TABLE OF CONTENTS FORM 10-K ANNUAL REPORT |
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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 financial services companies. 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 Company. 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 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 Company or its subsidiaries may have a material adverse 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 the subsidiary bank. The Company’s ability to pay dividends to its shareholders is largely dependent on the ability of the Bank, the Company’s bank subsidiary, 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 1 capital”). Banking organizations that are subject to the guidelines are required to maintain a ratio of Tier 1 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 |
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a limited amount of loan and lease loss reserves. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.” The Company’s Tier 1 and total risk-based capital ratios as of December 31, 2004 were 14.34% and 15.34%, respectively. In addition, the Federal Reserve Board has established a minimum leverage ratio of Tier 1 capital to quarterly average assets less goodwill (“Tier 1 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 1 leverage ratio of 3.00% plus an additional cushion of at least 100 to 200 basis points. The Company’s Tier 1 Leverage ratio as of December 31, 2004 was 8.70%, 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 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. Gramm-Leach permits financial subsidiaries to engage in the same types of activities permissible for non-bank 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 affect 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 1 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, 2004, 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 |
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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 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 that they may have on the Company’s business and earnings. As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”), signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”). IMLAFATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, or other financial institutions. During 2002, the Department of Treasury issued a number of regulations relating to enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Covered financial institutions also are barred from dealing with foreign “shell” banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. Regulations were also adopted during 2002 to implement minimum standards to verify customer identity, to encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, to prohibit the anonymous use of “concentration accounts,” and to require all covered financial institutions to have in place a Bank Secrecy Act compliance program. IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act to require federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts. The Bank has in place a Bank Secrecy Act compliance program, and engages in very few transactions of any kind with foreign financial institutions or foreign persons. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the “Act”) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client requires pre-approval by the issuer’s audit committee members. In addition, the audit partners must be rotated. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, legal |
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counsel is required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief financial officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties are also applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted. The Act accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within two business days of the change. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statement’s materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a “registered public accounting firm” in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC. Effective August 29, 2002, as directed by Section 302(a) of the Act, the Company’s chief executive officer and chief financial officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The Act imposes several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal controls; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls during the last quarter. |
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The Company operates the following branches as of December 31, 2004: |
| Name of Office | Locations Owned | County | Date Established | ||||
| Home Office | MONY Tower II, 18th Floor | Onondaga | August 27, 2001 | ||||
| 120 Madison St., Syracuse, NY | |||||||
| Baldwinsville | Route 31 & Willet Pkwy., Baldwinsville, NY | Onondaga | August 28, 2000 | ||||
| Canastota | Stroud Street & Route 5, Canastota, NY | Madison | December 7, 1974 | ||||
| Cicero | Widewaters Common | Onondaga | March 1, 2004 | ||||
| 7956 Route 11, Cicero, NY | |||||||
| Cincinnatus | 2743 NYS Route 26, Cincinnatus, NY | Cortland | January 1, 1943 | ||||
| Cortland | 65 Main Street, Cortland, NY | Cortland | March 1, 1869 | ||||
| Fairmount | West Genesee St., Syracuse, NY | Onondaga | October 30, 2000 | ||||
| Groton Avenue | 1125 Groton Avenue, Cortland, NY | Cortland | June 22, 1987 | ||||
| Hamilton | 1 Madison Street, Hamilton, NY | Madison | December 7, 1949 | ||||
| Hamilton | 38-40 Utica Street, Hamilton, NY | Madison | January 26, 1976 | ||||
| Drive-Up | |||||||
| James Street | 1001 James Street, Syracuse, NY | Onondaga | January 20, 2004 | ||||
| Lyndon Corners | 6930 E. Genesee St., Fayetteville, NY | Onondaga | July 20, 2000 | ||||
| Manlius | 8250 Manlius-Cazenovia Road, Manlius, NY | Onondaga | October 19, 1994 | ||||
| Marathon | 14 E. Main Street, Marathon, NY | Cortland | August 15, 1957 | ||||
| Oneida | 160 Main Street, Oneida, NY | Madison | December 12, 1851 | ||||
| Park Place | 300 South State Street, Syracuse, NY | Onondaga | July 19, 1999 | ||||
| Sherrill | 628 Sherrill Road, Sherrill, NY | Oneida | April 2, 1954 | ||||
| TOPS Plaza | Route 5 and Route 46, Oneida, NY | Madison | January 7, 1988 | ||||
| Tully | Route 80 at I-81, Tully, NY | Onondaga | January 26, 1989 | ||||
| Wal-Mart | 872 NYS Route 13, Cortland, NY | Cortland | March 10, 1997 | ||||
| ( Cortland ) | |||||||
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The offices at Cicero, Fairmount, James Street, Lyndon Corners, Manlius, MONY Tower II, Park Place, TOPS Plaza, Tully, and the Wal-Mart store are subject to leases and/or land leases. The other banking premises are owned. Real property and related banking facilities owned by the Company at December 31, 2004 had a net book value of $6.1 million and none of the properties was subject to any material encumbrances. For the year ended December 31, 2004, rental fees of $669,000 were paid on facilities leased by the Company for its operations. 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 |
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| 2004 | High | Low | Dividend Declared | ||||||
| 1st Quarter | $ | 34.95 | $ | 31.02 | $ 0.21 | ||||
| 2nd Quarter | 32.60 | 27.21 | 0.21 | ||||||
| 3rd Quarter | 30.25 | 27.16 | 0.21 | ||||||
| 4th Quarter | 30.50 | 27.57 | 0.21 | ||||||
| 2003 | High | Low | Dividend Declared | ||||||
| 1st Quarter | $ | 38.00 | $ | 26.90 | $ 0.21 | ||||
| 2nd Quarter | 35.70 | 27.00 | 0.21 | ||||||
| 3rd Quarter | 29.82 | 27.00 | 0.21 | ||||||
| 4th Quarter | 31.93 | 28.50 | 0.31 | * | |||||
* Includes a special cash dividend of $0.10 per share Registrar and Transfer Agent American Stock Transfer & Trust Company 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 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. |
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Item 6 — Selected Financial Data Five-Year Comparative Summary (Dollars in thousands except per-share data) |
| ASSETS AND DEPOSITS | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||
| Net Loans & Leases | $ | 517,585 | $ | 470,372 | $ | 409,204 | $ | 371,260 | $ | 312,378 | |||||
| Investment Securities | 325,125 | 305,787 | 314,994 | 272,690 | 223,078 | ||||||||||
| Deposits | 623,121 | 561,400 | 546,653 | 499,292 | 474,899 | ||||||||||
| Total Assets | 893,934 | 826,255 | 774,950 | 692,871 | 580,787 | ||||||||||
| Trust Department Assets | 248,188 | 223,242 | 214,318 | 245,234 | 236,496 | ||||||||||
| (Book value, not included in Total Assets) | |||||||||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||||||
| Capital, Surplus, and Undivided Profits | $ | 68,896 | $ | 66,153 | $ | 62,953 | $ | 53,463 | $ | 53,035 | |||||
OPERATING INCOME AND EXPENSES |
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| Total Interest Income | $ | 40,919 | $ | 40,220 | $ | 42,714 | $ | 43,124 | $ | 40,062 | |||||
| Total Interest Expense | 12,684 | 12,827 | 15,944 | 19,965 | 19,467 | ||||||||||
| Net Interest Income | 28,235 | 27,393 | 26,770 | 23,159 | 20,595 | ||||||||||
| Provision for Loan and Lease Losses | 984 | 2,349 | 1,895 | 2,455 | 1,150 | ||||||||||
| Net Interest Income after Provision for | |||||||||||||||
| Loan and Lease Losses | 27,251 | 25,044 | 24,875 | 20,704 | 19,445 | ||||||||||
| Non-interest Income | 8,223 | 9,287 | 6,764 | 6,991 | 6,649 | ||||||||||
| Total Operating Income | $ | 35,474 | $ | 34,331 | $ | 31,639 | $ | 27,695 | $ | 26,094 | |||||
| Salaries and Related Expense | 14,919 | 13,462 | 12,518 | 11,264 | 10,414 | ||||||||||
| Occupancy and Equipment Expense | 4,429 | 3,553 | 3,443 | 3,153 | 2,861 | ||||||||||
| Other Operating Expense | 6,945 | 6,513 | 6,416 | 5,550 | 5,362 | ||||||||||
| Total Operating Expense | $ | 26,293 | $ | 23,528 | $ | 22,377 | $ | 19,967 | $ | 18,637 | |||||
| Income Before Taxes | 9,181 | 10,803 | 9,262 | 7,728 | 7,457 | ||||||||||
| Provision for Income Taxes | 1,926 | 2,792 | 2,351 | 1,717 | 2,032 | ||||||||||
| Net Income | $ | 7,255 | $ | 8,011 | $ | 6,911 | $ | 6,011 | $ | 5,425 | |||||
| Per-Share Data | |||||||||||||||
| Net Income – Diluted | 2.00 | 2.23 | 1.98 | 1.70 | 1.52 | ||||||||||
| Book Value at Year End | 19.29 | 18.72 | 18.23 | 15.51 | 14.70 | ||||||||||
| Cash Dividends Declared | 0.84 | 0.94 | 0.79 | 0.85 | 0.71 | ||||||||||
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RESULTS OF OPERATIONS Earnings Summary and Executive Overview Net income for 2004 was $7,255,000, a decline of $756,000, or 9.4%, compared to net income of $8,011,000 in 2003. Earnings per share for 2004, on a fully diluted basis, were $2.00, off 10.3%, or $0.23 per share, compared to $2.23 per share in 2003. Basic earnings per share of $2.03 for the year ended December 31, 2004, compared to $2.28 for the year ended December 31, 2003. Diluted earnings in 2003 included an unusual $0.26 per share benefit from the Bank’s sale of its only Broome County, New York branch located in Whitney Point. Excluding that event, 2004 earnings rose 1.5% and 2004 net income rose 2.7%. The Company’s net income for 2003 included $950,000 after tax from the sale. Strong growth in the Bank’s earning assets continued in 2004, with average loans up 12.8% generating additional revenues that helped to offset the pressure of a declining net interest margin. The 2004 deposit growth rate of 11%, the highest growth rate since the 1999 merger of the Company’s subsidiary Banks, was achieved through the Bank’s expanding branch system and its focus on building business and personal account balances. The Bank’s strategic initiative to target branch expansion in Onondaga County, New York, was reflected in the first quarter opening of two de-novo branches and the relocation of another branch to a new facility in an improved location. On February 18, 2005, the Bank closed its previously announced acquisition of certain personal trust accounts and related assets under management from HSBC USA NA. The transaction was completed under Section 154 of the New York Banking Law. Specifically the Bank assumed the successor trustee role from HSBC on approximately 1830 personal trust accounts and further assumed approximately $560,000,000 in assets under management. Combined with its existing trust business the Bank now manages over 2400 trust accounts and approximately $800,000,000 of related investment assets. In connection with the acquisition the Bank hired 13 trust professionals from HSBC and opened an office in Buffalo New York to manage the acquired accounts. The acquisition will significantly increase the Bank’s non-interest income as a percentage of total operating income. 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: |
| 2004 | 2003 | 2002 | |||||||
| Percentage of net income to average total assets | 0.84 | % | 1.01 | % | 0.93 | % | |||
| Percentage of net income to average shareholders’ equity | 10.75 | % | 12.34 | % | 11.96 | % | |||
| Percentage of dividends declared to net income | 41.31 | % | 41.28 | % | 39.43 | % | |||
| Percentage of average shareholders’ equity to average total assets | 7.82 | % | 8.21 | % | 7.79 | % | |||
Net Interest Income The net interest income of the Bank is the Company’s principal source of operating income for payment of overhead and providing for loan and lease losses. It is the amount that interest and fees on loans and leases, investments, and other earning assets exceeds the cost of deposits and other interest-bearing liabilities. Net interest income increased $842,000, or 3.1%, to $28,235,000 in 2004. Growth in net interest income in 2004 was primarily attributable to strong growth in loans and lower rates paid on deposits and borrowed funds. The Company’s net interest margin (federal tax-equivalent net interest income divided by average earning assets) for 2004 of 3.67% was down 24 basis points compared to the 3.91% margin for 2003. The net interest margin for the fourth quarter of 2004 was 3.62%, declining 3 basis points compared to the 3.65% net interest margin reported for the year’s third quarter. The 2003 net interest margin declined 14 basis points compared to 2002. Also by comparison, 2003 net interest income increased $623,000, or 2.3%, compared with 2002, with the increase primarily the result of lower cost deposits. Interest income for 2004 at $40,919,000, was up $699,000 compared to 2003, with the 2004 tax-equivalent yield on average earning assets at 5.23%, declining 42 basis points during the 12 months ended December 31, 2004. Similar to 2003, asset yields declined in 2004 as new loans and investments were booked during the year at market rates lower than the yields on the assets that matured or prepaid during the year. Average earning assets for 2004 were $812,843,000, up $73,979,000, or 10%, compared to 2003, and represented 94.2% of total average assets in 2004. By comparison, average earning assets increased $45,310,000, or 6.5%, in 2003 compared to 2002, and for the comparable periods, the tax-equivalent yield on average earning assets declined 70 basis points. Average earning assets in 2003 were 93.5% of total average assets. Loans and leases continued to represent the majority of the Company’s interest earning assets and increased to 61.3% of average earning assets in 2004 from 59.8% in 2003. Average loans and leases increased $56,502,000 in 2004 with yields declining 62 basis points to |
13 |
5.71%. Interest income on loans and leases was up $480,000, or 1.7%, in 2004 compared to 2003. The Company’s residential mortgage loan portfolio reported an increase of $11,391,000, or 7%, in average loans when comparing the year 2004 to 2003. The average yield on the residential mortgage loan portfolio declined 61 basis points from 6.82% in 2003 to 6.21% in 2004, influenced by newly originated loans, and a refinancing of existing portfolio loans, being booked at the lower market rates in effect in 2004. Average consumer loans for the comparable periods increased 4.5%, or $2,602,000, on growth in home equity lines of credit. The average yield declined 44 basis points from 5.94% to 5.50% in 2004, influenced by new home equity lines that were indexed to the prime rate and booked at discounted introductory rates throughout the year. Average indirect auto loans increased 34.2%, or $28,136,000, during 2004. Average yields declined 114 ba sis points in 2004 compared to 2003, as 2004 new loan volume was originated at lower market rates influenced by zero percent dealer financing alternatives. Average commercial loans and leases for 2004 increased $14,373,000, or 10.4%, when compared to the prior year. Average leases within the portfolio grew 200% in 2004 versus 2003 and represented 36.4% of the commercial loan and lease growth. The average yield on the commercial loan and lease portfolio declined 26 basis points from 6.20% in 2003 to 5.94% in 2004. Average loans and leases in 2003 increased $41,453,000 compared to 2002 while average loan and lease yields declined 71 basis points. Interest income on loans and leases was down $226,000, or 0.8%, in 2003 compared to 2002. For the comparable periods, average residential mortgage loans increased $13,619,000, or 9.2%, average consumer loans increased $2,975,000, or 5.4%, average indirect auto loans increased $19,522,000, or 31.1%, and average commercial loans and leases increased $5,337,000, or 4%. Average investments in 2004 compared with 2003 increased $15,971,000, or 5.4%, which was the primary reason that tax-equivalent interest income from investments was up $327,000, or 2.4%, compared with 2003. By comparison, average investment securities increased $2,791,000 in 2003 compared to 2002, with tax-equivalent interest income off $2,127,000, or 13.4%. The average tax-equivalent yield of the portfolio declined 14 basis points, from 4.66% in 2003 to 4.52% in 2004. The decline in the 2004 yield is attributable to lower yields on the purchase of new investments. Investment income was positively impacted in 2004 as the Federal Home Loan Bank of New York’s (FHLB) resumed the payment of dividends on its stock that had been suspended in 2003. The average tax-equivalent yield on the portfolio had declined 77 basis points in 2003, when compared to 2002 with the larger decline in yield attributable to increased amortization expense resulting from a higher level of prepayments on mortgaged-backed securities in 2003. During 2004, average interest-bearing liabilities increased $58,584,000, or 8.9%, to $717,536,000. As a result of a continuation of lower market interest rates and repricing characteristics associated with the Company’s liabilities, the average cost of interest-bearing liabilities declined 18 basis points from 1.95% in 2003 to 1.77% in 2004. The Company’s interest expense, which is a function of the volume of and rates paid for interest-bearing liabilities, declined $143,000, or 1.1%, in 2004 compared to 2003. Interest expense on deposits increased $172,000, or 2%, in 2004 compared with 2003, as a decline in the average rate paid on deposits offset much of the cost associated with record growth in average interest-bearing deposits. Average interest-bearing deposits increased $55,349,000, or 11.1%. A 14 basis point decline in the average rate paid on deposits for the comparable periods was primarily attributable to a 32 basis point decline in the average rate paid on the Bank’s time deposit category. Interest expense on borrowings declined $315,000, as the average rate paid on borrowings declined 24 basis points. Average borrowings increased 2% compared with the prior year. Rates on both new and renewal borrowings reflected the lower market interest rates. By comparison, interest expense declined $3,117,000, or 19.6%, in 2003 compared to 2002, resulting primarily from a 61 basis point decline in the average cost of interest-bearing liabilities. Average interest-bearing liabilities increased $36,666,000, or 5.9%, during the 12 months ended December 31, 2003. When comparing 2003 with 2002, average interest-bearing deposits rose 4% and average borrowings were up 12.1%. |
14 |
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. Non-accrual loans have been included in the average balances. Securities are shown at average amortized cost. Average Balances and Net Interest Income |
| YEARS ENDED DECEMBER 31, | 2004 | 2003 | 2002 | ||||||||||||||||||||||||
| AVG. BALANCE |
AMT. OF INTEREST |
AVG. YIELD/ RATE PAID |
AVG. BALANCE |
AMT. OF INTEREST |
AVG. YIELD/ RATE PAID |
AVG. BALANCE |
AMT. OF INTEREST |
AVG. YIELD/ RATE PAID |
|||||||||||||||||||
| (DOLLARS IN THOUSANDS) | |||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||
| Federal funds sold | $ | 4,165 | $ | 45 | 1.08 | % | 2,659 | $ | 33 | 1.24 | % | $ | 1,593 | $ | 30 | 1.88 | % | ||||||||||
| Taxable investment securities | 236,917 | 9,313 | 3.93 | % | 229,472 | 9,340 | 4.07 | % | 236,198 | 11,890 | 5.03 | % | |||||||||||||||
| Nontaxable investment securities | 73,767 | 4,742 | 6.43 | % | 65,241 | 4,388 | 6.73 | % | 55,724 | 3,965 | 7.12 | % | |||||||||||||||
| Loans and Leases (net of unearned | |||||||||||||||||||||||||||
| discount) | 497,994 | 28,431 | 5.71 | % | 441,492 | 27,951 | 6.33 | % | 400,039 | 28,177 | 7.04 | % | |||||||||||||||
| Total interest-earning assets | $ | 812,843 | $ | 42,531 | 5.23 | % | $ | 738,864 | $ | 41,712 | 5.65 | % | $ | 693,554 | $ | 44,062 | 6.35 | % | |||||||||
| Non interest-earning assets: | |||||||||||||||||||||||||||
| Other assets | 52,264 | 49,262 | 47,583 | ||||||||||||||||||||||||
| Less: Allowance for loan and lease losses | (6,033 | ) | (5,728 | ) | (4,898 | ) | |||||||||||||||||||||
| Net unrealized gains/(losses) on | |||||||||||||||||||||||||||
| available-for-sale portfolio | 3,707 | 8,162 | 6,052 | ||||||||||||||||||||||||
| Total | $ | 862,781 | $ | 790,560 | $ | 742,291 | |||||||||||||||||||||
| Liabilities and Shareholders’ Equity: | |||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||
| Demand deposits | $ | 83,235 | $ | 230 | 0.28 | % | $ | 83,365 | $ | 252 | 0.30 | % | $ | 78,263 | $ | 399 | 0.51 | % | |||||||||
| Savings and money market deposits | 225,405 | 2,190 | 0.97 | % | 197,303 | 1,989 | 1.01 | % | 180,533 | 2,533 | 1.40 | % | |||||||||||||||
| Time deposits | 245,747 | 6,257 | 2.55 | % | 218,370 | 6,264 | 2.87 | % | 220,862 | 7,960 | 3.60 | % | |||||||||||||||
| Borrowings | 163,149 | 4,007 | 2.46 | % | 159,914 | 4,322 | 2.70 | % | 142,628 | 5,052 | 3.54 | % | |||||||||||||||
| Total interest-bearing liabilities | $ | 717,536 | $ | 12,684 | 1.77 | % | $ | 658,952 | $ | 12,827 | 1.95 | % | $ | 622,286 | $ | 15,944 | 2.56 | % | |||||||||
| Non interest-bearing liabilities: | |||||||||||||||||||||||||||
| Demand deposits | 68,949 | 57,886 | 54,213 | ||||||||||||||||||||||||
| Other liabilities | 8,799 | 8,823 | 7,996 | ||||||||||||||||||||||||
| Shareholders’ equity | 67,497 | 64,899 | 57,796 | ||||||||||||||||||||||||
| Total | $ | 862,781 | $ | 790,560 | $ | 742,291 | |||||||||||||||||||||
| Net interest earnings | $ | 29,847 | $ | 28,885 | $ | 28,118 | |||||||||||||||||||||
| Net yield on interest-earning assets | 3.67 | % | 3.91 | % | 4.05 | % | |||||||||||||||||||||
| Net interest spread | 3.46 | % | 3.70 | % | 3.79 | % | |||||||||||||||||||||
| Federal tax exemption on non-taxable | |||||||||||||||||||||||||||
| investment securities included in interest income |
$ | 1,612 | $ | 1,492 | $ | 1,348 | |||||||||||||||||||||
15 |
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 |
| 2004 COMPARED TO 2003 | 2003 COMPARED TO 2002 | |||||||||||||||||
| INCREASE (DECREASE) DUE TO | INCREASE (DECREASE) DUE TO | |||||||||||||||||
| VOLUME | RATE | NET CHANGE | VOLUME | RATE | NET CHANGE | |||||||||||||
| (IN THOUSANDS) | ||||||||||||||||||
| Interest earned on: | ||||||||||||||||||
| Federal funds sold | $ | 17 | $ | (5 | ) | $ | 12 | $ | 17 | $ | (14 | ) | $ | 3 | ||||
| Taxable investment securities | 298 | (325 | ) | (27 | ) | (310 | ) | (2,240 | ) | (2,550 | ) | |||||||
| Nontaxable investment securities | 560 | (206 | ) | 354 | 660 | (237 | ) | 423 | ||||||||||
| Loans and leases (net of unearned discount) | 3,250 | (2,770 | ) | 480 | 2,766 | (2,992 | ) | (226 | ) | |||||||||
| Total interest-earning assets | $ | 4,125 | $ | (3,306 | ) | $ | 819 | $ | 3,133 | $ | (5,483 | ) | $ | (2,350 | ) | |||
| Interest paid on: | ||||||||||||||||||
| Interest-bearing demand deposits | $ | (3 | ) | $ | (19 | ) | $ | (22 | ) | $ | 21 | $ | (168 | ) | $ | (147 | ) | |
| Savings and money market deposits | 282 | (81 | ) | 201 | 198 | (742 | ) | (544 | ) | |||||||||
| Time deposits | 739 | (746 | ) | (7 | ) | (87 | ) | (1,609 | ) | (1,696 | ) | |||||||
| Borrowings | 78 | (393 | ) | (315 | ) | 540 | (1,270 | ) | (730 | ) | ||||||||
| Total interest-bearing liabilities | $ | 1,096 | $ | (1,239 | ) | $ | (143 | ) | $ | 672 | $ | (3,789 | ) | $ | (3,117 | ) | ||
| Net interest earnings (FTE) | $ | 3,029 | $ | (2,067 | ) | $ | 962 | $ | 2,461 | $ | (1,694 | ) | $ | 767 | ||||
Non-interest Income The Company’s non-interest income is primarily derived from its subsidiary Bank, and is comprised of core components that include service charges on deposits, fees from trust and brokerage services, mortgage banking operations that include gains from sales and income from servicing, and other recurring operating income fees from normal banking operations, along with non-core components that primarily consist of net gains or losses from sales of investment securities. The following table sets forth certain information on non-interest income for the years indicated: |
| Non-interest Income |
| YEARS ENDED DECEMBER 31, | 2004 | 2003 | 2002 | ||||||
| (IN THOUSANDS) | |||||||||
| Service charges on deposit accounts | $ | 3,056 | $ | 2,927 | $ | 2,281 | |||
| Trust and brokerage income | 1,778 | 1,357 | 1,343 | ||||||
| Bank-owned life insurance | 810 | 461 | 485 | ||||||
| Gain on sale of loans | 197 | 421 | 226 | ||||||
| Other operating income | 1,594 | 1,618 | 1,634 | ||||||
| Core non-interest income | $ | 7,435 | $ | 6,784 | $ | 5,969 | |||
| Investment security gains | 717 | 1,142 | 791 | ||||||
| Gain/(loss) on disposal of assets | 71 | (46 | ) | 4 | |||||
| Net premium on sale of branch | — | 1,407 | — | ||||||
| Total non-interest income | $ | 8,223 | $ | 9,287 | $ | 6,764 | |||
Non-interest income in 2004 declined $1,064,000, or 11.5% compared to 2003. Non-interest income in 2003 included the $1,407,000 net premium received from the Bank’s sale of its only Broome County, New York branch that was located in Whitney Point. The Company’s core non-interest income increased 9.6% for the comparable periods. Significant contributions to the Company’s core non-interest income growth in 2004 were derived from higher returns resulting from death benefits on the Company’s investment in Bank-owned life insurance and a 31% increase in trust and brokerage fee income, which was primarily influenced by growth in the retail brokerage business. The 4.4% increase in Bank service charges on deposits reflected growth primarily in the form of increased overdraft fees. Income from the sale of loans declined during 2004 as weaker demand reduced the volume of mortgage loans available for sale. In other non-core components, investment security gains in 2004 declined by $425,000 compared to 2003. |
16 |
Non-interest income increased 37.3% in 2003 compared to 2002, primarily as a result of the Whitney Point branch sale. Core non-interest income rose by 13.7% on higher service charges on deposits and increased gains on the sale of mortgage loans. Operating Expenses The following table sets forth certain information on operating expenses for the years indicated: |
| Operating Expenses |
| YEARS ENDED DECEMBER 31, | 2004 | 2003 | 2002 | ||||||
| (IN THOUSANDS) | |||||||||
| Salaries, wages, and employee benefits | $ | 14,919 | $ | 13,462 | $ | 12,518 | |||
| Building, occupancy, and equipment | 4,429 | 3,553 | 3,443 | ||||||
| Communication expense | 614 | 557 | 581 | ||||||
| Stationary and supplies expense | 520 | 414 | 744 | ||||||
| Marketing expense | 603 | 526 | 496 | ||||||
| Other operating expense | 5,208 | 5,016 | 4,595 | ||||||
| Total operating expenses | $ | 26,293 | $ | 23,528 | $ | 22,377 | |||
Operating expense of $26,293,000 for the 12 months ended December 31, 2004, increased $2,765,000, or 11.8%, when compared to 2003. The increase compared to a $1,151,000, or 5.1%, increase, when comparing 2003 to 2002. Salaries and associated benefit expenses in 2004 were up $1,457,000, or 10.8%, compared to a $944,000, or 7.5% increase in 2003 over 2002, and represented 52.7% of the 2004 increase in total operating expense. The increase in 2004 salary and employee benefit expenses related to staffing at the Bank’s two new branches, growth in the retail brokerage department, an increase in the trust department support staff to prepare for and support the planned acquisition of a portion of the HSBC Bank USA, N.A. personal trust business, an increase in risk management staff costs relating to the Company’s need to comply with Section 404 of the Sarbanes Oxley Act, as well as year-over-year salary adjustments that approximated 3.5%. The number of the Company’s employees (full time equivalent) increased from 276 at the end of 2003 to 293 at the end of 2004. The Company’s occupancy and equipment expense increased $876,000, or 24.7%, in 2004 compared to 2003, following a 3.2% increase in the prior year. The higher expense in 2004 was attributable to increased lease and depreciation expenses associated with the 2004 new branches, as well as annual costs of operating system enhancements designed to improve efficiency. The increase in occupancy expense in 2003 compared with 2002 was primarily the result of increased depreciation and amortization expense in connection with the purchase and development of systems designed to provide improved customer service. In 2004, the combination of communication, stationary and supplies, marketing, and other operating expense increased $432,000, or 6.6%, compared to the prior year. The increase in these operating expenses significantly related to promoting and supporting the opening of the new branches in 2004. The increase also related to higher audit costs in connection with the Company’s requirement to comply with Sarbanes Oxley, increased education and training costs that focused on sales and process efficiency, and an increase in the provision expense to build the reserve for losses on a growing volume of loan commitments. In 2003, other operating expense increased $97,000, or 1.5%, compared with 2002. Provision For Income Tax The Company’s 2004 provision for income taxes declined by $866,000, or 31%, when compared to the 2003 expense, as result of lower pretax earnings and an increase in the percentage of non-taxable insurance and investment income to pretax income. The 2004 expense of $1,926,000 resulted in an effective tax rate of 21%, compared to the 2003 expense of $2,792,000 that reflected an effective tax rate of 25.8%. The Company’s effective tax rate is lower than the statutory tax rate as a result of its investment in tax exempt securities and its use of other tax savings strategies. |
17 |
ANALYSIS OF FINANCIAL CONDITION Investment Securities The investment portfolio is designed to provide a favorable total return utilizing low-risk, high quality investments while at the same time assisting in meeting the liquidity needs of the Bank’s loan and deposit operations, and supporting the Company’s interest risk objectives. The Company classifies the majority of its investment securities as available-for-sale. The Company does not engage in securities trading or derivatives activities in carrying out its investment strategies. The book value of the Company’s investment securities increased $22,743,000, or 7.6%, in the 12 months ended December 31, 2004, to a total of $322,668,000, compared to a decline of $4,291,000, or 1.4%, during the year 2003. The average tax-equivalent yield of the portfolio in 2004 declined 14 basis points, to 4.52% from 4.66% in 2003. On a comparative basis, the average portfolio yield declined 77 basis points in 2003 compared to 2002. When comparing year-end 2003 to year-end 2004, the tax-equivalent portfolio yield declined five basis points, from 4.40% to 4.35%. The interest rate environment in 2004 continued to positively impact the value of the Company’s fixed-rate investment securities, and resulted in the Company’s available-for-sale investment securities reflecting a market value that was 0.77% 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, 2004 investment portfolio reflects an unrealized gain on available-for-sale securities of $2,457,000, with an after-tax effect of $1,474,000 being reflected as a component of shareholders’ equity. By comparison, at December 31, 2003 the Company reported unrealized gains in its available-for-sale portfolio of $5,862,000 and an increase in shareholders’ equity of $3,517,000. The decline in both the unrealized gain and the after tax effect in accumulated other comprehensive income for the comparable periods, is the result of a higher level of interest rates at year-end 2004 compared to year-end 2003, as well as changes in the portfolio’s investment mix and maturity schedule. Based on amortized cost, the Company classified 98% of its investment portfolio as available-for-sale at year-end 2004. 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, | 2004 | 2003 | 2002 | |||||||||||||||
| AMORTIZED COST |
MARKET VALUE |
AMORTIZED COST |
MARKET VALUE |
AMORTIZED COST |
MARKET VALUE |
|||||||||||||
| (IN THOUSANDS) | ||||||||||||||||||
| Obligations of states and political subdivisions | $ | 5,367 | $ | 5,621 | $ | 6,756 | $ | 7,240 | $ | 6,188 | $ | 7,628 | ||||||
| Total | $ | 5,367 | $ | 5,621 | $ | 6,756 | $ | 7,240 | $ | 6,188 | $ | 7,628 | ||||||
The following table sets forth the amortized cost and market value for the Company’s available-for-sale securities within the investment portfolio: |
|
| YEARS ENDED DECEMBER 31, | 2004 | 2003 | 2002 | |||||||||||||||
| AMORTIZED COST |
MARKET VALUE |
AMORTIZED COST |
MARKET VALUE |
AMORTIZED COST |
MARKET VALUE |
|||||||||||||
| (IN THOUSANDS) | ||||||||||||||||||
| U.S. Treasury and other U.S. government agencies | $ | 98,197 | $ | 97,572 | $ | 115,494 | $ | 117,385 | $ | 98,233 | $ | 102,796 | ||||||
| Mortgage-backed securities | 135,431 | 135,089 | 103,598 | 103,577 | 138,072 | 140,833 | ||||||||||||
| Obligations of states and political subdivisions | 70,688 | 74,076 | 64,281 | 68,287 | 56,278 | 59,732 | ||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stock | 8,037 | 8,037 | 6,348 | 6,348 | 3,797 | 3,797 | ||||||||||||
| Other equity securities | 4,948 | 4,984 | 3,448 | 3,434 | 1,648 | 1,648 | ||||||||||||
| Total | $ | 317,301 | $ | 319,758 | $ | 293,169 | $ | 299,031 | $ | 298,028 | $ | 308,806 | ||||||
| Net unrealized gains on available-for-sale securities | 2,457 | 5,862 | 10,778 | |||||||||||||||
| Total Carrying Value | $ | 319,758 | $ | 299,031 | $ | 308,806 | ||||||||||||
18 |
The following table sets forth as of December 31, 2004, 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, 2004 | |||||||||||||||
| AMOUNT MATURING WITHIN ONE YEAR OR LESS |
AMOUNT MATURING AFTER ONE YEAR BUT WITHIN FIVE YEARS |
AMOUNT MATURING AFTER FIVE YEARS BUT WITHIN TEN YEARS |
AMOUNT MATURING AFTER TEN YEARS |
TOTAL COST | |||||||||||
| (DOLLARS IN THOUSANDS) | |||||||||||||||
| Held-To-Maturity Portfolio | |||||||||||||||
| Obligations of states and | |||||||||||||||
| political subdivisions | $ | 2,817 | $ | 1,774 | $ | 279 | $ | 496 | $ | 5,367 | |||||
| Total held-to-maturity | |||||||||||||||
| portfolio value | $ | 2,817 | $ | 1,774 | $ | 279 | $ | 496 | $ | 5,367 | |||||
| Weighted average yield | |||||||||||||||
| at year end (1) | 2.86 | % | 5.46 | % | 5.58 | % | 4.98 | % | 4.06 | % | |||||
| Available-for-Sale Portfolio | |||||||||||||||
| U.S. Treasury and other | |||||||||||||||
| U.S. government agencies | $ | 17,002 | $ | 59,226 | $ | 15,748 | $ | 6,221 | $ | 98,197 | |||||
| Mortgage-backed securities | 29,720 | 72,977 | 25,337 | 7,397 | 135,431 | ||||||||||
| Obligations of states and | |||||||||||||||
| political subdivisions | 1,327 | 14,512 | 44,425 | 10,424 | 70,688 | ||||||||||
| Total available-for-sale | |||||||||||||||
| portfolio value | $ | 48,049 | $ | 146,715 | $ | 85,510 | $ | 24,042 | $ | 304,316 | |||||
| Weighted average yield | |||||||||||||||
| at year end (1) | 3.78 | % | 4.08 | % | 4.13 | % | 4.17 | % | 4.06 | % | |||||
(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. Loans and leases The loan and lease portfolio is the largest component of the Bank’s earning assets and accounts for the greatest portion of total interest income. The Bank provides a full range of credit products delivered through its branch network. Consistent with the focus on providing community banking services, the Bank generally does not attempt to diversify geographically by making a significant amount of loans or leases to borrowers outside of the primary service area. Loans and leases are internally generated and the majority of the lending activity takes place in the New York State counties of Cortland, Madison, Onondaga, and Oneida. In addition, the Bank originates Indirect Auto loans in the western counties of New York State and the Bank’s leasing subsidiary originates leases throughout New York State. The Bank does not engage in highly leveraged transactions or foreign lending activities. The following table sets forth the composition of the Bank’s loan and lease portfolio at the dates indicated: |
| Composition of the Loan and Lease Portfolio |
| YEARS ENDED DECEMBER 31, | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||
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| AMOUNT | PERCENT | AMOUNT | PERCENT | AMOUNT | PERCENT | AMOUNT | PERCENT | AMOUNT | PERCENT | |||||||||||||||||||||
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| (DOLLARS IN THOUSANDS) | ||||||||||||||||||||||||||||||
| Commercial and Leases | $ | 166,757 | 32.2 | % | $ | 147,142 | 31.3 | % | $ | 134,584 | 32.9 | % | $ | 126,801 | 34.2 | % | $ | 108,447 | 34.7 | % | ||||||||||
| Residential Real Estate | 176,666 | 34.1 | % | 173,963 | 37.0 | % | 153,148 | 37.4 | % | 142,307 | 38.3 | % | 119,948 | 38.4 | % | |||||||||||||||
| Indirect Auto | 117,622 | 22.7 | % | 97,163 | 20.6 | % | 68,811 | 16.8 | % | 56,371 | 15.2 | % | 42,065 | 13.5 | % | |||||||||||||||
| Consumer | 63,862 | 12.4 | % | 58,803 | 12.5 | % | 57,734 | 14.1 | % | 50,363 | 13.5 | % | 45,652 | 14.6 | % | |||||||||||||||
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| Gross Loans and Leases | $ | 524,907 | 101.4 | % | $ | 477,071 | 101.4 | % | $ | 414,277 | 101.2 | % | $ | 375,842 | 101.2 | % | $ | 316,112 | 101.2 | % | ||||||||||
| Less: | ||||||||||||||||||||||||||||||
| Unearned discount | (2,055 | ) | (0.4 | %) | (630 | ) | (0.1 | %) | (54 | ) | (0.0 | %) | (104 | ) | (0.0 | %) | (364 | ) | (0.1 | %) | ||||||||||
| Allowance for loan | ||||||||||||||||||||||||||||||
| and lease losses | (5,267 | ) | (1.0 | %) | (6,069 | ) | (1.3 | %) | (5,019 | ) | (1.2 | %) | (4,478 | ) | (1.2 | %) | (3,370 | ) | (1.1 | %) | ||||||||||
|
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|
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| Net Loans and Leases | $ | 517,585 | 100.0 | % | $ | 470,372 | 100.0 | % | $ | 409,204 | 100.0 | % | $ | 371,260 | 100.0 | % | $ | 312,378 | 100.0 | % | ||||||||||
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19 |
On December 31, 2004, gross loans and leases were $524,907,000, increasing $47,836,000, or 10%, during the year. By comparison, loans increased $62,794,000, or 15.2%, in 2003. The Bank reported slight changes in the mix of its loan portfolio during 2004, with commercial loans and leases and indirect auto loans increasing as a percentage of total loans, while residential real estate loans declined. The Bank continued to report growth in all components of the loan portfolio during 2004. Residential mortgage loans, which represented the largest component of gross loans at December 31, 2004, increased $2,703,000, or 1.6%, during 2004 compared to an increase of $20,815,000, or 13.6%, in 2003. The mortgage portfolio at December 31, 2004 consists of 86% in fixed-rate loans and 14% in loans that have adjustable-rate features. The Bank originated $41,837,000 in residential mortgage loans in 2004 compared to $98,246,000 in 2003. The decline in the growth rate in 2004 originations reflected a slowdown in mortgage loan refinancings following record numbers in 2003 that were attributable to a 40 year low in mortgage loan rates. The Bank’s 2004 mortgage loan goal was to hold stable the size of the residential mortgage loan portfolio and reduce the percentage that the primarily long-term fixed-rate portfolio was to total loans. During 2004 the Bank sold $10,754,000 in mortgage loans and as of year-end 2004, was servicing loans with balances of $46,656,000. The servicing portfolio increased 10.7% during 2004. On a comparative basis, the Bank sold $25,987,000 in mortgage loans in 2003. Loans and leases in the commercial category consist primarily of short-term and/or floating-rate loans, lines of credit, as well as commercial mortgage loans, and commercial leases made to small- and medium-sized companies. Commercial loans and leases (less unearned discount) in 2004 increased $18,190,000, or 12.4%, to $164,702,000. By comparison, commercial loans and leases increased $11,982,000, or 8.9%, in 2003. Alliance Leasing, Inc., which was formed as a subsidiary of the Bank in 2002, contributed 56% of the total growth in commercial loans and leases during 2004. The leasing company engages in equipment finance. Consumer loans, which include home equity lines of credit, direct installment, and revolving credit loans, increased 8.6%, or $5,059,000, in 2004. During 2004, the Bank continued its prior year focus on building a high credit quality consumer loan portfolio, promoting its home equity line of credit product. Throughout 2004, the Bank offered its variable prime rate based product, at a discounted introductory rate for six months. As a result, the Bank increased home equity line of credit outstanding balances by $7,059,000, or 17.9%, in 2004 compared to 2003. Offsetting a part of the growth in home equity line balances, direct installment and other consumer loans, with a higher risk profile, declined $2,001,000, or 10.4% in 2004 compared to 2003. The Bank’s consumer loan portfolio does not contain credit card loans. By comparison, the consumer loan portfolio increased $1,069,000, or 1.9%, in 2003. The Indirect Auto loan portfolio in 2004 increased $20,459,000, or 21.1%, over the prior year, following an increase of $28,352,000, or 41.2%, in 2003 compared to 2002. The rate of portfolio growth slowed in 2004 in the face of strong incentives offered by automotive manufacturer’s financing programs as well an increase in the portfolio amortization rate. Indirect Auto loan originations in 2004 were $69,758,000, up 10.1% compared to loans originated in 2003. The Bank originated loans from, and provides service to, a network of Central and Western New York auto dealers. The following table shows the amount of loans outstanding as of December 31, 2004, which, based on remaining scheduled payments of principal, are due in the periods indicated: |
| AT DECEMBER 31, 2004 | MATURING WITHIN ONE YEAR OR LESS |
MATURING AFTER ONE BUT WITHIN FIVE YEARS |
MATURING AFTER FIVE BUT WITHIN TEN YEARS |
MATURING AFTER TEN YEARS |
TOTAL | |||||||||||
| (IN THOUSANDS) | ||||||||||||||||
| Commercial/Lease, net of unearned discount | $ | 65,931 | $ | 61,325 | $ | 24,516 | $ | 12,930 | $ | 164,702 | ||||||
| Residential Real Estate | 10,946 | 33,488 | 41,388 | 90,844 | 176,666 | |||||||||||
| Indirect Auto | 34,025 | 82,924 | 663 | 10 | 117,622 | |||||||||||
| Consumer | 6,022 | 11,577 | 42,527 | 3,736 | 63,862 | |||||||||||
| Total loans & leases net of unearned discount | $ | 116,924 | $ | 189,314 | $ | 109,094 | $ | 107,520 | $ | 522,852 | ||||||
The following table sets forth the sensitivity of the loan amounts due after one year to changes in interest rates: |
| AT DECEMBER 31, 2004 | FIXED RATE | VARIABLE RATE | ||||
| (IN THOUSANDS) | ||||||
| Due after one year, but within five years | $ | 159,655 | $ | 29,659 | ||
| Due after five years | $ | 149,257 | $ | 67,357 | ||
20 |
Loan Quality and the Allowance for Loan and Lease Losses The following table represents information concerning the aggregate amount of nonperforming asset |
| YEARS ENDED DECEMBER 31,
|
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans and leases accounted for on a | |||||||||||||||
| nonaccrual basis | $ | 2,434 | $ | 4,177 | $ | 853 | $ | 736 | $ | 686 | |||||
| Accruing loans and leases which are | |||||||||||||||
| contractually past due 90 days or more | |||||||||||||||
| as to principal or interest payments | 317 | 476 | 539 | 623 | 781 | ||||||||||
| Other real estate owned and other | |||||||||||||||
| repossessed assets | 53 | 24 | 198 | 320 | 354 | ||||||||||
| Total nonperforming loans, leases and assets | $ | 2,804 | $ | 4,677 | $ | 1,590 | $ | 1,679 | $ | 1,821 | |||||
| Ratio of allowance for loan and lease | |||||||||||||||
| losses to period-end nonperforming | |||||||||||||||
| loans and leases | 191.46 | % | 130.43 | % | 360.56 | % | 329.51 | % | 229.72 | % | |||||
| Ratio of nonperforming assets to | |||||||||||||||
| period-end total loans and leases, other real | |||||||||||||||
| estate owned, and repossessed assets | 0.53 | % | 0.98 | % | 0.38 | % | 0.45 | % | 0.58 | % | |||||
Nonperforming assets, defined as nonaccruing loans and leases plus loans and leases 90 days or more past due, along with other real estate owned and other repossessed assets as of December 31, 2004 were $2,804,000, down $1,873,000, or 40%, compared to year-end 2003. The decline in the level of nonperforming loans reflects a $1,200,000 charge off representing a portion of a commercial loan relationship that had been nonperforming since the first quarter of 2003, as well as balance reductions on other nonperforming loans. At year-end 2004, the nonperforming commercial relationship balance was $2,109,000, and represented 87% of total nonaccrual loans and leases and 77% of nonperforming loans and leases. Nonperforming loans, excluding the commercial relationship, total $642,000, or 0.12%, of total loans at December 31, 2004. The allowance to nonperforming loans and leases ratio improved from 130% at year-end 2003 to 191% at year-end 2004. Total delinquencies, defined as loans and leases 30 days or more past due and nonaccruing, were 1.02% of total loans and leases outstanding as of December 31, 2004, compared to 1.59% at the end of 2003. The improvement in the overall delinquency rate reflects lower delinquency rates in the commercial loan and indirect auto loan categories. The combination of strong underwriting and collection efforts throughout 2004 reduced the delinquency rate on indirect loans by 36%, to a rate of 0.48% at year-end. At year-end 2004 the commercial loan delinquency rate was 1.59%, the consumer loan delinquency rate was 0.47%, and the rate on residential mortgage loans was 1.04%, with the rates in all categories at comparable or lower levels than the prior year-end. The Bank has a loan and lease review program that it believes takes a conservative approach to evaluating nonperforming loans and leases and the loan and lease portfolio in general. The loan and lease review program continually audits the loan and lease portfolio to confirm management’s loan and lease risk rating system and track problem loans and leases, to insure compliance with loan and lease policy underwriting guidelines, and to evaluate the adequacy of the allowance for loan and lease losses. The Bank’s policy is to place a loan or lease on nonaccrual status and recognize income on a cash basis when a loan or lease is more than ninety days past due, unless in the opinion of management, the loan or lease is well secured and in the process of collection. The impact of interest not recognized on nonaccrual loans and leases was $267,000 in 2004 and was $300,000 in 2003. The amount of interest income on nonaccrual loans that was included in net income for the years 2004 and 2003 was less than $15,000. The Bank considers a loan and lease impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan or lease agreement. The measurement of impaired loans and leases is generally based upon the present value of future cash flows 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. As of December 31, 2004, there were no impaired loans or leases for which specific valuation allowances had been recorded. By comparison, a specific valuation allowance of $490,000 was recorded in connection with impaired loans at December 31, 2003. The allowance for loan and lease losses represents management’s best estimate of probable loan and lease losses in the Bank’s loan and lease 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 Bank 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, loan concentrations, policy changes and current interest rates are likely to have. For commercial loan and lease pools, the Bank establishes a specific reserve allocation for all loans and leases in excess of $150,000 which have been risk rated under the Bank’s risk rating system, as |
21 |
substandard or doubtful. The specific allocation is based on the most recent valuation of the loan or lease collateral. For all other commercial loans and leases, the Bank 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 qualitative 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 Bank’s loan and lease portfolio. Loans and leases are charged against the allowance for loan and lease losses, in accordance with the Bank’s loan and lease policy, when they are determined by management to be uncollectible. Recoveries on loans and leases previously charged-off are credited to the allowance for loan and lease losses when they are received. When management determines that the allowance for loan and lease losses is less than adequate to provide for potential losses, a direct charge is made to operating income. The following table summarizes loan and lease balances at the end of each period indicated and the daily average amount of loans and leases. Also summarized are changes in the allowance for loan and lease losses arising from loans and leases charged-off and recoveries on loans and leases previously charged-off and additions to the allowance, which have been charged to expense. |
| Summary of the Loan and Lease Loss Allowance |
| YEARS ENDED DECEMBER 31,
|
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (IN THOUSANDS) | |||||||||||||||
| Amount of loans and leases outstanding at end | |||||||||||||||
| of period (gross loans and leases less | |||||||||||||||
| unearned discount) | $ | 522,852 | $ | 476,441 | $ | 414,223 | $ | 375,738 | $ | 315,748 | |||||
| Daily average amount of gross loans and leases | |||||||||||||||
| (net of unearned discount) | 497,994 | 441,492 | 400,039 | 353,303 | 298,521 | ||||||||||
| Balance of allowance for loan and lease losses | |||||||||||||||
| at beginning of period | $ | 6,069 | $ | 5,019 | $ | 4,478 | $ | 3,370 | $ | 3,412 | |||||
| Loans and leases charged-off: | |||||||||||||||
| Commercial/lease | 1,271 | 487 | 367 | 326 | 780 | ||||||||||
| Real estate mortgage | 123 | 62 | 63 | 1 | 56 | ||||||||||
| Indirect Auto | 531 | 787 | 1,061 | 1,019 | 370 | ||||||||||
| Consumer | 265 | 333 | 303 | 376 | 251 | ||||||||||
| Total loans and leases charged-off | $ | 2,190 | $ | 1,669 | $ | 1,794 | $ | 1,722 | $ | 1,457 | |||||
| Recoveries of loans and leases previously | |||||||||||||||
| charged-off: | |||||||||||||||
| Commercial/lease | 52 | 53 | 82 | 32 | 74 | ||||||||||
| Real estate mortgage | 10 | — | 9 | 2 | 1 | ||||||||||
| Indirect Auto | 218 | 193 | 235 | 228 | 127 | ||||||||||
| Consumer | 124 | 124 | 114 | 113 | 63 | ||||||||||
| Total recoveries | $ | 404 | $ | 370 | $ | 440 | $ | 375 | $ | 265 | |||||
| Net loans and leases charged-off | 1,786 | 1,299 | 1,354 | 1,347 | 1,192 | ||||||||||
| Additions to allowance charged to expense | 984 | 2,349 | 1,895 | 2,455 | 1,150 | ||||||||||
| Balance at end of period | $ | 5,267 | 6,069 | $ | 5,019 | $ | 4,478 | $ | 3,370 | ||||||
| Ratio of allowance for loan and lease losses | |||||||||||||||
| to period-end loans and leases | 1.01 | % | 1.27 | % | 1.21 | % | 1.19 | % | 1.07 | % | |||||
| Ratio of net charge-offs to average loans and | |||||||||||||||
| leases outstanding | 0.36 | % | 0.29 | % | 0.34 | % | 0.38 | % | 0.40 | % | |||||
The allowance for loan and lease losses at December 31, 2004 was $5,267,000, or 1.01% of loans and leases outstanding, compared to $6,069,000, or 1.27% of loans and leases outstanding at December 31, 2003. The 2004 reduction of $802,000, or 13.2%, in the allowance for loan and lease losses was the result of net charge offs exceeding the amount of the 2004 provision expense. Net loans and leases charged-off increased to $1,786,000 in 2004 from $1,299,000 in 2003 and the ratio of net charge-offs to average loans and leases outstanding rose to 0.36% from 0.29% for the comparable periods. Significantly impacting the 2004 net charge off total was the charge off of $1,200,000 taken on the commercial loan relationship that has been reported as nonperforming. Over 70% of the
charge off had been reserved
for in 2003 as a part of the provision for loan and lease loss expense in that year. This single loss represented 67% of net loans charged off in 2004. Excluding that loss, the ratio of net charge-offs to average loans was 0.12% for 2004. This loss also significantly impacted the ratio of net commercial loan and lease losses to average commercial loans and leases during the year. Excluding the loss from net commercial loan and lease losses, the 2004 loss ratio was 0.04%, reflecting the overall quality of the commercial loan and lease underwriting guidelines and credit policy. On February 16, 2005, the Bank sold of all loans that represented the non-performing commercial loan relationship. As a result of |
22 |
the sale, the Bank received a recovery of approximately $100,000, and no further recoveries are expected. The Bank’s total nonperforming loans declined approximately 70% following the sale, and as a result the ratio of nonperforming loans to total loans also declined to approximately 0.12%. Loss rates improved in other loan portfolio categories, with net losses on consumer loans declining 32%, and net losses on indirect auto loans declining 47%. The loss rate in the mortgage portfolio has been less than 0.10% for the last five years. The decline in the consumer and indirect auto loan loss rates reflects the Bank’s strong loan underwriting guidelines and effective collection program. As a percentage of indirect auto loans originated in 2004, 90% were originated in the Bank’s Premium or Level A (FICO score 679 or above) credit quality categories, the same percentage as in 2003. The provision for loan and lease loss expense in 2004 was $1,365,000 less than the 2003 expense, and was equal to 55% of net loans charged off during the year and 0.20% of average loans and leases in 2004. The decline in the provision expense compared to the prior year reflected improvement in the overall credit quality indicators of the loan and lease portfolio, as well as a level of the allowance for loan and lease losses that was adequately provisioned for over prior periods to cover the commercial loan portfolio loss. By comparison, the 2003 provision for loan and lease loss expense was equal to 181% of the 2003 net loans charged off and was 0.53% of 2003 average loans. The following table shows the percentages of net charge-offs to total average loans outstanding within each individual loan category. |
| YEARS ENDED DECEMBER 31,
|
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans and leases charged-off as a percentage | |||||||||||||||
| of average loans within that category: | |||||||||||||||
| Commercial/lease | 0.80 | % | 0.31 | % | 0.21 | % | 0.23 | % | 0.66 | % | |||||
| Real estate mortgage | 0.07 | % | 0.04 | % | 0.04 | % | 0.00 | % | 0.05 | % | |||||
| Indirect Auto | 0.28 | % | 0.72 | % | 1.32 | % | 1.60 | % | 0.81 | % | |||||
| Consumer | 0.23 | % | 0.36 | % | 0.34 | % | 0.54 | % | 0.41 | % | |||||
| Ratio of total net charge-offs to average | |||||||||||||||
| loans and leases outstanding | 0.36 | % | 0.29 | % | 0.34 | % | 0.38 | % | 0.40 | % | |||||
The allowance for loan and lease losses has been allocated within the following categories of loans and leases at the dates indicated: |
| Allocation of the Allowance for Loan and Lease Losses |
| YEARS ENDED DECEMBER 31, |
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AMT. OF ALLOWANCE |
PERCENT
|
AMT. OF ALLOWANCE |
PERCENT
|
AMT. OF ALLOWANCE |
PERCENT
|
AMT. OF ALLOWANCE |
PERCENT
|
AMT. OF ALLOWANCE |
PERCENT
|
|||||||||||||||||||||
| (DOLLARS IN THOUSANDS) | ||||||||||||||||||||||||||||||
| Commercial and Leases | $ | 2,765 | 52.50 | % | $ | 3,091 | 50.93 | % | $ | 2,575 | 51.31 | % | $ | 2,588 | 57.79 | % | $ | 1,625 | 48.22 | % | ||||||||||
| Real estate mortgage | 689 | 13.08 | % | 608 | 10.01 | % | 361 | 7.19 | % | 305 | 6.81 | % | 276 | 8.19 | % | |||||||||||||||
| Indirect Auto | 1,447 | 27.47 | % | 1,879 | 30.96 | % | 1,551 | 30.90 | % | 1,075 | 24.01 | % | 819 | 24.30 | % | |||||||||||||||
| Consumer | 366 | 6.95 | % | 491 | 8.10 | % | 532 | 10.60 | % | 510 | 11.39 | % | 650 | 19.29 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total | $ | 5,267 | 100.00 | % | $ | 6,069 | 100.00 | % | $ | 5,019 | 100.00 | % | $ | 4,478 | 100.00 | % | $ | 3,370 | 100.00 | % | ||||||||||
|
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The allowance for loan and lease losses is allocated according to the amount deemed to be reasonably necessary to provide for the probable losses within each category of loans and leases. During 2004, improvement in the quality of the indirect auto and consumer loan portfolios measured primarily by lower charge offs and delinquency levels resulted in reductions of 23% and 25% respectively, in the levels of the allowance for these portfolio categories. At year-end 2004 these categories also represent a lower percentage of the total allowance, with the reduction also supported by indirect auto loan originations to primarily premium credit quality borrowers and consumer loans that primarily consist of home equity loans secured by borrower’s primary residences. The
2004 charge off of the $1,200,000 commercial loan reduced the potential amount of losses in the commercial loan and lease category at year-end and as a result the allowance component for commercial loans and leases declined 11% compared to year-end 2003. The commercial loan and lease component continues to represent the largest percentage of the allowance. |
23 |
Deposits and Other Borrowings The Company’s deposits are acquired through its subsidiary Bank and represent its primary source of funds. The deposit base is comprised of demand deposit, savings and money market accounts, and time deposits, that are primarily provided by individuals, businesses, and local governments within the communities served. The Bank continuously monitors market pricing, competitors’ rates, and internal interest rate spreads to maintain and promote growth and profitability. 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: |
| 2004 | 2003 | 2002 | |||||||||||||||||||
| AVG. BALANCE |
AVG. RATE PAID |
PERCENT OF DEPOSITS |
AVG. BALANCE |
AVG. RATE PAID |
PERCENT OF DEPOSITS |
AVG. BALANCE |
AVG. RATE PAID |
PERCENT OF DEPOSITS |
|||||||||||||
| (DOLLARS IN THOUSANDS) | |||||||||||||||||||||
| Noninterest-bearing demand deposits | $ | 68,949 | 0.00 | % | 11.06 | % | $ | 57,886 | 0.00 | % | 10.39 | % | $ | 54,213 | 0.00 | % | 10.15 | % | |||
| Interest-bearing demand deposits |
83,235 | 0.28 | % | 13.35 | % | 83,365 | 0.30 | % | 14.97 | % | 78,263 | 0.51 | % | 14.66 | % | ||||||
| Savings and money market deposits |
225,405 | 0.97 | % | 36.16 | % | 197,303 | 1.01 | % | 35.43 | % | 180,533 | 1.40 | % | 33.82 | % | ||||||
| Time deposits | 245,747 | 2.55 | % | 39.43 | % | 218,370 | 2.87 | % | 39.21 | % | 220,862 | 3.60 | % | 41.37 | % | ||||||
| Total average daily amount of deposits |
$ | 623,336 | 1.39 | % | 100.00 | % | $ | 556,924 | 1.53 | % | 100.00 | % | $ | 533,871 | 2.04 | % | 100.00 | % | |||
Average deposits during 2004 increased $66,412,000, or 11.9%, compared to a $23,053,000, or 4.3%, increase in 2003. Deposit growth in 2004 was significantly influenced by the Bank’s 2004 new branch openings, as well as a focus on building commercial deposits. Average non-interest bearing demand deposits grew 19.1% in 2004 with 89% of the growth in commercial deposits. The growth rate of average non-interest bearing deposits was 6.8% in 2003. Average interest-bearing demand deposits, the majority of which are consumer deposits, were at comparable levels with the prior year average. During 2004, promotion of the Bank’s money market product pushed average savings and money market balances up 14.2%, with growth most significant in consumer deposits. By comparison,
2003 growth in average savings
and money market balances was 9.3%. Average time deposit balances were up 12.5% in 2004, with nearly half of the growth in the consumer category, and much of that related to the 2004 new branch openings. Growth in average time deposits also included an increase of $11,716,000 in brokered certificates of deposits, that provided the Bank with rates and maturities that were preferential to local market alternatives. By comparison, average time deposits declined 1.1% in 2003. The 2003 rates of growth of average deposits, and average time deposits in particular, were negatively impacted by the 2003 sale of the Bank’s Whitney Point Branch and its approximate $13,000,000 in deposits. The Bank’s average deposit mix in 2004 was relatively unchanged compared to 2003. |
24 |
Composition of Deposits The following table sets forth the composition of the Bank’s deposits at year-end and the percentage change from the prior year for the years indicated: |
| 2004 | 2003 | 2002 | |||||||||||||
| (DOLLARS IN THOUSANDS) | BALANCE | PERCENT CHANGE |
BALANCE | PERCENT CHANGE |
BALANCE | PERCENT CHANGE |
|||||||||
| Commercial Deposits | |||||||||||||||
| Noninterest-bearing demand deposits | $ | 53,762 | 29.55 | % | $ | 41,499 | 11.74 | % | $ | 37,138 | (2.22 | %) | |||
| Interest-bearing demand deposits | 8,229 | (13.41 | %) | 9,503 | 4.30 | % | 9,111 | 27.44 | % | ||||||
| Savings and money market deposits | 31,271 | 27.40 | % | 24,546 | 4.00 | % | 23,603 | 10.73 | % | ||||||
| Time deposits | 17,315 | 18.43 | % | 14,620 | 3.91 | % | 14,070 | 64.81 | % | ||||||
| Total Commercial Deposits | $ | 110,577 | 22.63 | % | $ | 90,168 | 7.44 | % | $ | 83,922 | 11.92 | % | |||
| Consumer Deposits | |||||||||||||||
| Noninterest-bearing demand deposits | $ | 15,862 | 35.09 | % | $ | 11,742 | (9.95 | %) | $ | 13,040 | (15.60 | %) | |||
| Interest-bearing demand deposits | 60,644 | (6.71 | %) | 65,006 | 5.09 | % | 61,858 | 5.80 | % | ||||||
| Savings and money market deposits | 113,411 | 11.01 | % | 101,942 | 1.57 | % | 100,583 | 2.41 | % | ||||||
| Time deposits | 159,215 | 21.03 | % | 131,769 | (7.39 | %) | 142,042 | 13.98 | % | ||||||
| Total Consumer Deposits | $ | 349,132 | 12.46 | % | $ | 310,459 | (2.22 | %) | $ | 317,523 | 7.00 | % | |||
| Government Deposits | |||||||||||||||
| Noninterest-bearing demand deposits | $ | 4,925 | 73.17 | % | $ | 2,844 | (27.71 | %) | $ | 3,934 | 8.85 | % | |||
| Interest-bearing demand deposits | 13,018 | 17.23 | % | 11,105 | 12.57 | % | 9,865 | 7.65 | % | ||||||
| Savings and money market deposits | 62,053 | (20.12 | %) | 77,680 | 43.10 | % | 54,282 | 18.04 | % | ||||||
| Time deposits | 21,520 | (10.96 | %) | 24,169 | (31.70 | %) | 35,385 | (15.86 | %) | ||||||
| Total Government Deposits | $ | 101,516 | (12.33 | %) | $ | 115,798 | 11.92 | % | $ | 103,466 | 2.63 | % | |||
| Brokered Deposits | $ | 61,896 | 37.62 | % | $ | 44,975 | 7.75 | % | $ | 41,742 | 56.09 | % | |||
| TOTAL DEPOSITS | $ | 623,121 | 10.99 | % | $ | 561,400 | 2.70 | % | $ | 546,653 | 9.49 | % | |||
The strong growth rate of commercial deposits in 2004 pushed commercial deposits as a percentage of total deposits at year end 2004 to 17.7%, up from 16.1% a year earlier. For the comparable periods, consumer deposits increased to 56% of total deposits, up from 55.3%, while the percentage of government deposits to total deposits declined to 16.3% from 20.6% a year earlier. Throughout 2004, the Bank’s government customers had lower levels of funds available for both deposit and investment. Brokered certificates of deposit represented 9.9% of total deposits at December 31, 2004, up from 8% at year-end 2003. Time deposits in excess of $100,000, which are more volatile and sensitive to interest rates, totaled $69,158,000 at year-end 2004, representing 26.6% of total time deposits and 11.1% of total deposits. On a comparative basis, these deposits totaled $62,395,000, representing 29% of total time deposits and 11.1% of total deposits at year-end 2003. 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, 2004: |
| (IN THOUSANDS) | |||
| Less than three months | $ | 16,188 | |
| Three months to six months | 4,115 | ||
| Six months to one year | 20,795 | ||
| Over one year | 28,060 | ||
| Total | $ | 69,158 | |
25 |
The Bank offers retail repurchase agreements primarily to its larger business customers. Under the terms of the agreements, the Bank sells investment portfolio securities to the customer and agrees to repurchase the securities at a specified later date. The Bank views the arrangement as a deposit alternative for its business customers. As of December 31, 2004, retail repurchase agreement balances amounted to $23,254,000 compared to balances of $19,983,000 at December 31, 2003. During 2004, the Bank utilized collateralized repurchase agreements with various brokers and advances from the Federal Home Loan Bank of New York (FHLB) as alternative sources of funding and as a liability management practice. At December 31, 2004, the combination of repurchase agreements and FHLB advances were $148,600,000, compared to $158,500,000 at December 31, 2003. Detailed information regarding the Company’s borrowings is included in Note 8 in the Consolidated Financial Statements section of this report. In December 2003, the Company formed Alliance Financial Capital Trust I, a wholly owned subsidiary of the Company. The trust was formed for the purpose of issuing $10,000,000 of corporation-obligated mandatorily redeemable capital securities (the capital securities) to third party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company. The debentures held by the trust are the sole assets of that trust. Distributions on the capital securities issued by the trust are payable quarterly at a rate per annum equal to the interest rate being earned by the trust on the debentures held by the trust. The capital securities have a variable annual coupon rate that resets quarterly based upon three-month LIBOR plus 285 basis points. The capital securities have a 30-year maturity and are redeemable at par in January 2009 and any time thereafter. Capital In 2004, the Company added $7,255,000 into equity through net income and declared dividends to shareholders in the amount of $2,996,000, retaining $4,259,000 in undivided profits. During the year, the Company’s equity increased $406,000, in connection with the issuance of 17,111 shares of stock in connection with the exercise of stock options, and $177,000 in connection with the issuance of restricted stock. 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 under “Investment Securities” 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 a decrease in total shareholders’ equity of $2,043,000 for the year ended December 31, 2004. The Company’s ratio of shareholders’ equity to total assets of 7.71% at December 31, 2004 compares to 8.00% at December 31, 2003. 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, 2004, 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, is included in Note 16 in the Consolidated Financial Statements included in this report. The Company declared cash dividends equal to $0.84 per share in 2004 compared to $0.94 in 2003. During the fourth quarter of 2003, the Company declared a special cash dividend of $0.10 per share, in addition to its then regular dividend of $0.21 per share. The 2004 dividend pay-out ratio of 41% was comparable with the pay-out ratio in 2003. It is the Company’s current intention to maintain a dividend pay-out ratio at or about 40%, subject to applicable regulatory restrictions and operational funding requirements. Liquidity The Company’s liquidity is primarily measured by the Bank’s 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 Management Committee (ALCO) of the Bank is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. Management believes, as of December 31, 2004, that liquidity as measured by the Bank 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 FHLB, and securities sold under repurchase agreements. During the twelve months ended December 31, 2004, cash and cash equivalents declined by $566,000, as net cash used by investing activities of $73,435,000 exceeded the net cash provided by operating activities and financing activities of $72,869,000. Net cash provided by financing activities reflects a net increase in deposits of $61,721,000 and a net increase in borrowings of $3,371,000. Brokered deposits increased in the amount of $16,921,000 during the year ended December 31, 2004. Net cash used in investing activities reflects a net increase in loans of $48,197,000, a net increase in investment securities of $21,745,000, and a net increase in premises and equipment of $3,493,000. |
26 |
As a member of the FHLB, 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 December 31, 2004, the Bank’s credit limit with the FHLB was $116,611,000, with outstanding borrowings in the amount of $73,600,000.
The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. Contractual Obligations: The following table presents as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. |
| Payments Due In | ||||||||||||||||||||||
| Contractual obligation | Note Reference |
One Year or Less |
One to Three Years |
Three to Five Years |
Over Five Years |
Total | ||||||||||||||||
| (DOLLARS IN THOUSANDS) | ||||||||||||||||||||||
| Long-term debt* | 8 | $ | 30,000 | $ | 35,000 | $ | — | $ | 25,310 | $ | 90,310 | |||||||||||
| Operating leases | 13 | $ | 774 | $ | 1,310 | $ | 1,178 | $ | 1,642 | $ | 4,904 | |||||||||||
| *Excludes interest |
The Company also has obligations under its postretirement plan as described in Note 10 to the consolidated financial statements. The postretirement benefit payments represent actuarially determined future benefit payments to eligible plan participants. At December 31, 2004, the Company has a commitment to acquire a portion of the personal trust business of HSBC Bank USA, N.A. that is expected to increase the Bank’s trust assets under management to over $800,000,000. A closing is expected in the 2005 first quarter. Commitments and Off-Balance Sheet Arrangements: In the normal course of business, to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates, the Bank is party to financial instruments with off-balance sheet risk, held for purposes other than trading. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument, for loan commitments and standby letters of credit, is represented by the contractual amount of those instruments, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet loans. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Commitments to originate loans, unused lines of credit, and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon. Therefore, the amounts presented below do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The following table details the amounts and expected maturities of significant commitments and off-balance sheet arrangements as of December 31, 2004. Further discussion of these commitments and off-balance sheet arrangements is included in Note 13 to the consolidated financial statements. |
| Commitments to extend credit: | One Year or Less |
One to Three Years |
Three to Five Years |
Over Five Years |
Total | ||||||||||||||
| Commercial loans and leases | $ | 37,815 | $ | 5,758 | $ | 3,930 | $ | 629 | $ | 48,132 | |||||||||
| Residential real estate | 2,422 | 2,422 | |||||||||||||||||
| Revolving home equity lines | 1,043 | 1,400 | 2,457 | 27,307 | 32,207 | ||||||||||||||
| Consumer revolving credit | 4,585 | — | — | — | 4,585 | ||||||||||||||
| Standby letters of credit | 5,105 | — | — | — | 5,105 | ||||||||||||||
27 |
28 |
over the next twelve months with an adverse effect no greater than 7.5%. At December 31, 2004, based on the results of our simulation model and assuming that management does not take action to alter the outcome, the Company would expect net interest income to decrease 5.7% if short term interest rates increase by 2%, and increase 2.2% if short term interest rates decline by 1%. By comparison, at December 31, 2003, based on the results of our simulation model, and assuming that management did not take action to alter the outcome, the Company expected net interest income to decline 11% if short term interest rates increased by 2%, and increase 4.2 % if short term interest rates declined by 1%. Net Present Value Estimation The Net Present Value of Equity (NPV) measure is used for discerning levels of risk present in the balance sheet that might not be taken into account in the earnings simulation model due to the shorter time horizon used by that model. The NPV of the balance sheet, at a point in time, is defined as the discounted present value of the asset cash flows minus the discounted value of liability cash flows. Interest rate risk analysis using NPV involves changing the interest rates used in determining the cash flows and in discounting the cash flows. The Company’s NPV analysis models both an instantaneous 2% increasing and 2% decreasing interest rate scenario comparing the NPV in each scenario to the NPV in the current rate scenario. The resulting percentage change in NPV is an indication of the longer-term repricing risk and options risk embedded in the balance sheet. The NPV measure assumes a static balance sheet versus the growth assumptions that are incorporated into the earnings simulation measure, and an unlimited time horizon instead of the one-year horizon applied in the earnings simulation model. As with earnings simulation modeling, assumptions about the timing and the variability of balance sheet cash flows are critical in NPV analysis. Particularly important are assumptions driving mortgage prepayments in both the loan and investment portfolios, and changes in the noncontractual deposit portfolios. These assumptions are applied consistently in both models. Based on the December 31, 2004 NPV analysis, a 2% instantaneous increase in interest rates was estimated to decrease NPV by 3.1%. NPV was estimated to decline 2.9% if rates immediately declined by 1%. Policy guidelines limit the amount of the estimated decline to 25% in a 2% rate change scenario, and 12.5% in a 1% rate change scenario. As with the earnings simulation modeling, due to the low level of interest rates over the past two years, the Company modified its standard decreasing rate scenario to a 1% rate decline for the years ended 2004 and 2003. By comparison, the December 31, 2003 NPV analysis estimated a 2% instantaneous increase in interest rates would decrease NPV by 10.8%. NPV was estimated to decline 3.2% if rates immediately declined by 1%. 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, 2004: Expected Maturity/Principal Repayments at December 31, 2004 |
| 2005 | 2006 | 2007 | 2008 | 2009 | THERE- AFTER |
TOTAL | AVERAGE INTEREST RATE |
FAIR VALUE |
||||||||||||||||||||
| (DOLLARS IN THOUSANDS) | ||||||||||||||||||||||||||||
| Rate Sensitive Assets | ||||||||||||||||||||||||||||
| Loans and leases | $ | 174,536 | $ | 111,474 | $ | 53,906 | $ | 38,650 | $ | 42,540 | $ | 103,801 | $ | 524,907 | 5.67 | % | $ | 524,763 | ||||||||||
| Investments | 111,536 | 50,550 | 32,932 | 26,274 | 24,587 | 79,246 | 325,125 | 4.40 | % | 325,379 | ||||||||||||||||||
| Total rate sensitive assets | $ | 286,072 | $ | 162,024 | $ | 86,838 | $ | 64,924 | $ | 67,127 | $ | 183,047 | $ | 850,032 | $ | 850,142 | ||||||||||||
| Rate Sensitive Liabilities | ||||||||||||||||||||||||||||
| Savings, money market, and NOW accounts | $ | 63,875 | $ | 63,908 | $ | 63,908 | $ | 39,965 | $ | 22,959 | $ | 34,011 | $ | 288,626 | 0.88 | % | $ | 288,626 | ||||||||||
| Time deposits | 132,548 | 82,714 | 37,137 | 3,245 | 4,263 | 39 | 259,946 | 2.68 | % | 260,299 | ||||||||||||||||||
| Borrowings | 114,414 | 25,000 | 10,000 | — | — | 42,751 | 192,165 | 2.63 | % | 192,805 | ||||||||||||||||||
| Total rate sensitive liabilities | $ | 310,837 | $ | 171,622 | $ | 111,045 | $ | 43,210 | $ | 27,222 | $ | 76,801 | $ | 740,737 | $ | 741,730 | ||||||||||||
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 loans and leases could vary substantially if future prepayments differ from the Company’s historical experience. For liabilities, |
29 |
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. |
| Consolidated Statements of Condition | (Dollars
in thousands) |
|||||||
| Assets | Dec. 31, 2004 | Dec. 31, 2003 | ||||||
| Cash and due from banks | $ | 21,258 | $ | 21,824 | ||||
|
|
|
|||||||
| Total Cash and Cash Equivalents | $ | 21,258 | $ | 21,824 | ||||
| Held-to-maturity investment securities | 5,367 | 6,756 | ||||||
| Available-for-sale investment securities | 319,758 | 299,031 | ||||||
|
|
|
|||||||
| Total Investment Securities | $ | 325,125 | $ | 305,787 | ||||
| (fair value—$325,379 for 2004 and $306,271 for 2003) | ||||||||
| Total Loans and Leases | $ | 524,907 | $ | 477,071 | ||||
| Less: Unearned income | 2,055 | 630 | ||||||
| Less: Allowance for loan and lease losses | 5,267 | 6,069 | ||||||
|
|
|
|||||||
| Net Loans and Leases | $ | 517,585 | $ | 470,372 | ||||
| Bank premises, furniture, and equipment | 12,335 | 10,410 | ||||||
| Accrued interest receivable | 4,005 | 4,017 | ||||||
| Other Assets | 13,626 | 13,845 | ||||||
|
|
|
|||||||
| Total Assets | $ | 893,934 | $ | 826,255 | ||||
|
|
|
|||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Noninterest-bearing deposits | $ | 74,549 | $ | 56,085 | ||||
| Interest-bearing deposits | 548,572 | 505,315 | ||||||
|
|
|
|||||||
| Total Deposits | $ | 623,121 | $ | 561,400 | ||||
| Borrowings | 192,164 | 188,793 | ||||||
| Accrued interest payable | 1,451 | 1,244 | ||||||
| Other liabilities | 8,302 | 8,665 | ||||||
|
|
|
|||||||
| Total Liabilities | $ | 825,038 | $ | 760,102 | ||||
|
|
|
|||||||
| 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, 3,947,140 and 3,910,029 shares issued, and 3,571,872 and 3,534,761 shares outstanding for 2004 and 2003, respectively |
3,947 | 3,910 | ||||||
| Surplus | 10,298 | 9,268 | ||||||
| Unamortized value of restricted stock | (1,047 | ) | (563 | ) | ||||
| Undivided profits | 62,235 | 57,976 | ||||||
| Accumulated other comprehensive income | 1,418 | 3,517 | ||||||
| Treasury stock, at cost; 375,268 and 375,268 shares, respectively | (7,955 | ) | (7,955 | ) | ||||
|
|
|
|||||||
| Total Shareholders’ Equity | $ | 68,896 | $ | 66,153 | ||||
|
|
|
|||||||
| Total Liabilities and Shareholders’ Equity | $ | 893,934 | $ | 826,255 | ||||
|
|
|
|||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
30 |
| Consolidated Statements of Income (Dollars in thousands) | |||||||||
| Interest Income |
Years Ended Dec. 31, 2004 |
Dec. 31, 2003 | Dec. 31, 2002 | ||||||
|
|
|
|
|||||||
| Interest and fees on loans & leases | $ | 28,431 | $ | 27,951 | $ | 28,177 | |||
| Interest on investment securities: | |||||||||
| U.S. Government and Agency obligations | 8,943 | 9,141 | 11,555 | ||||||
| Obligations of states and political subdivisions | 3,158 | 2,920 | 2,678 | ||||||
| Other | 342 | 175 | 274 | ||||||
| Interest on federal funds sold | 45 | 33 | 30 | ||||||
|
|
|
|
|||||||
| Total Interest Income | $ | 40,919 | $ | 40,220 | $ | 42,714 | |||
| Interest Expense | |||||||||
| Interest on deposits | $ | 8,677 | $ | 8,505 | $ | 10,892 | |||
| Interest on borrowings | 4,007 | 4,322 | 5,052 | ||||||
|
|
|
|
|||||||
| Total Interest Expense | $ | 12,684 | $ | 12,827 | $ | 15,944 | |||
|
|
|
|
|||||||
| Net Interest Income | 28,235 | 27,393 | 26,770 | ||||||
| Provision for loan & lease losses | 984 | 2,349 | 1,895 | ||||||
|
|
|
|
|||||||
|
Net Interest Income After Provision For Loan & Lease Losses |
$ | 27,251 | $ | 25,044 | $ | 24,875 | |||
|
|
|
|
|||||||
| Non-interest Income | |||||||||
| Trust and brokerage services | $ | 1,778 | $ | 1,357 | $ | 1,343 | |||
| Service charges on deposit accounts | 3,056 | 2,927 | 2,281 | ||||||
| Investment securities gains | 717 | 1,142 | 791 | ||||||
| Gain on sale of loans | 197 | 421 | 226 | ||||||
| Bank owned life insurance | 810 | 461 | 485 | ||||||
| Net premium on sale of branch | — | 1,407 | — | ||||||
| Other non-interest income | 1,665 | 1,572 | 1,638 | ||||||
|
|
|
|
|||||||
| Total Non-interest Income | $ | 8,223 | $ | 9,287 | $ | 6,764 | |||
|
|
|
|
|||||||
| Total Operating Income | $ | 35,474 | $ | 34,331 | $ | 31,639 | |||
| Operating Expenses | |||||||||
| Salaries, wages, and employee benefits | $ | 14,919 | $ | 13,462 | $ | 12,518 | |||
| Building, occupancy, and equipment | 4,429 | 3,553 | 3,443 | ||||||
| Communication expense | 614 | 557 | 581 | ||||||
| Stationary and supplies expense | 520 | 414 | 744 | ||||||
| Marketing expense | 603 | 526 | 496 | ||||||
| Other operating expense | 5,208 | 5,016 | 4,595 | ||||||
|
|
|
|
|||||||
| Total Operating Expenses | $ | 26,293 | $ | 23,528 | $ | 22,377 | |||
|
|
|
|
|||||||
| Income Before Income Taxes | 9,181 | 10,803 | 9,262 | ||||||
| Provision for income taxes | 1,926 | 2,792 | 2,351 | ||||||
|
|
|
|
|||||||
| Net Income | $ | 7,255 | $ | 8,011 | $ | 6,911 | |||
|
|
|
|
|||||||
| Net Income Per Common Share | |||||||||
| Basic | $ | 2.03 | $ | 2.28 | $ | $ 2.00 | |||
| Diluted | $ | 2.00 | $ | 2.23 | $ | $ 1.98 | |||
|
|
|
|
|||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
31 |
| Consolidated Statements of Changes in Shareholders’ Equity (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
| FOR THE YEARS ENDED DEC. 31, 2004, 2003, 2002 |
ISSUED COMMON SHARES |
COMMON STOCK |
SURPLUS | UNAMORTIZED VALUE OF RESTRICTED STOCK |
UNDIVIDED PROFITS |
ACCUMULATED OTHER COMPREHENSIVE INCOME |
TREASURY STOCK |
TOTAL | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
| Balance at January 1, 2002 | 3,815,305 | $ | 3,815 | $ | 7,096 | — | $ | 49,086 | $ | 1,243 | $ | (7,777 | ) | $ | 53,463 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||||||
| Net income | 6,911 | 6,911 | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes: | 5,224 | 5,224 | ||||||||||||||||||||||||||||||||
| Stock options exercised | 12,500 | 13 | 210 | 223 | ||||||||||||||||||||||||||||||
| Cash dividends, $.79 per share | (2,725 | ) | (2,725 | ) | ||||||||||||||||||||||||||||||
| Treasury stock purchased | (143 | ) | (143 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Balance at December 31, 2002 | 3,827,805 | $ | 3,828 | $ | 7,306 | — | $ | 53,272 | $ | 6,467 | $ | (7,920 | ) | $ | 62,953 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||||||
| Net income | 8,011 | 8,011 | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes: | (2,950 | ) | (2,950 | ) | ||||||||||||||||||||||||||||||
| Issuance of restricted stock | 22,500 | 22 | 616 | (638 | ) | — | ||||||||||||||||||||||||||||
| Amortization of restricted stock | 75 | 75 | ||||||||||||||||||||||||||||||||
| Stock options exercised | 59,724 | 60 | 1,346 | 1,406 | ||||||||||||||||||||||||||||||
| Cash dividends, $.94 per share | (3,307 | ) | (3,307 | ) | ||||||||||||||||||||||||||||||
| Treasury stock purchased | (35 | ) | (35 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Balance at December 31, 2003 | 3,910,029 | $ | 3,910 | $ | 9,268 | ($563 | ) | $ | 57,976 | $ | 3,517 | $ | (7,955 | ) | $ | 66,153 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||||||
| Net income | 7,255 | 7,255 | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes: | (2,099 | ) | (2,099 | ) | ||||||||||||||||||||||||||||||
| Issuance of restricted stock | 20,000 | 20 | 641 | (661 | ) | — | ||||||||||||||||||||||||||||
| Amortization of restricted stock | 177 | 177 | ||||||||||||||||||||||||||||||||
| Stock options exercised | 17,111 | 17 | 389 | 406 | ||||||||||||||||||||||||||||||
| Cash dividends, $.84 per share | (2,996 | ) | (2,996 | ) | ||||||||||||||||||||||||||||||
| Treasury stock purchased | — | — | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Balance at December 31, 2004 | 3,947,140 | $ | 3,947 | $ | 10,298 | ($1,047 | ) | $ | 62,235 | $ | 1,418 | $ | (7,955 | ) | $ | 68,896 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
| Consolidated Statements of Comprehensive Income (Dollars in thousands) |
| Years Ended Dec. 31, 2004 |
Dec. 31, 2003
|
Dec. 31, 2002
|
|||||||
|---|---|---|---|---|---|---|---|---|---|
| Other comprehensive (loss) income, before tax: | |||||||||
| Change in minimum pension liability adjustment | $ | (56 | ) | $ | — | $ | — | ||
| Unrealized (loss) gain on securities: | |||||||||
| Unrealized holding (losses) gains arising during period | (3,404 | ) | (4,916 | ) | 8,707 | ||||
| Other comprehensive (loss) income, before tax | (3,460 | ) | (4,916 | ) | 8,707 | ||||
| Income tax benefit (expense) related to other comprehensive (loss) income |
1,361 | 1,966 | (3,483 | ) | |||||
| Other comprehensive (loss) income, net of tax | (2,099 | ) | (2,950 | ) | 5,224 | ||||
| Net Income | 7,255 | 8,011 | 6,911 | ||||||
| Comprehensive income | $ | 5,156 | $ | 5,061 | $ | 12,135 | |||
| The accompanying notes are an integral part of the consolidated financial statements. |
32 |
| Consolidated Statements of Cash Flows (Dollars in thousands) | |||||||||
| Increase (Decrease) in Cash and Cash Equivalents | |||||||||
| Years Ended Dec. 31, 2004 |
2003 | 2002 | |||||||
| Operating Activities | |||||||||
| Net income | $ | 7,255 | $ | 8,011 | $ | 6,911 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
| Provision for loan losses | 984 | 2,349 | 1,895 | ||||||
| Provision for depreciation | 1,639 | 1,416 | 1,469 | ||||||
| Decrease (increase) in surrender value of life insurance | 132 | (461 | ) | (485 | ) | ||||
| Provision (benefit) for deferred income taxes | 2,429 | 352 | (245 | ) | |||||
| (Accretion) amortization of investment security discounts and premiums, net | (280 | ) | (164 | ) | 355 | ||||
| Realized investment security gains | (717 | ) | (1,142 | ) | (791 | ) | |||
| Realized (gain) loss on the sale of assets | (71 | ) | 46 | (4 | ) | ||||
| Proceeds from the sale of mortgage loans | 10,848 | 26,108 | 14,752 | ||||||
| Origination of loans held-for-sale | (10,754 | ) | (25,987 | ) | (14,526 | ) | |||
| Gain on sale of loans | (94 | ) | (121 | ) | (226 | ) | |||
| Gain on sale of branch | — | (1,458 | ) | — | |||||
| Restricted stock expense | 177 | 75 | — | ||||||
| Change in other assets and liabilities | (836 | ) | 2,032 | (1,782 | ) | ||||
| Net Cash Provided by Operating Activities | $ | 10,712 | $ | 11,056 | $ | 7,323 | |||
| Investing Activities | |||||||||
| Proceeds from maturities, redemptions, calls and principal repayments of investment securities, available-for-sale | $ | 65,071 | $ | 86,560 | $ | 63,726 | |||
| Proceeds from maturities, redemptions, calls and principal repayments of investment securities, held-to-maturity | |||||||||
| 4,454 | 3,937 | 2,862 | |||||||
| Proceeds from sales of investment securities | 31,468 | 68,826 | 33,075 | ||||||
| Purchase of investment securities, available-for-sale | (119,673 | ) | (149,222 | ) | (131,145 | ) | |||
| Purchase of investment securities, held-to-maturity | (3,065 | ) | (4,504 | ) | (1,679 | ) | |||
| Net increase in loans | (48,197 | ) | (64,778 | ) | (39,839 | ) | |||
| Purchases of premises and equipment | (3,663 | ) | (1,833 | ) | (1,315 | ) | |||
| Proceeds from the sale of premises and equipment | 170 | 213 | 191 | ||||||
| Net cash used in sale of branch | — | (10,566 | ) | — | |||||
| Net Cash Used by Investing Activities | $ | (73,435 | ) | $ | (71,367 | ) | $ | (74,124 | ) |
| Financing Activities | |||||||||
| Net increase in demand deposits, NOW accounts, and savings accounts | $ | 17,519 | $ | 40,871 | $ | 15,841 | |||
| Net increase (decrease) in time deposits | 44,202 | (13,094 | ) | 31,520 | |||||
| Net increase in short-term borrowings | 33,371 | 19,105 | 7,242 | ||||||
| Net (decrease) increase in long-term borrowings | (30,000 | ) | 15,310 | 15,000 | |||||
| Proceeds from the exercise of stock options | 406 | 1,406 | 223 | ||||||
| Treasury stock purchased | — | (35 | ) | (143 | ) | ||||
| Cash dividends | (3,341 | ) | (2,902 | ) | (3,034 | ) | |||
| Net Cash Provided by Financing Activities | $ | 62,157 | $ | 60,661 | $ | 66,649 | |||
| Increase (decrease) in Cash and Cash Equivalents | (566 | ) | 350 | (152 | ) | ||||
| Cash and cash equivalents at beginning of year | 21,824 | 21,474 | 21,626 | ||||||
| Cash and Cash Equivalents at End of Year | $ | 21,258 | $ | 21,824 | $ | 21,474 | |||
33 |
| Supplemental Disclosures of Cash Flow Information: | |||||||||
| Cash paid during the year for: | |||||||||
| Interest on deposits and borrowings | $ | 12,477 | $ | 13,045 | $ | 15,790 | |||
| Income taxes | 1,280 | 2,600 | 3,085 | ||||||
| Noncash investing activities: | |||||||||
| Decrease
(increase) in net unrealized gain/losses on available-for-sale securities |
3,404 | 4,916 | (8,707 | ) | |||||
| Change in minimum pension liability adjustment | 56 | — | — | ||||||
| Noncash financing activities: | |||||||||
| Dividend declared and unpaid | 750 | 1,096 | 691 | ||||||
|
|
|
|
|||||||
| The accompanying notes are an integral part of the consolidated financial statements. |
34 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nature of Operations: Alliance Financial Corporation (the Company) is a bank holding company, which owns and operates Alliance Bank, N.A. and Alliance Financial Capital Trust I. The Company provides financial services through its Bank subsidiary primarily to individuals, small- to medium-sized businesses and government customers from 20 customer service facilities in Cortland, Madison, western Oneida, and Onondaga counties. Alliance Financial Capital Trust I was formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities to third party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company. The Bank has a substantially wholly owned subsidiary, Alliance Preferred Funding Corp., which is engaged in residential real estate activity and a wholly owned subsidiary, Alliance Leasing, Inc., which is engaged in commercial leasing activity. On February 18, 2005, the Bank closed its previously announced acquisition of certain personal trust accounts and related assets under management from HSBC, USA, NA. The Bank assumed the successor trustee role from HSBC on approximately 1830 personal trust accounts and further assumed approximately $560,000,000 in assets under management. Combined with its existing trust business the Bank now manages over 2400 trust accounts and approximately $800,000,000 of related investment assets. In connection with the acquisition the Bank hired 13 trust professionals from HSBC and opened an office in Buffalo New York to manage the acquired accounts. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Alliance Bank, N.A., after elimination of inter-company accounts and transactions. The Company’s wholly owned subsidiary Alliance Financial Capital Trust I qualifies as a variable interest entity under FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” However, the Company is not the primary beneficiary and therefore has not consolidated the accounts of Alliance Financial Capital Trust I in its consolidated financial statements. Critical Accounting Estimates and Policies: 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. Management has identified the allowance for loan and lease losses and accrued income taxes to be the accounting areas that require the most subjective and complex judgements, and as such could be the most subject to revision as new information becomes available. Risk and Uncertainties: In the normal course of its business, the Company encounters economic and regulatory risks. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, from its interest-earning assets. The Company’s primary credit risk is the risk of default on the Company’s loan portfolio that results from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects potential changes in the value of collateral underlying loans, the fair value of investment securities, and loans held for sale. The Company is subject to regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan and lease loss allowances, and operating restrictions resulting from the regulators’ judgements based on information available to them at the time of their examinations. 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. |
35 |
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 positive 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. Investment securities are reviewed regularly for other than temporary impairment. Where there is other than temporary impairment, the impairment loss is recognized in the consolidated statements of income. 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. The fair value of the collateral provided to a third party is continually monitored and additional collateral is provided to the third party, or surplus collateral is returned to the Company as deemed appropriate. Loans & Leases: Loans and direct financing leases are stated at unpaid principal balances less the allowance for loan and lease 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. Operating leases are stated at cost of the equipment less depreciation. Equipment on Operating leases is depreciated on a straight-line basis to its estimated residual value over the lease term. Operating lease income is recognized on a straight-line basis over the term of the lease. Income attributable to direct financing leases is initially recorded as unearned income and subsequently recognized as finance income at level rates of return over the term of the leases. The recorded residual values of the Company’s leased assets are estimated at the inception of the lease to be the expected fair market value of the assets at the end of the lease term. On a quarterly basis, the Company reassesses the realizable value of its lease residual values. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized immediately. 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 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 and lease growth, delinquency, losses, economic conditions, loan concentration, policy changes, and current interest rates are likely to have. For commercial loan and lease pools, the Company evaluates all loans and leases in excess of $150,000, which have been risk rated under the Company’s risk rating system, as substandard or doubtful for potential impairment. If impairment exists, a specific allocation to the allowance is made for the identified commercial loan or lease. 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 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 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 or leases is generally discounted at the historical effective interest rate, except that all collateral-dependent loans or leases are measured for impairment based on fair value of the collateral. Loans will be charged off when they are considered a loss regardless of the delinquency status. From a delinquency standpoint, the policy of this bank is to charge off loans when they are one hundred and twenty (120) days past due unless extenuating circumstances are documented that attest to the ability to collect the loan. Special circumstances to include fraudulent loans and loans in bankruptcy will be |
36 |
charged off no later than ninety (90) days of discovery or within one hundred and twenty days (120) days delinquent, whichever is shorter. In lieu of charging off the entire loan balance, loans with collateral may be written down to the value of the collateral, less cost to sell, if foreclosure of repossession of collateral is assured and in process. Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and leases, including impaired loans or leases, 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 or lease is classified as nonaccrual and the future collectibility of the recorded loan or lease 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. Mortgage Servicing Rights: Originated mortgage servicing rights are recorded at their fair value at the time of transfer and amortized in proportion to and over the period of estimated net servicing income or loss. The Company uses a valuation service provider that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company integrated assumptions that market participants would use in estimating future net servicing income, which included estimates of the cost of servicing per loan, the discount rate, and prepayment speeds. The carrying value of the originated mortgage servicing asset is periodically evaluated for impairment using similar market assumptions. Bank Premises, Furniture, and Equipment: Bank premises, furniture, and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from one year to ten years for furniture, fixtures and equipment; three to five years for software, hardware, and data handling equipment; and ten to thirty-nine years for buildings and building improvements. Leasehold improvements are amortized over the term of the respective lease. 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. Stock-Based Compensation: The Company’s stock-based compensation plan is accounted for based on the intrinsic value method set forth in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of the grant. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock option awards granted on Alliance Financial Corporation common stock. |
| 2004 | 2003 | 2002 | ||||||||||
| Net Income (in thousands): | ||||||||||||
| As reported | $ | 7,255 | $ | 8,011 | $ | 6,911 | ||||||
| Less pro forma expense related to options granted, net of related tax effects |
(43 | ) | (542 | ) | (381 | ) | ||||||
| Pro forma net income | $ | 7,212 | $ | 7,469 | $ | 6,530 | ||||||
| Pro forma net income per share: | ||||||||||||
| Basic – as reported | $ | 2.03 | $ | 2.28 | $ | 2.00 | ||||||
| Basic – pro forma | 2.02 | 2.13 | 1.89 | |||||||||
| Diluted – as reported | 2.00 | 2.23 | 1.98 | |||||||||
| Diluted – pro forma | 1.99 | 2.08 | 1.87 | |||||||||
The fair value of stock options granted prior to 2003 was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options, which have different characteristics from the Company’s employee stock options. The model is also sensitive to changes in assumptions, which can |
37 |
materially affect the fair value estimate. The fair value of the 2,000 options granted by the Company in 2004 was estimated by the Company. There were no stock options granted by the Company in 2003. The fair values of the stock options granted in 2002 were estimated at the date of the grant using the Black-Scholes option pricing model using the following assumptions: |
| 2004 | 2003 | 2002 | |||||
| Risk-free interest rate | — | — | 4.52 | % | |||
| Expected dividend yield | — | — | 3.40 | % | |||
| Volatility | — | — | 29.86 | % |
The per share weighted average fair value of stock options granted during 2002 was $5.27. The majority of the stock options, that have been granted by the Company, vest upon the attainment of certain stock price targets. The expected life for options vesting upon the attainment of certain stock price targets is two years after the performance target is attained and the option is vested, or nine years if the targets are not met. Increased volatility of the Company’s stock price in 2003 accelerated the expected vesting of options previously granted, and is reflected in increased pro-forma expense in 2003. Additional information regarding the Company’s Stock Option Plan is detailed in Footnote 12. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R, Share-Based Payment (SBP) that will require the Company to expense the value of employee stock options and similar awards. Under FAS 123R, the fair value of SBP awards is required to be included as compensation expense in the income statement beginning on the date that the Company grants awards to employees. For vested awards that are outstanding on the effective date of FAS 123R, the Company will not be required to record any additional compensation expense. For unvested awards that are outstanding on the effective date, compensation expense will be recognized in the income statement over the remainder of the vesting period for each option. Since the majority of employee stock options issued by the Company are vested and restricted stock awards are currently being recorded as compensation expense, the Company expects that the effect of FAS 123R on its financial statements will be minimal. FAS 123R is effective for the Company’s interim and annual periods beginning July 1, 2005. Until that date, the Company will continue to account for stock-based compensation in accordance with Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. 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; 3,565,226, 3,510,074, and 3,448,431for 2004, 2003, and 2002, 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 3,631,806, 3,584,930, and 3,482,809 for the years 2004, 2003, and 2002, respectively. For the years ending December 31, 2004, 2003 and 2002, basic earnings per share were $2.03, $2.28, and $2.00 respectively and diluted earnings per share were $2.00, $2.23, and $1.98 respectively. Subsequent Events: On February 15, 2005, the Bank entered into a 20-year agreement with Onondaga County, N.Y. for naming rights to its triple-A baseball stadium in Syracuse, N.Y., for which the Bank will pay in total, $2.8 million through annual installments. |
38 |
2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities at December 31 are as follows: |
| (Dollars in Thousands) | ||||||||||||
| Held-to-Maturity—2004 | AMORTIZED COST |
GROSS UNREALIZED GAINS |
GROSS UNREALIZED LOSSES |
ESTIMATED FAIR VALUE |
||||||||
|
|
|
|
|
|||||||||
| Obligations of states and political subdivisions | $ | 5,367 | $ | 254 | — | $ | 5,621 | |||||
|
|
|
|
|
|||||||||
| Total | $ | 5,367 | $ | 254 | — | $ | 5,621 | |||||
|
|
|
|
|
|||||||||
| Available-for-Sale—2004 | ||||||||||||
| U.S. Treasury and other U.S. government agencies | $ | 98,197 | $ | 369 | $ | 994 | $ | 97,572 | ||||
| Obligations of states and political subdivisions | 70,688 | 3,455 | 67 | 74,076 | ||||||||
| Mortgage-backed securities | 135,431 | 447 | 789 | 135,089 | ||||||||
| Total | $ | 304,316 | $ | 4,271 | $ | 1,850 | $ | 306,737 | ||||
|
|
|
|
|
|||||||||
| Stock Investments | ||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stock | $ | 8,037 | — | — | $ | 8,037 | ||||||
| Other equity securities | 4,448 | 55 | — | 4,503 | ||||||||
| Mutual Funds | 500 | — | 19 | 481 | ||||||||
|
|
|
|
|
|||||||||
| Total stock investment | $ | 12,985 | 55 | $ | 19 | $ | 13,021 | |||||
|
|
|
|
|
|||||||||
| Total available-for-sale | $ | 317,301 | $ | 4,326 | $ | 1,869 | $ | 319,758 | ||||
|
|
|
|
|
|||||||||
| Net unrealized gain on available-for-sale | 2,457 | |||||||||||
|
|
|
|
|
|||||||||
| Grand total carrying value | $ | 325,125 | ||||||||||
| Held-to-Maturity—2003 | ||||||||||||
| Obligations of states and political subdivisions | $ | 6,756 | $ | 484 | — | $ | 7,240 | |||||
|
|
|
|
|
|||||||||
| Total | $ | 6,756 | $ | 484 | — | $ | 7,240 | |||||
| Available-for-Sale—2003 | ||||||||||||
| U.S. Treasury and other U.S. government agencies | $ | 115,494 | $ | 2,789 | $ | 898 | $ | 117,385 | ||||
| Obligations of states and political subdivisions | 64,281 | 4,103 | 97 | 68,287 | ||||||||
| Mortgage-backed securities | 103,598 | 689 | 710 | 103,577 | ||||||||
|
|
|
|
|
|||||||||
| Total | $ | 283,373 | $ | 7,581 | $ | 1,705 | $ | 289,249 | ||||
|
|
|
|
|
|||||||||
| Stock Investments | ||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stock | $ | 6,348 | — | — | $ | 6,332 | ||||||
| Other equity securities | 2,948 | — | — | 2,964 | ||||||||
|
|
|
|
|
|||||||||
| Mutual Funds | 500 | — | 14 | 486 | ||||||||
|
|
|
|
|
|||||||||
| Total stock investment | $ | 9,796 | — | $ | 14 | $ | 9,782 | |||||
|
|
|
|
|
|||||||||
| Total available-for-sale | $ | 293,169 | $ | 7,581 | $ | 1,719 | $ | 299,031 | ||||
|
|
|
|
|
|||||||||
| Net unrealized gain on available-for-sale | 5,862 | |||||||||||
| Grand total carrying value | $ | 305,787 | ||||||||||
The carrying value and estimated market value of debt securities at December 31, 2004 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 | |||||||||||
| AMORTIZED COST |
ESTIMATED FAIR VALUE |
AMORTIZED COST |
ESTIMATED FAIR VALUE |
|||||||||
| Due in one year or less | $ | 2,817 | $ | 2,950 | $ | 48,049 | $ | 48,055 | ||||
| Due after one year through five years | 1,774 | 1,858 | 146,714 | 147,053 | ||||||||
| Due after five years through ten years | 279 | 292 | 85,510 | 87,409 | ||||||||
| Due after ten years | 497 | 521 | 24,043 | 24,220 | ||||||||
| Total debt securities | $ | 5,367 | $ | 5,621 | $ | 304,316 | $ | 306,737 | ||||
At December 31, 2004 and 2003, investment securities with a carrying value of $200,700 and $187,274, respectively, were pledged as collateral for certain deposits and other purposes as required or permitted by law. |
39 |
The Company recognized gross gains of $717, $1,142, and $835 for 2004, 2003, and 2002, respectively, and gross losses of $0, $0, and $44 for 2004, 2003, and 2002, respectively. The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004. |
| (Dollars in thousands) |
| LESS THAN 12 MONTHS | 12 MONTHS OR MORE | TOTAL | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TYPE OF SECURITY | FAIR VALUE | UNREALIZED LOSS |
FAIR VALUE | UNREALIZED LOSS |
FAIR VALUE | UNREALIZED LOSS |
||||||||||||||||
| U.S. Treasury and other U.S. | $ | 38,541 | $ | 424 | $ | 9,810 | $ | 570 | $ | 48,351 | $ | 994 | ||||||||||
| government agencies | ||||||||||||||||||||||
| Obligations of states and | ||||||||||||||||||||||
| political subdivisions | 2,987 | 22 | 941 | 45 | 3,928 | 67 | ||||||||||||||||
| Mortgage-backed securities | 74,692 | 439 | 21,338 | 350 | 96,030 | 789 | ||||||||||||||||
| Subtotal, debt securities | $ | 116,220 | $ | 885 | $ | 32,089 | $ | 965 | $ | 148,309 | $ | 1,850 | ||||||||||
| Mutual Funds | — | — | 500 | 19 | 500 | 19 | ||||||||||||||||
| Total temporarily impaired | $ | 116,220 | $ | 885 | $ | 32,589 | $ | 984 | $ | 148,809 | $ | 1,869 | ||||||||||
| securities | ||||||||||||||||||||||
3. LOANS AND LEASES Substantially all of the Bank’s loans and leases are granted to borrowers concentrated primarily within Cortland, Madison, Oneida, and Onondaga Counties. Major classifications of loans and leases at December 31 are as follows: |
| (Dollars In Thousands) | ||||||||
| 2004 | 2003 | |||||||
| Commercial loans and leases | $ | 166,757 | $ | 147,142 | ||||
| Real estate loans | 176,666 | 173,963 | ||||||
| Indirect loans | 117,622 | 97,163 | ||||||
| Consumer loans | 63,862 | 58,803 | ||||||
| Total | $ | 524,907 | $ | 477,071 | ||||
| Less: Unearned income | 2,055 | 630 | ||||||
| Less: Allowance for loan & lease losses | 5,267 | 6,069 | ||||||
| Net loans & leases | $ | 517,585 | $ | 470,372 | ||||
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 $46,656, $42,135, and $25,614 at December 31, 2004, 2003, and 2002, respectively. The carrying value of mortgage servicing rights was $292 and $263 at December 31, 2004 and 2003, respectively. Non-performing loans and leases and impaired loans and leases at December 31 are as follows: |
| (Dollars In Thousands) | ||||||||
| 2004 | 2003 | |||||||
| Loans ninety days past due and still accruing | $ | 317 | $ | 476 | ||||
| Non-accrual loans | 2,434 | 4,177 | ||||||
| Total non-performing loans | $ | 2,751 | $ | 4,653 | ||||
| Total impaired loans | $ | 0 | $ | 1,237 | ||||
40 |
4. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses for the years ended December 31 are summarized as follows: |
| (Dollars In Thousands) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Balance at January 1 | $ | 6,069 | $ | 5,019 | $ | 4,478 | ||||||
| Provision for loan and lease losses | 984 | 2,349 | 1,895 | |||||||||
| Recoveries credited | 404 | 370 | 440 | |||||||||
| Subtotal | $ | 7,457 | $ | 7,738 | $ | 6,813 | ||||||
| Less: Loans and leases charged-off | 2,190 | 1,669 | 1,794 | |||||||||
| Balance at December 31 | $ | 5,267 | $ | 6,069 | $ | 5,019 | ||||||
5. 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 2004. 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) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Balance at beginning of year | $ | 8,002 | $ | 8,963 | $ | 9,692 | ||||||
| New loans and advances | 964 | 898 | 1,220 | |||||||||
| Loan payments | (73 | ) | (1,859 | ) | (1,949 | ) | ||||||
| Balance at end of year | $ | 8,893 | $ | 8,002 | $ | 8,963 | ||||||
6. BANK PREMISES, FURNITURE, AND EQUIPMENT Bank premises, furniture, and equipment at December 31 consist of the following: |
| (Dollars In Thousands) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Land | $ | 1,155 | $ | 1,160 | $ | 1,078 | ||||||
| Bank premises | 11,095 | 9,766 | 9,734 | |||||||||
| Furniture and equipment | 17,706 | 15,584 | 14,347 | |||||||||
| Subtotal | $ | 29,956 | $ | 26,510 | $ | 25,159 | ||||||
| Less: Accumulated depreciation | 17,621 | 16,100 | 14,879 | |||||||||
| Balance at end of year | $ | 12,335 | $ | 10,410 | $ | 10,280 | ||||||
41 |
7. DEPOSITS The carrying amounts of deposits consisted of the following at December 31: |
| (Dollars In Thousands) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Noninterest-bearing checking | $ | 74,549 | $ | 56,085 | $ | 54,113 | ||||||
| Interest-bearing checking | 81,891 | 85,614 | 80,835 | |||||||||
| Savings accounts | 62,783 | 63,557 | 68,643 | |||||||||
| Money market accounts | 143,952 | 140,611 | 109,592 | |||||||||
| Time deposits | 259,946 | 215,533 | 233,470 | |||||||||
| Total deposits | $ | 623,121 | $ | 561,400 | $ | 546,653 | ||||||
The following table indicates the maturities of the Company’s time deposits at December 31: |
| (Dollars In Thousands) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Due in one year | $ | 132,548 | $ | 133,050 | $ | 139,186 | ||||||
| Due in two years | 82,714 | 64,282 | 61,238 | |||||||||
| Due in three years | 37,137 | 6,251 | 15,602 | |||||||||
| Due in four years | 3,246 | 9,229 | 3,164 | |||||||||
| Due in five years or more | 4,301 | 2,721 | 14,280 | |||||||||
| Total time deposits | $ | 259,946 | $ | 215,533 | $ | 233,470 | ||||||
Total time deposits in excess of $100 as of December 31, 2004 and 2003 were $69,158 and $62,395, respectively. 8. BORROWINGS The following is a summary of borrowings outstanding at December 31: (Dollars In Thousands) |
| 2004 | 2003 | 2002 | ||||||||||
| Short-term: Federal Home Loan Bank overnight advances |
$ | 3,600 | $ | 9,000 | $ | 8,500 | ||||||
| Federal Funds purchased | 10,000 | — | — | |||||||||
| Securities sold under repurchase agreements | 23,254 | 19,983 | 16,167 | |||||||||
| Federal Home Loan Bank term advances | — | — | 10,000 | |||||||||
| Repurchase agreements | 65,000 | 39,500 | 15,000 | |||||||||
| Total short-term borrowings | $ | 101,854 | $ | 68,483 | $ | 49,667 | ||||||
| Long-term Federal Home Loan Bank term advances |
70,000 | 70,000 | 55,000 | |||||||||
| Repurchase agreements | 10,000 | 40,000 | 50,000 | |||||||||
| Junior subordinated debentures | 10,310 | 10,310 | — | |||||||||
| Total long-term borrowings | $ | 90,310 | $ | 120,310 | $ | 105,000 | ||||||
| Total borrowings | $ | 192,164 | $ | 188,793 | $ | 154,667 | ||||||
42 |
| The principal balance, interest rate and maturity of the preceding borrowings at December 31, 2004 is as follows: |
| TERM | INCURRED DATE | PRINCIPAL | RATES | |||||||||
| Short-term: Federal Home Loan Bank overnight advances |
12/31/2004 | $ | 3,600 | 2.38% | ||||||||
| Federal Funds purchased | 12/31/2004 | 10,000 | 2.69 | % | ||||||||
| Securities sold under repurchase agreements | 12/31/2004 | 23,254 | 2.15 | % | ||||||||
| Total overnight borrowings | $ | 36,854 | ||||||||||
| Repurchase agreements | ||||||||||||
| original term – 92 days | 10/14/2004 | 10,000 | 2.11 | % | ||||||||
| original term – 6 months | 11/23/2004 | 15,000 | 2.64 | % | ||||||||
| original term – 30 days | 12/21/2004 | 10,000 | 2.40 | % | ||||||||
| original term – 11 days | 12/23/2004 | 20,000 | 2.40 | % | ||||||||
| original term – 62 days | 12/28/2004 | 10,000 | 2.52 | % | ||||||||
| Total repurchase agreements | $ | 65,000 | ||||||||||
| Total short-term borrowings | $ | 101,854 | ||||||||||
| Long-term Federal Home Loan Bank term advances |
||||||||||||
| original term – 10 years | 7/20/2000 | $ | 5,000 | 5.92 | % | |||||||
| original term – 10 years | 7/26/2000 | 5,000 | 6.30 | % | ||||||||
| original term – 10 years | 4/27/2001 | 5,000 | 4.13 | % | ||||||||
| original term – 2.25 years | 12/24/2002 | 5,000 | 2.63 | % | ||||||||
| original term – 2.75 years | 12/24/2002 | 5,000 | 2.63 | % | ||||||||
| original term – 3.25 years | 12/24/2002 | 5,000 | 2.63 | % | ||||||||
| original term – 3.75 years | 12/24/2002 | 5,000 | 2.64 | % | ||||||||
| original term – 2.92 years | 1/21/2003 | 10,000 | 2.03 | % | ||||||||
| original term – 3 years | 5/15/2003 | 15,000 | 2.24 | % | ||||||||
| original term – 2.5 years | 8/18/2004 | 5,000 | 3.11 | % | ||||||||
| original term – 2.75 years | 8/19/2004 | 5,000 | 3.24 | % | ||||||||
| Total advances | $ | 70,000 | ||||||||||
| Repurchase agreements | ||||||||||||
| original term – 1 year | 8/20/2004 | 10,000 | 2.28 | % | ||||||||
| Total repurchase agreements | $ | 10,000 | ||||||||||
| Junior subordinated debentures original term – 30 years |
12/19/2003 | 10,310 | 5.01 | % | ||||||||
| Total long-term borrowings | $ | 90,310 | ||||||||||
| Information related to borrowings at December 31 is as follows: |
| 2004 | 2003 | 2002 | ||||||||||
| Maximum outstanding at any month end | $ | 192,164 | $ | 188,793 | $ | 156,692 | ||||||
| Average amount outstanding during the year | $ | 163,149 | $ | 159,914 | $ | 142,628 | ||||||
| Average interest rate during the year | 2.46 | % | 2.70 | % | 3.54 | % | ||||||
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, 2004 had securities with a carrying value of $36,694 pledged as collateral for these agreements. At December 31, 2004 and 2003, 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 $85,966 and $76,599, respectively, of which $3,600 and $9,000 was outstanding as of December 31, 2004 and 2003, 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 $153,328 have been pledged by |
43 |
the Company under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. At December 31, 2004, the Company’s total borrowing capacity with the FHLB was $116,611. Repurchase agreements outstanding at December 31, 2004 are at interest rates ranging from 2.11% to 2.64%. The face value at December 31, 2004 of investment securities pledged under repurchase agreements and other borrowings approximated $77,431. On December 19, 2003, the Company formed a wholly owned subsidiary, Alliance Financial Capital Trust I, a Delaware business trust. The Trust issued $10,000 of 30-year floating rate Company-obligated pooled capital securities. The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2033, but may be redeemed at the Company’s option on predetermined dates with the first redemption date at par in five years. The Federal Deposit Insurance Company and the Federal Reserve Bank currently treat these capital securities as Tier 1 capital. The capital securities of the trust are a pooled trust preferred fund of ALESCO Preferred Funding II, Ltd., and interest rates on the securities adjust quarterly based on the 3-month LIBOR plus 2.85% (5.01% at December 31, 2004). The Company guarantees all of the securities. The Company capitalized $296 of deferred financing costs associated with the debt issuance, which is being amortized on a straight-line basis over a 30-year period. The capital securities held by the trust qualify as Tier 1 capital for the Company under Federal Reserve guidelines. As a result of FIN 46, the Federal Reserve Board is currently evaluating whether the inability to consolidate the trust with the Company will affect the qualification of the capital securities as Tier 1 capital. If in the future it is determined that the capital securities can no longer qualify as Tier 1 capital, the effect of such a change would not have a material impact on the Company’s capital ratios. At December 31, 2004 and 2003, the Company had available $12,500 of Federal Funds lines of credit with other financial institutions, of which $10,000 was in use at December 31, 2004 and none of the lines were being used at year-end 2003. 9. INCOME TAXES The provision for income taxes for the years ended December 31 is summarized as follows: |
| (Dollars In Thousands) | |||||||||||
| 2004 | 2003 | 2002 | |||||||||
| Current tax (benefit) expense | $ | (503 | ) | $ | 2,440 | $ | 2,596 | ||||
| Deferred tax provision (benefit) | 2,429 | 352 | (245 | ) | |||||||
| Total provision for income taxes | $ | 1,926 | $ | 2,792 | $ | 2,351 | |||||
The provision for income taxes includes the following: |
| 2004 | 2003 | 2002 | |||||||
| Federal income tax | $ | 1,785 | $ | 2,499 | $ | 1,993 | |||
| New York State franchise tax | 141 | 293 | 358 | ||||||
| Total | $ | 1,926 | $ | 2,792 | $ | 2,351 | |||
44 |
The components of deferred income taxes, included in other liabilities, at December 31, are as follows:
| 2004 | 2003 | 2002 | ||||||||||
| Assets: | ||||||||||||
| Allowance for loan and lease losses | $ | 2,052 | $ | 2,364 | $ | 1,796 | ||||||
| Postretirement benefits | 1,330 | 1,223 | 1,127 | |||||||||
| Deferred compensation | 1,159 | 1,089 | 1,032 | |||||||||
| Other | 458 | 125 | 73 | |||||||||
| Total Assets | $ | 4,999 | $ | 4,801 | $ | 4,028 | ||||||
| Liabilities: | ||||||||||||
| Investment securities | $ | 1,244 | $ | 2,459 | $ | 4,362 | ||||||
| Depreciation | 3,766 | 1,306 | 343 | |||||||||
| Other | 318 | 320 | 221 | |||||||||
| Total Liabilities | $ | 5,328 | $ | 4,085 | $ | 4,926 | ||||||
| Net deferred tax (liability) asset | $ | (329 | ) | $ | 716 | $ | (898 | ) | ||||
| A reconciliation between the statutory federal income tax rate and the effective income tax rate for 2004, 2003 and 2002 is as follows: |
| 2004 | 2003 | 2002 | ||||||||
| Statutory federal income tax rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||
| State franchise tax, net of federal tax benefit | 1.2 | % | 1.2 | % | 1.1 | % | ||||
| Tax exempt interest income | (10.8 | %) | (10.0 | %) | (10.8 | %) | ||||
| Tax exempt insurance income | (3.0 | %) | — | — | ||||||
| Other, net | (0.4 | %) | 0.6 | % | 1.1 | % | ||||
| Total | 21.0 | % | 25.8 | % | 25.4 | % | ||||
45 |
10. RETIREMENT PLANS AND POST-RETIREMENT BENEFITS The Company provides retirement benefits through a defined contribution 401(k) plan that covers substantially all of its employees. 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 $594, $578, and $475 in 2004, 2003, and 2002, respectively. The Company also provides post-retirement medical and life insurance benefits to qualifying employees. Benefits are available to full-time 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 plans that existed at First National Bank of Cortland and Oneida Valley National Bank, prior to the merger of the banks in 1999. The following tables set forth the changes in the post-retirement plans, fair value of plan assets, and accrued benefit cost as of December 31, 2004 and 2003: |
| (Dollars In Thousands) | ||||||||
| 2004 | 2003 | |||||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 5,230 | $ | 4,895 | ||||
| Service cost | 131 | 116 | ||||||
| Interest cost | 306 | 312 | ||||||
| Amendments | — | — | ||||||
| Actuarial (gain)/loss | (154 | ) | 160 | |||||
| Benefits paid | (299 | ) | (253 | ) | ||||
| Benefit obligation at end of year | $ | 5,214 | $ | 5,230 | ||||
| 2004 | 2003 | |||||||
| Components of prepaid/accrued benefit cost: | ||||||||
| Unfunded status | $ | (5,214 | ) | $ | (5,230 | ) | ||
| Unrecognized prior service cost/(benefit) | 291 | 320 | ||||||
| Unrecognized actuarial net loss | 1,536 | 1,775 | ||||||
| Accrued benefit obligation at end of year | $ | (3,387 | ) | $ | (3,135 | ) | ||
The weighted average discount rate used in determining the benefit obligation as of December 31, 2004 and 2003 was 5.75% and 6.00%, respectively. For measurement purposes, with respect to the postretirement benefit plans, a 12.0 percent annual rate of increase in the per capita cost of covered health care benefits is assumed for 2005. The rate is assumed to decrease gradually to 4.5 percent by the year 2014 and remain at that level thereafter. The composition of the plan’s net periodic cost for the years ended December 31 is as follows: |
| (Dollars In Thousands) | |||||||||
| 2004 | 2003 | 2002 | |||||||
| Service cost | $ | 145 | $ | 116 | $ | 108 | |||
| Interest cost | 306 | 312 | 288 | ||||||
| Amortization of unrecognized prior service cost |
99 | 91 | 69 | ||||||
| Net periodic cost | $ | 550 | $ | 519 | $ | 465 | |||
46 |
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 postretirement plan obligations | 48 | (40 | ) | ||
| Effect on postretirement plan obligations | 441 | (371 | ) | ||
| The following postretirement healthcare benefits are expected to be paid: | |||||
| Benefits paid for the year, | (Dollars in thousands) | |||
|---|---|---|---|---|
| 2005 | $ | 277 | ||
| 2006 | 285 | |||
| 2007 | 301 | |||
| 2008 | 293 | |||
| 2009 | 281 | |||
| 2010 - 2014 | $ | 1,530 | ||
It is important to note that the above benefit payments include expected life insurance claims, rather than the premiums that the Company is paying to provide the life insurance. 11. 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, 2004 and 2003 other liabilities included approximately $1,504 and $1,298, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2004, 2003, and 2002 approximated $237, $218, and $218, respectively. The Company has supplemental executive retirement plans for certain employees. Included in other assets, the Company has segregated assets of $705 and $806 at December 31, 2004 and 2003, respectively, to fund the estimated benefit obligation. At December 31, 2004 and 2003, other liabilities included approximately $1,472 and $1,499 accrued under these plans. The benefit obligation, service cost, and actuarial gain/(loss) were $1,648, $209, and ($148), respectively, at December 31, 2004 and $1,781, $232, and ($246), respectively, at December 31, 2003. Compensation expense includes approximately $171, $165, and $223 relating to these plans at December 31, 2004, 2003, and 2002, respectively. The discount rate used in determining the benefit obligation as of December 31, 2004 and 2003 was 5.75% and 6.00%, respectively. For measurement purposes in 2004, with respect to the supplemental executive retirement plans, an 8.50 percent annual rate was assumed as the investment return on account balances and salaries were assumed to increase at a rate of 4.00%. 12. STOCK OPTION PLAN The Company has a long-term incentive compensation plan that has been approved by the shareholders authorizing the use of 550,000 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 268,410 options outstanding at December 31, 2004, 246,410 of the options were issued with a 10-year term, vesting one year after the issue date, and exercisable based on the Company achieving specified stock prices. 20,000 of the options issued with a 10-year term and vest and become exercisable ratably over a three-year period. 2,000 of the options were issued with a five-year term and vested on issuance. |
47 |
|
Activity in the plan for 2004, 2003, and 2002 was as follows: |
||||||||||
| OPTIONS OUTSTANDING |
RANGE OF OPTION PRICE PER SHARE |
SHARES EXERCISABLE |
WEIGHTED AVERAGE EXERCISE PRICE OF OPTIONS OUTSTANDING |
|||||||
| 2002 | ||||||||||
| Granted | 63,900 | $ | 23.50 | 0 | $ | 23.50 | ||||
| Exercised | 12,500 | $ | 17.75-$18.25 | 0 | $ | 17.79 | ||||
| Forfeited | 22,077 | $ | 17.75-$24.75 | 0 | $ | 24.11 | ||||
| Ending balance | 346,196 | $ | 17.75-$24.75 | 104,042 | $ | 22.58 | ||||
| 2003 | ||||||||||
| Granted | 0 | 0 | 0 | 0 | ||||||
| Exercised | 59,724 | $ | 17.75-$24.75 | 0 | $ | 23.55 | ||||
| Forfeited | 1,974 | $ | 24.75 | 0 | $ | 24.75 | ||||
| Ending balance | 284,498 | $ | 17.75-$24.75 | 229,120 | $ | 21.81 | ||||
| 2004 | ||||||||||
| Granted | 2,000 | $ | 26.93-$28.65 | 0 | $ | 27.79 | ||||
| Exercised | 17,111 | $ | 18.25-$26.93 | 0 | $ | 23.76 | ||||
| Forfeited | 977 | $ | 24.75-$26.93 | 0 | $ | 25.31 | ||||
| Ending balance | 268,410 | $ | 17.75-$28.65 | 226,911 | $ | 22.30 | ||||
As of December 31, 2004, 10,000 of the options issued in 1999 were exercisable at an exercise price of $21.75. The options have a remaining life of 4.20 years. As of December 31, 2004, 40,000, 77,459, and 37,500 options issued in 2000 were exercisable at an exercise price of $18.50, $24.75 and $17.75, respectively. These options have a remaining life of 5 years. As of December 31, 2004, 1,000, 8,000 and 500 options issued in 2001 were exercisable at an exercise price of $18.25, $19.00 and $20.25, respectively. These options have a remaining life ranging from 1 to 6 years. As of December 31, 2004, 51,452 options issued in 2002 were exercisable at an exercise price of $23.50. These options have a remaining life of 7 years. There were no stock options granted in 2003. As of December 31, 2004, 1,000 of the options issued in 2004 were exercisable at an exercise price of $28.65. These options have a remaining life of 4.5 years. The following is a summary of activity in restricted stock for the years ended December 31, |
| SHARES | WEIGHTED AVERAGE GRANT PRICE |
||||||
| 2003 | |||||||
| Granted | 22,500 | $ | 28.34 | ||||
| Vested | — | — | |||||
| Forfeited | — | — | |||||
| Ending balance | 22,500 | $ | 28.34 | ||||
| 2004 | |||||||
| Granted | 20,000 | $ | 33.05 | ||||
| Vested | — | — | |||||
| Forfeited | — | — | |||||
| Ending balance | 42,500 | $ | 30.56 | ||||
The Company awards shares of restricted stock under the long-term incentive compensation plan. Restricted stock awards are recorded as deferred compensation, a component of stockholders’ equity, at fair value at the date of the grant and amortized to compensation expense over the specified vesting periods. These shares become vested over a 7-year period. Furthermore, 50% of the shares awarded, to all grantees except the Company’s Chief Executive Officer, become vested on the date, at least three years after the award date, that the Company’s stock price has closed at a price that is at least 160% of the award price for 15 consecutive days. Compensation expense to record the amortization of the cost of all restricted shares issued for the years ended December 31, 2004 and 2003 was $177,000 and $75,000, respectively. There was no compensation expense in 2002 for restricted stock. |
48 |
13. 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 | |||||||||
| 2004 | 2003 | 2002 | |||||||
| Commitments to extend credit | $ | 87,346 | $ | 68,916 | $ | 70,738 | |||
| Standby letters of credit | $ | 5,105 | $ | 5,576 | $ | 4,031 | |||
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. The Company leases office space and certain branches under noncancelable operating lease agreements having initial terms which expire at various dates through 2019. Total rental expenses were approximately $669 in 2004, $429 in 2003, and $426 in 2002. |
| Minimum rental payments under the initial terms of these leases are summarized as follows: |
| Year ending December 31, | (Dollars in thousands) | |||
|---|---|---|---|---|
| 2005 | $ | 774 | ||
| 2006 | 665 | |||
| 2007 | 645 | |||
| 2008 | 629 | |||
| 2009 | 549 | |||
| Thereafter | $ | 1,642 | ||
| Total minimum lease payments | $ | 4,904 | ||
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, 2004 was $6,425. |
||||
49 |
14. 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, 2004, approximately $17,200 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, 2004. 15. 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: |
| (DOLLARS IN THOUSANDS) | DEC. 31, 2004 CARRYING AMOUNT |
DEC. 31, 2004 FAIR VALUE |
DEC. 31, 2003 CARRYING AMOUNT |
DEC. 31, 2003 FAIR VALUE |
||||||||
| Financial Assets: | ||||||||||||
| Cash and cash equivalents | $ | 21,258 | $ | 21,258 | $ | 21,824 | $ | 21,824 | ||||
| Investment securities | 325,125 | 325,379 | 305,787 | 306,271 | ||||||||
| Loans and leases | 524,907 | 524,763 | 477,071 | 481,397 | ||||||||
| Total Financial Assets | $ | 871,290 | $ | 871,400 | $ | 804,682 | $ | 809,492 | ||||
| Financial Liabilities: | ||||||||||||
| Deposits | $ | 623,121 | $ | 623,475 | $ | 561,400 | $ | 563,070 | ||||
| Borrowings | 192,164 | 192,805 | 188,793 | 191,019 | ||||||||
| Total Financial Liabilities | $ | 815,285 | $ | 816,280 | $ | 750,193 | $ | 754,089 | ||||
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. |
50 |
|
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. 16. 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 (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004, that the Company and its subsidiary Bank met all capital adequacy requirements to which they were subject to. As of December 31, 2003, 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. As discussed in Note 8, the capital securities held by the Company’s subsidiary, Alliance Capital Trust I, qualify as Tier 1 capital for the Company under Federal Reserve Board guidelines. As a result of FIN 46, the Federal Reserve Board is currently evaluating whether the inability to consolidate the trust with the Company will affect the qualification of the capital securities as Tier 1 capital. If in the future it is determined that the capital securities can no longer qualify as Tier 1 capital, the effect of such a change would not have a material impact on the Company’s capital ratios. The Company’s actual capital amounts and ratios are presented in the following table: |
| FOR CAPITAL ADEQUACY PURPOSES |
TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS |
|||||||||||||||||
| AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||
| As of December 31, 2004 | ||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 82,858 | 15.34 | % | $ | 43,212 | >8.00 | % | $ | 54,015 | >10.00 | % | ||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 77,461 | 14.34 | % | 21,606 | >4.00 | % | 32,409 | >6.00 | % | |||||||||
| Tier 1 Capital (to Average Assets) | 77,461 | 8.70 | % | 35,595 | >4.00 | % | 44,493 | >5.00 | % | |||||||||
| As of December 31, 2003 | ||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 78,665 | 15.93 | % | $ | 39,479 | >8.00 | % | $ | 49,349 | >10.00 | % | ||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 72,596 | 14.70 | % | 19,739 | >4.00 | % | 29,609 | >6.00 | % | |||||||||
| Tier 1 Capital (to Average Assets) | 72,596 | 8.92 | % | 32,540 | >4.00 | % | 40,675 | >5.00 | % | |||||||||
51 |
|
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial information for the years ended December 31, 2004 and 2003 is as follows: |
| THREE MONTHS ENDED | 3/31/04 | 6/30/04 | 9/30/04 | 12/31/04 | 3/31/03 | 6/30/03 | 9/30/03 | 12/31/03 | |||||||||||||||||
| Total interest income | $ | 10,024 | $ | 10,079 | $ | 10,108 | $ | 10,708 | $ | 10,446 | $ | 10,009 | $ | 9,767 | $ | 9,998 | |||||||||
| Total interest expense | 3,036 | 2,985 | 3,127 | 3,536 | 3,515 | 3,356 | 3,042 | 2,914 | |||||||||||||||||
| Net interest income | 6,988 | 7,094 | 6,981 | 7,172 | 6,931 | 6,653 | 6,725 | 7,084 | |||||||||||||||||
| Provision for loan losses | 14 | 165 | 140 | 665 | 953 | 608 | 404 | 384 | |||||||||||||||||
| Noninterest income | 2,167 | 1,918 | 2,187 | 1,951 | 1,991 | 3,487 | 2,057 | 1,752 | |||||||||||||||||
| Noninterest expense | 6,617 | 6,526 | 6,512 | 6,638 | 5,669 | 5,657 | 5,894 | 6,308 | |||||||||||||||||
| Income before income taxes |
2,524 | 2,321 | 2,516 | 1,820 | 2,300 | 3,875 | 2,484 | 2,144 | |||||||||||||||||
| Provision for income taxes |
630 | 577 | 494 | 225 | 610 | 1,094 | 645 | 443 | |||||||||||||||||
| Net Income | 1,894 | 1,744 | 2,022 | 1,595 | 1,690 | 2,781 | 1,839 | 1,701 | |||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||||
| Basic | $ | 0.53 | $ | 0.49 | $ | 0.57 | $ | 0.45 | $ | 0.49 | $ | 0.79 | $ | 0.52 | $ | 0.48 | |||||||||
| Diluted | $ | 0.52 | $ | 0.48 | $ | 0.56 | $ | 0.44 | $ | 0.48 | $ | 0.77 | $ | 0.51 | $ | 0.47 | |||||||||
17. PARENT COMPANY FINANCIAL INFORMATION Condensed financial statement information of Alliance Financial Corporation is as follows: Balance Sheets |
| Assets | DEC. 31, 2004 | DEC. 31, 2003 | ||||||
| Investment in subsidiary Bank | $ | 70,466 | $ | 65,305 | ||||
| Cash | 5,150 | 9,424 | ||||||
| Investment securities | 4,104 | 2,548 | ||||||
| Other Assets | 360 | 296 | ||||||
| Total Assets | $ | 80,080 | $ | 77,573 | ||||
| Liabilities | ||||||||
| Junior subordinated debentures | $ | 10,310 | $ | 10,310 | ||||
| Dividends payable | 750 | 1,096 | ||||||
| Other liabilities | 124 | 14 | ||||||
| Total Liabilities | $ | 11,184 | $ | 11,420 | ||||
| Shareholders’ Equity | ||||||||
| Common stock | $ | 3,947 | $ | 3,910 | ||||
| Surplus | 10,298 | 9,268 | ||||||
| Unamortized value of restricted stock | (1,047 | ) | (563 | ) | ||||
| Undivided profits | 62,235 | 57,976 | ||||||
| Accumulated other comprehensive income | 1,418 | 3,517 | ||||||
| Treasury stock | (7,955 | ) | (7,955 | ) | ||||
| Total Shareholders’ Equity | $ | 68,896 | $ | 66,153 | ||||
| Total Liabilities and Shareholders’ Equity | $ | 80,080 | $ | 77,573 | ||||
52 |
|
Statements of Income |
| YEARS ENDED DEC. 31, 2004 |
DEC. 31, 2003 | DEC. 31, 2002 | ||||||||||
| Dividend income from subsidiary Bank | $ | — | $ | — | $ | 5,000 | ||||||
| Investment income | 175 | 5 | 4 | |||||||||
| Gain on the sale of securities | 269 | 72 | 250 | |||||||||
| Interest expense on junior subordinated debentures | (459 | ) | (14 | ) | — | |||||||
| Operating expenses | (97 | ) | (5 | ) | (4 | ) | ||||||
| (112 | ) | 58 | 5,250 | |||||||||
| Equity in undistributed income of subsidiary |
7,367 | 7,953 | 1,661 | |||||||||
| Net Income | $ | 7,255 | $ | 8,011 | $ | 6,911 | ||||||
| Statements of Cash Flows | ||||||||||||
| YEARS ENDED DEC. 31, 2004 |
DEC. 31, 2003 | DEC. 31, 2002 | ||||||||||
| Operating Activities | ||||||||||||
| Net Income | $ | 7,255 | $ | 8,011 | $ | 6,911 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
| Equity in undistributed net income of subsidiary |
(7,367 | ) | (7,953 | ) | (1,661 | ) | ||||||
| Realized investment security gains | (269 | ) | (72 | ) | (250 | ) | ||||||
| Change in assets and liabilities | 274 | (281 | ) | — | ||||||||
| Net Cash (Used In) Provided by Operating Activities | $ | (107 | ) | $ | (295 | ) | $ | 5,000 | ||||
| Investing Activities | ||||||||||||
| Purchase of investment securities, available-for-sale | $ | (1,739 | ) | $ | (2,550 | ) | $ | (238 | ) | |||
| Proceeds from sales of investment securities, available-for-sale |
507 | 312 | 451 | |||||||||
| Net Cash (Used in) Provided by Investing Activities | $ | (1,232 | ) | $ | (2,238 | ) | $ | 213 | ||||
| Financing Activities | ||||||||||||
| Proceeds from acquiring subordinated debentures | $ | — | $ | 10,310 | $ | — | ||||||
| Treasury stock purchased | — | (35 | ) | (143 | ) | |||||||
| Proceeds from the issuance of common stock | 406 | 1,406 | 223 | |||||||||
| Cash dividends paid | (3,341 | ) | (2,902 | ) | (3,034 | ) | ||||||
| Net Cash (Used in) Provided by Financing Activities | $ | (2,935 | ) | $ | 8,779 | $ | (2,954 | ) | ||||
| (Decrease) Increase in Cash and Cash Equivalents | (4,274 | ) | 6,246 | 2,259 | ||||||||
| Cash and Cash Equivalents at Beginning of Year | 9,424 | 3,178 | 919 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 5,150 | $ | 9,424 | $ | 3,178 | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||
| Noncash financing activities: Dividend declared and unpaid |
$ | 750 | $ | 1,096 | $ | 1,000 | ||||||
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. |
53 |
| /s/ Jack H. Webb | /s/ David P. Kershaw |
| —————————— | —————————— |
| Chairman, President & CEO | Chief Financial Officer & Treasurer |
| Syracuse, New York | |
| March 1, 2005 |
| MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. |
| /s/ Jack H. Webb | /s/ David P. Kershaw |
| —————————— | —————————— |
| Chairman, President & CEO | Chief Financial Officer & Treasurer |
| Syracuse, New York | |
| March 1, 2005 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Alliance Financial Corporation: We have completed an integrated audit of Alliance Financial Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in |
54 |
accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Alliance Financial Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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. Internal control over financial reporting Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
 |
Syracuse, New York |
| Item 9B — Other Information | |
| Not applicable | |
55 |
| Plan Category | Number of securities to be issued upon exercise of outstanding options |
Weighted-average exercise price of outstanding options |
Number of securities remaining available for future issuance under equity compensation plans |
||||||
| Options: | |||||||||
| Equity compensation plans approved by security holders | 268,410 | $ | 22.30 | 149,755 | |||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||
| Total | 268,410 | $ | 22.30 | 149,755 | |||||
| Restricted Stock Awards: | |||||||||
| Equity compensation plans approved by security holders | 42,500 | — | — | ||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||
| Total | 42,500 | — | — | ||||||
56 |
PART IV Item 15 — 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, 2004 and 2003. | ||
Consolidated Statements of Income for each of the Three Years in the Period Ended December 31, 2004. |
||
Consolidated Statements of Comprehensive Income for each of the Three Years in the Period Ended December 31, 2004. |
||
Consolidated Statements of Shareholders’ Equity for each of the Three Years in the Period Ended December 31, 2004. |
||
Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 2004. |
||
| Notes to Consolidated Financial Statements. | ||
| Report of Management’s Responsibility. | ||
| Report of Independent Registered Public Accounting Firm. | ||
| (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 |
| 2.1 | Trust Company Agreement and Plan of Merger by and between Alliance Bank, N.A, and HSBC Bank USA, N.A. dated as of August 16, 2004(11) |
| 3.1 | Amended and Restated Certificate of Incorporation of the Company(1) |
| 3.2 | Amended and Restated Bylaws of the Company(2) |
| 10.1* | Alliance Financial Corporation 1998 Long Term Incentive Compensation Plan(1) |
| 10.2* | 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) |
| 10.3* | 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) |
| 10.4* | Directors Compensation Deferral Plan of the Company(4) |
| 10.5* | Employment Agreement, dated as of May 1, 2000, by and among the Company, Alliance Bank, N.A. and Jack
H. Webb(5) |
| 10.6* | Supplemental Retirement Agreement, dated as of May 1, 2000, by and among the Company, Alliance Bank,
N.A. and Jack H. Webb(5) |
| 10.7* | First National Bank of Cortland Excess Benefit Plan for David R. Alvord, dated December 31, 1991, and
all amendments thereto(6) |
| 10.8* | Oneida Valley National Bank Supplemental Retirement Income Plan for John C. Mott, dated September 1,
1997, and all amendments thereto(7) |
| 10.9* | Employment Agreement dated as of April 29, 2003, by and among the Company, Alliance Bank, N.A. and
Jack H. Webb(8) |
| 10.10* | Employment Agreement dated as of April 1, 2003, by and among the Company, Alliance Bank, N.A. and John
W. Wilson(8) |
57 |
| 10.11* | Employment Agreement dated January 21, 2004 by and among the Company and John H. Watt Jr.(9) |
| 10.12* | Amendment dated May 4, 2004 to Employment Agreement by and among the Company, Alliance Bank,. N.A.
and John W. Wilson(10) |
| 10.13* | Change of Control Agreement, dated as of January 1, 2005, by and among the Company, Alliance Bank,
N.A., and Connie M. Whitton(11) |
| 21 | List of the Company’s Subsidiaries(11) |
| 23 | Consent of PricewaterhouseCoopers LLP(11) |
| 31.1 | Certification of Jack H. Webb, Chairman of the Board, President and Chief Executive Officer of the
Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(11) |
| 31.2 | Certification of David P. Kershaw, Treasurer and Chief Financial Officer of the Registrant, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002(11) |
| 32.1 | 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(11) |
| 32.2 | 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(11) |
| (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 exhibit number 3-2 to the Current Report on Form 8-K of the Company
(File No. 0-15366) filed with the Commission on September 3, 2004. |
| (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) | Incorporated herein by reference to the exhibit number 10.14 to annual reports on Form 10-K of the
Company (File No. 0-15366) filed with the Commission on March 29, 2002. |
| (8) | Incorporated herein by reference to the exhibit numbers 10.15 and 10.16 to quarterly reports on Form
10-Q of the Company (File No. 0-15366) filed with the Commission on August 13, 2003. |
| (9) | Incorporated herein by reference to the exhibit number 10.17 to annual reports on Form 10-K/A of the
Company (File No. 0-15366) filed with the Commission on March 25, 2004. |
| (10) | Incorporated herein by reference to the exhibit number 10.18 to quarterly reports on Form 10-Q of the
Company (File No. 0-15366) filed with the Commission on August 6, 2004. |
| (11) | Filed herewith |
| * | Denotes management contract or compensation plan or arrangement. |
| (b) See Item 15 (a) (3) above. |
| (c) See Item 15 (a) (2) above. |
58 |
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 3, 2005 | By | /s/ Jack H. Webb |
| ———————————— | ———————————— | |
| Jack H. Webb, Chairman, President & CEO | ||
| (Principal Executive Officer) | ||
| Date March 3, 2005 | 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 February 22, 2005 | |
| ———————————— | ———————————— | |
| Mary Pat Adams, Director | ||
| /s/Donald S. Ames | Date February 22, 2005 | |
| ———————————— | ———————————— | |
| Donald S. Ames, Director | ||
| /s/ Donald H. Dew | Date February 22, 2005 | |
| ———————————— | ———————————— | |
| Donald H. Dew, Director | ||
| /s/ Peter M. Dunn | Date February 22, 2005 | |
| ———————————— | ———————————— | |
| Peter M. Dunn, Director | ||
| /s/ David P. Kershaw | Date March 2, 2005 | |
| ———————————— | ———————————— | |
| David P. Kershaw, Treasurer and Director | ||
| (Principal Financial and Accounting Officer) | ||
| /s/ Samuel J. Lanzafame | Date March 2, 2005 | |
| ———————————— | ———————————— | |
| Samuel J. Lanzafame, Director | ||
| /s/ Margaret G. Ogden | Date March 2, 2005 | |
| ———————————— | ———————————— | |
| Margaret G. Ogden, Director | ||
| /s/Charles E. Shafer | Date February 22, 2005 | |
| ———————————— | ———————————— | |
| Charles E. Shafer, Director | ||
| /s/ Charles H. Spaulding | Date February 22, 2005 | |
| ———————————— | ———————————— | |
| Charles H. Spaulding, Director | ||
| /s/ Paul M. Solomon | Date March 2, 2005 | |
| ———————————— | ———————————— | |
| Paul M. Solomon, Director | ||
| /s/ Jack H. Webb | Date March 2, 2005 | |
| ———————————— | ———————————— | |
| Jack H. Webb, Chairman, President | ||
| & CEO and Director | ||
| (Principal Executive Officer) | ||
59 |