UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 0-15366
ALLIANCE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
New York 16-1276885
(State or other jurisdiction of (IRS Employer I.D. #)
incorporation or organization)
120 Madison Street, Syracuse, New York 13202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (315) 475-4478
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 |_|
The number of shares outstanding of the Registrant's common stock on November
14, 2002: Common Stock, $1.00 Par Value - 3,453,713 shares.
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of September 30, 2002
(unaudited) and December 31, 2001
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2002 and 2001 and Nine Months Ended
September 30, 2002 and 2001 (unaudited)
Consolidated Statements of Changes in Shareholders' Equity for
the Nine Months Ended September 30, 2002 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIANCE FINANCIAL CORPORATION
Consolidated Statements of Condition
(Dollars in Thousands)
September 30, 2002 December 31,
(Unaudited) 2001
ASSETS
Cash and due from banks $ 20,528 $ 21,626
Federal funds sold -- --
--------- ---------
Total cash and cash equivalents 20,528 21,626
Held-to-maturity investment securities 6,548 7,371
Available-for-sale investment securities 301,805 265,319
--------- ---------
Total investment securities (fair value
$309,098 & $273,477, respectively) 308,353 272,690
Total loans & leases 412,858 375,842
Unearned income (51) (104)
Allowance for loan and lease losses (5,114) (4,478)
--------- ---------
Net loans & leases 407,693 371,260
Bank premises, furniture, and equipment 10,457 10,621
Other assets 18,709 16,674
--------- ---------
Total Assets $ 765,740 $ 692,871
========= =========
LIABILITIES
Non-interest-bearing deposits $ 55,238 $ 57,044
Interest-bearing deposits 495,995 442,248
--------- ---------
Total deposits 551,233 499,292
Borrowings 142,228 132,425
Other liabilities 10,516 7,691
--------- ---------
Total Liabilities 703,977 639,408
SHAREHOLDERS' EQUITY
Preferred stock (par value $25.00)
1,000,000 shares authorized, none issued
Common stock (par value $1.00)
10,000,000 shares authorized
3,827,805 and 3,815,305 shares issued;
3,453,713 and 3,447,213 shares
outstanding, respectively 3,828 3,815
Surplus 7,306 7,096
Undivided profits 52,131 49,086
Accumulated other comprehensive income 6,418 1,243
Treasury stock, at cost; 374,092 shares
and 368,092 shares, respectively (7,920) (7,777)
--------- ---------
Total Shareholders' Equity 61,763 53,463
Total Liabilities & Shareholders' Equity $ 765,740 $ 692,871
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
ALLIANCE FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Interest Income:
Interest & fees on loans & leases $ 7,148 $ 7,523 $ 21,086 $ 21,819
Interest on investment securities 3,641 3,679 10,926 10,111
Interest on federal funds sold 9 9 27 380
---------- ---------- ---------- ----------
Total Interest Income 10,798 11,211 32,039 32,310
Interest Expense:
Interest on deposits 2,802 3,728 8,305 12,962
Interest on borrowings 1,303 1,216 3,784 2,664
---------- ---------- ---------- ----------
Total Interest Expense 4,105 4,944 12,089 15,626
Net Interest Income 6,693 6,267 19,950 16,684
Provision for loan and lease losses 480 585 1,575 1,665
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Losses 6,213 5,682 18,375 15,019
Other Income 1,875 1,362 5,157 5,077
---------- ---------- ---------- ----------
Total Operating Income 8,088 7,044 23,532 20,096
Other Expenses 5,717 4,983 16,757 14,810
---------- ---------- ---------- ----------
Income Before Income Taxes 2,371 2,061 6,775 5,286
Provision for income taxes 608 459 1,697 1,159
---------- ---------- ---------- ----------
Net Income $ 1,763 $ 1,602 $ 5,078 $ 4,127
========== ========== ========== ==========
Net Income per Common Share - Basic $ .51 $ .46 $ 1.47 $ 1.16
========== ========== ========== ==========
Net Income per Common Share - Diluted $ .51 $ .46 $ 1.46 $ 1.16
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
ALLIANCE FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2002
(Unaudited)
(Dollars in Thousands)
Accumulated
Other
Issued Compre-
Common Common Undivided hensive Treasury
Shares Stock Surplus Profits Income Stock Total
------ ----- ------- ------- ------ ----- -----
Balance at December 31, 2001 3,815,305 $3,815 $7,096 $49,086 $1,243 $(7,777) $53,463
Comprehensive income
Net Income 5,078 5,078
Other comprehensive income, net of taxes:
Unrealized appreciation in
available for sale securities, net of
reclassification adjustment 5,175 5,175
-------
Comprehensive income 10,253
Stock options exercised 12,500 13 210 223
Cash dividend, $.59 per share (2,033) (2,033)
Treasury stock purchased (143) (143)
Balance at September 30, 2002 3,827,805 $3,828 $7,306 $52,131 $ 6,418 $(7,920) $61,763
====== ====== ======== ======= ======== =======
The accompanying notes are an integral part of the financial statements.
ALLIANCE FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
2002 2001
-------- ---------
OPERATING ACTIVITIES
Net Income $ 5,078 $ 4,127
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan and lease losses 1,575 1,665
Provision for depreciation 1,085 995
Realized investment security gains (671) (963)
Realized gain on the sale of assets (6) --
Amortization (accretion) of investment security premiums and discounts, net 327 (5)
Change in other assets and liabilities (1,986) (1,720)
-------- ---------
Net Cash Provided by Operating Activities 5,402 4,099
INVESTMENT ACTIVITIES
Proceeds from maturities of investment securities,
available-for-sale 39,320 49,194
Proceeds from maturities of investment securities,
held-to-maturity 2,322 5,170
Purchase of investment securities, available-for-sale (94,190) (135,435)
Purchase of investment securities, held-to-maturity (1,499) (4,313)
Proceeds from the sale of investment securities 27,353 35,211
Increase in surrender value of life insurance (364) (180)
Net increase in loans & leases (45,978) (65,893)
Proceeds from the sale of loans 7,970 420
Purchase of premises and equipment, net (915) (791)
-------- ---------
Net Cash Used by Investing Activities (65,981) (116,617)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW & savings accounts 20,678 27,985
Net increase in time deposits 31,263 12,883
Net increase in short-term borrowings 14,803 15,186
Net (decrease) increase in long-term borrowings (5,000) 60,000
Proceeds from the exercise of stock options 223 --
Treasury Stock purchased (143) (2,910)
Cash dividends (2,343) (1,984)
-------- ---------
Net Cash Provided by Financing Activities 59,481 111,160
Decrease in Cash and Cash Equivalents (1,098) (1,358)
Cash and cash equivalents at beginning of year 21,626 19,274
-------- ---------
Cash and Cash Equivalents at End of Period $ 20,528 $ 17,916
-------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 12,078 $ 15,514
Income taxes 2,305 1,400
Non-Cash Investing Activities:
Increase in net unrealized gains/losses on
available-for-sale securities (8,625) (6,124)
Non-Cash Financing Activities:
Dividend declared and unpaid 690 642
The accompanying notes are an integral part of the consolidated financial
statements.
ALLIANCE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited financial statements were prepared in
accordance with the instructions for Form 10-Q and Regulation S-X and,
therefore, do not include information for footnotes necessary for a
complete presentation of financial condition, results of operations, and
cash flows in conformity with generally accepted accounting principles.
The following material under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written with
the presumption that the users of the interim financial statements have
read, or have access to, the latest audited financial statements and notes
thereto of the Company, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations as of December 31, 2001
and for the three-year period then ended, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. Accordingly,
only material changes in the results of operations and financial condition
are discussed in the remainder of Part I.
All adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial statements have been included in the
results of operations for the three months and nine months ended September
30, 2002 and 2001.
B. Earnings Per Share
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding throughout the three
months and nine months ended September 30, 2002 and 2001, using 3,450,324
and 3,489,662 weighted average common shares outstanding for the three
months ended, and 3,446,652 and 3,545,932 weighted average common shares
outstanding for the nine months ended, 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 for the three months and nine
months ended September 30, 2002 and 2001, adjusted for the effect of the
assumed exercise of stock options, were 3,484,357 and 3,498,215 for the
three months ended and 3,476,088 and 3,551,962 for the nine months ended,
respectively.
C. Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's best
estimate of probable loan and lease losses in the Company's loan
portfolio. Management's quarterly evaluation of the allowance for loan and
lease losses is a comprehensive analysis that builds a total reserve by
evaluating the risks within each loan and lease type, or pool, of similar
loans and leases. 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 and lease pools, the Company
establishes a specific reserve allocation for all loans and leases, 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 or lease collateral and the customer's
ability to pay. For all other commercial loans and leases, the Company
uses the general allocation methodology that establishes a reserve for
each risk-rating category. The general allocation methodology for
commercial loans and leases 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 and
lease losses in the Company's loan and lease portfolio.
A loan or lease 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 or lease agreement. The measurement of
impaired loans and leases is generally discounted at the historical
effective interest rate, except that all collateral-dependent loans and
leases are measured for impairment based on fair value of the collateral.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Throughout this analysis, the term "the Company" refers to the consolidated
entity of Alliance Financial Corporation, its wholly-owned banking subsidiary,
Alliance Bank, N.A. (the "Bank"), and the Bank's subsidiaries, Alliance
Preferred Funding Corp. and Alliance Leasing, Inc.. The Company is a New York
corporation, which was formed in November 1998 as a result of the merger of
Cortland First Financial Corporation and Oneida Valley Bancshares, Inc.
The following discussion presents material changes in the Company's results of
operations and financial condition during the three and nine months ended
September 30, 2002, which are not otherwise apparent from the consolidated
financial statements included in this report.
This discussion and analysis contains certain forward-looking statements (within
the meaning of the Private Securities Litigation Reform Act of 1995) with
respect to the financial condition, results of operations and business of the
Company. 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 pressures in the banking
industry; (2) changes in the interest rate environment that reduce margins; (3)
changes in the regulatory environment; (4) general economic conditions, either
nationally or regionally, that 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) possible inability to
maintain and increase market share and control expenses; and (9) other factors
detailed from time to time in the Company's SEC filings.
Operating results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Net income was $1,763,000, or $0.51 per share, for the third quarter of 2002
compared to $1,602,000, or $0.46 per share, for the same period in 2001. Net
income increased $161,000, or 10%, while earnings per share were up $0.05, or
10.9%, over the comparable period. The return on average assets and return on
average shareholder's equity were 0.93% and 11.80%, respectively, for the three
months ended September 30, 2002, compared to 0.94% and 11.90%, respectively, for
the third quarter of 2001.
For the nine months ended September 30, 2002, net income was $5,078,000, or
$1.46 per diluted share, compared to $4,127,000, or $1.16 per share, for the
same period in 2001. The $951,000 increase in net income is up 23% over the same
period in the previous year, while the diluted earnings per share increase of
$0.30 represents a 25.9% increase over the comparable period. The return on
average assets increased to 0.92% from 0.87%, while the return on average
shareholders' equity rose to 11.98% from 10.30%, when comparing the nine months
ended September 30, 2002 to the comparable period in 2001.
Analysis of Net Interest Income and the Net Interest Margin
For the three months ended September 30, 2002 compared to the three months ended
September 30, 2001, net interest income increased $426,000, or 6.8%, to
$6,693,000. The increase resulted as a $69,036,000 increase in average earning
assets generated additional income that was more than sufficient to offset the
negative impact of a net interest margin that declined from 4.16% for the
quarter ended September 30, 2001 to 4.00% for the quarter ended September 30,
2002. The increase in average earning assets is due to both strong growth across
all loan business lines, as well as significant increases in the investment
portfolio. The decline in the net interest margin for the comparable periods
resulted as lower market interest rates and competitive pricing pressures pushed
asset yields lower, and to a greater degree, than the Company's ability to
reduce the costs of interest bearing liabilities.
Total interest income declined $413,000, or 3.68%, for the quarter ended
September 30, 2002 compared to the quarter ended September 30, 2001. Loan and
lease income, that declined $375,000, or 4.98%, for the comparable periods, was
down primarily as a result of lower average loan and lease yields. Average loan
and lease yields declined 124 basis points with commercial loans and leases and
home equity dominated consumer loans most responsible for the overall yield
decline. An increase in average net loans and leases for the comparable periods
of $43,646,000, or 11.9%, with the growth most significant in home equity lines
of credit and indirect auto loans, generated additional income that helped
minimize the decline in total loan and lease income. The overall loan mix
reflected a 2% increase in indirect auto loans as a percentage of total loans
and leases, with a corresponding decline in commercial loans and leases.
Investment income declined only $38,000, or 1.03%, for the comparable periods as
increased earnings from a $24,235,000, or 9.09%, increase in average investments
nearly offset lower earnings resulting from a 55 basis point decline in the
average portfolio yield. The growth in investments, which was funded by
shorter-term borrowings, reflected attractive buying opportunities over the past
twelve months, both as to yield and as a spread over borrowings, and represented
an earnings strategy intended to leverage the Company's strong capital position.
Interest expense declined $839,000, or 17%, to $4,105,000 for the quarter ended
September 30, 2002 when compared to the same period in 2001, as lower market
interest rates positively impacted the average rate paid on interest bearing
liabilities, reducing it by 91 basis points. The decline in the average rate
paid on interest bearing liabilities, by far offset increased costs associated
with a $67,631,000, or 12%, increase in average interest bearing liabilities.
Although average interest bearing deposits for the comparable periods increased
$36,247,000, or 8%, deposit expense declined $926,000, as the average rate paid
on interest bearing deposits fell by 99 basis points. The lower average rate
paid was only slightly attributable to a change in the deposit mix, as 1% of
total deposits moved from time deposits to the lower rate savings and money
market category. Average time deposits for the most recent quarter were 42.7% of
total average deposits, and average savings and money market deposits
represented 32.8% of total average deposits. Average non-interest bearing demand
deposits remained stable for the comparable periods, but as a percentage of
total deposits, declined from 10.8% for the quarter ended September 30, 2001 to
10% for the quarter ended September 30, 2002. Although average borrowings
increased for the comparable periods $31,384,000, or 29.2%, interest expense on
the borrowings increased only $87,000, or 7.2%, as the average rate paid on
borrowings declined 78 basis points. The majority of the increase in borrowings
funded the increase in the investment portfolio.
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the average yields and rates thereon
for the periods indicated. 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.
For the three months ended September 30, 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Avg. Amt of Avg. Yield/ Avg. Amt of Avg. Yield/
Balance Interest Rate Paid Balance Interest Rate Paid
------- -------- --------- ------- -------- ---------
Assets:
Interest earning assets:
Federal Funds Sold $ 1,788 $ 9 2.01% $ 633 $ 9 5.69%
Taxable investment securities $234,106 $ 3,000 5.13% $ 213,209 $ 3,039 5.70%
Nontaxable investment securities $ 56,807 $ 971 6.84% $ 53,469 $ 970 7.25%
Loans & Leases (net of unearned discount) $410,375 $ 7,148 6.97% $ 366,729 $ 7,524 8.21%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 703,076 11,128 6.33% 634,040 11,542 7.28%
Noninterest earning assets:
Other assets 47,926 45,141
Less: Allowance for loan & lease losses (5,053) (3,997)
Net unrealized gains/(losses) on
available-for-sale portfolio 8,470 3,722
--------------- ----------------
Total $754,419 $ 678,906
=============== ================
Liabilities and Shareholders' Equity:
Interest bearing assets:
Demand deposits $ 79,559 $ 88 0.44% $ 72,765 $ 177 0.97%
Saving and money market deposits $178,995 $ 630 1.41% $ 159,009 $ 1,015 2.55%
Time deposits $233,281 $ 2,084 3.57% $ 223,814 $ 2,535 4.53%
Borrowings $138,863 $ 1,303 3.75% $ 107,479 $ 1,217 4.53%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 630,698 4,105 2.60% 563,067 4,944 3.51%
Noninterest bearing liabilities:
Demand deposits 54,699 54,993
Other liabilities 9,239 7,003
Shareholders' equity 59,783 53,843
--------------- ----------------
Total $754,419 $ 678,906
=============== ================
Net interest earnings (FTE) $ 7,023 $ 6,598
- -----------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 4.00% 4.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Federal tax exemption on non-taxable
investment securities included in interest income $ 330 $ 330
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 for
the periods indicated. Volume changes are computed by multiplying the volume
difference by the prior period's rate. Rate changes are computed by multiplying
the rate difference by the prior period's balance. The change in interest income
and expense due to both rate and volume has been allocated equally between the
volume and rate variances.
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 COMPARED TO 2001 2002 COMPARED TO 2001
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME RATE NET CHG VOLUME RATE NET CHG
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest earned on:
Federal funds sold $ 11 $ (11) $ -- $ (205) $ (148) $ (353)
Taxable investment securities 281 (320) (39) 2,156 (1,359) 797
Nontaxable investment securities 56 (56) -- 100 (81) 19
Loans & Leases (net of unearned discount) 828 (1,202) (374) 3,024 (3,758) (734)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 1,176 $ (1,589) $ (413) $ 5,075 $ (5,346) $ (271)
Interest paid on:
Interest-bearing demand deposits $ 12 $ (101) $ (89) $ 49 $ (345) $ (296)
Savings and money market deposits 98 (483) (385) 333 (1,938) (1,605)
Time deposits 97 (548) (451) (101) (2,656) (2,757)
Borrowings 325 (239) 86 2,314 (1,193) 1,121
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 532 $ (1,371) $ (839) $ 2,595 $ (6,132) $ (3,537)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest earnings (FTE) $ 644 $ (218) $ 426 $ 2,480 $ 786 $ 3,266
===================================================================================================================================
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the yields and rates thereon for the
periods indicated. 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.
For the nine months ended September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Avg. Amt of Avg. Yield/ Avg. Amt of Avg. Yield/
Balance Interest Rate Paid Balance Interest Rate Paid
------- -------- --------- ------- -------- ---------
Assets:
Interest earning assets:
Federal Funds Sold $ 1,939 $ 27 1.86% $ 9,587 $ 380 5.28%
Taxable investment securities $ 234,817 $ 9,006 5.11% $ 183,104 $ 8,209 5.98%
Nontaxable investment securities $ 54,473 $ 2,909 7.12% $ 52,545 $ 2,880 7.31%
Loans & Leases (net of unearned discount) $ 397,003 $ 21,086 7.08% $ 345,008 $ 21,820 8.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 688,232 33,028 6.40% 590,244 33,289 7.52%
Noninterest earning assets:
Other assets 47,395 44,731
Less: Allowance for loan & lease losses (4,828) (3,831)
Net unrealized gains/(losses) on
available-for-sale portfolio 4,889 2,491
-------------- -------------
Total $ 735,688 $ 633,635
============== =============
Liabilities and Shareholders' Equity:
Interest bearing assets:
Demand deposits $ 77,938 $ 324 0.55% $ 70,363 $ 620 1.17%
Saving and money market deposits $ 179,015 $ 1,953 1.45% $ 158,976 $ 3,558 2.98%
Time deposits $ 218,432 $ 6,028 3.68% $ 221,427 $ 8,784 5.29%
Borrowings $ 142,060 $ 3,784 3.55% $ 70,356 $ 2,664 5.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 617,445 12,089 2.61% 521,122 15,626 4.00%
Noninterest bearing liabilities:
Demand deposits 54,172 52,327
Other liabilities 7,547 6,768
Shareholders' equity 56,524 53,418
-------------- -------------
Total $ 735,688 $ 633,635
============== =============
Net interest earnings (FTE) $ 20,939 $ 17,663
- ------------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 4.06% 3.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Federal tax exemption on non-taxable
investment securities included in interest income $ 989 $ 979
For the nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001, net interest income increased $3,266,000, or 19.6%, to
$19,950,000. The increase resulted from a $97,988,000 increase in average
earning assets, as well as a 7 basis point increase in the net interest margin.
The increase in average earning assets for the comparable nine month periods
reflected significant growth in both loans and investments. The increase in the
margin is primarily due to lower market interest rates in 2002 impacting the
costs of liabilities more rapidly than yields on assets. Average earning asset
yields for the comparable periods declined 112 basis points while at the same
time the average cost of interest bearing liabilities declined 139 basis points.
Total interest income declined $271,000, or 0.8%, for the nine months ended
September 30, 2002 compared to the same period a year ago. Total interest income
declined for the comparable periods primarily as a result of lower yields on the
Company's loan and lease portfolio. Interest income from loans and leases
declined $733,000, or 3.4%, for the nine month period ending September 30, 2002
compared to the same period last year, as a 135 basis point decline in the
average yield negatively impacted the associated income to a greater degree than
the positive impact resulting from the $51,995,000 increase in average loans and
leases. Lower
yields on the Company's variable rate commercial loan and home equity line of
credit portfolios had the most significant impact on pushing the overall average
yield lower. With the lower market interest rates in 2002, the Company
significantly reduced its average short-term federal funds sold position
compared to the comparable prior year period, resulting in a $353,000 reduction
in interest income. An increase in investment income of $815,000, or 8.1%,
provided a partial offset to the decline in interest income from short-term
federal funds sold, and loan interest income. The increase in investment income
was attributable to a $53,641,000 increase in average investments that more than
offset a decline of 78 basis points in the average yield on the portfolio for
the comparable periods.
Interest expense declined $3,537,000, or 22.6%, for the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. The
lower interest expense resulted from the re-pricing of the majority of the
Company's interest bearing liabilities to the current lower market interest
rates. Deposit expense for the comparable periods declined $4,657,000, or 35.9%,
primarily the result of a decline of 150 basis points in the average rate paid
on interest bearing deposits. Average interest bearing deposits increased
$24,619,000, or 5.5%, for the comparable nine month periods, with the majority
of the growth in the lower cost NOW, savings and money market categories.
Average time deposits, as a percentage of total deposits, declined 2.8% for the
comparable periods, and averaged 41.3% of total deposits for the nine months
ended September 30, 2002. Interest expense on borrowings increased $1,120,000,
or 42%, primarily on the $71,704,000 increase in average borrowings. The
majority of the increase in borrowings funded investment purchases. With the
majority of the new borrowings at the lower market interest rates, the average
rate paid on borrowings declined 150 basis points to 3.55% for the nine month
period ended September 30, 2002.
Analysis of the Provision and Allowance for Loan and Lease Losses
A significant decline in net loans charged off during the quarter ended
September 30, 2002, continued a trend from this year's first and second
quarters, and allowed the Company to reduce the provision for loan and lease
losses expense by $105,000, or 18%, when compared to the quarter ended September
30, 2001. Net charge-offs for the quarter ended September 30, 2002 were
$251,000, declining 40% when compared to net charge-offs for the quarter ended
September 30, 2001. The level of the current quarter net charge-offs also showed
improvement when compared to net charge-offs of $289,000, representing 0.29% of
average loans and leases on an annualized basis for the quarter ended June 30,
2002, and $399,000, representing 0.41% of average loans and leases on an
annualized basis for the quarter ended March 31, 2002. The reduction in charge
offs almost entirely reflects efforts over the past eighteen months to improve
both underwriting and collection efforts in the indirect auto loan portfolio.
For the quarters ended September 30, 2002 and September 30, 2001, the ratio of
non-performing loans and leases to total loans and leases remained stable at a
level that was considered strong, and the ratio of the allowance for loan and
lease losses to non-performing loans and leases improved, reflecting an increase
in the level of the allowance. Delinquent loans (over 30 days past due and
non-accruing) as a percentage of total loans and leases averaged 1.18% for the
third quarter of 2002, compared to a rate that averaged 1.70% throughout 2001.
The following tables present loan quality ratios for the periods indicated and a
summary of the changes in the allowance for loan and lease losses arising from
loans charged-off and recoveries on loans previously charged-off and additions
to the allowance, which have been charged to expense for the periods indicated.
The Company reported no losses on leases during the quarter.
Three months ended Sept. 30, Nine months ended Sept. 30,
2002 2001 2002 2001
------------- -------------- ------------ ------------
Net Loans Charged-off to Average Loans & Leases, Annualized 0.24% 0.46% 0.32% 0.41%
Provision for Loan & Lease Losses to Average
Loans & Leases, Annualized 0.47% 0.64% 0.53% 0.64%
Allowance for Loan & Lease Losses to Period-end Loans 1.24% 1.05% 1.24% 1.05%
Allowance for Loan & Lease Losses to Nonperforming Loans 313.75% 258.16% 313.75% 258.16%
Nonperforming Loans to Period-end Loans & Leases 0.39% 0.40% 0.39% 0.40%
Nonperforming Assets to Period-end Assets 0.24% 0.24% 0.24% 0.24%
2002 2001 2002 2001
------------ ------------------ ------------- --------------
Allowance for Loan & Lease Losses, Beginning of Period $ 4,885 $ 3,810 $ 4,478 $ 3,370
Loans Charged-off (365) (554) (1,286) (1,352)
Recoveries of Loans Previously Charged-off 114 133 347 291
- --------------------------------------------------------------------------------------------------------------------------------
Net Loans Charged-off (251) (421) (939) (1,061)
- --------------------------------------------------------------------------------------------------------------------------------
Provision for Loan & Lease Losses 480 585 1,575 1,665
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan & Lease Losses, End of Period $ 5,114 $ 3,974 $ 5,114 $ 3,974
================================================================================================================================
For the nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001, the provision for loan and lease losses declined $90,000, or
5.4%. Similar to the quarterly results, the provision expense declined based on
improvement in loan portfolio quality indicators. The improvement in the ratio
of net charge offs to average loans and leases for the nine-month comparable
periods primarily reflects the decline in indirect auto loan losses during the
second and third quarters of 2002. For the nine months ended September 30, 2002,
the ratio of net indirect loans charged off as an annualized percentage of
average indirect loans, was 1.05%, down from 1.70% for the year ended December
31, 2001. As a result of the reduction in net losses during 2002, the provision
expense not only provided strong coverage for such losses, but was sufficient to
push the allowance for loan and lease losses as a percentage of period-end loans
and leases up 18% over the past year, to 1.24% at September 30, 2002.
Non-interest Income
The following table sets forth certain information on non-interest income for
the periods indicated:
(Dollars in thousands)
Three Months ended Sept. 30, Nine Months ended Sept. 30,
2002 2001 Change 2002 2001 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 588 $ 612 $ (24) -3.92% $ 1,696 $ 1,795 $ (99) -5.52%
Trust & brokerage services 311 332 (21) -6.33% 1,053 1,021 32 3.13%
Other operating income 701 581 120 20.65% 1,731 1,461 270 18.48%
- -----------------------------------------------------------------------------------------------------------------------------------
Core noninterest income $1,600 $1,525 $75 4.92% $4,480 $4,277 $203 4.75%
Investment securities gains 289 -- 289 0.00% 671 963 (292) -30.32%
Gain/(loss) on disposal of assets (14) (163) 149 0.00% 6 (163) 169 0.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $1,875 $1,362 $513 37.67% $5,157 $5,077 $80 1.58%
===================================================================================================================================
Core non-interest income for the quarter ended September 30, 2002 increased
$75,000, or 4.9%, when compared to the quarter ended September 30, 2001. Strong
growth in other income, attributed to increases in fees associated with greater
use of electronic banking services, and greater income from an increase in
mortgage sales, offset weaker income from service charges on deposits and trust
revenues. Service charge income was down as overdraft fee income declined on
lower overdraft volume. Weakness in the equity markets negatively impacted
portfolio values and the associated fees in the trust area. The significant
increase in total non-interest income for the comparable periods reflected the
investment security gains taken in the current quarter combined with a
nonrecurring loss in connection with a branch closing in the prior year.
For the nine months ended September 30, 2002, core non-interest income increased
$203,000, or 4.8%, compared to the nine months ended September 30, 2001. The
reasons for the changes in core non-interest income for the comparable periods
were similar to those impacting the third quarter results. Total non-interest
income for the comparable periods increased $80,000, or 1.6%, as the combination
of investment security gains and non-recurring items declined for the comparable
periods.
Non-interest Expense
Non-interest expense for the three months ended September 30, 2002 increased
$734,000 to $5,717,000 when compared to the quarter ended September 30, 2001.
Salary and employee benefit expenses increased in the third quarter of 2002
compared to the same period last year as a result of year over year salary
adjustments of approximately 3.5%, and a one-time adjustment to non-officer
salaries during the first quarter of 2002, following a comprehensive market
study designed to insure that the Company's compensation program was competitive
to attract and retain high performing employees. Higher costs associated with
employee health insurance programs also contributed to the increase. Increased
occupancy expense for the comparable periods reflects both higher lease and
depreciation costs associated with the third quarter 2001 opening of the
Company's new administrative offices, as well as increased costs supporting
further investment in information technology and communication systems.
Increases in other operating expenses related to higher marketing costs
associated with the development and launch of a new corporate image and branding
campaign, increased telephone expense related to a bank-wide upgrade to high
speed data communications, and higher costs of stationary and supplies relating
to the growth in loans and deposits.
The following table sets forth certain information on non-interest expense for
the periods indicated:
(Dollars in thousands)
Three Months ended Sept. 30, Nine Months ended Sept. 30,
2002 2001 Change 2002 2001 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries, wages, and employee benefits $ 3,274 $ 2,793 $481 17.22% $ 9,425 $ 8,402 $ 1,023 12.18%
Building, occupancy, and equipment 859 758 101 13.32% 2,605 2,348 257 10.95%
Other operating expense 1,584 1,432 152 10.61% 4,727 4,060 667 16.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 5,717 $ 4,983 734 14.73% $ 16,757 $ 14,810 1,947 13.15%
====================================================================================================================================
Non-interest expense for the nine months ended September 30, 2002 increased
$1,947,000, or 13.2%, compared to the same period last year. Salary and employee
benefit expenses increased 12.2% in the first nine months of 2002 compared to
the same period last year as a result of the year over year salary adjustments,
and the one-time adjustment to non-officer salaries that occurred during the
first quarter of 2002. The increase in occupancy expense for the comparable
periods, reflects both lease and depreciation costs associated with the third
quarter 2001 opening of the Company's new administrative offices. Increases in
other operating expenses related to higher advertising and marketing costs,
associated with a market research study and the corporate branding
campaign, increased loan administrative costs related to increased volume and
improved collections, and higher costs of stationary and supplies relating to
the growth in both loans and deposits.
Income taxes
The Company's effective tax rate increased to 25.6% for the three months ended
and 25% for the nine months ended September 30, 2002 respectively, compared to
22.3% for the three months ended and 21.9% for the nine months ended September
30, 2001, respectively. The change is a result of a decrease in non-taxable
investment income as a percentage of pretax income.
ANALYSIS OF THE FINANCIAL CONDITION
Total assets increased $72,869,000, or 14% on an annualized basis, from
$692,871,000 at December 31, 2001 to $765,740,000 at September 30, 2002. For the
nine months ended September 30, 2002, total loans and leases increased
$37,016,000, or 13.1% on an annualized basis, to $412,858,000. Growth occurred
in all categories of the loan and lease portfolio during the first nine months
of the year, with the portfolio mix reflecting only slight changes. Commercial
loans and leases and the residential mortgage loan categories, as a percentage
of total loans and leases, each declined slightly, while increases were
reflected in the indirect loan and consumer loan categories. For the nine months
ended September 30, 2002, commercial loans and leases were up $11,545,000, or
12.1% on an annualized basis, on growth in both new business relationships and
increased usage on lines of credit. Indirect auto loans increased $9,065,000, or
21.4% on an annualized basis, as a result of offering competitively priced loans
through a growing base of over 180 new and used car dealers. Consumer loans
increased $6,822,000, or 18.1% on an annualized basis, exclusively on the
Company's focus to build home equity lines of credit. Home equity lines were
offered at a discounted introductory rate for six months throughout the period.
Residential mortgage loan activity remained strong during the first nine months
of 2002, with the Company balancing portfolio growth with sales to the secondary
market. During the period, the residential mortgage loan portfolio increased
$9,584,000, or 9% on an annualized basis, and $7,970,000 in loans were sold to
Freddie Mac.
The following table sets forth the composition of the Company's loan and lease
portfolio at the dates indicated:
(Dollars in thousands)
September 30, 2002 December 31, 2001 September 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial loans & leases $ 138,346 33.9% $ 126,801 34.1% $138,909 36.9%
Residential mortgage 151,891 37.3% 142,307 38.3% 137,979 36.7%
Indirect Auto 65,436 16.1% 56,371 15.2% 52,950 14.1%
Consumer 57,185 14.0% 50,363 13.6% 50,467 13.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Loans & Leases 412,858 101.3% 375,842 101.2% 380,305 101.1%
Less:
Unearned Discount (51) (0.0%) (104) (0.0%) (145) (0.0%)
Allowance for Loan & Lease Losses (5,114) (1.3%) (4,478) (1.2%) (3,974) (1.1%)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans & Leases $ 407,693 100.0% $ 371,260 100.0% $376,186 100.0%
===================================================================================================================================
The investment portfolio, as of September 30, 2002 in the amount of
$308,353,000, increased $35,663,000, or 17.4% on an annualized basis, since
December 31, 2001. The majority of the increase occurred in March, as the
Company purchased $25,000,000 in a combination of two and three-year government
agency securities, funded by short-term borrowings. The transaction represented
an attractive buying opportunity both as to yield and as a
spread over borrowings. Since December 31, 2001, falling market rates have
increased the unrealized gain on the available for sale component of the
portfolio by $8,625,000, to $10,697,000.
Deposits as of September 30, 2002 increased $51,941,000, or 13.9% on an
annualized basis, to $551,233,000 over the nine month period. The Company's
deposit growth is primarily the result of growth in time deposits that increased
$31,263,000, or 20.6% on an annualized basis. The majority of that growth
occurred during the second quarter of 2002, as the Company pursued a strategy to
extend the average maturity of time deposits to better match the average
maturity of loans and reduce its risk to rising interest rates. The time deposit
growth was concentrated in two-year certificates of deposits. At September 30,
2002, time deposits represented 42.3% of total deposits compared to 40.5% at
December 31, 2001. Most all of the balance of the deposit growth in 2002
occurred in the money market category.
The Company's borrowings, consisting primarily of collateralized repurchase
agreements with brokers and advances from the Federal Home Loan Bank, increased
$9,803,000, or 9.9% on an annualized basis, during the first nine months of
2002. The increase provided funding for investment portfolio growth.
Liquidity
The Company's liquidity reflects its ability to provide funds to meet loan and
lease requests, to accommodate possible outflows in deposits, and to take
advantage of market interest rate opportunities. Funding of loan and lease
requests, providing for liability outflows, and management of interest rate
fluctuations requires continuous analysis in order to match the maturities of
specific categories of short-term loans and leases and investments with specific
types of deposits and borrowings. Liquidity is normally considered in terms of
the nature and mix of the Bank's sources and uses of funds. The Asset Liability
Committee of the Bank is responsible for implementing the policies and
guidelines for the maintenance of prudent levels of liquidity. Management
believes, as of September 30, 2002, that liquidity as measured by the Company is
in compliance with its policy guidelines.
The Bank's principal sources of funds for operations are cash flows generated
from earnings, deposits, loan and lease repayments, borrowings from the Federal
Home Loan Bank of New York (FHLB), and securities sold under repurchase
agreements. During the nine months ended September 30, 2002, cash and cash
equivalents decreased by $1,098,000, as net cash used by investing activities of
$65,981,000, exceeded the net cash provided by operating activities and
financing activities of $64,883,000. Net cash provided by financing activities
reflects a net increase in deposits of $51,941,000, and a net increase in
borrowings of $9,803,000. Brokered deposits in the amount of $10,000,000 were
utilized during the nine month period ended September 30, 2002. Net cash used in
investing activities reflects a net increase in loans of $38,008,000, and a net
increase in investment securities of $26,694,000.
As a member of the Federal Home Loan Bank of New York, the Bank is eligible to
borrow up to an established credit limit against certain residential mortgage
loans that have been pledged as collateral. As of September 30, 2002, the Bank's
credit limit with the FHLB was $114.7 million. The Bank's outstanding borrowings
from the FHLB on that date were $61.7 million.
Capital Resources
During the nine months ended September 30, 2002, shareholders equity increased
$8,300,000 to $61,763,000, and book value per share increased $2.37 to $17.88.
The increase in shareholders' equity resulted from net income of $5,078,000,
unrealized appreciation in available for sale securities (net of taxes) of
$5,175,000, and stock option exercise proceeds of $223,000, offset by treasury
stock purchases of $143,000 and dividend payments of $2,033,000.
Capital requirements for the Company and the Bank are established by the Federal
Reserve Board and the Office of the Comptroller of the Currency. Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios of Total and Tier 1 capital to risk
weighted assets, and of Tier 1 capital to average assets. The following table
compares the Company's actual capital amounts and ratios to the "well
capitalized" category, which is the highest capital category as defined in the
regulations.
Capitalized Under
Actual Prompt Corrective
Action Provisions
- ------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
As of September 30, 2002
Total Capital (to Risk-Weighted Assets) $ 60,459 12.69% $ 47,187 >|= 10.00%
Tier I Capital (to Risk-Weighted Assets) 55,345 11.61% 28,312 >|= 6.00%
Tier I Capital (to Average Assets) 55,345 7.34% 37,721 >|= 5.00%
As of December 31, 2001
Total Capital (to Risk-Weighted Assets) $ 56,698 13.08% $ 43,553 >|= 10.00%
Tier I Capital (to Risk-Weighted Assets) 52,220 12.05% 26,132 >|= 6.00%
Tier I Capital (to Average Assets) 52,220 7.53% 32,433 >|= 5.00%
On June 25, 2002, the Company's Board of Directors authorized the repurchase of
up to 100,000 shares, or approximately 3%, of the Company's outstanding common
stock during the period from July 18, 2002 through January 17, 2003. As of
September 30, 2002, the Company had not yet purchased any shares under the June
25, 2002 authorization.
Other Information
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 not
participate in the settlement negotiations, have indicated that they do not
intend to go along with the settlement. The Wisconsin tribe subsequently filed
new lawsuits 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk arises principally from interest rate risk in its
lending, investing, deposit and borrowing activities. The primary objective of
the Company's interest rate risk policy is to manage the exposure of net
interest income to changes in interest rates. Management actively monitors and
manages its interest rate risk exposure using a computer simulation model that
measures the impact of changes in interest rates on its net interest income.
The analysis described below is a 12-month outlook using balance sheet growth of
approximately 5% and funding expectations that reflect the current strategic
initiatives set forth by the Company. As of September 30, 2002, an instantaneous
200 basis point increase in market interest rates was estimated to have a
negative impact of 6.2% on net interest income over the next twelve month
period, while a 100 basis point decline in market interest rates was estimated
to also have a negative impact of 0.6% on the Company's net interest income. By
comparison, at December 31, 2001 the Company estimated that an instantaneous 200
basis point rise in rates would have a negative impact of 6.9% on net interest
income during the following twelve month period while a 200 basis point decline
in rates would have a positive impact of 6% on net interest income during the
following twelve month period. The Company's interest rate risk profile
reflected little change to rising market rates when compared to December 31,
2001. The Company's risk profile to lower interest rates at September 30, 2002,
no longer reflects an improvement in net interest income as was reported
December 31, 2001. The change primarily reflects the Company's current
expectations for increased prepayments on both mortgaged backed securities and
mortgage loans with a further decline in interest rates, and the reduced
interest income associated with the reinvestment of the increased cash flows at
lower rates. The Company also anticipates that its ability to lower interest
rates on deposits will be limited with further market rate declines, as short
term market rates approach a zero percent return. The potential change in net
interest income resulting from this analysis falls within the Company's interest
rate risk policy guidelines.
Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurement. Computation of the prospective effects of
hypothetical interest rate changes is based on numerous assumptions, including
relative levels of market interest rates, loan and lease and investment
prepayments, deposit decay rates and reinvestment/replacement of asset and
liability cash flows. While the Company believes such assumptions to be
reasonable and prudent, there can be no assurance that assumed prepayment speeds
and decay rates will approximate actual future activity and the reinvestment or
replacement of asset/liability cash flows may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. These
estimates and assumptions assume that management takes no action to mitigate any
negative effects from changing interest rates. Although the Company uses various
means to measure its interest rate risk, the Company's measurements are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on net interest income and will differ from actual
results.
At September 30, 2002, the Company's investment portfolio was invested primarily
in governmental agency and New York State municipal debt securities. Less than
one-half of one percent of the portfolio consisted of equity securities and
contained no corporate debt. Accordingly, the Company has minimal risk that
would result from a change in the market value of these securities.
ITEM 4. Controls and Procedures
During the 90-day period prior to the filing date of this report, management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports the
Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
Ex. No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 Amended and Restated Bylaws of the Company(1)
99.1 Certification of Jack H. Webb, Chairman of the Board,
President and Chief Executive Officer of the Registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(2)
99.2 Certification of David P. Kershaw, Treasurer and Chief
Financial Officer of the Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(2)
- --------------------------
(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 on
August 31, 1998, as amended.
(2) Filed herewith.
b) Reports on Form 8-K
On July 30, 2002, the Company filed a Current Report on Form 8-K to
report that the Board of Directors of the Company has authorized the
repurchase of up to 100,000 shares of its common stock. This
proposed repurchase replaces the Company's previously authorized
300,000 share annual repurchase program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE FINANCIAL CORPORATION
DATE November 14, 2002 /s/ Jack H. Webb
--------------------------------------------------------------------------
Jack H. Webb, Chairman of the Board, President
and Chief Executive Officer
DATE November 14, 2002 /s/ David P. Kershaw
--------------------------------------------------------------------------
David P. Kershaw, Treasurer & Chief Financial Officer
CERTIFICATIONS
1. I, Jack H. Webb, have reviewed this quarterly report on Form 10-Q of Alliance
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ Jack H. Webb
-------------------------------------------------
Name: Jack H. Webb
Title: Chairman of the Board, President and Chief
Executive Officer
1. I, David P. Kershaw, have reviewed this quarterly report on Form 10-Q of
Alliance Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ David P. Kershaw
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Name: David P. Kershaw
Title: Treasurer and Chief Financial Officer