------- ------------
$ 914,763 (80,208) 834,555
============ ============= ============
Year ended December 31, 2000:
Federal $ 418,594 (34,379) 384,215
State 73,258 32,507 105,765
------------ ------------ ------------
$ 491,852 (1,872) 489,980
============ ============= ============
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
============ ============= ============
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,
2001 2000 1999
---- ---- ----
Computed "expected" tax
expense $ 931,459 439,219 736,225
Increase (decrease) in taxes resulting from:
State income tax expense,
net of federal benefit 70,562 69,805 125,005
Income from bank owned
life insurance (145,831) -- --
Tax exempt interest (75,740) (22,847) (15,071)
Other, net 54,105 3,803 14,267
--------- ------- -------
$ 834,555 489,980 860,426
========= ======= =======
Effective tax rate: 30.5% 37.9% 39.7%
==== ==== ====
FINGER LAKES BANCORP, INC.
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, 2001 and 2000 are presented below:
2001 2000
---------- ----------
Deferred tax assets:
Excess of allowance for loan losses
over tax bad-debt reserves $ 507,797 469,644
Net unrealized loss on securities
available for sale 44,352 598,542
Supplemental retirement benefits 112,807 75,565
Postretirement benefits 127,861 134,258
Deferred compensation 103,097 89,005
Accrued environmental remediation costs 96,949 191,452
New York State tax credits 79,699 71,921
Other 78,806 41,119
---------- ----------
Total deferred tax assets 1,151,369 1,671,506
---------- ----------
Deferred tax liabilities:
Premises and equipment, principally due to
differences in depreciation 41,883 106,260
Mortgage servicing rights 122,047 103,011
Other 41,536 42,350
---------- ----------
Total deferred tax liabilities 205,466 251,621
---------- ----------
Net deferred tax assets included
in other assets $ 945,903 1,419,885
========== ==========
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, in each case as
defined for Federal and New York State tax purposes. 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 foreseeable future.
FINGER LAKES BANCORP, INC.
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, 2001, 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, 2001 with respect to
the Federal base-year reserve was $1,030,000. The unrecognized deferred
tax liability at December 31, 2001 with respect to the state base-year
reserve and the excess reserve resulting from use of the percentage of
taxable income method was $160,000 (net of Federal benefit).
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income
within a loss carryback period. A valuation allowance is recognized when
it is more likely than not that some portion of the deferred tax assets
will not be realized. In assessing the need for a valuation allowance,
management considers the scheduled reversal of the deferred tax
liabilities, the level of historical taxable income and projected future
taxable income over the periods in which the temporary differences
comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is
necessary at December 31, 2001 and 2000.
(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, 2001 and 2000,
using the most recent actuarial data measured at October 1, 2001 and
2000:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,324,835 2,235,295 388,178 352,482
Service cost 112,017 110,723 -- --
Interest cost 179,425 170,413 29,455 26,624
Actuarial (gain)/loss 124,505 (35,775) 197,542 46,791
Benefits paid (158,643) (155,821) (36,384) (37,719)
----------- --------- -------- --------
Benefit obligation at end of year 2,582,139 2,324,835 578,791 388,178
----------- --------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning
of year 3,604,512 3,213,016 -- --
Actual return on plan assets (501,534) 547,317 -- --
Employer contribution -- -- 36,384 37,719
Benefits paid (158,643) (155,821) (36,384) (37,719)
----------- --------- -------- --------
Fair value of plan assets at end
of year 2,944,335 3,604,512 -- --
----------- --------- -------- --------
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) RETIREMENT PLANS, CONTINUED
Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Funded status 362,196 1,279,677 (578,791) (388,178)
Unamortized net obligation at
transition -- -- 7,525 8,104
Unrecognized net (gain) loss
subsequent
to transition (90,997) (1,092,078) 243,475 46,791
---------- ---------- ---------- ----------
Prepaid (accrued) benefit
cost at year-end $ 271,199 187,599 (327,791) (333,283)
========== ========== ========== ==========
Pension Plan
------------
Pension plan expense (benefit) consists of the following in 2001, 2000
and 1999:
2001 2000 1999
--------- --------- ---------
Service cost $ 112,017 110,723 101,828
Interest on projected
benefit obligation 179,425 170,413 150,864
Expected return on plan
assets (317,267) (251,242) (222,442)
Amortization of net
transition asset -- -- (19,826)
Amortization of unrecognized gain (57,775) (34,402) --
Amortization of unrecognized
prior service cost -- -- 485
--------- --------- ---------
Net periodic pension expense
(benefit) $ (83,600) (4,508) 10,909
========= ========= =========
Weighted average discount rate 7.25% 7.75% 7.75%
========= ========= =========
Expected long-term rate of return 9.00% 8.00% 8.00%
========= ========= =========
The projected benefit obligation for the pension plan assumed a
long-term rate of increase in future compensation levels of 4.5%, 5.5%
and 5.5%, for 2001, 2000 and 1999, respectively.
Postretirement Plan
-------------------
Net periodic postretirement benefit cost included the following in 2001,
2000 and 1999:
2001 2000 1999
------- ------- -------
Service cost $ -- -- 33,123
Interest cost 29,455 26,624 42,815
Net curtailment charge -- -- 26,672
Net amortization and deferral 1,437 579 21,381
------- ------- -------
Net periodic postretirement
benefit cost $30,892 27,203 123,991
======= ======= =======
FINGER LAKES BANCORP, INC.
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 9.00% was assumed at
December 31, 2001 and 6.50% at December 31, 2000. The rate is assumed to
decrease gradually to 4.0% over the next five years and remain at that
level thereafter. The health care cost trend assumption affects 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, 2001 by $37,400, and
the net periodic postretirement benefit cost by $1,784 for the year then
ended.
The discount rate used in determining the accumulated postretirement
obligation was 7.25%, 8.00%, and 7.75% for 2001, 2000 and 1999,
respectively.
401(k) Plan
-----------
The Company has a 401(k) plan covering substantially all employees. The
Company currently does not match employee contributions to the 401(k)
plan. Participants vest immediately in their own contributions and over a
period of six years in any Company contributions. Expense for this plan
was $8,300, $10,200 and $7,900 for the years ended December 31, 2001,
2000 and 1999, respectively.
Supplemental Employee Retirement Plan (SERP)
--------------------------------------------
The Company maintains a nonqualified SERP for key executives. The
following table sets forth the changes the SERP's benefit obligation and
plan assets for 2001 and 2000, using the most recent actuarial data
measured at October 1, 2001 and 2000:
2001 2000
--------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 518,009 415,542
Service cost 65,447 --
Interest cost 36,893 30,647
Actuarial loss 29,387 2,194
Plan amendment -- 113,519
Benefits paid (43,735) (43,893)
--------- ---------
Benefit obligation at end of year 606,001 518,009
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 43,735 43,893
Benefits paid (43,735) (43,893)
--------- ---------
Fair value of plan assets at end of year -- --
--------- ---------
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) RETIREMENT PLANS, CONTINUED
Supplemental Employee Retirement Plan (SERP), Continued
2001 2000
--------- ---------
Funded status (606,001) (518,009)
Unamortized net obligation at transition 265,300 284,250
Unrecognized net loss subsequent to transition 46,072 16,315
Unrecognized prior service cost 17,107 23,712
--------- ---------
Accrued benefit cost at year end $(277,522) (193,362)
========= =========
Annual expense related to the SERP consists of the following in 2001,
2000 and 1999:
2001 2000 1999
-------- -------- --------
Service cost $ 65,447 -- --
Interest cost 36,863 30,647 26,032
Amortization of net
transition obligation 18,950 18,950 18,950
Unrecognized prior service cost 6,605 (8,464) (8,464)
-------- -------- --------
Net periodic pension expense $127,895 41,133 36,518
======== ======== ========
Weighted average discount rate 7.25% 8.00% 7.75%
======== ======== ========
(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. In 1995, the ESOP borrowed $471,980 to purchase
91,026 shares of the Company's common stock. The loan currently bears
interest at 7.75% and is payable in quarterly installments of $9,030. In
2000, the ESOP borrowed an additional $1,292,102 to purchase 184,586
shares of the Company's common stock. This loan currently bears interest
at 9.50% and is payable in quarterly installments of $21,535. At December
31, 2001, 94,518 shares had been released or were committed to be
released to employees with the remaining 181,094 unallocated shares held
in trust. The fair value of the unallocated shares on December 31, 2001
was $1,946,700. Compensation expense amounted to $225,631, $74,510 and
$73,822 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(10) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS
In accordance with the 1996 Stock Option Plan and the 2001 Stock Option
Plan (the "SOP"), the Company's Board of Directors may grant stock
options to officers and key employees to purchase up to 327,537 shares of
authorized but unissued common stock. Options are granted with an
exercise price equal to the fair value of the stock at the date of grant.
All stock options granted in 2001 and prior to 2000 have ten-year terms
and vest and become fully exercisable five years from the date of grant.
Options granted in 2000 have ten-year terms and become fully vested in
six months.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(10) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS, CONTINUED
The following table shows the per share weighted average fair value of
stock options granted, with their underlying assumptions, using the Black
Scholes option-pricing model:
2000 1999 2001
---- ---- ----
Per share weighted average
fair value of options granted during the year $ 1.44 $ 0.99 $ 1.86
Expected dividend yield 3.20% 3.20% 2.89%
Risk free interest rate 5.40% 5.50% 6.50%
Assumed volatility 33.13% 34.64% 37.02%
Expected life 5 years 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its SOP and
accordingly, no compensation cost has been recognized for stock options
in the financial statements. Had the Company recognized compensation cost
based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
Net income As reported $ 1,905,030 801,842 1,304,941
Pro forma 1,870,904 787,844 1,285,456
Net income per common share - basic As reported $ 0.59 0.24 0.38
Pro forma 0.58 0.23 0.38
Net income per common share - diluted As reported $ 0.59 0.24 0.38
Pro forma 0.58 0.23 0.38
Because the Company's stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model
was developed, and because changes in the subjective input assumptions
can materially affect the fair value estimate, the existing models, in
management's opinion, do not necessarily provide a reliable single
measure of the fair value of its stock options.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(10) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS, CONTINUED
Stock option activity for the years ended December 31, 2001, 2000 and
1999 follows:
Weighted-
Number of average
shares exercise price
------ --------------
Balance at December 31, 1998 111,858 $9.88
Granted 964 $9.33
Forfeited (1,928) (20.62)
Cancelled (5,785) (18.65)
--------- ---------
Balance at December 31, 1999 105,109 $9.20
Granted 30,856 6.97
Forfeited (8,678) (9.45)
Cancelled (13,500) (15.04)
--------- ---------
Balance at December 31, 2000 113,787 $7.88
Granted 213,750 9.30
Exercised (6,147) 7.79
--------- ---------
Balance at December 31, 2001 321,390 $8.83
========= =========
The range of exercise prices and weighted-average remaining contractual
life of outstanding options was $6.94 - $11.93 and eight years at
December 31, 2001 and $6.94 - $11.93 and seven years at December 31,
2000, respectively. At December 31, 2001 and 2000, the number of options
exercisable was 104,400 and 63,800 respectively.
The Company has a Management Recognition Plan (MRP) pursuant to which the
Company's Board of Directors may award shares of restricted 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
45,515 issued and outstanding shares for $8.75 per share. As of December
31, 2000, 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 $10,300 in 2001 and $106,000 in 2000 and 1999.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(10) STOCK OPTION AND MANAGEMENT RECOGNITION PLANS, CONTINUED
The Company also has a Recognition and Retention Plan (RRP) approved by
stockholders in 2001. The Company's Board of Directors may award shares
of common stock to officers and key employees. During 2001, 92,293 shares
were awarded under the RRP. The shares vest at a rate of 20% per year
from the grant date. The fair value of the shares awarded under the plan
was $858,325 at the grant date and is being amortized to compensation
expense on a straight-line basis over the vesting periods of the
underlying shares. Compensation expense of $107,285 was recorded in 2001,
with the remaining unearned compensation cost of $751,040 shown as a
reduction of stockholders' equity at December 31, 2001. The shares
awarded under the RRP were transferred from treasury stock at cost with
the difference between the fair value on the grant date and the cost of
the shares recorded as a reduction of retained earnings.
(11) NET INCOME PER COMMON SHARE
The following is a summary of the net income per share calculations for
the years ended December 31, 2001, 2000 and 1999:
2001 2000
---- ----
Weighted Weighted
Net Average Per-Share Net Average Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net income per common
share - basic $ 1,905,030 3,203,020 $ 0.59 $ 801,842 3,390,047 $ 0.24
----------- --------- ========= --------- --------- =======
Effect of dilutive securities:
Restricted stock grants 9,452 -
Stock options 18,908 157
Net income per common
share - diluted $ 1,905,030 3,231,380 $ 0.59 $ 801,842 3,390,204 $ 0.24
=========== ========= ========= ========= ========= =======
1999
-------------------------------------
Weighted
Net Average Per-Share
Income Shares Amount
------ ------ ------
Net income per common
share - basic $ 1,304,941 3,405,689 $ 0.38
----------- --------- ========
Effect of dilutive securities:
Stock options 17,762
----------
Net income per common
share - diluted $ 1,304,941 3,423,451 $ 0.38
============ ========= ========
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(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, 2001 and 2000 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:
2001 2000
----------- -----------
Commitments to originate loans:
Fixed rate residential mortgage loans $ 3,051,300 48,000
Adjustable rate residential mortgage loans 666,200 40,000
Fixed rate commercial real estate loans 340,000 324,000
Adjustable rate commercial real estate loans 8,324,000 2,890,000
Commercial loans 483,000 100,000
Consumer home equity loans 2,151,700 255,500
----------- -----------
$15,016,200 3,657,500
=========== ===========
2001 2000
----------- -----------
Unused lines of credit:
Construction loans $ 3,134,162 219,475
Commercial lines of credit 4,612,782 4,145,441
Home equity lines of credit 10,200,341 7,331,503
Other 662,688 557,567
----------- -----------
$18,609,973 12,253,986
=========== ===========
Outstanding letters of credit $ 10,000 10,000
=========== ===========
Commitments to sell loans:
Fixed rate residential mortgage loans $ 2,786,118 104,200
=========== ===========
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. Commitments to
originate fixed rate mortgage loans at December 31, 2001 have rates
ranging between 5.75% and 7.50%.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED
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, 2001, 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.
At December 31, 2001, the Company occupied branch facilities under
noncancelable operating leases. Office occupancy and equipment expense
includes rental expense of $322,520, $306,449 and $272,251 for the years
ended December 31, 2001, 2000 and 1999, respectively. The approximate
future minimum annual rental payments under the existing terms of such
leases at December 31, 2001 are as follows: $324,051, $336,170, $348,290,
$348,410 and $249,824 for the years ending December 31, 2002, 2003, 2004,
2005 and 2006, respectively, and $1,839,158 in later years.
(13) ENVIRONMENTAL MATTER
In April 1989, the Company foreclosed on property that had been a dry
cleaning and laundry facility. Environmental investigations revealed
groundwater and soil contamination and the Company incurred in excess of
$500,000 in remediation costs through 1992. During the period from 1993
to 1998 the Company had discussions with the Department of Environmental
Commission (DEC) and performed periodic soil testing to determine if the
property could be sold. In October 1998, further testing revealed a new
and more volatile contaminant in the soil. As a result, the Company
recorded a provision of $620,000 in December 1998 and $90,000 in 1999.
The Company received approval from the DEC of a Design Report and
Construction Plan in May 2000, and subsequently executed a contract on
July 21, 2000 for Remedial Construction, which began in August 2000. As a
result of the discussions with the DEC, the Company recorded an
additional provision of $180,000 in 2000. The remediation work has now
been completed.
The DEC requires groundwater, water level and hydraulic conductivity
testing to be performed quarterly in accordance with the Voluntary
Cleanup Agreement filed with the DEC on December 21, 1999 and the Revised
Voluntary Cleanup Operation, Maintenance and Monitoring Plan dated
January 21, 2002. The latest report is dated March 11, 2002, and
indicates no adverse findings.
At December 31, 2001, the Company had a $249,000 accrual in other
liabilities for the estimated billings associated with the final
remediation efforts and the voluntary cleanup plan. Management of the
Company believes that the recorded liability should be adequate to cover
probable costs in connection with this matter. However, it is possible
that the Company's liability exposure for the site will exceed the
amounts reserved and insured.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Other Comprehensive Income
--------------------------
The components of other comprehensive income (loss) for 2001, 2000 and
1999 are as follows:
2001 2000 1999
---------- ---------- ----------
Unrealized holding gains (losses) on available for
sale securities arising during year (pre-tax
unrealized holding gain (loss) was $1,875,819
in 2001, $4,428,763 in 2000, and ($6,056,610)
in 1999) $1,125,493 2,657,258 (3,633,966)
Less: reclassification adjustment for net realized gains
included in net income (pre-tax of $490,341 in 2001,
$50,383 in 2000, and $77,137 in 1999) 294,205 30,230 46,282
---------- ---------- ----------
Change in unrealized gains on securities,
available for sale, net of taxes $ 831,288 2,627,028 (3,680,248)
========== ========= ==========
Dividends
---------
The Mutual Holding Company, which prior to the stock offering owned
2,389,948 shares of stock in the 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 2000, and
$550,000 in 1999. The Company's ability to pay dividends is primarily
dependent upon the ability of its subsidiary bank to pay dividends to the
Company. The payment of dividends by the Bank is subject to continued
compliance with minimum regulatory capital requirements. In addition,
regulatory approval is generally required prior to the Bank declaring
dividends in an amount in excess of net income for that year plus net
income retained in the preceding two years.
Liquidation Account
-------------------
In order to grant priority in the Conversion to the eligible depositors,
the Bank established a liquidation account at the time of conversion in
an amount equal to its total retained earnings at November 10, 1994. In
the event of a future liquidation of the converted bank (and only in such
event), eligible account holders who continue to maintain accounts shall
be entitled to receive a distribution from the liquidation account. The
total amount of the liquidation account will be decreased (as balances of
eligible accounts are reduced) on annual determination dates. No cash
dividends may be paid to the stockholders and no shares may be
repurchased by the Company if such actions would reduce the Bank's
stockholders' equity below the amount required for the liquidation
account. At December 31, 2001, the amount remaining in this liquidation
account was approximately $8.0 million.
FINGER LAKES BANCORP, INC.
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, 2001, 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, 2001 and 2000, 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, 2001 and 2000, 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 at the holding
company level.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS, CONTINUED
Regulatory Capital Requirements, Continued
Minimum
Actual Requirement Well Capitalized
------ ----------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
-----------------
Total capital (to risk
weighted assets) $ 33,564,000 17.93% 14,976,960 8.00% 18,721,200 10.00%
Tier 1 capital (to risk
weighted assets) 33,159,000 17.71% 7,488,480 4.00% 11,232,720 6.00%
Tier 1 capital (to
average assets) 33,159,000 9.62% 13,783,511 4.00% 17,229,388 5.00%
Tangible capital 33,159,000 9.62% 5,168,816 1.50% - -
2001 Adjusted Tangible Assets were $345,360,000. 2001 Risk Weighted
Assets were $187,212,000.
Minimum
Actual Requirement Well Capitalized
------ ----------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2000
-----------------
Total capital (to risk
weighted assets) $ 34,764,000 20.68 % 13,446,720 8.00% 16,808,400 10.00%
Tier 1 capital (to risk
weighted assets) 34,308,000 20.41% 6,723,360 4.00% 10,085,040 6.00%
Tier 1 capital (to
average assets) 34,308,000 10.34% 13,277,800 4.00% 16,597,250 5.00%
Tangible capital 34,308,000 10.34% 4,979,175 1.50% - -
2000 Adjusted Tangible Assets were $331,945,000. 2000 Risk Weighted
Assets were $168,084,000.
Regulatory capital ratios of the Company at December 31, computed on a
consolidated basis are summarized below:
2001 2000
---- ----
Total capital (to risk weighted assets) 20.05% 22.78%
Tier 1 capital (to risk weighted assets) 19.83% 22.51%
Tier 1 capital (to average assets) 10.67% 11.33%
Tangible capital 10.67% 11.33%
(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.
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
LOANS
The fair values of variable rate loans that reprice frequently and have
no significant credit risk, approximate carrying amounts. Fair values of
fixed rate residential mortgage loans are based on quoted market prices
of similar loans sold in the secondary market, adjusted for differences
in loan characteristics. The fair values of other loans are estimated
through discounted cash flow analyses using interest rates currently
being offered for loans with similar terms and credit quality.
Delinquent loans are valued using the discounted cash flow methods
described above. While credit risk is a component of the discount rate
used to value loans, delinquent loans are presumed to possess additional
risk. Therefore, the calculated fair values of loans delinquent more than
30 days are reduced by an allocated amount of the general allowance for
loan losses.
DEPOSITS
The fair values of demand deposits, savings accounts and money market
accounts are, by definition, equal to the amounts payable on demand at
the reporting date (e.g., their carrying amounts). 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 assets and
liabilities are as follows:
December 31, 2001 December 31, 2000
----------------- -----------------
Carrying Carrying
amounts Fair value amounts Fair value
------- ---------- ------- ----------
Financial assets:
Securities $ 137,429,819 137,453,725 132,884,514 132,885,064
Loans 180,222,949 182,869,127 170,907,336 170,079,990
Financial liabilities:
Deposits:
Demand deposit accounts,
savings and money
market accounts 88,373,225 88,373,225 74,148,691 74,148,691
Certificates of deposit 143,347,115 143,519,045 154,313,710 154,409,907
Advances from FHLB 70,626,937 71,784,659 60,242,677 60,571,463
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
OTHER FINANCIAL INSTRUMENTS
Based on the characteristics of cash, cash equivalents, accrued interest
receivable, and FHLB stock, the carrying amounts approximate the fair
values. The fair values 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.
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition of Finger Lakes
Bancorp as of December 31, 2001 and 2000 and the condensed statements of
income and condensed statements of cash flows for 2001, 2000 and 1999
should be read in conjunction with the consolidated financial statements
and related notes.
December 31,
-----------------------------------------------
2001 2000
---- ----
Condensed Statements of Financial Condition
-------------------------------------------
Assets:
Cash $ 3,918,758 $ 3,242,590
Notes receivable from
subsidiary bank 1,292,789 1,415,049
Other assets 1,667 10,211
Investment in subsidiary 33,130,170 33,495,654
--------------- ----------------
$ 38,343,384 $ 38,163,504
=============== ================
Liabilities and stockholders' equity:
Note payable to subsidiary bank $ 1,592,643 $ 1,592,643
Stockholders' equity 36,750,741 36,570,861
--------------- ----------------
$ 38,343,384 $ 38,163,504
=============== ================
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED
Condensed Statements of Income
For the years ended
December 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
Interest income $ 129,531 $ 29,638 $ 15,958
Dividends from subsidiary bank 3,300,000 -- --
Expense 112,660 47,261 22,340
----------- ----------- -----------
Income/(loss) before income taxes and
equity in undistributed earnings
of subsidiary 3,316,871 (17,623) (6,382)
Income tax expense/(benefit) 13,840 (7,620) (2,591)
----------- ----------- -----------
Income/(loss) before (dividends in
excess of net income) equity in
undistributed earnings of subsidiary 3,303,031 (10,003) (3,791)
(Dividends in excess of net income)
equity in undistributed earnings of
subsidiary (1,398,001) 811,845 1,308,732
----------- ----------- -----------
Net income $ 1,905,030 $ 801,842 $ 1,304,941
=========== =========== ===========
Condensed Statements of Cash Flows
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,905,030 $ 801,842 $ 1,304,941
Adjustments to reconcile net income
to net cash provided by
operating activities:
Dividends in excess of net
income (equity in undistributed
earnings) of subsidiary 1,398,001 (811,845) (1,308,732)
Amortization of deferred
stock compensation 107,285 -- --
Other, net 8,551 37,902 9,598
----------- ----------- -----------
Net cash provided by
operating activities 3,418,867 27,899 5,807
----------- ----------- -----------
FINGER LAKES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED
Condensed Statements of Cash Flows, Continued
For the years ended December 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from investing activities:
Capitalization of Bank -- (10,742,976) --
Note receivable issued to subsidiary -- (1,292,102) --
Principal collected on note receivable 122,260 57,656 36,121
------------ ------------ ------------
Net cash provided by (used in)
investing activities 122,260 (11,977,422) 36,121
------------ ------------ ------------
Cash flows from financing activities:
Increase in note payable to subsidiary -- 1,292,842 10,150
Purchase of treasury stock (2,091,629) -- --
Stock options exercised 53,616 -- --
Net proceeds from stock offering -- 13,971,795 --
Cash dividends paid (826,946) (283,214) (283,211)
------------ ------------ ------------
Net cash (used in) provided by
financing activities (2,864,959) 14,981,423 (273,061)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 676,168 3,031,900 (231,133)
Cash and cash equivalents at beginning
of year 3,242,590 210,690 441,823
------------ ------------ ------------
Cash and cash equivalents at end
of year $ 3,918,758 $ 3,242,590 $ 210,690
============ ============ ============
FINGER LAKES BANCORP, INC.
QUARTERLY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for fiscal 2001 and 2000 follows (in
thousands, except per share data):
2001
----
By Quarter 1 2 3 4 Year
- - - - ----
Interest income $ 5,919 5,920 5,848 5,755 23,442
Interest expense 3,741 3,700 3,441 3,099 13,981
------ ----- ------ ----- ------
Net interest income 2,178 2,220 2,407 2,656 9,461
Provision for loan
losses 60 75 90 150 375
Noninterest income 543 694 605 671 2,513
Noninterest expense 2,155 2,232 2,193 2,279 8,859
------ ----- ----- ----- -----
Income before income
tax expense 506 607 729 898 2,740
Income tax expense 163 184 223 265 835
------ ------ ------ ----- -------
Net income $ 343 423 506 633 1,905
====== ====== ====== ===== =======
Net income per common
share:
Basic $ 0.11 0.13 0.16 0.20 0.59
Diluted $ 0.11 0.13 0.16 0.20 0.59
===== ======= ===== ===== ====
2000
----
By Quarter 1 2 3 4 Year
- - - - ----
Interest income $ 5,335 5,486 5,717 5,907 22,445
Interest expense 3,175 3,330 3,568 3,676 13,749
----- ----- ----- ----- ------
Net interest income 2,160 2,156 2,149 2,231 8,696
Provision for loan
losses 60 30 60 110 260
Noninterest income 250 261 263 367 1,141
Noninterest expense 2,083 2,046 1,963 2,193 8,285
------ ----- ------ ----- -----
Income before income
tax expense 267 341 389 295 1,292
Income taxes 103 127 149 111 490
--- --- --- --- ---
Net income $ 164 214 240 184 802
=== === === === ===
Net income per common
share:
Basic $ 0.05 0.06 0.07 0.06 0.24
Diluted $ 0.05 0.06 0.07 0.06 0.24
==== ==== ==== ==== ====
Summation of the quarterly net income per common share does not necessarily
equal the annual amount due to the averaging effect of shares throughout the
year.
CORPORATE INFORMATION
FINGER LAKES BANCORP, INC.
DIRECTORS
G. Thomas Bowers
Chairman, President &
Chief Executive Officer
Michael J. Hanna
Director of Athletics
Hobart & William Smith Colleges
Chris M. Hansen
Owner
Hansen's Citrus Groves
James E. Hunter
Director, NYS Agricultural
Experiment Station
Ronald C. Long
President, Long Milk Hauling & Trucking
Owner, R. C. Long Construction
Bernard G. Lynch
Retired President
Lynch Furniture Stores
Arthur W. Pearce
Senior Consultant
IDEAWorks, LLC
Joan C. Rogers
Retired Vice President
BJR Broadcasting
OFFICERS
G. Thomas Bowers
Chairman, President &
Chief Executive Officer
Leslie J. Zornow
Senior Vice President, Retail Banking
Terry L. Hammond
Executive Vice President &
Chief Financial Officer
Thomas A. Mayfield
Senior Vice President & Senior Loan Officer
Richard J. Harrison
Executive Vice President &
Chief Credit Officer
SAVINGS BANK OF THE FINGER LAKES
OFFICERS
G. Thomas Bowers
Chairman, President &
Chief Executive Officer
Terry L. Hammond
Executive Vice President &
Chief Financial Officer
Richard J. Harrison
Executive Vice President &
Chief Credit Officer
Leslie J. Zornow
Senior Vice President, Retail Banking
Thomas A. Mayfield
Senior Vice President &
Senior Loan Officer
Robert F. Eberle
Vice President, Operations
Diana R. Johnson
Vice President & Controller
Richard R. Sisson
Vice President, Community Lending
Dale E. Sollenberger
Vice President, Information Technology
Peter W. Hin
Vice President, Commercial Lending
Timothy J. McLoughlin
Vice President, Commercial Lending
Assistant Vice Presidents
- -------------------------
David R. Caster, Asset Management
Kathleen M. Fay, Loan Servicing
Susan M. Hibbard, Branch Manager
Kelly J. Mittiga, Branch Manager
R. David Patz, Commercial Lending
Beth M. Putnam, Branch Manager
Nancee K. Scott, Branch Manager
BANK OFFICERS
Tyna L. Borrelli
Kerth M. Friel
Molly C. Mahoney
Mary H. Raeman
Ronald A. Rubin
Thomas J. Short
Pennie L. Smith
Jane C. Spano
CORPORATE INFORMATION
TOMPKINS COUNTY ADVISORY BOARD
Stanley Goldberg
Bishop's Hardware Home Center
Bruce Kane
Certified Public Accountant
Robert Lama
The Lama Agency
Libby Long
David Long Appraisal
William Zikakis
Buttermilk Development
EXECUTIVE OFFICES
470 Exchange Street
Geneva, New York 14456
(315) 789-3838
NASDAQ TRADING SYMBOL
"FLBC" - Finger Lakes Bancorp, Inc.
TRANSFER AGENT
American Stock Transfer & Trust
40 Wall Street
New York, New York 10005
BANKING OFFICES
MAIN OFFICE
470 Exchange Street
Geneva, New York 14456
(315) 789-3838
Nancee K. Scott, Manager
PYRAMID BRANCH OFFICE
Routes 5 & 20
Geneva, New York 14456
(315) 789-6004
Kelly J. Mittiga, Manager
SEAWAY BRANCH OFFICE
Routes 5 & 20
Waterloo, New York 13165
(315) 539-0200
Molly C. Mahoney, Manager
ITHACA COMMONS BRANCH OFFICE
301 East State Street
Ithaca, New York 14850
(607) 272-1111
Jane C. Spano, Manager
SOUTH MEADOW BRANCH OFFICE
702 South Meadow Street
Ithaca, New York 14850
(607) 272-2211
Beth M. Putnam, Manager
CANANDAIGUA BRANCH OFFICE
659 South Main Street
Canandaigua, New York 14424
(585) 393-0660
Susan M. Hibbard, Manager
AUBURN BRANCH OFFICE
108 Genesee Street
Auburn, New York 13021
(315) 253-3355
Pennie L. Smith, Manager
10K AVAILABILITY
Copies of the Finger Lakes Bancorp, Inc.
Form 10-K for the year ended December
31, 2001 are available free of charge to
Stockholders upon written request to:
Savings Bank of the Finger Lakes
470 Exchange Street
Geneva, New York 14456
Attn: Terry L. Hammond
STOCKHOLDER RELATIONS
Terry L. Hammond
Executive Vice President &
Chief Financial Officer
Savings Bank of the Finger Lakes
470 Exchange Street
Geneva, New York 14456
(315) 789-3838
thammond@sbfl.com
- -----------------
AUDITORS
KPMG LLP
113 South Salina Street
Syracuse, New York 13104
COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
MARKET MAKERS
Friedman, Billings, Ramsey & Co.
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Jones & Associates, Inc.
Knight Securities LP
Tucker Anthony, Inc.