SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 000-31821
FINGER LAKES BANCORP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1594819
-------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
470 EXCHANGE STREET, GENEVA, NEW YORK 14456
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (315) 789-3838
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding
as of October 22, 2002
COMMON STOCK, $.01 PAR VALUE 3,173,807
---------------------------- ---------
Class Outstanding
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FINGER LAKES BANCORP, INC.
Form 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited):
Consolidated Statements of Financial Condition
at September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income for the three and nine
month periods ended September 30, 2002 and
September 30, 2001 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2002 and September 30,
2001 5 - 6
Consolidated Statements of Changes in Stockholders' Equity
for the nine month period ended September 30, 2002 7
Notes to Consolidated Financial Statements 8 - 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
Item 3 - Quantitative & Qualitative Disclosure about
Market Risk 14 - 15
Item 4 - Controls and Procedures 15 - 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19 - 20
Exhibit 99.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350; Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 21
Exhibit 99.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350; Adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 22
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Item 1 -- Financial Statements
FINGER LAKES BANCORP, INC.
Consolidated Statements of Financial Condition
(dollars in thousands, except per share data)
(unaudited)
September 30, December 31,
2002 2001
------------- ------------
Assets
Cash and due from banks $ 3,904 3,875
Securities available for sale, at fair value 140,017 135,599
Securities held to maturity, fair value
of $20,972 at September 30, 2002 and
$1,855 at December 31, 2001 20,421 1,831
Loans 202,947 181,757
Less allowance for loan losses 1,854 1,534
--------- --------
Net loans 201,093 180,223
Accrued interest receivable 2,082 1,878
Federal Home Loan Bank Stock, at cost 3,855 4,327
Premises and equipment, net 3,879 4,134
Bank owned life insurance 8,776 8,432
Other assets 2,656 3,061
--------- --------
Total assets $ 386,683 343,360
========= ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 270,747 231,720
Advances from Federal Home Loan Bank 73,593 70,627
Other liabilities 3,823 4,262
--------- --------
Total liabilities 348,163 306,609
--------- --------
Stockholders' Equity:
Preferred Stock; $.01 par value; authorized
1,000,000 shares; issued and
outstanding -- none -- --
Common Stock, $.01 par value; 5,000,000 shares
authorized; 3,451,257 shares issued
at September 30, 2002 and December 31, 2001 35 35
Additional paid-in capital 20,301 20,167
Retained earnings 21,323 19,779
Treasury stock -- at cost; 277,450 and 107,800
shares at September 30, 2002 and December 31,
2001, respectively (3,006) (1,154)
Accumulated other comprehensive income (loss) 1,578 (66)
Unearned compensation (565) (751)
Unallocated shares of ESOP (1,146) (1,259)
--------- --------
Total stockholders' equity 38,520 36,751
--------- --------
Total liabilities and stockholders' equity $ 386,683 343,360
========= ========
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Nine months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- ------- --------
Interest income:
Loans $ 3,694 3,613 10,751 10,746
Securities 2,173 2,235 6,568 6,930
Other 2 -- 4 11
------- ------- ------- -------
5,869 5,848 17,323 17,687
------- ------- ------- -------
Interest expense:
Deposits 2,008 2,419 5,886 7,901
Borrowings 971 1,022 2,916 2,982
------- ------- ------- -------
2,979 3,441 8,802 10,883
------- ------- ------- -------
Net interest income 2,890 2,407 8,521 6,804
Provision for loan losses 130 90 470 225
------- ------- ------- -------
Net interest income after
provision for loan losses 2,760 2,317 8,051 6,579
------- ------- ------- -------
Non interest income:
Service charges and other
fee income 451 347 1,299 1,000
Net gain on sale of
securities 151 91 359 412
Increase in cash value of
bank owned life insurance 114 116 344 311
Net gain on sale of loans 67 46 175 106
Other 6 5 13 13
------- ------- ------- -------
789 605 2,190 1,842
------- ------- ------- -------
Non interest expenses:
Salaries and employee benefits 1,354 1,089 3,869 3,157
Office occupancy and equipment 401 401 1,232 1,262
Professional fees 121 127 398 409
Marketing and advertising 63 84 297 274
Data processing 56 56 171 169
Reduction of environmental
remediation liability -- -- (166) --
Other 458 436 1,419 1,308
------- ------- ------- -------
2,453 2,193 7,220 6,579
------- ------- ------- -------
Income before income tax expense 1,096 729 3,021 1,842
Income tax expense 348 223 930 571
------- ------- ------- -------
Net income $ 748 506 2,091 1,271
======= ======= ======= =======
Net income per common share:
Basic $ 0.25 0.16 0.70 0.40
======= ======= ======= =======
Diluted $ 0.24 0.16 0.67 0.40
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months
Ended September 30,
------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 2,091 1,271
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 603 604
Amortization of fees, discounts and
premiums 449 123
Provision for loan losses 470 225
Reduction of environmental remediation liability (166) --
Net gain on sale of securities available
for sale (359) (412)
Net gain on sale of loans (175) (106)
Net gain from sale of real estate owned (19) (7)
Allocation of ESOP 247 163
Amortization of deferred stock compensation 186 64
Increase in cash value of BOLI (344) (311)
Proceeds from sale of loans held for sale 14,244 8,009
Loans originated for sale (13,303) (7,594)
Decrease/(increase) in accrued interest
receivable (204) 334
Increase in other assets (725) (147)
Decrease in other liabilities (273) (384)
--------- ---------
Net cash provided by operating activities 2,722 1,832
--------- ---------
Cash flows from investing activities:
Proceeds from maturities of and principal
collected on securities available for sale 32,855 26,031
Proceeds from maturities of and principal
collected on securities held to maturity 1,059 --
Proceeds from sales of securities available
for sale 74,134 86,333
Purchases of securities available for sale (108,617) (125,678)
Purchases of securities held to maturity (19,683) --
Loans originated and purchased (66,386) (35,591)
Principal collected on loans 44,117 26,389
Purchase of bank owned life insurance -- (3,000)
Proceeds from sale of real estate owned 110 89
Redemption of FHLB stock 1,975 --
Purchases of FHLB stock (1,503) (525)
Purchases of premises and equipment, net (348) (100)
--------- ---------
Net cash used in investing activities (42,287) (26,052)
--------- ---------
(continued)
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FINGER LAKES BANCORP, INC.
Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
Nine months
Ended September 30,
------------------------
2002 2001
---------- ----------
Cash flows from financing activities:
Net increase in savings, demand and money
market accounts $ 11,326 15,097
Net increase/(decrease) in time
deposits 27,701 (8,166)
Net increase in short term advances from FHLB 3,900 5,600
Long term advances from FHLB -- 15,124
Repayments of long term advances from FHLB (934) (807)
Shares acquired for stock benefit plans -- (937)
Stock options exercised -- 20
Purchase of treasury stock (1,852) --
Stock issuance costs -- (24)
Dividends on common stock (547) (620)
-------- --------
Net cash provided by financing activities 39,594 25,287
-------- --------
Net increase in cash and cash equivalents 29 1,067
Cash and cash equivalents at beginning of period 3,875 4,496
-------- --------
Cash and cash equivalents at end of period $ 3,904 5,563
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,723 10,838
Income taxes 883 410
Non-cash investing activities:
Transfer of loans to real estate owned $ 57 113
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Nine months ended September 30, 2002
(dollars in thousands, except per share data)
(unaudited)
Accumulated
Additional Other Unearned Unallocated
Common Paid - in Retained Treasury Comprehensive Compen- Shares
Stock Capital Earnings Stock Income sation of ESOP Total
-------- ---------- -------- -------- ------------- -------- ----------- ---------
Balance at December 31, 2001 $ 35 20,167 19,779 (1,154) (66) (751) (1,259) 36,751
Comprehensive income:
Net income -- -- 2,091 -- -- -- -- 2,091
Change in net unrealized
gains/losses on securities
available for sale, net of
taxes -- -- -- -- 1,644 -- -- 1,644
-------
Total comprehensive income 3,735
-------
Allocation of shares under ESOP -- 134 -- -- -- -- 113 247
Purchase of treasury shares -- -- -- (1,852) -- -- -- (1,852)
Amortization of deferred stock
compensation -- -- -- -- -- 186 -- 186
Cash dividends declared, $.18
per share -- -- (547) -- -- -- -- (547)
-------- -------- -------- -------- -------- ------- -------- --------
Balance at September 30, 2002 $ 35 20,301 21,323 (3,006) 1,578 (565) (1,146) 38,520
======== ======== ======== ======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
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FINGER LAKES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(1) 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.
On July 21, 2002, the Bancorp signed a definitive merger agreement with
First Niagara Financial Group, Inc., under which First Niagara Financial
Group, Inc. will, subject to regulatory and shareholder approval as well as
other conditions set forth in the agreement, acquire all of the outstanding
shares of the Bancorp for $20.00 per share and the Bancorp will be merged
into First Niagara Financial Group, Inc. As a result of the merger, Savings
Bank of the Finger Lakes will also be merged into First Niagara Financial
Group, Inc. The transaction is expected to be completed during the first
quarter of 2003.
(2) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance
with instructions for Form 10-Q and, therefore, do not include information
or footnotes necessary for a complete presentation of financial position,
results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, in
the opinion of management, all adjustments consisting of only normal
recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the
three and nine months ended September 30, 2002 and 2001. The results of
operations for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results which may be expected for an
entire fiscal year or other interim periods.
The unaudited consolidated financial statements should be read in
conjunction with the Company's 2001 Annual Report on Form 10-K. Amounts in
the prior periods' consolidated financial statements are reclassified when
necessary to conform to the current periods' presentation. All intercompany
accounts and transactions have been eliminated in consolidation.
(3) NET INCOME PER SHARE
Basic net income per common share for the three-month and nine-month
periods ended September 30, 2002 and 2001 was computed by dividing net
income by the weighted average number of total common shares outstanding
during the period, excluding unallocated ESOP shares and deferred stock
compensation shares. Diluted net income per common share reflects the
effects of incremental common shares (computed using the treasury stock
method) that would be issuable upon exercise of dilutive stock options and
unearned stock compensation.
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The following is a summary of the net income per share calculations (in
thousands, except net income per share):
For the three months For the nine months
Ended September 30, 2002 Ended September 30, 2002
------------------------ ------------------------
Basic Diluted Basic Diluted
------- --------- -------- ---------
Net income $ 748 748 $ 2,091 2,091
------- --------- -------- ---------
Weighted average shares 2,942 2,942 2,967 2,967
Common stock equivalents --- 188 --- 135
------- -------- -------- ---------
Total weighted average shares 2,942 3,130 2,967 3,102
======= ======== ======== =========
Net income per share $ 0.25 0.24 $ 0.70 0.67
======= ======== ======== =========
For the three months For the nine months
Ended September 30, 2001 Ended September 30, 2001
------------------------ ------------------------
Basic Diluted Basic Diluted
------- --------- -------- ---------
Net income $ 506 506 $ 1,271 1,271
------- -------- -------- ---------
Weighted average shares 3,154 3,154 3,193 3,193
Common stock equivalents --- 37 --- 25
------- -------- -------- ---------
Total weighted average shares 3,154 3,191 3,193 3,218
======= ======== ======== =========
Net income per share $ 0.16 0.16 $ 0.40 0.40
======= ======== ======== =========
(4) DIVIDENDS
The Company declared a regular cash dividend of $.06 per share for the
quarter ended June 30, 2002 on July 15, 2002, payable August 12, 2002 to
stockholders of record July 29, 2002.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
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 in SFAS No.
142.
The adoption of SFAS Nos. 141 and 142 did not materially affect the
Company's financial condition and results of operations. The Company
adopted SFAS No. 141 on July 1, 2001 and SFAS No. 142 on January 1, 2002.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Where appropriate, the following discussion relating to Finger Lakes Bancorp,
Inc. (referred to as FLBC") contains the insights of management into known
events and trends that have or may be expected to have a material effect on
FLBC's operations and financial condition. The information presented may also
contain certain forward-looking statements regarding future financial
performance, which are not historical facts and which involve various risks and
uncertainties.
When or if used in any Securities and Exchange Commission filings, or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases" "anticipate,"
would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "is estimated," "is projected," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the private Securities Litigation Reform Act of 1995. Any such
statements are subject to risks and uncertainties that include but are not
limited to: changes in economic conditions in FLBC's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in FLBC's market area, and competition. All or some of these factors could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
FLBC cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and advises readers that
various factors including regional and national economic conditions, substantial
changes in the levels of market interest rates, credit and other risks
associated with lending and investing activities, and competitive and regulatory
factors could affect FLBC's financial performance and cause FLBC's actual
results for future periods to differ materially from those anticipated or
projected. FLBC does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
Total assets as of September 30, 2002 were $386.7 million, an increase of $43.3
million or 12.6% from December 31, 2001. The increase was due primarily to a
$20.9 million or 11.6% increase in net loans, an increase of $4.4 million or
3.3% in securities available for sale, and an increase of $18.6 million in
securities held to maturity. Commercial real estate and business loans increased
by $21.2 million. In addition, home equity loans increased by $5.0 million and
other consumer loans increased by $3.0 million, while residential mortgage loans
decreased by $8.0 million. The increase in securities available for sale is a
result of purchases of $108.6 million, partially offset by amortizations and
prepayments of $32.9 million and sales of $74.1 million. The increase of $18.6
million in securities held to maturity represents securities purchased in
connection with a leverage strategy implemented to enhance net interest income.
The growth in assets during the first nine months of 2002 was funded in part by
a $39.0 million or 16.8% increase in total deposits. Savings deposits increased
by $4.7 million or 7.9%, demand deposits increased $6.6 million or 23.0%, and
certificate of deposits increased $17.7 million or 12.4%. In addition, the
Company originated $10.0 million in brokered certificates of deposit during the
second quarter of 2002. Advances from the Federal Home Loan Bank of New York
("FHLB") increased by $3.0 million or 4.2% during the first nine months of 2002,
as funding needs exceeded retail deposit growth.
Stockholders' equity totaled $38.5 million as of September 30, 2002, an increase
of $1.8 million from December 31, 2001. The increase in stockholders' equity
resulted from net income of $2.1 million, and an increase of $1.6 million in the
market value of securities available for sale, net of related deferred
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income taxes, partially offset by dividend distributions of $548,000, and
treasury shares purchased in the amount of $1.9 million at an average cost of
$10.91.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
GENERAL
Net income for the quarter ended September 30, 2002 amounted to $748,000 or
$0.24 per diluted share, compared to net income of $506,000, or $0.16 per
diluted share for the quarter ended September 30, 2001. The increase in net
income is primarily attributable to an increase of $483,000 in net interest
income, as well as an increase in noninterest income of $184,000. This was
partially offset by an increase of $260,000 in noninterest expenses, an increase
in provision for loan losses of $40,000 and an increase of $125,000 in income
tax expense.
NET INTEREST INCOME
Net interest income is determined by our interest rate spread (i.e., the
difference between yields earned on our interest-earning assets and rates paid
on our interest-bearing liabilities) and the relative amounts of our
interest-earning assets and interest-bearing liabilities. Net interest income
amounted to $2.9 million for the three month period ended September 30, 2002, an
increase of $483,000 from the same period last year. The average interest rate
spread for the three-month period ended September 30, 2002 was 2.96% versus
2.63% during the same period in 2001. The average yield on interest-earning
assets decreased 68 basis points from 7.10% to 6.42%, while the average cost of
interest-bearing liabilities decreased 101 basis points from 4.47% to 3.46%.
INTEREST INCOME
Total interest income for the three-month period ended September 30, 2002
amounted to $5.9 million, relatively unchanged from the same period in 2001. The
average yield on earning assets decreased to 6.42% during the three months ended
September 30, 2002 compared to 7.10% in the same period of 2001. Interest income
on loans for the three months ended September 30, 2002 amounted to $3.7 million,
an increase of $81,000 from the same period in 2001. Total loans increased by
$18.9 million to an average outstanding loan balance of $200.8 million for the
three months ended September 30, 2002, offset by a decrease in the average yield
to 7.30% from 7.88% during the same period last year. Interest income on
securities for the three months ended September 30, 2002 amounted to $2.2
million, a decrease of $62,000 from the same period last year. Changes in
interest income on securities resulted from an increase in the average
outstanding securities balance (at amortized cost) of $17.1 million to $162.1
million, offset by a decrease in the yield on the portfolio, as the average
yield decreased 80 basis points to 5.32%.
INTEREST EXPENSE
Total interest expense for the three months ended September 30, 2002 was $3.0
million, a decrease of $462,000 from the same period in 2001. During the third
quarter of 2002, interest expense on deposits amounted to $2.0 million while
interest expense on borrowed funds amounted to $971,000. Interest expense on
deposits decreased $411,000 or 17.0% as average deposits increased $35.9 million
to $269.8 million and the average cost of deposits decreased 115 basis points to
2.95%. The average cost of borrowings decreased 30 basis points to 5.36% from
5.66% a year ago, while average outstanding borrowings remained relatively flat
at $71.8 million.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $130,000 for the three months ended
September 30, 2002, an increase of $40,000 from the same period last year. This
increase reflects management's consideration of qualitative factors, including,
but not limited to, the substantial growth in commercial real estate and
business loans. The allowance for loan losses amounted to $1.9 million as of
September 30, 2002 or 0.91% of total loans outstanding and 616% of
non-performing loans. Non-performing loans decreased from $362,000 as of
December 31, 2001 to $301,000 as of September 30, 2002. The decrease in
non-
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performing loans primarily relates to a charge off of $76,000 on one
commercial relationship. The ratio of non-performing assets to total assets was
0.10% at September 30, 2002 as compared to 0.20% at December 31, 2001. Net
recoveries of $8,500 were recognized during the third quarter of 2002, as
compared to net charge-offs of $102,000 for the same period last year.
Management reviews the adequacy of the allowance for loan losses quarterly
through an asset classification and review process and an analysis of the level
of loan delinquencies and general market and economic conditions. To the best of
Management's knowledge, the allowance for loan losses includes all known and
inherent losses at each reporting date that are both probable and reasonable to
estimate. However, there can be no assurance that the allowance for loan losses
will be adequate to cover all losses that may in fact be realized in the future
or that additional provisions for loan losses will not be required.
NONINTEREST INCOME
Noninterest income, consisting primarily of service charges on deposit accounts,
loan servicing fees, increases in the value of bank owned life insurance, and
gains and losses on loans and securities sold, was $789,000 for the three months
ended September 30, 2002, an increase of $184,000 or 30.4% compared to the third
quarter of 2001. Service charges and other fee income was $451,000 for the three
months ended September 30, 2002, an increase of $104,000 over the same period in
2001. This improvement is primarily attributable to an increase of $84,000 in
service charges on deposit accounts and $22,000 in loan prepayment penalties.
Net gains on the sale of securities were $151,000, an increase of $60,000 from
the same period last year. This increase resulted primarily from sales of
securities with longer average lives, as we restructured a portion of the
securities portfolio to achieve an overall shorter duration of the portfolio.
NONINTEREST EXPENSE
Noninterest expense amounted to $2.5 million for the three months ended
September 30, 2002, an increase of $260,000 or 11.9% from the same period last
year. An increase of $265,000 in salaries and employee benefits expense was
primarily the result of annual salary increases and the cost of stock-based
benefit plans. Office occupancy and equipment expense remained unchanged from
the prior year. Professional fees decreased $6,000 or 4.7% from the same period
last year, primarily due to the decision to discontinue outsourcing certain
information technology functions. Marketing and advertising expenses decreased
$21,000 or 25% from the same period last year, primarily due to expenses
relating to a new product line for small business, introduced at this time last
year. Other noninterest expense, which in part includes postage, office
supplies, telephone charges, director's fees, insurance, and third party check
processing, increased $22,000 or 5.0% from the same period last year.
INCOME TAXES
Income tax expense for the three months ended September 30, 2002 was $348,000 on
income before tax of $1.1 million, reflecting an effective tax rate of 31.8%.
For the same period in 2001, the effective rate was 30.6%. We have managed our
effective tax rate through 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 $2.4 million at September 30, 2002.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
GENERAL
Net income for the nine months ended September 30, 2002 amounted to $2.1 million
or $0.67 per diluted share, compared to net income of $1.3 million, or $0.40 per
diluted share for the nine months ended September 30, 2001. The increase in net
income is primarily attributable to an increase of $1.7 million in net interest
income and an increase of $348,000 in noninterest income. This was partially
offset by an
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increase of $641,000 in noninterest expenses, an increase of $245,000 in loan
loss provisions, and an increase of $359,000 in income tax expense.
NET INTEREST INCOME
Net interest income is determined by our interest rate spread (i.e., the
difference between yields earned on our interest-earning assets and rates paid
on our interest-bearing liabilities) and the relative amounts of our
interest-earning assets and interest-bearing liabilities. Net interest income
amounted to $8.5 million for the nine-month period ended September 30, 2002, an
increase of $1.7 million from the same period last year. The average interest
rate spread for the nine-month period ended September 30, 2002 was 3.07% versus
2.47% during the same period in 2001. Based on the maturity and repricing
characteristics of the Company's balance sheet, during the first nine months of
the year 2002 when interest rates were falling, liabilities repriced at a faster
rate than assets. The average yield on interest-earning assets decreased 62
basis points from 7.30% to 6.68%, while the average cost of interest-bearing
liabilities decreased 123 basis points from 4.83% to 3.60%.
INTEREST INCOME
Total interest income for the nine-month period ended September 30, 2002
amounted to $17.3 million, a decrease of $364,000 from the same period in 2001.
The average yield on earning assets decreased to 6.68% during the nine months
ended September 30, 2002 compared to 7.30% in the same period of 2001. Interest
income on loans for the nine months ended September 30, 2002 amounted to $10.8
million, relatively unchanged from the same period in 2001. Total loans
increased to an average outstanding loan balance of $192.0 million for the nine
months ended September 30, 2002, offset by a decrease in the average yield to
7.49% from 8.05% during the same period last year. Interest income on securities
for the nine months ended September 30, 2002 amounted to $6.6 million, a
decrease of $362,000 from the same period last year. This decrease was
attributed to an increase in the average outstanding securities balance (at
amortized cost), which increased by $9.5 million to $154.5 million, offset by a
decrease in the yield on the portfolio, as the average yield decreased 70 basis
points to 5.69%.
INTEREST EXPENSE
Total interest expense for the nine months ended September 30, 2002 was $8.8
million, a decrease of $2.1 million from the same period in 2001. For the first
nine months of 2002, interest expense on deposits amounted to $5.9 million while
interest expense on borrowed funds amounted to $2.9 million. Interest expense on
deposits decreased $2.0 million as average deposits increased $20.4 million to
$253.6 million while the average cost of deposits decreased 143 basis points to
3.10%. Interest expense on borrowings decreased $66,000 from the same period
last year. The average cost of borrowings decreased 53 basis points to 5.32%
from 5.85% a year ago, while the average outstanding borrowings increased $5.2
million to $73.3 million.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $470,000 for the nine months ended
September 30, 2002, an increase of $245,000 from the same period last year. This
increase reflects management's consideration of qualitative factors, including,
but not limited to, the substantial growth in commercial real estate and
business loans. The allowance for loan losses amounted to $1.9 million as of
September 30, 2002 or 0.91% of total loans outstanding and 616% of
non-performing loans. Non-performing loans decreased from $362,000 as of
December 31, 2001 to $301,000 as of September 30, 2002. The decrease in
non-performing loans is primarily the result of a charge off of one commercial
relationship. The ratio of non-performing assets to total assets was 0.10% at
September 30, 2002 as compared to 0.20% at December 31, 2001. Net charge-offs
during the first nine months of 2002 were $181,000, as compared to $153,000 for
the same period last year.
Management reviews the adequacy of the allowance for loan losses quarterly
through an asset classification and review process and an analysis of the level
of loan delinquencies and general market and economic conditions. To the best of
Management's knowledge, the allowance for loan losses
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includes all known and inherent losses at each reporting date that are both
probable and reasonable to estimate. However, there can be no assurance that the
allowance for loan losses will be adequate to cover all losses that may in fact
be realized in the future or that additional provisions for loan losses will not
be required.
NONINTEREST INCOME
Noninterest income, consisting primarily of service charges on deposit accounts,
loan servicing fees, income from the sale of annuities and mutual funds,
increases in the value of bank owned life insurance, and gains and losses on
loans and securities sold, was $2.2 million for the nine months ended September
30, 2002, an increase of $348,000 or 18.9% compared to the same period in 2001.
Service charges and other fee income was $1.3 million for the nine months ended
September 30, 2002, an increase of $299,000 or 29.9% over the same period in
2001. This improvement is primarily attributable to an increase of $237,000 or
32.4% in service charges on deposit accounts, as well as $87,000 in loan
prepayment penalties. Gains on sale of securities decreased $53,000 during the
nine-month period ended September 30, 2002 as compared to the same period last
year as a result of a restructuring of the portfolio during 2001. The increase
of $69,000 in net gains from the sale of loans reflects higher levels of loan
sales during 2002. The increase in the cash value of bank owned life insurance
in the amount of $33,000 can be attributed to the purchase of additional
insurance in March 2001.
NONINTEREST EXPENSE
Noninterest expense amounted to $7.2 million for the nine months ended September
30, 2002, an increase of $641,000 or 9.7% from the same period last year. An
increase of $712,000 in salaries and employee benefits expense was primarily the
result of annual salary increases and the cost of stock-based benefit plans. A
decrease of $30,000 in office occupancy and equipment expense was in part the
result of lower depreciation expense, due to a fully depreciated branch and
related equipment in our Ithaca market. In addition, lower utility costs this
year contributed $14,000 to the reduction in office occupancy expense.
Professional fees decreased $11,000 or 2.8%, due in part to the decision to
discontinue outsourcing certain information technology functions. This decrease
in professional fees is offset by increased legal fees incurred in connection
with a review of certain benefit plans. Marketing expenses increased $23,000 or
8.4% primarily due to expenses relating to a certificate of deposit promotion
targeted at longer term maturities, as well as a renewed home equity loan
campaign. In the second quarter of 2002, we reversed $166,000 of accruals for
environmental remediation relating to a foreclosed dry cleaning and laundry
facility, as the final project costs were less than the budgeted estimates. The
remediation work is completed and we are currently negotiating a contract to
continue monitoring of the property. We have determined that the recorded
liability is currently adequate to cover the anticipated costs of the monitoring
for the new contract period. Other noninterest expense, which in part includes
postage, office supplies, telephone charges, director's fees, insurance, and
third party check processing, increased $111,000 or 8.5% from the same period
last year. This is in part due to increased costs on life insurance policies, as
well as increased costs for NASDAQ filing and investor relations.
INCOME TAXES
Income tax expense for the nine months ended September 30, 2002 was $930,000 on
income before tax of $3.0 million, reflecting an effective tax rate of 30.8%.
For the same period in 2001, the effective rate was 31.0%. The decrease in our
effective tax rate is the result of our purchase of bank owned life insurance,
which is a tax-advantaged means of financing employee benefits, the formation of
a real estate investment trust in September 2001, as well as our investment in
municipal bonds, which totaled $2.4 million at September 30, 2002.
ITEM 3 -- QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. The Company does not
currently have a trading portfolio nor does it use derivatives to manage market
and interest rate risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. The committee, comprised of senior management, has developed policies
to measure, manage, and monitor interest rate risk. Interest rate risk arises
from a variety of factors, including differences in the timing between the
contractual maturity or repricing of the Company's assets and liabilities. For
example, the Company's net interest income is affected by changes in the level
of market interest rates as the repricing characteristics of its loans and other
assets do not necessarily match those of its deposits, borrowings and capital.
The OTS requires the Company to measure interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on NPV
of sudden and sustained 100 to 300 basis point increases and decreases in market
interest rates. The Company's board of directors has adopted an interest rate
risk policy which establishes minimum NPV ratios (i.e. the ratio of NPV to the
present value of assets) in the event of 100, 200 and 300 basis point increases
and decreases in market interest rates. The following table sets forth certain
calculations, based on information provided to the Company by the OTS, with
respect to the sensitivity of NPV to changes in market interest rates at June
30, 2002 (date of latest available data):
BASIS POINT ESTIMATED NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
CHANGE ------------------------------------ ---------------------------
IN RATES BASIS POINTS
$ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------- -------- -------- --------- ------------
(Dollars in Thousands)
+300 $ 23,764 (17,606) (43)% 6.36% (392) bp
+200 30,579 (10,790) (26) 7.97 (232) bp
+100 36,936 (4,433) (11) 9.38 (90) bp
- 41,370 - - 10.28 -
-100 41,810 440 1 10.27 (2) bp
As shown by the table, increases in interest rates are estimated to
significantly decrease our NPV, while decreases in interest rates are estimated
to result in much smaller net changes in our NPV. The table suggests that in the
event of a 200 basis point increase in interest rates, we would experience a
decrease in NPV as a percentage of assets to 7.97% from 10.28%. Net portfolio
values in a falling rate environment of 200 and 300 basis points or more have
not been shown, due to the current interest rate environment of historically low
rates.
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.
ITEM 4 -- CONTROLS AND PROCEDURES
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Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, the company's Chief Executive Officer, G. Thomas Bowers, and Chief
Financial Officer, Terry L. Hammond, have concluded the company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. There have been no significant changes in the company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their evaluation.
-16-
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) See Index to Exhibits
(b) Reports on Form 8-K
On July 23, 2002, the registrant filed a Current
Report on Form 8-K, which disclosed, pursuant to
Items 2 and 7 of such report, a definitive merger
agreement had been signed by First Niagara
Financial Group, Inc. and the registrant on July
21, 2002, pursuant to which First Niagara Financial
Group, Inc. will acquire all of the outstanding
shares of Finger Lakes Bancorp, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2002 By: /s/ G. Thomas Bowers
---------------------------
G. Thomas Bowers
Chairman, President and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Terry L. Hammond
--------------------------
Terry L. Hammond
Executive Vice President and
Chief Financial Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, G. Thomas Bowers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Finger Lakes
Bancorp, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to made
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ G. Thomas Bowers
--------------------------------------
G. Thomas Bowers
President and Chief Executive Officer
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CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Terry L. Hammond, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Finger Lakes
Bancorp, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to made
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Terry L. Hammond
------------------------------
Terry L. Hammond
Executive Vice President and
Chief Financial Officer
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