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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15366
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ALLIANCE FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
State of incorporation: New York
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I.R.S. Employer Identification No.: 16-1276885
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Address of principal executive offices: 65 Main Street, Cortland, NY 13045
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Registrant's telephone number including area code: (607) 756-2831
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Securities registered pursuant to Section 12(b) of the Act: None
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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
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 15, 2000 was $69,101,666.
The number of shares outstanding of the Registrant's common stock on March 15,
2000: 3,505,861 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
May 2, 2000 (the "Proxy Statement"), are incorporated by reference in Part III.
Page 1 of 56. Exhibit Index is located on Page 53.
<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1999
ALLIANCE FINANCIAL CORPORATION
Page
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 53
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management 53
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 53
<PAGE>
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) expected cost savings from the merger described herein cannot be fully
realized or cannot be realized as quickly as anticipated; (2) the planned
expansion into the Syracuse market is not completed on schedule or on budget or
the new branches do not attract the expected loan and deposit customers; (3)
competitive pressure in the banking industry increases significantly; (4) costs
or difficulties related to the integration of the businesses of Cortland First
Financial Corporation and Oneida Valley Bancshares, Inc. are greater than
expected; (5) changes in the interest rate environment reduce margins; (6)
general economic conditions, either nationally or regionally, are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (7) changes occur in the regulatory environment; (8) changes occur in
business conditions and inflation; and (9) changes occur in the securities
markets.
Item 1 -- Description of the Business
General
Alliance Financial Corporation ("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 provides banking services through dual headquarter offices
located at 65 Main Street, Cortland, NY and 160 Main Street, Oneida, NY, as well
as through 16 customer service facilities located in Cortland, Madison,
Onondaga, northern Broome, and western Oneida counties.
At December 31, 1999, the Company had 238 full-time employees and 27
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 ("FDIC") 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
and business term loans, working capital facilities and accounts receivable
financing programs, as well as installment loans, student loans, and personal
lines of credit to individuals. Trust and investment department services include
personal trust, employee benefit trust, investment management, custodial,
financial planning and brokerage services. The Company also offers safe deposit
boxes, travelers checks, money orders, wire transfers, collection services,
drive-in facilities, automatic teller machines, 24-hour telephone banking, and
24-hour night depositories.
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 Company is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended ("BHCA") and as such is
subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). As a bank holding company, the Company's
activities and those of its subsidiaries are limited to the business of banking
and activities closely related or incidental to banking. The BHCA requires the
prior approval of the Federal Reserve Board in any case where a bank holding
company proposes to acquire direct or indirect ownership or control of more than
5% of any class of the voting shares of, or substantially all of the assets of,
any bank (unless it owns a majority of such bank's voting shares) or otherwise
to control a bank or to merge or consolidate with any other bank holding
company. The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank. The Company is a legal entity separate and distinct from its bank
subsidiary. The principal source of the Company's income is earnings from the
Company's subsidiary bank. Federal laws impose limitations on the ability of
subsidiary banks to pay dividends as discussed in the Notes to Consolidated
Financial Statements. Federal Reserve Board policy requires bank holding
companies to serve as a source of financial strength to their subsidiary banks
by standing ready to use available resources to provide adequate capital funds
to their subsidiary banks during periods of financial stress or adversity. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revised the depository institution regulatory and funding
provisions of the Federal Deposit Insurance Act and made revisions to several
other federal banking statures. Among other things, federal banking regulators
are required to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. FDICIA identifies
the following capital categories for financial institutions: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Rules adopted by the federal banking agencies under
FDICIA provide that an institution is deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater,
and the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
level for any capital measure. FDICIA imposes progressively more restrictive
constraints on operation, management, and capital distributions, depending on
the capital category in which an institution is classified. At December 31,
1999, the Company and its subsidiary bank were in the well-capitalized category
based on the ratios and guidelines noted above.
The Company's subsidiary bank is supervised and regularly examined by the
Office of the Comptroller of the Currency (OCC). The various laws and
regulations administered by the OCC affect corporate practices such as payment
of dividends, incurrence of debt, and acquisition of financial institutions, and
affect business practices, such as payment of interest on deposits, the charging
of interest on loans, the types of business conducted, and location of offices.
The Company's regulators have broad authority to initiate proceedings designed
to prohibit its subsidiary bank from engaging in unsafe and unsound banking
practices.
On November 12, 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach") was signed
into law that concluded a decade of debate in the Congress regarding a
fundamental reformation of the nation's financial system. As discussed above,
the activities of bank holding companies have traditionally been limited to the
business of banking and activities closely related or incidental to banking.
Effective March 11, 2000, Gramm-Leach will permit bank holding companies to
engage in a broader range of financial activities by electing to become
financial holding companies, which may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
Among the activities that will be deemed "financial in nature", in addition to
the traditional lending activities, securities underwriting, dealing in or
making a market in securities, are the sponsoring of mutual funds and investment
companies, insurance underwriting and agency activities, merchant banking
activities, and activities which the Federal Reserve Board considers to be
closely related to banking. A bank holding company may become a financial
holding company under the new statute only if each of its subsidiary banks is
well capitalized, is well managed and has at least a satisfactory rating under
the Community Reinvestment Act. A bank holding company that does not comply with
such requirement may be required to cease engaging in certain activities. Any
bank holding company that does not elect to become a financial holding company
remains subject to the current restrictions of the BHCA . Under the new
legislation, the Federal Reserve Board serves as the primary "umbrella"
regulator of financial holding companies with supervisory authority over each
parent company and limited authority over its subsidiaries. The primary
regulator of each subsidiary of a financial holding company will depend on the
type of activity conducted by the subsidiary. At this time, the Company has not
determined whether it will become a financial holding company.
Item 2 -- Properties
The Registrant operates the following branches:
Name of Office Location County Date Established
Home Office 65 Main Street Cortland March 1, 1869
Cortland, NY
Canastota Stroud Street & Route 5 Madison December 7, 1974
Canastota, NY
Cincinnatus 2743 NYS Route 26 Cortland January 1, 1943
Cincinnatus, 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
Manlius 201 Fayette Street Onondaga October 19, 1994
Manlius, NY
Marathon 14 E. Main Street Cortland August 15, 1957
Marathon, NY
McGraw 30 Main Street Cortland May 1, 1967
McGraw, NY
North Main North Main Street Madison September 9, 1966
Oneida, NY
One 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
Wal-Mart 1294 Lenox Avenue Madison July 17, 1996
(Oneida) Oneida, NY
The offices in One Park Place, TOPS Plaza, Tully, Whitney Point, and both
Wal-Mart stores are leased. The other banking premises are owned.
Item 3 -- Legal Proceedings
In December 1998, the Oneida Indian Nation ("The Nation") and the U.S. Justice
Department filed motions to amend a long outstanding claim against the State of
New York to include a class of 20,000 unnamed defendants who own real property
in Madison and Oneida Counties. If the motion is granted to amend the claim,
litigation could involve assets of the Company. On March 26, 1999, the United
States District Court heard arguments on the matter and has reserved its
decision pending a negotiated settlement of the matter by the State of New York
and the Nation. As of December 31, 1999, the matter is still in the process of
settlement. The Nation has publicly stated that the purpose of the legal action
currently being undertaken is to force the State of New York to negotiate an
equitable settlement of their original claim which was ruled on by the United
States Supreme Court in favor of The Nation over 13 years ago. 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.
There are no other pending legal proceedings, other than routine litigation
incidental to the business of the subsidiary bank, to which the Company or its
subsidiary 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 bank or the Company's financial condition.
Item 4 -- Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5 -- Market for Registrant's Common Stock and Related Shareholders Matters
Common Stock Data:
The common stock of Alliance Financial Corporation (Symbol: ALNC) is listed for
quoting in the Nasdaq National Market. Market makers for the stock are Ryan,
Beck & Company (800-342-2325), Tucker Anthony (800-343-3036), and First Albany
Corporation (800-336-3245). There were 902 shareholders of record as of December
31, 1999. The following table presents stock prices for the common stock of
Alliance Financial Corporation for all of 1999 and the fourth quarter of 1998
(after the merger of Cortland First Financial Corporation ("Cortland") and
Oneida Valley Bancshares, Inc. ("Oneida") in November 1998), and for Cortland
for the first three quarters of 1998 and the fourth quarter of 1998 (until such
merger). Dividends paid in 1998 have been restated to reflect the combined
dividends of Cortland and Oneida. Stock prices below are based on 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.
1999 High Low Dividend Paid
- ---- ------- ------- -------------
1st Quarter $ 25.50 $ 20.00 $ .175
2nd Quarter 21.75 19.50 .175
3rd Quarter 29.50 18.25 .175
4th Quarter 27.63 22.50 .175
1998 High Low Dividend Paid
- ---- ------- ------- -------------
1st Quarter $ 29.25 $ 27.00 $ .14
2nd Quarter 29.25 29.25 .14
3rd Quarter 30.50 25.00 .14
4th Quarter 31.25 25.00 .25
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
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 writing or
calling ASTC Dividend Reinvestment at 1-800-278-4353.
<PAGE>
Item 6 -- Selected Financial Data (Dollars In Thousands, except per-share data)
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Five Year Comparative Summary
<TABLE>
<CAPTION>
Assets and Deposits 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Loans $282,025 $250,295 $236,484 $231,134 $223,702
Investment Securities 194,382 172,237 163,338 154,724 149,571
Deposits 435,074 413,594 377,927 372,588 360,376
Total Assets 519,197 471,705 436,430 428,310 412,808
Trust Dept Assets 185,972 147,244 145,487 125,833 103,448
(not included in Total Assets)
Shareholders' Equity 49,245 51,168 49,750 50,177 47,542
(Capital, Surplus & Undivided Profits)
Operating Income & Expenses
Total Interest Income 34,508 32,213 31,791 31,016 30,449
Total Interest Expense 14,220 13,398 12,984 12,194 12,013
Net Interest Income 20,288 18,815 18,807 18,822 18,436
Provision for Possible
Loan Losses 975 770 625 633 475
Net Interest Income after
Provision for Possible
Loan Losses 19,313 18,045 18,182 18,189 17,961
Other Operating Income 4,558 3,989 3,866 3,387 3,168
Total Operating Income 23,871 22,034 22,048 21,576 21,129
Salaries & Related Expense 9,112 8,712 8,206 7,695 7,543
Occupancy & Equipment
Expense 2,587 2,607 2,412 2,265 2,188
Other Operating Expense 4,926 6,178 4,077 3,828 3,850
Total Operating Expense 16,625 17,497 14,695 13,788 13,581
Income Before Taxes 7,246 4,537 7,353 7,788 7,548
Provision for Income Taxes 1,844 1,104 2,220 2,434 2,410
----- ----- ----- ----- -----
Net Income 5,402 3,433 5,133 5,354 5,138
Per-Share Statistics
Net Income $ 1.51 $ 0.95 $ 1.40 $ 1.43 $ 1.37
Book Value at Year End 13.97 14.23 13.82 13.47
12.67
Cash Dividends Declared 0.70 0.67 0.88 0.56 0.51
</TABLE>
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
MANAGEMENT'S DISCUSSION & ANALYSIS OF
THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Alliance Financial Corporation (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 merged its two subsidiary banks, First National
Bank of Cortland and Oneida Valley National Bank, forming a new wholly owned
subsidiary, Alliance Bank, N.A. as of the close of business on April 16, 1999.
Pursuant to the terms of the 1998 merger, each share of Cortland stock was
exchanged for one share of the Company's stock and each share of Oneida stock
was exchanged for 1.8 shares of the Company's stock. The merger constituted a
tax-free reorganization and has been accounted for as a pooling of interests
under Accounting Principals Board Opinion No. 16.
The following discussion and analysis reviews the Company's business, and
provides information that has been restated to include the combined results of
operations and financial condition of Cortland, Oneida, and the subsidiary banks
for the year 1999 and all prior periods presented. Certain reclassifications
were made to Cortland's and Oneida's prior years financial statements to conform
to the Company's presentation. This discussion should be read in conjunction
with the consolidated financial statements and accompanying notes, and other
statistical information included elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net income for 1999 was $5.402 million, or $1.51 per share, compared to $3.433
million, or $0.95 per share, in 1998. The Company's 1999 net income increased
$1.969 million, or 57.4%, and earnings per share increased $0.56, or 58.9%,
compared to 1998 results. In connection with the 1998 merger of the holding
company, a non-recurring charge to 1998 operating expenses of $1.701 million was
recorded, which had the effect of reducing net income after tax by $1.022
million and earnings per share by $0.28. Excluding the nonrecurring
merger-related expenses from the Company's 1998 results, 1999 net income
increased $947 thousand, or 21.3% and earnings per share increased $0.28, or
22.8%. The success of 1999 earnings results is attributable to strong balance
sheet growth generating increases in net interest income, a double-digit
increase in non-interest income led by trust department earnings at a record
level, and a lower rate of increase in operating expenses reflecting positive
results of the merger.
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:
1999 1998 1997
---- ---- ----
Percentage of net income to
average total assets 1.09% 0.74% 1.17%
Percentage of net income to
average shareholders' equity 10.56% 6.91% 10.25%
Percentage of dividends declared
to net income 46.24% 70.20% 62.32%
Percentage of average
shareholders' equity to
average total assets 10.29% 10.95% 11.50%
NET INTEREST INCOME
Net interest income is the Company's principal source of operating income for
payment of overhead and providing for possible 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 on a tax equivalent basis increased $1.520 million, to
$21.501 million in 1999. The growth in net interest income resulted from
increases in 1999's average earning assets which offset a declining net interest
margin.
Loans represented the majority of the Company's interest earning assets and
have remained stable at 57% of earning assets over the past two years. Although
average loans increased $19.312 million in 1999, yields declined 30 basis points
to 8.68%, with lower yields in commercial, consumer, and residential mortgage
loans. Interest income on loans in 1999 was up $959 thousand, or 4.4%, compared
to 1998. Average loans in 1998 increased $7.806 million compared to 1997, while
average loan yields declined 19 basis points primarily due to the decline in the
real estate mortgage loan portfolio yields. Interest income on loans was up $235
thousand in 1998 compared to 1997.
Average investments in 1999 increased by $27.588 million, with tax
equivalent interest income from investments up $1.702 million compared to 1998.
In comparison, average investment securities increased $4.431 million in 1998
compared to 1997, with tax equivalent interest income up just $87 thousand.
Interest income in 1999 from the sale of federal funds in the amount of $433
thousand declined $319 thousand compared to 1998, as the Company reduced its
average federal funds sold balances throughout the year.
Tax equivalent interest income for 1999 at $35.721 million, was $2.342
million more than 1998, although the 1999 tax equivalent yield on average
earning assets was 7.67%, 19 basis points less than 1998. Average earning assets
for 1999 were $465.581 million, up $41.155 million compared to 1998, and
represented 93.6% of total average assets in 1999. Average earning assets in
1998 were 93.5% of total average assets. Asset yields showed improvement at
year-end 1999 following three successive 25 basis point increases in the federal
funds rate, the result of Federal Reserve Board action beginning at mid-year.
During 1999, average interest-bearing liabilities increased by $41.800
million, or 12.12%, to $386.700 million. The cost of interest-bearing
liabilities declined 20 basis points from 3.88% in 1998 to 3.68% in 1999. The
Company's interest expense, which is a function of the volume of, and rates paid
for interest bearing liabilities, increased $822 thousand, or 6.14% in 1999. The
increase was primarily a result of volume increases in time deposits, along with
increased borrowings primarily through the Federal Home Loan Bank. By
comparison, interest expense increased $414 thousand, or 3.19% in 1998 as a
result of smaller percentage increases in interest-bearing demand and time
deposit balances. Average interest-bearing liabilities increased $14.190
million, or 4.29%, in 1998 compared to 1997.
The Company's net interest margin (federal tax equivalent net interest
income divided by average earning assets) declined 9 basis points, from 4.71% in
1998, to 4.62% in 1999.
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the yields and rates thereon.
Interest income and yield information is adjusted for items exempt from federal
income taxes and assumes a 34% tax rate. Non-accrual loans have been included in
the average balances. Securities are shown at average amortized cost.
<PAGE>
Average Balances and Net Interest Income
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars In Thousands) 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
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 8,260 $ 433 5.24% $ 14,005 $ 752 5.38% $ 9,147 $ 494 5.40%
Taxable investment securities 143,671 8,798 6.12% 114,545 7,075 6.18% 117,433 7,440 6.34%
Nontaxable investment securities 49,689 3,567 7.18% 51,227 3,588 7.00% 43,908 3,136 7.14%
Loans (net of unearned discount) 263,961 22,923 8.68% 244,649 21,964 8.98% 236,843 21,729 9.17%
------- ------ ----- ------- ------ ----- -------- ------ -----
Total interest-earning assets 465,581 35,721 7.67% 424,426 33,379 7.86% 407,331 32,799 8.05%
Non-interest-earning assets:
Other assets 35,486 31,078 30,714
Less: Allowance for loan losses (3,240) (2,933) (2,980)
Net unrealized (losses) gains on
available-for-sale portfolio (560) 1,229 225
------ ----- -----
Total $497,267 $453,800 $435,290
======== ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Demand deposits $ 64,480 $ 1,042 1.62% $ 61,228 $ 1,191 1.95% $ 54,493 $ 1,017 1.87%
Savings deposits 148,895 4,632 3.11% 141,285 4,763 3.37% 140,041 4,821 3.44%
Time deposits 163,115 7,947 4.87% 140,639 7,346 5.22% 134,710 7,066 5.25%
Short-term borrowings 10,210 599 5.87% 1,748 98 5.60% 1,466 80 5.46%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing liabilities 386,700 14,220 3.68% 344,900 13,398 3.88% 330,710 12,984 3.93%
Non-interest-bearing liabilities:
Demand deposits 54,590 53,675 49,634
Other liabilities 4,803 5,553 4.887
Shareholders' equity 51,174 49,672 50,059
------ ------- --------
Total $497,267 $453,800 $435,290
======== ======== ========
Net interest earnings $21,501 $19,981 $19,815
======= ======= =======
Net yield on interest-earning assets 4.62% 4.71% 4.86%
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
--------------------- ---------------------
(In Thousands) Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Change Volume Rate Net Change
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold and time
deposits in other banks $ (305) $ (14) $ (319) $ 261 $ (4) $ 257
Taxable investment securities 1,796 (73) 1,723 (180) (185) (365)
Nontaxable investment securities (111) 90 (21) 519 (66) 453
Loans (net of unearned discount) 1,714 (755) 959 701 (466) 235
----- ----- ----- ----- ---- ----
Total interest-earning assets $3,094 $ (752) $2,342 $1,301 $(721) $ 580
====== ====== ====== ====== ===== =====
Interest paid on:
Interest-bearing demand deposits $ 58 $ (207) $ (149) $ 128 $ 46 $ 174
Savings deposits 246 (377) (131) 42 (100) (58)
Time deposits 1,133 (532) 601 315 (35) 280
Short-term borrowings 485 16 501 16 2 18
------ ------- ------ ------ ----- -----
Total interest-bearing liabilities $1,922 $(1,100) $ 822 $ 501 $ (87) $ 414
====== ======= ====== ====== ===== =====
Net interest earnings (FTE) $1,172 $ 348 $1,520 $ 800 $(634) $ 166
</TABLE>
<PAGE>
NON-INTEREST INCOME
Non-interest income for 1999 was $4.558 million, which was up 14.3%, or $569
thousand, compared to 1998. Non-interest income increased 3.2%, or $123 thousand
in 1998. The Company's non-interest income is composed of recurring fees from
normal banking operations, trust and data processing department fees, and net
gains/losses from sales of investment securities. Income from service charges on
deposits at $1.939 million, up 13.7% from the prior year following a 10.1%
increase in 1998, was the principal source of the bank's non-interest income.
Trust department income increased 43.7% in 1999 to $1.134 million compared to
$789 thousand in 1998. The growth in trust revenue is a reflection of both an
increase in the market value of trust department assets as well as growth in the
departments' customer base resulting from strong new business development
efforts in 1999. Trust department income represents 25% of total non-interest
income. Trust department income increased 1.8% in 1998 compared to 1997. The
Company took minimal gains from the sale of investment securities in 1999. Gains
on sales of securities in 1999 of $136 thousand compared to $26 thousand in
1998. Significant contributions to the Company's non-interest income were
derived from electronic banking service fees, data processing service contracts
with other financial institutions, and dividends received from the credit
insurance programs offered through the Company's subsidiary bank.
The following table sets forth certain information on non-interest income for
the years indicated.
Non-Interest Income
Years ended December 31,
(In Thousands) 1999 1998 1997
---- ---- ----
Trust department services $1,134 $ 789 $ 775
Service charges on deposit accounts 1,939 1,706 1,550
Data processing services 268 257 244
Investment securities gains 136 26 115
Other operating income 1,081 1,211 1,182
------ ------ ------
Total non-interest income $4,558 $3,989 $3,866
<PAGE>
NON-INTEREST EXPENSE
Operating expense in 1999 declined $872 thousand, or 5%, compared to an increase
of $2.802 million, or 19.1% in 1998 over the 1997 operating expense. In 1998,
the merger of Cortland First Financial Corporation and Oneida Valley Bancshares,
Inc. resulted in expenses of $1.701 million being charged against the Company's
earnings. Excluding these 1998 nonrecurring merger-related expenses,
non-interest expense in 1999 was up $829 thousand, or 5.2%, compared to 1998. On
the same basis, operating expense in 1998 was up $1.101 million, or 7.5%
compared to 1997. Salaries and associated benefit expenses in 1999 were up $400
thousand, or 4.6%, compared to a 6.2% increase in 1998 over 1997, and
represented the majority of the increase in operating expenses. Salary and
benefits expense was favorably impacted during the year as a result of certain
employees electing to participate in an early retirement program relating to the
merger. Increases in salary and benefits during the year were associated with
staffing a new Syracuse, New York office that opened in July, and new business
development and account officers employed in the growing commercial loan and
trust departments. In connection with the merger of the banks in 1999, the
Company consolidated various benefit programs and elected to terminate the
former Oneida Valley National Bank defined benefit pension plan. As a result of
the termination, the Company charged $75 thousand against pension expense in
1999 and expects to charge approximately $460 thousand in additional pension
expense in 2000, both of which will be nonrecurring. A gain on the termination
of the plan is expected to more than offset all of the expense in 2000.
The Company's occupancy and equipment expense received benefits from the
merger and declined approximately 1% in 1999 compared to 1998. In the prior
year, occupancy and equipment expense increased $195 thousand, or 8.1%, compared
to 1997. Excluding 1998 merger related expenses, other operating expense in 1999
increased $449 thousand, or 10%, compared to 1998. The 1999 increases were
primarily related to the reordering of stationery, forms, and supplies
associated with the April merger of the subsidiary banks along with higher
advertising costs to promote the Company's new name and image. Communication
expense increased as the Company improved the speed at which it could
communicate throughout its 18 branch system.
Non-Interest Expense
Years ended December 31,
(In Thousands) 1999 1998 1997
---- ---- ----
Salaries, wages, and employee benefits $ 9,112 $ 8,712 $ 8,206
Building, occupancy and equipment 2,587 2,607 2,412
Merger related expenses -- 1,701 --
Other operating expense 4,926 4,477 4,077
------- ------- -------
Total non-interest expense $16,625 $17,497 $14,695
<PAGE>
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. In connection with its
merger, the Company elected in 1998 to reclassify the majority of its
held-to-maturity investment securities to available-for-sale, and to maintain
the majority of its portfolio 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.
Based on amortized cost, the Company classified 94% of its investment portfolio
as available-for-sale at year-end 1999. The Company's book value of investment
debt securities increased $26.705 million, or 15.85%, in the 12 months ending
December 31, 1999 to a total of $195.138 million, compared to an increase of
$8.005 million, or 5%, in 1998 over 1997. The average tax equivalent yield of
the portfolio declined four basis points, from 6.43% in 1998 to 6.39% in 1999.
The portfolio yield had declined 12 basis points in 1998 compared to 1997.
During the year ending December 31, 1999, market interest rates increased
significantly, with the yield on three-year U.S. Treasury securities
approximately 150 basis points above its December 31, 1998 rate. The increase in
rates, which causes a decline in the market value of fixed-rate investment
securities, resulted in the Company's available-for-sale investment securities
reflecting a market value which was 1.87% less 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 comprehensive income section of its shareholders' equity. The
Company's investment portfolio reflects an unrealized loss on available-for-sale
securities of $3.476 million, with an after tax effect of $2.086 million being
reflected as a reduction in shareholders' equity. Since the Company expects
actual future sales of securities to be minimal, as has been its past practice,
the losses reflected on the financial statements are not expected to be
realized. At December 31,1998, the Company reported unrealized gains in its
available-for-sale portfolio of $1.815 million.
The composition of the portfolio as of December 31, 1999 consisted of U.S.
Treasury and Agency Securities representing 31% of the total, mortgage-backed
securities at 35%, tax-exempt investments at 25%, and other securities
representing 9% of the total. The composition of the portfolio shows little
change when compared to year-end 1998. Gains on sales of investment securities
in 1999 were $136 thousand compared to $26 thousand in 1998.
<PAGE>
The following table sets forth the amortized cost and market value for the
Company's held-to-maturity investment securities portfolio:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands) Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $ -- $ -- $ 500 $ 501 $10,028 $10,076
Mortgage-backed securities -- -- -- -- 6,070 6,104
Obligations of states and
political subdivisions 12,449 12,449 12,936 12,986 21,159 21,388
Other securities -- -- -- -- 2,516 2,538
------- ------- ------- ------- ------- -------
TOTAL $12,449 $12,449 $13,436 $13,487 $39,773 $40,106
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the amortized cost and market value for the
Company's available-for-sale debt securities within the investment portfolio:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands) Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $ 61,871 $ 61,225 $ 49,461 $ 49,870 $ 46,534 $ 46,694
Mortgage-backed securities 68,227 66,178 56,169 56,402 45,464 45,707
Obligations of states and
political subdivisions 37,516 37,196 39,168 40,315 28,129 28,720
Other securities 15,075 14,614 10,199 10,225 528 536
--------- -------- -------- -------- -------- --------
TOTAL $ 182,689 $179,213 $154,997 $156,812 $120,655 $121,657
========= ======== ======== ======== ======== ========
Net unrealized (losses) gains on
available-for-sale debt securities $ (3,476) $ 1,815 $ 1,002
--------- -------- --------
Total Carrying Value $ 179,213 $156,812 $121,657
========= ======== ========
</TABLE>
<PAGE>
The following table sets forth as of December 31, 1999 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:
<TABLE>
<CAPTION>
At December 31, 1999
Amount Amount Amount
Maturing Maturing After Maturing After
Within One Year but Five Years but Amount
One Year Within Five Within Ten Maturing After
(Dollars In Thousands) or Less Years Years Ten Years Total Cost
<S> <C> <C> <C> <C> <C>
Held-To-Maturity Portfolio
States and political subdivisions $ 8,233 $ 2,564 $ 1,652 $-- $ 12,449
------- -------- ------- ----- --------
Total held-to-maturity portfolio value $ 8,233 $ 2,564 $ 1,652 $-- $ 12,449
------- -------- ------- ----- --------
Weighted average yield at year end (1) 6.51% 9.09% 8.57% 0.00% 7.27%
Available-for-Sale Portfolio:
U.S. Treasury and other
U.S. Government agencies $16,720 $ 36,041 9,110 $-- $ 61,871
Mortgage-backed securities 4,184 46,760 12,468 4,815 68,227
States and political subdivisions 3,948 16,542 14,145 2,881 37,516
Other -- 12,162 2,913 -- 15,075
------- -------- ------ ----- --------
Total available-for-sale portfolio value $24,852 $111,505 $38,636 $7,696 $182,689
======= ======== ======= ====== ========
Weighted average yield at year end (1) 6.18% 6.25% 6.69% 6.67% 6.35%
</TABLE>
(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.
<PAGE>
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.
<TABLE>
<CAPTION>
Composition of the Loan Portfolio
Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $105,169 37.3% $ 80,121 32.0% $ 66,422 28.1% $ 59,911 25.9% $ 60,147 26.9%
Real estate mortgage 114,450 40.6% 113,570 45.4% 105,937 44.8% 107,462 46.5% 103,082 46.1%
Consumer 66,878 23.7% 61,817 24.7% 70,169 29.7% 70,595 30.5% 67,072 30.0%
------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Gross Loans 286,497 101.6% 255,508 102.1% 242,528 102.6% 237,968 102.9% 230,301 103.0%
Less:
Unearned discount (1,060) (0.4%) (2,212) (0.9%) (3,087) (1.3%) (3,809) (1.6%) (3,732) (1.7%)
Allowance for
loan losses (3,412) (1.2%) (3,001) (1.2%) (2,957) (1.3%) (3,025) (1.3%) (2,867) (1.3%)
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net Loans $282,025 100.0% $250,295 100.0% $236,484 100.0% $231,134 100.0% $223,702 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== =====
</TABLE>
<PAGE>
On December 31, 1999 loans (net of unearned discount) were $285.437
million, increasing $32.141 million, or 12.7%, during the year. Loans increased
$13.855 million, or 5.9% in 1998. Although the majority of the Company's loans
continue to be residential mortgage loans on our customers' primary residences,
increasing emphasis has been placed on growing the commercial loan portfolio.
Residential mortgage loans, which represent 40.6% of net loans, increased $880
thousand, or 0.8% during 1999. The mortgage portfolio consists of 85% fixed-rate
loans, and 15% with rates that adjust on an annual basis. The Company originated
$24.621 million in mortgage loans during 1999. As of December 31, 1999, the
Company was servicing mortgage loans sold in the secondary market with balances
of $16.612 million. The total of mortgage loans being serviced at December 31,
1998 was $15.133 million.
Loans in the commercial category consist primarily of short-term and/or
floating rate loans, as well as commercial mortgage loans, made to small and
medium-sized companies. Commercial loans in 1999 increased $25.048 million, or
31.3% to $105.169 million over the year-end 1998. A large percentage of the
growth in the commercial loan portfolio resulted from new business relationships
developed in the Onondaga county market.
Consumer loans, net of unearned discount, which include home equity and
revolving credit loans, increased 10.4%, or $6.213 million, to $65.818 million
as of December 31, 1999. During 1999, the Company increased its focus on
indirect auto lending, employing a new business development officer, and
centralizing underwriting and loan processing. Indirect auto loans increased
$3.865 million, or 23.6%, in 1999 compared to 1998 and represented 76.4% of the
1999 growth in consumer loans.
The following table shows the amount of loans outstanding as of December 31,
1999, which, based on remaining scheduled payments of principal, are due in the
periods indicated.
<TABLE>
<CAPTION>
At December 31, 1999
(In Thousands) Maturing in One Maturing After One Maturing After Maturing After
Year or Less but Within Five Five but Within Ten Years
Years Ten Years Total
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $43,263 $32,460 $12,156 $17,290 $105,169
Real estate mortgage 7,465 31,940 34,348 40,697 114,450
Consumer, net of unearned
discount 18,276 38,109 8,652 781 65,818
------ ------ ----- --- ------
Total loans, net of unearned
discount $69,004 $102,509 $55,156 $58,768 $285,437
======= ======== ======= ======= ========
</TABLE>
The following table sets forth the sensitivity of the loan amounts due after one
year to changes in interest rates:
At December 31, 1999
(In Thousands) Fixed Rate Variable Rate
Due after one year, but within five years $69,564 $32,945
Due after five years $80,005 $33,919
<PAGE>
LOAN QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount of
nonperforming assets:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 682 $ 552 $ 525 $ 819 $ 582
Accruing loans which are contractually past due 90
days or more as to principal or interest payments 409 298 1,204 597 389
Other real estate owned and other repossessed assets 269 257 363 0 135
------ ------ ------ ------ ------
Total nonperforming loans and assets $1,360 $1,107 $2,092 $1,416 $1,106
====== ====== ====== ====== ======
Ratio of allowance for loan losses to period-end
nonperforming loans 312.74% 353.06% 171.02% 213.63% 295.28%
Ratio of nonperforming assets to period-end total
loans, other real estate owned, and repossessed assets 0.48% 0.44% 0.87% 0.60% 0.49%
</TABLE>
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 31,1999 were $1.360 million, increasing $253 thousand, or 22.85%,
compared to year-end 1998. The ratio of nonperforming assets to year-end loans,
other real estate owned, and other repossessed assets increased from 0.44% at
December 31, 1998 to 0.48% at December 31, 1999. The ratio of nonperforming
loans to total loans also increased slightly from 0.32% at December 31, 1998 to
0.38% at December 31, 1999.
The Company's policy is to place a loan on nonaccrual status and recognize
income on a cash basis when it 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 1999. 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 or 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, 1999, there were no impaired loans for which specific valuation
allowances had been recorded.
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.
Management determines the allowance for loan losses based on a number of
factors including reviewing and evaluating the bank's loan portfolio in order to
identify potential problem loans, concentrations of credit, and risk factors
connected to the portfolio, as well as current local and national economic
conditions. The allowance for loan losses represents management's estimate of an
amount that is adequate to provide for potential losses inherent in the 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, 1999 was $3.412
million, or 1.20% of loans (net of unearned discount) outstanding compared to
$3.001 million, or 1.18% of loans outstanding at December 31, 1998. The adequacy
of the allowance to provide coverage for nonperforming loans was 313% at
year-end 1999 compared to 353% at year-end 1998. The provision expense in 1999
of $975 thousand provided coverage in excess of the $564 thousand in net loans
charged off. The ratio of net charge-offs to average loans outstanding declined
to 0.21% in 1999 compared to 0.30% in 1998. Loan losses in the Company's
residential mortgage loan portfolio continue to be negligible, with commercial
loan portfolio net loan losses in 1999 of $51 thousand, representing 0.07% of
average commercial loans outstanding in 1999. Over the past two years, 79% of
total loans charged-off have been consumer loans, with the majority being
installment loans. Net consumer loan losses in 1999 in the amount of $475
thousand were 0.73% of average consumer loans outstanding for 1999.
A relatively low level of nonperforming loans combined with a stable and
low level of net charge-offs, continues to allow the Company to carry a reserve
for loan losses below peers.
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 possible losses arising from loans charged-off and recoveries on
loans previously charged-off and additions to the allowance, which have been
charged to expenses.
<TABLE>
<CAPTION>
Summary Of Loan Loss Allowance
Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of
period (gross loans less unearned discount) $285,437 $253,296 $239,441 $234,159 $226,569
-------- -------- -------- -------- --------
Daily average amount of loans (net of
unearned discount) 263,961 244,649 236,843 230,007 223,188
-------- -------- -------- -------- --------
Balance of allowance for possible loan
losses at beginning of period 3,001 2,957 3,025 2,867 2,836
Loans charged-off:
Commercial and agricultural 73 218 148 218 213
Real estate mortgage 38 29 57 0 10
Consumer 637 693 602 385 340
-------- -------- -------- -------- --------
Total loans charged-off $ 748 $ 940 $ 807 $ 603 $ 563
Recoveries of loans previously charged-off:
Commercial and agricultural 21 111 17 36 46
Real estate mortgage 1 -- -- -- --
Consumer 162 103 97 92 73
-------- -------- -------- -------- --------
Total recoveries $ 184 $ 214 $ 114 $ 128 $ 119
Net loans charged-off $ 564 $ 726 $ 693 $ 475 $ 444
-------- -------- -------- -------- --------
Additions to allowance charged to expense 975 770 625 633 475
-------- -------- -------- -------- --------
Balance at end of period $ 3,412 $ 3,001 $ 2,957 $ 3,025 $ 2,867
-------- -------- -------- -------- --------
Ratio of allowance for loan losses to period-
end loans 1.20% 1.18% 1.23% 1.29% 1.27%
Ratio of net charge-offs to average loans 0.21% 0.30% 0.29% 0.21% 0.20%
outstanding
</TABLE>
<PAGE>
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans at the dates
indicated.
<TABLE>
<CAPTION>
Allocation of the Allowance For Loan Losses
Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ----
Amt. of Amt. of Amt. of Amt. of Amt. of
(Dollars In Thousands) Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & agricultural $1,857 54.43% $1,159 38.62% $948 32.05% $859 28.39% $850 29.65%
Real estate mortgage 391 11.46% 482 16.06% 541 18.30% 546 18.05% 543 18.94%
Consumer 1,164 34.11% 698 23.26% 906 30.64% 849 28.07% 724 25.25%
Unallocated -- -- 662 22.06% 562 19.01% 771 25.49% 750 26.16%
Total $3,412 100.00% $3,001 100.00% $2,957 100.00% $3,025 100.00% $2,867 100.00%
</TABLE>
<PAGE>
OTHER ASSETS
During the fourth quarter of 1999, the Company purchased $7.5 million of
insurance, insuring the lives of a number of the Company's key executives and
managers. The Company views the purchase as protection against the loss of its
key personnel. The bank-owned life insurance is carried on the books at its
current cash surrender value. Increases in cash surrender value are based on
market rates paid by the two insurance companies that have issued the policies,
and are credited to other income.
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 which are 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 for 1999 increased $34.253 million, or 8.6%, to $431.080
million, compared to an $17.949 million, or 4.7%, increase in 1998 over 1997.
Compared to December 31, 1998, deposits as of December 31, 1999 of $435.074
million were up $21.480 million. The Company's deposit mix has been relatively
stable over the past three years, with changes reflecting a slight shift from
regular savings to money market savings accounts, on which the Company pays
higher interest rates. The Company's demand deposits, including both
interest-bearing and non-interest-bearing accounts, reflected an increase in
average outstanding balances of $4.167 million, or 3.6%, during 1999 following a
10.3% increase when comparing 1998 to 1997. These core transactional accounts
continue to provide the company with an important low-cost source of funds. With
a relatively low rate of inflation during 1999, low savings rates encouraged
depositors to transfer balances to time deposits. Average time deposits in 1999
increased $22.476 million, or 16%, compared to 1998, following an increase of
$5.929 million, or 4.4%, when comparing 1998 to 1997. Depositors continued to
favor time deposits with maturities of 18 months or less. Time deposits in
excess of $100 thousand, which are more volatile and sensitive to interest
rates, totaled $72.457 million at year-end 1999, 43.2% of time deposits and
16.7% of total deposits, compared to 38.7%, and 14%, respectively, at year-end
1998. The Company has been more aggressive in acquiring large balance time
deposits in the past two years, matching the liabilities with assets that have
similar interest rate risk characteristics. The Company's total municipal
deposits of $110.819 million on December 31, 1999 represented 25.5% of total
deposits compared to $82.086 million, or 19.89%, on December 31, 1998.
The average daily amount of deposits, the average rate paid, and the percentage
of deposits on each of the following deposit categories is summarized below for
the years indicated.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Avg. Avg. Avg.
Avg. Rate Percent of Avg. Rate Percent of Avg. Rate Percent of
Balance Paid Deposits Balance Paid Deposits Balance Paid Deposits
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 54,590 0.00% 12.66% $ 53,675 0.00% 13.53% $ 49,634 0.00% 13.10%
Interest-bearing demand deposits 64,480 1.62% 14.96% 61,228 1.95% 15.43% 54,493 1.87% 14.39%
Savings deposits 148,895 3.11% 34.54% 141,285 3.37% 35.60% 140,041 3.44% 36.96%
Time deposits 163,115 4.87% 37.84% 140,639 5.22% 35.44% 134,710 5.25% 35.55%
Total average daily amount of
domestic deposits $431,080 3.16% 100.00% $396,827 3.35% 100.00% $378,878 3.41% 100.00%
</TABLE>
<PAGE>
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, 1999.
(In Thousands)
Less than three months $41,336
Three months to six months 22,415
Six months to one year 4,921
Over one year 3,785
-----
Total $72,457
=======
In the fourth quarter of 1999, the Company began offering 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. As of
December 31, 1999, repurchase agreements amounted to $7.225 million. During
1999, the Company increased borrowings from the Federal Home Loan Bank by $24
million. Borrowings at December 31, 1999 were all scheduled to mature in 90 days
or less and are considered as an alternative to purchasing large time deposits
from corporate or municipal customers based on cost and timing issues.
CAPITAL
In 1999, the Company added $5.402 million into equity through net income and
returned $2.498 million to its shareholders in the form of dividends, retaining
$2.904 million in undivided profits. During the year, the Company repurchased
68,800 shares of its common stock at a cost of $1.653 million in connection with
a stock repurchase program that was announced early in the third quarter. The
Board of Directors believes that the 1999 repurchases of stock have been an
excellent investment opportunity for the Company and its shareholders, based on
the Company's strong capital position and growth potential. Total shareholders'
equity also reflects an adjustment for the SFAS 115 required 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 a reduction in total
shareholders' equity of $2.086 million as of December 31, 1999. The Company's
ratio of shareholders' equity to assets of 9.49% at December 31, 1999 compares
to 10.85% at December 31, 1998.
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, 1999, 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 paid cash dividends equal to $0.70 per share in 1999 compared
to $0.67 in 1998. The 1999 dividend pay-out ratio was 46%.
LIQUIDITY
Liquidity is the ability of the Company to generate and maintain sufficient cash
flows to fund its operations and to meet customer's 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. Lines of credit with the bank's primary correspondents and the Federal
Home Loan Bank as of year-end 1999 were $64.273 million of which $55.273 million
remained available.
IMPACT OF THE YEAR 2000
Prior to year-end 1999, the Company had completed the assessment of its Y2K
risk, had implemented all necessary system enhancements, and had tested all
systems and equipment to ensure customer service and minimize its business risks
in the year 2000. A Business Resumption Contingency Plan along with a Liquidity
Contingency Plan were in place to provide for problems should they occur. As a
result of strong customer communications and marketing efforts by both the
Company and the banking industry, consumer confidence in the banking industry's
ability to resolve Y2K problems increased as January 1, 2000 approached. The
increase in consumer confidence resulted in the Company experiencing no
significant Y2K related deposit declines or cash withdrawals in December of
1999. The month of January 2000 reflected a successful transition to the year
2000 of all of the Company's systems and equipment. In particular, the Company's
on-premise computer processing system continued to perform as the Y2K testing
program had indicated that it would. All year-end processing was completed as
scheduled and daily processing since year-end has been performed without any Y2K
related incidents. By the end of the first week of business in January, the
Company's contingency cash was reinvested. The Company estimates that interest
income was negatively impacted in the fourth quarter of 1999 by $100 thousand as
a result of the uninvested cash being reserved for Y2K customer contingencies.
Total costs incurred and income lost by the Company in connection with
remediation and contingency planning for Y2K are estimated at $250 thousand,
with $60 thousand expensed in 1998, and $190 thousand of expense and lost income
in 1999.
Early indications from the Company's commercial loan department reflect
that the quality of the Company's loan portfolio has had no negative Y2K related
impact. The Company believes that its business risks to Y2K related problems
have been significantly reduced with the successful operation of its systems
during the early part of the year 2000. By the end of the first quarter of 2000,
the Company expects that a sufficient level of business activity with all of its
third party vendors will indicate if any risk remains. Until such time, the
Company will continue to maintain its Y2K Business Resumption Contingency Plan
to manage such risk.
<PAGE>
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 generally 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, such as credit quality and liquidity risks, 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, 1999, an instantaneous 200
basis point increase in market interest rates was estimated to have a negative
impact of 5.19% 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 3.63% on the Company's net interest income. By comparison, at
December 31, 1998 the Company estimated an instantaneous 200 basis point rise in
rates would have a negative impact of 4.46% on net interest income during 1999
while a 200 basis point decline in rates would have a positive impact of 2.55%
on net interest income during 1999. The Company took on slightly more risk to
changing interest rates during 1999 as it continued to grow its municipal and
large certificate of deposit base along with increased borrowings from the
Federal Home Loan Bank. Both funding sources have short-term repricing
characteristics or maturities. Although a considerable amount of the funding was
utilized in the making of variable rate commercial loans, the Company also
increased other loan and investment assets with three to five year repricing
characteristics or maturities. The Company believes that the increase in yield
for the extended maturities warrants the small increase in its overall interest
rate risk. 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.
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayments at December 31, 1999
Average
There- Interest Fair
2000 2001 2002 2003 2004 after Total Rate Value
---- ---- ---- ---- ---- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets
Loans $ 86,379 $45,730 $24,371 $26,003 $21,919 $ 81,035 $285,437 8.49% $280,342
Investments 43,818 32,466 28,833 28,492 14,220 50,029 197,858 5.99% 194,382
-------- ------- ------- ------- ------- -------- -------- ----- --------
Total rate sensitive assets $130,197 $78,196 $53,204 $54,495 $36,139 $131,064 $483,295 $474,724
======== ======= ======= ======= ======= ======== ======== ========
Rate Sensitive Liabilities
Savings, Money Market, and
NOW Accounts $ 44,963 $ -- $ -- $ -- $ -- $165,771 $210,734 2.69% $210,734
Time Deposits 139,293 16,291 5,764 3,234 2,605 591 167,778 5.07% 167,634
Short-Term Borrowings 31,225 -- -- -- -- -- 31,225 5.33% 31,225
-------- ------- -------- ------ ------ -------- -------- ----- --------
Total Rate Sensitive
Liabilities $215,481 $16,291 $ 5,764 $3,234 $2,605 $166,362 $409,737 $409,593
======== ======= ======== ====== ====== ======== ======== ========
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and prepayment of principal. The prepayment
experience reflected herein is based on the Company's historical experience. The
actual maturities and run-off of loans could vary substantially if future
prepayments differ from the Company's historical experience. For liabilities,
regular savings and NOW accounts of individuals, partnerships, and corporations
(IPC) are considered to be 90% core (maturing in over five years), with 10%
assumed to mature in one year. IPC money market savings are considered to be 75%
core. Savings and NOW accounts of municipalities are considered 75% core
(maturing in over five years), with 25% assumed to mature in one year. Money
market savings accounts of public entities are considered to be 50% core.
<PAGE>
Item 8 -- Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF CONDITION (Dollars In Thousands)
ASSETS Dec. 31, 1999 Dec. 31, 1998
- ------ ------------- -------------
Cash and due from banks $ 20,231 $ 23,431
Federal funds sold -- 10,700
Total Cash and Cash Equivalents 20,231 34,131
Held-to-maturity investment securities 12,449 13,436
Available-for-sale investment securities 181,933 158,801
Total Investment Securities 194,382 172,237
(fair value - $194,382 for 1999 and
$172,288 for 1998)
Total Loans 286,497 255,508
Less: Unearned income 1,060 2,212
Less: Allowance for possible loan losses 3,412 3,001
Net Loans 282,025 250,295
Bank premises, furniture and equipment 8,888 8,289
Accrued interest receivable 3,402 2,884
Other assets 10,269 3,869
Total Assets $ 519,197 $ 471,705
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits $ 56,562 $ 60,534
Interest-bearing deposits 378,512 353,060
Total Deposits 435,074 413,594
Short-term borrowings 31,225 752
Other liabilities 3,653 6,191
Total Liabilities 469,952 420,537
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, 3,641,035
and 3,641,178 shares issued, and 3,526,011
and 3,594,954 shares outstanding for 1999
and 1998, respectively 3,641 3,641
Surplus 3,641 3,641
Undivided profits 46,768 43,864
Accumulated other comprehensive (loss) income (2,086) 1,088
Treasury stock, at cost; 115,024 shares
and 46,224 shares, respectively (2,719) (1,066)
Total Shareholders' Equity 49,245 51,168
Total Liabilities and Shareholders' Equity $ 519,197 $ 471,705
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Dollars In Thousands, except per share data)
<TABLE>
<CAPTION>
INTEREST INCOME Years ended Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
----------- ------------- ------------- -------------
<S> <C> <C> <C>
Interest and fees on loans $22,923 $21,964 $21,729
Interest on investment securities:
U.S. Government and Agency obligations 7,542 6,370 6,888
Obligations of state and political
subdivisions 2,636 2,550 2,250
Other 974 577 430
Interest on federal funds sold 433 752 494
Total Interest Income 34,508 32,213 31,791
INTEREST EXPENSE
Interest on deposits 13,621 13,300 12,904
Interest on short-term borrowings 599 98 80
Total Interest Expense 14,220 13,398 12,984
Net Interest Income 20,288 18,815 18,807
Provision for possible loan losses 975 770 625
Net Interest Income After
Provision For Loan Losses 19,313 18,045 18,182
OTHER INCOME
Trust department services 1,134 789 775
Service charges on deposit accounts 1,939 1,706 1,550
Data processing services 268 257 244
Investment securities gains 136 26 115
Other operating income 1,081 1,211 1,182
Total Other Income 4,558 3,989 3,866
Total Operating Income 23,871 22,034 22,048
OTHER EXPENSES
Salaries, wages and employee benefits 9,112 8,712 8,206
Building occupancy and equipment 2,587 2,607 2,412
Supplies, advertising and communication
expense 1,623 1,424 1,367
Merger related expense -- 1,701 --
Other operating expense 3,303 3,053 2,710
Total Other Expenses 16,625 17,497 14,695
Income Before Income Taxes 7,246 4,537 7,353
Provision for income taxes 1,844 1,104 2,220
Net Income $ 5,402 $ 3,433 $ 5,133
Net Income Per Common
Share - Basic and Diluted $ 1.51 $ 0.95 $ 1.40
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME: (Dollars In Thousands)
<TABLE>
<CAPTION>
Years ended Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- ------------
<S> <C> <C> <C>
Net Income $ 5,402 $3,433 $5,133
Other comprehensive (loss) income net
of taxes: Unrealized net (losses)
gains on securities:
Unrealized holding (losses) gains
arising during period (5,155) 839 625
Less: Reclassification adjustment
for gains included in net income (136) (26) (115)
(5,291) 813 510
Income tax benefit (provision) 2,117 (332) (190)
Other comprehensive (loss) income,
net of tax (3,174) 481 320
Comprehensive Income $ 2,228 $3,914 $5,453
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY:
(Dollars In Thousands)
<TABLE>
<CAPTION>
Accumulative
Issued Other
Common Issued Undivided Comprehensive Treasury
Shares Stock Surplus Profits Income Stock Total
------ ----- ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,725,532 $ 3,726 $ 3,726 $ 42,438 $ 287 -- $50,177
Net income for the year 5,133 5,133
Change in unrealized net gain on
investment securities
320 320
Treasury stock purchased
$(1,119) (1,119)
Treasury stock sold 9 53 62
Cash dividends, $.88 per share (3,199) (3,199)
Purchase and retirement of common shares (80,030) (80) (80) (1,464) (1,624)
Balance at December 31,1997 3,645,502 3,646 3,646 42,917 607 (1,066) 49,750
Net income for the year 3,433 3,433
Change in unrealized net gain on
investment securities 481 481
Cash dividends, $.67 per share (2,410) (2,410)
Purchase and retirement of common shares (4,324) (5) (5) (76) (86)
Balance at December 31,1998 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 loss 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
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS:
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Dollars In Thousands)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
Years ended: Dec. 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 5,402 $ 3,433 $ 5,133
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 975 770 625
Provision for depreciation 1,108 1,376 1,059
Benefit for deferred income taxes (340) (628) (8)
Amortization of investment security premiums, net 929 520 316
Realized investment security gains (136) (26) (115)
Loss on disposal of bank equipment -- -- 10
Change in other assets and liabilities 593 1,501 (463)
Net Cash Provided by Operating Activities 8,531 6,946 6,557
INVESTING ACTIVITIES
Proceeds from maturities of investment securities,
available-for-sale 44,572 48,943 21,797
Proceeds from maturities of investment securities,
held-to-maturity 1,751 6,674 11,693
Proceeds from sales of investment securities 12,793 5,374 15,794
Purchase of investment securities, available-for-sale (84,451) (68,055) (50,701)
Purchase of investment securities, held-to-maturity (2,894) (2,047) (5,020)
Purchase of life insurance and increase in
surrender value of life insurance (7,580) -- --
Net increase in loans (32,705) (14,120) (8,118)
Purchases of premises and equipment (1,707) (710) (1,827)
Proceeds from disposition of bank equipment -- -- 51
Net Cash Used by Investing Activities (70,221) (23,941) (16,331)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCING ACTIVITIES
Years ended: Dec. 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net increase in demand deposits, NOW accounts
and savings accounts 3,365 20,169 472
Net increase in time deposits 18,115 15,498 4,866
Net increase (decrease) in short-term borrowings 30,473 (3,256) 3,169
Treasury stock purchased (1,653) -- (1,119)
Treasury stock sold -- -- 62
Retirement of common shares -- (86) (1,624)
Cash dividends (2,510) (2,188) (3,219)
Net Cash Provided by Financing Activities 47,790 30,137 2,607
(Decrease) Increase in Cash and Cash Equivalents (13,900) 13,142 (7,167)
Cash and cash equivalents at beginning of year 34,131 20,989 28,156
Cash and Cash Equivalents at End of Year 20,231 34,131 20,989
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and short-term borrowings 13,855 13,435 12,874
Income taxes 2,322 1,663 2,264
Non-cash investing activity:
Decrease (increase) in net unrealized gain/losses
on available-for-sale securities 5,291 (813) (510)
Transfer to other real estate owned -- 70 275
Non-cash financing activities:
Dividend declared and unpaid 617 629 407
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL 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 eighteen branches in Broome, Cortland,
Madison, Oneida, and Onondaga counties in New York State. 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 subsidiary after elimination of
intercompany accounts and transactions.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
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.
Business Combination: In November 1998, Cortland First Financial Corporation
(Cortland) completed a merger with Oneida Valley Bancshares, Inc. (Oneida) and
commenced operations under the name Alliance Financial Corporation (the
Company). Pursuant to the terms of the merger, each share of Cortland stock was
exchanged for one share of the Company's stock and each share of Oneida stock
was exchanged for 1.8 shares of the Company's stock. The merger constituted a
tax-free reorganization and has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, the consolidated
financial statements for the periods presented have been restated to include the
combined results of operations, financial position and cash flows of Cortland
and Oneida. There were no transactions between Cortland and Oneida prior to the
merger. Certain reclassifications were made to Cortland's and Oneida's prior
year financial statements to conform to the Company's presentation.
In conjunction with the merger, the Company recorded a 1998 charge to
operating expenses of $1,701 ($1,022 after taxes, or $0.28 per common share) for
direct merger and restructuring costs relating to the merger.
Restructuring costs primarily relate to the consolidation of administration
and operational functions.
Reclassification: Certain amounts from 1998 and 1997 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
which the Company has the positive intent and ability to hold to maturity, and
are reported at cost, adjusted for amortization of premiums and accretion of
discounts. Investment securities not classified as held-to-maturity are
classified as available-for-sale and are reported at fair value, with net
unrealized holding gains and losses reflected as a separate component of
stockholders' 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.
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. 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 Credit Losses: The adequacy for the allowance for possible loan
losses is periodically evaluated by the Company in order to maintain the
allowance at a level that is sufficient to absorb probable credit losses.
Management's evaluation of the adequacy of the allowance is based on a review of
the Company's historical loss experience, known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the ability of the
borrower to repay interest and/or principal, the estimated value of collateral,
and an analysis of the levels and trends of delinquencies, charge-offs, and the
risk ratings of the various loan categories. Such factors as the level and trend
of interest rates and the condition of the national and local economies are also
considered.
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 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.
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 and there is no amortization of deferred
fees.
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; 3,576,728, 3,596,548 and 3,660,914 for 1999, 1998 and 1997, respectively.
Diluted earnings per share gives 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 dilutive effect of the
assumed exercise of stock options, were 3,577,109 and 3,596,548 for the years
1999 and 1998, respectively. There were no stock options outstanding during the
year 1997. For the years ending December 31, 1999 and 1998, both basic and
diluted earnings per share were $1.51 and $0.95, respectively. Options to
purchase 100,000 shares of common stock at $29.125 per share were outstanding
during the years 1999 and 1998, but were not included in the computation of
diluted earnings per share because the options exercise price was greater than
the average market price of the common shares. These options expire on November
25, 2008.
<PAGE>
INVESTMENT SECURITIES (Dollars In Thousands)
The amortized cost and approximate fair value of investment securities at
December 31 are as follows:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Held-to-Maturity - 1999
Obligations of states and
political subdivisions $ 12,449 $ -- $ -- $ 12,449
Total $ 12,449 $ -- $ -- $ 12,449
Available-for-Sale - 1999
U.S. Treasury and other U.S.
government agencies $ 61,871 $ 54 $ 700 $ 61,225
Obligations of states and
political subdivisions 37,516 214 534 37,196
Mortgage-backed securities 68,227 51 2,100 66,178
Other securities 15,075 -- 461 14,614
Total $182,689 $ 319 $3,795 $179,213
Stock Investments
Federal Home Loan Bank 1,664 -- -- 1,664
Federal Reserve Bank and others 1,056 -- -- 1,056
Total stock investments 2,720 -- -- 2,720
Total available-for-sale $185,409 $ 319 $3,795 $181,933
Net unrealized loss on
available-for-sale (3,476)
Grand total carrying value $194,382
Held-to-Maturity - 1998
U.S. Treasury and other U.S.
government agencies $ 500 $ 1 $ -- $ 501
Obligations of states and
political subdivisions 12,936 50 -- 12,986
Total $13,436 $ 51 $ -- $ 13,487
Available-for-Sale - 1998
U.S. Treasury and other U.S.
government agencies $49,461 $ 471 $ 62 $ 49,870
Obligations of states and
political subdivisions 39,168 1,157 10 40,315
Mortgage-backed securities 56,169 364 131 56,402
Other securities 10,199 79 53 10,225
Total $154,997 $2,071 $ 256 $156,812
Stock Investments
Federal Home Loan Bank 1,600 -- -- 1,600
Federal Reserve Bank and others 389 -- -- 389
Total stock investment 1,989 -- -- 1,989
Total available-for-sale $156,986 $2,071 $ 256 $158,801
Net unrealized gain on
available-for-sale 1,815
Grand total carrying value $172,237
</TABLE>
<PAGE>
The carrying value and estimated market value of debt securities at December 31,
1999 by contractual maturity, are shown below. The maturities of mortgage-backed
securities are based on the 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.
<TABLE>
<CAPTION>
(Dollars In Thousands) Held-to-Maturity Available-for-Sale
---------------- ------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $ 8,233 $ 8,233 $ 24,852 $ 24,788
Due after one year through five years 2,564 2,564 111,505 109,746
Due after five years through ten years 1,652 1,652 38,636 37,284
Due after ten years -- -- 7,696 7,395
Total Debt Securities $12,449 $12,449 $182,689 $179,213
</TABLE>
At December 31, 1999 and 1998, investment securities with a carrying value of
$152,986 and $100,398, respectively, were pledged as collateral for certain
deposits and other purposes as required or permitted by law.
LOANS (Dollars In Thousands)
Major classifications of loans at December 31 are as follows:
1999 1998
---- ----
Commercial and agricultural $105,169 $ 80,121
Real estate loans 114,450 113,570
Consumer loans 66,878 61,817
Total 286,497 255,508
-------- --------
Less: Unearned income 1,060 2,212
Less: Allowance for possible loan losses 3,412 3,001
-------- --------
Net loans $282,025 $250,295
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 was $16,612, $15,133 and $7,637 at December 31, 1999,
1998, and 1997, respectively.
ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars In Thousands)
Changes in the allowance for possible loan losses for the years ended December
31, are summarized as follows:
1999 1998 1997
---- ---- ----
Balance at January 1 $3,001 $2,957 $3,025
Provision for possible loan losses 975 770 625
Recoveries credited 184 214 114
Subtotal 4,160 3,941 3,764
Less: Loans charged-off 748 940 807
Balance at December 31 $3,412 $3,001 $2,957
The average recorded investment in impaired loans was zero for the year
ended December 31, 1999 and approximated $200 for the year ended December 31,
1998. None of these loans had a specific valuation allowance recorded. The
Company recognized no interest income on impaired loans during 1999 and 1998.
The amount of nonaccrual loans for the years ended December 31, 1999 and 1998
were $682 and $552 respectively, and the income not recognized from these loans
was immaterial for the years ended December 31, 1999, 1998, and 1997.
<PAGE>
RELATED PARTY TRANSACTIONS (Dollars In Thousands)
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 1999. 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 the
normal risk of collectibility or present other unfavorable features. Loan
transactions with related parties are summarized as follows:
1999 1998
---- ----
Balance at beginning of year $ 5,703 $ 3,403
New loans and advances 3,445 4,152
Loan payments (1,273) (1,852)
------- -------
Balance at end of year $ 7,875 $ 5,703
BANK PREMISES, FURNITURE AND EQUIPMENT (Dollars In Thousands) Bank premises,
furniture and equipment at December 31, consist of the following:
1999 1998
---- ----
Land $ 913 $ 913
Bank premises 8,644 8,470
Furniture and equipment 10,415 9,033
Subtotal 19,972 18,416
Less: Accumulated depreciation 11,084 10,127
------- -------
Balance at end of year $ 8,888 $ 8,289
DEPOSITS (Dollars In Thousands)
The carrying amounts of deposits consisted of the following at December 31:
1999 1998
---- ----
Non-interest-bearing checking $ 56,562 $ 60,534
Interest-bearing checking 64,442 68,081
Savings accounts 78,066 78,692
Money market accounts 68,226 56,624
Time deposits 167,778 149,663
-------- --------
Total deposits $435,074 $413,594
The following table indicates the maturities of the Company's time deposits at
December 31:
1999 1998
---- ----
Due in one year $139,293 $115,337
Due in two years 16,291 20,271
Due in three years 5,764 6,074
Due in four years 3,234 7,378
Due in five years or more 3,196 603
-------- --------
Total deposits $167,778 $149,663
Total time deposits in excess of $100 as of December 31, 1999 and 1998 were
$72,457 and $57,922, respectively.
<PAGE>
BORROWINGS (Dollars In Thousands)
The following is a summary of borrowings at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
Original Original
Amount Rate Term Amount Rate Term
<S> <C> <C> <C> <C> <C> <C>
Short-term borrowings:
Treasury Tax and Loan $ -- 0.00% $752 4.40% Demand
Securities sold under
repurchase agreements 7,225 5.57% Demand -- 0.00%
Federal Home Loan
Bank term advances: -- 0.00%
Borrowing incurred 11/04/99 2,000 5.64% 90 days
Borrowing incurred 11/30/99 3,000 5.85% 90 days
Borrowing incurred 12/29/99 5,000 5.95% 60 days
Borrowing incurred 12/29/99 5,000 6.04% 90 days
Federal Home Loan
Bank overnight advances 9,000 4.10% Demand -- 0.00%
------- ----- ---- -----
Balance at end of year $31,225 $752
</TABLE>
Information related to short-term borrowings at December 31 is as follows:
1999 1998
---- ----
Maximum outstanding at any month end $31,225 $1,712
Average amount outstanding during the year $10,210 $1,748
Average interest rate during the year 5.87% 5.60%
Average amounts outstanding and average interest rates are computed using
monthly averages.
At December 31, 1999 and 1998, the Company had available a line of credit with
the Federal Home Loan Bank of New York (FHLB) of $49,273 and $43,100,
respectively, of which $9,000 and $0 was outstanding as of December 31, 1999 and
1998, 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 $113,930 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, 1999, the Company's total borrowings
potential with the FHLB was $82,858.
At December 31, 1999 and 1998, the Company also had available $15,000 and
$2,500, respectively, lines of credit with other financial institutions which
were unused.
<PAGE>
INCOME TAXES (Dollars In Thousands)
The provision for income taxes for the years ended December 31 is summarized as
follows:
1999 1998 1997
---- ---- ----
Current tax expense $ 2,184 $ 1,732 $ 2,228
Deferred tax benefit (340) (628)
(8)
Total provision for income taxes $ 1,844 $ 1,104 $ 2,220
The provision for income taxes includes the following:
1999 1998 1997
---- ---- ----
Federal income tax $ 1,628 $ 780 $ 1,693
New York State franchise tax 216 324 527
Total $ 1,844 $ 1,104 $ 2,220
The components of deferred income taxes, included in other assets, at December
31 are as follows:
1999 1998
---- ----
Assets:
Allowance for possible loan losses $1,002 $ 755
Postretirement benefits 941 822
Deferred compensation 753 583
Merger costs 274 261
Other 48 8
Total Assets $3,018 $2,429
Liabilities:
Investment securities $1,391 $ 727
Accretion 44 40
Prepaid pension 183 197
Depreciation 174 113
Other 43 19
Total Liabilities $1,835 $1,096
Net deferred tax asset $1,183 $1,333
A reconciliation between the statutory federal income tax rate and the effective
income tax rate for 1999, 1998, and 1997 is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State franchise tax, net of
federal tax benefit 1.5% 4.7% 4.8%
Tax exempt income (10.3%) (16.4%) (8.7%)
Other, net 0.3% 2.0% 0.1%
Total 25.5% 24.3% 30.2%
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (Dollars In Thousands)
As of the close of business April 16, 1999, the Company merged its two
subsidiary banks, First National Bank of Cortland (Cortland) and Oneida Valley
National Bank (Oneida), taking the new name Alliance Bank, N.A. During the
remainder of the year, the Company evaluated its various retirement and employee
benefit plans, approving changes that would provide a uniform plan of benefits
for all employees. Effective June 30, 1999, the Company terminated the former
Oneida Valley National Bank noncontributory defined benefit pension plan which
had covered substantially all of its employees. As of the termination date, plan
participants accrued no additional benefits. The Company expects to complete the
process of distributing the benefit obligation along with a percentage of the
excess assets to the plan participants before June 30, 2000.
During the fourth quarter of 1999, the Company amended and merged the
postretirement medical and life insurance benefit plans that were available to
the employees of Cortland and Oneida, to present a uniform plan of benefits for
all employees. Benefits are available to full-time employees who have worked 15
years and attained age 55. Retirees and certain active employees with more than
20 years of service to the Company will continue to receive benefits under the
former plans.
<PAGE>
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,
1999 and 1998:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $5,252 $4,090 $3,049 $1,768
Service cost 148 228 75 70
Interest cost 308 319 193 122
Amendments, curtailments, special termination 303 -- -- 274
Actuarial (gain)/loss (277) 865 (118) 867
Benefits paid (279) (250) (138) (52)
Benefit obligation at end of year $5,455 $5,252 $3,061 $3,049
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $6,190 $6,167 $ 0 $ 0
Actual return on plan assets 1,187 273 -- --
Benefits paid (279) (250) -- --
Fair value of plan assets at end of year $7,098 $6,190 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Components of prepaid/accrued benefit cost:
Funded status $1,643 $ 938 $(3,061) $(3,049)
Unrecognized transition obligation (216) (260) -- --
Unrecognized prior service cost (11) (62) (96) (68)
Unrecognized actuarial net (gain)/loss (958) (7) 791 903
Prepaid/(accrued) benefit cost $ 458 $ 609 $(2,366) $(2,214)
</TABLE>
Plan assets at December 31, 1999 are invested in short-term money market
accounts.
Significant assumptions used in determining the benefit obligation as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average discount rate 6.07% 6.75% 7.50% 6.50%
Expected long-term rate of return on plan assets 4.00% 8.50% -- --
Rate of increase in future compensation levels -- 4.00% -- --
</TABLE>
For measurement purposes, with respect to the postretirement benefit plans, a
7.0 percent annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2000. The rate was assumed to decrease gradually
to 4.5 percent by the year 2005 and remain at that level thereafter.
<PAGE>
The composition of the net periodic pension cost for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 148 $ 228 $ 288 $ 75 $ 70 $ 55
Interest cost 308 319 325 193 122 119
Amortization of transition obligation (44) (74) -- -- -- --
Amortization of unrecognized prior
service cost (8) (8) (8) 22 (10 (14)
Expected return on plan assets (513) (511) (478) -- -- --
Special termination benefits/
curtailment 260 -- -- -- 274 --
Net periodic cost (benefit) $ 151 $ (46) $ 53 $290 $ 456 $ 160
</TABLE>
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 25 (20)
Effect on postretirement
plan obligations 262 (218)
The Company offers a defined contribution 401(k) plan covering substantially all
of its employees. Contributions to the 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 year. Company
contributions to the plan were $440, $425, and $440 in 1999, 1998, and 1997,
respectively.
DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS (Dollars In Thousands)
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, 1999 and 1998, other liabilities
included approximately $980 and $789, respectively, relating to deferred
compensation. Deferred compensation expense for the years ended December 31,
1999, 1998, and 1997 approximated $191, $157, and $139, respectively.
The Company has supplemental executive retirement plans for certain
employees. The Company has segregated assets of $875 and $826 at December 31,
1999 and 1998, respectively, to fund the estimated benefit obligation. These
assets are included in other assets. At December 31, 1999 and 1998, other
liabilities included approximately $904 and $811 accrued under these plans.
Compensation expense includes approximately $65, $87, and $99 relating to these
plans at December 31, 1999, 1998, and 1997, respectively.
<PAGE>
STOCK OPTION PLAN (Options are stated in whole numbers)
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. All options have a 10-year term and vest and become exercisable
ratably over a 3-year period. At December 31, 1999, there were 290,000 shares
available for grant.
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:
1999 1998
---- ----
Net Income (In Thousands):
As reported $5,402 $3,433
Pro forma $5,226 $3,415
Earnings per share (basic and diluted):
As reported $1.51 $0.95
Pro forma $1.46 $0.95
The per share weighted average fair value of stock options granted during 1999
and 1998 was $6.15 and $6.66, respectively. Fair values were arrived at using
the Black-Scholes option pricing model with the following assumptions:
1999 1998
---- ----
Risk-free interest rate 5.32% 4.63%
Expected dividend yield 2.00% 2.00%
Volatility 28.50% 22.50%
Expected life (years) 5 5
Activity in the plan for 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Range of Option Shares Exercise Price of
Outstanding Price Per Share Exercisable Shares Outstanding
<S> <C> <C> <C> <C>
1998
Beginning balance 0 0 0 0
Granted 100,000 $29.125 0 $29.125
Exercised 0 0 0 0
Forfeited 0 0 0 0
Ending balance 100,000 $29.125 0 $29.125
1999
Granted 10,000 $21.75 33,334 $28.45
Exercised 0 0 0 0
Forfeited 0 0 0 0
Ending balance 110,000 $21.75- 33,334 $28.45
$29.125
</TABLE>
As of December 31, 1999, 33,334 of the 100,000 options issued in 1998 were
exercisable at an exercise price of $29.125. The options have a remaining life
of 8.90 years. As of December 31, 1999, none of the 10,000 options issued in
1999 were exercisable. These options have a remaining life of 9.25 years.
<PAGE>
COMMITMENTS AND CONTINGENT LIABILITIES (Dollars In Thousands)
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:
Contract Amount
1999 1998
---- ----
Commitments to extend credit $38,351 $38,201
Standby letters of credit $ 1,443 $ 1,505
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 payment 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, 1999,
aggregate future minimum lease payments under noncancelable operating leases
with initial or remaining terms equal to or exceeding one year consist of the
following: 2000 - $222; 2001 - $201; 2002 - $185; 2003 - $179; 2004 - $128; and
$1,144 thereafter. Total rental expense amounted to $147 in 1999; $146 in 1998;
and $146 in 1997.
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, 1999 was $600.
<PAGE>
DIVIDENDS
The primary source of cash to pay dividends to the Company's shareholders is
through dividends from its banking subsidiary. Banking regulations limit the
amount of dividends that a bank may pay to its parent company. At December 31,
1999, approximately $2,900 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, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard 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:
<TABLE>
<CAPTION>
(Dollars In Thousands)
Dec. 31, 1999 Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1998
Carrying Amount Fair Value Carrying Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 20,231 $ 20,231 $ 34,131 $ 34,131
Investment securities 194,382 194,382 172,237 172,288
Net loans 282,025 280,342 250,295 257,188
Total Financial Assets $496,638 $494,955 $456,663 $463,607
Financial Liabilities:
Deposits $435,074 $434,929 $413,594 $414,392
Short-term borrowings 31,225 31,225 752 752
Total Financial Liabilities $466,299 $466,154 $414,346 $415,144
</TABLE>
The fair value of commitments to extend credit and standby letters of credit is
not significant.
<PAGE>
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
statement 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 non-interest-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.
Short-term borrowings: The carrying amounts of short-term borrowings approximate
their fair value.
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 I Capital (as defined
in the regulations) to risk-weighted assets (as defined) and of Tier I Capital
(as defined) to average assets (as defined). Management believes, as of December
31, 1999, that the Company and its subsidiary bank meet all capital adequacy
requirements to which they are subject.
As of July 26, 1999, 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 I risk-based,
and Tier I leverage ratios as set forth in the tables below. There are no
conditions or events since that notification that management believes have
changed the bank's category.
<PAGE>
The Company's actual capital amounts and ratios are presented in the following
table (Dollars In Thousands).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(>or=) (>or=)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk-Weighted Assets) $54,743 17.22% $25,435 8.00% $31,794 10.00%
Tier I Capital (to Risk-Weighted Assets) 51,331 16.14% 12,718 4.00% 19,077 6.00%
Tier I Capital (to Average Assets) 51,331 10.02% 20,488 4.00% 25,610 5.00%
As of December 31, 1998
Total Capital (to Risk-Weighted Assets) $53,081 20.14% $21,083 8.00% $26,354 10.00%
Tier I Capital (to Risk-Weighted Assets) 50,080 19.00% 10,542 4.00% 15,813 6.00%
Tier I Capital (to Average Assets) 50,080 10.81% 18,528 4.00% 23,160 5.00%
</TABLE>
<PAGE>
PARENT COMPANY FINANCIAL INFORMATION (Dollars In Thousands)
Condensed financial statement information of Alliance Financial Corporation is
as follows:
BALANCE SHEETS Dec. 31, 1999 Dec. 31, 1998
------------- -------------
Assets:
Investment in subsidiary bank $ 47,225 $ 47,382
Cash 2,369 4,633
Investment securities 268 28
Total Assets $ 49,862 $ 52,043
Liabilities:
Accounts payable -- 246
Dividends payable 617 629
Total Liabilities 617 875
Shareholders' Equity:
Common stock 3,641 3,641
Surplus 3,641 3,641
Undivided profits 46,768 43,864
Accumulated other comprehensive income (2,086) 1,088
Treasury stock (2,719) (1,066)
Total Shareholders' Equity $ 49,245 $ 51,168
Total Liabilities and Shareholders' Equity $ 49,862 $ 52,043
<TABLE>
<CAPTION>
Statements of Income
Years Ended Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
----------- ------------- ------------- -------------
<S> <C> <C> <C>
Dividend income from subsidiary bank $ 2,500 $ 3,781 $ 6,000
Investment income 7 2 2
Operating expenses (122) (1,036) (58)
2,385 2,747 5,944
Equity (deficit) in undistributed income
of subsidiary 3,017 686 (811)
Net Income $ 5,402 $ 3,433 $ 5,133
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years Ended Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
----------- ------------- ------------- -------------
Operating Activities
<S> <C> <C> <C>
Net Income $ 5,402 $ 3,433 $ 5,133
Adjustments to reconcile net income to
net cash provided by operating activities:
(Equity) deficit in undistributed net
income of subsidiary (3,017) (686) 811
Decrease (increase) in other assets -- 431 (25)
(Decrease) increase in other liabilities (246) 246 20
Net Cash Provided by Operating Activities 2,139 3,424 5,939
Investing Activities
Dividends received -- 3,435 --
Purchase of investment securities,
available for sale (240) -- --
Net Cash (Used In) Provided by
Investing Activities (240) 3,435 --
Financing Activities
Purchase and retirement of common shares -- (86) (1,624)
Treasury stock purchased (1,653) -- (1,119)
Cash dividends paid (2,510) (2,188) (3,219)
Treasury stock sold -- -- 62
Net Cash used by Financing Activities (4,163) (2,274) (5,900)
(Decrease) Increase in Cash and
Cash Equivalents (2,264) 4,585 39
Cash and Cash Equivalents at
Beginning of Year 4,633 48 9
Cash and Cash Equivalents at
End of Year $ 2,369 $ 4,633 $ 48
Supplemental Disclosures of
Cash Flow Information:
Non-cash investing activities:
Other comprehensive loss (income)
net of tax 3,174 (481) (320)
Non-cash financing activities:
Dividend declared and unpaid $ 617 $ 629 $ 407
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Alliance Financial Corporation
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Alliance Financial Corporation at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Syracuse, New York
January 14, 2000
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.
David R. Alvord John C. Mott David P. Kershaw
President & Co-Chief Executive Officer Treasurer &
Co-Chief Executive Officer Chief Financial Officer
<PAGE>
Item 9 -- Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure None.
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 section entitled "Information Concerning Nominees for Directors and Other
Directors" 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 sections entitled "Voting Securities and Principal Holders Thereof" and
"Information Concerning Nominees for Directors and Other Directors" 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, 1999 and 1998.
Consolidated Statements of Income For Each of the Three Years in the
Period Ended December 31, 1999.
Consolidated Statements of Shareholders' Equity For Each of the Three
Years in the Period Ended December 31, 1999.
Consolidated Statements of Cash Flows For Each of the Three Years in
the Period Ended December 31, 1999.
Notes to Consolidated Financial Statements. Independent Accountants'
Report.
(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 attached 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.
<PAGE>
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)
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)
21 List of the Company's Subsidiaries(5)
23 Consent of PricewaterhouseCoopers LLP(5)
27 Financial Data Schedule(5)
(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 14, 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) Filed herewith.
Item 14 (b) -- Reports on Form 8-K
None
Item 14 (c)
See Item 14 (a) (3) above.
Item 14 (d)
See Item 14 (a) (2) above.
<PAGE>
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 21, 2000 By /s/ David R. Alvord
------------------------------ --------------------------------------
David R. Alvord, President & Co-CEO
Date March 21, 2000 By /s/ David P. Kershaw
------------------------------ --------------------------------------
David P. Kershaw, Treasurer & CFO
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/ David R. Alvord Date March 21, 2000
- ---------------------------------- --------------------------
David R. Alvord, President, Co-CEO, and Director
/s/ Donald S. Ames Date March 21, 2000
- ---------------------------------- --------------------------
Donald S. Ames, Director
/s/ Donald H. Dew Date March 21, 2000
- ---------------------------------- --------------------------
Donald H. Dew, Director
/s/ Peter M. Dunn Date March 21, 2000
- ---------------------------------- --------------------------
Peter M. Dunn, Director
Date
- ---------------------------------- --------------------------
Robert H. Fearon, Jr., Director
/s/ Samuel J. Lanzafame Date March 21, 2000
- ---------------------------------- --------------------------
Samuel J. Lanzafame, Director
Date
- ---------------------------------- --------------------------
Harry D. Newcomb, Director
/s/ John C. Mott Date March 21, 2000
- ---------------------------------- --------------------------
John C. Mott, Co-CEO and Director
Date
- ---------------------------------- --------------------------
Charles E. Shafer, Director
/s/ Charles H. Spaulding Date March 21, 2000
- ---------------------------------- --------------------------
Charles H. Spaulding, Director
/s/ David J. Taylor Date March 21, 2000
- ---------------------------------- --------------------------
David J. Taylor, Director
/s/ Edward W. Thoma Date March 21, 2000
- ---------------------------------- --------------------------
Edward W. Thoma, Director
<PAGE>
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.
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 our report dated January 14, 2000, relating to the consolidated financial
statements of Alliance Financial Corporation, which appears in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Syracuse, New York
March 27, 2000
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