SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 0-15366
ALLIANCE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
State of incorporation: New York
I.R.S. Employer Identification No.: 16-1276885
Address of principal executive offices: MONY Tower II, 18th Floor,
120 Madison Street, Syracuse, NY 13202
Registrant's telephone number including area code: (315) 475-4478
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$1.00 par value.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 27, 2002 was $76,019,862.
The number of outstanding shares of the Registrant's common stock on March 27,
2002: 3,442,338 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
on May 7, 2002 (the "Proxy Statement"), are incorporated by reference in Part
III.
1
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2001
ALLIANCE FINANCIAL CORPORATION
Page
PART I
Item 1. Description of the Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion & Analysis of the Results of
Operations and Financial Condition 11
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 45
2
PART I
This Annual Report on Form 10-K contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
Alliance Financial Corporation and its subsidiary. These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) an increase in competitive pressure in the banking industry; (2) changes in
the interest rate environment reduce margins; (3) changes in the regulatory
environment; (4) general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (5) changes in business conditions and
inflation; (6) changes in the securities markets; (7) changes occur in
technology used in the banking business; (8) the new Syracuse area branches do
not attract the expected loan and deposit customers; (9) the ability to maintain
and increase market share and control expenses; and (10) other factors detailed
from time to time in the Company's SEC filings.
Item 1 -- Description of the Business
General
Alliance Financial Corporation (the "Company") is a New York registered
bank holding company formed on November 25, 1998 as a result of the merger of
Cortland First Financial Corporation and Oneida Valley Bancshares, Inc., which
were incorporated in May 30, 1986 and October 31, 1984, respectively. The
Company is the parent holding company of Alliance Bank, N.A. (the "Bank"), which
was formed as the result of a merger of First National Bank of Cortland and
Oneida Valley National Bank as of the close of business, April 16, 1999. Unless
the context otherwise provides, references herein to the "Company" mean Alliance
Financial Corporation and the Bank.
The Company's administrative offices are located on the 18th Floor, MONY
Tower II, 120 Madison St., Syracuse, N.Y. Banking services are provided at the
administrative offices, as well as at main offices located at 65 Main Street,
Cortland, N.Y. and 160 Main Street, Oneida, N.Y., and 17 customer service
facilities located in Cortland, Madison, Onondaga, northern Broome, and western
Oneida counties.
At December 31, 2001, the Company had 261 full-time employees and 22
part-time employees.
The Bank is a member of the Federal Reserve System and the Federal Home
Loan Bank System, and deposits are insured by the Federal Deposit Insurance
Corporation up to applicable limits.
Services
The Company offers full service banking with a broad range of financial
products to meet the needs of its commercial, retail, government, and trust
customers. Depository account services include interest and non-interest bearing
checking accounts, money market accounts, savings accounts, time deposit
accounts, and individual retirement accounts. The Company's lending activities
include the making of residential and commercial mortgage loans, business lines
of credit, working capital facilities and business term loans, as well as
installment loans, home equity loans, student loans, and personal lines of
credit to individuals. Trust and investment department services include personal
trust, employee benefit trust, investment management, custodial, and financial
planning. Non-bank retail investment services are provided, with securities
offered through Pittsford Capital Markets, Inc. The Company also offers safe
deposit boxes, travelers checks, money orders, wire transfers, collection
services, drive-up banking facilities, 24-hour night depositories, automated
teller machines, 24-hour telephone banking, and on-line internet banking.
Commercial leasing services are offered through Alliance Leasing, Inc., a
subsidiary of the Bank.
Competition
The Company's business is extremely competitive. The Company competes not
only with other commercial banks but also with other financial institutions such
as thrifts, credit unions, money market and mutual funds, insurance companies,
brokerage firms, and a variety of other companies offering financial services.
Supervision and Regulation
The following discussion summarizes some of the laws and regulations
applicable to bank holding companies and national banks and provides certain
specific information relevant to the Registrant. This regulatory framework
primarily is intended for the protection of depositors and the deposit insurance
funds that insure bank deposits, and not for the protection of shareholders or
creditors of bank holding companies and banks. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety
3
by reference to those provisions. Moreover, Congress, state legislatures and
regulatory agencies frequently propose changes to the law and regulations
affecting the banking industry. The likelihood and timing of any changes and the
impact such changes might have on the Company are impossible to accurately
predict. A change in the statutes, regulations, or regulatory policies
applicable to the Registrant or its subsidiary may have a material effect on
their business.
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended, and is subject to supervision, regulation and
examination by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Bank Holding Company Act and other federal laws
subject bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements
and activities, including regulatory enforcement actions for violations of laws
and regulations. The Bank Holding Company Act requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors. The Change in Bank Control Act prohibits a person or group of persons
from acquiring "control" of a bank holding company unless the Federal Reserve
Board has been notified and has not objected to the transaction. In addition,
any entity is required to obtain the approval of the Federal Reserve Board under
the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer
that is a bank holding company) or more of the Company's outstanding common
stock, or otherwise obtaining control or a "controlling influence" over the
Company.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their non-banking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis. Bank holding companies and their
affiliates are prohibited from tying the provision of certain services, such as
extensions of credit, to other services offered by a holding company or its
affiliates.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. The Federal Reserve Board may charge the bank
holding company with engaging in unsafe and unsound practices for failure to
commit resources to a subsidiary bank when required. Any capital loans by the
Company to its subsidiary bank would be subordinate in right of payment to
depositors and to certain other indebtedness of such subsidiary banks.
The Company's ability to pay dividends to its shareholders is largely
dependent on the ability of the Company's bank subsidiary, Alliance Bank, N.A.
(the "Bank"), to pay dividends to the Company. The ability of both the Company
and the Bank to pay dividends are limited by federal statutes, regulations and
policies. For example, it is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common stock only out of income
available over the past year, and only if prospective earnings retention is
consistent with the holding company's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiaries. Furthermore, the Bank
must obtain regulatory approval for the payment of dividends if the total of all
dividends declared in any calendar year would exceed the total of the Bank's net
profits, as defined by applicable regulations, for that year, combined with its
retained net profits for the preceding two years. The Bank may not pay a
dividend in an amount greater than its undivided profits then on hand after
deducting its losses and bad debts, as defined by applicable regulations.
The Federal Reserve Board has established risk-based capital guidelines
that are applicable to bank holding companies. The guidelines established a
framework intended to make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations and take off-balance
sheet exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes, and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I capital
to risk-weighted assets of at least 4.00% and a ratio of total capital to
risk-weighted assets of at least 8.00%. The appropriate regulatory authority may
set higher capital requirements when an organization's particular circumstances
warrant. The remainder ("Tier 2 capital") may consist of a limited amount of
subordinated debt, limited-life preferred stock, certain other instruments and a
limited amount of loan and lease loss reserves. The sum of Tier I capital and
Tier 2 capital is "total risk-based capital." The Company's Tier I and total
risk-based capital ratios as of December 31, 2001 were 12.05% and 13.08%,
respectively.
In addition, the Federal Reserve Board has established a minimum leverage
ratio of Tier 1 capital to quarterly average assets less goodwill ("Tier I
leverage ratio") of 3.00% for bank holding companies that meet certain specified
criteria,. including that they have the highest regulatory rating. All other
bank holding companies are required to maintain a Tier I leverage ratio of 3.00%
plus an additional cushion of at least 100 to 200 basis points. The Company's
Tier I Leverage ratio as of December 31, 2001 was 7.53%, which exceeded its
regulatory requirement of 4.00%. The guidelines provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November
12, 1999. Gramm-Leach permits, subject to certain conditions, combinations among
banks, securities firms and insurance companies. Under Gramm-Leach, bank holding
companies are permitted to offer their customers virtually any type of financial
service including banking, securities underwriting, insurance (both underwriting
and agency), and merchant banking. In order to engage in these additional
financial activities, a bank holding company must
4
qualify and register with the Federal Reserve Board as a "financial holding
company" by meeting certain higher standards for capital adequacy and
management, with heavy penalties for non-compliance.
Gramm-Leach establishes that the federal banking agencies will regulate the
banking activities of financial holding companies and banks' financial
subsidiaries, the U.S. Securities and Exchange Commission will regulate their
securities activities and state insurance regulators will regulate their
insurance activities.
Bank holding companies that wish to engage in expanded activities but do
not wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permissible for nonbank subsidiaries of financial holding companies, with the
exception of merchant banking, insurance and annuity underwriting and real
estate investment and development. Merchant banking may be permitted after a
five-year waiting period under certain regulatory circumstances.
Gramm-Leach also provides new protections against the transfer and use by
financial institutions of consumers' nonpublic, personal information. At this
time, the Company has not elected to become a financial holding company.
Transactions between the holding company and its subsidiary bank are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries. Affiliate transactions are also
subject to Section 23B of the Federal Reserve Act which generally requires that
certain transactions between the holding company and its affiliates be on terms
substantially the same, or at least as favorable to the banks, as those
prevailing at the time for comparable transactions with or involving other
nonaffiliated persons. The restrictions on loans to directors, executive
officers, principal shareholders and their related interests (collectively
referred to herein as "insiders") contained in the Federal Reserve Act and
Regulation O apply to all insured institutions and their subsidiaries and
holding companies. These restrictions include limits on loans to one borrower
and conditions that must be met before such a loan can be made. There is also an
aggregate limitation on all loans to insiders and their related interests.
Insiders are subject to enforcement actions for knowingly accepting loans in
violation of applicable restrictions.
As a national bank, the Bank is subject to primary supervision, regulation,
and examination by the Office of the Comptroller of the Currency ("OCC") and
secondary regulation by the FDIC and the Federal Reserve Board. The Bank is
subject to federal statutes and regulations that significantly affects its
business and activities. The Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory approval
to enter into certain transactions. Other applicable statutes and regulations
relate to insurance of deposits, allowable investments, loans, acceptance of
deposits, trust activities, mergers, consolidations, payment of dividends,
capital requirements, reserves against deposits, establishment of branches and
certain other facilities, limitations on loans to one borrower and loans to
affiliated persons, and other aspects of the business of banks. In addition,
federal legislation has instructed federal agencies to adopt standards or
guidelines governing banks' internal controls, information systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. Regulatory authorities have broad flexibility to initiate
proceedings designed to prohibit banks from engaging in unsafe and unsound
banking practices.
The Federal Deposit Insurance Corporation improvement Act of 1991
("FDICIA") substantially revised the depository institution regulatory and
funding provisions of the Federal Deposit Insurance Act and made revisions to
several other federal banking statures. Among other things, federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet minimum capital requirements. FDICIA
identifies the following capital categories for financial institutions: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Rules adopted by the federal
banking agencies under FDICIA provide that an institution is deemed to be well
capitalized if the institution has a total risk-based capital ratio of 10.0% or
greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of
5.0% or greater, and the institution is not subject to an order, written
agreement, capital directive, or prompt corrective action directive to meet and
maintain a specific level for any capital measure. FDICIA imposes progressively
more restrictive constraints on operation, management, and capital
distributions, depending on the capital category in which an institution is
classified. At December 31, 2001, the Company and the Bank were in the
well-capitalized category based on the ratios and guidelines noted above.
The Bank must pay assessments to the FDIC for federal deposit insurance
protection. The FDIC has adopted a risk-based assessment system as required by
FDICIA. Under this system, FDIC-insured depository institutions pay insurance
premiums at rates based on their risk classification. Institutions assigned to
higher risk classifications pay assessments at higher rates than institutions
that pose a lower risk. An institution's risk classification is assigned based
on its capital level and the level of supervisory concern the institution poses
to the regulators. In addition, the FDIC can impose special assessments in
certain instances. Under FDIC regulations, no FDIC-insured bank can accept
brokered deposits unless it is well capitalized, or is adequately capitalized
and receives a waiver from the FDIC. In addition, these regulations prohibit any
bank that is not well capitalized from paying an interest rate on brokered
deposits in excess of three-quarters of one percentage point over certain
prevailing market rates.
The Community Reinvestment Act of 1977 ("CRA") and the regulations issued
thereunder are intended to encourage banks to help meet the credit needs of
their service area, including low and moderate income neighborhoods, consistent
with the safe and sound operations of the banks. These regulations also provide
for regulatory assessment of a bank's record in meeting the needs of its service
area when considering applications regarding establishing branches, mergers or
other bank or branch acquisitions. The Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 requires federal banking agencies to make public a
rating of a bank's performance under the CRA. In the case of a bank holding
company, the CRA performance record of the banks involved in the transaction are
reviewed in connection with
5
the filing of an application to acquire ownership or control of shares or assets
of a bank or to merge with any other bank holding company. An unsatisfactory
record can substantially delay or block the transaction.
The Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. These laws and
regulations include, among others, the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage
Disclosure Act and the Real Estate Settlement Procedures Act. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Banks must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
The earnings of the Company are significantly affected by the monetary and
fiscal policies of governmental authorities, including the Federal Reserve
Board. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives are open-market operations in U.S.
Government securities and federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member bank
deposits. These instruments of monetary policy are used in varying combinations
to influence the overall level of bank loans, investments and deposits, and the
interest rates charged on loans and paid for deposits. The Federal Reserve Board
frequently uses these instruments of monetary policy, especially its open-market
operations and the discount rate, to influence the level of interest rates and
to affect the strength of the economy, the level of inflation or the price of
the dollar in foreign exchange markets. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banking
institutions in the past and are expected to continue to do so in the future. It
is not possible to predict the nature of future changes in monetary and fiscal
policies, or the effect which they may have on the Company's business and
earnings.
Item 2 -- Properties
The Company operates the following branches:
Name of Office Location County Date Established
- -------------- -------- ------ ----------------
Home Office 65 Main Street Cortland March 1, 1869
Cortland, NY
Administrative Office MONY Tower II Onondaga August 27, 2001
120 Madison St.
Syracuse, NY
Baldwinsville Route 31 & Willet Pkwy. Onondaga August 28, 2000
Baldwinsville, NY
Canastota Stroud Street & Route 5 Madison December 7, 1974
Canastota, NY
Cincinnatus 2743 NYS Route 26 Cortland January 1, 1943
Cincinnatus, NY
Fairmount West Genesee St. Onondaga October 30, 2000
Syracuse, NY
Groton Avenue 1125 Groton Avenue Cortland June 22, 1987
Cortland, NY
Hamilton 1 Madison Street Madison December 7, 1949
Hamilton, NY
Hamilton 38-40 Utica Street Madison January 26, 1976
Drive-Up Hamilton, NY
Lyndon Corners 6930 E. Genesee St. Onondaga July 20, 2000
Fayetteville, NY
Manlius 201 Fayette Street Onondaga October 19, 1994
Manlius, NY
6
Marathon 14 E. Main Street Cortland August 15, 1957
Marathon, NY
North Main North Main Street Madison September 9, 1966
Oneida, NY
Park Place 300 South State Street Onondaga July 19, 1999
Syracuse, NY
Oneida 160 Main Street Madison December 12, 1851
Oneida, NY
Sherrill 628 Sherrill Road Oneida April 2, 1954
Sherrill, NY
TOPS Plaza Route 5 and Route 46 Madison January 7, 1988
Oneida, NY
Tully Route 80 at I-81 Onondaga January 26, 1989
Tully, NY
Whitney Point 2950 NYS Route 11 Broome April 7, 1994
Whitney Point, NY
Wal-Mart 872 NYS Route 13 Cortland March 10, 1997
(Cortland) Cortland, NY
The offices at Fairmount, Lyndon Corners, MONY Tower II, Park Place, TOPS Plaza,
Tully, Whitney Point, and the Wal-Mart store are leased. The other banking
premises are owned.
Item 3 -- Legal Proceedings
In December of 1998, the Oneida Indian Nation ("The Nation") and the U.S.
Justice Department filed a motion to amend a long-standing land claim against
the State of New York to include a class of 20,000 unnamed defendants who own
real property in Madison County and Oneida County. An additional motion sought
to include the Company as a representative of a class of landowners. On
September 25, 2000, the United States District Court of Northern New York
rendered a decision denying the motion to include the landowners as a group, and
thus, excluding the Company and many of its borrowers from the litigation. The
State of New York, the County of Madison and the County of Oneida remain as
defendants in the litigation. This ruling may be appealed by The Nation, and
does not prevent The Nation from suing landowners individually, in which case
the litigation could involve assets of the Company. On August 3, 2001, the
Justice Department moved to amend its complaint to drop landowners as
defendants.
In February 2002, the State of New York, the Nation and the Counties of
Madison and Oneida announced that they have reached a tentative agreement to
settle the land claim. Among other things, this settlement would pay the three
Oneida tribes $500 million for their lost land. However, the proposed settlement
would require the approval of governments from county legislatures to the United
States Congress. Even if such approvals are received, a final agreement is
expected to be years away as the parties work out numerous details. Moreover,
the other two Oneida tribes, from Wisconsin and Ontario, which did participate
in the settlement negotiations, have indicated that they do not intend to go
along with the settlement. The Wisconsin tribe subsequently filed new law suits
against individual landowners, and have publicly stated its intention to
continue to file other new suits against landowners. Management believes that,
ultimately, the State of New York will be held responsible for these claims and
this matter will be settled without adversely impacting the Company.
7
There are no other pending legal proceedings, other than routine litigation
incidental to the business of the Bank, to which the Company or the Bank is a
party or to which their property is the subject. In management's opinion, no
pending action, if adversely decided, would materially affect the Company's
financial condition.
Item 4 -- Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 2001.
8
PART II
Item 5 -- Market for Registrant's Common Stock and Related Shareholder Matters
Common Stock Data:
The common stock of the Company is listed for quoting in the Nasdaq National
Market under the symbol "ALNC". Market makers for the stock are Ryan, Beck &
Company (800-342-2325), Sandler O'Neill & Partners, LP (800-635-6851), McConnell
Budd & Romano (800-538-6957), Dain Rauscher (800-343-3036), and Monroe
Securities, Inc. (716-546-5560). There were 828 shareholders of record as of
December 31, 2001. The following table presents stock prices for the Company for
2001 and 2000. Stock prices below are based on daily high and low closing prices
for the quarter, as reported on the Nasdaq National Market. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
2001 High Low Dividend Paid
- ---- ---- --- -------------
1st Quarter $20.06 $17.38 $0.185
2nd Quarter 19.50 18.80 0.185
3rd Quarter 21.00 18.80 0.185
4th Quarter 24.40 19.52 0.290*
2000 High Low Dividend Paid
- ---- ---- --- -------------
1st Quarter $23.75 $19.70 $0.175
2nd Quarter 23.25 17.69 0.175
3rd Quarter 22.25 18.50 0.175
4th Quarter 21.00 17.50 0.185
* Includes an extra cash dividend of $0.10 per share
The transfer agent for the stock is American Stock Transfer & Trust Company
("ASTC"). They can be contacted at the following address:
Registrar and Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, NY 10005
Automatic Dividend Reinvestment Plan
The Company has an automatic dividend reinvestment plan. This plan is
administered by ASTC, as agent. It offers a convenient way for shareholders to
increase their investment in the Company. The plan enables certain shareholders
to reinvest cash dividends on all or part of their common stock in additional
shares of the Company's common stock without paying brokerage commissions or
service charges. Shareholders who are interested in this program may receive a
Plan Prospectus and enrollment card by calling ASTC Dividend Reinvestment at
1-800-278-4353, or writing to the following address:
Dividend Reinvestment
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
The Company has historically paid regular quarterly cash dividends on its common
stock, and the Board of Directors presently intends to continue the payment of
regular quarterly cash dividends, subject to the need for those funds for debt
service and other purposes. However, because substantially all of the funds
available for the payment of dividends are derived from the Bank, future
dividends will depend upon the earnings of the Bank, its financial condition and
its need for funds. Furthermore, there are a number of federal banking policies
and regulations that would restrict the Company's ability to pay dividends. In
particular, because the Bank is a depository institution whose deposits are
insured by the FDIC, it may not pay dividends or distribute capital assets if it
is in default on any assessment due the FDIC. Also, as a national bank, the Bank
is subject to OCC regulations which impose certain minimum capital requirements
that would affect the amount of cash available for distribution to the Company.
In addition, under Federal Reserve policy, the Company is required to maintain
adequate regulatory capital, is expected to serve as a source of financial
strength to the Bank and to commit resources to support the Bank. These policies
and regulations may have the effect of reducing the amount of dividends that the
Company can declare to its shareholders.
9
Item 6 - Selected Financial Data
Five-Year Comparative Summary
(Dollars in thousands except per-share data)
ASSETS AND DEPOSITS 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans $371,260 $312,378 $282,025 $250,295 $236,484
INVESTMENT SECURITIES 272,690 223,078 194,382 172,237 163,338
Deposits 499,292 474,899 435,074 413,594 377,927
Total Assets 692,871 580,787 519,197 471,705 436,430
Trust Department Assets
(Book value, not included in
Total Assets) 245,234 236,496 185,972 147,244 145,487
SHAREHOLDERS' EQUITY
Capital, Surplus, and Undivided Profits 53,463 53,035 49,245 51,168 49,750
OPERATING INCOME AND EXPENSES
Total Interest Income 43,124 40,062 34,508 32,213 31,791
Total Interest Expense 19,965 19,467 14,220 13,398 12,984
- -------------------------------------------------------------------------------------------------------------
Net Interest Income 23,159 20,595 20,288 18,815 18,807
Provision for Loan Losses 2,455 1,150 975 770 625
- -------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for
Loan Losses 20,704 19,445 19,313 18,045 18,182
Other Operating Income 6,991 6,649 4,558 3,989 3,866
- -------------------------------------------------------------------------------------------------------------
Total Operating Income 27,695 26,094 23,871 22,034 22,048
Salaries and Related Expense 11,264 10,414 9,112 8,712 8,206
Occupancy and Equipment Expense 3,153 2,861 2,587 2,607 2,412
Other Operating Expense 5,550 5,362 4,926 6,178 4,077
- -------------------------------------------------------------------------------------------------------------
Total Operating Expense 19,967 18,637 16,625 17,497 14,695
Income Before Taxes 7,728 7,457 7,246 4,537 7,353
Provision for Income Taxes 1,717 2,032 1,844 1,104 2,220
- -------------------------------------------------------------------------------------------------------------
Net Income $ 6,011 $ 5,425 $ 5,402 $ 3,433 $ 5,133
- -------------------------------------------------------------------------------------------------------------
Per-Share Statistics
Net Income $ 1.71 $ 1.52 $ 1.51 $ 0.95 $ 1.40
Book Value at Year End 15.51 14.70 13.97 14.23 13.82
Cash Dividends Declared $ 0.85 $ 0.71 $ 0.70 $ 0.67 $ 0.88
- -------------------------------------------------------------------------------------------------------------
10
Item 7 - Management's Discussion & Analysis of the Results of Operations and
Financial Condition
INTRODUCTION
The Company is a New York corporation, which was formed in November 1998 as
a result of the merger of Cortland First Financial Corporation (Cortland) and
Oneida Valley Bancshares, Inc. (Oneida). The Company is a bank holding company
that operates one wholly owned subsidiary, Alliance Bank, N.A., which provides a
full range of financial services in the Central New York marketplace.
The following discussion and analysis reviews the Company's business, and
provides information that is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of the Company and its operating subsidiary. This discussion should be read in
conjunction with the consolidated financial statements and accompanying notes,
and other information included elsewhere in this 2001 Annual Report on Form
10-K.
RESULTS OF OPERATIONS
Net income for 2001 was $6,011,000, an increase of $586,000, or 10.8%,
compared to net income of $5,425,000 in 2000. Earnings per share for 2001, on a
fully diluted basis, were $1.70, an increase of $0.18 per share compared to
$1.52 per share in 2000. Basic earnings per share of $1.71 for the year ended
December 31, 2001, compared to $1.52 for the year ended December 31, 2000. The
annualized return on average equity for 2001 increased to 11.14% from 10.86% in
2000.
Strong growth in earning assets continued in 2001 with average loans up
18.4% and average investments up 12.8%. The significant increase in earning
assets, combined with declining market interest rates that lowered the cost of
funds throughout the year, resulted in net interest income growth of 12.4%.
Record net income for 2001 was also attributable to growth of more than 5% in
other income, disciplined expense management, and effective tax planning.
Selected Performance Measures
Return on average assets, return on average equity, dividend payout, and
equity to asset ratios for the years indicated are as follows:
2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Percentage of net income to average total assets 0.93% 0.98% 1.09%
Percentage of net income to average shareholders' equity 11.14% 10.86% 10.56%
Percentage of dividends declared to net income 49.15% 46.70% 46.24%
Percentage of average shareholders' equity to average total assets 8.32% 9.03% 10.29%
NET INTEREST INCOME
Net interest income is the Company's principal source of operating income
for payment of overhead and providing for loan losses. It is the amount that
interest and fees on loans, investments, and other earning assets exceeds the
cost of deposits and other interest-bearing liabilities.
Net interest income increased $2,564,000, or 12.4%, to $23,159,000 in 2001.
The growth in net interest income resulted from increases in average earning
assets during the year, which offset a declining net interest margin.
Interest income for 2001 at $43,124,000, was $3,062,000 more than 2000,
with the 2001 tax-equivalent yield on average earning assets at 7.36%, declining
58 basis points during the 12 months ended December 31, 2001. Asset yields
declined throughout the year as a result of Federal Reserve Board actions that
lowered the federal funds rate by a total of 475 basis points during 2001.
Average earning assets for 2001 were $604,051,000, up $85,152,000, or 16.4%,
compared to 2000, and represented 93.1% of total average assets in 2001. By
comparison, average earning assets increased $53,318,000, or 11.5%, in 2000
compared to 1999, and for the comparable periods, the tax-equivalent yield on
average earning assets increased 27 basis points. Average earning assets in 2000
were 93.8% of total average assets.
Loans continued to represent the majority of the Company's interest earning
assets and have remained stable at 58% of earning assets over the past three
years. Average loans increased $54,782,000 in 2001 with yields declining 72
basis points to 8.22%. The Company's residential mortgage loan portfolio
reported an increase of $13,269,000, or 11.5%, in average loans when comparing
the year 2001 to 2000. The average yield on the portfolio declined only 11 basis
points from 8.00% in 2000 to 7.89%, as the Company experienced only a moderate
prepayment rate in 2001. Average consumer loans for the comparable periods
increased 28.8%, or $22,037,000, on strong growth in indirect auto financing.
The average yield declined 73 basis points from 9.57% to 8.84% in 2001, as the
new business was booked at lower rates during the year. Average commercial loans
for 2001 increased $19,026,000, or 17.8%, when compared to the prior year, on
strong new business development. The commercial portfolio, which primarily
reprices with short-term market rate indexes, reported a decline in the average
yield of 141 basis points, from 9.46% to 8.05%. Interest income on loans in 2001
was up $2,327,000, or 8.7%, compared to 2000.
11
Average loans in 2000 increased $34,560,000 compared to 1999 while average
loan yields increased 26 basis points. Interest income on loans was up
$3,778,000 in 2000 compared to 1999.
Average investments in 2001 increased by $27,577,000, with tax-equivalent
interest income from investments up $794,000, or 5.6%, compared to 2000. In
comparison, average investment securities increased $22,504,000 in 2000 compared
to 1999, with tax-equivalent interest income up $1,869,000. The average
tax-equivalent yield of the portfolio declined 41 basis points, from 6.59% in
2000 to 6.18% in 2001. The average tax-equivalent yield on the portfolio had
increased 18 basis points in 2000, when compared to 1999. Interest income in
2001 from the sale of federal funds, in the amount of $383,000, increased
$97,000 compared to 2000, as the Company increased its average federal funds
sold balances by $2,793,000 throughout the year.
During 2001, average interest-bearing liabilities increased by $90,544,000,
or 20.4%, to $534,735,000. As a result of falling market interest rates and the
repricing characteristics associated with the liabilities, the average cost of
interest-bearing liabilities declined 65 basis points from 4.38% in 2000 to
3.73% in 2001. The Company's interest expense, which is a function of the volume
of and rates paid for interest-bearing liabilities, increased $498,000, or
2.56%, in 2001. The relatively small rate of increase in interest expense
resulted as significantly lower rates paid on deposits and borrowings throughout
2001 offset the majority of the costs associated with the liability growth.
By comparison, interest expense increased $5,247,000, or 36.9%, in 2000
compared to 1999 as a result of volume and rate increases on deposits, along
with higher rates paid on increased borrowings primarily through the Federal
Home Loan Bank. The average cost of interest-bearing liabilities increased 70
basis points for the 12 months ended December 31, 2000. Average interest-bearing
liabilities increased $57,491,000, or 14.9%, during the 12 months ended December
31, 2000.
Although the Company's net interest margin (federal tax-equivalent net
interest income divided by average earning assets) declined 14 basis points,
from 4.19% in 2000, to 4.05% in 2001, it showed improvement throughout the 2001
year. The margin increased from a 3.76% average for the first quarter of 2001,
to a 4.22% average for the fourth quarter of 2001. By comparison, the margin
declined throughout 2000, with a 4.36% average for the first quarter of 2000 and
a 4.05% average for the fourth quarter of 2000.
The following table sets forth information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and yield information is adjusted for items
exempt from federal income taxes and assumes a 34% tax rate. Nonaccrual loans
have been included in the average balances. Securities are shown at average
amortized cost.
12
Average Balances and Net Interest Income
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Avg. Avg. Avg.
Yield/ Yield/ Yield/
Avg. Amt. of Rate Avg. Amt. of Rate Avg. Amt. of Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold $ 7,307 $ 383 5.24% $ 4,514 $ 286 6.34% $ 8,260 $ 433 5.24%
Taxable investment securities 190,463 11,161 5.86% 168,581 10,826 6.42% 143,671 8,798 6.12%
Nontaxable investment securities 52,978 3,867 7.30% 47,283 3,408 7.21% 49,689 3,567 7.18%
Loans (net of unearned discount) 353,303 29,028 8.22% 298,521 26,701 8.94% 263,961 22,923 8.68%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 604,051 44,439 7.36% 518,899 41,221 7.94% 465,581 35,721 7.67%
Noninterest-earning assets:
Other assets 45,181 41,275 35,486
Less: Allowance for loan losses (3,954) (3,587) (3,240)
Net unrealized gains/(losses) on
available-for-sale portfolio 3,391 (3,441) (560)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 648,669 $ 553,146 $ 497,267
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Demand deposits $ 71,627 $ 752 1.05% $ 62,928 $ 960 1.53% $ 64,480 $ 1,042 1.62%
Savings and money
market deposits 160,382 4,315 2.69% 152,573 5,176 3.39% 148,895 4,632 3.11%
Time deposits 219,756 11,006 5.01% 189,535 10,841 5.72% 163,115 7,947 4.87%
Borrowings 82,970 3,892 4.69% 39,155 2,490 6.36% 10,210 599 5.87%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 534,735 19,965 3.73% 444,191 19,467 4.38% 386,700 14,220 3.68%
Noninterest-bearing liabilities:
Demand deposits 52,871 54,800 54,590
Other liabilities 7,118 4,220 4,803
Shareholders' equity 53,945 49,935 51,174
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 648,669 $ 553,146 $ 497,267
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest earnings $24,474 $21,754 $21,501
- -----------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 4.05% 4.19% 4.62%
13
The following table sets forth the dollar volume of increase (decrease) in
interest income and interest expense resulting from changes in the volume of
earning assets and interest-bearing liabilities, and from changes in rates.
Volume changes are computed by multiplying the volume difference by the prior
year's rate. Rate changes are computed by multiplying the rate difference by the
prior year's balance. The change in interest due to both rate and volume has
been allocated equally between the volume and rate variances.
Volume and Rate Variances
2001 Compared to 2000 2000 Compared to 1999
- -------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Change Volume Rate Net Change
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Interest earned on:
Federal funds sold $ 162 $ (65) $ 97 $ (217) $ 70 $ (147)
Taxable investment securities 1,342 (1,007) 335 1,560 468 2,028
Nontaxable investment securities 414 46 460 (173) 14 (159)
Loans (net of unearned discount) 4,687 (2,361) 2,326 3,046 732 3,778
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $6,605 $(3,387) $ 3,218 $ 4,216 $ 1,284 $ 5,500
- -------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest-bearing demand deposits $ 114 $ (322) $ (208) $ (24) $ (58) $ (82)
Savings and money market deposits 236 (1,097) (861) 121 423 544
Time deposits 1,620 (1,455) 165 1,397 1,497 2,894
Borrowings 2,420 (1,018) 1,402 1,770 121 1,891
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $4,390 $(3,892) $ 498 $ 3,264 $ 1,983 $ 5,247
- -------------------------------------------------------------------------------------------------------------------------------
Net interest earnings (FTE) $2,215 $ 505 $ 2,720 $ 952 $ (699) $ 253
14
NONINTEREST INCOME
Noninterest income for 2001 was $6,991,000, up 5.1%, or $342,000, compared
to 2000. The Company's noninterest income is primarily comprised of recurring
fees from normal banking operations, trust department fees, and net gains or
losses from sales of investment securities. Income from service charges on
deposits at $2,370,000, up 18.9% from the prior year following a 2.8% increase
in 2000 over 1999, was the principal source of the Bank's noninterest income.
Increases in service charge income resulted from changes in the Company's fee
schedules early in 2001. Income from trust and brokerage services of $1,405,000
in 2001 showed little growth compared to the prior year, with fees being
negatively impacted by poor performance in the equity markets. Strong growth in
new trust and investment management accounts, with initial market values of
$17,606,000 opened during 2001, generated additional revenues, offsetting lower
fee income from the existing customer base that resulted from declining market
values. The ability to maintain trust revenue at last year's level is a
reflection of strong new business development efforts over the past two years.
Trust department income increased 22.8% in 2000 compared to 1999 on both growth
in new accounts and market value appreciation. During 2001, the Company executed
a number of investment strategies that resulted in security gains. Gains on
sales of securities in 2001 of $1,495,000 compared to $711,000 in 2000.
Significant contributions to the Company's other operating income were
derived from electronic banking and other customer service fees, as well as
increases in the cash value of Company-owned life insurance. During 2001, the
Company terminated data processing contracts with a number of other banks
following an analysis that indicated the profit margin on the business was
unsatisfactory. Revenues from this source declined $234,000 in 2001 compared to
the prior year. The Company also reported a one-time loss of $163,000 in 2001 in
connection with the closing of an in-store branch. In the third quarter of 2000,
the Company booked a $532,000 one-time gain on the termination of the former
Oneida Valley National Bank defined benefit pension plan.
By comparison, noninterest income of $6,649,000 in 2000 increased 45.9%, or
$2,091,000, compared to 1999.
The following table sets forth certain information on noninterest income
for the years indicated:
NonInterest Income
Years ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Service charges on deposit accounts $2,370 $1,993 $1,939
Trust department services 1,405 1,393 1,134
Bank owned life insurance 475 469 80
Investment securities gains 1,495 711 136
Other operating income 1,246 2,083 1,269
- -------------------------------------------------------------------------------
Total noninterest income $6,991 $6,649 $4,558
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Operating expense of $19,967,000 for the 12 months ended December 31, 2001,
increased $1,330,000, or 7.1%, when compared to 2000. The increase compared to a
$2,012,000, or 12.1%, increase, when comparing 2000 to 1999. Salaries and
associated benefit expenses in 2001 were up $850,000, or 8.2%, compared to a
14.3% increase in 2000 over 1999, and represented the majority of the 2001
increase in total expense. Increases were primarily attributed to higher
salaries associated with hiring new employees in a more competitive marketplace.
The Company also experienced significantly higher costs in connection with
providing employee medical benefits, and increased costs associated with
supplemental executive retirement plans. The Company's occupancy and equipment
expense increased $292,000, or 10.2%, in 2001 compared to 2000, following a
10.6% increase in the prior year. The increase was primarily associated with the
purchase and development of technology systems, designed to provide improved
customer service through both branch and on-line systems, as well as costs
relating to the Company's opening of new administrative offices. The occupancy
expense for 2001 also reflects twelve months of costs associated with three new
branches that were opened in the last half of 2000. Other noninterest expense in
2001 increased $188,000, or 3.5%, compared to the prior year. The rate of
increase reflected the Company's efforts in expense control, with the increase
attributable to costs related to servicing the growth in assets.
In 2000, other operating expense increased $436,000, or 8.9%, compared to
1999.
The following table sets forth certain information on noninterest expense
for the years indicated:
Noninterest Expense
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------
(In thousands)
Salaries, wages, and employee benefits $11,264 $10,414 $ 9,112
Building, occupancy, and equipment 3,153 2,861 2,587
Other operating expense 5,550 5,362 4,926
- -----------------------------------------------------------------------------
Total noninterest expense $19,967 $18,637 $16,625
- -----------------------------------------------------------------------------
15
PROVISION FOR INCOME TAX
Utilizing improved tax planning strategies, the Company reduced its 2001
provision for income taxes by $315,000, or 15.5%, when compared to the 2000
expense. The 2001 expense of $1,717,000 resulted in an effective tax rate of
22.2%, compared to the 2000 expense of $2,032,000 that reflected an effective
tax rate of 27.3%.
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
The investment portfolio is designed to meet the Company's liquidity needs
when loans expand or deposits contract while, at the same time, generating a
favorable return on low-risk, high-quality investments. The Company classifies
the majority of its investment securities as available-for-sale to support and
maintain the Company's interest risk objectives. The Company does not engage in
securities trading or derivatives activities in carrying out its investment
strategies.
The Federal Reserve Bank took unprecedented steps in 2001 to stimulate an
economy that fell into a recession late in the first quarter of the year. The
targeted federal funds rate was lowered 11 times throughout the year, a total of
475 basis points, ending 2001 at 1.75%. As short-term interest rates moved
significantly lower during the year, yields across the curve also declined. The
yield curve, that was relatively flat at the beginning of the year, ended 2001
very positively sloped. The rally in the bond market improved the value of the
Company's portfolio, offering significant opportunities for gains and
repositioning during the year. The Company sold the majority of its callable
securities late in 2000 and early in 2001 to capture gains, with reinvestment in
planned amortization class mortgage-backed securities that were well protected
against prepayment as rates continued to fall. The Company also sold the
majority of its corporate bond portfolio during the year, to reduce credit risk
at the same time capturing further gains. As a result of opportunities
associated with the positively sloped yield curve, during the third quarter of
the year the Company executed a $50 million leverage transaction. The Company
purchased a combination of callable agency and mortgage-backed securities with a
6-year average life, funded by repurchase agreements with a 30-month average
life. The transaction locked in a spread of 167 basis points for an expected
24-month minimum period. Gains on sales of investment securities in 2001 were
$1,495,000 compared to $711,000 in 2000.
Investment securities purchased during the falling rate environment of 2001
reduced the overall portfolio yield. The average tax-equivalent yield of the
portfolio in 2001 declined 41 basis points, to 6.18% from 6.59% in 2000. On a
comparative basis, the portfolio yield increased 18 basis points in 2000
compared to 1999. When comparing year-end 2000 to year-end 2001, the portfolio
yield declined 104 basis points, from 6.80% to 5.76%.
The Company's book value of investment debt securities increased
$47,020,000, or 21.6%, in the 12 months ended December 31, 2001, to a total of
$264,807,000, compared to an increase of $22,649,000, or 11.6%, during the year
2000.
The decline in interest rates, which causes an increase in the market value
of fixed-rate investment securities, resulted in the Company's
available-for-sale investment securities reflecting a market value that was
0.80% greater than the portfolios' book value. In compliance with SFAS 115, the
Company reflects net unrealized gains and losses on its available-for-sale
portfolio in its financial statement investment securities total, as well as the
after-tax effect of the gains and losses in the accumulated other comprehensive
income section of its shareholders' equity. The Company's December 31, 2001
investment portfolio reflects an unrealized gain on available-for-sale
securities of $2,071,000, with an after-tax effect of $1,243,000 being reflected
as an increase in shareholders' equity. At December 31, 2000, the Company
reported unrealized gains in its available-for-sale portfolio of $1,171,000 and
an increase in shareholders' equity of $702,000. Based on amortized cost, the
Company classified 97% of its investment portfolio as available-for-sale at
year-end 2001.
The following table sets forth the amortized cost and market value for the
Company's held-to-maturity investment securities portfolio:
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
(In thousands)
Obligations of states and
political subdivisions $7,371 $8,158 $10,223 $10,365 $12,449 $12,449
- -----------------------------------------------------------------------------------------------------
Total $7,371 $8,158 $10,223 $10,365 $12,449 $12,449
- -----------------------------------------------------------------------------------------------------
16
The following table sets forth the amortized cost and market value for the
Company's available-for-sale debt securities within the investment portfolio:
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury and other
U.S. government agencies $ 61,430 $ 62,228 $ 50,911 $ 51,538 $ 61,871 $ 61,225
Mortgage-backed securities 146,484 147,151 93,447 93,413 68,227 66,178
Obligations of states and
political subdivisions 48,009 48,687 44,289 44,996 37,516 37,196
Other securities 1,513 1,441 18,917 18,788 15,075 14,614
- -------------------------------------------------------------------------------------------------------------
Total $257,436 $259,507 $207,564 $208,735 $ 182,689 $179,213
- -------------------------------------------------------------------------------------------------------------
Net unrealized gains/(losses)
on available-for-sale
debt securities $ 2,071 $ 1,171 $ (3,476)
- -------------------------------------------------------------------------------------------------------------
Total Carrying Value $259,507 $208,735 $ 179,213
- -------------------------------------------------------------------------------------------------------------
The following table sets forth as of December 31, 2001, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the basis of the cost, weighted for scheduled maturity
of each security, and adjusted to a fully tax-equivalent basis:
At December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------
Amount Amount
Amount MaturinG After Maturing After Amount
Maturing Within One Year but Five Years but Maturing After
One Year or Less Within Five Years Within Ten Years Ten Years Total Cost
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Held-To-Maturity Portfolio
Obligations of states and
political subdivisions $ 3,628 $ 1,835 $ 748 $ 1,160 $ 7,371
- ------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity
portfolio value $ 3,628 $ 1,835 $ 748 $ 1,160 $ 7,371
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average yield
at year end (1) 5.78% 8.32% 6.81% 8.89% 7.00%
Available-for-Sale Portfolio
U.S. Treasury and other
U.S. government agencies $ 2,000 $ 19,084 $40,346 $ -- $ 61,430
Mortgage-backed securities 16,318 85,844 36,749 7,573 146,484
Obligations of states and
political subdivisions 5,213 11,567 18,982 12,247 48,009
Other securities -- 1,513 -- -- 1,513
- ------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
portfolio value $23,531 $118,008 $96,077 $19,820 $257,436
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average yield
at year end (1) 4.97% 5.59% 5.81% 6.94% 5.72%
(1) Weighted average yields on the tax-exempt obligations have been computed on
a fully tax-equivalent basis assuming a marginal federal tax rate of 34%.
These yields are an arithmetic computation of interest income divided by
average balance and may differ from the yield to maturity which considers
the time value of money.
17
LOANS
The loan portfolio is the largest component of the Company's earning assets
and accounts for the greatest portion of total interest income. The Company
provides a full range of loan products delivered through its branch network.
Consistent with the focus on providing community banking services, the Company
generally does not attempt to diversify geographically by making a significant
amount of loans to borrowers outside of the primary service area. Loans are
internally generated and lending activity is primarily confined to Cortland,
Madison, Onondaga, northern Broome, and Western Oneida counties. The Company
does not engage in highly leveraged transactions or foreign lending activities.
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated:
Composition of the Loan Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $126,801 34.2% $108,447 34.7% $105,169 37.3% $ 80,121 32.0% $ 66,422 28.1%
Real estate mortgage 142,307 38.3% 119,948 38.4% 114,450 40.6% 113,570 45.4% 105,937 44.8%
Consumer 106,734 28.7% 87,717 28.1% 66,878 23.7% 61,817 24.7% 70,169 29.7%
- --------------------------------------------------------------------------------------------------------------------------
Gross Loans 375,842 101.2% 316,112 101.2% 286,497 101.6% 255,508 102.1% 242,528 102.6%
Less:
Unearned discount (104) (0.0%) (364) (0.1%) (1,060) (0.4%) (2,212) (0.9%) (3,087) (1.3%
Allowance for loan
losses (4,478) (1.2%) (3,370) (1.1%) (3,412) (1.2%) (3,001) (1.2%) (2,957) (1.3%
- --------------------------------------------------------------------------------------------------------------------------
Net Loans $371,260 100.0% $312,378 100.0% $282,025 100.0% $250,295 100.0% $236,484 100.0%
- --------------------------------------------------------------------------------------------------------------------------
On December 31, 2001, gross loans were $375,842,000, increasing
$59,730,000, or 18.9%, during the year. By comparison, loans increased
$29,615,000, or 10.3%, in 2000. The Company reported little change in the mix of
its loan portfolio throughout 2001, with strong growth across all business
lines.
Residential mortgage loans, which represented 37.9% of gross loans at
December 31, 2001, increased $22,359,000, or 18.6%, during 2001 compared to an
increase of $5,498,000, or 4.8% in 2000. The mortgage portfolio at December 31,
2001 consists of 79% in fixed-rate loans, and 21% in loans that have
adjustable-rate features. The Company originated $47,664,000 in mortgage loans
during 2001. The majority of the loans were originated in Cortland and Madison
counties. As of December 31, 2001, the Company was servicing mortgage loans sold
in the secondary market with balances of $16,142,000. The total of mortgage
loans being serviced at December 31, 2000 was $15,766,000.
Loans in the commercial category consist primarily of short-term and/or
floating-rate loans, lines of credit, as well as commercial mortgage loans, made
to small- and medium-sized companies. Commercial loans in 2001 increased
$18,354,000, or 16.9%, to $126,801,000. By comparison, commercial loans
increased $3,278,000, or 3.1%, in 2000. The Company continued to maintain strong
market share in its core markets, while developing the majority of its 2001
growth from new customers in the Onondaga county marketplace. Growth in new
commercial relationships, and increased use of approved lines of credit
throughout the year, resulted in average commercial loans during 2001 being
$19,026,000, or 17.8% greater than in 2000.
Consumer loans, which include indirect auto, home equity, direct
installment, and revolving credit loans, increased 21.7%, or $19,017,000, in
2001. During 2001, the Company continued its focus on indirect auto lending,
providing service to a network of more than 150 Central New York dealers.
Indirect auto loans increased $14,305,000, or 34%, in 2001 compared to 2000,
following an increase of $21,820,000, or 108%, in 2000 compared to 1999. The
rate of growth in indirect auto loans during 2001 eased, as the Company
tightened its underwriting guidelines in response to a higher than desirable
loss rate and a weakening economy. Strong promotions of home equity lines of
credit in 2001 increased outstanding balances by $4,337,000, or 26.8% during
2001. The Company's consumer loan portfolio does not contain credit card loans.
18
The following table shows the amount of loans outstanding as of December
31, 2001, which, based on remaining scheduled payments of principal, are due in
the periods indicated:
Maturing Maturing
Maturing within After One but After Five but Maturing After
At December 31, 2001 One Year or Less Within Five Years Within Ten Years Ten Years Total
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Commercial $48,016 $ 41,078 $22,255 $15,452 $126,801
Real estate mortgage 8,984 33,127 37,416 62,780 142,307
Consumer, net of unearned discount 24,834 60,671 17,429 3,696 106,630
- ----------------------------------------------------------------------------------------------------------------------------
Total loans net of unearned discount $81,834 $134,876 $77,100 $81,928 $375,738
- ----------------------------------------------------------------------------------------------------------------------------
The following table sets forth the sensitivity of the loan amounts due
after one year to changes in interest rates:
At December 31, 2001 Fixed Rate Variable Rate
- -----------------------------------------------------------------------------
(In thousands)
Due after one year, but within five years $100,666 $34,210
Due after five years $112,269 $46,759
LOAN QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount
of nonperforming assets:
Years ended December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis $ 736 $ 686 $ 682 $ 552 $ 525
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payments 623 781 409 298 1,204
Other real estate owned and other
repossessed assets 320 354 269 257 363
- -------------------------------------------------------------------------------------------------------
Total nonperforming loans and assets $1,679 $1,821 $1,360 $1,107 $2,092
- -------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to
period-end nonperforming loans 329.51% 229.72% 312.74% 353.06% 171.02%
Ratio of nonperforming assets to
period-end total loans, other real
estate owned, and repossessed assets 0.45% 0.58% 0.48% 0.44% 0.87%
- -------------------------------------------------------------------------------------------------------
Nonperforming assets, defined as nonaccruing loans plus loans 90 days or
more past due, along with other real estate owned and other repossessed assets
as of December 31, 2001 were $1,679,000, declining $142,000, or 7.8%, compared
to year- end 2000. The ratio of nonperforming assets to year-end loans, other
real estate owned, and other repossessed assets improved to 0.45% at December
31, 2001 from 0.58% at December 31, 2000.
The ratio of nonperforming loans to total loans, in the amount of 0.36% at
December 31, 2001, also showed improvement when compared to a ratio of 0.46% at
December 31, 2000. The year-end ratio compares very favorably to the most recent
peer bank data contained in the Uniform Bank Performance Report for all banks
with total assets between $500,000,000 and $1,000,000,000, as published by the
Federal Reserve Board's Division of Banking Supervision and Regulation, which as
of September 30, 2001 reported a peer average of 0.77%. The adequacy of the
allowance to provide coverage for nonperforming loans improved to 330% at
year-end 2001 compared to 230% at year-end 2000. Total delinquencies, defined as
loans 30 days or more past due and nonaccruing, were 1.85% of total loans
outstanding as of December 31, 2001, compared to 1.60% at the end of 2000. At
December 31, 2001, 66.3% of delinquent loans were less than 60 days past due.
The Company has a loan review program that it believes takes a conservative
approach to evaluating nonperforming loans and the loan portfolio in general.
The loan review program continually audits the loan portfolio to confirm
management's loan risk rating system and track problem loans, to insure
compliance with loan policy underwriting guidelines, and to evaluate the
adequacy of the allowance for loan losses.
19
The Company's policy is to place a loan on nonaccrual status and recognize
income on a cash basis when a loan is more than ninety days past due, unless in
the opinion of management, the loan is well secured and in the process of
collection. The impact of interest not recognized on nonaccrual loans was
immaterial in 2001. The Company considers a loan impaired when, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based upon the present value of future cash flows discounted at the
historical effective interest rate, except that all collateral-dependent loans
are measured for impairment based on fair value of the collateral. As of
December 31, 2001, there were no impaired loans for which specific valuation
allowances had been recorded.
The allowance for loan losses represents management's best estimate of
probable loan losses in the Company's loan portfolio. Management's quarterly
evaluation of the allowance for loan losses is a comprehensive analysis that
builds a total reserve by evaluating the risks within each loan type, or pool,
of similar loans. The Company uses a general allocation methodology for all
residential and consumer loan pools. This methodology estimates a reserve for
each pool based on the most recent three-year loss rate, adjusted to reflect the
expected impact that current trends regarding loan growth, delinquency, losses,
economic conditions, and current interest rates are likely to have. For
commercial loan pools, the Company establishes a specific reserve allocation for
all loans, which have been risk rated under the Company's risk rating system, as
substandard, doubtful, or loss. The specific allocation is based on the most
recent valuation of the loan collateral and the customer's ability to pay. For
all other commercial loans, the Company uses the general allocation methodology
that establishes a reserve for each risk rating category. The general allocation
methodology for commercial loans considers the same factors that are considered
when evaluating residential mortgage and consumer loan pools. The combination of
using both the general and specific allocation methodologies reflects
management's best estimate of the probable loan losses in the Company's loan
portfolio. Loans are charged against the allowance for loan losses, in
accordance with the Company's loan policy, when they are determined by
management to be uncollectible. Recoveries on loans previously charged-off are
credited to the allowance for loan losses when they are received. When
management determines that the allowance for loan losses is less than adequate
to provide for potential losses, a direct charge is made to operating income.
The allowance for loan losses account at December 31, 2001 was $4,478,000,
or 1.19% of loans outstanding, compared to $3,370,000, or 1.07% of loans
outstanding, at December 31, 2000. The 2001 increase of $1,108,000 in the
reserve for loan losses was funded by a $2,455,000 provision expense that was
equal to 1.82 times the amount of net loan losses for 2001. Although net loans
charged-off increased from $1,192,000 in 2000 to $1,347,000 in 2001, the ratio
of net charge-offs to average loans outstanding declined to 0.38% in 2001
compared to 0.40% in 2000. The Company experienced a significant increase in
consumer loan losses in 2001, particularly in its indirect auto loan portfolio.
Consumer loan losses represented 81% of total loan losses with 59% of the total
loan losses in indirect auto loans. In the second half of 2001, the Company
tightened its indirect auto loan underwriting guidelines, and terminated
relationships with a number of dealerships that were considered unsatisfactory.
Commercial loan losses represented the balance of the 2001 loan losses, and
declined significantly from the amount reported in 2000. The Company reported no
net losses in its residential mortgage loan portfolio in 2001.
20
The following table summarizes loan balances at the end of each period
indicated and the daily average amount of loans. Also summarized are changes in
the allowance for loan losses arising from loans charged-off and recoveries on
loans previously charged-off and additions to the allowance, which have been
charged to expense.
Summary of Loan Loss Allowance
Years ended December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Amount of loans outstanding at
end of period (gross loans less
unearned discount) $375,738 $315,748 $285,437 $253,296 $239,441
- ---------------------------------------------------------------------------------------------------------------------
Daily average amount of loans
(net of unearned discount) $353,303 $298,521 $263,961 $244,649 $236,843
- ---------------------------------------------------------------------------------------------------------------------
Balance of allowance for loan
losses at beginning of period $ 3,370 $ 3,412 $ 3,001 $ 2,957 $ 3,025
Loans charged-off:
Commercial 326 780 73 218 148
Real estate mortgage 1 56 38 29 57
Consumer 1,395 621 637 693 602
- ---------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,722 1,457 748 940 807
Recoveries of loans previously charged-off:
Commercial 32 74 21 111 17
Real estate mortgage 2 1 1 -- --
Consumer 341 190 162 103 97
- ---------------------------------------------------------------------------------------------------------------------
Total recoveries 375 265 184 214 114
Net loans charged-off 1,347 1,192 564 726 693
- ---------------------------------------------------------------------------------------------------------------------
Additions to allowance charged
to expense 2,455 1,150 975 770 625
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 4,478 $ 3,370 $ 3,412 $ 3,001 $ 2,957
Ratio of allowance for loan losses
to period-end loans 1.19% 1.07% 1.20% 1.18% 1.23%
Ratio of net charge-offs to
average loans outstanding 0.38% 0.40% 0.21% 0.30% 0.29%
The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the probable losses within the
following categories of loans at the dates indicated:
Allocation of the Allowance for Loan Losses
Years ended December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Amt. of Amt. of Amt. of Amt. of Amt. of
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial $2,588 57.79% $1,625 48.22% $1,857 54.43% $1,159 38.62% $ 948 32.05%
Real estate mortgage 305 6.81% 276 8.19% 391 11.46% 482 16.06% 541 18.30%
Consumer 1,585 35.40% 1,469 43.59% 1,164 34.11% 698 23.26% 906 30.64%
Unallocated -- -- -- -- -- -- 662 22.06% 562 19.01%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $4,478 100.0% $3,370 100.0% $3,412 100.0% $3,001 100.0% $2,957 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
21
DEPOSITS AND OTHER BORROWINGS
The Company's deposit accounts represent its primary source of funds. The
deposit base is comprised of demand deposit, savings and money market accounts,
and other time deposits, that are primarily provided by individuals, businesses,
and local governments within the communities served. The Company continuously
monitors market pricing, competitors' rates, and internal interest rate spreads
to maintain and promote growth and profitability.
Average deposits during 2001 increased $44,800,000, or 9.7%, compared to a
$28,756,000, or 6.7%, increase in 2000. Compared to December 31, 2000, deposits
as of December 31, 2001, in the amount of $499,292,000, were up $24,393,000, or
5.1%. The growth in average deposits during 2001 was a result of strong growth
in a number of business lines. Average commercial deposits were up 10% compared
to the prior year, consistent with and related to, the strong growth in new
commercial loan relationships. Development of new municipal relationships
increased the opportunities to acquire competitively priced time deposits, and
resulted in an increase of 1.9% in average municipal deposits outstanding during
2001. Average consumer deposits in 2001 increased 8.8% over the prior year, with
increases attributable to growth in money market and time deposit balances.
Average deposits also increased during 2001 as the Company acquired brokered
certificates of deposit, with rates and maturities that were preferential to
other deposit alternatives.
The Company's average deposit mix in 2001, compared to 2000, reflected a
slight shift from lower cost demand deposit, savings, and money market accounts,
to higher cost time deposit accounts. The Company's average demand deposits,
including both interest-bearing and noninterest-bearing accounts, declined 1% as
a percentage of total average deposits, to 24.7% during 2001, following a 2%
decline the prior year. Although declining as a percentage of the total, this
group of average deposits increased $6,770,000, or 5.8%, when comparing 2001 to
2000. These core transactional accounts continue to represent a significant
percentage of total deposits and provide the Company with an important low-cost
source of funds. The Company's savings and money market average deposit balances
increased $7,809,000, or 5.1%, during 2001 primarily on the growth in the
Company's retail money market balances. The product was priced to compete with
brokerage money market accounts. Average time deposits in 2001 increased
$30,221,000, or 15.9%, compared to 2000, following an increase of $26,420,000,
or 16.2%, when comparing 2000 to 1999. Average time deposit increases were
reported in the commercial and consumer categories, as well as in brokered
certificates of deposit. Throughout the year, customers shortened the average
maturity of their time deposits as well as transferred balances to money market
and savings products, in response to declining interest rates. Commercial
deposits ended the year with strong growth, up $11,437,000, or 18%, compared to
the prior year-end. Consumer deposits were up $3,136,000, or 1.1%, with
increases in lower cost demand deposit and money market balances. The Company's
total municipal deposits of $100,817,000 on December 31, 2001 represented 20.2%
of total deposits, down from $118,286,000, or 24.9% of total deposits on
December 31, 2000. During the fourth quarter of 2001, competitors priced
municipal money market products at a premium to time deposits. The Company
determined not to match the competitive pricing structure but to offset the
deposit declines with lower cost borrowings of similar maturity. Brokered
certificates of deposit in the amount of $26,742,000, represented 13.2% of time
deposits, and 5.4% of total deposits at December 31, 2001. The Company reported
no brokered certificates of deposit at December 31, 2000.
Time deposits in excess of $100 thousand, which are more volatile and
sensitive to interest rates, totaled $68,520,000 at year-end 2001, representing
33.9% of total time deposits, and 13.7% of total deposits. On a comparative
basis, these deposits totaled $94,728,000, representing 44.3% of total time
deposits, and 19.9% of total deposits at year-end 2000.
The average daily amount of deposits, the average rate paid, and the
percentage of deposits on each of the following deposit categories are
summarized below for the years indicated:
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Avg. Percent Avg. Percent Avg. Percent
Avg. Rate of Avg. Rate of Avg. Rate of
Balance Paid Deposits Balance Paid Deposits Balance Paid Deposits
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing
demand deposits $ 52,871 0.00% 10.48% $ 54,800 0.00% 11.92% $ 54,590 0.00% 12.66%
Interest-bearing
demand deposits 71,627 1.05% 14.19% 62,928 1.53% 13.68% 64,480 1.62% 14.96%
Savings and money
market deposits 160,382 2.69% 31.78% 152,573 3.39% 33.18% 148,895 3.11% 34.54%
Time deposits 219,756 5.01% 43.55% 189,535 5.72% 41.22% 163,115 4.87% 37.84%
- ----------------------------------------------------------------------------------------------------------------------------------
Total average daily amount
of deposits $504,636 3.19% 100.00% $459,836 3.69% 100.00% $431,080 3.16% 100.00%
- ----------------------------------------------------------------------------------------------------------------------------------
22
The following table indicates the amount of the Company's time deposits of
$100,000 or more by time remaining until maturity as of December 31, 2001:
(In thousands)
Less than three months $44,413
Three months to six months 6,495
Six months to one year 11,121
Over one year 6,491
- --------------------------------------------------------------
Total $68,520
- --------------------------------------------------------------
The Company offers retail repurchase agreements primarily to its larger
business customers. Under the terms of the agreements, the Company sells
investment portfolio securities to the customer and agrees to repurchase the
securities at a specified later date. The Company views the arrangement as a
deposit alternative for its business customers. As of December 31, 2001, retail
repurchase agreement balances amounted to $17,412,000 compared to balances of
$6,936,000 at December 31, 2000. During 2001, the Company utilized
collateralized repurchase agreements with various brokers, and advances from the
Federal Home Loan Bank of New York as alternative sources of funding and as a
liability management practice. At December 31, 2001, the combination of
repurchase agreements and term advances were $115,013,000, compared to
$36,750,000 at December 31, 2000.
CAPITAL
In 2001, the Company added $6,011,000 into equity through net income and
returned $2,955,000 to its shareholders in the form of cash dividends, retaining
$3,056,000 in undivided profits. During the year, the Company repurchased
161,627 shares of its common stock at a cost of $3,169,000 in connection with a
stock repurchase program. Total shareholders' equity also reflects an adjustment
for the change in market value of the Company's available-for-sale investment
securities. As previously discussed in the Investment Securities section, the
after-tax effect of the net unrealized gains and losses is reported as the
Accumulated Other Comprehensive Income component of shareholders' equity, and
reflects an increase in total shareholders' equity of $1,243,000 as of December
31, 2001. The Company's ratio of shareholders' equity to total assets of 7.72%
at December 31, 2001 compares to 9.13% at December 31, 2000. The Company's goal
is to maintain a strong capital position, consistent with the risk profile of
its subsidiary bank, that supports growth and expansion activities while at the
same time exceeding regulatory standards. Capital adequacy in the banking
industry is evaluated primarily by the use of ratios which measure capital
against total assets, as well as against total assets that are weighted based on
defined risk characteristics. At December 31, 2001, the Company exceeded all
regulatory required minimum capital ratios and met the regulatory definition of
a "well-capitalized institution." A more comprehensive analysis of regulatory
capital requirements, including ratios for the Company and its subsidiary bank,
is included in Note 16 in the Consolidated Financial Statements section of the
Annual Report.
The Company declared cash dividends equal to $0.845 per share in 2001
compared to $0.71 in 2000. During the fourth quarter of 2001, the regular
quarterly dividend rate was increased from $0.185 per share to $0.19 per share,
and the Company declared an extra cash dividend of $0.10 per share. The 2001
dividend pay-out ratio was 49% compared to a 47% pay-out ratio in 2000.
LIQUIDITY
Liquidity is the ability of the Company to generate and maintain sufficient
cash flows to fund its operations and to meet customers' loan demands or deposit
withdrawals. Maintaining a stable core deposit base is one of the fundamentals
in the Company's liquidity management policy. It is the Company's goal to raise
cash when needed, at the most reasonable cost, with a minimum of loss.
Management carefully monitors its liquidity position and seeks to maintain
adequate liquidity to meet its needs. The Company meets its liquidity needs by
balancing levels of cash flow from the sale or maturity of available-for-sale
investment securities and loan amortizing payments and maturities, as well as
with the availability of dependable borrowing sources which can be accessed when
needed. Total borrowing capacity with the Federal Home Loan Bank and other banks
with which the Company has approved lines of credit as of year-end 2001 was
$103,245,000 and $15,000,000, respectively, of which $63,245,000 and $15,000,000
remained available, respectively. The Company also has contracts with a number
of brokers whereby it may enter into collateralized repurchase agreements. As of
December 31, 2001, the Company owns $37,000,000 in securities that were
available for pledging purposes.
23
OTHER INFORMATION
On January 4, 2002, the Company announced that its Board of Directors
approved the formation of a commercial leasing company. The company specializes
in information technology, municipal, health care, energy and utilities,
education, and equipment leasing. The leasing company is a subsidiary of the
Bank.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates or prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The Company's
market risk arises principally from interest rate risk in its lending, deposit
and borrowing activities. Other types of market risks do not arise in the normal
course of the Company's business activities. Management actively monitors and
manages its interest rate risk exposure. Although the Company manages other
risks, as in credit quality and liquidity risk, in the normal course of
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's
profitability is affected by fluctuations in interest rates. Management's goal
is to maintain a reasonable balance between exposure to interest rate
fluctuations and earnings. A sudden and substantial change in interest rates may
adversely impact the Company's earnings to the extent that the interest rates on
interest-earning assets and interest-bearing liabilities do not change at the
same speed, to the same extent, or on the same basis. The Company monitors the
impact of changes in interest rates on its net interest income using a computer
simulation model.
The model measures the change in net interest income which results when
market interest rates change. As of December 31, 2001, an instantaneous 200
basis point increase in market interest rates was estimated to have a negative
impact of 6.9% on net interest income over the next twelve-month period, while a
200 basis point decrease in market interest rates was estimated to have a
positive impact of 6.0% on the Company's net interest income. By comparison, at
December 31, 2000 the Company estimated an instantaneous 200 basis point rise in
rates would have a negative impact of 11.9% on net interest income during 2001
while a 200 basis point decline in rates would have a positive impact of 6.7% on
net interest income during 2001. During the second half of 2001, the Company
began to realign its asset/liability mix to reduce its risk to rising rates.
Although the economy remained weak and the Federal Reserve Bank continued to
lower rates throughout 2001, expectations for an economic recovery and higher
rates in 2002 increased. Risk to rising rates was reduced through the growth of
adjustable-rate commercial and consumer loans, the purchase of shorter-term
investments, and the acquisition of term brokered certificates of deposit and
borrowings. The Company expects that interest rates will move higher in 2002,
with its net interest margin coming under slight pressure toward the end of the
year. The potential change in net interest income resulting from this analysis
falls within the Company's interest rate risk policy guidelines.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit rate changes, and should not be relied upon
as indicative of actual results.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 2001:
Expected Maturity/Principal Repayments at December 31, 2001
Average
There- Interest Fair
2002 2003 2004 2005 2006 after Total Rate Value
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Rate Sensitive Assets
Loans $122,087 $ 77,717 $35,161 $31,919 $29,704 $ 74,672 $371,260 7.42% $377,841
Investments 49,852 30,685 25,157 42,802 17,469 106,725 272,690 5.52% 273,477
----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $171,939 $108,402 $60,318 $74,721 $47,173 $181,397 $643,950 $651,318
----------------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Liabilities
Savings, money market, and
NOW accounts $ 24,928 $ -- $ -- $ -- $ -- $215,370 $240,298 1.30% $240,298
Time deposits 147,691 41,248 9,558 2,554 899 -- 201,950 3.87% 203,639
Borrowings 34,366 40,000 30,000 -- -- 28,059 132,425 3.60% 138,772
----------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities $206,985 $ 81,248 $39,558 $ 2,554 $ 899 $243,429 $574,673 $582,709
----------------------------------------------------------------------------------------------------------------------------------
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and prepayment of principal. The prepayment
experience reflected herein is based on the Company's historical experience. The
actual maturities and run-off of
24
loans could vary substantially if future prepayments differ from the Company's
historical experience. For liabilities, expected maturities are contractual
maturities for time deposits and borrowings. Non-maturity liabilities have
estimated maturities based on an analysis that considers the historic stability
of the balances and the competitiveness of the Company's pricing, for each
account type. At December 31, 2001, 90% of the Company's non-maturity consumer
and business type account balances were assumed to be core, or stable, with
maturities over 5 years. Non-maturity balances with public fund, or municipal
customers, were estimated to be 88% core, or stable, with maturities over 5
years. Non-maturity balances not considered to be core, are expected to mature
within the first year.
Item 8 - Financial Statements and Supplemental Data
Consolidated Statements of Condition (Dollars in thousands)
Assets Dec. 31, 2001 Dec. 31, 2000
Cash and due from banks $ 21,626 $ 19,274
Federal funds sold -- --
- ----------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 21,626 19,274
Held-to-maturity investment securities 7,371 10,223
Available-for-sale investment securities 265,319 212,855
- ----------------------------------------------------------------------------------------------------
Total Investment Securities 272,690 223,078
(fair value--$273,477 for 2001 and $223,220 for 2000)
Total Loans 375,842 316,112
Less: Unearned income 104 364
Less: Allowance for loan losses 4,478 3,370
- ----------------------------------------------------------------------------------------------------
Net Loans 371,260 312,378
Bank premises, furniture, and equipment 10,621 10,671
Accrued interest receivable 4,085 4,160
Other assets 12,589 11,226
- ----------------------------------------------------------------------------------------------------
Total Assets $692,871 $580,787
- ----------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 57,044 $ 52,195
Interest-bearing deposits 442,248 422,704
Total Deposits 499,292 474,899
Borrowings 132,425 46,086
Other liabilities 7,691 6,767
- ----------------------------------------------------------------------------------------------------
Total Liabilities 639,408 527,752
- ----------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock--par value $25.00 a share;
1,000,000 shares authorized, none issued;
Common stock--par value $1.00 a share;
10,000,000 shares authorized 3,815,305 and
3,815,305 shares issued, and 3,447,213 and 3,608,840
shares outstanding for 2001 and 2000, respectively 3,815 3,815
Surplus 7,096 7,096
Undivided profits 49,086 46,030
Accumulated other comprehensive income 1,243 702
Treasury stock, at cost; 368,092 and 206,465 shares, respectively (7,777) (4,608)
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 53,463 53,035
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $692,871 $580,787
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
25
Consolidated Statements of Income (Dollars in thousands)
Interest Income Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
Interest and fees on loans $29,028 $26,701 $22,923
Interest on investment securities:
U.S. Government and
Agency obligations 9,898 9,261 7,542
Obligations of states and
political subdivisions 2,649 2,411 2,636
Other 1,166 1,403 974
Interest on federal funds sold 383 286 433
- --------------------------------------------------------------------------------------------------
Total Interest Income 43,124 40,062 34,508
Interest Expense
Interest on deposits 16,073 16,977 13,621
Interest on borrowings 3,892 2,490 599
- --------------------------------------------------------------------------------------------------
Total Interest Expense 19,965 19,467 14,220
- --------------------------------------------------------------------------------------------------
Net Interest Income 23,159 20,595 20,288
Provision for loan losses 2,455 1,150 975
- --------------------------------------------------------------------------------------------------
Net Interest Income After Provision
For Loan Losses 20,704 19,445 19,313
Other Income
Trust and brokerage services 1,405 1,393 1,134
Service charges on deposit accounts 2,370 1,993 1,939
Investment securities gains 1,495 711 136
Other operating income 1,721 2,552 1,349
- --------------------------------------------------------------------------------------------------
Total Other Income 6,991 6,649 4,558
- --------------------------------------------------------------------------------------------------
Total Operating Income 27,695 26,094 23,871
Other Expenses
Salaries, wages, and employee benefits 11,264 10,414 9,112
Building, occupancy, and equipment 3,153 2,861 2,587
Other operating expense 5,550 5,362 4,926
- --------------------------------------------------------------------------------------------------
Total Other Expenses 19,967 18,637 16,625
- --------------------------------------------------------------------------------------------------
Income Before Income Taxes 7,728 7,457 7,246
Provision for income taxes 1,717 2,032 1,844
- --------------------------------------------------------------------------------------------------
Net Income $ 6,011 $ 5,425 $ 5,402
- --------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic $ 1.71 $ 1.52 $ 1.51
Diluted $ 1.70 $ 1.52 $ 1.51
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
26
Consolidated Statements of Comprehensive Income (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 6,011 $ 5,425 $ 5,402
Other comprehensive income net of taxes:
Unrealized net gains on securities:
Unrealized holding gains (losses) arising during the period 2,396 5,358 (5,155)
Less: Reclassification adjustment for gains included in net income (1,495) (711) (136)
- ------------------------------------------------------------------------------------------------------------------------
901 4,647 (5,291)
Income tax (provision) benefit (360) (1,859) 2,117
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 541 2,788 (3,174)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 6,552 $ 8,213 $ 2,228
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands)
Accumulated
Issued Other
For the Years Ended Common Common Undivided Comprehensive Treasury
Dec. 31, 2001, 2000, 1999 Shares Stock Surplus Profits Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 3,641,178 $3,641 $3,641 $43,864 $ 1,088 $(1,066) $51,168
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year 5,402 5,402
Change in unrealized net gain
on investment securities (3,174) (3,174)
Cash dividends, $.70 per share (2,498) (2,498)
Treasury stock purchased (1,653) (1,653)
Shares returned in lieu
of fractional shares (143)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 3,641,035 3,641 3,641 46,768 (2,086) (2,719) 49,245
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year 5,425 5,425
Change in unrealized net gain
on investment securities 2,788 2,788
Cash dividends, $.71 per share (2,534) (2,534)
5% stock dividend 174,270 174 3,455 (3,629) --
Treasury stock purchased (1,889) (1,889)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 3,815,305 3,815 7,096 46,030 702 (4,608) 53,035
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year 6,011 6,011
Change in unrealized net gain
on investment securities 541 541
Cash dividends, $.845 per share (2,955) (2,955)
Treasury stock purchased (3,169) (3,169)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 3,815,305 $3,815 $7,096 $49,086 $ 1,243 $(7,777) $53,463
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
27
Consolidated Statements of Cash Flows (Dollars in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Operating Activities Years Ended Dec. 31, 2001 2000 1999
Net income $ 6,011 $ 5,425 $ 5,402
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,455 1,150 975
Provision for depreciation 1,346 1,208 1,108
Increase in surrender value of life insurance (300) (469) (80)
Benefit for deferred income taxes (385) (225) (340)
(Accretion) amortization of investment security discounts and premiums, net (183) 168 929
Realized investment security gains (1,495) (711) (136)
Change in other assets and liabilities (372) 183 593
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,077 6,729 8,451
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities of investment securities, available-for-sale 67,362 29,667 44,572
Proceeds from maturities of investment securities, held-to-maturity 8,216 6,697 1,751
Proceeds from sales of investment securities 51,147 33,668 12,793
Purchase of investment securities, available-for-sale (168,393) (89,067) (84,451)
Purchase of investment securities, held-to-maturity (5,364) (4,471) (2,894)
Purchase of life insurance -- -- (7,500)
Net increase in loans (61,337) (31,503) (32,705)
Purchases of premises and equipment (1,296) (2,991) (1,707)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (109,665) (58,000) (70,141)
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase (decrease) in demand deposits, NOW accounts, and savings accounts 35,977 (5,930) 3,365
Net (decrease) increase in time deposits (11,584) 45,755 18,115
Net increase (decrease) in short-term borrowings 16,339 (139) 30,473
Net increase in long-term borrowings 70,000 15,000 --
Treasury stock purchased (3,169) (1,889) (1,653)
Cash dividends (2,623) (2,483) (2,510)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 104,940 50,314 47,790
- -------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2,352 (957) (13,900)
Cash and cash equivalents at beginning of year 19,274 20,231 34,131
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 21,626 $ 19,274 $ 20,231
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowings $ 20,131 $ 18,990 $ 13,855
Income taxes 2,020 2,362 2,322
Noncash investing activities:
Decrease (increase) in net unrealized gain/losses on
available-for-sale securities (901) (4,647) 5,291
Noncash financing activities:
Dividend declared and unpaid 1,000 668 617
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
28
NOTES TO CONSOLIDATED STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Alliance Financial Corporation (the Company) is a bank
holding company, which owns and operates Alliance Bank, N.A. The Company
provides financial services primarily to individuals, small- to medium-sized
businesses and government customers from 19 branches in Broome, Cortland,
Madison, Oneida, and Onondaga counties. The Bank has a substantially wholly
owned subsidiary, Alliance Preferred Funding Corp., which is engaged in
residential real estate activity.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
Use of Estimates in the Preparation of Financial Statements: The preparation of
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification: Certain amounts from prior years have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net income as previously reported.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
Investment Securities: The Company classifies investment securities as
held-to-maturity or available-for-sale. Held-to-maturity securities are those
that the Company has the intent and ability to hold to maturity, and are
reported at cost, adjusted for amortization of premiums and accretion of
discounts. Investment securities not classified as held-to-maturity are
classified as available-for-sale and are reported at fair value, with net
unrealized holding gains and losses reflected as a separate component of
shareholders' equity, net of the applicable income tax effect. None of the
Company's investment securities have been classified as trading securities.
Gains and losses on the sale of investment securities are based on the specific
identification method. Premiums and discounts on securities are amortized and
accreted into income using the interest method over the life of the security.
Securities Sold under Agreements to Repurchase: Repurchase agreements are
accounted for as collateralized borrowings, and the obligations to repurchase
securities sold are reflected as a liability in the statement of financial
condition, since the Company maintains effective control over the transferred
securities. The securities underlying the agreements remain in the investment
account.
Loans: Loans are stated at unpaid principal balances less the allowance for loan
losses, unearned interest income and net deferred loan origination fees and
costs.
Unearned income on certain installment loans is taken into income on the
actuarial method. Interest on all other loans is based upon the principal amount
outstanding. Interest on loans is accrued except when in management's opinion
the collectibility of interest is doubtful, at which time the accrual of
interest on the loan is discontinued.
Loan origination fees and certain direct loan origination costs are deferred
and the net amount is amortized as a yield adjustment over the life of the loan.
The Company is generally amortizing these amounts over the contractual life of
the related loans. However, for certain fixed-rate mortgage loans that are
generally made for a 20-year term, the Company has anticipated prepayments and
used an estimated life of 7.5 years.
Allowance for Loan Losses: The allowance for loan losses represents management's
best estimate of probable loan losses in the Company's loan portfolio.
Management's quarterly evaluation of the allowance for loan losses is a
comprehensive analysis that builds a total reserve by evaluating the risks
within each loan type, or pool, of similar loans. The Company uses a general
allocation methodology for all residential and consumer loan pools. This
methodology estimates a reserve for each pool based on the most recent
three-year loss rate, adjusted to reflect the expected impact that current
trends regarding loan growth, delinquency, losses, economic conditions, and
current interest rates are likely to have. For commercial loan pools, the
Company establishes a specific reserve allocation for all loans, which have been
risk rated under the Company's risk rating system, as substandard, doubtful, or
loss. The specific allocation is based on the most recent valuation of the loan
collateral and the customer's ability to pay. For all other commercial loans,
the Company uses the general allocation methodology that establishes a reserve
for each risk rating category. The general allocation methodology for commercial
loans considers the same factors that are considered when evaluating residential
mortgage and consumer loan pools. The combination of using both the general and
specific allocation methodologies reflects management's best estimate of the
probable loan losses in the Company's loan portfolio.
29
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally discounted at the
historical effective interest rate, except that all collateral-dependent loans
are measured for impairment based on fair value of the collateral.
Income Recognition on Impaired and Nonaccrual Loans: Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity of payment of principal or interest for a period of more than 90 days
unless they are well secured and are in the process of collection. While a loan
is classified as nonaccrual and the future collectibility of the recorded loan
balance is doubtful, collections of interest and principal are generally applied
as a reduction to principal outstanding.
Other Real Estate: Other real estate is comprised of real estate acquired
through foreclosure and is recorded at the lower of cost or fair value (net of
estimated costs to sell) at the date of acquisition.
Bank Premises, Furniture, and Equipment: Bank premises, furniture, and equipment
are stated at cost less accumulated depreciation computed principally using the
straight-line method over the estimated useful lives of the assets. Maintenance
and repairs are charged to operating expenses as incurred. The asset cost and
accumulated depreciation are removed from the accounts for assets sold or
retired and any resulting gain or loss is included in the determination of the
income.
Income Taxes: Provision for income taxes is based on taxes currently payable or
refundable and deferred income taxes on temporary differences between the tax
basis of assets and liabilities and their reported amount in the financial
statements. Deferred tax assets and liabilities are reported in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.
Trust Department Assets: Assets held in fiduciary or agency capacities for
customers are not included in the accompanying consolidated statements of
condition, since such items are not assets of the Company. Fees associated with
providing trust management services are recorded on a cash basis of income
recognition and are included in Other Income.
Earnings Per Share: Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding throughout each
year; 3,523,127, 3,569,073, and 3,576,728 for 2001, 2000, and 1999,
respectively. Diluted earnings per share gives the effect to weighted average
shares which would be outstanding assuming the exercise of options using the
treasury stock method. Weighted average shares outstanding adjusted for the
effect of the assumed exercise of stock options were 3,532,494, 3,579,114, and
3,577,109 for the years 2001, 2000, and 1999, respectively. For the year ending
December 31, 2001, basic earnings per share were $1.71 and diluted earnings per
share were $1.70. For the years ending December 31, 2000 and 1999, both basic
and diluted earnings per share were $1.52 and $1.51, respectively.
30
INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities at
December 31 are as follows:
(Dollars in Thousands)
Amortized Gross Unreal- Gross Unreal- Estimated
Held-to-Maturity--2001 Cost ized Gains ized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 7,371 $ 787 $ -- $ 8,158
- --------------------------------------------------------------------------------------------------------------------
Total $ 7,371 $ 787 $ -- $ 8,158
- --------------------------------------------------------------------------------------------------------------------
Available-for-Sale--2001
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S. government agencies $ 61,430 $1,146 $ 348 $ 62,228
Obligations of states and political subdivisions 48,009 910 232 48,687
Mortgage-backed securities 146,484 1,279 612 147,151
Other securities 1,513 33 105 1,441
- --------------------------------------------------------------------------------------------------------------------
Total $257,436 $3,368 $1,297 $259,507
- --------------------------------------------------------------------------------------------------------------------
Stock Investments
Federal Home Loan Bank 4,830 -- -- 4,830
Federal Reserve Bank and others 982 -- -- 982
- --------------------------------------------------------------------------------------------------------------------
Total stock investment 5,812 -- -- 5,812
- --------------------------------------------------------------------------------------------------------------------
Total available-for-sale $263,248 $3,368 $1,297 $265,319
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 2,071
- --------------------------------------------------------------------------------------------------------------------
Grand total carrying value $272,690
- --------------------------------------------------------------------------------------------------------------------
Held-to-Maturity--2000
- --------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 10,223 $ 142 $ -- $ 10,365
- --------------------------------------------------------------------------------------------------------------------
Total $ 10,223 $ 142 $ -- $ 10,365
- --------------------------------------------------------------------------------------------------------------------
Available-for-Sale--2000
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S. government agencies $ 50,911 $ 725 $ 98 $ 51,538
Obligations of states and political subdivisions 44,289 766 59 44,996
Mortgage-backed securities 93,447 367 401 93,413
Other securities 18,917 175 304 18,788
- --------------------------------------------------------------------------------------------------------------------
Total $207,564 $2,033 $ 862 $208,735
- --------------------------------------------------------------------------------------------------------------------
Stock Investments
Federal Home Loan Bank 3,310 -- -- 3,310
Federal Reserve Bank and others 810 -- -- 810
- --------------------------------------------------------------------------------------------------------------------
Total stock investment 4,120 -- -- 4,120
- --------------------------------------------------------------------------------------------------------------------
Total available-for-sale $211,684 $2,033 $ 862 $212,855
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 1,171
- --------------------------------------------------------------------------------------------------------------------
Grand total carrying value $223,078
- --------------------------------------------------------------------------------------------------------------------
31
The carrying value and estimated market value of debt securities at
December 31, 2001 by contractual maturity are shown below. The maturities of
mortgage-backed securities are based on average life of the security. All other
expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
(Dollars In Thousands)
Held-to-Maturity Available-for-Sale
- --------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Cost Fair Value Amortized Cost Fair Value
- --------------------------------------------------------------------------------------------------
Due in one year or less $3,628 $4,014 $ 23,531 $ 23,740
Due after one year through five years 1,835 2,032 118,008 119,080
Due after five years through ten years 748 827 96,077 96,824
Due after ten years 1,160 1,285 19,820 19,863
- --------------------------------------------------------------------------------------------------
Total debt securities $7,371 $8,158 $257,436 $259,507
- --------------------------------------------------------------------------------------------------
At December 31, 2001 and 2000, investment securities with a carrying value of
$242,777 and $163,700, respectively, were pledged as collateral for certain
deposits and other purposes as required or permitted by law.
The Company recognized gross gains of $1,513, $738, and $154 for 2001,
2000, and 1999, respectively, and gross losses of $18, $27, and $18 for 2001,
2000, and 1999, respectively.
LOANS
Major classifications of loans at December 31 are as follows:
(Dollars In Thousands)
2001 2000
- ---------------------------------------------------------------
Commercial $126,801 $108,447
Real estate loans 142,307 119,948
Consumer loans 106,734 87,717
- ---------------------------------------------------------------
Total 375,842 316,112
- ---------------------------------------------------------------
Less: Unearned income 104 364
Less: Allowance for loan losses 4,478 3,370
- ---------------------------------------------------------------
Net loans $371,260 $312,378
- ---------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid balances of mortgage
loans serviced for others were $16,142, $15,766, and $16,612 at December 31,
2001, 2000, and 1999, respectively.
Substantially all of the Bank's loans are granted to borrowers concentrated
primarily within Cortland, Madison, Oneida, and Onondaga Counties.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31 are
summarized as follows:
(Dollars In Thousands)
2001 2000 1999
- -------------------------------------------------------------------
Balance at January 1 $3,370 $3,412 $3,001
Provision for loan losses 2,455 1,150 975
Recoveries credited 375 265 184
Subtotal 6,200 4,827 4,160
Less: Loans charged-off 1,722 1,457 748
- -------------------------------------------------------------------
Balance at December 31 $4,478 $3,370 $3,412
- -------------------------------------------------------------------
The average recorded investment in impaired loans was zero for the years ended
December 31, 2001, 2000, and 1999. The amount of nonaccrual loans for the years
ended December 31, 2001, 2000, and 1999 was $736, $686, and $682, respectively.
32
RELATED PARTY TRANSACTIONS
Directors and executive officers of the Company and their affiliated companies
were customers of, and had other transactions with, the Company in the ordinary
course of business during 2001. It is the Company's policy that all loans and
commitments included in such transactions are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and do not involve more than
normal risk of collectibility or present other unfavorable features. Loan
transactions with related parties are summarized as follows:
(Dollars In Thousands)
2001 2000
- ---------------------------------------------------------------------
Balance at beginning of year $ 9,825 $ 7,875
New loans and advances 1,229 4,281
Loan payments (1,362) (2,331)
- ---------------------------------------------------------------------
Balance at end of year $ 9,692 $ 9,825
- ---------------------------------------------------------------------
BANK PREMISES, FURNITURE, AND EQUIPMENT
Bank premises, furniture, and equipment at December 31 consist of the following:
(Dollars In Thousands)
2001 2000
- ---------------------------------------------------------------------
Land $ 1,223 $ 1,238
Bank premises 9,756 9,774
Furniture and equipment 13,161 11,933
- ---------------------------------------------------------------------
Subtotal 24,140 22,945
- ---------------------------------------------------------------------
Less: Accumulated depreciation 13,519 12,274
- ---------------------------------------------------------------------
Balance at end of year $10,621 $10,671
- ---------------------------------------------------------------------
DEPOSITS
The carrying amounts of deposits consisted of the following at December 31:
(Dollars In Thousands)
2001 2000
- ---------------------------------------------------------------------
Noninterest-bearing checking $ 57,044 $ 52,195
Interest-bearing checking 74,782 71,070
Savings accounts 68,538 65,957
Money market accounts 96,978 71,882
Time deposits 201,950 213,795
- ---------------------------------------------------------------------
Total deposits $499,292 $ 474,899
- ---------------------------------------------------------------------
The following table indicates the maturities of the Company's time deposits at
December 31:
2001 2000
- ----------------------------------------------------------------------
Due in one year $147,691 $184,865
Due in two years 41,248 21,842
Due in three years 9,558 3,768
Due in four years 2,554 2,191
Due in five years or more 899 1,129
- ---------------------------------------------------------------------
Total time deposits $201,950 $213,795
- ---------------------------------------------------------------------
Total time deposits in excess of $100 as of December 31, 2001 and 2000 were
$68,520 and $94,728, respectively.
33
BORROWINGS
The following is a summary of borrowings at December 31:
(Dollars In Thousands)
2001 2000
- ----------------------------------------------------------------------------------------------------------
Incurred Original Incurred Original
Date Amount Rate Term Date Amount Rate Term
- ----------------------------------------------------------------------------------------------------------
Securities sold under
repurchase agreements 12/31/01 $ 17,412 1.95% Demand 12/29/00 $ 6,936 6.00% Demand
Federal Home Loan
Bank term advances: 4/28/00 5,000 1.77% 2 years 4/28/00 5,000 6.43% 2 years
7/20/00 5,000 5.92% 10 years 7/20/00 5,000 5.92% 10 years
7/26/00 5,000 6.30% 10 years 7/26/00 5,000 6.30% 10 years
1/24/01 5,000 5.48% 2 years 9/5/00 5,000 6.76% 6 months
2/1/01 5,000 5.12% 2 years 12/1/00 5,000 6.53% 6 months
4/27/01 5,000 4.13% 10 years 12/28/00 6,750 6.42% 28 days
5/22/01 10,000 5.26% 3 years 12/29/00 5,000 6.89% 6 months
Repurchase agreements: 7/18/01 10,000 4.53% 2 years
7/18/01 10,000 4.99% 3 years
8/20/01 10,000 4.64% 3 years
9/26/01 20,000 3.49% 2 years
12/19/01 10,013 0.90% 30 days
12/20/01 15,000 1.87% 33 days
Federal Home Loan
Bank overnight advances -- -- Demand 2,400 5.85% Demand
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $132,425 $46,086
- ----------------------------------------------------------------------------------------------------------
Information related to borrowings at December 31 is as follows:
2001 2000
- -----------------------------------------------------------------------------
Maximum outstanding at any month end $132,425 $74,162
Average amount outstanding during the year $ 82,970 $39,155
- -----------------------------------------------------------------------------
Average interest rate during the year 4.69% 6.36%
- -----------------------------------------------------------------------------
Average amounts outstanding and average interest rates are computed using
monthly averages.
The Company offers retail repurchase agreements primarily to its larger business
customers. Under the terms of the agreement, the Company sells investment
portfolio securities to the customer agreeing to repurchase the securities at a
specified later date. The Company views the borrowing as a deposit alternative
for its business customers. The Company at December 31, 2001 had securities with
a carrying value of $20,406 pledged as collateral for these agreements.
At December 31, 2001 and 2000, the Company had available an overnight line
of credit and a one-month overnight repricing line of credit with the Federal
Home Loan Bank of New York (FHLB), that totaled $56,990 and $50,551,
respectively, of which $0 and $2,400 was outstanding as of December 31, 2001 and
2000, respectively. The Company also has access to the FHLB's Term Advance
Program under which it can borrow at various terms and interest rates.
Residential mortgage loans in the amount of $137,566 have been pledged by the
Company under a blanket collateral agreement to secure the Company's line of
credit and term borrowings. At December 31, 2001, the Company's total borrowing
capacity with the FHLB was $103,245.
Repurchase agreements outstanding at December 31, 2001 are at interest
rates ranging from 0.90% to 4.99%. The face value at December 31, 2001 of
investment securities pledged under repurchase agreements and other borrowings
approximated $82,750.
At December 31, 2001 and 2000, the Company had available $15,000 of lines
of credit with other financial institutions which were unused.
34
INCOME TAXES
The provision for income taxes for the years ended December 31 is summarized as
follows:
(Dollars In Thousands)
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Current tax expense $2,102 $2,257 $2,184
Deferred tax benefit (385) (225) (340)
- -------------------------------------------------------------------------------------------------
Total provision for income taxes $1,717 $2,032 $1,844
- -------------------------------------------------------------------------------------------------
The provision for income taxes includes the following:
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Federal income tax $1,422 $1,746 $1,628
New York State franchise tax 295 286 216
- -------------------------------------------------------------------------------------------------
Total $1,717 $2,032 $1,844
- -------------------------------------------------------------------------------------------------
The components of deferred income taxes, included in other liabilities, at
December 31, are as follows:
2001 2000
- -------------------------------------------------------------------------------------------------
Assets:
Allowance for loan losses $1,518 $ 977
Postretirement benefits 1,075 1,047
Deferred compensation 1,090 859
Other 63 335
- -------------------------------------------------------------------------------------------------
Total Assets $3,746 $3,218
- -------------------------------------------------------------------------------------------------
Liabilities:
Investment securities $ 845 $ 557
Depreciation 341 256
Other 187 56
- -------------------------------------------------------------------------------------------------
Total Liabilities $1,373 $ 869
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $2,373 $2,349
- -------------------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the effective
income tax rate for 2001, 2000, and 1999 is as follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State franchise tax, net of federal tax benefit 0.7% 1.7% 1.5%
Tax exempt income (12.0%) (11.0%) (10.3%)
Other, net (0.5%) 2.6% 0.3%
- -------------------------------------------------------------------------------------------------
Total 22.2% 27.3% 25.5%
- -------------------------------------------------------------------------------------------------
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
The Company provides retirement benefits through a defined contribution 401(k)
plan that covers substantially all of its employees. Prior to July 1, 1999, a
group of employees were covered by a noncontributory defined benefit pension
plan. That plan was terminated effective June 30, 1999 and following a
satisfactory review by the Internal Revenue Service, distributions of plan
participants benefit obligations were completed during the third quarter of
2000. As a result of the settlement, the Company received $1,239 and recognized
a net gain of $532 in other operating income. The pension plan had no assets
remaining at December 31, 2000. The Company also provides postretirement medical
and life insurance benefits to qualifying employees under a plan developed in
the fourth quarter of 1999. Benefits are available to full-time
35
employees who have worked 15 years and attained age 55. Retirees and certain
active employees with more than 20 years of service to the Company continue to
receive benefits in accordance with the former plans.
The following tables set forth the changes in the plan's benefit obligation,
fair value of plan assets, and prepaid (accrued) benefit cost as of December 31,
2001 and 2000:
(Dollars In Thousands)
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $-- $ 5,455 $ 3,096 $ 3,061
Service cost -- -- 65 54
Interest cost -- 137 226 223
Amendments, curtailments, special termination -- 686 -- --
Actuarial loss/(gain) -- -- 521 (96)
Benefits paid -- (6,278) (153) (146)
- -------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $-- $ -- $ 3,755 $ 3,096
- -------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $-- $ 7,098 $-- $--
Actual return on plan assets -- 419 -- --
Benefits paid -- (6,278) -- --
Transfer to plan sponsor -- (1,239) -- --
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $-- $ -- $-- $--
- -------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Components of prepaid/accrued benefit cost:
Funded status $-- $-- $(3,755) $(3,096)
Unrecognized transition obligation -- -- -- --
Unrecognized prior service cost -- -- (73) (85)
Unrecognized actuarial net loss -- -- 1,168 668
- -------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit obligation at
end of year $-- $-- $(2,660) $(2,513)
- -------------------------------------------------------------------------------------------------------
There were no plan assets at December 31, 2000.
Significant assumptions used in determining the benefit obligation as of
December 31, 2001 and 2000 are as follows:
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Weighted average discount rate -- -- 7.00% 7.50%
Expected long-term rate of return on plan assets -- -- -- --
For measurement purposes, with respect to the postretirement benefit plans, a
10.0 percent annual rate of increase in the per capita cost of covered health
care benefits is assumed for 2002. The rate is assumed to decrease gradually to
4.5 percent by the year 2010 and remain at that level thereafter.
36
The composition of the plan's net periodic cost for the years ended December 31
is as follows:
(Dollars In Thousands)
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Service cost $-- $ -- $ 148 $ 65 $ 54 $ 75
Interest cost -- 137 308 226 223 193
Amortization of transition obligation -- (44) (44) -- -- --
Amortization of unrecognized prior
service cost -- (8) (8) 8 15 22
Expected return on plan assets -- (156) (513) -- -- --
Special termination benefits/curtailment -- 529 260 -- -- --
- -------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $-- $458 $ 151 $299 $292 $290
- -------------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one percentage point change in assumed health
care cost trend rates would have the following effects:
One percentage One percentage
point increase point decrease
- ---------------------------------------------------------------------------------------------
Effect on total service and interest cost components 26 (22)
Effect on postretirement plan obligations 347 (290)
Contributions to the Company's 401(k) plan are determined by the Board of
Directors and are based on percentages of compensation for eligible employees.
Contributions are funded following the end of the plan (calendar) year. Company
contributions to the plan were $461, $470, and $440 in 2001, 2000, and 1999,
respectively.
DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company maintains optional deferred compensation plans for its directors,
whereby fees normally received are deferred and paid by the Company upon the
retirement of the director. At December 31, 2001 and 2000 other liabilities
included approximately $1,238 and $1,142, respectively, relating to deferred
compensation. Deferred compensation expense for the years ended December 31,
2001, 2000, and 1999 approximated $242, $162, and $191, respectively.
The Company has supplemental executive retirement plans for certain
employees. Included in other assets, the Company has segregated assets of $1,038
and $878 at December 31, 2001 and 2000, respectively, to fund the estimated
benefit obligation. At December 31, 2001 and 2000, other liabilities included
approximately $1,538 and $1,026 accrued under these plans. The benefit
obligation, service cost, and actuarial gain/(loss) were $1,624, $277, and ($8),
respectively, at December 31, 2001 and $1,339, $189, and ($272), respectively,
at December 31, 2000. Compensation expense includes approximately $302, $138,
and $65 relating to these plans at December 31, 2001, 2000, and 1999,
respectively.
37
STOCK OPTION PLAN
During November 1998, shareholders approved the 1998 long-term incentive
compensation plan. This plan authorized grants of options of up to 400,000
shares of authorized but unissued common stock of the Company. Under the plan,
the Board of Directors may grant incentive stock options, non-qualified stock
options, and restricted stock awards to officers, employees, and certain other
individuals. Of the 316,873 options outstanding at December 31, 2001, 7,000 have
a five-year term, were vested on issuance, and become exercisable based on the
Company achieving specified stock prices. The remaining options have a 10-year
term, with 289,873 of the options vesting one year after the issue date, and
exercisable based on the Company achieving specified stock prices. 20,000
options vest and become exercisable ratably over a three-year period.
The Company has elected to account for its stock-based compensation plan in
accordance with Accounting Principles Board Opinion No. 25 and accordingly, no
compensation cost has been recognized for stock options in the accompanying
consolidated financial statements. Had the Company determined compensation cost
based on the fair value of its stock options at the grant date under SFAS No.
123, the Company's net income and earnings per share would have been reduced to
pro forma amounts indicated in the following table:
2001 2000 1999
- --------------------------------------------------------------------------------------
Net Income (in thousands):
As reported $ 6,011 $ 5,425 $ 5,402
Pro forma 5,740 5,112 5,226
Earnings per share (basic):
As reported $ 1.71 $ 1.52 $ 1.51
Pro forma 1.63 1.43 1.46
Earnings per share (diluted):
As reported $ 1.70 $ 1.52 $ 1.51
Pro forma 1.62 1.43 1.46
The per share weighted average fair value of stock options granted during 2001,
2000, and 1999 was $4.77, $6.45, and $6.15, respectively. Fair values were
arrived at using the Black-Scholes option pricing model with the following
assumptions:
2001 2000 1999
- ---------------------------------------------------------------------------------------
Risk-free interest rate 4.62% 6.23% 5.32%
Expected dividend yield 3.00% 3.00% 2.00%
Volatility 31.70% 31.20% 28.50%
Expected life (years) 5 5 5
Activity in the plan for 2001, 2000, and 1999 was as follows:
Range of Weighted Average
Options Option Price Shares Exercise Price of
Outstanding Per Share Exercisable OPTIONS Outstanding
- --------------------------------------------------------------------------------------------------
1999
Beginning balance 100,000 $29.125 0 $29.125
Granted 10,000 $21.75 0 $21.75
Exercised 0 0 0 0
Forfeited 0 0 0 0
Ending balance 110,000 $21.75-$29.125 33,334 $28.45
2000
Granted 296,914 $17.75-$24.75 0 $22.66
Exercised 0 0 0 0
Forfeited 100,000 0 (33,334) $29.125
Ending balance 306,914 $17.75-$24.75 3,334 $22.63
2001
Granted 21,500 $18.25-$20.25 0 $19.08
Exercised 0 0 0 0
Forfeited 11,541 0 0 $24.75
Ending balance 316,873 $17.75-$24.75 71,750 $22.31
38
As of December 31, 2001, 6,667 of the options issued in 1999 were exercisable at
an exercise price of $21.75. The options have a remaining life of 7.20 years. As
of December 31, 2001, 18,333 and 39,750 options issued in 2000 were exercisable
at an exercise price of $18.50 and $17.75, respectively. As of December 31,
2001, 7,000 of the options issued in 2001 were exercisable at an exercise price
of $18.25. These options have a remaining life ranging from 4 to 9 years.
COMMITMENTS AND CONTINGENT LIABILITIES
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 consist primarily of commitments to extend credit
and letters of credit which involve, to varying degrees, elements of credit risk
in excess of amounts recognized in the consolidated statements of condition. The
contract amount of those commitments and letters of credit reflects the extent
of involvement the Company has in those particular classes of financial
instruments. The Company's exposure to credit loss in the event of
nonperformance by the counterparty to the financial instrument for commitments
to extend credit and letters of credit is represented by the contractual amount
of the instruments. The Company uses the same credit policies in making
commitments and letters of credit as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk:
(Dollars In Thousands)
Contract Amount
2001 2000
- -------------------------------------------------
Commitments to
extend credit $63,374 $46,057
Standby letters of credit $ 1,067 $ 346
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 payments of a fee. Since some of the commitment amounts are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Since the
letters of credit are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
For both commitments to extend credit and letters of credit, the amount of
collateral obtained, if deemed necessary by the Company upon the extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies, but includes residential and commercial real estate.
Principal operating leases are for bank premises. At December 31, 2001,
aggregate future minimum lease payments under noncancelable operating leases
with initial or remaining terms equal to or exceeding one year consisted of the
following: 2002-$405; 2003-$392; 2004-$318; 2005-$318; 2006-$318; and $1,870
thereafter. Total rental expenses amounted to $242 in 2001, $241 in 2000, and
$147 in 1999.
The Company is required to maintain a reserve balance as established by the
Federal Reserve Bank of New York. The required average total reserve for the
14-day maintenance period ended December 31, 2001 was $3,782.
DIVIDENDS AND RESTRICTIONS
The primary source of cash to pay dividends to the Company's shareholders is
through dividends from its banking subsidiary. The Federal Reserve Board and the
Office of the Comptroller of the Currency are authorized to determine certain
circumstances that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment of such dividends. The payment of dividends
that deplete a bank's capital base could be deemed to constitute such an unsafe
or unsound practice. Banking organizations may generally only pay dividends from
the combined current year and prior two years net income less any dividends
previously paid during that period. At December 31, 2001, approximately $5,800
was available for the declaration of dividends by the Bank. There were no loans
or advances from the subsidiary Bank to the Company at December 31, 2001.
39
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
of financial instruments, whether or not recognized in the statement of
condition, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying amounts and estimated fair values of financial instruments are as
follows:
Dec. 31, 2001 Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2000
Carrying Amount Fair Value Carrying Amount Fair Value
- ---------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 21,626 $ 21,626 $ 19,274 $ 19,274
Investment securities 272,690 273,477 223,078 223,220
Net loans 371,260 377,841 312,378 310,186
- ---------------------------------------------------------------------------------------------------
Total Financial Assets $665,576 $672,944 $554,730 $552,680
- ---------------------------------------------------------------------------------------------------
Financial Liabilities:
Deposits $499,292 $500,980 $474,899 $474,572
Borrowings 132,425 138,772 46,086 46,086
- ---------------------------------------------------------------------------------------------------
Total Financial Liabilities $631,717 $639,752 $520,985 $520,658
- ---------------------------------------------------------------------------------------------------
The fair value of commitments to extend credit and standby letters of credit is
not significant.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the consolidated
statements of condition for cash and short-term instruments approximate those
assets' fair value.
Investment Securities: Fair values for investment securities are based on quoted
market prices or dealer quotes.
Loans: Fair values for loans are estimated using discounted cash flow analysis,
based on interest rates approximating those currently being offered for loans
with similar terms and credit quality. The fair value of accrued interest
approximates carrying value.
Deposits: The fair values disclosed for noninterest-bearing accounts and
accounts with no stated maturity are, by definition, equal to the amount payable
on demand at the reporting date. The fair value of time deposits was estimated
by discounting expected monthly maturities at interest rates approximating those
currently being offered on time deposits of similar terms. The fair value of
accrued interest approximates carrying value.
Borrowings: The carrying amounts of short-term borrowings approximate their fair
value. The fair value of long-term borrowings are estimated using discounted
cash flow analysis, based on interest rates approximating those currently being
offered for borrowings with similar terms.
Off-balance-sheet Instruments: Off-balance-sheet financial instruments consist
of commitments to extend credit and standby letters of credit, with fair value
based on fees currently charged to enter into agreements with similar terms and
credit quality.
REGULATORY MATTERS
The Company and its banking subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the tables below) of total and Tier 1 Capital (as defined
in the regulations) to risk-weighted assets
40
(as defined) and of Tier 1 Capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2001, that the Company and its
subsidiary Bank met all capital adequacy requirements to which they are subject.
As of September 30, 2001, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as "well-capitalized," under
the regulatory framework for prompt corrective action. To be categorized as
"well-capitalized," the Bank must maintain total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the tables below. There are no
conditions or events since that notification that management believes have
changed the institution's category. The Company's actual capital amounts and
ratios are presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of December 31, 2001
Total Capital (to Risk-Weighted Assets) $56,698 13.08% $34,842 >/=8.00% $43,553 >/=10.00%
Tier I Capital (to Risk-Weighted Assets) 52,220 12.05% 17,421 >/=4.00% 26,132 >/= 6.00%
Tier I Capital (to Average Assets) 52,220 7.53% 25,947 >/=4.00% 32,433 >/= 5.00%
- ---------------------------------------------------------------------------------------------------
As of December 31, 2000
Total Capital (to Risk-Weighted Assets) $55,703 16.22% $27,466 >/=8.00% $34,333 >/=10.00%
Tier I Capital (to Risk-Weighted Assets) 52,333 15.24% 13,733 >/=4.00% 20,600 >/= 6.00%
Tier I Capital (to Average Assets) 52,333 9.46% 22,126 >/=4.00% 27,657 >/= 5.00%
- ---------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial information for the years ended December 31, 2001
and 2000 is as follows:
THREE MONTHS ENDED 3/31/01 6/30/01 9/30/01 12/31/01 3/31/00 6/30/00 9/30/00 12/31/00
- -------------------------------------------------------------------------------------------------------------------
Total interest income $10,571 $10,528 $11,211 $10,814 $9,276 $9,920 $10,213 $10,653
Total interest expense 5,609 5,073 4,944 4,339 4,161 4,642 5,138 5,526
Net interest income 4,962 5,455 6,267 6,475 5,115 5,278 5,075 5,127
Provision for loan losses 590 490 585 790 250 300 300 300
Noninterest income 2,017 1,698 1,362 1,914 1,332 1,420 2,105 1,792
Noninterest expense 4,915 4,912 4,983 5,157 4,382 4,485 4,871 4,899
Income before
income taxes 1,474 1,751 2,061 2,442 1,815 1,913 2,009 1,720
Provision for
income taxes 309 391 459 558 481 507 669 375
Net Income 1,165 1,360 1,602 1,884 1,334 1,406 1,340 1,345
Earnings per share:
Basic $ 0.32 $ 0.38 $ 0.46 $ 0.55 $ 0.38 $ 0.40 $0.37 $0.37
Diluted $ 0.32 $ 0.38 $ 0.46 $ 0.54 $ 0.38 $ 0.40 $0.37 $0.37
- -------------------------------------------------------------------------------------------------------------------
41
Parent Company Financial Information
Condensed financial statement information of Alliance Financial Corporation is
as follows:
Balance Sheets
Assets Dec. 31, 2001 Dec. 31, 2000
- ---------------------------------------------------------------------------
Investment in subsidiary Bank $ 53,343 $ 50,768
Cash 919 2,907
Investment securities 201 28
- ---------------------------------------------------------------------------
Total Assets $ 54,463 $ 53,703
- ---------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------
Dividends payable 1,000 668
- ---------------------------------------------------------------------------
Total Liabilities 1,000 668
- ---------------------------------------------------------------------------
Shareholders' Equity
Common stock 3,815 3,815
Surplus 7,096 7,096
Undivided profits 49,086 46,030
Accumulated other comprehensive income 1,243 702
Treasury stock (7,777) (4,608)
- ---------------------------------------------------------------------------
Total Shareholders' Equity $ 53,463 $ 53,035
- ---------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 54,463 $ 53,703
- ---------------------------------------------------------------------------
42
Statements of Income
Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
- -------------------------------------------------------------------------------------------------------------------
Dividend income from subsidiary Bank $ 4,000 $ 4,500 $ 2,500
Investment income 6 9 7
Gain on the sale of securities -- 181 --
Operating expenses (29) (19) (122)
- -------------------------------------------------------------------------------------------------------------------
3,977 4,671 2,385
Equity in undistributed income
of subsidiary 2,034 754 3,017
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 6,011 $ 5,425 $ 5,402
- -------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 6,011 $ 5,425 $ 5,402
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed net income
of subsidiary (2,034) (754) (3,017)
Realized investment security gains -- (181) --
Decrease in other liabilities -- -- (246)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,977 4,490 2,139
Investing Activities
Purchase of investment securities, available-for-sale (173) (128) (240)
Proceeds from sales of investment securities,
available-for-sale -- 548 --
- -------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (173) 420 (240)
Financing Activities
Treasury stock purchased (3,169) (1,889) (1,653)
Cash dividends paid (2,623) (2,483) (2,510)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (5,792) (4,372) (4,163)
- -------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (1,988) 538 (2,264)
Cash and Cash Equivalents at Beginning of Year 2,907 2,369 4,633
Cash and Cash Equivalents at End of Year $ 919 $ 2,907 $2,369
Supplemental Disclosures of Cash Flow Information:
Noncash financing activities:
Dividend declared and unpaid $1,000 $ 668 $ 617
On October 26, 2001 the Company's Board of Directors adopted a shareholders
rights plan. Under the plan, Series A Junior Participating Preferred Stock
Purchase Rights were distributed at the close of business on October 29, 2001 to
shareholders of record as of that date. The Rights trade with the Common Stock,
and are exercisable and trade separately from the Common Stock only if a person
or group acquires or announces a tender or exchange offer that would result in
such person or group owning 20 percent or more of the Common Stock of the
Company. In the event the person or group acquires a 20 percent Common Stock
position, the Rights allow other holders to purchase stock of the Company at a
discount to market value. The Company is generally entitled to redeem the Rights
at $.001 per Right at any time prior to the 10th day after a person or group has
acquired a 20 percent Common Stock position. The Rights will expire on October
29, 2011 unless the plan is extended or the Rights are earlier redeemed or
exchanged.
43
REPORT OF INDEPENDENT ACCOUNTANTS
Audit and Compliance Committee and
Shareholders of Alliance Financial Corporation
In our opinion, the accompanying consolidated statement of condition and
the related consolidated statements of income, changes in shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Alliance Financial Corporation and Subsidiaries at December 31, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
January 18, 2002
REPORT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
Annual Report on Form 10-K, including the determination of amounts that must
necessarily be based on judgments and estimates. It is the belief of management
that the consolidated financial statements have been prepared in conformity, in
all material respects, with generally accepted accounting principles appropriate
in the circumstances and that the financial information appearing throughout
this annual report is consistent, in all material respects, with the
consolidated financial statements.
Management depends upon the Company's system of internal accounting
controls in meeting its responsibility for reliable financial statements. This
system is designed to provide reasonable assurance that assets are safeguarded
and that transactions are executed in accordance with management's authorization
and are properly recorded.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the Company's management, internal auditors
and independent auditors, PricewaterhouseCoopers LLP, to review matters relating
to the quality of financial reporting, internal accounting control, and the
nature, extent, and results of audit efforts. The internal auditors and
independent auditors have unlimited access to the Audit Committee to discuss all
such matters.
/s/ Jack H. Webb /s/ David P. Kershaw
---------------- --------------------
Chairman & CEO Chief Financial Officer & Treasurer
44
Item 9 -- Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10 -- Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by reference to
the sections entitled "Information Concerning Nominees for Directors, Directors
Continuing in Office and Additional Executive Officers" and "Section 16 (a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement.
Item 11 -- Executive Compensation
The information required by this Item 11 is incorporated herein by reference to
the section entitled "Executive Compensation" in the Company's Proxy Statement.
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is incorporated herein by reference to
the section entitled "Information Concerning Nominees for Directors, Directors
Continuing in Office and Additional Executive Officers" in the Company's Proxy
Statement.
Item 13 -- Certain Relationships and Related Transactions
The information required by this Item 13 is incorporated herein by reference to
the section entitled "Transactions with Management" in the Company's Proxy
Statement.
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) The following financial statements are included in Item 8:
Consolidated Statements of Condition at December 31, 2001 and 2000.
Consolidated Statements of Income For Each of the Three Years in the
Period Ended December 31, 2001. Consolidated Statements of
Comprehensive Income For Each of the Three Years in the Period Ended
December 31, 2001. Consolidated Statements of Shareholders' Equity For
Each of the Three Years in the Period Ended December 31, 2001.
Consolidated Statements of Cash Flows For Each of the Three Years in
the Period Ended December 31, 2001. Notes to Consolidated Financial
Statements. Independent Accountants' Report. Report of Management's
Responsibility.
(2) Financial statement schedules are omitted from this Form 10-K since
the required information is not applicable to the Company.
(3) Listing of Exhibits:
The following documents are filed as Exhibits to this Form 10-K or are
incorporated by reference to the prior filings of the Company with the
Securities and Exchange Commission.
FORM 10-K
Exhibit
Number Exhibit
3.1 Amended and Restated Certificate of Incorporation of the Company(1)
3.2 Amended and Restated Bylaws of the Company(1)
10.1 Stock Option Agreement, dated as of July 10, 1998, between Cortland
First (as the issuer) and Oneida Valley (as the grantee)(2)
45
10.2 Stock Option Agreement, dated as of July 10, 1998, between Oneida Valley
(as the issuer) and Cortland First (as the grantee)(2)
10.3 Form of Voting Agreement, dated as of July 10, 1998, between Cortland
First Directors and Oneida Valley(2)
10.4 Form of Voting Agreement, dated as of July 10, 1998, between Oneida
Valley Directors and Cortland First(2)
10.5 Employment Agreement, dated as of November 25, 1998, between the Company
and David R. Alvord(1)
10.6 Employment Agreement, dated as of November 25, 1998, between the Company
and John C. Mott(1)
10.7 Alliance Financial Corporation 1998 Long Term Incentive Compensation
Plan(1)
10.8 Change of Control Agreement, dated as of February 16, 1999, by and among
the Company, First National Bank of Cortland, Oneida Valley National
Bank, and David P. Kershaw(3)
10.9 Change of Control Agreement, dated as of February 16, 1999, by and among
the Company, First National Bank of Cortland, Oneida Valley National
Bank, and James W. Getman(3)
10.10 Directors Compensation Deferral Plan of the Company(4)
10.11 Employment Agreement, dated as of May 1, 2000, by and among the Company,
Alliance Bank, N.A. and Jack H. Webb(5)
10.12 Supplemental Retirement Agreement, dated as of May 1, 2000, by and among
the Company, Alliance Bank, N.A. and Jack H. Webb(5)
10.13 First National Bank of Cortland Excess Benefit Plan for David R. Alvord,
dated December 31, 1991, and all amendments thereto(6)
10.14 Oneida Valley National Bank Supplemental Retirement Income Plan for John
C. Mott, dated September 1, 1997, and all amendments thereto(7)
21 List of the Company's Subsidiaries(7)
23 Consent of PricewaterhouseCoopers LLP(7)
(1) Incorporated herein by reference to the exhibit with the same number to the
Registration Statement on Form S-4 (Registration No. 333-62623) of the
Company previously filed with the Securities and Exchange Commission (the
"Commission") on August 31, 1998, as amended.
(2) Incorporated herein by reference to the exhibit with the same number to the
Current Report on Form 8-K of the Company (File No. 0-15366) filed with the
Commission on July 22, 1998.
(3) Incorporated herein by reference to the exhibit numbers 10.1 and 10.2 to
quarterly reports on Form 10-Q of the Company (File No. 0-15366) filed with
the Commission on May 17, 1999.
(4) Incorporated herein by reference to the exhibit number 10.1 to quarterly
reports on Form 10-Q of the Company (File No. 0-15366) filed with the
Commission on August 13, 1999.
(5) Incorporated herein by reference to the exhibit number 10.1 and 10.2 to
quarterly reports on Form 10-Q of the Company (File No. 0-15366) filed with
the Commission on August 14, 2000.
(6) Incorporated herein by reference to the exhibit number 10.13 to annual
reports on Form 10-K of the Company (File No. 0-15366) filed with the
Commission on March 30, 2001.
(7) Filed herewith
46
Item 14 (b) -- Reports on Form 8-K
On October 25, 2001, the Company filed a Current Report on Form 8-K to
report the adoption of a shareholder rights plan and the distribution of
associated preferred share purchase rights to shareholders of the Company.
Item 14 (c)
See Item 14 (a) (3) above.
Item 14 (d)
See Item 14 (a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALLIANCE FINANCIAL CORPORATION
(Registrant)
Date March 29, 2002 By /s/ Jack H. Webb
------------------- -------------------------------------------
Jack H. Webb, Chairman, President & CEO
(Principal Executive Officer)
Date March 29, 2002 By /s/ David P. Kershaw
------------------- -------------------------------------------
David P. Kershaw, Treasurer & CFO
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant, and
in the capacities and on the dates indicated.
/s/ Mary Pat Adams Date March 26, 2002
- ---------------------------------- --------------------
Mary Pat Adams, Director
/s/ Donald S. Ames Date March 26, 2002
- ---------------------------------- --------------------
Donald S. Ames, Secretary and Director
/s/ John H. Buck Date March 26, 2002
- ---------------------------------- --------------------
John H. Buck, Director
/s/ Donald H. Dew Date March 26, 2002
- ---------------------------------- --------------------
Donald H. Dew, Director
Date
- ---------------------------------- --------------------
Peter M. Dunn, Director
/s/ David P. Kershaw Date March 26, 2002
- ---------------------------------- --------------------
David P. Kershaw, Treasurer and Director
(Principal Financial and Accounting Officer)
Date
- ---------------------------------- --------------------
Samuel J. Lanzafame, Director
Date
- ---------------------------------- --------------------
Robert M. Lovell, Director
47
/s/ Margaret G. Ogden Date March 26, 2002
- ---------------------------------- --------------------
Margaret G. Ogden, Director
/s/ Charles E. Shafer Date March 26, 2002
- ---------------------------------- --------------------
Charles E. Shafer, Director
/s/ Charles H. Spaulding Date March 26, 2002
- ---------------------------------- --------------------
Charles H. Spaulding, Director
/s/ Paul M. Solomon Date March 26, 2002
- ---------------------------------- --------------------
Paul M. Solomon, Director
/s/ David J. Taylor Date March 26, 2002
- ---------------------------------- --------------------
David J. Taylor, Director
/s/ Jack H. Webb Date March 26, 2002
- ---------------------------------- --------------------
Jack H. Webb, Chairman, President
& CEO and Director
(Principal Executive Officer)
48