-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DcjTM39468KkI01E/67scacCInbtUs6FGpBohmnKoOje1/K183o93jHf7HSzLwb8 M3d8Uqck2x9SRWsOcusT9A== 0000891554-02-001663.txt : 20020415 0000891554-02-001663.hdr.sgml : 20020415 ACCESSION NUMBER: 0000891554-02-001663 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE FINANCIAL CORP /NY/ CENTRAL INDEX KEY: 0000796317 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161276885 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15366 FILM NUMBER: 02593698 BUSINESS ADDRESS: STREET 1: 65 MAIN ST STREET 2: PO BOX 5430 CITY: CORTLAND STATE: NY ZIP: 13045-5430 BUSINESS PHONE: 6077581228 MAIL ADDRESS: STREET 1: PO BOX 5430 STREET 2: 65 MAIN STREET CITY: CORTLAND STATE: NY ZIP: 13045-5430 FORMER COMPANY: FORMER CONFORMED NAME: CORTLAND FIRST FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-K 1 d50228_10-k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to _____ Commission file number 0-15366 ALLIANCE FINANCIAL CORPORATION (Exact name of Registrant as specified in its charter) State of incorporation: New York I.R.S. Employer Identification No.: 16-1276885 Address of principal executive offices: MONY Tower II, 18th Floor, 120 Madison Street, Syracuse, NY 13202 Registrant's telephone number including area code: (315) 475-4478 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 par value. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 27, 2002 was $76,019,862. The number of outstanding shares of the Registrant's common stock on March 27, 2002: 3,442,338 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be held on May 7, 2002 (the "Proxy Statement"), are incorporated by reference in Part III. 1 TABLE OF CONTENTS FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2001 ALLIANCE FINANCIAL CORPORATION Page PART I Item 1. Description of the Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion & Analysis of the Results of Operations and Financial Condition 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 45 PART III Item 10. Directors and Executive Officers of the Registrant 45 Item 11. Executive Compensation 45 Item 12. Security Ownership of Certain Beneficial Owners and Management 45 Item 13. Certain Relationships and Related Transactions 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 2 PART I This Annual Report on Form 10-K contains certain forward-looking statements with respect to the financial condition, results of operations and business of Alliance Financial Corporation and its subsidiary. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) an increase in competitive pressure in the banking industry; (2) changes in the interest rate environment reduce margins; (3) changes in the regulatory environment; (4) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (5) changes in business conditions and inflation; (6) changes in the securities markets; (7) changes occur in technology used in the banking business; (8) the new Syracuse area branches do not attract the expected loan and deposit customers; (9) the ability to maintain and increase market share and control expenses; and (10) other factors detailed from time to time in the Company's SEC filings. Item 1 -- Description of the Business General Alliance Financial Corporation (the "Company") is a New York registered bank holding company formed on November 25, 1998 as a result of the merger of Cortland First Financial Corporation and Oneida Valley Bancshares, Inc., which were incorporated in May 30, 1986 and October 31, 1984, respectively. The Company is the parent holding company of Alliance Bank, N.A. (the "Bank"), which was formed as the result of a merger of First National Bank of Cortland and Oneida Valley National Bank as of the close of business, April 16, 1999. Unless the context otherwise provides, references herein to the "Company" mean Alliance Financial Corporation and the Bank. The Company's administrative offices are located on the 18th Floor, MONY Tower II, 120 Madison St., Syracuse, N.Y. Banking services are provided at the administrative offices, as well as at main offices located at 65 Main Street, Cortland, N.Y. and 160 Main Street, Oneida, N.Y., and 17 customer service facilities located in Cortland, Madison, Onondaga, northern Broome, and western Oneida counties. At December 31, 2001, the Company had 261 full-time employees and 22 part-time employees. The Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System, and deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits. Services The Company offers full service banking with a broad range of financial products to meet the needs of its commercial, retail, government, and trust customers. Depository account services include interest and non-interest bearing checking accounts, money market accounts, savings accounts, time deposit accounts, and individual retirement accounts. The Company's lending activities include the making of residential and commercial mortgage loans, business lines of credit, working capital facilities and business term loans, as well as installment loans, home equity loans, student loans, and personal lines of credit to individuals. Trust and investment department services include personal trust, employee benefit trust, investment management, custodial, and financial planning. Non-bank retail investment services are provided, with securities offered through Pittsford Capital Markets, Inc. The Company also offers safe deposit boxes, travelers checks, money orders, wire transfers, collection services, drive-up banking facilities, 24-hour night depositories, automated teller machines, 24-hour telephone banking, and on-line internet banking. Commercial leasing services are offered through Alliance Leasing, Inc., a subsidiary of the Bank. Competition The Company's business is extremely competitive. The Company competes not only with other commercial banks but also with other financial institutions such as thrifts, credit unions, money market and mutual funds, insurance companies, brokerage firms, and a variety of other companies offering financial services. Supervision and Regulation The following discussion summarizes some of the laws and regulations applicable to bank holding companies and national banks and provides certain specific information relevant to the Registrant. This regulatory framework primarily is intended for the protection of depositors and the deposit insurance funds that insure bank deposits, and not for the protection of shareholders or creditors of bank holding companies and banks. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety 3 by reference to those provisions. Moreover, Congress, state legislatures and regulatory agencies frequently propose changes to the law and regulations affecting the banking industry. The likelihood and timing of any changes and the impact such changes might have on the Company are impossible to accurately predict. A change in the statutes, regulations, or regulatory policies applicable to the Registrant or its subsidiary may have a material effect on their business. The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. In addition, any entity is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the Company's outstanding common stock, or otherwise obtaining control or a "controlling influence" over the Company. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. The Federal Reserve Board may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. Any capital loans by the Company to its subsidiary bank would be subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. The Company's ability to pay dividends to its shareholders is largely dependent on the ability of the Company's bank subsidiary, Alliance Bank, N.A. (the "Bank"), to pay dividends to the Company. The ability of both the Company and the Bank to pay dividends are limited by federal statutes, regulations and policies. For example, it is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the holding company's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Furthermore, the Bank must obtain regulatory approval for the payment of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank's net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years. The Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts, as defined by applicable regulations. The Federal Reserve Board has established risk-based capital guidelines that are applicable to bank holding companies. The guidelines established a framework intended to make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and take off-balance sheet exposures into explicit account in assessing capital adequacy. The Federal Reserve Board guidelines define the components of capital, categorize assets into different risk classes, and include certain off-balance sheet items in the calculation of risk-weighted assets. At least half of the total capital must be comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, less goodwill ("Tier I capital"). Banking organizations that are subject to the guidelines are required to maintain a ratio of Tier I capital to risk-weighted assets of at least 4.00% and a ratio of total capital to risk-weighted assets of at least 8.00%. The appropriate regulatory authority may set higher capital requirements when an organization's particular circumstances warrant. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt, limited-life preferred stock, certain other instruments and a limited amount of loan and lease loss reserves. The sum of Tier I capital and Tier 2 capital is "total risk-based capital." The Company's Tier I and total risk-based capital ratios as of December 31, 2001 were 12.05% and 13.08%, respectively. In addition, the Federal Reserve Board has established a minimum leverage ratio of Tier 1 capital to quarterly average assets less goodwill ("Tier I leverage ratio") of 3.00% for bank holding companies that meet certain specified criteria,. including that they have the highest regulatory rating. All other bank holding companies are required to maintain a Tier I leverage ratio of 3.00% plus an additional cushion of at least 100 to 200 basis points. The Company's Tier I Leverage ratio as of December 31, 2001 was 7.53%, which exceeded its regulatory requirement of 4.00%. The guidelines provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November 12, 1999. Gramm-Leach permits, subject to certain conditions, combinations among banks, securities firms and insurance companies. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking. In order to engage in these additional financial activities, a bank holding company must 4 qualify and register with the Federal Reserve Board as a "financial holding company" by meeting certain higher standards for capital adequacy and management, with heavy penalties for non-compliance. Gramm-Leach establishes that the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. Bank holding companies that wish to engage in expanded activities but do not wish to become financial holding companies may elect to establish "financial subsidiaries," which are subsidiaries of national banks with expanded powers. The Act permits financial subsidiaries to engage in the same types of activities permissible for nonbank subsidiaries of financial holding companies, with the exception of merchant banking, insurance and annuity underwriting and real estate investment and development. Merchant banking may be permitted after a five-year waiting period under certain regulatory circumstances. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. At this time, the Company has not elected to become a financial holding company. Transactions between the holding company and its subsidiary bank are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries. Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the holding company and its affiliates be on terms substantially the same, or at least as favorable to the banks, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. As a national bank, the Bank is subject to primary supervision, regulation, and examination by the Office of the Comptroller of the Currency ("OCC") and secondary regulation by the FDIC and the Federal Reserve Board. The Bank is subject to federal statutes and regulations that significantly affects its business and activities. The Bank must file reports with its regulators concerning its activities and financial condition and obtain regulatory approval to enter into certain transactions. Other applicable statutes and regulations relate to insurance of deposits, allowable investments, loans, acceptance of deposits, trust activities, mergers, consolidations, payment of dividends, capital requirements, reserves against deposits, establishment of branches and certain other facilities, limitations on loans to one borrower and loans to affiliated persons, and other aspects of the business of banks. In addition, federal legislation has instructed federal agencies to adopt standards or guidelines governing banks' internal controls, information systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits, asset quality, earnings and stock valuation, and other matters. Regulatory authorities have broad flexibility to initiate proceedings designed to prohibit banks from engaging in unsafe and unsound banking practices. The Federal Deposit Insurance Corporation improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statures. Among other things, federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA identifies the following capital categories for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Rules adopted by the federal banking agencies under FDICIA provide that an institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. FDICIA imposes progressively more restrictive constraints on operation, management, and capital distributions, depending on the capital category in which an institution is classified. At December 31, 2001, the Company and the Bank were in the well-capitalized category based on the ratios and guidelines noted above. The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based assessment system as required by FDICIA. Under this system, FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications pay assessments at higher rates than institutions that pose a lower risk. An institution's risk classification is assigned based on its capital level and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless it is well capitalized, or is adequately capitalized and receives a waiver from the FDIC. In addition, these regulations prohibit any bank that is not well capitalized from paying an interest rate on brokered deposits in excess of three-quarters of one percentage point over certain prevailing market rates. The Community Reinvestment Act of 1977 ("CRA") and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications regarding establishing branches, mergers or other bank or branch acquisitions. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with 5 the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Banks must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations. The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company's business and earnings. Item 2 -- Properties The Company operates the following branches:
Name of Office Location County Date Established - -------------- -------- ------ ---------------- Home Office 65 Main Street Cortland March 1, 1869 Cortland, NY Administrative Office MONY Tower II Onondaga August 27, 2001 120 Madison St. Syracuse, NY Baldwinsville Route 31 & Willet Pkwy. Onondaga August 28, 2000 Baldwinsville, NY Canastota Stroud Street & Route 5 Madison December 7, 1974 Canastota, NY Cincinnatus 2743 NYS Route 26 Cortland January 1, 1943 Cincinnatus, NY Fairmount West Genesee St. Onondaga October 30, 2000 Syracuse, NY Groton Avenue 1125 Groton Avenue Cortland June 22, 1987 Cortland, NY Hamilton 1 Madison Street Madison December 7, 1949 Hamilton, NY Hamilton 38-40 Utica Street Madison January 26, 1976 Drive-Up Hamilton, NY Lyndon Corners 6930 E. Genesee St. Onondaga July 20, 2000 Fayetteville, NY Manlius 201 Fayette Street Onondaga October 19, 1994 Manlius, NY
6
Marathon 14 E. Main Street Cortland August 15, 1957 Marathon, NY North Main North Main Street Madison September 9, 1966 Oneida, NY Park Place 300 South State Street Onondaga July 19, 1999 Syracuse, NY Oneida 160 Main Street Madison December 12, 1851 Oneida, NY Sherrill 628 Sherrill Road Oneida April 2, 1954 Sherrill, NY TOPS Plaza Route 5 and Route 46 Madison January 7, 1988 Oneida, NY Tully Route 80 at I-81 Onondaga January 26, 1989 Tully, NY Whitney Point 2950 NYS Route 11 Broome April 7, 1994 Whitney Point, NY Wal-Mart 872 NYS Route 13 Cortland March 10, 1997 (Cortland) Cortland, NY
The offices at Fairmount, Lyndon Corners, MONY Tower II, Park Place, TOPS Plaza, Tully, Whitney Point, and the Wal-Mart store are leased. The other banking premises are owned. Item 3 -- Legal Proceedings In December of 1998, the Oneida Indian Nation ("The Nation") and the U.S. Justice Department filed a motion to amend a long-standing land claim against the State of New York to include a class of 20,000 unnamed defendants who own real property in Madison County and Oneida County. An additional motion sought to include the Company as a representative of a class of landowners. On September 25, 2000, the United States District Court of Northern New York rendered a decision denying the motion to include the landowners as a group, and thus, excluding the Company and many of its borrowers from the litigation. The State of New York, the County of Madison and the County of Oneida remain as defendants in the litigation. This ruling may be appealed by The Nation, and does not prevent The Nation from suing landowners individually, in which case the litigation could involve assets of the Company. On August 3, 2001, the Justice Department moved to amend its complaint to drop landowners as defendants. In February 2002, the State of New York, the Nation and the Counties of Madison and Oneida announced that they have reached a tentative agreement to settle the land claim. Among other things, this settlement would pay the three Oneida tribes $500 million for their lost land. However, the proposed settlement would require the approval of governments from county legislatures to the United States Congress. Even if such approvals are received, a final agreement is expected to be years away as the parties work out numerous details. Moreover, the other two Oneida tribes, from Wisconsin and Ontario, which did participate in the settlement negotiations, have indicated that they do not intend to go along with the settlement. The Wisconsin tribe subsequently filed new law suits against individual landowners, and have publicly stated its intention to continue to file other new suits against landowners. Management believes that, ultimately, the State of New York will be held responsible for these claims and this matter will be settled without adversely impacting the Company. 7 There are no other pending legal proceedings, other than routine litigation incidental to the business of the Bank, to which the Company or the Bank is a party or to which their property is the subject. In management's opinion, no pending action, if adversely decided, would materially affect the Company's financial condition. Item 4 -- Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 2001. 8 PART II Item 5 -- Market for Registrant's Common Stock and Related Shareholder Matters Common Stock Data: The common stock of the Company is listed for quoting in the Nasdaq National Market under the symbol "ALNC". Market makers for the stock are Ryan, Beck & Company (800-342-2325), Sandler O'Neill & Partners, LP (800-635-6851), McConnell Budd & Romano (800-538-6957), Dain Rauscher (800-343-3036), and Monroe Securities, Inc. (716-546-5560). There were 828 shareholders of record as of December 31, 2001. The following table presents stock prices for the Company for 2001 and 2000. Stock prices below are based on daily high and low closing prices for the quarter, as reported on the Nasdaq National Market. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. 2001 High Low Dividend Paid - ---- ---- --- ------------- 1st Quarter $20.06 $17.38 $0.185 2nd Quarter 19.50 18.80 0.185 3rd Quarter 21.00 18.80 0.185 4th Quarter 24.40 19.52 0.290* 2000 High Low Dividend Paid - ---- ---- --- ------------- 1st Quarter $23.75 $19.70 $0.175 2nd Quarter 23.25 17.69 0.175 3rd Quarter 22.25 18.50 0.175 4th Quarter 21.00 17.50 0.185 * Includes an extra cash dividend of $0.10 per share The transfer agent for the stock is American Stock Transfer & Trust Company ("ASTC"). They can be contacted at the following address: Registrar and Transfer Agent American Stock Transfer & Trust Company 40 Wall Street - 46th Floor New York, NY 10005 Automatic Dividend Reinvestment Plan The Company has an automatic dividend reinvestment plan. This plan is administered by ASTC, as agent. It offers a convenient way for shareholders to increase their investment in the Company. The plan enables certain shareholders to reinvest cash dividends on all or part of their common stock in additional shares of the Company's common stock without paying brokerage commissions or service charges. Shareholders who are interested in this program may receive a Plan Prospectus and enrollment card by calling ASTC Dividend Reinvestment at 1-800-278-4353, or writing to the following address: Dividend Reinvestment American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 The Company has historically paid regular quarterly cash dividends on its common stock, and the Board of Directors presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and other purposes. However, because substantially all of the funds available for the payment of dividends are derived from the Bank, future dividends will depend upon the earnings of the Bank, its financial condition and its need for funds. Furthermore, there are a number of federal banking policies and regulations that would restrict the Company's ability to pay dividends. In particular, because the Bank is a depository institution whose deposits are insured by the FDIC, it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. Also, as a national bank, the Bank is subject to OCC regulations which impose certain minimum capital requirements that would affect the amount of cash available for distribution to the Company. In addition, under Federal Reserve policy, the Company is required to maintain adequate regulatory capital, is expected to serve as a source of financial strength to the Bank and to commit resources to support the Bank. These policies and regulations may have the effect of reducing the amount of dividends that the Company can declare to its shareholders. 9 Item 6 - Selected Financial Data Five-Year Comparative Summary (Dollars in thousands except per-share data)
ASSETS AND DEPOSITS 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Loans $371,260 $312,378 $282,025 $250,295 $236,484 INVESTMENT SECURITIES 272,690 223,078 194,382 172,237 163,338 Deposits 499,292 474,899 435,074 413,594 377,927 Total Assets 692,871 580,787 519,197 471,705 436,430 Trust Department Assets (Book value, not included in Total Assets) 245,234 236,496 185,972 147,244 145,487 SHAREHOLDERS' EQUITY Capital, Surplus, and Undivided Profits 53,463 53,035 49,245 51,168 49,750 OPERATING INCOME AND EXPENSES Total Interest Income 43,124 40,062 34,508 32,213 31,791 Total Interest Expense 19,965 19,467 14,220 13,398 12,984 - ------------------------------------------------------------------------------------------------------------- Net Interest Income 23,159 20,595 20,288 18,815 18,807 Provision for Loan Losses 2,455 1,150 975 770 625 - ------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 20,704 19,445 19,313 18,045 18,182 Other Operating Income 6,991 6,649 4,558 3,989 3,866 - ------------------------------------------------------------------------------------------------------------- Total Operating Income 27,695 26,094 23,871 22,034 22,048 Salaries and Related Expense 11,264 10,414 9,112 8,712 8,206 Occupancy and Equipment Expense 3,153 2,861 2,587 2,607 2,412 Other Operating Expense 5,550 5,362 4,926 6,178 4,077 - ------------------------------------------------------------------------------------------------------------- Total Operating Expense 19,967 18,637 16,625 17,497 14,695 Income Before Taxes 7,728 7,457 7,246 4,537 7,353 Provision for Income Taxes 1,717 2,032 1,844 1,104 2,220 - ------------------------------------------------------------------------------------------------------------- Net Income $ 6,011 $ 5,425 $ 5,402 $ 3,433 $ 5,133 - ------------------------------------------------------------------------------------------------------------- Per-Share Statistics Net Income $ 1.71 $ 1.52 $ 1.51 $ 0.95 $ 1.40 Book Value at Year End 15.51 14.70 13.97 14.23 13.82 Cash Dividends Declared $ 0.85 $ 0.71 $ 0.70 $ 0.67 $ 0.88 - -------------------------------------------------------------------------------------------------------------
10 Item 7 - Management's Discussion & Analysis of the Results of Operations and Financial Condition INTRODUCTION The Company is a New York corporation, which was formed in November 1998 as a result of the merger of Cortland First Financial Corporation (Cortland) and Oneida Valley Bancshares, Inc. (Oneida). The Company is a bank holding company that operates one wholly owned subsidiary, Alliance Bank, N.A., which provides a full range of financial services in the Central New York marketplace. The following discussion and analysis reviews the Company's business, and provides information that is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiary. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes, and other information included elsewhere in this 2001 Annual Report on Form 10-K. RESULTS OF OPERATIONS Net income for 2001 was $6,011,000, an increase of $586,000, or 10.8%, compared to net income of $5,425,000 in 2000. Earnings per share for 2001, on a fully diluted basis, were $1.70, an increase of $0.18 per share compared to $1.52 per share in 2000. Basic earnings per share of $1.71 for the year ended December 31, 2001, compared to $1.52 for the year ended December 31, 2000. The annualized return on average equity for 2001 increased to 11.14% from 10.86% in 2000. Strong growth in earning assets continued in 2001 with average loans up 18.4% and average investments up 12.8%. The significant increase in earning assets, combined with declining market interest rates that lowered the cost of funds throughout the year, resulted in net interest income growth of 12.4%. Record net income for 2001 was also attributable to growth of more than 5% in other income, disciplined expense management, and effective tax planning. Selected Performance Measures Return on average assets, return on average equity, dividend payout, and equity to asset ratios for the years indicated are as follows:
2001 2000 1999 - ---------------------------------------------------------------------------------------------------- Percentage of net income to average total assets 0.93% 0.98% 1.09% Percentage of net income to average shareholders' equity 11.14% 10.86% 10.56% Percentage of dividends declared to net income 49.15% 46.70% 46.24% Percentage of average shareholders' equity to average total assets 8.32% 9.03% 10.29%
NET INTEREST INCOME Net interest income is the Company's principal source of operating income for payment of overhead and providing for loan losses. It is the amount that interest and fees on loans, investments, and other earning assets exceeds the cost of deposits and other interest-bearing liabilities. Net interest income increased $2,564,000, or 12.4%, to $23,159,000 in 2001. The growth in net interest income resulted from increases in average earning assets during the year, which offset a declining net interest margin. Interest income for 2001 at $43,124,000, was $3,062,000 more than 2000, with the 2001 tax-equivalent yield on average earning assets at 7.36%, declining 58 basis points during the 12 months ended December 31, 2001. Asset yields declined throughout the year as a result of Federal Reserve Board actions that lowered the federal funds rate by a total of 475 basis points during 2001. Average earning assets for 2001 were $604,051,000, up $85,152,000, or 16.4%, compared to 2000, and represented 93.1% of total average assets in 2001. By comparison, average earning assets increased $53,318,000, or 11.5%, in 2000 compared to 1999, and for the comparable periods, the tax-equivalent yield on average earning assets increased 27 basis points. Average earning assets in 2000 were 93.8% of total average assets. Loans continued to represent the majority of the Company's interest earning assets and have remained stable at 58% of earning assets over the past three years. Average loans increased $54,782,000 in 2001 with yields declining 72 basis points to 8.22%. The Company's residential mortgage loan portfolio reported an increase of $13,269,000, or 11.5%, in average loans when comparing the year 2001 to 2000. The average yield on the portfolio declined only 11 basis points from 8.00% in 2000 to 7.89%, as the Company experienced only a moderate prepayment rate in 2001. Average consumer loans for the comparable periods increased 28.8%, or $22,037,000, on strong growth in indirect auto financing. The average yield declined 73 basis points from 9.57% to 8.84% in 2001, as the new business was booked at lower rates during the year. Average commercial loans for 2001 increased $19,026,000, or 17.8%, when compared to the prior year, on strong new business development. The commercial portfolio, which primarily reprices with short-term market rate indexes, reported a decline in the average yield of 141 basis points, from 9.46% to 8.05%. Interest income on loans in 2001 was up $2,327,000, or 8.7%, compared to 2000. 11 Average loans in 2000 increased $34,560,000 compared to 1999 while average loan yields increased 26 basis points. Interest income on loans was up $3,778,000 in 2000 compared to 1999. Average investments in 2001 increased by $27,577,000, with tax-equivalent interest income from investments up $794,000, or 5.6%, compared to 2000. In comparison, average investment securities increased $22,504,000 in 2000 compared to 1999, with tax-equivalent interest income up $1,869,000. The average tax-equivalent yield of the portfolio declined 41 basis points, from 6.59% in 2000 to 6.18% in 2001. The average tax-equivalent yield on the portfolio had increased 18 basis points in 2000, when compared to 1999. Interest income in 2001 from the sale of federal funds, in the amount of $383,000, increased $97,000 compared to 2000, as the Company increased its average federal funds sold balances by $2,793,000 throughout the year. During 2001, average interest-bearing liabilities increased by $90,544,000, or 20.4%, to $534,735,000. As a result of falling market interest rates and the repricing characteristics associated with the liabilities, the average cost of interest-bearing liabilities declined 65 basis points from 4.38% in 2000 to 3.73% in 2001. The Company's interest expense, which is a function of the volume of and rates paid for interest-bearing liabilities, increased $498,000, or 2.56%, in 2001. The relatively small rate of increase in interest expense resulted as significantly lower rates paid on deposits and borrowings throughout 2001 offset the majority of the costs associated with the liability growth. By comparison, interest expense increased $5,247,000, or 36.9%, in 2000 compared to 1999 as a result of volume and rate increases on deposits, along with higher rates paid on increased borrowings primarily through the Federal Home Loan Bank. The average cost of interest-bearing liabilities increased 70 basis points for the 12 months ended December 31, 2000. Average interest-bearing liabilities increased $57,491,000, or 14.9%, during the 12 months ended December 31, 2000. Although the Company's net interest margin (federal tax-equivalent net interest income divided by average earning assets) declined 14 basis points, from 4.19% in 2000, to 4.05% in 2001, it showed improvement throughout the 2001 year. The margin increased from a 3.76% average for the first quarter of 2001, to a 4.22% average for the fourth quarter of 2001. By comparison, the margin declined throughout 2000, with a 4.36% average for the first quarter of 2000 and a 4.05% average for the fourth quarter of 2000. The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and yield information is adjusted for items exempt from federal income taxes and assumes a 34% tax rate. Nonaccrual loans have been included in the average balances. Securities are shown at average amortized cost. 12 Average Balances and Net Interest Income
Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Avg. Avg. Avg. Yield/ Yield/ Yield/ Avg. Amt. of Rate Avg. Amt. of Rate Avg. Amt. of Rate Balance Interest Paid Balance Interest Paid Balance Interest Paid - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Assets: Interest-earning assets: Federal funds sold $ 7,307 $ 383 5.24% $ 4,514 $ 286 6.34% $ 8,260 $ 433 5.24% Taxable investment securities 190,463 11,161 5.86% 168,581 10,826 6.42% 143,671 8,798 6.12% Nontaxable investment securities 52,978 3,867 7.30% 47,283 3,408 7.21% 49,689 3,567 7.18% Loans (net of unearned discount) 353,303 29,028 8.22% 298,521 26,701 8.94% 263,961 22,923 8.68% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 604,051 44,439 7.36% 518,899 41,221 7.94% 465,581 35,721 7.67% Noninterest-earning assets: Other assets 45,181 41,275 35,486 Less: Allowance for loan losses (3,954) (3,587) (3,240) Net unrealized gains/(losses) on available-for-sale portfolio 3,391 (3,441) (560) - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 648,669 $ 553,146 $ 497,267 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Interest-bearing liabilities: Demand deposits $ 71,627 $ 752 1.05% $ 62,928 $ 960 1.53% $ 64,480 $ 1,042 1.62% Savings and money market deposits 160,382 4,315 2.69% 152,573 5,176 3.39% 148,895 4,632 3.11% Time deposits 219,756 11,006 5.01% 189,535 10,841 5.72% 163,115 7,947 4.87% Borrowings 82,970 3,892 4.69% 39,155 2,490 6.36% 10,210 599 5.87% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 534,735 19,965 3.73% 444,191 19,467 4.38% 386,700 14,220 3.68% Noninterest-bearing liabilities: Demand deposits 52,871 54,800 54,590 Other liabilities 7,118 4,220 4,803 Shareholders' equity 53,945 49,935 51,174 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 648,669 $ 553,146 $ 497,267 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest earnings $24,474 $21,754 $21,501 - ----------------------------------------------------------------------------------------------------------------------------------- Net yield on interest-earning assets 4.05% 4.19% 4.62%
13 The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates. Volume changes are computed by multiplying the volume difference by the prior year's rate. Rate changes are computed by multiplying the rate difference by the prior year's balance. The change in interest due to both rate and volume has been allocated equally between the volume and rate variances. Volume and Rate Variances
2001 Compared to 2000 2000 Compared to 1999 - ------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) Due To Increase (Decrease) Due To Volume Rate Net Change Volume Rate Net Change - ------------------------------------------------------------------------------------------------------------------------------- (In thousands) Interest earned on: Federal funds sold $ 162 $ (65) $ 97 $ (217) $ 70 $ (147) Taxable investment securities 1,342 (1,007) 335 1,560 468 2,028 Nontaxable investment securities 414 46 460 (173) 14 (159) Loans (net of unearned discount) 4,687 (2,361) 2,326 3,046 732 3,778 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $6,605 $(3,387) $ 3,218 $ 4,216 $ 1,284 $ 5,500 - ------------------------------------------------------------------------------------------------------------------------------- Interest paid on: Interest-bearing demand deposits $ 114 $ (322) $ (208) $ (24) $ (58) $ (82) Savings and money market deposits 236 (1,097) (861) 121 423 544 Time deposits 1,620 (1,455) 165 1,397 1,497 2,894 Borrowings 2,420 (1,018) 1,402 1,770 121 1,891 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $4,390 $(3,892) $ 498 $ 3,264 $ 1,983 $ 5,247 - ------------------------------------------------------------------------------------------------------------------------------- Net interest earnings (FTE) $2,215 $ 505 $ 2,720 $ 952 $ (699) $ 253
14 NONINTEREST INCOME Noninterest income for 2001 was $6,991,000, up 5.1%, or $342,000, compared to 2000. The Company's noninterest income is primarily comprised of recurring fees from normal banking operations, trust department fees, and net gains or losses from sales of investment securities. Income from service charges on deposits at $2,370,000, up 18.9% from the prior year following a 2.8% increase in 2000 over 1999, was the principal source of the Bank's noninterest income. Increases in service charge income resulted from changes in the Company's fee schedules early in 2001. Income from trust and brokerage services of $1,405,000 in 2001 showed little growth compared to the prior year, with fees being negatively impacted by poor performance in the equity markets. Strong growth in new trust and investment management accounts, with initial market values of $17,606,000 opened during 2001, generated additional revenues, offsetting lower fee income from the existing customer base that resulted from declining market values. The ability to maintain trust revenue at last year's level is a reflection of strong new business development efforts over the past two years. Trust department income increased 22.8% in 2000 compared to 1999 on both growth in new accounts and market value appreciation. During 2001, the Company executed a number of investment strategies that resulted in security gains. Gains on sales of securities in 2001 of $1,495,000 compared to $711,000 in 2000. Significant contributions to the Company's other operating income were derived from electronic banking and other customer service fees, as well as increases in the cash value of Company-owned life insurance. During 2001, the Company terminated data processing contracts with a number of other banks following an analysis that indicated the profit margin on the business was unsatisfactory. Revenues from this source declined $234,000 in 2001 compared to the prior year. The Company also reported a one-time loss of $163,000 in 2001 in connection with the closing of an in-store branch. In the third quarter of 2000, the Company booked a $532,000 one-time gain on the termination of the former Oneida Valley National Bank defined benefit pension plan. By comparison, noninterest income of $6,649,000 in 2000 increased 45.9%, or $2,091,000, compared to 1999. The following table sets forth certain information on noninterest income for the years indicated: NonInterest Income Years ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------- (In thousands) Service charges on deposit accounts $2,370 $1,993 $1,939 Trust department services 1,405 1,393 1,134 Bank owned life insurance 475 469 80 Investment securities gains 1,495 711 136 Other operating income 1,246 2,083 1,269 - ------------------------------------------------------------------------------- Total noninterest income $6,991 $6,649 $4,558 - ------------------------------------------------------------------------------- NONINTEREST EXPENSE Operating expense of $19,967,000 for the 12 months ended December 31, 2001, increased $1,330,000, or 7.1%, when compared to 2000. The increase compared to a $2,012,000, or 12.1%, increase, when comparing 2000 to 1999. Salaries and associated benefit expenses in 2001 were up $850,000, or 8.2%, compared to a 14.3% increase in 2000 over 1999, and represented the majority of the 2001 increase in total expense. Increases were primarily attributed to higher salaries associated with hiring new employees in a more competitive marketplace. The Company also experienced significantly higher costs in connection with providing employee medical benefits, and increased costs associated with supplemental executive retirement plans. The Company's occupancy and equipment expense increased $292,000, or 10.2%, in 2001 compared to 2000, following a 10.6% increase in the prior year. The increase was primarily associated with the purchase and development of technology systems, designed to provide improved customer service through both branch and on-line systems, as well as costs relating to the Company's opening of new administrative offices. The occupancy expense for 2001 also reflects twelve months of costs associated with three new branches that were opened in the last half of 2000. Other noninterest expense in 2001 increased $188,000, or 3.5%, compared to the prior year. The rate of increase reflected the Company's efforts in expense control, with the increase attributable to costs related to servicing the growth in assets. In 2000, other operating expense increased $436,000, or 8.9%, compared to 1999. The following table sets forth certain information on noninterest expense for the years indicated: Noninterest Expense Years ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------- (In thousands) Salaries, wages, and employee benefits $11,264 $10,414 $ 9,112 Building, occupancy, and equipment 3,153 2,861 2,587 Other operating expense 5,550 5,362 4,926 - ----------------------------------------------------------------------------- Total noninterest expense $19,967 $18,637 $16,625 - ----------------------------------------------------------------------------- 15 PROVISION FOR INCOME TAX Utilizing improved tax planning strategies, the Company reduced its 2001 provision for income taxes by $315,000, or 15.5%, when compared to the 2000 expense. The 2001 expense of $1,717,000 resulted in an effective tax rate of 22.2%, compared to the 2000 expense of $2,032,000 that reflected an effective tax rate of 27.3%. ANALYSIS OF FINANCIAL CONDITION INVESTMENT SECURITIES The investment portfolio is designed to meet the Company's liquidity needs when loans expand or deposits contract while, at the same time, generating a favorable return on low-risk, high-quality investments. The Company classifies the majority of its investment securities as available-for-sale to support and maintain the Company's interest risk objectives. The Company does not engage in securities trading or derivatives activities in carrying out its investment strategies. The Federal Reserve Bank took unprecedented steps in 2001 to stimulate an economy that fell into a recession late in the first quarter of the year. The targeted federal funds rate was lowered 11 times throughout the year, a total of 475 basis points, ending 2001 at 1.75%. As short-term interest rates moved significantly lower during the year, yields across the curve also declined. The yield curve, that was relatively flat at the beginning of the year, ended 2001 very positively sloped. The rally in the bond market improved the value of the Company's portfolio, offering significant opportunities for gains and repositioning during the year. The Company sold the majority of its callable securities late in 2000 and early in 2001 to capture gains, with reinvestment in planned amortization class mortgage-backed securities that were well protected against prepayment as rates continued to fall. The Company also sold the majority of its corporate bond portfolio during the year, to reduce credit risk at the same time capturing further gains. As a result of opportunities associated with the positively sloped yield curve, during the third quarter of the year the Company executed a $50 million leverage transaction. The Company purchased a combination of callable agency and mortgage-backed securities with a 6-year average life, funded by repurchase agreements with a 30-month average life. The transaction locked in a spread of 167 basis points for an expected 24-month minimum period. Gains on sales of investment securities in 2001 were $1,495,000 compared to $711,000 in 2000. Investment securities purchased during the falling rate environment of 2001 reduced the overall portfolio yield. The average tax-equivalent yield of the portfolio in 2001 declined 41 basis points, to 6.18% from 6.59% in 2000. On a comparative basis, the portfolio yield increased 18 basis points in 2000 compared to 1999. When comparing year-end 2000 to year-end 2001, the portfolio yield declined 104 basis points, from 6.80% to 5.76%. The Company's book value of investment debt securities increased $47,020,000, or 21.6%, in the 12 months ended December 31, 2001, to a total of $264,807,000, compared to an increase of $22,649,000, or 11.6%, during the year 2000. The decline in interest rates, which causes an increase in the market value of fixed-rate investment securities, resulted in the Company's available-for-sale investment securities reflecting a market value that was 0.80% greater than the portfolios' book value. In compliance with SFAS 115, the Company reflects net unrealized gains and losses on its available-for-sale portfolio in its financial statement investment securities total, as well as the after-tax effect of the gains and losses in the accumulated other comprehensive income section of its shareholders' equity. The Company's December 31, 2001 investment portfolio reflects an unrealized gain on available-for-sale securities of $2,071,000, with an after-tax effect of $1,243,000 being reflected as an increase in shareholders' equity. At December 31, 2000, the Company reported unrealized gains in its available-for-sale portfolio of $1,171,000 and an increase in shareholders' equity of $702,000. Based on amortized cost, the Company classified 97% of its investment portfolio as available-for-sale at year-end 2001. The following table sets forth the amortized cost and market value for the Company's held-to-maturity investment securities portfolio:
Years ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value - ----------------------------------------------------------------------------------------------------- (In thousands) Obligations of states and political subdivisions $7,371 $8,158 $10,223 $10,365 $12,449 $12,449 - ----------------------------------------------------------------------------------------------------- Total $7,371 $8,158 $10,223 $10,365 $12,449 $12,449 - -----------------------------------------------------------------------------------------------------
16 The following table sets forth the amortized cost and market value for the Company's available-for-sale debt securities within the investment portfolio:
Years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------- (In thousands) U.S. Treasury and other U.S. government agencies $ 61,430 $ 62,228 $ 50,911 $ 51,538 $ 61,871 $ 61,225 Mortgage-backed securities 146,484 147,151 93,447 93,413 68,227 66,178 Obligations of states and political subdivisions 48,009 48,687 44,289 44,996 37,516 37,196 Other securities 1,513 1,441 18,917 18,788 15,075 14,614 - ------------------------------------------------------------------------------------------------------------- Total $257,436 $259,507 $207,564 $208,735 $ 182,689 $179,213 - ------------------------------------------------------------------------------------------------------------- Net unrealized gains/(losses) on available-for-sale debt securities $ 2,071 $ 1,171 $ (3,476) - ------------------------------------------------------------------------------------------------------------- Total Carrying Value $259,507 $208,735 $ 179,213 - -------------------------------------------------------------------------------------------------------------
The following table sets forth as of December 31, 2001, the maturities of investment securities and the weighted-average yields of such securities, which have been calculated on the basis of the cost, weighted for scheduled maturity of each security, and adjusted to a fully tax-equivalent basis:
At December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------ Amount Amount Amount MaturinG After Maturing After Amount Maturing Within One Year but Five Years but Maturing After One Year or Less Within Five Years Within Ten Years Ten Years Total Cost - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Held-To-Maturity Portfolio Obligations of states and political subdivisions $ 3,628 $ 1,835 $ 748 $ 1,160 $ 7,371 - ------------------------------------------------------------------------------------------------------------------------------ Total held-to-maturity portfolio value $ 3,628 $ 1,835 $ 748 $ 1,160 $ 7,371 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average yield at year end (1) 5.78% 8.32% 6.81% 8.89% 7.00% Available-for-Sale Portfolio U.S. Treasury and other U.S. government agencies $ 2,000 $ 19,084 $40,346 $ -- $ 61,430 Mortgage-backed securities 16,318 85,844 36,749 7,573 146,484 Obligations of states and political subdivisions 5,213 11,567 18,982 12,247 48,009 Other securities -- 1,513 -- -- 1,513 - ------------------------------------------------------------------------------------------------------------------------------ Total available-for-sale portfolio value $23,531 $118,008 $96,077 $19,820 $257,436 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average yield at year end (1) 4.97% 5.59% 5.81% 6.94% 5.72%
(1) Weighted average yields on the tax-exempt obligations have been computed on a fully tax-equivalent basis assuming a marginal federal tax rate of 34%. These yields are an arithmetic computation of interest income divided by average balance and may differ from the yield to maturity which considers the time value of money. 17 LOANS The loan portfolio is the largest component of the Company's earning assets and accounts for the greatest portion of total interest income. The Company provides a full range of loan products delivered through its branch network. Consistent with the focus on providing community banking services, the Company generally does not attempt to diversify geographically by making a significant amount of loans to borrowers outside of the primary service area. Loans are internally generated and lending activity is primarily confined to Cortland, Madison, Onondaga, northern Broome, and Western Oneida counties. The Company does not engage in highly leveraged transactions or foreign lending activities. The following table sets forth the composition of the Company's loan portfolio at the dates indicated: Composition of the Loan Portfolio
- -------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Commercial $126,801 34.2% $108,447 34.7% $105,169 37.3% $ 80,121 32.0% $ 66,422 28.1% Real estate mortgage 142,307 38.3% 119,948 38.4% 114,450 40.6% 113,570 45.4% 105,937 44.8% Consumer 106,734 28.7% 87,717 28.1% 66,878 23.7% 61,817 24.7% 70,169 29.7% - -------------------------------------------------------------------------------------------------------------------------- Gross Loans 375,842 101.2% 316,112 101.2% 286,497 101.6% 255,508 102.1% 242,528 102.6% Less: Unearned discount (104) (0.0%) (364) (0.1%) (1,060) (0.4%) (2,212) (0.9%) (3,087) (1.3% Allowance for loan losses (4,478) (1.2%) (3,370) (1.1%) (3,412) (1.2%) (3,001) (1.2%) (2,957) (1.3% - -------------------------------------------------------------------------------------------------------------------------- Net Loans $371,260 100.0% $312,378 100.0% $282,025 100.0% $250,295 100.0% $236,484 100.0% - --------------------------------------------------------------------------------------------------------------------------
On December 31, 2001, gross loans were $375,842,000, increasing $59,730,000, or 18.9%, during the year. By comparison, loans increased $29,615,000, or 10.3%, in 2000. The Company reported little change in the mix of its loan portfolio throughout 2001, with strong growth across all business lines. Residential mortgage loans, which represented 37.9% of gross loans at December 31, 2001, increased $22,359,000, or 18.6%, during 2001 compared to an increase of $5,498,000, or 4.8% in 2000. The mortgage portfolio at December 31, 2001 consists of 79% in fixed-rate loans, and 21% in loans that have adjustable-rate features. The Company originated $47,664,000 in mortgage loans during 2001. The majority of the loans were originated in Cortland and Madison counties. As of December 31, 2001, the Company was servicing mortgage loans sold in the secondary market with balances of $16,142,000. The total of mortgage loans being serviced at December 31, 2000 was $15,766,000. Loans in the commercial category consist primarily of short-term and/or floating-rate loans, lines of credit, as well as commercial mortgage loans, made to small- and medium-sized companies. Commercial loans in 2001 increased $18,354,000, or 16.9%, to $126,801,000. By comparison, commercial loans increased $3,278,000, or 3.1%, in 2000. The Company continued to maintain strong market share in its core markets, while developing the majority of its 2001 growth from new customers in the Onondaga county marketplace. Growth in new commercial relationships, and increased use of approved lines of credit throughout the year, resulted in average commercial loans during 2001 being $19,026,000, or 17.8% greater than in 2000. Consumer loans, which include indirect auto, home equity, direct installment, and revolving credit loans, increased 21.7%, or $19,017,000, in 2001. During 2001, the Company continued its focus on indirect auto lending, providing service to a network of more than 150 Central New York dealers. Indirect auto loans increased $14,305,000, or 34%, in 2001 compared to 2000, following an increase of $21,820,000, or 108%, in 2000 compared to 1999. The rate of growth in indirect auto loans during 2001 eased, as the Company tightened its underwriting guidelines in response to a higher than desirable loss rate and a weakening economy. Strong promotions of home equity lines of credit in 2001 increased outstanding balances by $4,337,000, or 26.8% during 2001. The Company's consumer loan portfolio does not contain credit card loans. 18 The following table shows the amount of loans outstanding as of December 31, 2001, which, based on remaining scheduled payments of principal, are due in the periods indicated:
Maturing Maturing Maturing within After One but After Five but Maturing After At December 31, 2001 One Year or Less Within Five Years Within Ten Years Ten Years Total - ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Commercial $48,016 $ 41,078 $22,255 $15,452 $126,801 Real estate mortgage 8,984 33,127 37,416 62,780 142,307 Consumer, net of unearned discount 24,834 60,671 17,429 3,696 106,630 - ---------------------------------------------------------------------------------------------------------------------------- Total loans net of unearned discount $81,834 $134,876 $77,100 $81,928 $375,738 - ----------------------------------------------------------------------------------------------------------------------------
The following table sets forth the sensitivity of the loan amounts due after one year to changes in interest rates: At December 31, 2001 Fixed Rate Variable Rate - ----------------------------------------------------------------------------- (In thousands) Due after one year, but within five years $100,666 $34,210 Due after five years $112,269 $46,759 LOAN QUALITY AND THE ALLOWANCE FOR LOAN LOSSES The following table represents information concerning the aggregate amount of nonperforming assets:
Years ended December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis $ 736 $ 686 $ 682 $ 552 $ 525 Accruing loans which are contractually past due 90 days or more as to principal or interest payments 623 781 409 298 1,204 Other real estate owned and other repossessed assets 320 354 269 257 363 - ------------------------------------------------------------------------------------------------------- Total nonperforming loans and assets $1,679 $1,821 $1,360 $1,107 $2,092 - ------------------------------------------------------------------------------------------------------- Ratio of allowance for loan losses to period-end nonperforming loans 329.51% 229.72% 312.74% 353.06% 171.02% Ratio of nonperforming assets to period-end total loans, other real estate owned, and repossessed assets 0.45% 0.58% 0.48% 0.44% 0.87% - -------------------------------------------------------------------------------------------------------
Nonperforming assets, defined as nonaccruing loans plus loans 90 days or more past due, along with other real estate owned and other repossessed assets as of December 31, 2001 were $1,679,000, declining $142,000, or 7.8%, compared to year- end 2000. The ratio of nonperforming assets to year-end loans, other real estate owned, and other repossessed assets improved to 0.45% at December 31, 2001 from 0.58% at December 31, 2000. The ratio of nonperforming loans to total loans, in the amount of 0.36% at December 31, 2001, also showed improvement when compared to a ratio of 0.46% at December 31, 2000. The year-end ratio compares very favorably to the most recent peer bank data contained in the Uniform Bank Performance Report for all banks with total assets between $500,000,000 and $1,000,000,000, as published by the Federal Reserve Board's Division of Banking Supervision and Regulation, which as of September 30, 2001 reported a peer average of 0.77%. The adequacy of the allowance to provide coverage for nonperforming loans improved to 330% at year-end 2001 compared to 230% at year-end 2000. Total delinquencies, defined as loans 30 days or more past due and nonaccruing, were 1.85% of total loans outstanding as of December 31, 2001, compared to 1.60% at the end of 2000. At December 31, 2001, 66.3% of delinquent loans were less than 60 days past due. The Company has a loan review program that it believes takes a conservative approach to evaluating nonperforming loans and the loan portfolio in general. The loan review program continually audits the loan portfolio to confirm management's loan risk rating system and track problem loans, to insure compliance with loan policy underwriting guidelines, and to evaluate the adequacy of the allowance for loan losses. 19 The Company's policy is to place a loan on nonaccrual status and recognize income on a cash basis when a loan is more than ninety days past due, unless in the opinion of management, the loan is well secured and in the process of collection. The impact of interest not recognized on nonaccrual loans was immaterial in 2001. The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on fair value of the collateral. As of December 31, 2001, there were no impaired loans for which specific valuation allowances had been recorded. The allowance for loan losses represents management's best estimate of probable loan losses in the Company's loan portfolio. Management's quarterly evaluation of the allowance for loan losses is a comprehensive analysis that builds a total reserve by evaluating the risks within each loan type, or pool, of similar loans. The Company uses a general allocation methodology for all residential and consumer loan pools. This methodology estimates a reserve for each pool based on the most recent three-year loss rate, adjusted to reflect the expected impact that current trends regarding loan growth, delinquency, losses, economic conditions, and current interest rates are likely to have. For commercial loan pools, the Company establishes a specific reserve allocation for all loans, which have been risk rated under the Company's risk rating system, as substandard, doubtful, or loss. The specific allocation is based on the most recent valuation of the loan collateral and the customer's ability to pay. For all other commercial loans, the Company uses the general allocation methodology that establishes a reserve for each risk rating category. The general allocation methodology for commercial loans considers the same factors that are considered when evaluating residential mortgage and consumer loan pools. The combination of using both the general and specific allocation methodologies reflects management's best estimate of the probable loan losses in the Company's loan portfolio. Loans are charged against the allowance for loan losses, in accordance with the Company's loan policy, when they are determined by management to be uncollectible. Recoveries on loans previously charged-off are credited to the allowance for loan losses when they are received. When management determines that the allowance for loan losses is less than adequate to provide for potential losses, a direct charge is made to operating income. The allowance for loan losses account at December 31, 2001 was $4,478,000, or 1.19% of loans outstanding, compared to $3,370,000, or 1.07% of loans outstanding, at December 31, 2000. The 2001 increase of $1,108,000 in the reserve for loan losses was funded by a $2,455,000 provision expense that was equal to 1.82 times the amount of net loan losses for 2001. Although net loans charged-off increased from $1,192,000 in 2000 to $1,347,000 in 2001, the ratio of net charge-offs to average loans outstanding declined to 0.38% in 2001 compared to 0.40% in 2000. The Company experienced a significant increase in consumer loan losses in 2001, particularly in its indirect auto loan portfolio. Consumer loan losses represented 81% of total loan losses with 59% of the total loan losses in indirect auto loans. In the second half of 2001, the Company tightened its indirect auto loan underwriting guidelines, and terminated relationships with a number of dealerships that were considered unsatisfactory. Commercial loan losses represented the balance of the 2001 loan losses, and declined significantly from the amount reported in 2000. The Company reported no net losses in its residential mortgage loan portfolio in 2001. 20 The following table summarizes loan balances at the end of each period indicated and the daily average amount of loans. Also summarized are changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off and additions to the allowance, which have been charged to expense.
Summary of Loan Loss Allowance Years ended December 31, 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Amount of loans outstanding at end of period (gross loans less unearned discount) $375,738 $315,748 $285,437 $253,296 $239,441 - --------------------------------------------------------------------------------------------------------------------- Daily average amount of loans (net of unearned discount) $353,303 $298,521 $263,961 $244,649 $236,843 - --------------------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at beginning of period $ 3,370 $ 3,412 $ 3,001 $ 2,957 $ 3,025 Loans charged-off: Commercial 326 780 73 218 148 Real estate mortgage 1 56 38 29 57 Consumer 1,395 621 637 693 602 - --------------------------------------------------------------------------------------------------------------------- Total loans charged-off 1,722 1,457 748 940 807 Recoveries of loans previously charged-off: Commercial 32 74 21 111 17 Real estate mortgage 2 1 1 -- -- Consumer 341 190 162 103 97 - --------------------------------------------------------------------------------------------------------------------- Total recoveries 375 265 184 214 114 Net loans charged-off 1,347 1,192 564 726 693 - --------------------------------------------------------------------------------------------------------------------- Additions to allowance charged to expense 2,455 1,150 975 770 625 - --------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 4,478 $ 3,370 $ 3,412 $ 3,001 $ 2,957 Ratio of allowance for loan losses to period-end loans 1.19% 1.07% 1.20% 1.18% 1.23% Ratio of net charge-offs to average loans outstanding 0.38% 0.40% 0.21% 0.30% 0.29%
The allowance for loan losses has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses within the following categories of loans at the dates indicated:
Allocation of the Allowance for Loan Losses Years ended December 31, 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Amt. of Amt. of Amt. of Amt. of Amt. of Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Commercial $2,588 57.79% $1,625 48.22% $1,857 54.43% $1,159 38.62% $ 948 32.05% Real estate mortgage 305 6.81% 276 8.19% 391 11.46% 482 16.06% 541 18.30% Consumer 1,585 35.40% 1,469 43.59% 1,164 34.11% 698 23.26% 906 30.64% Unallocated -- -- -- -- -- -- 662 22.06% 562 19.01% - ---------------------------------------------------------------------------------------------------------------------------------- Total $4,478 100.0% $3,370 100.0% $3,412 100.0% $3,001 100.0% $2,957 100.0% - ----------------------------------------------------------------------------------------------------------------------------------
21 DEPOSITS AND OTHER BORROWINGS The Company's deposit accounts represent its primary source of funds. The deposit base is comprised of demand deposit, savings and money market accounts, and other time deposits, that are primarily provided by individuals, businesses, and local governments within the communities served. The Company continuously monitors market pricing, competitors' rates, and internal interest rate spreads to maintain and promote growth and profitability. Average deposits during 2001 increased $44,800,000, or 9.7%, compared to a $28,756,000, or 6.7%, increase in 2000. Compared to December 31, 2000, deposits as of December 31, 2001, in the amount of $499,292,000, were up $24,393,000, or 5.1%. The growth in average deposits during 2001 was a result of strong growth in a number of business lines. Average commercial deposits were up 10% compared to the prior year, consistent with and related to, the strong growth in new commercial loan relationships. Development of new municipal relationships increased the opportunities to acquire competitively priced time deposits, and resulted in an increase of 1.9% in average municipal deposits outstanding during 2001. Average consumer deposits in 2001 increased 8.8% over the prior year, with increases attributable to growth in money market and time deposit balances. Average deposits also increased during 2001 as the Company acquired brokered certificates of deposit, with rates and maturities that were preferential to other deposit alternatives. The Company's average deposit mix in 2001, compared to 2000, reflected a slight shift from lower cost demand deposit, savings, and money market accounts, to higher cost time deposit accounts. The Company's average demand deposits, including both interest-bearing and noninterest-bearing accounts, declined 1% as a percentage of total average deposits, to 24.7% during 2001, following a 2% decline the prior year. Although declining as a percentage of the total, this group of average deposits increased $6,770,000, or 5.8%, when comparing 2001 to 2000. These core transactional accounts continue to represent a significant percentage of total deposits and provide the Company with an important low-cost source of funds. The Company's savings and money market average deposit balances increased $7,809,000, or 5.1%, during 2001 primarily on the growth in the Company's retail money market balances. The product was priced to compete with brokerage money market accounts. Average time deposits in 2001 increased $30,221,000, or 15.9%, compared to 2000, following an increase of $26,420,000, or 16.2%, when comparing 2000 to 1999. Average time deposit increases were reported in the commercial and consumer categories, as well as in brokered certificates of deposit. Throughout the year, customers shortened the average maturity of their time deposits as well as transferred balances to money market and savings products, in response to declining interest rates. Commercial deposits ended the year with strong growth, up $11,437,000, or 18%, compared to the prior year-end. Consumer deposits were up $3,136,000, or 1.1%, with increases in lower cost demand deposit and money market balances. The Company's total municipal deposits of $100,817,000 on December 31, 2001 represented 20.2% of total deposits, down from $118,286,000, or 24.9% of total deposits on December 31, 2000. During the fourth quarter of 2001, competitors priced municipal money market products at a premium to time deposits. The Company determined not to match the competitive pricing structure but to offset the deposit declines with lower cost borrowings of similar maturity. Brokered certificates of deposit in the amount of $26,742,000, represented 13.2% of time deposits, and 5.4% of total deposits at December 31, 2001. The Company reported no brokered certificates of deposit at December 31, 2000. Time deposits in excess of $100 thousand, which are more volatile and sensitive to interest rates, totaled $68,520,000 at year-end 2001, representing 33.9% of total time deposits, and 13.7% of total deposits. On a comparative basis, these deposits totaled $94,728,000, representing 44.3% of total time deposits, and 19.9% of total deposits at year-end 2000. The average daily amount of deposits, the average rate paid, and the percentage of deposits on each of the following deposit categories are summarized below for the years indicated:
2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Avg. Percent Avg. Percent Avg. Percent Avg. Rate of Avg. Rate of Avg. Rate of Balance Paid Deposits Balance Paid Deposits Balance Paid Deposits - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Noninterest-bearing demand deposits $ 52,871 0.00% 10.48% $ 54,800 0.00% 11.92% $ 54,590 0.00% 12.66% Interest-bearing demand deposits 71,627 1.05% 14.19% 62,928 1.53% 13.68% 64,480 1.62% 14.96% Savings and money market deposits 160,382 2.69% 31.78% 152,573 3.39% 33.18% 148,895 3.11% 34.54% Time deposits 219,756 5.01% 43.55% 189,535 5.72% 41.22% 163,115 4.87% 37.84% - ---------------------------------------------------------------------------------------------------------------------------------- Total average daily amount of deposits $504,636 3.19% 100.00% $459,836 3.69% 100.00% $431,080 3.16% 100.00% - ----------------------------------------------------------------------------------------------------------------------------------
22 The following table indicates the amount of the Company's time deposits of $100,000 or more by time remaining until maturity as of December 31, 2001: (In thousands) Less than three months $44,413 Three months to six months 6,495 Six months to one year 11,121 Over one year 6,491 - -------------------------------------------------------------- Total $68,520 - -------------------------------------------------------------- The Company offers retail repurchase agreements primarily to its larger business customers. Under the terms of the agreements, the Company sells investment portfolio securities to the customer and agrees to repurchase the securities at a specified later date. The Company views the arrangement as a deposit alternative for its business customers. As of December 31, 2001, retail repurchase agreement balances amounted to $17,412,000 compared to balances of $6,936,000 at December 31, 2000. During 2001, the Company utilized collateralized repurchase agreements with various brokers, and advances from the Federal Home Loan Bank of New York as alternative sources of funding and as a liability management practice. At December 31, 2001, the combination of repurchase agreements and term advances were $115,013,000, compared to $36,750,000 at December 31, 2000. CAPITAL In 2001, the Company added $6,011,000 into equity through net income and returned $2,955,000 to its shareholders in the form of cash dividends, retaining $3,056,000 in undivided profits. During the year, the Company repurchased 161,627 shares of its common stock at a cost of $3,169,000 in connection with a stock repurchase program. Total shareholders' equity also reflects an adjustment for the change in market value of the Company's available-for-sale investment securities. As previously discussed in the Investment Securities section, the after-tax effect of the net unrealized gains and losses is reported as the Accumulated Other Comprehensive Income component of shareholders' equity, and reflects an increase in total shareholders' equity of $1,243,000 as of December 31, 2001. The Company's ratio of shareholders' equity to total assets of 7.72% at December 31, 2001 compares to 9.13% at December 31, 2000. The Company's goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary bank, that supports growth and expansion activities while at the same time exceeding regulatory standards. Capital adequacy in the banking industry is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. At December 31, 2001, the Company exceeded all regulatory required minimum capital ratios and met the regulatory definition of a "well-capitalized institution." A more comprehensive analysis of regulatory capital requirements, including ratios for the Company and its subsidiary bank, is included in Note 16 in the Consolidated Financial Statements section of the Annual Report. The Company declared cash dividends equal to $0.845 per share in 2001 compared to $0.71 in 2000. During the fourth quarter of 2001, the regular quarterly dividend rate was increased from $0.185 per share to $0.19 per share, and the Company declared an extra cash dividend of $0.10 per share. The 2001 dividend pay-out ratio was 49% compared to a 47% pay-out ratio in 2000. LIQUIDITY Liquidity is the ability of the Company to generate and maintain sufficient cash flows to fund its operations and to meet customers' loan demands or deposit withdrawals. Maintaining a stable core deposit base is one of the fundamentals in the Company's liquidity management policy. It is the Company's goal to raise cash when needed, at the most reasonable cost, with a minimum of loss. Management carefully monitors its liquidity position and seeks to maintain adequate liquidity to meet its needs. The Company meets its liquidity needs by balancing levels of cash flow from the sale or maturity of available-for-sale investment securities and loan amortizing payments and maturities, as well as with the availability of dependable borrowing sources which can be accessed when needed. Total borrowing capacity with the Federal Home Loan Bank and other banks with which the Company has approved lines of credit as of year-end 2001 was $103,245,000 and $15,000,000, respectively, of which $63,245,000 and $15,000,000 remained available, respectively. The Company also has contracts with a number of brokers whereby it may enter into collateralized repurchase agreements. As of December 31, 2001, the Company owns $37,000,000 in securities that were available for pledging purposes. 23 OTHER INFORMATION On January 4, 2002, the Company announced that its Board of Directors approved the formation of a commercial leasing company. The company specializes in information technology, municipal, health care, energy and utilities, education, and equipment leasing. The leasing company is a subsidiary of the Bank. Item 7A - Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Other types of market risks do not arise in the normal course of the Company's business activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Company's financial condition and results of operations. The Company's profitability is affected by fluctuations in interest rates. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a computer simulation model. The model measures the change in net interest income which results when market interest rates change. As of December 31, 2001, an instantaneous 200 basis point increase in market interest rates was estimated to have a negative impact of 6.9% on net interest income over the next twelve-month period, while a 200 basis point decrease in market interest rates was estimated to have a positive impact of 6.0% on the Company's net interest income. By comparison, at December 31, 2000 the Company estimated an instantaneous 200 basis point rise in rates would have a negative impact of 11.9% on net interest income during 2001 while a 200 basis point decline in rates would have a positive impact of 6.7% on net interest income during 2001. During the second half of 2001, the Company began to realign its asset/liability mix to reduce its risk to rising rates. Although the economy remained weak and the Federal Reserve Bank continued to lower rates throughout 2001, expectations for an economic recovery and higher rates in 2002 increased. Risk to rising rates was reduced through the growth of adjustable-rate commercial and consumer loans, the purchase of shorter-term investments, and the acquisition of term brokered certificates of deposit and borrowings. The Company expects that interest rates will move higher in 2002, with its net interest margin coming under slight pressure toward the end of the year. The potential change in net interest income resulting from this analysis falls within the Company's interest rate risk policy guidelines. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit rate changes, and should not be relied upon as indicative of actual results. The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 2001: Expected Maturity/Principal Repayments at December 31, 2001
Average There- Interest Fair 2002 2003 2004 2005 2006 after Total Rate Value - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Rate Sensitive Assets Loans $122,087 $ 77,717 $35,161 $31,919 $29,704 $ 74,672 $371,260 7.42% $377,841 Investments 49,852 30,685 25,157 42,802 17,469 106,725 272,690 5.52% 273,477 ---------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets $171,939 $108,402 $60,318 $74,721 $47,173 $181,397 $643,950 $651,318 ---------------------------------------------------------------------------------------------------------------------------------- Rate Sensitive Liabilities Savings, money market, and NOW accounts $ 24,928 $ -- $ -- $ -- $ -- $215,370 $240,298 1.30% $240,298 Time deposits 147,691 41,248 9,558 2,554 899 -- 201,950 3.87% 203,639 Borrowings 34,366 40,000 30,000 -- -- 28,059 132,425 3.60% 138,772 ---------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive liabilities $206,985 $ 81,248 $39,558 $ 2,554 $ 899 $243,429 $574,673 $582,709 ----------------------------------------------------------------------------------------------------------------------------------
Expected maturities are contractual maturities adjusted for prepayments of principal. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayment of principal. The prepayment experience reflected herein is based on the Company's historical experience. The actual maturities and run-off of 24 loans could vary substantially if future prepayments differ from the Company's historical experience. For liabilities, expected maturities are contractual maturities for time deposits and borrowings. Non-maturity liabilities have estimated maturities based on an analysis that considers the historic stability of the balances and the competitiveness of the Company's pricing, for each account type. At December 31, 2001, 90% of the Company's non-maturity consumer and business type account balances were assumed to be core, or stable, with maturities over 5 years. Non-maturity balances with public fund, or municipal customers, were estimated to be 88% core, or stable, with maturities over 5 years. Non-maturity balances not considered to be core, are expected to mature within the first year. Item 8 - Financial Statements and Supplemental Data
Consolidated Statements of Condition (Dollars in thousands) Assets Dec. 31, 2001 Dec. 31, 2000 Cash and due from banks $ 21,626 $ 19,274 Federal funds sold -- -- - ---------------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents 21,626 19,274 Held-to-maturity investment securities 7,371 10,223 Available-for-sale investment securities 265,319 212,855 - ---------------------------------------------------------------------------------------------------- Total Investment Securities 272,690 223,078 (fair value--$273,477 for 2001 and $223,220 for 2000) Total Loans 375,842 316,112 Less: Unearned income 104 364 Less: Allowance for loan losses 4,478 3,370 - ---------------------------------------------------------------------------------------------------- Net Loans 371,260 312,378 Bank premises, furniture, and equipment 10,621 10,671 Accrued interest receivable 4,085 4,160 Other assets 12,589 11,226 - ---------------------------------------------------------------------------------------------------- Total Assets $692,871 $580,787 - ---------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing deposits $ 57,044 $ 52,195 Interest-bearing deposits 442,248 422,704 Total Deposits 499,292 474,899 Borrowings 132,425 46,086 Other liabilities 7,691 6,767 - ---------------------------------------------------------------------------------------------------- Total Liabilities 639,408 527,752 - ---------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock--par value $25.00 a share; 1,000,000 shares authorized, none issued; Common stock--par value $1.00 a share; 10,000,000 shares authorized 3,815,305 and 3,815,305 shares issued, and 3,447,213 and 3,608,840 shares outstanding for 2001 and 2000, respectively 3,815 3,815 Surplus 7,096 7,096 Undivided profits 49,086 46,030 Accumulated other comprehensive income 1,243 702 Treasury stock, at cost; 368,092 and 206,465 shares, respectively (7,777) (4,608) - ---------------------------------------------------------------------------------------------------- Total Shareholders' Equity 53,463 53,035 - ---------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $692,871 $580,787 - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 25
Consolidated Statements of Income (Dollars in thousands) Interest Income Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999 Interest and fees on loans $29,028 $26,701 $22,923 Interest on investment securities: U.S. Government and Agency obligations 9,898 9,261 7,542 Obligations of states and political subdivisions 2,649 2,411 2,636 Other 1,166 1,403 974 Interest on federal funds sold 383 286 433 - -------------------------------------------------------------------------------------------------- Total Interest Income 43,124 40,062 34,508 Interest Expense Interest on deposits 16,073 16,977 13,621 Interest on borrowings 3,892 2,490 599 - -------------------------------------------------------------------------------------------------- Total Interest Expense 19,965 19,467 14,220 - -------------------------------------------------------------------------------------------------- Net Interest Income 23,159 20,595 20,288 Provision for loan losses 2,455 1,150 975 - -------------------------------------------------------------------------------------------------- Net Interest Income After Provision For Loan Losses 20,704 19,445 19,313 Other Income Trust and brokerage services 1,405 1,393 1,134 Service charges on deposit accounts 2,370 1,993 1,939 Investment securities gains 1,495 711 136 Other operating income 1,721 2,552 1,349 - -------------------------------------------------------------------------------------------------- Total Other Income 6,991 6,649 4,558 - -------------------------------------------------------------------------------------------------- Total Operating Income 27,695 26,094 23,871 Other Expenses Salaries, wages, and employee benefits 11,264 10,414 9,112 Building, occupancy, and equipment 3,153 2,861 2,587 Other operating expense 5,550 5,362 4,926 - -------------------------------------------------------------------------------------------------- Total Other Expenses 19,967 18,637 16,625 - -------------------------------------------------------------------------------------------------- Income Before Income Taxes 7,728 7,457 7,246 Provision for income taxes 1,717 2,032 1,844 - -------------------------------------------------------------------------------------------------- Net Income $ 6,011 $ 5,425 $ 5,402 - -------------------------------------------------------------------------------------------------- Net Income Per Common Share Basic $ 1.71 $ 1.52 $ 1.51 Diluted $ 1.70 $ 1.52 $ 1.51 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 26
Consolidated Statements of Comprehensive Income (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------ Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 6,011 $ 5,425 $ 5,402 Other comprehensive income net of taxes: Unrealized net gains on securities: Unrealized holding gains (losses) arising during the period 2,396 5,358 (5,155) Less: Reclassification adjustment for gains included in net income (1,495) (711) (136) - ------------------------------------------------------------------------------------------------------------------------ 901 4,647 (5,291) Income tax (provision) benefit (360) (1,859) 2,117 - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), net of tax 541 2,788 (3,174) - ------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $ 6,552 $ 8,213 $ 2,228 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands) Accumulated Issued Other For the Years Ended Common Common Undivided Comprehensive Treasury Dec. 31, 2001, 2000, 1999 Shares Stock Surplus Profits Income Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1999 3,641,178 $3,641 $3,641 $43,864 $ 1,088 $(1,066) $51,168 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year 5,402 5,402 Change in unrealized net gain on investment securities (3,174) (3,174) Cash dividends, $.70 per share (2,498) (2,498) Treasury stock purchased (1,653) (1,653) Shares returned in lieu of fractional shares (143) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 3,641,035 3,641 3,641 46,768 (2,086) (2,719) 49,245 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year 5,425 5,425 Change in unrealized net gain on investment securities 2,788 2,788 Cash dividends, $.71 per share (2,534) (2,534) 5% stock dividend 174,270 174 3,455 (3,629) -- Treasury stock purchased (1,889) (1,889) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 3,815,305 3,815 7,096 46,030 702 (4,608) 53,035 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year 6,011 6,011 Change in unrealized net gain on investment securities 541 541 Cash dividends, $.845 per share (2,955) (2,955) Treasury stock purchased (3,169) (3,169) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 3,815,305 $3,815 $7,096 $49,086 $ 1,243 $(7,777) $53,463 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 27 Consolidated Statements of Cash Flows (Dollars in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Operating Activities Years Ended Dec. 31, 2001 2000 1999 Net income $ 6,011 $ 5,425 $ 5,402 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,455 1,150 975 Provision for depreciation 1,346 1,208 1,108 Increase in surrender value of life insurance (300) (469) (80) Benefit for deferred income taxes (385) (225) (340) (Accretion) amortization of investment security discounts and premiums, net (183) 168 929 Realized investment security gains (1,495) (711) (136) Change in other assets and liabilities (372) 183 593 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 7,077 6,729 8,451 - ------------------------------------------------------------------------------------------------------------------------------- Investing Activities Proceeds from maturities of investment securities, available-for-sale 67,362 29,667 44,572 Proceeds from maturities of investment securities, held-to-maturity 8,216 6,697 1,751 Proceeds from sales of investment securities 51,147 33,668 12,793 Purchase of investment securities, available-for-sale (168,393) (89,067) (84,451) Purchase of investment securities, held-to-maturity (5,364) (4,471) (2,894) Purchase of life insurance -- -- (7,500) Net increase in loans (61,337) (31,503) (32,705) Purchases of premises and equipment (1,296) (2,991) (1,707) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (109,665) (58,000) (70,141) - ------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net increase (decrease) in demand deposits, NOW accounts, and savings accounts 35,977 (5,930) 3,365 Net (decrease) increase in time deposits (11,584) 45,755 18,115 Net increase (decrease) in short-term borrowings 16,339 (139) 30,473 Net increase in long-term borrowings 70,000 15,000 -- Treasury stock purchased (3,169) (1,889) (1,653) Cash dividends (2,623) (2,483) (2,510) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 104,940 50,314 47,790 - ------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 2,352 (957) (13,900) Cash and cash equivalents at beginning of year 19,274 20,231 34,131 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 21,626 $ 19,274 $ 20,231 - ------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest on deposits and borrowings $ 20,131 $ 18,990 $ 13,855 Income taxes 2,020 2,362 2,322 Noncash investing activities: Decrease (increase) in net unrealized gain/losses on available-for-sale securities (901) (4,647) 5,291 Noncash financing activities: Dividend declared and unpaid 1,000 668 617 - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 28 NOTES TO CONSOLIDATED STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Alliance Financial Corporation (the Company) is a bank holding company, which owns and operates Alliance Bank, N.A. The Company provides financial services primarily to individuals, small- to medium-sized businesses and government customers from 19 branches in Broome, Cortland, Madison, Oneida, and Onondaga counties. The Bank has a substantially wholly owned subsidiary, Alliance Preferred Funding Corp., which is engaged in residential real estate activity. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany accounts and transactions. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification: Certain amounts from prior years have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income as previously reported. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investment Securities: The Company classifies investment securities as held-to-maturity or available-for-sale. Held-to-maturity securities are those that the Company has the intent and ability to hold to maturity, and are reported at cost, adjusted for amortization of premiums and accretion of discounts. Investment securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair value, with net unrealized holding gains and losses reflected as a separate component of shareholders' equity, net of the applicable income tax effect. None of the Company's investment securities have been classified as trading securities. Gains and losses on the sale of investment securities are based on the specific identification method. Premiums and discounts on securities are amortized and accreted into income using the interest method over the life of the security. Securities Sold under Agreements to Repurchase: Repurchase agreements are accounted for as collateralized borrowings, and the obligations to repurchase securities sold are reflected as a liability in the statement of financial condition, since the Company maintains effective control over the transferred securities. The securities underlying the agreements remain in the investment account. Loans: Loans are stated at unpaid principal balances less the allowance for loan losses, unearned interest income and net deferred loan origination fees and costs. Unearned income on certain installment loans is taken into income on the actuarial method. Interest on all other loans is based upon the principal amount outstanding. Interest on loans is accrued except when in management's opinion the collectibility of interest is doubtful, at which time the accrual of interest on the loan is discontinued. Loan origination fees and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment over the life of the loan. The Company is generally amortizing these amounts over the contractual life of the related loans. However, for certain fixed-rate mortgage loans that are generally made for a 20-year term, the Company has anticipated prepayments and used an estimated life of 7.5 years. Allowance for Loan Losses: The allowance for loan losses represents management's best estimate of probable loan losses in the Company's loan portfolio. Management's quarterly evaluation of the allowance for loan losses is a comprehensive analysis that builds a total reserve by evaluating the risks within each loan type, or pool, of similar loans. The Company uses a general allocation methodology for all residential and consumer loan pools. This methodology estimates a reserve for each pool based on the most recent three-year loss rate, adjusted to reflect the expected impact that current trends regarding loan growth, delinquency, losses, economic conditions, and current interest rates are likely to have. For commercial loan pools, the Company establishes a specific reserve allocation for all loans, which have been risk rated under the Company's risk rating system, as substandard, doubtful, or loss. The specific allocation is based on the most recent valuation of the loan collateral and the customer's ability to pay. For all other commercial loans, the Company uses the general allocation methodology that establishes a reserve for each risk rating category. The general allocation methodology for commercial loans considers the same factors that are considered when evaluating residential mortgage and consumer loan pools. The combination of using both the general and specific allocation methodologies reflects management's best estimate of the probable loan losses in the Company's loan portfolio. 29 A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on fair value of the collateral. Income Recognition on Impaired and Nonaccrual Loans: Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity of payment of principal or interest for a period of more than 90 days unless they are well secured and are in the process of collection. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. Other Real Estate: Other real estate is comprised of real estate acquired through foreclosure and is recorded at the lower of cost or fair value (net of estimated costs to sell) at the date of acquisition. Bank Premises, Furniture, and Equipment: Bank premises, furniture, and equipment are stated at cost less accumulated depreciation computed principally using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operating expenses as incurred. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of the income. Income Taxes: Provision for income taxes is based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements. Deferred tax assets and liabilities are reported in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Trust Department Assets: Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition, since such items are not assets of the Company. Fees associated with providing trust management services are recorded on a cash basis of income recognition and are included in Other Income. Earnings Per Share: Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding throughout each year; 3,523,127, 3,569,073, and 3,576,728 for 2001, 2000, and 1999, respectively. Diluted earnings per share gives the effect to weighted average shares which would be outstanding assuming the exercise of options using the treasury stock method. Weighted average shares outstanding adjusted for the effect of the assumed exercise of stock options were 3,532,494, 3,579,114, and 3,577,109 for the years 2001, 2000, and 1999, respectively. For the year ending December 31, 2001, basic earnings per share were $1.71 and diluted earnings per share were $1.70. For the years ending December 31, 2000 and 1999, both basic and diluted earnings per share were $1.52 and $1.51, respectively. 30 INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities at December 31 are as follows: (Dollars in Thousands)
Amortized Gross Unreal- Gross Unreal- Estimated Held-to-Maturity--2001 Cost ized Gains ized Losses Fair Value - -------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions $ 7,371 $ 787 $ -- $ 8,158 - -------------------------------------------------------------------------------------------------------------------- Total $ 7,371 $ 787 $ -- $ 8,158 - -------------------------------------------------------------------------------------------------------------------- Available-for-Sale--2001 - -------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government agencies $ 61,430 $1,146 $ 348 $ 62,228 Obligations of states and political subdivisions 48,009 910 232 48,687 Mortgage-backed securities 146,484 1,279 612 147,151 Other securities 1,513 33 105 1,441 - -------------------------------------------------------------------------------------------------------------------- Total $257,436 $3,368 $1,297 $259,507 - -------------------------------------------------------------------------------------------------------------------- Stock Investments Federal Home Loan Bank 4,830 -- -- 4,830 Federal Reserve Bank and others 982 -- -- 982 - -------------------------------------------------------------------------------------------------------------------- Total stock investment 5,812 -- -- 5,812 - -------------------------------------------------------------------------------------------------------------------- Total available-for-sale $263,248 $3,368 $1,297 $265,319 - -------------------------------------------------------------------------------------------------------------------- Net unrealized gain on available-for-sale 2,071 - -------------------------------------------------------------------------------------------------------------------- Grand total carrying value $272,690 - -------------------------------------------------------------------------------------------------------------------- Held-to-Maturity--2000 - -------------------------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions $ 10,223 $ 142 $ -- $ 10,365 - -------------------------------------------------------------------------------------------------------------------- Total $ 10,223 $ 142 $ -- $ 10,365 - -------------------------------------------------------------------------------------------------------------------- Available-for-Sale--2000 - -------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government agencies $ 50,911 $ 725 $ 98 $ 51,538 Obligations of states and political subdivisions 44,289 766 59 44,996 Mortgage-backed securities 93,447 367 401 93,413 Other securities 18,917 175 304 18,788 - -------------------------------------------------------------------------------------------------------------------- Total $207,564 $2,033 $ 862 $208,735 - -------------------------------------------------------------------------------------------------------------------- Stock Investments Federal Home Loan Bank 3,310 -- -- 3,310 Federal Reserve Bank and others 810 -- -- 810 - -------------------------------------------------------------------------------------------------------------------- Total stock investment 4,120 -- -- 4,120 - -------------------------------------------------------------------------------------------------------------------- Total available-for-sale $211,684 $2,033 $ 862 $212,855 - -------------------------------------------------------------------------------------------------------------------- Net unrealized gain on available-for-sale 1,171 - -------------------------------------------------------------------------------------------------------------------- Grand total carrying value $223,078 - --------------------------------------------------------------------------------------------------------------------
31 The carrying value and estimated market value of debt securities at December 31, 2001 by contractual maturity are shown below. The maturities of mortgage-backed securities are based on average life of the security. All other expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars In Thousands)
Held-to-Maturity Available-for-Sale - -------------------------------------------------------------------------------------------------- Estimated Estimated Amortized Cost Fair Value Amortized Cost Fair Value - -------------------------------------------------------------------------------------------------- Due in one year or less $3,628 $4,014 $ 23,531 $ 23,740 Due after one year through five years 1,835 2,032 118,008 119,080 Due after five years through ten years 748 827 96,077 96,824 Due after ten years 1,160 1,285 19,820 19,863 - -------------------------------------------------------------------------------------------------- Total debt securities $7,371 $8,158 $257,436 $259,507 - --------------------------------------------------------------------------------------------------
At December 31, 2001 and 2000, investment securities with a carrying value of $242,777 and $163,700, respectively, were pledged as collateral for certain deposits and other purposes as required or permitted by law. The Company recognized gross gains of $1,513, $738, and $154 for 2001, 2000, and 1999, respectively, and gross losses of $18, $27, and $18 for 2001, 2000, and 1999, respectively. LOANS Major classifications of loans at December 31 are as follows: (Dollars In Thousands) 2001 2000 - --------------------------------------------------------------- Commercial $126,801 $108,447 Real estate loans 142,307 119,948 Consumer loans 106,734 87,717 - --------------------------------------------------------------- Total 375,842 316,112 - --------------------------------------------------------------- Less: Unearned income 104 364 Less: Allowance for loan losses 4,478 3,370 - --------------------------------------------------------------- Net loans $371,260 $312,378 - --------------------------------------------------------------- Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid balances of mortgage loans serviced for others were $16,142, $15,766, and $16,612 at December 31, 2001, 2000, and 1999, respectively. Substantially all of the Bank's loans are granted to borrowers concentrated primarily within Cortland, Madison, Oneida, and Onondaga Counties. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31 are summarized as follows: (Dollars In Thousands) 2001 2000 1999 - ------------------------------------------------------------------- Balance at January 1 $3,370 $3,412 $3,001 Provision for loan losses 2,455 1,150 975 Recoveries credited 375 265 184 Subtotal 6,200 4,827 4,160 Less: Loans charged-off 1,722 1,457 748 - ------------------------------------------------------------------- Balance at December 31 $4,478 $3,370 $3,412 - ------------------------------------------------------------------- The average recorded investment in impaired loans was zero for the years ended December 31, 2001, 2000, and 1999. The amount of nonaccrual loans for the years ended December 31, 2001, 2000, and 1999 was $736, $686, and $682, respectively. 32 RELATED PARTY TRANSACTIONS Directors and executive officers of the Company and their affiliated companies were customers of, and had other transactions with, the Company in the ordinary course of business during 2001. It is the Company's policy that all loans and commitments included in such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than normal risk of collectibility or present other unfavorable features. Loan transactions with related parties are summarized as follows: (Dollars In Thousands) 2001 2000 - --------------------------------------------------------------------- Balance at beginning of year $ 9,825 $ 7,875 New loans and advances 1,229 4,281 Loan payments (1,362) (2,331) - --------------------------------------------------------------------- Balance at end of year $ 9,692 $ 9,825 - --------------------------------------------------------------------- BANK PREMISES, FURNITURE, AND EQUIPMENT Bank premises, furniture, and equipment at December 31 consist of the following: (Dollars In Thousands) 2001 2000 - --------------------------------------------------------------------- Land $ 1,223 $ 1,238 Bank premises 9,756 9,774 Furniture and equipment 13,161 11,933 - --------------------------------------------------------------------- Subtotal 24,140 22,945 - --------------------------------------------------------------------- Less: Accumulated depreciation 13,519 12,274 - --------------------------------------------------------------------- Balance at end of year $10,621 $10,671 - --------------------------------------------------------------------- DEPOSITS The carrying amounts of deposits consisted of the following at December 31: (Dollars In Thousands) 2001 2000 - --------------------------------------------------------------------- Noninterest-bearing checking $ 57,044 $ 52,195 Interest-bearing checking 74,782 71,070 Savings accounts 68,538 65,957 Money market accounts 96,978 71,882 Time deposits 201,950 213,795 - --------------------------------------------------------------------- Total deposits $499,292 $ 474,899 - --------------------------------------------------------------------- The following table indicates the maturities of the Company's time deposits at December 31: 2001 2000 - ---------------------------------------------------------------------- Due in one year $147,691 $184,865 Due in two years 41,248 21,842 Due in three years 9,558 3,768 Due in four years 2,554 2,191 Due in five years or more 899 1,129 - --------------------------------------------------------------------- Total time deposits $201,950 $213,795 - --------------------------------------------------------------------- Total time deposits in excess of $100 as of December 31, 2001 and 2000 were $68,520 and $94,728, respectively. 33 BORROWINGS The following is a summary of borrowings at December 31:
(Dollars In Thousands) 2001 2000 - ---------------------------------------------------------------------------------------------------------- Incurred Original Incurred Original Date Amount Rate Term Date Amount Rate Term - ---------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements 12/31/01 $ 17,412 1.95% Demand 12/29/00 $ 6,936 6.00% Demand Federal Home Loan Bank term advances: 4/28/00 5,000 1.77% 2 years 4/28/00 5,000 6.43% 2 years 7/20/00 5,000 5.92% 10 years 7/20/00 5,000 5.92% 10 years 7/26/00 5,000 6.30% 10 years 7/26/00 5,000 6.30% 10 years 1/24/01 5,000 5.48% 2 years 9/5/00 5,000 6.76% 6 months 2/1/01 5,000 5.12% 2 years 12/1/00 5,000 6.53% 6 months 4/27/01 5,000 4.13% 10 years 12/28/00 6,750 6.42% 28 days 5/22/01 10,000 5.26% 3 years 12/29/00 5,000 6.89% 6 months Repurchase agreements: 7/18/01 10,000 4.53% 2 years 7/18/01 10,000 4.99% 3 years 8/20/01 10,000 4.64% 3 years 9/26/01 20,000 3.49% 2 years 12/19/01 10,013 0.90% 30 days 12/20/01 15,000 1.87% 33 days Federal Home Loan Bank overnight advances -- -- Demand 2,400 5.85% Demand - ---------------------------------------------------------------------------------------------------------- Balance at end of year $132,425 $46,086 - ----------------------------------------------------------------------------------------------------------
Information related to borrowings at December 31 is as follows: 2001 2000 - ----------------------------------------------------------------------------- Maximum outstanding at any month end $132,425 $74,162 Average amount outstanding during the year $ 82,970 $39,155 - ----------------------------------------------------------------------------- Average interest rate during the year 4.69% 6.36% - ----------------------------------------------------------------------------- Average amounts outstanding and average interest rates are computed using monthly averages. The Company offers retail repurchase agreements primarily to its larger business customers. Under the terms of the agreement, the Company sells investment portfolio securities to the customer agreeing to repurchase the securities at a specified later date. The Company views the borrowing as a deposit alternative for its business customers. The Company at December 31, 2001 had securities with a carrying value of $20,406 pledged as collateral for these agreements. At December 31, 2001 and 2000, the Company had available an overnight line of credit and a one-month overnight repricing line of credit with the Federal Home Loan Bank of New York (FHLB), that totaled $56,990 and $50,551, respectively, of which $0 and $2,400 was outstanding as of December 31, 2001 and 2000, respectively. The Company also has access to the FHLB's Term Advance Program under which it can borrow at various terms and interest rates. Residential mortgage loans in the amount of $137,566 have been pledged by the Company under a blanket collateral agreement to secure the Company's line of credit and term borrowings. At December 31, 2001, the Company's total borrowing capacity with the FHLB was $103,245. Repurchase agreements outstanding at December 31, 2001 are at interest rates ranging from 0.90% to 4.99%. The face value at December 31, 2001 of investment securities pledged under repurchase agreements and other borrowings approximated $82,750. At December 31, 2001 and 2000, the Company had available $15,000 of lines of credit with other financial institutions which were unused. 34 INCOME TAXES The provision for income taxes for the years ended December 31 is summarized as follows:
(Dollars In Thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------- Current tax expense $2,102 $2,257 $2,184 Deferred tax benefit (385) (225) (340) - ------------------------------------------------------------------------------------------------- Total provision for income taxes $1,717 $2,032 $1,844 - ------------------------------------------------------------------------------------------------- The provision for income taxes includes the following: 2001 2000 1999 - ------------------------------------------------------------------------------------------------- Federal income tax $1,422 $1,746 $1,628 New York State franchise tax 295 286 216 - ------------------------------------------------------------------------------------------------- Total $1,717 $2,032 $1,844 - -------------------------------------------------------------------------------------------------
The components of deferred income taxes, included in other liabilities, at December 31, are as follows:
2001 2000 - ------------------------------------------------------------------------------------------------- Assets: Allowance for loan losses $1,518 $ 977 Postretirement benefits 1,075 1,047 Deferred compensation 1,090 859 Other 63 335 - ------------------------------------------------------------------------------------------------- Total Assets $3,746 $3,218 - ------------------------------------------------------------------------------------------------- Liabilities: Investment securities $ 845 $ 557 Depreciation 341 256 Other 187 56 - ------------------------------------------------------------------------------------------------- Total Liabilities $1,373 $ 869 - ------------------------------------------------------------------------------------------------- Net deferred tax asset $2,373 $2,349 - -------------------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the effective income tax rate for 2001, 2000, and 1999 is as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------- Statutory federal income tax rate 34.0% 34.0% 34.0% State franchise tax, net of federal tax benefit 0.7% 1.7% 1.5% Tax exempt income (12.0%) (11.0%) (10.3%) Other, net (0.5%) 2.6% 0.3% - ------------------------------------------------------------------------------------------------- Total 22.2% 27.3% 25.5% - -------------------------------------------------------------------------------------------------
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS The Company provides retirement benefits through a defined contribution 401(k) plan that covers substantially all of its employees. Prior to July 1, 1999, a group of employees were covered by a noncontributory defined benefit pension plan. That plan was terminated effective June 30, 1999 and following a satisfactory review by the Internal Revenue Service, distributions of plan participants benefit obligations were completed during the third quarter of 2000. As a result of the settlement, the Company received $1,239 and recognized a net gain of $532 in other operating income. The pension plan had no assets remaining at December 31, 2000. The Company also provides postretirement medical and life insurance benefits to qualifying employees under a plan developed in the fourth quarter of 1999. Benefits are available to full-time 35 employees who have worked 15 years and attained age 55. Retirees and certain active employees with more than 20 years of service to the Company continue to receive benefits in accordance with the former plans. The following tables set forth the changes in the plan's benefit obligation, fair value of plan assets, and prepaid (accrued) benefit cost as of December 31, 2001 and 2000: (Dollars In Thousands)
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $-- $ 5,455 $ 3,096 $ 3,061 Service cost -- -- 65 54 Interest cost -- 137 226 223 Amendments, curtailments, special termination -- 686 -- -- Actuarial loss/(gain) -- -- 521 (96) Benefits paid -- (6,278) (153) (146) - ------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $-- $ -- $ 3,755 $ 3,096 - -------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $-- $ 7,098 $-- $-- Actual return on plan assets -- 419 -- -- Benefits paid -- (6,278) -- -- Transfer to plan sponsor -- (1,239) -- -- - ------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $-- $ -- $-- $-- - -------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Components of prepaid/accrued benefit cost: Funded status $-- $-- $(3,755) $(3,096) Unrecognized transition obligation -- -- -- -- Unrecognized prior service cost -- -- (73) (85) Unrecognized actuarial net loss -- -- 1,168 668 - ------------------------------------------------------------------------------------------------------- Prepaid/(accrued) benefit obligation at end of year $-- $-- $(2,660) $(2,513) - -------------------------------------------------------------------------------------------------------
There were no plan assets at December 31, 2000. Significant assumptions used in determining the benefit obligation as of December 31, 2001 and 2000 are as follows:
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Weighted average discount rate -- -- 7.00% 7.50% Expected long-term rate of return on plan assets -- -- -- --
For measurement purposes, with respect to the postretirement benefit plans, a 10.0 percent annual rate of increase in the per capita cost of covered health care benefits is assumed for 2002. The rate is assumed to decrease gradually to 4.5 percent by the year 2010 and remain at that level thereafter. 36 The composition of the plan's net periodic cost for the years ended December 31 is as follows: (Dollars In Thousands)
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- Service cost $-- $ -- $ 148 $ 65 $ 54 $ 75 Interest cost -- 137 308 226 223 193 Amortization of transition obligation -- (44) (44) -- -- -- Amortization of unrecognized prior service cost -- (8) (8) 8 15 22 Expected return on plan assets -- (156) (513) -- -- -- Special termination benefits/curtailment -- 529 260 -- -- -- - ------------------------------------------------------------------------------------------------------------- Net periodic cost (benefit) $-- $458 $ 151 $299 $292 $290 - -------------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
One percentage One percentage point increase point decrease - --------------------------------------------------------------------------------------------- Effect on total service and interest cost components 26 (22) Effect on postretirement plan obligations 347 (290)
Contributions to the Company's 401(k) plan are determined by the Board of Directors and are based on percentages of compensation for eligible employees. Contributions are funded following the end of the plan (calendar) year. Company contributions to the plan were $461, $470, and $440 in 2001, 2000, and 1999, respectively. DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS The Company maintains optional deferred compensation plans for its directors, whereby fees normally received are deferred and paid by the Company upon the retirement of the director. At December 31, 2001 and 2000 other liabilities included approximately $1,238 and $1,142, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2001, 2000, and 1999 approximated $242, $162, and $191, respectively. The Company has supplemental executive retirement plans for certain employees. Included in other assets, the Company has segregated assets of $1,038 and $878 at December 31, 2001 and 2000, respectively, to fund the estimated benefit obligation. At December 31, 2001 and 2000, other liabilities included approximately $1,538 and $1,026 accrued under these plans. The benefit obligation, service cost, and actuarial gain/(loss) were $1,624, $277, and ($8), respectively, at December 31, 2001 and $1,339, $189, and ($272), respectively, at December 31, 2000. Compensation expense includes approximately $302, $138, and $65 relating to these plans at December 31, 2001, 2000, and 1999, respectively. 37 STOCK OPTION PLAN During November 1998, shareholders approved the 1998 long-term incentive compensation plan. This plan authorized grants of options of up to 400,000 shares of authorized but unissued common stock of the Company. Under the plan, the Board of Directors may grant incentive stock options, non-qualified stock options, and restricted stock awards to officers, employees, and certain other individuals. Of the 316,873 options outstanding at December 31, 2001, 7,000 have a five-year term, were vested on issuance, and become exercisable based on the Company achieving specified stock prices. The remaining options have a 10-year term, with 289,873 of the options vesting one year after the issue date, and exercisable based on the Company achieving specified stock prices. 20,000 options vest and become exercisable ratably over a three-year period. The Company has elected to account for its stock-based compensation plan in accordance with Accounting Principles Board Opinion No. 25 and accordingly, no compensation cost has been recognized for stock options in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company's net income and earnings per share would have been reduced to pro forma amounts indicated in the following table:
2001 2000 1999 - -------------------------------------------------------------------------------------- Net Income (in thousands): As reported $ 6,011 $ 5,425 $ 5,402 Pro forma 5,740 5,112 5,226 Earnings per share (basic): As reported $ 1.71 $ 1.52 $ 1.51 Pro forma 1.63 1.43 1.46 Earnings per share (diluted): As reported $ 1.70 $ 1.52 $ 1.51 Pro forma 1.62 1.43 1.46
The per share weighted average fair value of stock options granted during 2001, 2000, and 1999 was $4.77, $6.45, and $6.15, respectively. Fair values were arrived at using the Black-Scholes option pricing model with the following assumptions:
2001 2000 1999 - --------------------------------------------------------------------------------------- Risk-free interest rate 4.62% 6.23% 5.32% Expected dividend yield 3.00% 3.00% 2.00% Volatility 31.70% 31.20% 28.50% Expected life (years) 5 5 5
Activity in the plan for 2001, 2000, and 1999 was as follows:
Range of Weighted Average Options Option Price Shares Exercise Price of Outstanding Per Share Exercisable OPTIONS Outstanding - -------------------------------------------------------------------------------------------------- 1999 Beginning balance 100,000 $29.125 0 $29.125 Granted 10,000 $21.75 0 $21.75 Exercised 0 0 0 0 Forfeited 0 0 0 0 Ending balance 110,000 $21.75-$29.125 33,334 $28.45 2000 Granted 296,914 $17.75-$24.75 0 $22.66 Exercised 0 0 0 0 Forfeited 100,000 0 (33,334) $29.125 Ending balance 306,914 $17.75-$24.75 3,334 $22.63 2001 Granted 21,500 $18.25-$20.25 0 $19.08 Exercised 0 0 0 0 Forfeited 11,541 0 0 $24.75 Ending balance 316,873 $17.75-$24.75 71,750 $22.31
38 As of December 31, 2001, 6,667 of the options issued in 1999 were exercisable at an exercise price of $21.75. The options have a remaining life of 7.20 years. As of December 31, 2001, 18,333 and 39,750 options issued in 2000 were exercisable at an exercise price of $18.50 and $17.75, respectively. As of December 31, 2001, 7,000 of the options issued in 2001 were exercisable at an exercise price of $18.25. These options have a remaining life ranging from 4 to 9 years. COMMITMENTS AND CONTINGENT LIABILITIES The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and letters of credit which involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated statements of condition. The contract amount of those commitments and letters of credit reflects the extent of involvement the Company has in those particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent credit risk: (Dollars In Thousands) Contract Amount 2001 2000 - ------------------------------------------------- Commitments to extend credit $63,374 $46,057 Standby letters of credit $ 1,067 $ 346 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payments of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since the letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For both commitments to extend credit and letters of credit, the amount of collateral obtained, if deemed necessary by the Company upon the extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but includes residential and commercial real estate. Principal operating leases are for bank premises. At December 31, 2001, aggregate future minimum lease payments under noncancelable operating leases with initial or remaining terms equal to or exceeding one year consisted of the following: 2002-$405; 2003-$392; 2004-$318; 2005-$318; 2006-$318; and $1,870 thereafter. Total rental expenses amounted to $242 in 2001, $241 in 2000, and $147 in 1999. The Company is required to maintain a reserve balance as established by the Federal Reserve Bank of New York. The required average total reserve for the 14-day maintenance period ended December 31, 2001 was $3,782. DIVIDENDS AND RESTRICTIONS The primary source of cash to pay dividends to the Company's shareholders is through dividends from its banking subsidiary. The Federal Reserve Board and the Office of the Comptroller of the Currency are authorized to determine certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The payment of dividends that deplete a bank's capital base could be deemed to constitute such an unsafe or unsound practice. Banking organizations may generally only pay dividends from the combined current year and prior two years net income less any dividends previously paid during that period. At December 31, 2001, approximately $5,800 was available for the declaration of dividends by the Bank. There were no loans or advances from the subsidiary Bank to the Company at December 31, 2001. 39 FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information of financial instruments, whether or not recognized in the statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of financial instruments are as follows:
Dec. 31, 2001 Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2000 Carrying Amount Fair Value Carrying Amount Fair Value - --------------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 21,626 $ 21,626 $ 19,274 $ 19,274 Investment securities 272,690 273,477 223,078 223,220 Net loans 371,260 377,841 312,378 310,186 - --------------------------------------------------------------------------------------------------- Total Financial Assets $665,576 $672,944 $554,730 $552,680 - --------------------------------------------------------------------------------------------------- Financial Liabilities: Deposits $499,292 $500,980 $474,899 $474,572 Borrowings 132,425 138,772 46,086 46,086 - --------------------------------------------------------------------------------------------------- Total Financial Liabilities $631,717 $639,752 $520,985 $520,658 - ---------------------------------------------------------------------------------------------------
The fair value of commitments to extend credit and standby letters of credit is not significant. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the consolidated statements of condition for cash and short-term instruments approximate those assets' fair value. Investment Securities: Fair values for investment securities are based on quoted market prices or dealer quotes. Loans: Fair values for loans are estimated using discounted cash flow analysis, based on interest rates approximating those currently being offered for loans with similar terms and credit quality. The fair value of accrued interest approximates carrying value. Deposits: The fair values disclosed for noninterest-bearing accounts and accounts with no stated maturity are, by definition, equal to the amount payable on demand at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered on time deposits of similar terms. The fair value of accrued interest approximates carrying value. Borrowings: The carrying amounts of short-term borrowings approximate their fair value. The fair value of long-term borrowings are estimated using discounted cash flow analysis, based on interest rates approximating those currently being offered for borrowings with similar terms. Off-balance-sheet Instruments: Off-balance-sheet financial instruments consist of commitments to extend credit and standby letters of credit, with fair value based on fees currently charged to enter into agreements with similar terms and credit quality. REGULATORY MATTERS The Company and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the tables below) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets 40 (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Company and its subsidiary Bank met all capital adequacy requirements to which they are subject. As of September 30, 2001, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as "well-capitalized," under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios are presented in the following table:
To Be Well Capitalized Under For Capital Prompt Corrective Adequacy Purposes Action Provisions - --------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------- As of December 31, 2001 Total Capital (to Risk-Weighted Assets) $56,698 13.08% $34,842 >/=8.00% $43,553 >/=10.00% Tier I Capital (to Risk-Weighted Assets) 52,220 12.05% 17,421 >/=4.00% 26,132 >/= 6.00% Tier I Capital (to Average Assets) 52,220 7.53% 25,947 >/=4.00% 32,433 >/= 5.00% - --------------------------------------------------------------------------------------------------- As of December 31, 2000 Total Capital (to Risk-Weighted Assets) $55,703 16.22% $27,466 >/=8.00% $34,333 >/=10.00% Tier I Capital (to Risk-Weighted Assets) 52,333 15.24% 13,733 >/=4.00% 20,600 >/= 6.00% Tier I Capital (to Average Assets) 52,333 9.46% 22,126 >/=4.00% 27,657 >/= 5.00% - ---------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial information for the years ended December 31, 2001 and 2000 is as follows:
THREE MONTHS ENDED 3/31/01 6/30/01 9/30/01 12/31/01 3/31/00 6/30/00 9/30/00 12/31/00 - ------------------------------------------------------------------------------------------------------------------- Total interest income $10,571 $10,528 $11,211 $10,814 $9,276 $9,920 $10,213 $10,653 Total interest expense 5,609 5,073 4,944 4,339 4,161 4,642 5,138 5,526 Net interest income 4,962 5,455 6,267 6,475 5,115 5,278 5,075 5,127 Provision for loan losses 590 490 585 790 250 300 300 300 Noninterest income 2,017 1,698 1,362 1,914 1,332 1,420 2,105 1,792 Noninterest expense 4,915 4,912 4,983 5,157 4,382 4,485 4,871 4,899 Income before income taxes 1,474 1,751 2,061 2,442 1,815 1,913 2,009 1,720 Provision for income taxes 309 391 459 558 481 507 669 375 Net Income 1,165 1,360 1,602 1,884 1,334 1,406 1,340 1,345 Earnings per share: Basic $ 0.32 $ 0.38 $ 0.46 $ 0.55 $ 0.38 $ 0.40 $0.37 $0.37 Diluted $ 0.32 $ 0.38 $ 0.46 $ 0.54 $ 0.38 $ 0.40 $0.37 $0.37 - -------------------------------------------------------------------------------------------------------------------
41 Parent Company Financial Information Condensed financial statement information of Alliance Financial Corporation is as follows: Balance Sheets Assets Dec. 31, 2001 Dec. 31, 2000 - --------------------------------------------------------------------------- Investment in subsidiary Bank $ 53,343 $ 50,768 Cash 919 2,907 Investment securities 201 28 - --------------------------------------------------------------------------- Total Assets $ 54,463 $ 53,703 - --------------------------------------------------------------------------- Liabilities - --------------------------------------------------------------------------- Dividends payable 1,000 668 - --------------------------------------------------------------------------- Total Liabilities 1,000 668 - --------------------------------------------------------------------------- Shareholders' Equity Common stock 3,815 3,815 Surplus 7,096 7,096 Undivided profits 49,086 46,030 Accumulated other comprehensive income 1,243 702 Treasury stock (7,777) (4,608) - --------------------------------------------------------------------------- Total Shareholders' Equity $ 53,463 $ 53,035 - --------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 54,463 $ 53,703 - --------------------------------------------------------------------------- 42
Statements of Income Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999 - ------------------------------------------------------------------------------------------------------------------- Dividend income from subsidiary Bank $ 4,000 $ 4,500 $ 2,500 Investment income 6 9 7 Gain on the sale of securities -- 181 -- Operating expenses (29) (19) (122) - ------------------------------------------------------------------------------------------------------------------- 3,977 4,671 2,385 Equity in undistributed income of subsidiary 2,034 754 3,017 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 6,011 $ 5,425 $ 5,402 - -------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows Years Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 1999 - ------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income $ 6,011 $ 5,425 $ 5,402 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (2,034) (754) (3,017) Realized investment security gains -- (181) -- Decrease in other liabilities -- -- (246) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,977 4,490 2,139 Investing Activities Purchase of investment securities, available-for-sale (173) (128) (240) Proceeds from sales of investment securities, available-for-sale -- 548 -- - ------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (173) 420 (240) Financing Activities Treasury stock purchased (3,169) (1,889) (1,653) Cash dividends paid (2,623) (2,483) (2,510) - ------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (5,792) (4,372) (4,163) - ------------------------------------------------------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (1,988) 538 (2,264) Cash and Cash Equivalents at Beginning of Year 2,907 2,369 4,633 Cash and Cash Equivalents at End of Year $ 919 $ 2,907 $2,369 Supplemental Disclosures of Cash Flow Information: Noncash financing activities: Dividend declared and unpaid $1,000 $ 668 $ 617
On October 26, 2001 the Company's Board of Directors adopted a shareholders rights plan. Under the plan, Series A Junior Participating Preferred Stock Purchase Rights were distributed at the close of business on October 29, 2001 to shareholders of record as of that date. The Rights trade with the Common Stock, and are exercisable and trade separately from the Common Stock only if a person or group acquires or announces a tender or exchange offer that would result in such person or group owning 20 percent or more of the Common Stock of the Company. In the event the person or group acquires a 20 percent Common Stock position, the Rights allow other holders to purchase stock of the Company at a discount to market value. The Company is generally entitled to redeem the Rights at $.001 per Right at any time prior to the 10th day after a person or group has acquired a 20 percent Common Stock position. The Rights will expire on October 29, 2011 unless the plan is extended or the Rights are earlier redeemed or exchanged. 43 REPORT OF INDEPENDENT ACCOUNTANTS Audit and Compliance Committee and Shareholders of Alliance Financial Corporation In our opinion, the accompanying consolidated statement of condition and the related consolidated statements of income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Alliance Financial Corporation and Subsidiaries at December 31, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Syracuse, New York January 18, 2002 REPORT OF MANAGEMENT'S RESPONSIBILITY Management is responsible for preparation of the consolidated financial statements and related financial information contained in all sections of this Annual Report on Form 10-K, including the determination of amounts that must necessarily be based on judgments and estimates. It is the belief of management that the consolidated financial statements have been prepared in conformity, in all material respects, with generally accepted accounting principles appropriate in the circumstances and that the financial information appearing throughout this annual report is consistent, in all material respects, with the consolidated financial statements. Management depends upon the Company's system of internal accounting controls in meeting its responsibility for reliable financial statements. This system is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the Company's management, internal auditors and independent auditors, PricewaterhouseCoopers LLP, to review matters relating to the quality of financial reporting, internal accounting control, and the nature, extent, and results of audit efforts. The internal auditors and independent auditors have unlimited access to the Audit Committee to discuss all such matters. /s/ Jack H. Webb /s/ David P. Kershaw ---------------- -------------------- Chairman & CEO Chief Financial Officer & Treasurer 44 Item 9 -- Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable PART III Item 10 -- Directors and Executive Officers of the Registrant The information required by this Item 10 is incorporated herein by reference to the sections entitled "Information Concerning Nominees for Directors, Directors Continuing in Office and Additional Executive Officers" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement. Item 11 -- Executive Compensation The information required by this Item 11 is incorporated herein by reference to the section entitled "Executive Compensation" in the Company's Proxy Statement. Item 12 -- Security Ownership of Certain Beneficial Owners and Management The information required by this Item 12 is incorporated herein by reference to the section entitled "Information Concerning Nominees for Directors, Directors Continuing in Office and Additional Executive Officers" in the Company's Proxy Statement. Item 13 -- Certain Relationships and Related Transactions The information required by this Item 13 is incorporated herein by reference to the section entitled "Transactions with Management" in the Company's Proxy Statement. PART IV Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this report: (1) The following financial statements are included in Item 8: Consolidated Statements of Condition at December 31, 2001 and 2000. Consolidated Statements of Income For Each of the Three Years in the Period Ended December 31, 2001. Consolidated Statements of Comprehensive Income For Each of the Three Years in the Period Ended December 31, 2001. Consolidated Statements of Shareholders' Equity For Each of the Three Years in the Period Ended December 31, 2001. Consolidated Statements of Cash Flows For Each of the Three Years in the Period Ended December 31, 2001. Notes to Consolidated Financial Statements. Independent Accountants' Report. Report of Management's Responsibility. (2) Financial statement schedules are omitted from this Form 10-K since the required information is not applicable to the Company. (3) Listing of Exhibits: The following documents are filed as Exhibits to this Form 10-K or are incorporated by reference to the prior filings of the Company with the Securities and Exchange Commission. FORM 10-K Exhibit Number Exhibit 3.1 Amended and Restated Certificate of Incorporation of the Company(1) 3.2 Amended and Restated Bylaws of the Company(1) 10.1 Stock Option Agreement, dated as of July 10, 1998, between Cortland First (as the issuer) and Oneida Valley (as the grantee)(2) 45 10.2 Stock Option Agreement, dated as of July 10, 1998, between Oneida Valley (as the issuer) and Cortland First (as the grantee)(2) 10.3 Form of Voting Agreement, dated as of July 10, 1998, between Cortland First Directors and Oneida Valley(2) 10.4 Form of Voting Agreement, dated as of July 10, 1998, between Oneida Valley Directors and Cortland First(2) 10.5 Employment Agreement, dated as of November 25, 1998, between the Company and David R. Alvord(1) 10.6 Employment Agreement, dated as of November 25, 1998, between the Company and John C. Mott(1) 10.7 Alliance Financial Corporation 1998 Long Term Incentive Compensation Plan(1) 10.8 Change of Control Agreement, dated as of February 16, 1999, by and among the Company, First National Bank of Cortland, Oneida Valley National Bank, and David P. Kershaw(3) 10.9 Change of Control Agreement, dated as of February 16, 1999, by and among the Company, First National Bank of Cortland, Oneida Valley National Bank, and James W. Getman(3) 10.10 Directors Compensation Deferral Plan of the Company(4) 10.11 Employment Agreement, dated as of May 1, 2000, by and among the Company, Alliance Bank, N.A. and Jack H. Webb(5) 10.12 Supplemental Retirement Agreement, dated as of May 1, 2000, by and among the Company, Alliance Bank, N.A. and Jack H. Webb(5) 10.13 First National Bank of Cortland Excess Benefit Plan for David R. Alvord, dated December 31, 1991, and all amendments thereto(6) 10.14 Oneida Valley National Bank Supplemental Retirement Income Plan for John C. Mott, dated September 1, 1997, and all amendments thereto(7) 21 List of the Company's Subsidiaries(7) 23 Consent of PricewaterhouseCoopers LLP(7) (1) Incorporated herein by reference to the exhibit with the same number to the Registration Statement on Form S-4 (Registration No. 333-62623) of the Company previously filed with the Securities and Exchange Commission (the "Commission") on August 31, 1998, as amended. (2) Incorporated herein by reference to the exhibit with the same number to the Current Report on Form 8-K of the Company (File No. 0-15366) filed with the Commission on July 22, 1998. (3) Incorporated herein by reference to the exhibit numbers 10.1 and 10.2 to quarterly reports on Form 10-Q of the Company (File No. 0-15366) filed with the Commission on May 17, 1999. (4) Incorporated herein by reference to the exhibit number 10.1 to quarterly reports on Form 10-Q of the Company (File No. 0-15366) filed with the Commission on August 13, 1999. (5) Incorporated herein by reference to the exhibit number 10.1 and 10.2 to quarterly reports on Form 10-Q of the Company (File No. 0-15366) filed with the Commission on August 14, 2000. (6) Incorporated herein by reference to the exhibit number 10.13 to annual reports on Form 10-K of the Company (File No. 0-15366) filed with the Commission on March 30, 2001. (7) Filed herewith 46 Item 14 (b) -- Reports on Form 8-K On October 25, 2001, the Company filed a Current Report on Form 8-K to report the adoption of a shareholder rights plan and the distribution of associated preferred share purchase rights to shareholders of the Company. Item 14 (c) See Item 14 (a) (3) above. Item 14 (d) See Item 14 (a) (2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE FINANCIAL CORPORATION (Registrant) Date March 29, 2002 By /s/ Jack H. Webb ------------------- ------------------------------------------- Jack H. Webb, Chairman, President & CEO (Principal Executive Officer) Date March 29, 2002 By /s/ David P. Kershaw ------------------- ------------------------------------------- David P. Kershaw, Treasurer & CFO (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the dates indicated. /s/ Mary Pat Adams Date March 26, 2002 - ---------------------------------- -------------------- Mary Pat Adams, Director /s/ Donald S. Ames Date March 26, 2002 - ---------------------------------- -------------------- Donald S. Ames, Secretary and Director /s/ John H. Buck Date March 26, 2002 - ---------------------------------- -------------------- John H. Buck, Director /s/ Donald H. Dew Date March 26, 2002 - ---------------------------------- -------------------- Donald H. Dew, Director Date - ---------------------------------- -------------------- Peter M. Dunn, Director /s/ David P. Kershaw Date March 26, 2002 - ---------------------------------- -------------------- David P. Kershaw, Treasurer and Director (Principal Financial and Accounting Officer) Date - ---------------------------------- -------------------- Samuel J. Lanzafame, Director Date - ---------------------------------- -------------------- Robert M. Lovell, Director 47 /s/ Margaret G. Ogden Date March 26, 2002 - ---------------------------------- -------------------- Margaret G. Ogden, Director /s/ Charles E. Shafer Date March 26, 2002 - ---------------------------------- -------------------- Charles E. Shafer, Director /s/ Charles H. Spaulding Date March 26, 2002 - ---------------------------------- -------------------- Charles H. Spaulding, Director /s/ Paul M. Solomon Date March 26, 2002 - ---------------------------------- -------------------- Paul M. Solomon, Director /s/ David J. Taylor Date March 26, 2002 - ---------------------------------- -------------------- David J. Taylor, Director /s/ Jack H. Webb Date March 26, 2002 - ---------------------------------- -------------------- Jack H. Webb, Chairman, President & CEO and Director (Principal Executive Officer) 48 EX-10.14 3 d50228_10-14.txt SUPPLEMENTAL RETIREMENT INCOME PLAN EXHIBIT 10.14 ONEIDA VALLEY NATIONAL BANK SUPPLEMENTAL RETIREMENT INCOME PLAN Article I Establishment, Purpose and Effective Date of Plan 1.1 Establishment. Oneida Valley National Bank, a New York banking corporation (the "Company") hereby establishes a supplemental executive retirement program, which shall be known as Oneida Valley National Bank Supplemental Retirement Income Plan (the "Plan"). 1.2 Purpose. The purpose of the Plan is to provide supplemental retirement income in excess of the retirement benefits otherwise provided to employees under the Company's qualified and non-qualified retirement plans to the Executive named in Section 2.1(G). Payment of the retirement benefits under this Plan will be made from the general assets of the Company, or by such other method as is consistent with Section 5.2 of this plan and which is agreed to by the Executive and the Company. 1.3 Effective Date. The Plan shall become effective as of September 1, 1997. Article II Definitions 2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below: (A) "Actuarial Equivalent" means a benefit payable in a different form, but having the same value when computed using mortality determined by reference to the 1983 Group Annuity Mortality Table, with an interest rate equal to seven percent (7%). (B) "Base Compensation" means the highest annual regular compensation (excluding any and all additional compensation, such as bonuses, fringe benefits (whether or not taxable), and qualified and non-qualified plan contributions contributed by the Company) paid to the Executive prior to his termination of employment. Base Compensation shall include any compensation deferred by the Executive under a 40 1(k) or Section 125 plan sponsored by the Company. In the event termination of employment occurs at a time other than December 31, Base Compensation shall be calculated by reference to the greatest Base Compensation received by the Executive during any 12 consecutive month period immediately preceding termination of employment. For purposes of this Plan, Base Compensation shall not be limited by Section 401(a)(17) of the Code. (C) "Beneficiary" means the person(s) properly designated to receive, under provisions of the Plan, benefits payable in the event of the Executive's death. (D) "Board" means the Board of Directors of the Company, or a committee comprised of members of the Board of Directors assigned the responsibility to administer the Plan. (E) "Code" means the Internal Revenue Code of 1986 as amended from time to time, and any regulations relating thereto. (F) "Company" means Oneida Valley National Bank. 49 (G) "Executive" means John Mott. (H) "Non-Qualified Retirement Plan" means any plan of deferred compensation maintained by the Company for the benefit of the Executive. (I) "Normal Retirement" means the termination of the Executive's employment upon attaining age 62. (J) "Normal Retirement Date" means the first day of the month coinciding with or next following the date the Executive attains 62 years of age. (K) "Plan" means the Oneida Valley National Bank Supplemental Retirement Income Plan. (L) "Plan Year" is January 1 through December 31. (M) "Qualified Retirement Plan" means any tax qualified retirement or profit sharing plan maintained by the Company. (N) "Supplemental Retirement Benefit" means the benefit payable to the Executive pursuant to Article IV of the Plan by reason of his termination of employment with the Company for any reason other than death. In the case of the Executive's death, a benefit is payable as described in Section 4.4(B). 2.2 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender when used the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. Article III Vesting 3.1 Vesting Schedule. All benefits under this Plan shall be fully vested at all times unless the Executive's employment with the Company is terminated for cause. Article IV Supplemental Retirement Benefit 4.1 Amount. In general, the Supplemental Retirement Benefit payable to the Executive at his Normal Retirement Date pursuant to Section 4.2, and calculated as of his date of termination shall be equal to (a) minus (b) minus (c) minus (d), where: (a) is a monthly benefit equal to 55% of the Executive's Base Compensation divided by 12, (b) is the monthly Company provided normal retirement benefit(s) to which the Executive is entitled under any Qualified Retirement Plan or Non-Qualified Retirement Plan maintained by the Company, calculated as of his date of termination, (c) is the monthly Social Security benefits to which the Executive becomes entitled and actually receives, and (d) is the monthly retirement benefits to which the Executive is entitled from his employment with Merchants National Bank. 50 The amount of offset in section 4.1(b) attributable to employer provided benefits from the Company's 401(k) plan shall be based on the monthly benefit that is the actuarial equivalent of the lump sum due to Employer contribution at the date of termination. 4.2 Form of Benefit. The Supplemental Retirement Benefit payable to the Executive shall be paid in any one of the following forms as determined by the Board, in its sole discretion, after non-binding consultation with the Executive: (a) a straight life annuity, payable monthly, and guaranteed for 5 years, (b) a joint and 50% survivor annuity, payable monthly, (c) a 100% joint and survivor annuity, payable monthly, and guaranteed for 5 years, (d) a joint and 50% survivor annuity, payable monthly, and guaranteed for 5 years, (e) a straight life annuity, payable monthly, (f) a joint and 50% survivor annuity, payable monthly, with "pop-up", and (g) a 100% joint and survivor annuity, payable monthly, with "pop-up". Each of these optional forms of benefit shall be the actuarial equivalent of a life annuity, determined by employing the assumptions set forth in Section 2.1(A). 4.3 Payment of Benefit. Payment of the Supplemental Retirement Benefit shall commence on the first day of the month following the month in which termination of employment occurs. 4.4 Termination. In the event the Executive terminates employment for reason other than Normal Retirement, the Executive shall be entitled to be paid his Supplemental Retirement Benefit pursuant to this Article IV as follows: (A) Termination of Employment or Disability. In the event the Executive terminates employment for any reason other than death or for cause prior to attaining his Normal Retirement Age, the Executive shall be entitled to receive his Supplemental Retirement Benefit calculated as in Section 4.1 except that the amount in Section 4.1(a) shall be multiplied by a fraction, the numerator of which shall be his actual number of calendar months of employment with the Company and the denominator of which shall be the number of calendar months with the Company which the Executive would have completed had he survived until his attainment of age 62. Such benefit shall be payable at the Executive's Normal Retirement Date. At the sole discretion of the Board, payments may be made at an earlier date in a reduced amount that is the actuarially equivalent of the amount that would be payable at the Executive's Normal Retirement Date. (B) Death. If the Executive dies prior to his attainment of age 62, the Executive's Beneficiary shall receive the same benefit that would have been payable had the Executive terminated employment the day before he died, elected a joint and 100% survivor annuity with the contingent annuitant being the Executive's Beneficiary, and subsequently died on the day of his actually death. (C) Termination-for-Cause. Notwithstanding any other provision of the Plan, in the event the Company terminates a Participant's employment due to Termination-for-Cause, the Participant's Supplemental Retirement Benefit will be 51 forfeitable and the benefits under the Plan will be payable only at the discretion of the Board. The Board may in its sole discretion determine that no benefit, a reduced benefit, or a full benefit as specified by the Plan, shall be payable to the Participant. "Termination-for-Cause" means termination of the Participant's employment by the Company, by written notice to the Participant, specifying the event relied upon for such termination, due to (i) the Participant's willful misconduct in respect of his duties for the Company, (ii) conviction for a felony or willful neglect or an act of common law fraud, (iii) material, knowing and intentional failure to comply with applicable laws with respect to the execution of the Company's business operations, (iv) theft, fraud, embezzlement, dishonesty or similar conduct which has resulted or is likely to result in material economic damage to the Company or any of its affiliates or subsidiaries, or (v) dependence or addiction to alcohol or use of drugs (except those legally prescribed by and administered pursuant to the directions of a practitioner licensed to do so under the laws of the state or country of licensure) which in the opinion of the Board, interferes with the Participant's ability to perform his assigned duties and responsibilities. 4.5 Covenant Not To Compete. Executive agrees and understands that he shall not, for a period of five (5) years following his termination of employment with Company, in any way compete with the business of the Company within a 150 mile radius of any location where the Company maintains or conducts business within the State of New York. For the purposes of this Section, Executive shall not have any interest whatsoever, whether as owner, employee, independent contractor, shareholder, partner, sole proprietor, or consultant in or to any business which competes with the business of the Company. In the event the Executive violates this covenant, future benefits under this Plan (measured from the date of violation of this covenant) shall be forfeited. Article V General Provisions 5.1 Administration. The Board shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof The Board shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 5.2 Funding. The Board, in its sole discretion, may elect to fund the benefits payable under the plan through various investments. However, any such investment shall remain the property of the Company and be subject to the claims of general creditors of the Company. The Executive shall have no right, title or interest in any such investments. The Executive may not pledge as collateral any investments purchased to fund benefits under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that assets of the Company will be sufficient to pay any benefit hereunder. It is the intention of the parties that this Plan will be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). 5.3 No Employment Contract. Nothing contained in the Plan shall be construed as a contract of employment between the Company and the Executive or as a right of the Executive to be continued in the employment of the Company or as a limitation on the right of the Company to discharge the Executive with or without cause. 5.4 Spendthrift Provision. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of or other obligations or claims against, such person or entity including claims for alimony, support, separate maintenance and claims in 52 bankruptcy proceedings. 5.5 Binding Effect. This Plan shall be binding upon and inure to the benefit of the parties, their respective legal representatives, and any successor to the Company, any of which shall be deemed to be substituted for the Company under the terms of this Plan. For these purposes, "successor" shall include any person, firm, corporation, or other business entity which at any time, whether by merger, consolidation, purchase, or otherwise, acquires all or substantially all of the Company's assets or business. The Company agrees to notify the Executive in writing of the terms of any proposed transfer of such assets or business and, if such a transfer is consummated, to require its successor to expressly acknowledge and assume its obligations in writing under this Plan. 5.6 Injunctive Relief. The Company acknowledges that in the event it proposes to transfer all or substantially all of its assets or business to a successor as described in Section 5.5 of this Plan without obtaining such successor's express written acknowledgment and assumption of its obligations under this Plan, that such action will cause irreparable harm to the Executive, legal remedies would be inadequate to protect the Executive, and the Executive shall be entitled to injunctive relief to prevent such transfer. 5.7 Applicable Law. The Plan shall be governed by and construed in accordance with the laws of the State of New York, except to the extent preempted by ERISA. IN WITNESS WHEREOF, the Company has executed this Agreement this 18th day of August 1997, effective September 1, 1997 forward. The Oneida Valley National Bank /s/ David P. Kershaw, EVP ------------------------- 53 AMENDMENT TO ALLIANCE BANK, N.A. and ALLIANCE FINANCIAL CORPORATION EMPLOYEES' SUPPLEMENTAL RETIREMENT PLAN (Formerly Oneida Valley National Bank Supplemental Retirement Income Plan) THIS AMENDMENT ("Amendment") is dated May 15, 2001, by and among ALLIANCE BANK, N.A., a banking organization organized under the laws of the state of New York ("Bank") and ALLIANCE FINANCIAL CORPORATION, a New York corporation and registered bank holding company ("Corporation") (the Corporation and the Bank are referred to collectively herein as "Employer") and JOHN C. MOTT, who resides at 459 Foxwood Terrace, Oneida, New York ("Employee"). RECITALS WHEREAS, the Employer sponsors a certain supplemental retirement plan for the benefit of Employee (the "Plan"), originally effective September 1, 1997, by an agreement by and among all of the parties hereto (Agreement"); and WHEREAS, such Agreement is set forth on Exhibit "A", attached hereto and made a part hereof; and WHEREAS, the parties wish to amend the Agreement. NOW, THEREFORE, the Agreement is hereby amended effective as of the day and year first above written as follows: Article IV. Paragraph 4.1(a) of the Agreement shall be deleted in its entirety and replaced with the following: "4.1 (a) is a monthly benefit equal to 65% of the Executive's Base Compensation divided by 12," As amended hereby, all of the terms and provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment the day and year first above written. ALLIANCE BANK, N.A. By: /s/ Donald S. Ames ------------------ Name: Donald S. Ames Title: Chairman - Compensation Committee ALLIANCE FINANCIAL CORPORATION By: /s/ Donald S. Ames ------------------ Name: Donald S. Ames Title: Chairman - Compensation Committee /s/ John C. Mott ---------------- John C. Mott 54 EX-21 4 d50228_21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 -- Subsidiaries Subsidiaries of the Registrant Alliance Bank, N.A. is a wholly owned subsidiary of Alliance Financial Corporation and is a national banking association organized under the laws of the United States. Alliance Preferred Funding Corp. is a substantially wholly owned subsidiary of Alliance Bank, N.A. and is organized under the laws of the State of Delaware. Alliance Leasing Inc. is a wholly owned subsidiary of Alliance Bank, N.A. and is organized under the laws of the State of New York. 55 EX-23 5 d50228_23.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 -- Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 33-65417) and on Form S-8 (File No. 333-95343) of Alliance Financial Corporation of our report dated January 18, 2002 relating to the consolidated financial statements, which appear in this Form 10-K. PricewaterhouseCoopers LLP Syracuse, New York March 28, 2002 56 -----END PRIVACY-ENHANCED MESSAGE-----