As filed with the Securities and Exchange Commission on August 31, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CORTLAND FIRST FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 6712 16-1276885
--------------- --------------------------- ------------------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
-------------------
65 Main Street
Cortland, New York 13045
(607) 756-2831
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------
David R. Alvord
President and Chief Executive Officer
Cortland First Financial Corporation
65 Main Street
Cortland, New York 13045
(607) 756-2831
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
It is requested that copies of notices and communications be sent to:
George J. Getman, Esq. and Edward J. Moses, Esq.
Bond, Schoeneck & King, LLP Mackenzie Smith Lewis Michell & Hughes LLP
One Lincoln Center 101 South Salina Street
Syracuse, New York 13202-1355 Syracuse, New York 13202
(315) 422-0121 (315) 474-7571
-------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________________.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________________.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ] ______________________.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price per Aggregate Offering Amount of
Registered(1) Registered(2) Unit(2) Price(2) Registration Fee(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $1.00 per share 1,805,754 Shares $24.0625 $43,450,956.00 $12,818.03
===================================================================================================================
</TABLE>
(1) Represents the estimated maximum number of shares of common stock, par
value $1.00 per share, of Cortland First Financial Corporation, expected to
be issued in exchange for up to 902,877 shares of common stock, par value
$2.50 per share, of Oneida Valley Bancshares, Inc., upon consummation of
the merger of Oneida Valley Bancshares, Inc. with and into Cortland First
Financial Corporation, as described in this registration statement.
(2) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rule 457(f)(1) under the
Securities Act of 1933, as amended, based on the average of the bid and
asked price ($48.125) for Oneida Valley Bancshares, Inc. common stock on
August 27, 1998, as adjusted to reflect the maximum Exchange Ratio of 2.00.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
[CORTLAND LETTERHEAD]
_____________________, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Meeting and Proxy
Statement/Prospectus for the Special Meeting of Shareholders of Cortland First
Financial Corporation ("Cortland First") to be held on _______________________,
1998, at 4:00 p.m., Eastern Time, at the office of Cortland First located at 65
Main Street, Cortland, New York.
At the Special Meeting you will be asked to consider and vote on a proposal
to approve an Agreement and Plan of Reorganization, including a related Plan of
Merger, pursuant to which Cortland First will merge with Oneida Valley
Bancshares, Inc. ("Oneida Valley") under the name "Alliance Financial
Corporation." Simultaneously with the merger or as soon as practicable
thereafter, First National Bank of Cortland will merge with Oneida Valley
National Bank, Oneida Valley's sole subsidiary, under the name "Alliance Bank,
N.A."
In addition to the merger, you will be asked to consider and vote upon a
proposal to approve the Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan (the "Incentive Plan"). If approved, the Incentive Plan would
provide Alliance Financial Corporation with the ability to attract and retain
key executives, other employees and directors by offering such persons
equity-based compensation opportunities, and to align the long term interests of
these key personnel with those of Alliance Financial Corporation's shareholders.
Upon consummation of the merger, each share of Cortland First common stock
will automatically be converted into one share of common stock of Alliance
Financial Corporation ("Alliance Common Stock"). Oneida Valley shareholders will
receive between 1.75 and 2.00 shares (determined pursuant to the formula
described in the Proxy Statement/Prospectus) of Alliance Common Stock for each
share of Oneida Valley common stock held, and cash in lieu of any fractional
share. Oneida Valley shareholders generally will not recognize gain or loss for
federal income tax purposes to the extent Alliance Common Stock is received in
the merger in exchange for Oneida Valley common stock, although the receipt of
cash in lieu of fractional shares will be taxable. The Alliance Common Stock is
expected to be traded on the Nasdaq National Market System under the symbol
"____."
Cortland First and Oneida Valley are similar in size, and this strategic
merger-of-equals transaction will result in a regional community bank with
approximately $450 million in total assets, a strong geographic market presence
in central New York State and a wider range of products and services. Management
believes the merger will also present opportunities for savings through
achievement of various economies of scale. YOUR BOARD OF DIRECTORS HAS CAREFULLY
CONSIDERED THE PROPOSED MERGER AND HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF CORTLAND FIRST AND ITS SHAREHOLDERS. ACCORDINGLY, YOUR BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER, AND RECOMMENDS A VOTE
"FOR" APPROVAL OF THE AGREEMENT AND A VOTE "FOR" APPROVAL OF THE INCENTIVE PLAN.
<PAGE>
The enclosed Proxy Statement/Prospectus contains more detailed information
concerning the Board's decision and the proposed merger. We urge you to consider
it carefully. Because of the significance of these matters to our company, it is
very important that your shares be represented at the Special Meeting, whether
or not you plan to attend in person. The affirmative vote of the holders of
two-thirds of all outstanding shares of Cortland First's common stock is
required for approval of the Agreement. As such, a failure to vote for approval
of the Agreement would have the same effect as a vote against the Agreement. In
addition, the affirmative vote of a majority of the shares represented at the
Special Meeting is required for approval of the Incentive Plan.
We urge you to take the time to consider this important matter and vote
now. In order to make sure that your vote is represented, please indicate your
vote on the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the Special Meeting in person, you may revoke your proxy
at the meeting and vote in person.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR the Agreement and approval of the Incentive Plan.
Sincerely,
David R. Alvord
President and Chief Executive Officer
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________________, 1998
Notice is hereby given that a Special Meeting (the "Special Meeting") of
the Shareholders of Cortland First Financial Corporation ("Cortland First") will
be held at the office of Cortland First located at 65 Main Street, Cortland, New
York, on _________________, 1998 at 4:00 p.m. Eastern Time, for the following
purposes:
1. MERGER. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Reorganization among Cortland First, First National Bank
of Cortland, Oneida Valley Bancshares, Inc. ("Oneida Valley"), a bank holding
company organized under the laws of New York, and Oneida Valley National Bank, a
wholly owned subsidiary of Oneida Valley, and a related Plan of Merger between
Oneida Valley National Bank and First National Bank of Cortland (collectively,
the "Agreement"), pursuant to which, among other things, (i) Cortland First will
merge with Oneida Valley under the name "Alliance Financial Corporation;" (ii)
each share of Cortland First's common stock, par value $1.6667 per share,
outstanding at the time of the Merger (other than shares held by dissenting
shareholders and as otherwise provided in the Agreement) will automatically be
converted into one share of Alliance Financial Corporation common stock; and
(iii) each share of Oneida Valley's common stock, par value $2.50 per share,
outstanding at the effective time of the Merger (other than shares held by
dissenting shareholders and as otherwise provided in the Agreement) will be
converted into at least 1.75 but not more than 2.00 shares (determined pursuant
to the formula described in the Proxy Statement/Prospectus) of Alliance
Financial Corporation common stock and cash in lieu of any fractional share;
2. APPROVAL OF INCENTIVE PLAN. To consider and vote upon a proposal to
approve the Alliance Financial Corporation 1998 Long Term Incentive Compensation
Plan (the "Incentive Plan"); and
3. OTHER BUSINESS. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements thereof,
including proposals to adjourn the Special Meeting to permit further
solicitation of proxies by the Board of Directors in the event that there are
not sufficient votes to approve any proposal at the time of the Special Meeting,
provided that no proxies voted against the Merger or the Incentive Plan will be
voted in favor of adjournment to solicit additional proxies in favor of the
Merger or the Incentive Plan, respectively.
Pursuant to Cortland First's Bylaws, the Board of Directors has set
___________, 1998 as the record date for the determination of the holders of
Cortland First's common stock entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof.
The affirmative vote of the holders of at least two-thirds of the
outstanding Cortland First common stock is required for approval of the
Agreement, and the affirmative vote of a majority of the shares represented at
the Special Meeting is required for approval of the Incentive Plan. Your vote is
therefore important regardless of the number of shares you own. Each
shareholder, even though he or she may plan to attend the Special Meeting, is
urged to sign, date and return the enclosed proxy without delay in the enclosed
postage-paid envelope. You may revoke your proxy at any time prior to the
Special Meeting. Any shareholder present at the Special Meeting or at any
adjournments or postponements thereof may revoke his or her proxy and vote
personally on each matter brought before the Special Meeting.
<PAGE>
If you have any questions or require assistance, please call David R.
Alvord at (607) 756-2831.
BY ORDER OF THE BOARD OF DIRECTORS
Donald S. Ames
Corporate Secretary
IMPORTANT
YOUR VOTE IS IMPORTANT. IN ORDER TO ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE AS SOON AS POSSIBLE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED
STATES.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE AGREEMENT AND "FOR" APPROVAL OF THE INCENTIVE PLAN.
<PAGE>
[ONEIDA LETTERHEAD]
_____________________, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Meeting and Proxy
Statement/Prospectus for the Special Meeting of Shareholders of Oneida Valley
Bancshares, Inc. ("Oneida Valley") to be held on _______________________, 1998,
at 4:00 p.m., Eastern Time, at the office of Oneida Valley located at 160 Main
Street, Oneida, New York.
At the Special Meeting you will be asked to consider and vote on a proposal
to approve an Agreement and Plan of Reorganization, including a related Plan of
Merger, pursuant to which Oneida Valley will merge with Cortland First Financial
Corporation ("Cortland First") under the name "Alliance Financial Corporation."
Simultaneously with the merger or as soon as practicable thereafter, Oneida
Valley National Bank will merge with First National Bank of Cortland, Cortland
First's sole subsidiary, under the name "Alliance Bank, N.A."
In addition to the merger, you will be asked to consider and vote upon a
proposal to approve the Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan (the "Incentive Plan"). If approved, the Incentive Plan would
provide Alliance Financial Corporation with the ability to attract and retain
key executives, other employees and directors by offering such persons
equity-based compensation opportunities, and to align the long term interests of
these key personnel with those of Alliance Financial Corporation's shareholders.
Upon consummation of the merger, Oneida Valley shareholders will receive
between 1.75 and 2.00 shares (determined pursuant to the formula described in
the Proxy Statement/Prospectus) of common stock of Alliance Financial
Corporation ("Alliance Common Stock") for each share of Oneida Valley common
stock held, and cash in lieu of any fractional share. Oneida Valley shareholders
generally will not recognize gain or loss for federal income tax purposes to the
extent Alliance Common Stock is received in the merger in exchange for Oneida
Valley common stock, although the receipt of cash in lieu of fractional shares
will be taxable. Each share of Cortland First common stock will automatically be
converted into one share of Alliance Common Stock. The Alliance Common Stock is
expected to be traded on the Nasdaq National Market System under the symbol
"____."
Oneida Valley and Cortland First are similar in size, and this strategic
merger-of-equals transaction will result in a regional community bank with
approximately $450 million in total assets, a strong geographic market presence
in central New York State and a wider range of products and services. Management
believes the merger will also present opportunities for savings through
achievement of various economies of scale. YOUR BOARD OF DIRECTORS HAS CAREFULLY
CONSIDERED THE PROPOSED MERGER AND HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF ONEIDA VALLEY AND ITS SHAREHOLDERS. ACCORDINGLY, YOUR BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER, AND RECOMMENDS A VOTE
"FOR" APPROVAL OF THE AGREEMENT AND A VOTE "FOR" APPROVAL OF THE INCENTIVE PLAN.
<PAGE>
The enclosed Proxy Statement/Prospectus contains more detailed information
concerning the Board's decision and the proposed merger. We urge you to consider
it carefully. Because of the significance of these matters to our company, it is
very important that your shares be represented at the Special Meeting, whether
or not you plan to attend in person. The affirmative vote of the holders of
two-thirds of all outstanding shares of Oneida Valley's common stock is required
for approval of the Agreement. As such, a failure to vote for approval of the
Agreement would have the same effect as a vote against the Agreement. In
addition, the affirmative vote of a majority of the shares represented at the
Special Meeting is required for approval of the Incentive Plan.
We urge you to take the time to consider this important matter and vote
now. In order to make sure that your vote is represented, please indicate your
vote on the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the Special Meeting in person, you may revoke your proxy
at the meeting and vote in person.
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR the Agreement and approval of the Incentive Plan.
Sincerely,
John C. Mott Robert H. Fearon, Jr.
President Chairman of the Board
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________________, 1998
Notice is hereby given that a Special Meeting (the "Special Meeting") of
the Shareholders of Oneida Valley Bancshares, Inc. ("Oneida Valley") will be
held at the office of Oneida Valley located at 160 Main Street, Oneida, New
York, on _________________, 1998 at 4:00 p.m. Eastern Time, for the following
purposes:
1. MERGER. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Reorganization among Oneida Valley, Oneida Valley National
Bank, Cortland First Financial Corporation ("Cortland First"), a bank holding
company organized under the laws of New York, and First National Bank of
Cortland, a wholly owned subsidiary of Cortland First, and a related Plan of
Merger between Oneida Valley National Bank and First National Bank of Cortland
(collectively, the "Agreement"), pursuant to which, among other things, (i)
Oneida Valley will merge with Cortland First under the name "Alliance Financial
Corporation;" (ii) each share of Oneida Valley's common stock, par value $2.50
per share, outstanding at the effective time of the Merger (other than shares
held by dissenting shareholders and as otherwise provided in the Agreement) will
be converted into at least 1.75 but not more than 2.00 shares (determined
pursuant to the formula described in the Proxy Statement/Prospectus) of Alliance
Financial Corporation common stock and cash in lieu of any fractional share; and
(iii) each share of Cortland First's common stock, par value $1.6667 per share,
outstanding at the time of the Merger (other than shares held by dissenting
shareholders and as otherwise provided in the Agreement) will automatically be
converted into one share of Alliance Financial Corporation common stock;
2. APPROVAL OF INCENTIVE PLAN. To consider and vote upon a proposal to
approve the Alliance Financial Corporation 1998 Long Term Incentive Compensation
Plan (the "Incentive Plan"); and
3. OTHER BUSINESS. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements thereof,
including proposals to adjourn the Special Meeting to permit further
solicitation of proxies by the Board of Directors in the event that there are
not sufficient votes to approve any proposal at the time of the Special Meeting,
provided that no proxies voted against the Merger or the Incentive Plan will be
voted in favor of adjournment to solicit additional proxies in favor of the
Merger or the Incentive Plan, respectively.
Pursuant to Oneida Valley's Bylaws, the Board of Directors has set
___________, 1998 as the record date for the determination of the holders of
Oneida Valley's common stock entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof.
The affirmative vote of the holders of at least two-thirds of the
outstanding Oneida Valley common stock is required for approval of the
Agreement, and the affirmative vote of a majority of the shares represented at
the Special Meeting is required for approval of the Incentive Plan. Your vote is
therefore important regardless of the number of shares you own. Each
shareholder, even though he or she may plan to attend the Special Meeting, is
urged to sign, date and return the enclosed proxy without delay in the enclosed
postage-paid envelope. You may revoke your proxy at any time prior to the
Special Meeting. Any shareholder present at the Special Meeting or at any
adjournments or postponements thereof may revoke his or her proxy and vote
personally on each matter brought before the Special Meeting.
<PAGE>
If you have any questions or require assistance, please call John C. Mott
at (315) 363-4500.
BY ORDER OF THE BOARD OF DIRECTORS
David P. Kershaw
Corporate Secretary
IMPORTANT
YOUR VOTE IS IMPORTANT. IN ORDER TO ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE AS SOON AS POSSIBLE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED
STATES.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE AGREEMENT AND "FOR" APPROVAL OF THE INCENTIVE PLAN.
<PAGE>
PROSPECTUS OF CORTLAND FIRST FINANCIAL CORPORATION
(TO BE RENAMED "ALLIANCE FINANCIAL CORPORATION" UPON THE
EFFECTIVE DATE OF THE MERGER TO WHICH THIS DOCUMENT RELATES)
JOINT PROXY STATEMENT OF
ONEIDA VALLEY BANCSHARES, INC.
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _____________, 1998
AND
CORTLAND FIRST FINANCIAL CORPORATION
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _____________, 1998
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished to shareholders of
Cortland First Financial Corporation, a New York business corporation ("Cortland
First"), and to shareholders of Oneida Valley Bancshares, Inc., a New York
business corporation ("Oneida Valley"), in connection with the solicitation of
proxies by the respective Boards of Directors of Cortland First and Oneida
Valley for use at the Special Meeting of Shareholders of Cortland First
(including any adjournment or postponement thereof, the "Cortland First
Meeting") and the Special Meeting of Shareholders of Oneida Valley (including
any adjournment or postponement thereof, the "Oneida Valley Meeting," and
collectively with the Cortland First Meeting, the "Meetings"), to be held on
_________________, 1998, and _________________, 1998, respectively, at the times
and places set forth in the accompanying notice. It is anticipated that the
mailing of this Proxy Statement/Prospectus and the enclosed proxy card will
commence on or about ________________, 1998.
The accompanying Notice of Special Meeting and this Proxy
Statement/Prospectus describe the formal business expected to be transacted at
the Meetings. At the Cortland First and Oneida Valley Meetings, shareholders of
Cortland First and Oneida Valley, respectively, will be asked to approve an
Agreement and Plan of Reorganization and related Plan of Merger, each dated as
of July 10, 1998 (collectively, the "Agreement"), providing for the merger (the
"Merger") of Cortland First and Oneida Valley under the name "Alliance Financial
Corporation." Simultaneously with the Merger or as soon as practicable
thereafter, First National Bank of Cortland, a wholly owned subsidiary of
Cortland First, and Oneida Valley National Bank, a wholly owned subsidiary of
Oneida Valley, will merge (the "Bank Merger") under the name "Alliance Bank,
N.A." pursuant to an Agreement and Plan of Merger dated as of July 10, 1998 (the
"Bank Merger Agreement"). Upon the Effective Date (as defined in the Agreement),
each share of common stock, par value $2.50 per share, of Oneida Valley ("Oneida
Valley Common Stock") issued and outstanding immediately prior to the Effective
Date will be converted into at least 1.75 but not more than 2.00 shares (as
determined pursuant to the formula described in this Proxy Statement/Prospectus,
the "Exchange Ratio") of the common stock, par value $1.00 per share, of
Alliance Financial Corporation ("Alliance Common Stock") and cash in lieu of any
fractional share of Alliance Common Stock, and each share of common stock, par
value $1.6667 per share, of Cortland First ("Cortland First Common Stock")
issued and outstanding immediately prior to the Effective Date will continue to
be a share of Alliance Common Stock. Based on the shares outstanding at
September ___,
<PAGE>
1998, upon consummation of the Merger the shareholders of Cortland First and
Oneida Valley would hold approximately 55% and 45% of the outstanding shares of
Alliance Financial Corporation, respectively, if the Exchange Ratio is 1.75, and
approximately 52% and 48% of the outstanding shares of Alliance Financial
Corporation, respectively, if the Exchange Ratio is 2.00. For a more complete
description of the Agreement and the terms of the Merger, see "PROPOSAL I -
APPROVAL OF MERGER."
In addition, at the Cortland First and Oneida Valley Meetings, shareholders
of Cortland First and Oneida Valley, respectively, will be asked to consider and
vote upon a proposal to approve the Alliance Financial Corporation 1998 Long
Term Incentive Compensation Plan (the "Incentive Plan"). See "PROPOSAL II -
APPROVAL OF LONG TERM INCENTIVE PLAN."
The outstanding shares of Cortland First Common Stock and Oneida Valley
Common Stock are not listed or traded on a recognized securities exchange and
are inactively traded. The last reported sale prices of Cortland First and
Oneida Valley Common Stock on September ___, 1998 were $______ and $_____ per
share, respectively. The shares of Alliance Common Stock offered hereby are
expected to be quoted on the National Association of Securities Dealers
Automated Quotations National Market System (the "Nasdaq National Market"). See
"INFORMATION WITH RESPECT TO CORTLAND FIRST -- Market Price and Dividends on
Cortland First Common Stock" and "INFORMATION WITH RESPECT TO ONEIDA VALLEY--
Market Price and Dividends on Oneida Valley Common Stock" for additional
information regarding the market for Cortland First and Oneida Valley Common
Stock.
Consummation of the Merger is subject to satisfaction of a number of
conditions, including the receipt of all regulatory approvals, consents or
waivers required or mutually deemed necessary in connection with the Merger and
the Bank Merger and the approval of the Agreement by the shareholders of each of
Cortland First and Oneida Valley. Applications have been filed with the
appropriate bank regulatory authorities for the required approvals, consents and
waivers. Shareholder approval of the Agreement requires the affirmative vote of
the holders of at least two-thirds of the outstanding Oneida Valley Common Stock
and at least two-thirds of the outstanding Cortland First Common Stock. Because
the Agreement provides for certain amendments to Cortland First's Certificate of
Incorporation, which will become the Certificate of Incorporation of Alliance
Financial Corporation, approval of the Agreement will constitute approval of
such amendments. See "PROPOSAL I - APPROVAL OF MERGER -- Representations and
Warranties; Conditions to the Merger; Waiver; and -- Amendments to Certificate
of Incorporation and Bylaws." Shareholder approval of the Incentive Plan
requires the affirmative vote of a majority of the shares represented at the
Cortland First Meeting and a majority of the shares represented at the Oneida
Valley Meeting. See "PROPOSAL II -- APPROVAL OF LONG TERM INCENTIVE PLAN."
This Proxy Statement/Prospectus also constitutes a prospectus of Alliance
Financial Corporation for up to 1,805,754 shares of Alliance Common Stock
issuable in connection with the Merger.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AUTHORITY OR ANY
OTHER GOVERNMENTAL AGENCY NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES AUTHORITY OR ANY OTHER GOVERNMENTAL AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
THE SHARES OF ALLIANCE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
All information contained in this Proxy Statement/Prospectus with respect
to Cortland First and First National Bank of Cortland has been supplied by
Cortland First, and all information with respect to Oneida Valley and Oneida
Valley National Bank has been supplied by Oneida Valley.
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Proxy
Statement/Prospectus and, if given or made, such information or representation
should not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, the securities offered by this Proxy Statement/Prospectus
in any jurisdiction or to any person to whom it is unlawful to make such offer
or solicitation of an offer in such jurisdiction. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of Cortland First or Oneida Valley or any of their
respective subsidiaries, or in the information set forth herein, since the date
of this Proxy Statement/Prospectus. This Proxy Statement/Prospectus does not
cover any resales of Alliance Common Stock received by shareholders who are
affiliates of Cortland First or Oneida Valley, within the meaning of applicable
securities laws, upon the consummation of the Merger, and no person is
authorized to use this Proxy Statement/Prospectus in connection with any such
resale.
The date of this Proxy Statement/Prospectus is September ___, 1998.
3
<PAGE>
TABLE OF CONTENTS
PAGE
----
INTRODUCTION .............................................................. 1
AVAILABLE INFORMATION ..................................................... 6
FORWARD-LOOKING STATEMENTS ................................................ 7
SUMMARY ................................................................... 8
COMPARATIVE PER SHARE DATA ................................................ 16
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA .......................... 17
THE MEETINGS .............................................................. 18
Date, Time and Place ............................................. 18
Matters to be Considered at the Meetings ......................... 18
Record Dates; Stock Entitled to Vote; Quorum ..................... 18
Votes Required ................................................... 19
Voting and Revocability of Proxies ............................... 20
Voting Securities and Principal Holders Thereof .................. 21
Section 16(a) Beneficial Ownership Reporting Compliance .......... 24
Other Matters .................................................... 24
Miscellaneous .................................................... 24
PROPOSAL I - APPROVAL OF MERGER ........................................... 25
The Companies .................................................... 25
Background of the Merger ......................................... 26
Reasons for the Merger and Recommendation of the Boards
of Directors ................................................... 28
Opinions of Financial Advisors ................................... 32
Terms of the Merger/Exchange Ratio ............................... 40
Surrender of Certificates ........................................ 41
Representations and Warranties; Conditions to the
Merger; Waiver ................................................. 41
Regulatory Approvals ............................................. 42
Business Pending the Merger ...................................... 43
Effective Date of the Merger; Termination ........................ 44
Management and Operations After the Merger ....................... 44
Effect of the Merger on Employees and Management ................. 50
Amendments to Certificate of Incorporation and Bylaws ............ 53
Restated Certificate of Incorporation ............................ 54
Bylaws ........................................................... 55
Certain Differences in Rights of Shareholders .................... 55
Dissenters' Rights of Appraisal .................................. 62
Federal Income Tax Consequences .................................. 64
Resale of Alliance Common Stock .................................. 65
Expenses ......................................................... 66
Accounting Treatment ............................................. 66
Stock Option Agreements .......................................... 67
PROPOSAL II -- APPROVAL OF LONG TERM INCENTIVE PLAN ....................... 67
General Features Of The Incentive Plan ........................... 68
Federal Income Tax Consequences .................................. 70
Grants Presently Contemplated .................................... 71
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TABLE OF CONTENTS (CONT'D)
PAGE
----
Vote Required For Approval ...................................... 71
INFORMATION WITH RESPECT TO CORTLAND FIRST ............................... 71
Description of Business ......................................... 71
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 73
Management ...................................................... 94
Executive Compensation .......................................... 94
Market Price And Dividends on Cortland First Common Stock ....... 99
INFORMATION WITH RESPECT TO ONEIDA VALLEY ................................ 100
Description of Business ......................................... 100
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 102
Management ...................................................... 122
Executive Compensation .......................................... 122
Market Price And Dividends on Oneida Valley Common Stock ........ 125
DESCRIPTION OF CAPITAL STOCK ............................................. 126
Cortland First .................................................. 126
Oneida Valley ................................................... 126
Alliance Financial Corporation .................................. 127
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS .............. 128
EXPERTS .................................................................. 135
LEGAL MATTERS ............................................................ 135
SHAREHOLDER PROPOSALS .................................................... 135
CORTLAND FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS ...................................... F-1
ONEIDA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS ...................................... F-23
APPENDIX
CAPITAL FORMATION GROUP'S FAIRNESS OPINION ............................... A
EMPIRE VALUATION'S FAIRNESS OPINION ...................................... B
DISSENTERS' RIGHTS OF APPRAISAL NYBCL SECTION 623 ........................ C
ALLIANCE FINANCIAL CORPORATION CERTIFICATE OF INCORPORATION .............. D
ALLIANCE FINANCIAL CORPORATION BYLAWS .................................... E
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AVAILABLE INFORMATION
Cortland First is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, Cortland First files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports and other information filed by Cortland First can be inspected and
copied (upon payment of prescribed fees) at the Commission's public reference
facilities located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained at prescribed rates by writing to the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
Reports, proxy statements and other information that have been filed
electronically with the Commission may also be obtained from the Commission's
Website, the address of which is http://www.sec.gov.
Cortland First has filed with the Commission a registration statement on
Form S-4 (together with all amendments and exhibits thereto) under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of Alliance Common Stock to be issued pursuant to, and as contemplated
by, the Agreement (the "Registration Statement"). This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. The Registration Statement may
be inspected and copied as set forth above.
Statements contained in this Proxy Statement/Prospectus or any document
incorporated by reference herein as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is hereby
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being hereby qualified in all
respects by such reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains, or incorporates by reference
other documents that contain, forward-looking statements with respect to the
financial condition, results of operations and business of Alliance Financial
Corporation upon consummation of the Merger, the Bank Merger and the other
transactions contemplated by the Agreement, including statements relating to:
(a) cost savings and accretions to reported earnings that may be realized from
the Merger; (b) impacts on revenues that may result from the Merger; and (c)
restructuring charges that may be incurred in connection with the Merger. These
forward-looking statements involve certain risks and uncertainties. For example,
see "AVAILABLE INFORMATION," "COMPARATIVE PER SHARE DATA," "SELECTED HISTORICAL
AND PRO FORMA FINANCIAL DATA," "PROPOSAL I -- APPROVAL OF MERGER," and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS." 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 cannot be fully realized or cannot be
realized as quickly as anticipated; (2) Alliance Financial Corporation's 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)
Alliance Financial Corporation is unable to attract and retain qualified
personnel (including, without limitation, branch managers and loan and trust
officers) sufficient to enable it to fulfill its strategic plan; (4) competitive
pressure in the banking industry increases significantly; (5) costs or
difficulties related to the integration of the businesses of Cortland First and
Oneida Valley are greater than expected; (6) changes in the interest rate
environment reduce margins; (7) general economic conditions, either nationally
or regionally, are less favorable than expected, resulting in, among other
things, a deterioration in credit quality; (8) changes occur in the regulatory
environment; (9) changes occur in the business conditions and inflation; and
(10) changes occur in the securities markets. The forward-looking statements
contained in this Proxy Statement/Prospectus or incorporated herein by reference
speak only as of the date as of which such statements are made, and Cortland
First, Oneida Valley and Alliance Financial Corporation assume no duty to update
these forward-looking statements to reflect new, changing or unanticipated
events or circumstances. PricewaterhouseCoopers LLP has not compiled, examined
or performed any procedures with respect to any forward-looking statements, nor
have they expressed any opinion or any form of assurance on such information or
its achievability, and they assume no responsibility for, and disclaim any
association with, the forward-looking statements.
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary is necessarily general and
abbreviated and has been prepared to assist shareholders in their review of this
Proxy Statement/Prospectus. This summary is not intended to be a complete
explanation of the matters covered in this Proxy Statement/Prospectus and is
qualified in all respects by reference to the more detailed information
contained elsewhere in this Proxy Statement/Prospectus, the accompanying
Appendices and the documents incorporated herein by reference, which
shareholders are urged to read carefully.
THE COMPANIES
Cortland First. Cortland First, a New York business corporation, is the
holding company for First National Bank of Cortland, a national banking
association chartered in 1869. At June 30, 1998, Cortland First and its
subsidiaries had total consolidated assets, deposits and shareholders' equity of
approximately $234 million, $206 million, and $25 million, respectively. First
National Bank of Cortland is the sole subsidiary of Cortland First. The primary
business of First National Bank of Cortland consists of offering individual,
business and municipal customers a full range of loan and deposit products and
trust and investment services from its network of community banking offices
located in Cortland, McGraw, Cincinnatus, Marathon, Whitney Point, and Tully,
New York.
Cortland First is a public reporting company and files periodic reports,
proxy statements and other information with the Securities and Exchange
Commission. The principal executive offices of Cortland First are located at 65
Main Street, Cortland, New York 13045, and its telephone number is (607)
756-2831. For further information concerning Cortland First and First National
Bank of Cortland, see "AVAILABLE INFORMATION" and "INFORMATION WITH RESPECT TO
CORTLAND FIRST."
Oneida Valley. Oneida Valley, a New York business corporation, is the
holding company for Oneida Valley National Bank, a national banking association
originally chartered in 1851. At June 30, 1998, Oneida Valley and its
subsidiaries had total consolidated assets, deposits and shareholders' equity of
approximately $234 million, $203 million, and $25 million, respectively. Oneida
Valley National Bank is the sole subsidiary of Oneida Valley. The primary
business of Oneida Valley National Bank consists of offering individual,
business and municipal customers a full range of loan and deposit products and
trust and investment services from its network of community banking offices
located in Oneida, Sherrill, Canastota, Hamilton, and Manlius, New York.
The principal executive offices of Oneida Valley are located at 160 Main
Street, Oneida, New York 13421, and its telephone number is (315) 363-4500. For
further information concerning Oneida Valley and Oneida Valley National Bank,
see "INFORMATION WITH RESPECT TO ONEIDA VALLEY."
THE MEETINGS; RECORD DATES
The Cortland First Meeting will be held on _____________, 1998, at 4:00
p.m. Eastern Time, at the office of Cortland First located at 65 Main Street,
Cortland, New York. Only holders of record of Cortland First Common Stock at the
close of business on ___________, 1998 (the "Cortland First Record Date") will
be entitled to notice of, and to vote at, the Cortland First Meeting. At the
Cortland First Record Date, 1,969,776 shares of Cortland First Common Stock were
outstanding and entitled to vote.
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The Oneida Valley Meeting will be held on _____________, 1998, at 4:00 p.m.
Eastern Time, at the office of Oneida Valley located at 160 Main Street, Oneida,
New York. Only holders of record of Oneida Valley Common Stock at the close of
business on ___________, 1998 (the "Oneida Valley Record Date") will be entitled
to notice of, and to vote at, the Oneida Valley Meeting. At the Oneida Valley
Record Date, 902,877 shares of Oneida Valley Common Stock were outstanding and
entitled to vote.
MATTERS TO BE CONSIDERED AT THE MEETINGS
The accompanying Notice of Special Meeting and this Proxy
Statement/Prospectus describe the formal business expected to be transacted at
the Meetings. During the Meetings, shareholders will be asked to consider and
vote upon approval of the Agreement and the Incentive Plan. Approval of the
Agreement by Cortland First's and Oneida Valley's shareholders at the Meetings
is a condition to and required for consummation of the Merger. The shareholders
of Cortland First and Oneida Valley also may consider and vote upon such other
matters as are properly brought before the respective Meetings, including
proposals to adjourn a Special Meeting to permit further solicitation of proxies
by the Board of Directors in the event that there are not sufficient votes to
approve any proposal at the time of the Special Meeting; provided that no
proxies voted against the Merger will be voted in favor of adjournment to
solicit additional proxies in favor of the Merger and no proxies voted against
the Incentive Plan will be voted in favor of adjournment to solicit additional
proxies in favor of the Incentive Plan.
For additional information with respect to the Meetings and the voting
rights of shareholders, see "THE MEETINGS."
VOTES REQUIRED
Approval of the Agreement requires the affirmative vote of at least
two-thirds of the outstanding Cortland First Common Stock and the affirmative
vote of at least two-thirds of the outstanding Oneida Valley Common Stock.
Because the Agreement provides for certain amendments to Cortland First's
Certificate of Incorporation, which will become the Certificate of Incorporation
of Alliance Financial Corporation, approval of the Agreement will constitute
approval of such amendments. Approval of the Incentive Plan requires the
affirmative vote of a majority of the shares represented at the Cortland First
Meeting and the affirmative vote of a majority of the shares represented at the
Oneida Valley Meeting.
Directors and executive officers of Cortland First and affiliates of such
persons had voting power with respect to 127,052 shares (excluding shares for
which ownership is disclaimed) of Cortland First Common Stock, representing
6.45% of the Cortland First Common Stock outstanding, as of __________, 1998.
Such persons have entered into agreements ("Cortland First Voting Agreements")
with Oneida Valley, whereby each such person has agreed to vote all shares of
Cortland First Common Stock that he or she is entitled to vote in favor of the
Agreement. Accordingly, in the aggregate, it is expected that at least 127,052
shares of Cortland First Common Stock (representing 6.45% of the outstanding
shares) will be voted in favor of the Agreement.
Directors and executive officers of Oneida Valley and affiliates of such
persons had voting power with respect to 83,325 shares (excluding shares for
which ownership is disclaimed) of Oneida Valley Common Stock, representing 9.23%
of the Oneida Valley Common Stock outstanding, as of __________, 1998. Such
persons have entered into agreements ("Oneida Valley Voting Agreements") with
Cortland First, whereby each such person has agreed to vote all shares of Oneida
Valley Common Stock that he or she is
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entitled to vote in favor of the Agreement. Accordingly, in the aggregate, it is
expected that at least 83,325 shares of Oneida Valley Common Stock (representing
9.23% of the outstanding shares) will be voted in favor of the Agreement.
THE PROPOSED MERGER
The following summary is qualified in its entirety by reference to the more
detailed information contained elsewhere in this Proxy Statement/Prospectus, as
well as the full text of the Agreement, which is incorporated herein by
reference. The full text of the Agreement is available upon written request to
David R. Alvord at Cortland First or John C. Mott at Oneida Valley, at the
respective addresses set forth above. See "-- The Companies."
In accordance with the terms of the Agreement, Oneida Valley will merge
with and into Cortland First under the name of "Alliance Financial Corporation,"
whereupon the separate existence of Oneida Valley will cease. Simultaneously
with the consummation of the Merger or as soon as practicable thereafter, First
National Bank of Cortland will merge with and into Oneida Valley National Bank
under the name of "Alliance Bank, N.A." under Oneida Valley National Bank's
charter, whereupon the separate existence of First National Bank of Cortland
will cease. On the Effective Date, each outstanding share of Oneida Valley
Common Stock will be converted into at least 1.75 but not more than 2.00 shares
(determined pursuant to the Agreement), of Alliance Common Stock and cash in
lieu of any fractional share of Alliance Common Stock. From and after the
Effective Date, each share of Cortland First Common Stock shall represent one
share of Alliance Common Stock. See "PROPOSAL I -- APPROVAL OF MERGER -- Terms
of the Merger/Exchange Ratio."
REASONS FOR THE MERGER AND RECOMMENDATION OF BOARDS OF DIRECTORS
The Boards of Directors of Oneida Valley and Cortland First approved the
terms of the Merger on the basis of a combination of the two companies rather
than as an acquisition of one by the other. The terms of the Agreement were
reached in arms-length negotiations and have been designed to provide Cortland
First and Oneida Valley shareholders with a continuing investment in the
combined entity. The Boards of Directors believe that the Merger will provide
expanded product and service capabilities to the customers of First National
Bank of Cortland and Oneida Valley National Bank, and will enable the combined
entity to compete more effectively with other banks and financial institutions
in the markets served by them. The Boards of Directors believe that the Merger
will result in a stronger financial institution with increased opportunities to
invest in technology and to expand into new geographic and product markets, as
well as increased ability to attract and retain qualified management personnel
and enhanced predictability in management succession. The Boards of Directors
believe that the terms of the Merger are fair to their respective shareholders
and, among other things, will afford their respective shareholders the
opportunity to continue as equity participants in a larger independent community
banking organization with a greater potential for growth. See "PROPOSAL I -
APPROVAL OF MERGER --Reasons for the Merger and Recommendation of the Boards of
Directors."
THE BOARDS OF DIRECTORS OF CORTLAND FIRST AND ONEIDA VALLEY HAVE DETERMINED
THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF CORTLAND FIRST'S AND
ONEIDA VALLEY'S SHAREHOLDERS, CUSTOMERS AND COMMUNITIES SERVED. ACCORDINGLY, THE
BOARDS HAVE EACH UNANIMOUSLY APPROVED THE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND
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UNANIMOUSLY RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE AGREEMENT AND "FOR" APPROVAL OF THE INCENTIVE PLAN.
OPINIONS OF FINANCIAL ADVISORS
Cortland First retained Capital Formation Group of Rochester, L.P.
("Capital Formation Group") to provide a written opinion dated July 8, 1998 to
Cortland First's Board of Directors that, as of such date, the Exchange Ratio
was fair, from a financial point of view, to the holders of Cortland First
Common Stock. A copy of Capital Formation Group's written confirmation of that
opinion as of the date hereof is attached hereto as Appendix A. Oneida Valley
retained Empire Valuation Consultants, Inc. ("Empire Valuation") to provide a
written opinion dated July 10, 1998 to Oneida Valley's Board of Directors that,
as of such date, the Exchange Ratio was fair, from a financial point of view, to
the holders of Oneida Valley Common Stock. A copy of Empire Valuation's written
confirmation of that opinion as of the date hereof is attached hereto as
Appendix B. The copies of such opinions attached hereto should be read in their
entirety with respect to the assumptions made, limitations on the review
undertaken and other matters. See "PROPOSAL I -- APPROVAL OF MERGER -- Opinions
of Financial Advisors" for information regarding, among other things, the
selections of Capital Formation Group and Empire Valuation, their compensation
for services rendered in connection with the Merger, and their rendering of such
opinions.
EFFECTIVE TIME AND CLOSING DATE
The Merger shall become effective at the time and on the date specified in
the certificate of merger to be filed with the New York Department of State (the
"Effective Date"). Such filing will occur only after the receipt of all
requisite regulatory approvals, approval of the Agreement by the requisite vote
of Cortland First's and Oneida Valley's respective shareholders and the
satisfaction or waiver of all other conditions to the Merger. The closing of the
Merger is expected to occur in the fourth quarter of 1998.
CONDITIONS TO THE MERGER; WAIVER AND AMENDMENT; TERMINATION
Consummation of the Merger is subject to satisfaction of a number of
conditions, including the receipt of all regulatory approvals, consents or
waivers required or mutually deemed necessary in connection with the Merger and
the Bank Merger and the approval of the Agreement by the shareholders of each of
Cortland First and Oneida Valley.
Substantially all of the conditions to consummation of the Merger and the
Bank Merger (except for required shareholder and regulatory approvals) may be
waived at any time, by the party for whose benefit they were created, and the
Agreement may be amended or supplemented at any time, by written agreement of
the parties, except that no such waiver, amendment or supplement executed after
approval of the Agreement by shareholders of Cortland First and/or Oneida Valley
shall alter the Exchange Ratio. In addition, the Agreement may be terminated,
either before or after shareholder approval, under certain circumstances. See
"PROPOSAL I -- APPROVAL OF MERGER -- Representations and Warranties; Conditions
to the Merger; Waiver" and "-- Effective Date of the Merger; Termination."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Bond, Schoeneck & King, LLP, counsel to Cortland First, has delivered its
opinion to Cortland First and Oneida Valley that the Merger will constitute a
reorganization within the meaning of Section 368(a) of
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the Internal Revenue Code of 1986, as amended (the "Code"), provided the Merger
is consummated in accordance with the Agreement and certain related agreements.
Bond, Schoeneck & King, LLP has further opined that, for federal income tax
purposes, no gain or loss will be recognized by the shareholders of Oneida
Valley who exchange all of their Oneida Valley Common Stock solely for Alliance
Common Stock pursuant to the Merger (except to the extent that cash is received
in lieu of the issuance of fractional shares of Alliance Common Stock). Bond,
Schoeneck & King, LLP's opinion is based on facts, representations and
assumptions that were provided to Bond, Schoeneck & King, LLP by Cortland First
and Oneida Valley and that are consistent with the state of facts that Cortland
First and Oneida Valley believe will be existing as of the Effective Date.
The foregoing is a summary of material federal income tax consequences of
the Merger to shareholders of Oneida Valley. A more extensive summary is set
forth under the heading "PROPOSAL I -- APPROVAL OF MERGER -- Federal Income Tax
Consequences," which discusses additional federal income tax consequences of the
Merger to Oneida Valley shareholders, including the federal income tax
consequences of receiving cash in lieu of a fractional share interest in
Alliance Common Stock. Shareholders should read in full the detailed description
of the material regarding federal income tax consequences under that heading.
MANAGEMENT AFTER THE MERGER AND EFFECTS OF THE MERGER ON MANAGEMENT
After the Merger, the Board of Directors of Alliance Financial Corporation
will consist of 22 persons, 12 of whom currently constitute the full Board of
Cortland First and 10 of whom currently constitute the full Board of Oneida
Valley (or replacements named by Cortland First or Oneida Valley, respectively),
and the Board of Directors of Alliance Bank, N.A. will consist of the same
persons serving as directors of Alliance Financial Corporation. It is
anticipated that David R. Alvord (Cortland First's current President and Chief
Executive Officer) and John C. Mott (Oneida Valley's current President) will
serve as Co-Chief Executive Officers of Alliance Financial Corporation and
Alliance Bank, N.A., and as Co-Chairmen of the Board of Directors and of its
executive committee. The management of Alliance Financial Corporation and
Alliance Bank, N.A. will be drawn from the present management of Cortland First,
First National Bank of Cortland, Oneida Valley and Oneida Valley National Bank,
and from additional personnel hired to assist in the implementation of the
combined companies' strategic plan. See "PROPOSAL I -- APPROVAL OF MERGER --
Management and Operations After the Merger."
Messrs. Alvord and Mott will enter into employment agreements with Alliance
Financial Corporation, and other executive officers of Cortland First and Oneida
Valley may be employed by Alliance Financial Corporation. It is expected that
Alliance Financial Corporation will, consistent with past practices, review the
compensation levels of its executive officers, including Messrs. Alvord and
Mott, following the Merger and make any appropriate adjustments, including
increases, based on the executives' positions and responsibilities and a
comparison of compensation levels for comparable executives at comparable
institutions. Excluding compensation and benefits either previously earned but
not yet paid or to be earned and paid in the future, no director or executive
officer of Cortland First or Oneida Valley is expected to receive any
substantial payment or other financial benefit as a result of the Merger.
It is the intention of Cortland First and Oneida Valley to work together
prior to the Effective Date to develop and design a severance plan or policy
which would be effective after the Effective Date and which would be available
for eligible employees of Alliance Financial Corporation or Alliance Bank, N.A.
who are affected by the Merger. There can be no assurance that such a plan will
be adopted, and no assurance as to
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the specific benefits that may be available under the plan. The Agreement also
contains provisions relating to, among other things, employee benefits and
indemnification and liability coverage of officers and directors after the
Merger.
For additional information, see "PROPOSAL I -- APPROVAL OF MERGER --
Management and Operations After the Merger" and "-- Effect of the Merger on
Employees and Management."
ACCOUNTING TREATMENT
It is a condition to the consummation of the Merger that the Merger be
accounted for as a pooling of interests and that Cortland First and Oneida
Valley shall have received from their independent accountants a letter to the
effect that the accountants are not aware of any reason that would preclude the
Merger from being accounted for as a pooling of interests. See "PROPOSAL I --
APPROVAL OF MERGER -- Accounting Treatment."
AMENDMENTS TO CERTIFICATE OF INCORPORATION
From and after the Effective Date, Alliance Financial Corporation will
operate under the Certificate of Incorporation of Cortland First, as amended and
restated pursuant to the Agreement. The amendments to be made to Cortland
First's Certificate of Incorporation are integral to the structure of the
proposed Merger, and were negotiated by Oneida Valley and Cortland First and set
forth in the Agreement. Shareholders are not being asked to vote separately on
the content or provisions of Alliance Financial Corporation's Certificate of
Incorporation taken as a whole, or on any individual amendment or provision.
That approval or disapproval is subsumed within the shareholders' approval or
disapproval of the Merger and the Agreement. None of the proposed charter
amendments will be adopted if the Merger is disapproved by the shareholders of
either Cortland First or Oneida Valley, or if the Merger is not consummated for
any other reason. See "PROPOSAL I -- APPROVAL OF MERGER -- Amendments to
Certificate of Incorporation and Bylaws."
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Upon completion of the Merger, shareholders of Cortland First and Oneida
Valley will be shareholders of Alliance Financial Corporation, and their rights
as such will be governed by Cortland First's Certificate of Incorporation and
Bylaws, as amended, which will be Alliance Financial Corporation's Certificate
of Incorporation and Bylaws, as well as by New York law. The rights of
shareholders of Alliance Financial Corporation will be different in certain
respects from the rights of shareholders of Oneida Valley, and from the current
rights of shareholders of Cortland First (before giving effect to the proposed
amendments). See "PROPOSAL I -- APPROVAL OF MERGER -- Certain Differences in
Rights of Shareholders."
SURRENDER OF CERTIFICATES
As soon as practicable after the Effective Date, holders of Oneida Valley
Common Stock will be notified in writing regarding the manner in which their
share certificates will be exchanged for share certificates of Alliance
Financial Corporation. Oneida Valley shareholders should not send in their
certificates until so notified. See "PROPOSAL I -- APPROVAL OF MERGER --
Surrender of Certificates."
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From and after the Effective Date, each share of Cortland First Common
Stock will automatically represent one share of Alliance Common Stock.
Accordingly, holders of Cortland First Common Stock will not need to surrender
or exchange their certificates.
STOCK OPTION AGREEMENTS
Cortland First Stock Option Agreement. In connection with execution of the
Agreement, Cortland First and Oneida Valley executed a Stock Option Agreement
(the "Cortland First Stock Option Agreement") pursuant to which Cortland First
granted Oneida Valley an option (the "Cortland First Option") to purchase up to
391,985 authorized but unissued shares of Cortland First Common Stock at a price
of $28.50 per share, such number of shares and exercise price being subject to
adjustment under certain circumstances. The Cortland First Option is exercisable
only upon the occurrence of certain events that could jeopardize consummation of
the Merger. Oneida Valley may request that Cortland First repurchase the
Cortland First Option together with any shares of Cortland First Common Stock
purchased by Oneida Valley pursuant to the Cortland First Option, under certain
circumstances and at a price set forth in the Cortland First Stock Option
Agreement. See "PROPOSAL I -- APPROVAL OF MERGER -- Stock Option Agreements."
Oneida Valley Stock Option Agreement. In connection with execution of the
Agreement, Oneida Valley and Cortland First executed a Stock Option Agreement
(the "Oneida Valley Stock Option Agreement") pursuant to which Oneida Valley
granted Cortland First an option (the "Oneida Valley Option") to purchase up to
180,150 authorized but unissued shares of Oneida Valley Common Stock at a price
of $52.50 per share, such number of shares and exercise price being subject to
adjustment under certain circumstances. The Oneida Valley Option is exercisable
only upon the occurrence of certain events that could jeopardize consummation of
the Merger. Cortland First may request that Oneida Valley repurchase the Oneida
Valley Option together with any shares of Oneida Valley Common Stock purchased
by Cortland First pursuant to the Oneida Valley Option, under certain
circumstances and at a price set forth in the Oneida Valley Stock Option
Agreement. See "PROPOSAL I -- APPROVAL OF MERGER -- Stock Option Agreements."
MARKETS AND MARKET PRICES
Oneida Valley Common Stock is not listed or traded on a recognized
securities exchange and is inactively traded under the symbol "ONVB." Cortland
First Common Stock is not listed or traded on a recognized securities exchange
and is inactively traded under the symbol "CTLN." The parties expect that
Alliance Financial Corporation will apply for shares of Alliance Common Stock to
be listed on the Nasdaq National Market under the symbol "____."
The following table sets forth the last reported sale prices per share of
Cortland First Common Stock and Oneida Valley Common Stock on (i) July 10, the
last business day preceding public announcement of the signing of the Agreement,
and (ii) ___________, 1998, the latest practicable date prior to the mailing of
this Proxy Statement/Prospectus. The Exchange Ratio will be calculated based
upon the price of the
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Cortland First Common Stock over a period of time preceding the Effective Date,
as described more fully under "PROPOSAL I -- APPROVAL OF MERGER -- Terms of the
Merger/Exchange Ratio." No assurance can be given as to what the market price of
Alliance Common Stock will be if and when the Merger is consummated.
ONEIDA VALLEY CORTLAND FIRST
COMMON STOCK COMMON STOCK
------------ --------------
July 10, 1998 $40.50 $29.50
______, 1998
DISSENTERS' RIGHTS
Under Section 910 of the New York Business Corporation Law (the "NYBCL"),
holders of Cortland First Common Stock and holders of Oneida Valley Common Stock
who, prior to the applicable vote of shareholders on the Merger, properly file
with Cortland First or Oneida Valley, as the case may be, a written notice of
intention to dissent will have the right to obtain a cash payment for the "fair
value" of their shares. In order to exercise such rights, a shareholder must
comply with certain procedural requirements set forth in Section 623 of the
NYBCL, a description of which is provided in "PROPOSAL I -- APPROVAL OF MERGER
- -- Dissenters' Rights of Appraisal" and the full text of which is attached to
this Proxy Statement/Prospectus as Appendix C. Such "fair value" would
potentially be determined in judicial proceedings, the result of which cannot be
predicted. Failure to take any of the steps required under Section 623 of the
NYBCL on a timely basis may result in the loss of dissenters' rights. See
"PROPOSAL I -- APPROVAL OF MERGER -- Dissenters' Rights of Appraisal."
15
- --------------------------------------------------------------------------------
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents at the dates and for the periods indicated (i)
historical consolidated per share data for Cortland First and Oneida Valley
Common Stock, (ii) pro forma per share data for Alliance Financial Corporation
and (iii) equivalent pro forma per share data for Oneida Valley Common Stock.
Alliance Financial Corporation pro forma data represents the effect of the
Merger on a share of Cortland First Common Stock. The Oneida Valley pro forma
equivalent data represents Alliance Financial Corporation pro forma data before
rounding, multiplied by 1.75 and 2.00 (pro forma Exchange Ratio), respectively,
and thereby reflects the effect of the Merger on a share of Oneida Valley Common
Stock. The information presented is based upon the historical financial
statements of Cortland First and Oneida Valley appearing elsewhere in this Proxy
Statement/Prospectus. See "AVAILABLE INFORMATION," "SELECTED HISTORICAL AND PRO
FORMA FINANCIAL DATA" and "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS."
ALLIANCE ONEIDA
HISTORICAL PRO FORMA (1) PRO FORMA (1)
----------------- -------------- --------------
CORTLAND ONEIDA 1.75 2.00 1.75 2.00
-------- ------ ---- ---- ---- ----
NET INCOME PER SHARE
Year ended:
December 31, 1997 $1.31 $2.72 $1.42 $1.33 $2.49 $2.66
December 31, 1996 1.41 2.63 1.45 1.37 2.54 2.74
December 31, 1995 1.36 2.49 1.39 1.30 2.43 2.60
Six months ended:
June 30, 1998 0.57 1.18 0.62 0.58 1.09 1.16
June 30, 1997 0.63 1.30 0.68 0.64 1.19 1.28
DIVIDEND PER SHARE
Year ended:
December 31, 1997 1.06 1.20 0.89 0.84 1.56 1.68
December 31, 1996 0.497 1.14 0.57 0.53 1.00 1.06
December 31, 1995 0.433 1.08 0.52 0.49 0.91 0.98
Six months ended:
June 30, 1998 0.28 0.50 0.28 0.27 0.49 0.54
June 30, 1997 0.28 0.50 0.28 0.27 0.49 0.54
BOOK VALUE PER SHARE
At December 31, 1997 12.70 27.33 13.76 12.94 24.08 25.88
At June 30, 1998 $12.94 $28.04 $14.31 $13.45 $25.04 $26.90
- ------------
(1) Represents the effect on the reported amounts using an exchange ratio for
Oneida Valley Common Stock of 1.75 and 2.00, respectively.
16
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present selected historical and pro forma combined
financial information for Cortland First, Oneida Valley and Alliance Financial
Corporation which has been derived from audited consolidated financial
statements of Cortland First and Oneida Valley through December 31, 1997 and
unaudited financial statements for the periods ended June 30, 1997 and June 30,
1998. This summary should be read in connection with the financial statements,
including the respective notes thereto, and other financial information
appearing elsewhere in this Proxy Statement/Prospectus. See "AVAILABLE
INFORMATION."
The data in the financial tables and statements in this Proxy
Statement/Prospectus does not reflect possible adjustments for expenses related
to the Merger, or any potential cost savings or revenue enhancements resulting
from the Merger. Accordingly, the pro forma combined financial condition and
results of operations of Alliance Financial Corporation as of the Effective Date
and thereafter may be materially different from that reflected in the pro forma
information below. See "AVAILABLE INFORMATION," "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS" and "PROPOSAL I - APPROVAL OF MERGER --
Operations after the Merger."
<TABLE>
<CAPTION>
CORTLAND FIRST FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
Six months ended
Years ended December 31 June 30,
------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(000'S Omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 14,292 $ 14,314 $ 15,223 $ 15,632 $ 15,985 $ 7,988 $ 7,836
Interest expense 5,013 4,725 5,848 6,220 6,531 3,259 3,235
-------- -------- -------- -------- -------- -------- --------
Net interest income 9,279 9,589 9,375 9,412 9,454 4,729 4,601
Allowance for possible loan losses 300 300 300 283 390 180 125
-------- -------- -------- -------- -------- -------- --------
Net interest income after allowance
for loan losses 8,979 9,289 9,075 9,129 9,064 4,549 4,476
Other operating income 1,303 1,369 1,446 1,523 1,777 764 870
Other operating expenses 6,390 6,790 6,700 6,678 7,302 3,573 3,857
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 3,892 3,868 3,821 3,974 3,539 1,740 1,489
Applicable income taxes 1,163 1,178 1,088 1,128 920 464 366
-------- -------- -------- -------- -------- -------- --------
Net income $ 2,729 $ 2,690 $ 2,733 $ 2,846 $ 2,619 $ 1,276 $ 1,123
======== ======== ======== ======== ======== ======== ========
Net income per share- basic $ 1.35 $ 1.33 $ 1.36 $ 1.41 $ 1.31 $ 0.63 $ 0.57
Return on average assets (1) 1.43% 1.37% 1.34% 1.32% 1.18% 1.40% 1.00%
Return on average equity (1) 14.70% 13.25% 12.38% 11.75% 10.38% 10.04% 8.94%
Dividends declared per share $ 0.40 $ 0.4166 $ 0.433 $ 0.497 $ 1.06 $ 0.28 $ 0.28
BALANCE SHEET DATA:
Loans $105,699 $109,909 $112,204 $113,632 $113,172 $112,975 $114,995
Allowance for loan losses 1,080 1,226 1,176 1,271 1,240 1,222 1,268
Investments 67,587 70,380 75,262 84,128 88,256 93,772 88,277
Assets 198,759 188,683 203,860 219,072 219,369 225,273 233,566
Deposits 167,302 176,967 178,446 191,838 192,210 197,432 205,956
Stockholders' equity 20,063 20,424 23,654 25,378 25,007 25,919 25,483
Book value per share 9.95 10.13 11.73 12.59 12.70 12.87 12.94
Equity to total assets 10.09% 10.82% 11.60% 11.58% 11.40% 11.51% 10.91%
Trust Department assets (2) $ 50,130 $ 49,872 $ 56,359 $ 61,924 $ 64,420 $ 65,659 $ 76,383
</TABLE>
- ----------------
(1) For interim periods this percentage is annualized
(2) Calculated at book value
<TABLE>
<CAPTION>
ONEIDA VALLEY BANCSHARES, INC.
SELECTED FINANCIAL DATA
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(000'S Omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 13,823 $ 13,825 $ 15,225 $ 15,384 $ 15,806 $ 7,727 $ 8,079
Interest expense 4,877 4,778 6,165 5,974 6,453 3,049 3,466
-------- -------- -------- -------- -------- -------- --------
Net interest income 8,946 9,047 9,060 9,410 9,353 4,678 4,613
Allowance for possible loan losses 360 40 175 350 235 150 198
-------- -------- -------- -------- -------- -------- --------
Net interest income after allowance
for loan losses 8,586 9,007 8,885 9,060 9,118 4,528 4,415
Other operating income 1,644 1,545 1,722 1,864 2,089 941 1,045
Other operating expenses 6,236 6,515 6,881 7,110 7,393 3,619 3,914
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 3,994 4,037 3,726 3,814 3,814 1,850 1,546
Applicable income taxes 1,388 1,426 1,321 1,306 1,300 626 481
-------- -------- -------- -------- -------- -------- --------
Net income $ 2,606 $ 2,611 $ 2,405 $ 2,508 $ 2,514 $ 1,224 $ 1,065
======== ======== ======== ======== ======== ======== ========
Net income per share- basic $ 2.70 $ 2.71 $ 2.49 $ 2.63 $ 2.72 $ 1.30 $ 1.18
Return on average assets (1) 1.37% 1.34% 1.19% 1.20% 1.18% 1.18% 0.97%
Return on average equity (1) 12.83% 11.86% 10.58% 10.34% 10.13% 9.92% 8.81%
Dividends declared per share $ 0.94 $ 1.06 $ 1.08 $ 1.14 $ 1.20 $ 0.50 $ 0.50
BALANCE SHEET DATA:
Loans $105,809 $117,740 $121,777 $129,996 $137,606 $130,668 $141,427
Allowance for loan losses 1,578 1,610 1,691 1,754 1,717 1,814 1,644
Investments 74,228 66,115 66,897 61,127 63,745 62,620 63,814
Assets 194,900 200,904 208,948 209,238 217,499 215,827 233,749
Deposits 170,458 176,188 181,930 180,750 185,717 187,974 203,234
Stockholders' equity 21,223 21,041 23,888 24,799 24,743 24,241 25,316
Book value per share 22.00 21.81 24.76 26.11 27.33 26.52 26.85
Equity to total assets 10.89% 10.47% 11.43% 11.85% 11.38% 11.23% 10.83%
Trust Department assets (2) $ 30,671 $ 35,555 $ 47,089 $ 63,909 $ 81,067 $ 72,079 $ 87,504
</TABLE>
- ----------------
(1) For interim periods this percentage is annualized.
(2) Calculated at market value.
<TABLE>
<CAPTION>
ALLIANCE FINANCIAL CORPORATION
SELECTED PROFORMA FINANCIAL DATA
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ------
PRO FORMA (000'S Omitted)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 28,115 $ 28,139 $ 30,448 $ 31,016 $ 31,791 $ 15,715 $ 15,915
Interest expense 9,890 9,503 12,013 12,194 12,984 6,308 6,701
-------- -------- -------- -------- -------- -------- --------
Net interest income 18,225 18,636 18,435 18,822 18,807 9,407 9,214
Allowance for possible loan losses 660 340 475 633 625 330 323
-------- -------- -------- -------- -------- -------- --------
Net interest income after allowance
for loan losses 17,565 18,296 17,960 18,189 18,182 9,077 8,891
Other operating income 2,947 2,914 3,168 3,387 3,866 1,705 1,915
Other operating expenses 12,626 13,305 13,581 13,788 14,695 7,192 7,771
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 7,886 7,905 7,547 7,788 7,353 3,590 3,035
Applicable income taxes 2,551 2,604 2,409 2,434 2,220 1,090 847
-------- -------- -------- -------- -------- -------- --------
Net income $ 5,335 $ 5,301 $ 5,138 $ 5,354 $ 5,133 $ 2,500 $ 2,188
======== ======== ======== ======== ======== ======== ========
Net income per share-basic:
at an exchange ratio of 1.75 $ 1.44 $ 1.43 $ 1.39 $ 1.45 $ 1.42 $ 0.68 $ 0.62
at an exchange ratio of 2.00 $ 1.35 $ 1.34 $ 1.30 $ 1.37 $ 1.33 $ 0.64 $ 0.58
Return on average assets (1) 1.40% 1.36% 1.27% 1.26% 1.18% 1.16% 0.98%
Return on average equity (1) 13.72% 12.53% 11.47% 11.04% 10.26% 9.94% 8.84%
Dividends declared per share:
at an exchange ratio of 1.75 $ 0.46 $ 0.50 $ 0.52 $ 0.57 $ 0.89 $ 0.28 $ 0.28
at an exchange ratio of 2.00 $ 0.43 $ 0.47 $ 0.49 $ 0.53 $ 0.84 $ 0.27 $ 0.27
BALANCE SHEET DATA:
Loans $211,508 $227,649 $233,981 $243,628 $250,778 $243,643 $254,787
Allowance for loan losses 2,658 2,836 2,867 3,025 2,957 3,036 2,912
Investments 141,815 136,495 142,159 145,255 152,001 156,392 152,091
Assets 393,659 389,587 412,808 428,310 436,868 441,100 467,315
Deposits 337,760 353,155 360,376 372,588 377,927 385,406 409,190
Stockholders' equity 41,286 41,465 47,542 50,177 49,750 50,160 50,799
Book value per share:
at an exchange ratio of 1.75 11.15 11.19 12.83 13.62 13.76 13.64 14.31
at an exchange ratio of 2.00 10.46 10.51 12.03 12.79 12.94 12.81 13.45
Equity to total assets 20.98% 21.29% 23.03% 23.43% 22.78% 22.74% 21.74%
Trust Department assets (2) $ 80,801 $ 85,427 $103,448 $125,833 $145,487 $137,738 $163,887
</TABLE>
- -----------------
(1) For interim periods this percentage is annualized
(2) See individual companies selected financial data for basis of presentation
of assets.
17
<PAGE>
THE MEETINGS
DATE, TIME AND PLACE
The Cortland First Meeting will be held at the office of Cortland First
located at 65 Main Street, Cortland, New York on _____________, 1998, at 4:00
p.m. Eastern Time.
The Oneida Valley Meeting will be held at the office of Oneida Valley
located at 160 Main Street, Oneida, New York on _____________, 1998, at 4:00
p.m. Eastern Time.
MATTERS TO BE CONSIDERED AT THE MEETINGS
Cortland First. At the Cortland First Meeting, the holders of Cortland
First Common Stock will be asked to consider and vote upon (i) the approval and
adoption of the Merger Agreement, (ii) the approval of the Alliance Financial
Corporation 1998 Long Term Incentive Compensation Plan, and (iii) such other
matters as may properly be brought before the Cortland First Meeting.
The Board of Directors of Cortland First has unanimously approved the
Merger Agreement and recommends a vote FOR approval and adoption of the Merger
Agreement. The Board of Directors has also unanimously approved and recommends a
vote FOR approval of the Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan.
Oneida Valley. At the Oneida Valley Meeting, holders of Oneida Valley
Common Stock will be asked to consider and vote upon (i) the approval and
adoption of the Merger Agreement, (ii) the approval of the Alliance Financial
Corporation 1998 Long Term Incentive Compensation Plan, and (iii) such other
matters as may properly be brought before the Oneida Valley Meeting.
The Board of Directors of Oneida Valley has unanimously approved the Merger
Agreement and recommends a vote FOR approval and adoption of the Merger
Agreement. The Board of Directors has also unanimously approved and recommends a
vote FOR approval of the Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan.
RECORD DATES; STOCK ENTITLED TO VOTE; QUORUM
Cortland First. Only holders of record of Cortland First Common Stock on
the Cortland First Record Date will be entitled to notice of, and to vote at,
the Cortland First Meeting. On the Cortland First Record Date, 1,969,776 shares
of Cortland First Common Stock were issued and outstanding and held by
approximately 550 holders of record.
Shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast on the Cortland First Record Date must be
represented in person or by proxy at the Cortland First Meeting in order for a
quorum to be present for purposes of voting on approval of the Agreement,
approval of the Incentive Plan and any other matters to be considered at the
Cortland First Meeting.
Oneida Valley. Only holders of record of Oneida Valley Common Stock on the
Oneida Valley Record Date will be entitled to notice of, and to vote at, the
Oneida Valley Meeting. On the Oneida Valley
18
<PAGE>
Record Date, 902,877 shares of Oneida Valley Common Stock were issued and
outstanding and held by approximately 430 holders of record.
Shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast on the Oneida Valley Record Date must be
represented in person or by proxy at the Oneida Valley Meeting in order for a
quorum to be present for purposes of voting on approval of the Agreement,
approval of the Incentive Plan and any other matters to be considered at the
Oneida Valley Meeting.
VOTES REQUIRED
Cortland First. The approval and adoption of the Merger Agreement will
require the affirmative vote, in person or by proxy at the Cortland First
Meeting, of holders of at least 66 2/3% of the outstanding Cortland First Common
Stock. The approval of the Alliance Financial Corporation 1998 Long Term
Incentive Compensation Plan will require the affirmative vote of a majority of
the votes cast in person or by proxy at the Cortland First Meeting.
Each holder of shares of Cortland First Common Stock outstanding on the
Cortland First Record Date will be entitled to one vote for each share held of
record on each matter to be considered at the Cortland First Meeting.
Shareholders of Cortland First are not entitled to cumulate votes for any matter
to be considered at the Cortland First Meeting.
Directors and executive officers of Cortland First and affiliates of such
persons had voting power with respect to 127,052 shares (excluding shares for
which ownership is disclaimed) of Cortland First Common Stock, representing
6.45% of the Cortland First Common Stock outstanding, as of __________, 1998.
Such persons have entered into agreements ("Cortland First Voting Agreements")
with Oneida Valley, whereby each such person has agreed to vote all shares of
Cortland First Common Stock that he or she is entitled to vote in favor of the
Agreement. Accordingly, in the aggregate, it is expected that at least 127,052
shares of Cortland First Common Stock (representing 6.45% of the outstanding
shares) will be voted in favor of the Agreement.
Oneida Valley. The approval and adoption of the Merger Agreement will
require the affirmative vote, in person or by proxy at the Oneida Valley
Meeting, of holders of at least 66 2/3% of the outstanding Oneida Valley Common
Stock. The approval of the Alliance Financial Corporation 1998 Long Term
Incentive Compensation Plan will require the affirmative vote of a majority of
the votes cast in person or by proxy at the Oneida Valley Meeting.
Each holder of shares of Oneida Valley Common Stock outstanding on the
Oneida Valley Record Date will be entitled to one vote for each share held of
record on each matter to be considered at the Oneida Valley Meeting.
Shareholders of Oneida Valley are not entitled to cumulate votes for any matter
to be considered at the Oneida Valley Meeting.
Directors and executive officers of Oneida Valley and affiliates of such
persons had voting power with respect to 83,325 shares (excluding shares for
which ownership is disclaimed) of Oneida Valley Common Stock, representing 9.23%
of the Oneida Valley Common Stock outstanding, as of __________, 1998. Such
persons have entered into agreements ("Oneida Valley Voting Agreements") with
Cortland First, whereby each such person has agreed to vote all shares of Oneida
Valley Common Stock that he or she is entitled to vote in favor of the
Agreement. Accordingly, in the aggregate, it is expected that at least 83,325
19
<PAGE>
shares of Oneida Valley Common Stock (representing 9.23% of the outstanding
shares) will be voted in favor of the Agreement.
VOTING AND REVOCABILITY OF PROXIES
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by properly executed proxies
will be voted at the Meetings and all adjournments thereof.
Proxies for the Cortland First Meeting. Proxies for the Cortland First
Meeting may be revoked by written notice to David R. Alvord at the address set
forth above, by filing a later dated proxy prior to a vote being taken on a
particular proposal at the Cortland First Meeting or by attending the Cortland
First Meeting and voting in person. The presence of a shareholder at the
Cortland First Meeting will not in itself revoke such shareholder's proxy.
Proxies solicited by the Board of Directors of Cortland First will be voted
in accordance with the directions given therein. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AND FOR APPROVAL OF
THE INCENTIVE PLAN. The proxy confers discretionary authority on the persons
named therein to vote with respect to any matters incident to the conduct of the
Cortland First Meeting. If any business, other than approval of the Merger and
approval of the Incentive Plan, is presented at the Cortland First Meeting,
proxies will be voted by those named therein in accordance with the
determination of a majority of the Cortland First Board of Directors. Proxies
marked as abstentions will not be counted as votes cast. In addition, shares
held in street name which have been designated by brokers on proxies as not
voted will not be counted as votes cast. Proxies marked as abstentions or as
broker non-votes, however, will be treated as shares present for purposes of
determining whether a quorum is present.
Proxies for the Oneida Valley Meeting. Proxies for the Oneida Valley
Meeting may be revoked by written notice to John C. Mott at the address set
forth above, by filing a later dated proxy prior to a vote being taken on a
particular proposal at the Oneida Valley Meeting or by attending the Oneida
Valley Meeting and voting in person. The presence of a shareholder at the Oneida
Valley Meeting will not in itself revoke such shareholder's proxy.
Proxies solicited by the Board of Directors of Oneida Valley will be voted
in accordance with the directions given therein. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AND FOR APPROVAL OF
THE INCENTIVE PLAN. The proxy confers discretionary authority on the persons
named therein to vote with respect to any matters incident to the conduct of the
Oneida Valley Meeting. If any business, other than approval of the Merger and
approval of the Incentive Plan, is presented at the Oneida Valley Meeting,
proxies will be voted by those named therein in accordance with the
determination of a majority of the Oneida Valley Board of Directors. Proxies
marked as abstentions will not be counted as votes cast. In addition, shares
held in street name which have been designated by brokers on proxies as not
voted will not be counted as votes cast. Proxies marked as abstentions or as
broker non-votes, however, will be treated as shares present for purposes of
determining whether a quorum is present.
20
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Cortland First. The securities entitled to vote at the Cortland First
Meeting consist of Cortland First's common stock, par value $1.6667 per share.
The following table sets forth information regarding the shares of Cortland
First Common Stock beneficially owned as of _________________, 1998 by (i) each
director and named executive officer of Cortland First and (ii) all directors
and executive officers as a group. No person or group of persons are known by
Cortland First to own beneficially more than 5% of the Cortland First Common
Stock.
<TABLE>
<CAPTION>
PERCENT OF
SHARES (7) OF
SHARES CORTLAND FIRST
BENEFICIALLY COMMON STOCK
NAME & ADDRESS* OF BENEFICIAL OWNER OWNED (1) OUTSTANDING
- ----------------------------------- ------------ --------------
<S> <C> <C>
David R. Alvord 5,440 .28%
Donald S. Ames 74,400 3.78%
Mary Alice Bellardini 325 .02%
John H. Buck 2,411 .12%
Robert M. Lovell 1,669 (2) .08%
Harry D. Newcomb 5,672 (3) .29%
Garrison A. Marsted 67,400 (4) 3.40%
Charles E. Shafer 11,146 (5) .57%
Richard J. Shay 1,618 .08%
Charles H. Spaulding 3,277 (6) .17%
David J. Taylor 4,500 .23%
Stuart E. Young 651 .03%
All Directors and Officers as a Group (13 in Group) 178,831 9.08%
</TABLE>
- ------------
* The address of each director and officer is c/o First National Bank of
Cortland, Cortland, New York 13045.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of
Cortland First Common Stock if he or she has or shares voting or investment
power with respect to such Cortland First Common Stock or has a right to
acquire beneficial ownership at any time within 60 days from __________,
1998. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares. Except as otherwise noted, ownership is direct,
21
<PAGE>
and the named beneficial owners exercise sole voting and investment power
over the shares of the Cortland First Common Stock.
(2) Includes 430 shares owned by Mr. Lovell's daughter, pursuant to the Uniform
Gift to Minors Act, as to which Mr. Lovell has sole voting and investment
power.
(3) Includes 2,646 shares owned by Mr. Newcomb's wife, as to which Mr. Newcomb
disclaims any beneficial ownership.
(4) Includes 1,200 shares owned by Mr. Marsted's wife, as to which Mr. Marsted
disclaims any beneficial ownership, and 14,985 shares held by the Estate of
Mary Ellen G. Marsted, for which Mr. Marsted serves as personal
representative as to which Mr. Marsted disclaims any beneficial ownership.
Also included are 24,815 shares held in various trusts for which Mr.
Marsted serves as co-trustee and as to which Mr. Marsted disclaims any
beneficial ownership.
(5) Includes 3,381 shares owned by Mr. Shafer's wife, as to which Mr. Shafer
disclaims any beneficial ownership, and 900 shares owned by each of Mr.
Shafer's two sons, as to which Mr. Shafer disclaims any beneficial
ownership.
(6) Includes 2,952 shares owned by Mr. Spaulding's wife, as to which Mr.
Spaulding disclaims any beneficial ownership.
(7) Based on 1,969,776 shares of Cortland First Common Stock outstanding on
September ____, 1998.
Oneida Valley. The securities entitled to vote at the Oneida Valley Meeting
consist of Oneida Valley's common stock, par value $2.50 per share. The
following table sets forth information regarding the shares of Oneida Valley
Common Stock beneficially owned as of ____________, 1998 by (i) each director
and named executive officer of Oneida Valley, (ii) all directors and officers as
a group, and (iii) each person known by Oneida Valley to own beneficially more
than 5% of the Oneida Valley Common Stock.
<TABLE>
<CAPTION>
PERCENT OF
SHARES (8) OF
SHARES ONEIDA VALLEY
BENEFICIALLY COMMON STOCK
NAME & ADDRESS* OF BENEFICIAL OWNER OWNED (1) OUTSTANDING
- ----------------------------------- ------------ --------------
<S> <C> <C>
John W. Bailey 780 .09%
Donald H. Dew 823 .09%
Peter M. Dunn 39,299 4.35%
Robert H. Fearon, Jr. 74,347 (2) 8.23%
David P. Kershaw 1,493 (3) .17%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
SHARES (8) OF
SHARES ONEIDA VALLEY
BENEFICIALLY COMMON STOCK
NAME & ADDRESS* OF BENEFICIAL OWNER OWNED (1) OUTSTANDING
- ----------------------------------- ------------ --------------
<S> <C> <C>
Robert H. Kuiper 1,843 (4) .20%
Samuel J. Lanzafame 2,958 (5) .33%
John C. Mott 2,500 (6) .28%
Richard G. Smith 1,762 (7) .20%
Edward M. Thoma 484 .05%
All Directors and Officers as a Group (11 in Group) 126,289 13.99%
</TABLE>
- -----------------
* The address of each director and officer is c/o Oneida Valley National
Bank, 160 Main Street, Oneida, New York, 13421.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of
Oneida Valley Common Stock if he or she has or shares voting or investment
power with respect to such Oneida Valley Common Stock or has a right to
acquire beneficial ownership at any time within 60 days from
_______________, 1998. As used herein, "voting power" is the power to vote
or direct the voting of shares and "investment power" is the power to
dispose or direct the disposition of shares. Except as otherwise noted,
ownership is direct, and the named beneficial owners exercise sole voting
and investment power over the shares of the Oneida Valley Common Stock.
(2) Includes 2,800 shares held by Mr. Fearon as co-trustee for a trust under
the will of Robert H. Fearon, as to which Mr. Fearon disclaims beneficial
ownership. Also included are 37,472 shares owned by Mr. Fearon's wife, as
to which Mr. Fearon disclaims any beneficial ownership.
(3) Includes 126 shares owned jointly with Mr. Kershaw's wife.
(4) Includes 394 shares owned by Mr. Kuiper's wife, as to which Mr. Kuiper
disclaims any beneficial ownership.
(5) Includes 1,298 shares owned by Mr. Lanzafame's wife, as to which Mr.
Lanzafame disclaims beneficial ownership and 1,000 shares owned by Mr.
Lanzafame's children, as to which Mr. Lanzafame disclaims beneficial
ownership.
(6) Includes 300 shares owned jointly with Mr. Mott's wife.
(7) Includes 300 shares owned jointly with Mr. Smith's wife.
(8) Based on 902,877 shares of Oneida Valley Common Stock outstanding on
September ____, 1998.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to regulations promulgated under the Exchange Act, Cortland
First's officers and directors and all persons who own more than 10% of Cortland
First's Common Stock ("Reporting Persons") are required to file reports
detailing their ownership and changes of ownership in the Cortland First Common
Stock and to furnish Cortland First with copies of all such ownership reports
that are filed. Based solely on Cortland First's review of copies of such
ownership reports which it has received in the past fiscal year or with respect
to the past fiscal year, or written representations from the Reporting Persons
that no annual report of changes in beneficial ownership were required, Cortland
First believes that during fiscal year 1997 all Reporting Persons have complied
with these reporting requirements.
Oneida Valley's officers, directors and 10% shareholders are not currently
subject to the above-referenced Exchange Act reporting requirements.
OTHER MATTERS
The Oneida Valley and Cortland First Boards of Directors are not aware of
any business to come before the Meetings other than those matters described in
this Proxy Statement/Prospectus and matters incident to the conduct of the
Meetings. However, if any other matters should properly come before either
Meeting or any adjournments or postponements thereof, including any proper
proposals to adjourn either Meeting to permit further solicitation of proxies by
the Board of Directors in the event that there are not sufficient votes to
approve any proposal at the time of the Meeting, it is intended that proxies in
the accompanying form will be voted in respect thereof in accordance with the
determination of a majority of the Board of Directors, provided that no proxies
voted against the Merger will be voted in favor of adjournment to solicit
additional proxies in favor of the Merger and no proxies voted against the
Incentive Plan will be voted in favor of adjournment to solicit additional
proxies in favor of the Incentive Plan.
MISCELLANEOUS
The cost of soliciting proxies will be borne by Cortland First and Oneida
Valley with respect to their respective shareholders, and Cortland First and
Oneida Valley have agreed to share the expenses associated with the printing of
this Proxy Statement/Prospectus. Cortland First and Oneida Valley will reimburse
brokerage firms and other custodians, nominees and fiduciaries for reasonable
expenses incurred by them in sending proxy materials to the beneficial owners of
Cortland First and Oneida Valley Common Stock. In addition to solicitations by
mail, directors, officers and regular employees of Cortland First and Oneida
Valley may solicit proxies personally or by telegraph or telephone without
additional compensation therefor. Cortland First and Oneida Valley do not intend
to retain a proxy soliciting firm to assist in the solicitation of proxies.
However, if Cortland First and Oneida Valley do retain a proxy soliciting firm,
Cortland First and Oneida Valley will be responsible for costs relating to such
engagement.
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PROPOSAL I - APPROVAL OF MERGER
This section of this Proxy Statement/Prospectus describes certain aspects
of the Merger. The following description does not purport to be complete and is
qualified in its entirety by reference to the Agreement, which is incorporated
herein by reference. The full text of the Agreement is available upon written
request to David R. Alvord at Cortland First or John C. Mott at Oneida Valley,
at the respective addresses set forth below.
THE COMPANIES
Cortland First and First National Bank of Cortland. Cortland First is a New
York corporation and is registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") as a bank holding company within
the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"). At
June 30, 1998, Cortland First, on a consolidated basis, had total assets of
approximately $234 million, total deposits of approximately $206 million and
shareholders' equity of approximately $25 million.
Cortland First's sole subsidiary is First National Bank of Cortland. First
National Bank of Cortland was chartered in 1869 and is a member of the Federal
Reserve System. It operates its main office at 65 Main Street, Cortland, New
York, and seven other branch offices in Cortland, Southern Onondaga and Northern
Broome Counties. First National Bank of Cortland is a member of the Federal Home
Loan Bank of New York (the "FHLBNY") and its deposits are insured up to the
prescribed limits by the FDIC. First National Bank of Cortland is subject to
comprehensive regulation, supervision and examination by the Office of the
Comptroller of the Currency ("OCC"), the Federal Reserve Board and the FDIC.
First National Bank of Cortland conducts a general commercial banking and
trust business. It offers retail and wholesale banking services including
demand, savings and time deposits, commercial, mortgage and installment loans,
consumer banking and trust services. Services offered by its trust department
include trust administration, investment management, and custody services.
The executive offices of Cortland First and First National Bank of Cortland
are located at 65 Main Street, Cortland, New York 13045. The telephone number is
(607) 756-2831. For additional information, see "INFORMATION WITH RESPECT TO
CORTLAND FIRST -- Description of Business;" "SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA -- Cortland First" and "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS." Additional information about Cortland First and First
National Bank of Cortland also is included in the Cortland First documents filed
with the Commission. See "AVAILABLE INFORMATION."
Oneida Valley and Oneida Valley National Bank. Oneida Valley is a New York
corporation and is registered with the Federal Reserve Board as a bank holding
company within the meaning of the BHCA. At June 30, 1998, Oneida Valley, on a
consolidated basis, had total assets of approximately $234 million, total
deposits of approximately $203 million and shareholders' equity of approximately
$25 million.
Oneida Valley's sole subsidiary is Oneida Valley National Bank. Oneida
Valley National Bank was chartered in 1851 and is a member of the Federal
Reserve System. It operates its main office at 160 Main Street, Oneida, New
York, and seven other branch offices in Madison, Western Oneida and Eastern
Onondaga Counties. Oneida Valley National Bank is a member of the FHLBNY and its
deposits are insured up to the prescribed limits by the FDIC. Oneida Valley
National Bank is subject to comprehensive regulation, supervision and
examination by the OCC, the Federal Reserve Board and the FDIC.
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The executive offices of Oneida Valley and Oneida Valley National Bank are
located at 160 Main Street, Oneida, New York 13421. The telephone number is
(315) 363-4500. For additional information, see "INFORMATION WITH RESPECT TO
ONEIDA VALLEY -- Description of Business"; SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA -- Oneida Valley" and "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS."
Alliance Financial Corporation and Alliance Bank, N.A.. Alliance Financial
Corporation will be a New York corporation and will result from a change in the
name of Cortland First. Alliance Financial Corporation will own all of the
capital stock of Alliance Bank, N.A. and will engage, through Alliance Bank,
N.A., in the business of banking and banking related activities. Alliance
Financial Corporation will maintain dual headquarters at the current executive
offices of Cortland First and Oneida Valley.
As of June 30, 1998, on a pro forma basis, Alliance Financial Corporation
would have had total assets of approximately $467 million, total deposits of
approximately $409 million and total shareholders' equity of approximately $51
million.
Alliance Bank, N.A. will serve approximately 36,000 households which are
currently served by First National Bank of Cortland and Oneida Valley National
Bank through a network of full service branch offices located in Onondaga,
Cortland, Madison, Oneida and Broome Counties in New York. In addition, the
parties expect that following consummation of the Bank Merger, Alliance Bank,
N.A. will open or acquire several branch locations in the Syracuse metropolitan
area. The Bank Merger will expand the products and services that are currently
offered individually by Oneida Valley National Bank and First National Bank of
Cortland. Following the Bank Merger, all branch offices of Alliance Bank, N.A.
will offer the full array of loan, deposit and other financial products and
services of the combined entity.
See "SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
BACKGROUND OF THE MERGER
Cortland First and Oneida Valley have traditionally concentrated their
business activities on providing community banking services in their respective
market areas. Over the past several years, the environment for independent
community banks in general, and specifically in the market areas served by
Cortland First and Oneida Valley, has become increasingly competitive. The
resulting pressures on both margins and loan growth have been compounded by the
high cost of maintaining skilled staff while simultaneously introducing
competitive technology and products.
As a result of these factors, Cortland First and Oneida Valley both
recognized the need to grow and diversify. Moreover, Cortland First and Oneida
Valley each believed that providing an independently managed, service-focused,
community banking alternative to the super-regional banking organizations
remained an attractive, long-term strategy for building shareholder value. In
the current environment, however, they also recognized that it would be
difficult to rapidly expand their respective operations without substantial
pressure on financial performance. Accordingly, they separately concluded that
it would be in the best interests of their respective shareholders and other
constituents to remain independent community banks and to seek competitive
strength through strategic mergers that would provide opportunities for both
cost consolidation as well as geographic and product expansion. While each had
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explored possible business combinations with other financial institutions in the
past, these discussions had not resulted in any substantive agreements.
David R. Alvord, Cortland First's President and Chief Executive Officer,
and John C. Mott, Oneida Valley's President, have known each other for many
years. In April 1998, Mr. Alvord and Mr. Mott met to discuss the possibility of
a merger of Cortland First and Oneida Valley and their respective bank
subsidiaries, and mutually agreed that it was worthy of further consideration.
Accordingly, representatives of Cortland First and Oneida Valley and their
financial, legal and accounting advisors met during early May 1998 to consider
the financial basis upon which a "merger of equals" could be achieved. Based
upon these meetings it appeared that the proposed merger could be of substantial
potential future value to both companies' shareholders, and that an exchange
ratio appropriate to such a "merger of equals" appeared to be feasible.
On May 13, 1998, separate special meetings of the Cortland First and Oneida
Valley Boards were held to evaluate the merits of a potential business
combination. The directors were advised of the rationale for the proposed
transaction, the proposed corporate structure for Alliance Financial
Corporation, the transaction process and the relative exchange ratios. Both
Boards authorized their respective managements to pursue further due diligence,
to select and retain financial advisors to evaluate the fairness of the
transaction from a financial point of view and, if appropriate, to continue
efforts toward a definitive agreement. During late May and early June 1998, the
parties' respective legal counsel, financial advisors and accountants met
numerous times to discuss the specific details of a proposed transaction and
merger agreement.
On June 10, 1998, the Oneida Valley Board met to review an update of the
proposed transaction, as presented by Capital Formation Group and Jamesson
Associates (an independent banking industry consulting firm). The Oneida Valley
directors were updated on the activities since the May 13, 1998 meeting, and
were advised on the merger process, including the responsibilities of the
outside directors, management and advisors, and an estimated timetable for the
transaction. The importance of a viable strategic plan for Alliance Financial
Corporation was stressed by management. The Cortland First Board had a similar
presentation and held similar discussions at a meeting on June 22, 1998.
On June 25, 1998, Capital Formation Group and Jamesson Associates gave the
Oneida Valley Board a presentation of the proposed strategic plan for Alliance
Financial Corporation. The plan incorporated revenue enhancement brought about
by proposed expansion into the Syracuse metropolitan area, increased lending
activity in the respective banks' current geographic markets and in Syracuse,
increased fee revenue and other benefits afforded due to the larger size of the
combined entity, cost savings associated with the proposed merger and scale of
operations, and other possible strategies to aid in earnings improvement. The
directors also discussed proposed exchange ratios for the transaction. The
Cortland First Board had a similar presentation and held similar discussions at
a meeting on June 30, 1998.
In late June and early July, the parties' respective legal counsel,
financial and other advisors continued negotiation of a definitive agreement for
presentation to the Cortland First and Oneida Valley Boards, and on July 8,
1998, the Boards met separately to consider a proposed definitive merger
agreement, as well as the financial and other proposed terms and conditions of
the Merger (including the Exchange Ratio). At the Cortland First Board meeting,
Capital Formation Group reviewed historical information relating to Cortland
First and projected financial information with respect to Alliance Financial
Corporation, and Capital Formation Group gave its opinion that the proposed
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<PAGE>
Exchange Ratio was fair to Cortland First's shareholders from a financial point
of view. The Board reviewed the proposed structure of the Merger, the proposed
terms of the Agreement, the proposed Stock Option Agreements and the proposed
Cortland First and Oneida Valley Voting Agreements.
After consideration and discussion of the proposed transaction and
consultation with its management, financial advisors and legal counsel, Cortland
First's Board of Directors concluded that the Merger would advance its business
strategies and objectives, for the reasons described below. Accordingly, the
Board approved the Merger, the Agreement and the Stock Option Agreements as in
the best interests of Cortland First's shareholders and other constituencies,
and directed that the Merger and the Agreement be submitted for approval by
Cortland First's shareholders at the Cortland First Meeting.
At the July 8, 1998 Oneida Valley Board meeting, Empire Valuation reviewed
historical information relating to Oneida Valley and projected financial
information with respect to Alliance Financial Corporation, and gave its opinion
that the proposed Exchange Ratio was fair to Oneida Valley's shareholders from a
financial point of view. The Board reviewed the proposed structure of the
Merger, the proposed terms of the Agreement, the proposed Stock Option
Agreements and the proposed Cortland First and Oneida Valley Voting Agreements.
Following discussion, the Board adjourned the meeting to allow individual
directors to further contemplate the transaction.
On July 10, 1998, the Oneida Valley Board reconvened to vote on the Merger.
After further discussion of the proposed transaction and consultation with its
management, financial advisors and legal counsel, the Oneida Valley Board of
Directors concluded that the merger would advance Oneida Valley's business
strategies and objectives, for the reasons described below. Accordingly, the
Board of Directors approved the Merger, the Agreement and the Stock Option
Agreements as being in the best interests of Oneida Valley's shareholders and
other constituencies, and directed that the Merger and the Agreement be
submitted for approval by Oneida Valley's shareholders at the Oneida Valley
Meeting.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARDS OF DIRECTORS
Cortland First. In reaching the decision to approve the Merger, Cortland
First's Board of Directors considered a number of factors, including the factors
described under " -- Background of the Merger," as well as:
(i) the respective business, operations, asset quality, financial
condition, earnings, strategic business plans, competitive positions and
stock price performance of Cortland First and Oneida Valley (see "--
Background of the Merger" and "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA");
(ii) the ability to pursue new market opportunities in the Syracuse
metropolitan area and Cortland First's existing geographic market, benefit
from new products and product enhancements, and expand its business;
(iii) the similar community banking cultures and business philosophies
of the two companies, particularly with respect to customer satisfaction,
efficiency and credit quality and serving the banking needs of their
respective communities, and the companies' compatible management teams;
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(iv) the projected market capitalization and market position of the
combined entity, the diversification of Cortland First's asset and deposit
bases, the ability of the combined company to compete more effectively in
the combined geographic market area of Oneida Valley and Cortland First,
and the ability of the combined company to expand into the Syracuse
metropolitan area through the opening or acquisition of branch locations
(see "SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS");
(v) the expected financial effects of the proposed transactions,
including the enhanced revenue anticipated to result from the Merger and
the Bank Merger, the aggregate pre-tax cost savings (resulting from back
office efficiencies, consolidations and other cost savings), which are
estimated by management to be approximately $750,000, $1,000,000 and
$1,000,000 in 1999, 2000 and 2001, respectively, and the effects of the
Merger and the Bank Merger on the risk-based and leverage capital ratios of
Alliance Financial Corporation and Alliance Bank, N.A. (see "SELECTED
HISTORICAL AND PRO FORMA FINANCIAL DATA," and "-- Management and Operations
After the Merger");
(vi) the likely impact of the proposed Merger on the employees and
customers of Cortland First and its subsidiaries, on the communities in
which Cortland First presently conducts its business, and on Cortland
First's other constituencies;
(vii) the current and prospective economic, regulatory and competitive
climate facing independent community banking organizations, including the
consolidation currently underway in the banking industry and competition
from larger institutions and from nonbank providers of financial services
(see "Background of the Merger");
(viii) the Exchange Ratio in the Merger from a number of valuation
perspectives, the relative ownership of Cortland First's shareholders in
Alliance Financial Corporation, and related discussions with the Board's
financial advisors;
(ix) the July 8, 1998 opinion of Capital Formation Group that the
Exchange Ratio is fair to Cortland First's shareholders from a financial
point of view (see "-- Opinions of Financial Advisors");
(x) the terms of the Agreement, including the proposed Board
representation and management structure of the combined company (see
"--Management and Operations After the Merger");
(xi) the terms of the Stock Option Agreements (see "-- Stock Option
Agreements");
(xii) the regulatory and shareholder approvals required for the
consummation of the Merger and the Bank Merger (see "-- Regulatory
Approvals");
(xiii) the treatment of the Merger as a pooling-of-interests for
financial accounting purposes and as a tax-free reorganization for federal
income tax purposes (see "-- Federal Income Tax Consequences" and "--
Accounting Treatment");
(xiv) the expenses relating to the Merger and certain costs of
post-Merger integration of operations, expected to be approximately
$600,000 to $1,000,000 on an after-tax basis (see "-- Management and
Operations After the Merger");
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(xv) the fact that the Merger is expected to be accretive to Alliance
Financial Corporation's earnings pre-tax during the first full year of
operations, and the extent to which planned investments necessary to
accomplish Alliance Financial Corporation's strategic plan may offset some
or all of the expected accretive effects (see " -- Management and
Operations After the Merger"); and
(xvi) the likelihood that the Merger will result in increased
liquidity and trading volumes for shares of Alliance Common Stock.
IN LIGHT OF THE REASONS DESCRIBED ABOVE, CORTLAND FIRST'S BOARD OF
DIRECTORS HAS UNANIMOUSLY DETERMINED THE MERGER TO BE FAIR TO AND IN THE BEST
INTERESTS OF CORTLAND FIRST AND CORTLAND FIRST'S SHAREHOLDERS, CUSTOMERS AND
COMMUNITIES SERVED. ACCORDINGLY, CORTLAND FIRST'S BOARD HAS UNANIMOUSLY APPROVED
THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER,
AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
AGREEMENT.
The foregoing discussion of information and factors considered by Cortland
First's Board of Directors is not intended to be exhaustive but includes all
material factors considered by the Board. In reaching its determination to
approve and recommend the Merger, Cortland First's Board did not assign relative
or specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors.
Oneida Valley. In reaching its decision to approve the Merger, Oneida
Valley's Board of Directors considered a number of factors, including the
factors described under "-- Background of the Merger," as well as:
(i) the respective business, operations, asset quality, financial
condition, earnings, strategic business plans, competitive positions and
stock price performance of Cortland First and Oneida Valley (see "--
Background of the Merger" and "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA");
(ii) the ability to pursue new market opportunities in the Syracuse
metropolitan area and Oneida Valley's existing geographic market, benefit
from new products and product enhancements, and expand its business;
(iii) the similar community banking cultures and business philosophies
of the two companies, particularly with respect to customer satisfaction,
efficiency and credit quality and serving the banking needs of their
respective communities, and the companies' compatible management teams;
(iv) the projected market capitalization and market position of the
combined entity, the diversification of the companies' asset and deposit
bases, the ability of the combined company to compete more effectively in
the combined geographic market area of Oneida Valley and Cortland First,
and the ability of the combined company to expand into the Syracuse
metropolitan area through the opening or acquisition of branch locations
(see "SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS");
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(v) the expected financial effects of the proposed transactions,
including the enhanced revenue anticipated to result from the Merger and
the Bank Merger, the aggregate pre-tax cost savings (resulting from back
office efficiencies, consolidations and other cost savings), which are
estimated by management to be approximately $750,000, $1,000,000 and
$1,000,000 in 1999, 2000 and 2001, respectively, and the effects of the
Merger and the Bank Merger on the risk-based and leverage capital ratios of
Alliance Financial Corporation and Alliance Bank, N.A. (see "SELECTED
HISTORICAL AND PRO FORMA FINANCIAL DATA," and "-- Management and Operations
After the Merger");
(vi) the likely impact of the proposed Merger on the employees and
customers of Oneida Valley and its subsidiaries, on the communities in
which Oneida Valley presently conducts its business, and on Oneida Valley's
other constituencies;
(vii) the current and prospective economic, regulatory and competitive
climate facing independent community banking organizations, including the
consolidation currently underway in the banking industry and competition
from larger institutions and from nonbank providers of financial services
(see "Background of the Merger");
(viii) the Exchange Ratio in the Merger from a number of valuation
perspectives, the relative ownership of Oneida Valley's shareholders in
Alliance Financial Corporation, and related discussions with the Board's
financial advisors;
(ix) the July 10, 1998 opinion of Empire Valuation that the Exchange
Ratio is fair to Oneida Valley's shareholders from a financial point of
view (see "-- Opinions of Financial Advisors");
(x) the terms of the Agreement, including the proposed Board
representation and management structure of the combined company (see
"--Management and Operations After the Merger");
(xi) the terms of the Stock Option Agreements (see "-- Stock Option
Agreements");
(xii) the regulatory and shareholder approvals required for the
consummation of the Merger and the Bank Merger (see "-- Regulatory
Approvals");
(xiii) the treatment of the Merger as a pooling-of-interests for
financial accounting purposes and as a tax-free reorganization for federal
income tax purposes (see "-- Federal Income Tax Consequences" and
"--Accounting Treatment");
(xiv) the expenses relating to the Merger and certain costs of
post-Merger integration of operations, expected to be approximately
$600,000 to $1,000,000 on an after-tax basis (see "-- Management and
Operations After the Merger");
(xv) the fact that the Merger is expected to be accretive to Alliance
Financial Corporation's earnings during the first full year of operations,
and the extent to which planned investments necessary to accomplish
Alliance Financial Corporation's strategic plan may offset some or all of
the expected accretive effects (see "-- Management and Operations After the
Merger"); and
(xvi) the likelihood that the Merger will result in increased
liquidity and trading volumes for shares of Alliance Common Stock.
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IN LIGHT OF THE REASONS DESCRIBED ABOVE, ONEIDA VALLEY'S BOARD OF DIRECTORS
HAS UNANIMOUSLY DETERMINED THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF
ONEIDA VALLEY AND ONEIDA VALLEY'S SHAREHOLDERS, CUSTOMERS AND COMMUNITIES
SERVED. ACCORDINGLY, ONEIDA VALLEY'S BOARD HAS UNANIMOUSLY APPROVED THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE AGREEMENT.
The foregoing discussion of information and factors considered by Oneida
Valley's Board of Directors is not intended to be exhaustive but includes all
material factors considered by the Board. In reaching its determination to
approve and recommend the Merger, Oneida Valley's Board did not assign relative
or specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors.
OPINIONS OF FINANCIAL ADVISORS
Capital Formation Group of Rochester, L.P. Cortland First engaged Capital
Formation Group to act as its financial advisor in connection with the merger.
Pursuant to the terms of the formal engagement signed on June 2, 1998, Capital
Formation Group agreed to assist Cortland First in analyzing the proposed merger
with Oneida Valley. Capital Formation Group is a privately owned investment
banking and financial advisory company headquartered in Rochester, NY and is
primarily engaged in providing merger and acquisition advice to corporations
located or conducting their primary business activity in the Eastern Great Lakes
Region. Capital Formation Group has continually provided such service to its
clients since its inception in 1992. The principals of Capital Formation Group
have completed, during the period since inception, approximately 60 merger and
acquisition transactions in which it provided such services to its clients.
Cortland First selected Capital Formation Group to assist its management and its
Board in the structuring, pricing and negotiation of the proposed terms of the
Merger, based upon Capital Formation Group's expertise. As part of its business,
Capital Formation Group is engaged in the valuation of businesses and their
securities in connection with such mergers and acquisitions, the facilitation of
mergers and acquisitions through negotiations of terms and conditions, and the
issuance of Fairness Opinions in connection with such transactions.
As part of its engagement, representatives of Capital Formation Group
attended the meeting of Cortland First's board held on July 8, 1998 at which the
Board considered and approved the Merger. At the meeting, Capital Formation
Group rendered written and oral opinions that, as of such date, the Exchange
Ratio was fair to Cortland First and its shareholders from a financial point of
view. Such opinion was reconfirmed in writing as of the date of this Proxy
Statement/Prospectus.
The full text of Capital Formation Group's written opinion dated as of the
date of the Proxy Statement/Prospectus is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. The descriptions
of the opinions and analyses set forth herein are qualified in their entirety by
reference to Appendix A. Cortland First shareholders are urged to read the
attached opinion in its entirety for a description of procedures followed,
assumptions made, matters considered, and qualifications and limitations of the
review undertaken by Capital Formation Group in connection therewith.
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Capital Formation Group's opinions are directed to Cortland First's Board
and address only the Exchange Ratio. They do not address the underlying business
decision to proceed with the Merger and do not constitute a recommendation to
any Cortland First shareholder as to how such shareholder should vote with
respect to the Merger or any other matter related thereto.
In connection with rendering its opinions, Capital Formation Group
performed a variety of financial analyses. The following is a summary of
analyses performed by Capital Formation Group, but does not purport to be a
complete description of all the analyses underlying Capital Formation Group's
opinions. The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to a partial analysis or
summary description. Capital Formation Group believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and analyses, could
create an incomplete view of the analyses and processes underlying its opinions.
In performing its analyses, Capital Formation Group made numerous assumptions
with respect to industry performance, business and economic conditions and
various other matters, many of which cannot be predicted and are beyond the
control of Cortland First, Oneida Valley, and Capital Formation Group. Any
estimates contained in Capital Formation Group's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates on the values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies or
their securities may actually be sold. Because such estimates are inherently
subject to uncertainty, neither Cortland First, Oneida Valley, nor Capital
Formation Group assumes responsibility for their accuracy.
The following is a summary of the analysis prepared by Capital Formation
Group in connection with its opinion.
Relative Contribution Analysis: Capital Formation Group analyzed the
relative contributions of Cortland First and Oneida Valley in relation to the
proportionate interest in Alliance Financial Corporation that will be held by
shareholders of the respective companies following the Merger. Capital Formation
Group estimated that the holders of Cortland First Common Stock would hold
approximately 52.1% to 55.4% of the outstanding shares of Alliance Financial
Corporation and the holders of Oneida Valley Common Stock would hold
approximately 44.6% to 47.9% of the outstanding shares of Alliance Financial
Corporation after the Merger.
Capital Formation Group also analyzed the relative contributions of
Cortland First and Oneida Valley to the net income, assets, and book value of
equity of the combined entity for the twelve months ended March 31, 1998 and for
the twelve months ended June 30, 1998. Based on the twelve months ended March
31, 1998, Cortland First's net income, assets and book value represent 51.2%,
49.6% and 50.2%, respectively, of the total of such amounts for the combined
company. Based on the twelve months ended June 30, 1998, Cortland First's net
income, assets and book value represent 50.9%, 50.0% and 50.2%, respectively, of
the total such amounts for the combined company. Additionally, Capital Formation
Group analyzed the market value of Cortland First and Oneida Valley, where the
proportionate share of the combined total was approximately 62.5% for Cortland
First and was approximately 37.5% for Oneida Valley as of June 8, 1998. As
another measure of relative value, Capital Formation Group analyzed the value of
both Cortland First and Oneida Valley through an adjusted net asset valuation
exercise. The proportionate values for Cortland First and Oneida Valley were
49.5% and 50.5%, respectively.
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Given the possible range of the Exchange Ratio, the consideration to be
paid to the Oneida Valley shareholders represents 44.6% to 47.9% of the total
equity of the combined company after the Merger, on a pro forma basis.
Comparable Company Analysis: Capital Formation Group reviewed and compared
selected financial and operating data for Cortland First and Oneida Valley with
those of a peer group of six selected bank holding companies located in New York
(the "Comparable Group"). Capital Formation Group selected the Comparable Group
companies on the basis of various factors, including primarily each company's
concentration in the banking business and the maturity of its business. Capital
Formation Group examined certain publicly available financial data of the
Comparable Group, including market capitalization, assets, book value of equity
and earnings. Capital Formation Group's analysis compared Cortland First and
Oneida Valley with the Comparable Group in terms of return on assets and return
on equity for the twelve months ended March 31, 1998 and June 30, 1998. Capital
Formation Group analyzed the dividends paid by Cortland First and Oneida Valley
relative to the Comparable Group for the period ended December 31, 1997 in terms
of both dividend payout ratio and dividend yield.
The analysis also compared price per share as a multiple of the latest
twelve month earnings per share and as a multiple of book value per share for
the periods ending March 31, 1998 and June 30, 1998. Although Cortland First and
Oneida Valley were very similar on a comparable financial basis to each other,
Cortland First compared favorably to the Comparable Group in terms of market
price, while Oneida Valley's market price was below that of its theoretical
price based on the market multiples of the Comparable Group.
Stock Trading History: Capital Formation Group reviewed the history of the
trading price of Cortland First Common Stock. Capital Formation Group noted
that: Cortland First Common Stock, like Oneida Valley Common Stock, was
relatively illiquid with a relatively limited trading market and that when it
traded, the Cortland First Common Stock has traded with relatively wide bid/ask
price spreads and low share volume.
Pro Forma Merger Analysis: Capital Formation Group analyzed certain pro
forma effects of the Merger on Cortland First's estimated assets, book value,
revenues and net income for the twelve months ended March 31, 1998 and June 30,
1998. This analysis reflected no synergies for the combined companies. Based on
both pro forma earnings per share and pro forma book value per share, this
analysis showed accretion through all points of the flexible Exchange Ratio
(2.00 shares-to-1.00 through 1.75 shares-to-1.00). Capital Formation Group also
analyzed the effect of the Merger on Cortland First's ratios and balance sheet
and believes it will not materially adversely affect Cortland First's financial
flexibility.
In arriving at the Capital Formation Group Opinions, Capital Formation
Group performed certain financial analyses, the material portions of which are
summarized above. The summary set forth above does not purport to be a complete
description of Capital Formation Group's analyses. Capital Formation Group
believes that its analysis and the summary set forth above must be considered as
a whole and that selecting portions of its analyses could create an incomplete
view of the process underlying the analyses set forth in the Capital Formation
Group Opinions. In performing its analyses, Capital Formation Group made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Cortland First and Oneida Valley. The trading values of
the Cortland First Common Stock and the Oneida Valley Common Stock may be
significantly more or less than the amounts set forth in Capital Formation
Group's analysis. Actual
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trading values depend upon several factors, including events affecting financial
institutions generally, general economic, market and interest rate conditions
and other factors which generally influence the price of securities.
No company used in the comparable company analysis summarized above is
identical to Cortland First or Oneida Valley. Accordingly, any such analysis of
the value of the proposed Merger involves complex considerations and judgements
concerning differences in the potential financial and operating characteristics
of the comparable companies and other factors in relation to the trading value
of the comparable companies.
In connection with rendering its opinions, Capital Formation Group
reviewed, among other things: (i) the Agreement and exhibits thereto; (ii) the
Cortland First Voting Agreements and the Oneida Valley Voting Agreements; (iii)
the Stock Option Agreements; (iv) Cortland First's audited consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations as contained in its annual reports to
shareholders for the years ended December 31, 1995, 1996 and 1997, respectively;
(v) Oneida Valley's audited consolidated financial statements and management's
discussion and analysis of financial condition and results of operations as
contained in its annual reports to shareholders for the years ended December 31,
1995, 1996 and 1997, respectively; (vi) Oneida Valley's unaudited consolidated
financial statements contained in its quarterly reports to shareholders for the
quarters ended March 31 and June 30, 1998; (vii) Cortland First's unaudited
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations contained in its Quarterly Reports
on form 10-Q for the quarter ended March 31 and June 30, 1998; (viii) certain
financial analyses, including estimates of future financial performance, of
Cortland First prepared by and reviewed with management of Cortland First and
the views of senior management of Cortland First regarding Cortland First's past
and current business operations, results thereof, financial condition and future
prospects; (ix) certain financial analyses, including estimates of future
financial performance, of Oneida Valley regarding Oneida Valley's past and
current business operation, results thereof, financial condition and future
prospects; (x) estimated pro forma impacts of the Merger; (xi) the publicly
reported historical price and trading activity of Cortland First Common Stock
and Oneida Valley Common Stock, respectively, including comparison of certain
financial and stock market information for Cortland First and Oneida Valley with
similar publicly available information for certain other companies the
securities of which are publicly traded; (xii) the financial terms of recent
business combinations in the savings and banking institution industries, to the
extent publicly available; (xiii) the current market environment generally and
the banking environment in particular; and (xiv) such other information,
financial studies, analyses and investigations and financial, economic and
market criteria as Capital Formation Group considered relevant.
In connection with rendering the Capital Formation Group Fairness Opinion,
Capital Formation Group confirmed the appropriateness of its reliance on the
analyses used to render the July 8, 1998 opinion by performing procedures to
update certain of such analyses and by reviewing assumptions upon which such
analyses were based and factors considered therewith.
In performing its reviews and analyses, Capital Formation Group assumed and
relied upon, without independent verification, the accuracy and completeness of
all financial information, analyses and other information that was publicly
available or otherwise furnished to, reviewed by or discussed with it, and
Capital Formation Group does not assume any responsibility or liability
therefor. Capital Formation Group did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or
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the liabilities of Cortland First or Oneida Valley or any of their respective
subsidiaries, or the collectibility of any such assets, nor was it furnished
with any such evaluations or appraisals (relying, where relevant, on the
analyses and estimates of Cortland First and Oneida Valley). With respect to the
information regarding potential future financial performance provided by each
company's management, Capital Formation Group assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgements of the respective managements of Cortland First and Oneida Valley
and that such performances will be achieved. Capital Formation Group also
assumed that there has been no material change in Cortland First's or Oneida
Valley's assets, financial condition, results of operations, business or
prospects since June 30, 1998, the date of the last financial statements noted
above, that Cortland First and Oneida Valley will remain as going concerns for
all periods relevant to its analyses, that the Merger will accounted for as a
pooling of interests and that the conditions precedent in the Agreement are not
waived.
The estimates of future financial performance furnished to Capital
Formation Group and used by it in certain of its analyses were prepared by the
senior management of Cortland First and Oneida Valley. Cortland First and Oneida
Valley do not publicly disclose internal management projections of the type
provided to Capital Formation Group in connection with its review of the Merger,
and as a result, such projections were not prepared with a view towards public
disclosure. These estimates were based on numerous variables and assumptions
which are inherently uncertain, including, without limitation, factors related
to general economic and competitive conditions, and accordingly, actual results
could vary significantly from those set forth in such projections.
Capital Formation Group has been retained by Cortland First's Board of
Directors as an independent contractor to act as financial adviser with respect
to the Merger. Capital Formation Group, as part of its business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, the facilitator of mergers and acquisitions through
negotiations of terms and conditions, and the issuance of Fairness Opinions in
connection with such transactions. As specialists in the securities of banking
companies, Capital Formation Group has experience in, and knowledge of, the
valuation of banking enterprises.
Cortland First, Oneida Valley, Capital Formation Group and Jamesson
Associates, an independent banking industry consulting firm (collectively the
"Transaction Advisors"), have entered into an agreement signed June 2, 1998
relating to the services provided the Transaction Advisors. Cortland First and
Oneida Valley paid the Transaction Advisors a non-refundable retainer fee of
$50,000 upon execution of the agreement, $100,000 upon delivery of the Capital
Formation Group Opinion and $50,000 on the date that this Proxy
Statement/Prospectus was initially mailed to shareholders, and have agreed to
pay the Transaction Advisors $145,000 on the Effective Date. Cortland First and
Oneida Valley have also agreed to pay the Transaction Advisors $45,000 in
connection with strategic planning advice with respect to the Merger to continue
beyond the closing through December 31, 1998. Cortland First and Oneida Valley
have also agreed to reimburse the Transaction Advisors for reasonable
out-of-pocket expenses and disbursements incurred in connection with its
retention and to indemnify against certain liabilities, including liabilities
under the federal securities laws.
Empire Valuation Consultants, Inc. Pursuant to an engagement letter dated
as of June 10, 1998 (the "Empire Valuation Agreement"), Oneida Valley retained
Empire Valuation as an independent financial advisor in connection with Oneida
Valley's consideration of the proposed Agreement. In its regular course of
business, Empire Valuation provides merger & acquisition and valuation serves
to, and renders fairness
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opinions on behalf of, corporate clients, corporate trustees, attorneys,
accountants, investors, financial institutions, the courts, and participants of
employee benefit plans. Empire's consultants have prepared or managed the
preparation of over 5,000 appraisals for a broad range of purposes, covering a
broad range of industries, both domestic and overseas, and for corporate clients
of all sizes. Empire's five principal and/or managing directors have
cumulatively over 110 years of experience in investment banking and valuation
experience. Empire's consultants have extensive experience in providing expert
testimony; have and currently hold national and regional officer and leadership
positions with the American Society of Appraisers; and have significant
experience in the banking and financial industries.
Pursuant to the terms of the Empire Valuation Agreement, Oneida Valley's
Board of Directors asked Empire Valuation to render its opinion as to the
fairness, from a financial point of view, of the Exchange Ratio to the holders
of Oneida Valley Common Stock. At the July 8, 1998 meeting (at which Oneida
Valley's Board reviewed the Agreement), and at the July 10 meeting (at which the
Board approved the Agreement), Empire Valuation delivered to the Board its
written opinion that, as of such date, the Exchange Ratio was fair, from a
financial point of view, to the holders of shares of Oneida Valley Common Stock.
Empire Valuation has also delivered to Oneida Valley's Board a written opinion
dated as of the date of this Proxy Statement/Prospectus (the "Empire Valuation
Fairness Opinion") which is substantially identical to its July 10, 1998
opinion.
The full text of the Empire Valuation Fairness Opinion, which sets forth
procedures followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken in connection with such opinion, is
attached as Appendix B to this Proxy Statement/Prospectus and is incorporated
herein by reference. The descriptions of the opinions set forth herein are
qualified in their entirety by reference to Appendix B. Holders of shares of
Oneida Valley Common Stock are urged to read the Empire Valuation Fairness
Opinion in its entirety in connection with their consideration of the Merger.
Empire Valuation's opinions were provided to Oneida Valley's Board of
Directors for its information and are directed only to the fairness, from a
financial point of view, of the Exchange Ratio to holders of shares of Oneida
Valley Common Stock. They do not address the underlying business decision of
Oneida Valley to engage in the Merger or any other aspect of the Merger and do
not constitute a recommendation to any holder of shares of Oneida Valley Common
Stock as to how such shareholder should vote at the Oneida Valley Meeting with
respect to the Agreement or any other matter related thereto.
In connection with rendering its opinions, Empire Valuation performed a
variety of financial analyses. The following is a summary of analyses performed
by Empire Valuation, but does not purport to be a complete description of all
the analyses underlying Empire Valuation's opinions. The preparation of a
fairness opinion is a complex process involving subjective judgments and is not
necessarily susceptible to a partial analysis or summary description. Empire
Valuation believes that its analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and processes underlying its opinions. In performing its analyses,
Empire Valuation made numerous assumptions with respect to industry performance,
business and economic conditions and various other matters, many of which cannot
be predicted and are beyond the control of Oneida Valley, Cortland First and
Empire Valuation. Any estimates contained in Empire Valuation's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates on the values of companies
do not purport to be appraisals or necessarily reflect the prices at which
companies
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or their securities may actually be sold. Because such estimates are inherently
subject to uncertainty, neither Oneida Valley, Cortland First nor Empire
Valuation assumes responsibility for their accuracy.
Empire Valuation performed a comparative review and analysis of Oneida
Valley's and Cortland First's historical financial statements and operating
performance. In particular, Empire Valuation analyzed the five year growth rates
for each bank's total assets, total shareholders' equity and net income. Oneida
Valley's five year compounded growth rate in total assets, total stockholders'
equity and net income were 3.09%, 5.04% and 0.77%, respectively. Cortland
First's five year compounded growth rate in total assets, total stockholders'
equity and net income were 3.35%, 7.37% and 3.47%, respectively. In addition,
Empire Valuation reviewed and analyzed Oneida Valley's and Cortland First's
relative historical trading volumes, stock prices and aggregate market values.
Utilizing the comparative balance sheets as of March 31, 1998, and the implied
aggregate market capitalizations for each bank based upon the latest trades in
early July 1998, Empire compared the relative contribution of Oneida Valley and
Cortland First to Alliance Financial Corporation. Oneida Valley's relative
percentage contribution of its total assets, total equity and net income as of,
and for period ending, March 31, 1998, was 50.36%, 49.76%, and 48.75%,
respectively. However, Oneida Valley's unadjusted market capital contribution
based upon its and Cortland First's average trading prices in early July 1998
was about 37.36%. Given the possible range of the Exchange Ratio, the
consideration to be paid to Oneida Valley's shareholders represent a relative
pro forma market capital allocation between 47.89% and 44.58%.
Empire Valuation also reviewed and compared selected financial, operating
and market value data for Oneida Valley and Cortland First with those of a group
of five selected bank holding companies located in Upstate New York ("peer
group"). The peer group was selected based upon size and business similarities.
Empire reviewed and compared reported March 31, 1998 financial data for the peer
group with Oneida Valley and Cortland First including total assets, total equity
(book value), trailing twelve months of earnings, recent trend in earnings,
dividend payout ratios, return on equity and return on assets. Empire Valuation
also reviewed the comparative selected market valuation multiples and the
dividend yields for the peer group, Oneida Valley and Cortland First.
In connection with rendering its opinions, Empire Valuation reviewed, among
other things: (i) the Agreement and exhibits thereto; (ii) the Cortland First
Voting Agreements and the Oneida Valley Voting Agreements; (iii) the Stock
Option Agreements; (iv) Oneida Valley's audited consolidated financial
statements and management's discussion and analysis of financial condition and
results of operations as contained in its annual reports to shareholders for the
years ended December 31, 1995, 1996 and 1997, respectively; (v) Cortland First's
audited consolidated financial statements and management's discussion and
analysis of financial condition and results of operations as contained in its
annual reports to shareholders for the years ended December 31, 1995, 1996 and
1997, respectively; (vi) Oneida Valley's unaudited consolidated financial
statements contained in its quarterly reports to shareholders for the quarters
ended March 31 and June 30, 1998; (vii) Cortland First's unaudited consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations contained in its Quarterly Reports on Form
10-Q for the quarters ended March 31 and June 30, 1998; (viii) certain financial
analyses, including estimates of future financial performance, of Oneida Valley
prepared by and reviewed with management of Oneida Valley and the views of
senior management of Oneida Valley regarding Oneida Valley's past and current
business operations, results thereof, financial condition and future prospects;
(ix) certain financial analyses, including estimates of future financial
performance, of Cortland First prepared by and reviewed with management of
Cortland First and the views of senior management of Cortland First regarding
Cortland First's past and current business operations, results thereof,
financial condition and future
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prospects; (x) estimated pro forma impacts of the Merger; (xi) the publicly
reported historical price and trading activity for Oneida Valley Common Stock
and Cortland First Common Stock, respectively, including a comparison of certain
financial and stock market information for Oneida Valley and Cortland First with
similar publicly available information for certain other companies the
securities of which are publicly traded; (xii) the financial terms of recent
business combinations in the savings and banking institution industries, to the
extent publicly available; (xiii) the current market environment generally and
the banking environment in particular; and (xiv) such other information,
financial studies, analyses and investigations and financial, economic and
market criteria as Empire Valuation considered relevant.
In connection with rendering the Empire Valuation Fairness Opinion, Empire
Valuation confirmed the appropriateness of its reliance on the analyses used to
render the July 10, 1998 opinion by performing procedures to update certain of
such analyses and by reviewing assumptions upon which such analyses were based
and factors considered in connection therewith.
In performing its reviews and analyses, Empire Valuation assumed and relied
upon, without independent verification, the accuracy and completeness of all
financial information, analyses and other information that was publicly
available or otherwise furnished to, reviewed by or discussed with it, and
Empire Valuation does not assume any responsibility or liability therefor.
Empire Valuation did not make an independent evaluation or appraisal of the
specific assets, the collateral securing assets or the liabilities of Oneida
Valley or Cortland First or any of their respective subsidiaries, or the
collectibility of any such assets, nor was it furnished with any such
evaluations or appraisals (relying, where relevant, on the analyses and
estimates of Oneida Valley and Cortland First). With respect to the information
regarding potential future financial performance provided by each company's
management, Empire Valuation assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of Oneida
Valley and Cortland First and that such performances will be achieved. Empire
Valuation also assumed that there has been no material change in Oneida Valley's
or Cortland First's assets, financial condition, results of operations, business
or prospects since June 30, 1998, the date of the last financial statements
noted above, that Oneida Valley and Cortland First will remain as going concerns
for all periods relevant to its analyses, that the Merger will be accounted for
as a pooling of interests and that the conditions precedent in the Agreement are
not waived.
The estimates of future financial performance furnished to Empire Valuation
and used by it in certain of its analyses were prepared by the senior management
of Oneida Valley and Cortland First. Oneida Valley and Cortland First do not
publicly disclose internal management projections of the type provided to Empire
Valuation in connection with its review of the Merger, and as a result, such
projections were not prepared with a view towards public disclosure. These
estimates were based on numerous variables and assumptions which are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions, and accordingly, actual results could vary
significantly from those set forth in such projections.
Under the Empire Valuation Agreement, Oneida Valley has agreed to pay
Empire Valuation a fee of $25,000 upon delivery of its fairness opinion. Oneida
Valley has also agreed to reimburse Empire Valuation for its reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify Empire Valuation and its affiliates and their respective partners,
directors, officers, employees, agents, and controlling persons against certain
expenses and liabilities, including liabilities under the federal securities
laws.
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TERMS OF THE MERGER/EXCHANGE RATIO
On the Effective Date, Oneida Valley will be merged with and into Cortland
First, pursuant to the NYBCL, and the name of Cortland First will be changed to
"Alliance Financial Corporation." It is also intended that on the Effective Date
or as soon as practicable thereafter, First National Bank of Cortland will be
merged with and into Oneida Valley National Bank, and the name of the resulting
national bank will be "Alliance Bank, N.A."
On the Effective Date, each share of Cortland First Common Stock
outstanding before the Merger shall continue to be an outstanding share of
Alliance Common Stock following the Merger. Each outstanding share of Oneida
Valley Common Stock will be converted into Alliance Common Stock, at the
Exchange Ratio of at least 1.75 but not more than 2.00 shares of Alliance Common
Stock for each share of Oneida Valley Common Stock, determined by rounding the
average closing bid price for Cortland First Common Stock for the 30 calendar
days preceding the Effective Date to the nearest $0.125 (the "Exchange Price"),
in order to determine the number of shares of Alliance Common Stock (the
"Exchange Shares") to be received for each share of Oneida Valley Common Stock
as presented in the following table:
EXCHANGE PRICE EXCHANGE SHARES
-------------- ---------------
$26.250 or less 2.00
26.375 1.99
26.500 1.98
26.625 1.97
26.750 1.96
26.875 1.95
27.000 1.94
27.125 1.94
27.250 1.93
27.375 1.92
27.500 1.91
27.625 1.90
27.750 1.89
27.875 1.88
28.000 1.88
28.125 1.87
28.250 1.86
28.375 1.85
28.500 1.84
28.625 1.83
28.750 1.83
28.875 1.82
29.000 1.81
29.125 1.80
29.250 1.79
29.375 1.79
29.500 1.78
29.625 1.77
29.750 1.76
29.875 1.76
30.00 or more 1.75
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SURRENDER OF CERTIFICATES
As soon as practicable after the Effective Date, Alliance Financial
Corporation or its stock transfer agent, acting in the capacity of exchange
agent, will mail to all holders of Oneida Valley Common Stock a letter of
transmittal, together with instructions for the exchange of their Oneida Valley
Common Stock certificates for certificates representing Alliance Common Stock
and a check representing the amount paid in lieu of issuing any fractional
share. Until so exchanged, each certificate representing Oneida Valley Common
Stock outstanding immediately after the Effective Date shall be deemed for all
purposes to evidence ownership of the number of shares of Alliance Common Stock
into which such shares have been converted. If any certificate representing
Oneida Valley Common Stock surrendered for exchange is to be issued in a name
other than that in which a certificate for exchange is issued, the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer and the person requesting such exchange shall affix any requisite stock
transfer tax stamps to the certificate surrendered or provide funds for their
purchase or establish to the satisfaction of Alliance Financial Corporation or
its agent that such taxes are not payable. ONEIDA VALLEY SHAREHOLDERS SHOULD NOT
SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE FURTHER INSTRUCTIONS.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties by Cortland First and
Oneida Valley regarding, among other things, their capitalization, organization,
ownership and capitalization of their subsidiaries, qualification to do
business, authority to enter into the Agreement and the Oneida Valley Stock
Option Agreement and the Cortland First Stock Option Agreement, Cortland First's
filings with the Commission, reliability of financial statements, taxes,
employee benefit plans, undisclosed liabilities, the truth and accuracy of
information prepared and provided by them in connection with the Merger, the
absence of certain legal proceedings and other events, including material
adverse changes in the parties' respective businesses, financial condition or
results of operations and compliance with applicable laws and regulations.
Except as otherwise provided in the Agreement, these representations and
warranties will not survive the Effective Date.
The respective obligations of Cortland First, Oneida Valley, First National
Bank of Cortland and Oneida Valley National Bank to consummate the Merger and
the Bank Merger are subject to the satisfaction or waiver, at or prior to the
Effective Date, of the following conditions: (i) the taking of all corporate
action necessary to consummate the Merger and the Bank Merger; (ii) approval of
the Agreement by the shareholders of Cortland First and Oneida Valley; (iii)
receipt of regulatory approvals for the Merger and the Bank Merger without any
condition which materially and adversely affects the anticipated benefits of the
transactions; (iv) the receipt of the opinion described under "-- Federal Income
Tax Consequences"; (v) qualification of the Merger for pooling of interests
accounting treatment; (vi) the effectiveness of the Registration Statement under
the Securities Act; (vii) the receipt of all necessary state securities or "Blue
Sky" permits, authorizations or exemptions; (viii) the receipt of requisite
third party consents; (ix) the absence of any order, decree or injunction
enjoining or prohibiting the consummation of the Merger or the Bank Merger; (x)
the continuing accuracy of the representations and warranties of each party in
the Agreement; (xi) each party shall have complied with its covenants in the
Agreement; (xii) delivery of customary closing documents; and (xiii) the absence
of any material adverse change affecting the party subject to exceptions set
forth in the Agreement.
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Shareholder approval of the Agreement requires the affirmative vote of the
holders of at least two-thirds of the outstanding Oneida Valley Common Stock and
at least two-thirds of the outstanding Cortland First Common Stock. Because the
Agreement provides for certain amendments to Cortland First's Certificate of
Incorporation, which will become the Certificate of Incorporation of Alliance
Financial Corporation, approval of the Agreement will constitute approval of
such amendments. See "-Amendments to Certificate of Incorporation."
Directors and executive officers of Cortland First and affiliates of such
persons had voting power with respect to 127,052 shares (excluding shares for
which ownership is disclaimed) of Cortland First Common Stock, representing
6.45% of the Cortland First Common Stock outstanding, as of __________, 1998.
Such persons have entered into agreements ("Cortland First Voting Agreements")
with Oneida Valley, whereby each such person has agreed to vote all shares of
Cortland First Common Stock that he or she is entitled to vote in favor of the
Agreement. Accordingly, in the aggregate, it is expected that at least 127,052
shares of Cortland First Common Stock (representing 6.45% of the outstanding
shares) will be voted in favor of the Agreement.
Directors and executive officers of Oneida Valley and affiliates of such
persons had voting power with respect to 83,325 shares (excluding shares for
which ownership is disclaimed) of Oneida Valley Common Stock, representing 9.23%
of the Oneida Valley Common Stock outstanding, as of __________, 1998. Such
persons have entered into agreements ("Oneida Valley Voting Agreements") with
Cortland First, whereby each such person has agreed to vote all shares of Oneida
Valley Common Stock that he or she is entitled to vote in favor of the
Agreement. Accordingly, in the aggregate, it is expected that at least 83,325
shares of Oneida Valley Common Stock (representing 9.23% of the outstanding
shares) will be voted in favor of the Agreement.
Except with respect to any required shareholder or regulatory approvals,
substantially all of the conditions to consummation of the Merger and the Bank
Merger may be waived at any time by the party for whose benefit they were
created, and the Agreement may be amended or supplemented at any time by written
agreement of the parties, except that no such waiver, amendment or supplement
executed after approval of the Agreement by Cortland First's shareholders and/or
Oneida Valley's shareholders shall alter the Exchange Ratio. Certain conditions
to consummation of the Merger cannot be waived as a matter of law, including the
existence of an effective registration statement, the absence of a government
order enjoining or prohibiting consummation of the Merger or any other
transaction contemplated by the Agreement, and the receipt of all required "Blue
Sky" permits or other authorizations.
REGULATORY APPROVALS
General. Cortland First and Oneida Valley are not aware of any other
governmental approvals or actions that are required for consummation of the
Merger or the Bank Merger except as described below. Should any such approval or
action be required, it is presently contemplated that such approval or action
would be sought. There can be no assurance that any such approval or action, if
needed, could be obtained, would not delay consummation of the Merger and would
not be conditioned in a manner that would cause Cortland First or Oneida Valley
to abandon the Merger and the Bank Merger. To the extent that the following
information describes or refers to statutes and regulations, it is qualified in
its entirety by reference to them.
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Merger. The Merger is subject to the prior approval of the Federal Reserve
Board under the BHCA. Cortland First will file a written notice in lieu of
application with the Federal Reserve Bank of New York pursuant to 12 C.F.R.
Section 225.14(a), acting under delegated authority under the Federal Reserve
Board, requesting prior approval of the Merger.
Bank Merger. The Bank Merger is subject to the approval of the OCC under
Section 18(c) of the Federal Deposit Insurance Act (the "Bank Merger Act") and
under Section 215a of the National Bank Act. First National Bank of Cortland and
Oneida Valley National Bank will jointly file an Interagency Bank Merger Act
Application seeking OCC approval of the Bank Merger. The Bank Merger may not be
consummated until the 30th day after such approval (or such shorter period as
the OCC may prescribe with the concurrence of the United States Attorney
General, but not less than 15 days), during which time the United States
Department of Justice may challenge the Bank Merger on antitrust grounds.
BUSINESS PENDING THE MERGER
Under the terms of the Agreement, each of Cortland First, First National
Bank of Cortland, Oneida Valley and Oneida Valley National Bank generally is
required to carry on its respective business in the usual, regular and ordinary
course in substantially the same manner as in past practice, and generally is
prohibited from taking any action that would adversely affect the ability of the
parties to consummate the Merger or the other transactions contemplated by the
Agreement. In addition, each party generally may not, without the prior written
consent of the other, or as otherwise provided in the Agreement, increase
compensation or fringe benefits of directors or executive officers under any
circumstances, or increase compensation or fringe benefits of other officers or
employees beyond customary limits; declare or pay any dividends or other
distributions on capital stock other than within certain specified limits; issue
shares of capital stock or permit any treasury shares to become outstanding
other than issuances pursuant to stock options authorized by the Agreement;
issue, grant or authorize any stock options, except as otherwise agreed to;
effect any recapitalization, reclassification, stock dividend, stock split or
like change in capitalization or redeem, repurchase or otherwise acquire any
shares of its capital stock; change its lending, investment, asset/liability
management or other material banking policies in any material respect except as
required by law; or take other actions, other than in the ordinary course of
business, that might impact the financial condition or business of the entity.
The Agreement provides that, after the date of the Agreement and prior to
the Effective Date, each of the parties will coordinate with the other the
declaration of any dividends with respect to Cortland First Common Stock or
Oneida Valley Common Stock and the record dates and payment dates relating
thereto, in order to ensure that holders of Cortland First Common Stock and
Oneida Valley Common Stock shall not receive two dividends, or fail to receive
one dividend, for any single calendar quarter with respect to their shares of
Cortland First Common Stock and/or Oneida Valley Common Stock and any shares of
Alliance Common Stock any such holder receives in exchange therefor in the
Merger.
In addition, Cortland First, First National Bank of Cortland, Oneida Valley
and Oneida Valley National Bank have also agreed that neither they nor any of
their officers, directors, agents or affiliates will solicit or encourage any
inquiries or proposals with respect to an acquisition, business combination or
similar transaction involving, or any purchase of all or any substantial portion
of the assets or equity securities of, Cortland First, First National Bank of
Cortland, Oneida Valley or Oneida Valley National Bank; provided that if an
unsolicited inquiry or proposal is received by either party and the directors of
that party determine (in good faith after consultation with financial advisors
and legal counsel) that their fiduciary duties require
43
<PAGE>
them to consider such inquiry or proposal, that party shall be free to deal with
any such proposal or inquiry in any matter that is deemed by its directors as
being in the best interests of that party's shareholders and that is not
contrary to the terms of the Agreement or the applicable Stock Option Agreement.
Each party has also agreed to notify the other party immediately if it receives
any inquiries or proposals with respect to the foregoing types of transactions.
EFFECTIVE DATE OF THE MERGER; TERMINATION
It is anticipated that the Merger, the Bank Merger and the other
transactions contemplated by the Agreement will be consummated in the fourth
quarter of 1998, following satisfaction or waiver of all conditions to closing.
The Agreement may be terminated by any party, whether before or after
shareholder approval: (i) in the event of a material breach by the other party
of any covenant, agreement, representation or warranty in the Agreement or in
the Bank Merger Agreement which has not been cured within the period allowed by
the Agreement; (ii) on the Closing Date (as defined in the Agreement), if any of
the conditions precedent to the obligations of such party to consummate the
Merger have not been satisfied or fulfilled; (iii) if any application for any
required regulatory approval has been denied, and the time for all appeals and
requests for reconsideration of such denial has run; (iv) if the shareholders of
Cortland First or Oneida Valley fail to approve the Agreement at the Meetings;
or (v) in the event that the Merger is not consummated by March 31, 1999. The
Agreement also may be terminated at any time by the mutual written consent of
the parties.
In the event of termination, the Agreement shall become null and void,
except that certain provisions relating to expenses and confidentiality of
information exchanged between the parties shall survive any such termination,
and any termination resulting from a material breach of a representation,
warranty, covenant or agreement in the Agreement shall not relieve any breaching
party from liability for any uncured willful breach of any such representation,
warranty, covenant or agreement giving rise to such termination.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
The Board of Directors and management of Alliance Financial Corporation and
Alliance Bank, N.A. will be drawn from Cortland First, Oneida Valley, First
National Bank of Cortland and Oneida Valley National Bank. In addition, Alliance
Financial Corporation and Alliance Bank, N.A. may hire new personnel as
necessary to assist in the planned expansion into the Syracuse metropolitan area
and implementation of other aspects of their strategic plan. Following is a
discussion of the anticipated management and operations of Alliance Financial
Corporation and Alliance Bank, N.A. after the Effective Date.
Board of Directors of Alliance Financial Corporation. The Agreement
provides that the Board of Directors of Alliance Financial Corporation following
the Merger shall consist of the 22 persons who currently constitute the full
Boards of Cortland First and Oneida Valley. Approval of the Agreement by the
shareholders of Cortland First and Oneida Valley will be deemed to constitute
the election of the respective designees of Cortland First and Oneida Valley as
directors of Alliance Financial Corporation.
The Board of Directors of Alliance Financial Corporation will be divided
into three classes, with the terms of office of the classes ending in successive
years. The terms of the directors of Alliance Financial
44
<PAGE>
Corporation after the Effective Date have been allocated so that, as nearly as
practicable, the terms of the same number of persons designated as directors by
each party will expire in each applicable year.
If, prior to the Effective Date of the Merger, any of the individuals named
by Cortland First or Oneida Valley becomes unable or unwilling to serve as a
director of Alliance Financial Corporation, or either Cortland First or Oneida
Valley determines to replace the individual, the party that designated the
individual may name a replacement to become a director of Alliance Financial
Corporation following the Effective Date.
Set forth below is a table showing each person currently named by Cortland
First and Oneida Valley to serve on the Board of Directors of Alliance Financial
Corporation following the Effective Date; his or her current position with
Cortland First, First National Bank of Cortland, Oneida Valley or Oneida Valley
National Bank, as the case may be; his or her current principal occupation, and
the year in which his or her term of office is set to expire. As noted above,
each of Cortland First's designees currently serves as a director of Cortland
First and First National Bank of Cortland, and each of Oneida Valley's designees
currently serves as a director of Oneida Valley and Oneida Valley National Bank.
<TABLE>
<CAPTION>
DATE
BUSINESS EXPERIENCE TERM TO
NAME AND AGE AND DIRECTORSHIPS EXPIRE
- ------------ ------------------- --------
<S> <C> <C>
CORTLAND FIRST DESIGNEES
- ------------------------
David R. Alvord President, Chief Executive Officer and Director 1999
(59) of Cortland First; President, Chief Executive
Officer and Director - First National Bank of
Cortland.
Donald S. Ames Director of Cortland First and First National Bank 1999
(56) of Cortland; President - Cortland Laundry, Inc.,
Cortland, New York (commercial laundry).
Mary Alice Bellardini Director of Cortland First and First National Bank 2001
(65) of Cortland; Mayor - Village of Homer (4/87 to
present); Director - Blue Cross and Blue Shield of
Central New York, Inc. (health and hospitalization
insurance) (1984 to 1994); Director - HMO-CNY,
Inc. (health maintenance organization) (1995).
John H. Buck Director of Cortland First and First National Bank 2001
(53) of Cortland; President - Buck Environmental
Laboratories, Inc. (testing facility for air,
water, soil, and waste).
45
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DATE
BUSINESS EXPERIENCE TERM TO
NAME AND AGE AND DIRECTORSHIPS EXPIRE
- ------------ ------------------- --------
<S> <C> <C>
Robert M. Lovell Director of Cortland First and First National Bank 2000
(52) of Cortland; Consultant - Healthcare; President -
Cortland Memorial Hospital (4/86 to 6/96).
Harry D. Newcomb Director of Cortland First and First National Bank 2001
(70) of Cortland; President - Newcomb Motors, Inc.,
Cortland, New York (automobile dealer).
Garrison A. Marsted Director of Cortland First and First National Bank 1999
(58) of Cortland, Chairman of the Board, Treasurer and
Principal Owner - Overhead Door Company of
Cortland, Inc. (1997-Present); President, CEO,
Treasurer and Principal Owner - Overhead Door
Company, Inc. (1992-1997).
Charles E. Shafer Director of Cortland First and First National Bank 2000
(49) of Cortland, Partner - Riehlman, Shafer & Shafer
(attorneys at law).
Richard J. Shay Director of Cortland First and First National Bank 2000
(66) of Cortland; Administrative Law Judge; District
Attorney - Cortland County, Cortland, New York
(1/1/80 to 6/14/97).
Charles H. Spaulding Director of Cortland First and First National Bank 2000
(50) of Cortland; President - George B. Bailey
Agency, Inc., Cortland, New York (insurance
agency).
David J. Taylor Director of Cortland First and First National Bank 1999
(55) of Cortland; President - Prosco Products, Inc.,
Cortland, New York (manufacturer's
representative/ distributor).
Stuart E. Young Director of Cortland First and First National Bank 2001
(48) of Cortland; Partner - Spruce-Eden Farms (dairy
farm); President - Cortland Bulk Milk Producers
Cooperative, Inc.
ONEIDA VALLEY DESIGNEES
- -----------------------
John W. Bailey Director of Oneida Valley and Oneida Valley 1999
(56) National Bank; CEO, Bailey & Haskell Assoc.
46
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DATE
BUSINESS EXPERIENCE TERM TO
NAME AND AGE AND DIRECTORSHIPS EXPIRE
- ------------ ------------------- --------
<S> <C> <C>
Donald H. Dew Director of Oneida Valley and Oneida Valley 2000
(46) National Bank; President & CEO, Diemolding Corp.
Peter M. Dunn Director of Oneida Valley and Oneida Valley 1999
(61) National Bank; Attorney
Robert H. Fearon, Jr. Chairman of the Board, Oneida Valley and Oneida 2000
(71) Valley National Bank
David P. Kershaw Director of Oneida Valley and Oneida Valley 1999
(49) National Bank; Executive Vice President, Oneida
Valley National Bank
Robert H. Kuiper Director of Oneida Valley and Oneida Valley 2000
(64) National Bank; Retired businessman; Member,
Madison County Board of Supervisors
Samuel J. Lanzafame Director of Oneida Valley and Oneida Valley 2001
(47) National Bank; President, Central Locating
Service, Ltd.
John C. Mott President & CEO, Oneida Valley National Bank; 2001
(59) President of Oneida Valley; Director of Oneida
Valley and Oneida Valley National Bank
Richard G. Smith Director of Oneida Valley and Oneida Valley 2000
(54) National Bank; Administrator, Oneida Health Care
Center
Edward W. Thoma Director of Oneida Valley and Oneida Valley 2001
(53) National Bank; Sr. Vice President--Finance, Oneida
Ltd.
</TABLE>
Additional information regarding each of the Cortland First Designees is
included in the Annual Report on Form 10-K for Cortland First for the fiscal
year ended December 31, 1997. See "AVAILABLE INFORMATION."
The Agreement provides that it is the intention of the parties that David
R. Alvord and John C. Mott shall be elected Co-Chairmen of the Board and
Co-Chairmen of the Executive Committee of the Board of Alliance Financial
Corporation. In addition, the Board may designate Executive, Audit, Personnel,
Nominating, Trust and other Committees pursuant to the Alliance Financial
Corporation Bylaws. The Bylaws provide that the members of any such committees
will be composed so as to include on each committee as nearly equal as possible
numbers of directors who previously served with Cortland First and Oneida
Valley, and that any chairs of such committees will be designated so that as
nearly equal as possible numbers of directors who previously served with
Cortland First and Oneida Valley will serve in such positions.
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<PAGE>
Executive Management of Alliance Financial Corporation. The Agreement
provides that from and after the Effective Date, David R. Alvord and John C.
Mott shall serve as Co-Chief Executive Officers of Alliance Financial
Corporation for the duration of their respective Employment Agreements. See "--
Effect of the Merger on Employees and Management." The management of Alliance
Financial Corporation will be drawn from the present management of Cortland
First and Oneida Valley, and from personnel hired to assist in the
implementation of its strategic plan.
Board of Directors and Management of Alliance Bank, N.A. The Agreement
provides that the Board of Directors of Alliance Bank, N.A. shall consist of the
22 persons designated by Cortland First and Oneida Valley to serve on the Board
of Directors of Alliance Financial Corporation. The Agreement provides for
substitution of such designees in the same manner as for directors of Alliance
Financial Corporation. See "-- Board of Directors of Alliance Financial
Corporation." The Agreement provides that from and after the Effective Date,
David R. Alvord and John C. Mott shall serve as Co-Chief Executive Officers of
Alliance Bank, N.A. for the duration of their respective Employment Agreements.
See "-- Effect of the Merger on Employees and Management." The management of
Alliance Bank, N.A. will be drawn from the present management of First National
Bank of Cortland and Oneida Valley National Bank, and from personnel hired to
assist in the implementation of its strategic plan.
Board and Committee Fees. It currently is anticipated that each member of
the Board of Directors of Alliance Bank, N.A. will receive an annual retainer
fee of $3,000, and fees of $400 for each meeting attended. It is anticipated
that directors will not be separately compensated for regular meetings attended
as directors of Alliance Financial Corporation. Directors serving on the
following board committees will also receive per meeting fees for meetings
attended as follows: Compensation Committee $200 per meeting; Trust Committee
$150 per meeting; Audit and Compliance Committee $150 per meeting; Loan
Committee $150 per meeting; and Business Development Committee $150 per meeting.
Indemnification. Pursuant to the Agreement, Alliance Financial Corporation
shall, from and after the Effective Date, indemnify, defend and hold harmless,
each person who is, has been or becomes prior to the Effective Date, an officer
or director of Cortland First or Oneida Valley or any of their respective
subsidiaries (the "Indemnified Parties") against all losses, claims, damages,
liabilities, costs, expenses (including attorney's fees and expenses in advance
of the full disposition of any such claim to each Indemnified Party to the
fullest extent permitted by applicable law upon receipt of any undertaking
required by applicable law), judgments and amounts that are paid in settlement
of or in connection with any threatened or actual claim, action, suit,
proceeding or investigation (each a "Claim"), based in whole or in part on, or
arising in whole or in part out of, or pertaining to the fact that such person
is or was a director or officer of Cortland First or Oneida Valley or any of
their subsidiaries, if such Claim pertains to any matter or fact arising,
existing or occurring before the Effective Date (including without limitation
the Merger), regardless of whether such Claim is asserted or arises before or
after the Effective Date to the fullest extent permitted under applicable law in
effect as of the date of the Agreement or as amended prior to the Effective Date
and under, respectively, Cortland First's and Oneida Valley's governing
corporate documents. In addition, from and after the Effective Date, the
Indemnified Parties who become directors or officers of Alliance Financial
Corporation shall have indemnification rights on a prospective basis.
The parties have also agreed, for a period of six years after the Effective
Date, that Alliance Financial Corporation shall cause to be maintained the
current directors' and officers' liability insurance policy of Oneida Valley for
the benefit of the Oneida Valley directors and officers (provided that Alliance
Financial Corporation may substitute therefor policies of at least the same
coverage and amounts containing
48
<PAGE>
terms and conditions which are substantially no less advantageous) with respect
to claims arising from facts or events occurring prior to the Effective Date.
Following consummation of the Merger, directors and officers of Alliance
Financial Corporation will be covered by liability insurance maintained by
Alliance Financial Corporation.
Headquarters. The Agreement provides that, from and after the Effective
Date, Alliance Financial Corporation shall maintain dual headquarters at the
current headquarters of Cortland First and Oneida Valley, and the Bylaws of
Alliance Financial Corporation will require an affirmative vote of two-thirds of
the directors of Alliance Financial Corporation to change the location of the
dual headquarters.
Operations after the Merger. Following the Bank Merger, Alliance Bank, N.A.
will continue to serve approximately 36,000 households through a network of full
service branch offices located in Onondaga, Cortland, Madison, Oneida and Broome
Counties in New York. The Bank Merger is expected to expand and enhance the
products and services that are currently offered by Oneida Valley National Bank
and First National Bank of Cortland. Following the Bank Merger, all full service
branch offices of Alliance Bank, N.A. will offer the full array of loan, deposit
and other financial products and services of the combined entity.
As a result of the combined entity's higher capital levels, Alliance Bank,
N.A.'s legal lending limit will be approximately twice that of either Oneida
Valley National Bank or First National Bank of Cortland prior to the Bank
Merger. The increased lending limit will permit Alliance Bank, N.A. to compete
for larger lending relationships.
It is not presently expected that Alliance Bank, N.A. will discontinue any
products or services that are material to either Oneida Valley National Bank or
First National Bank of Cortland. However, the combined institution will seek to
integrate the two banks' respective products and services with a view towards
creating a consistent product line with standardized rates, fees and service
charges, subject to variations arising due to competition or other business or
marketing considerations.
Management expects to achieve cost savings and operating synergies
subsequent to the Merger and the Bank Merger. The cost savings and operating
synergies are expected to be derived principally from elimination of duplicative
data processing, financial reporting and other operations functions. Aggregate
pre-tax cost savings are estimated by management to approximate $750,000,
$1,000,000 and $1,000,000 in 1999, 2000 and 2001, respectively. Because of the
uncertainties inherent in merging two financial institutions, as well as
potential changes in the regulatory environment and changes in economic
conditions, no assurance can be given that any particular level of cost savings
will be realized, that any such cost savings will be realized over the time
period currently anticipated or that such cost savings will not be offset to
some degree by increases in other expenses, including expenses related to
integrating the two companies.
In addition to expected cost savings and operating synergies, management
believes that opportunities to increase revenue exist with the offering of more
commercial and retail bank products to the respective predecessor banks'
customers. These opportunities are expected to arise by virtue of Alliance Bank,
N.A.'s entry into new geographic markets, offering new product lines and
competing for larger lending relationships.
Based upon projected cost savings, operating synergies and business
expansions expected to be achieved subsequent to consummation of the Merger,
management believes that the Merger will be accretive
49
<PAGE>
to earnings per share in both 1999 and 2000. There can be no assurance, however,
that the investments and expenditures necessary to facilitate the contemplated
expansions will not offset some or all of the expected accretive effects. In
addition, Cortland First and Oneida Valley anticipate that Alliance Financial
Corporation will incur approximately $600,000 to $1,000,000 (on an after-tax
basis) in expenses relating to the Merger and certain costs of post-Merger
integration of operations.
See "AVAILABLE INFORMATION" and "FORWARD-LOOKING STATEMENTS."
EFFECT OF THE MERGER ON EMPLOYEES AND MANAGEMENT
Employees. On the Effective Date, all employees of Cortland First, Oneida
Valley and their respective subsidiaries on that date shall be employed by
Alliance Financial Corporation and/or Alliance Bank, N.A. Because the two banks
have little overlap in geographic market coverage and due to the planned
addition of branches in the Syracuse metropolitan area, the parties believe that
overall employment in Alliance Bank, N.A. will increase following the Merger and
the Bank Merger in connection with the planned geographic expansions. In
anticipation of the Merger, the parties have identified operational efficiencies
that may be obtained through the consolidation of the entities in the Merger and
the Bank Merger and, in that regard, some positions at each entity may be
combined, eliminated and/or moved after consummation of the Merger and the Bank
Merger. The parties expect, however, that attrition will account for the
majority of job eliminations. The parties expect that Alliance Financial
Corporation will realize cost savings with regard to employees and other matters
in periods following the Effective Date. See "-- Management and Operations After
the Merger" for information regarding certain related expenses expected to be
incurred in connection with the Merger.
Employee Benefit Plans. The Agreement provides that, after the Effective
Date, all directors, officers and employees of Alliance Financial Corporation
and its subsidiaries will be entitled to participate in compensation, benefit,
welfare and related plans, programs or arrangements made available to similarly
situated persons under the same terms and conditions, notwithstanding such
individuals' prior affiliation with Cortland First or Oneida Valley, and that
the parties will work together to develop, design and prepare for the
implementation of such plans, programs or arrangements. The parties anticipate
that such plans, programs and arrangements will provide that, for purposes of
determining eligibility for and vesting of rights under such plans only (and not
for pension benefit or other accrual purposes, except to the extent that an
employee was covered by the applicable plan prior to the Effective Date and had
accrued benefits thereunder), service with Oneida Valley, Oneida Valley National
Bank, Cortland First or First National Bank of Cortland prior to the Effective
Date shall be treated as service with an "employer" for purposes of such plans.
The parties' ability to implement such plans, programs and arrangements is
subject, however, to an evaluation of associated costs and other relevant
factors. There can be no assurance as to the specific terms and conditions of
any plans, programs and arrangements that may be adopted by Alliance Financial
Corporation.
Stock Option Plan. The Agreement provides that the parties will work
together to develop and approve a stock based incentive compensation plan for
key executives, employees and directors of Alliance Financial Corporation which
shall include provisions for the issuance of incentive stock options,
nonqualified stock options, restricted stock grants and similar features in
order to provide a long term incentive to key executives, employees and
directors, enhance the ability of Alliance Financial Corporation to attract and
retain talented executives, employees and directors, and more closely align the
interests of management with the interests of the shareholders. In this regard,
the parties have proposed the Alliance
50
<PAGE>
Financial Corporation 1998 Long Term Incentive Compensation Plan for approval by
Cortland First and Oneida Valley shareholders at the Meetings. See "PROPOSAL II
- -- APPROVAL OF LONG TERM INCENTIVE COMPENSATION PLAN."
Employment Agreements and Other Arrangements -- Cortland First. Cortland
First has an employment agreement with David R. Alvord, its President and Chief
Executive Officer. The agreement provides that if Cortland First were to engage
in a merger, acquisition or other "change in control" to which Mr. Alvord did
not consent, Mr. Alvord would be entitled to receive a severance payment equal
to three times his then base salary plus the amount of any taxes or other
charges that may be imposed on Mr. Alvord pursuant to the Internal Revenue Code
as a result of any "excess parachute payments." However, in connection with the
termination of his existing employment agreement and the execution of his
planned new employment agreement described below, Mr. Alvord is expected to
consent to the Merger pursuant to the terms of his existing agreement, so no
payment will be made to Mr. Alvord under his existing agreement in connection
with the Merger. See "INFORMATION WITH RESPECT TO CORTLAND FIRST -- Executive
Compensation -- Employment Agreement."
Upon the consummation of the Merger, Mr. Alvord's existing employment
agreement with Cortland First will be terminated and replaced by a new
employment agreement with Alliance Financial Corporation, which will become
effective on the Effective Date. Under the new agreement, Mr. Alvord will be
employed as Co-Chief Executive Officer (with John C. Mott, Oneida Valley's
current President) of Alliance Financial Corporation for a period of three
years. The agreement requires Mr. Alvord to devote his full business time and
attention to the performance of his duties for an annual base salary of
$175,000, subject to review and potential increase by the Alliance Financial
Corporation Board of Directors on an annual basis. Mr. Alvord also will be
eligible to participate in any and all incentive compensation, bonus, stock
option or similar plans maintained by Alliance Financial Corporation, as well as
any company-maintained employee pension benefit plans, group life insurance
plans, medical plans, dental plans, long-term disability plans, business travel
insurance programs and other fringe benefit plans or programs. The agreement
provides that, anything to the contrary notwithstanding and except with respect
to supplemental retirement benefits, Mr. Alvord will receive total annual cash
compensation and fringe benefits at least equal to the greater of: (i) the
highest total annual cash compensation and fringe benefits provided to Mr.
Alvord by Cortland First with respect to any of the three calendar years
preceding the Effective Date, or (ii) the highest total annual cash compensation
and fringe benefits provided to Mr. Mott by Oneida Valley with respect to any of
the three calendar years preceding the Effective Date.
The agreement may be terminated by Alliance Financial Corporation with or
without cause (as defined in the agreement). If Alliance Financial Corporation
terminates Mr. Alvord's employment for reasons other than cause, it must give
Mr. Alvord 60 days' prior written notice, and must pay Mr. Alvord, within 30
days after the date of termination, a lump sum equal to the unpaid compensation
and benefits that Mr. Alvord would have received if he had remained employed
under the terms of the agreement until the end of the three-year term of
employment. Mr. Alvord may terminate the agreement at any time upon 60 days'
prior written notice to Alliance Financial Corporation, in which case Mr. Alvord
shall be entitled only to compensation and benefits he has earned or accrued
through the date of termination.
If Mr. Alvord's employment is terminated by Alliance Financial Corporation
for any reason other than cause within 24 months following a change of control
that occurs during the term of the agreement, Alliance Financial Corporation
shall (i) within 60 days of termination, pay Mr. Alvord 2.99 times his average
annual compensation during the five full taxable years (or any shorter period of
employment) that
51
<PAGE>
immediately precedes the year during which the change of control occurs; (ii)
provide Mr. Alvord with fringe benefits, or the cash equivalent of such
benefits, to which he is entitled under the agreement for a period of 24 months
following his termination; and (iii) treat as immediately vested and exercisable
all forms of equity-based compensation, including unexpired stock options,
previously granted to Mr. Alvord.
Employment Agreement and Other Arrangements -- Oneida Valley. Oneida Valley
does not currently have a written employment agreement with John C. Mott, its
President. Oneida Valley National Bank does, however, have a change in control
agreement with Mr. Mott. The agreement provides that if Oneida Valley National
Bank were to engage in a merger, acquisition or other "change in control" to
which Mr. Mott did not consent, the bank would thereafter be obligated to employ
Mr. Mott for a term of three years or, if later, until he reaches age 65, at a
compensation level not less than his then current base salary. In addition, if
Mr. Mott chooses to terminate his employment following the occurrence of a
"change in control," he would be entitled to receive a severance payment at the
rate of his highest base salary paid at any time under the agreement plus any
applicable bonus or incentive compensation, to be paid by Oneida Valley National
Bank over the remaining unexpired term of the Agreement. In connection with the
termination of his existing change in control agreement and the execution of his
planned new employment agreement described below, Mr. Mott is expected to waive
his right to payment under the existing agreement in connection with the Merger.
See "INFORMATION WITH RESPECT TO ONEIDA VALLEY -- Executive Compensation --
Change in Control Agreement."
Upon the consummation of the Merger, Mr. Mott's existing change in control
agreement with Oneida Valley National Bank will be terminated and replaced by an
employment agreement with Alliance Financial Corporation, which will become
effective on the Effective Date. Under the agreement, Mr. Mott will be employed
as Co-Chief Executive Officer (with David R. Alvord, Cortland First's President
and Chief Executive Officer) of Alliance Financial Corporation for a period of
three years. The agreement requires Mr. Mott to devote his full business time
and attention to the performance of his duties for an annual base salary of
$175,000, subject to review and potential increase by the Alliance Financial
Corporation Board of Directors on an annual basis. Mr. Mott also will be
eligible to participate in any and all incentive compensation, bonus, stock
option or similar plans maintained by Alliance Financial Corporation, as well as
any company-maintained employee pension benefit plans, group life insurance
plans, medical plans, dental plans, long-term disability plans, business travel
insurance programs and other fringe benefit plans or programs. The agreement
provides that, anything to the contrary notwithstanding and except with respect
to supplemental retirement benefits, Mr. Mott will receive total annual cash
compensation and fringe benefits at least equal to the greater of: (i) the
highest total annual cash compensation and fringe benefits provided to Mr. Mott
by Oneida Valley with respect to any of the three calendar years preceding the
Effective Date, or (ii) the highest total annual cash compensation and fringe
benefits provided to Mr. Alvord by Cortland First with respect to any of the
three calendar years preceding the Effective Date.
The agreement may be terminated by Alliance Financial Corporation with or
without cause (as defined in the agreement). If Alliance Financial Corporation
terminates Mr. Mott's employment for reasons other than cause, it must give Mr.
Mott 60 days' prior written notice, and must pay Mr. Mott, within 30 days after
the date of termination, a lump sum equal to the unpaid compensation and
benefits that Mr. Mott would have received if he had remained employed under the
terms of the agreement until the end of the three-year term of employment. Mr.
Mott may terminate the agreement at any time upon 60 days' prior written notice
to Alliance Financial Corporation, in which case Mr. Mott shall be entitled only
to compensation and benefits he has earned or accrued through the date of
termination.
52
<PAGE>
If Mr. Mott's employment is terminated by Alliance Financial Corporation
for any reason other than cause within 24 months following a change of control
that occurs during the term of the agreement, Alliance Financial Corporation
shall (i) within 60 days of termination, pay Mr. Mott 2.99 times his average
annual compensation during the five full taxable years (or any shorter period of
employment) that immediately precedes the year during which the change of
control occurs; (ii) provide Mr. Mott with fringe benefits, or the cash
equivalent of such benefits, to which he is entitled under the agreement for a
period of 24 months following his termination; and (iii) treat as immediately
vested and exercisable all forms of equity-based compensation, including
unexpired stock options, previously granted to Mr. Mott.
Severance Plan. It is the intention of the parties to provide for a
severance plan or policy which would be effective after the Effective Date and
which would be available for eligible employees of Alliance Financial
Corporation or Alliance Bank, N.A. who are affected by the Merger and/or the
Bank Merger. The parties have agreed to work together prior to the Effective
Date to develop and design such a plan, taking into account the business and
integration plan of Alliance Bank, N.A., the level of service and period of
service of employees, the cost of such a plan, and other relevant factors. There
can be no assurance that such a plan will be adopted, and no assurance as to the
persons eligible to participate in, or the specific benefits that may be
available under, the plan.
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS
The information in this Proxy Statement/Prospectus concerning the terms of
the Cortland First Certificate of Incorporation, and the proposed amendments
thereto, is qualified in its entirety by reference to the full text of the
proposed Certificate of Incorporation for Alliance Financial Corporation (the
"Amended and Restated Certificate") and proposed Bylaws (the "Amended and
Restated Bylaws") which are attached as Appendices D, and E, respectively.
Shareholders are urged to read carefully the full text of the Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws.
From and after the Effective Date, the Amended and Restated Certificate
will constitute Alliance Financial Corporation's Certificate of Incorporation,
and the Amended and Restated Bylaws will constitute Alliance Financial
Corporation's Bylaws. The amendments to be made to Cortland First's Certificate
of Incorporation and Bylaws are integral to the structure of the proposed
Merger, and were negotiated by Oneida Valley and Cortland First and set forth in
the Agreement. Shareholders are not being asked to vote separately on the
content or provisions of Alliance Financial Corporation's Certificate of
Incorporation taken as a whole, or on any individual charter amendment. That
approval or disapproval is subsumed within the shareholders' approval or
disapproval of the Merger and the Agreement. In this regard, the Merger must be
approved by vote of at least two-thirds of the outstanding shares of Cortland
First Common Stock and by vote of at least two-thirds of the outstanding shares
of Oneida Valley Common Stock. None of the proposed charter amendments will be
adopted if the Merger is disapproved by the shareholders of either Cortland
First or Oneida Valley, or if the Merger is not consummated for any other
reason.
If approved as described above, (i) Cortland First's Certificate of
Incorporation will be comprehensively revised, amended and restated to create
the Amended and Restated Certificate, and (ii) Cortland First's Bylaws will be
comprehensively revised, amended and restated to create the Amended and Restated
Bylaws. The following summarizes the material provisions of the Amended and
Restated Certificate and the Amended and Restated Bylaws.
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RESTATED CERTIFICATE OF INCORPORATION
Name. The name of Cortland First under the Amended and Restated Certificate
will be changed to "Alliance Financial Corporation."
Authorized Capital. The aggregate number of shares of authorized capital of
Alliance Financial Corporation under the Amended and Restated Certificate will
be 11,000,000 shares, 10,000,000 of which will be shares of common stock, $1.00
par value per share, and 1,000,000 of which will be "blank check" preferred
stock, $25.00 par value.
Board of Directors. The Amended and Restated Certificate of Incorporation
provides that the management of the corporation will be vested in a Board of
Directors consisting of not less than nine or more than 25 persons, as fixed by
the Board of Directors from time to time. The Board of Directors will be divided
into three classes, each class serving staggered three-year terms. Directors may
only be removed without cause upon the affirmative vote of not less than 80% of
the shares entitled to vote generally in the election of directors.
Shareholders will not be entitled to cumulate votes in elections of directors.
Supermajority Voting Requirements for Fundamental Transactions. The Amended
and Restated Certificate requires the affirmative vote of two-thirds of the
entire Board of Directors to approve an extraordinary corporate transaction such
as a merger, consolidation or sale of assets other than in the ordinary course
of business. In addition, the Amended and Restated Certificate provides that a
business combination with an "interested shareholder" shall require the
affirmative vote of at least 80% of the votes entitled to be cast by the holders
of all then outstanding shares of common stock unless the transaction (i) has
previously been approved by at least two-thirds of the Directors who are not
affiliated or associated with the interested shareholder and (ii) meets certain
fair price and operational continuity requirements set forth in the Amended and
Restated Certificate, in which case the combination must be approved by
two-thirds of the votes entitled to be cast by the holders of all then
outstanding shares of common stock. An "interested shareholder" is generally a
person or entity who owns three percent or more of the total number of shares of
Alliance Financial Corporation's common stock outstanding at any time within
three years prior to the date in question. See "-- Certain Differences in Rights
of Shareholders."
Opposition of Tender or Other Offer. The Amended and Restated Certificate
authorizes the Board of Directors, if it deems advisable, to oppose a tender or
other offer based on certain enumerated factors (including the impact of the
proposed transaction on constituencies other than the company's shareholders),
and to take any lawful action to accomplish its purpose of opposing an offer if
it deems such action to be advisable.
Amendment. The Amended and Restated Certificate can generally be amended in
the manner specified by New York law, except that provisions set forth in
Articles 6,7,8,9,10, 11 and 12 (relating to the absence of preemptive rights,
classification of directors, the number of directors, the Board's authority to
oppose a tender or other offer, supermajority voting requirements for certain
business combinations, limitation of director liability and amendment of the
Certificate of Incorporation) cannot be amended unless the amendment is approved
by the affirmative vote of shareholders entitled to cast at least 80% of all
votes which all shareholders are then entitled to cast; provided, however, that
this 80% voting requirement shall not apply (and any such amendment shall
require only the shareholder vote specified by New York law) if such amendment
shall have been approved by two thirds of the full Board of Directors, if all of
such
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Directors are persons who would be eligible to serve as "Continuing Directors."
See "-- Certain Differences in Rights of Shareholders."
Limitation of Liability. The Amended and Restated Certificate contains
provisions, similar to those contained in the present certificates of
incorporation of Cortland First and Oneida Valley, limiting the personal
liability of directors to the maximum extent permissible by New York law.
BYLAWS
Time, Date and Place of Annual Meeting. Under the Amended and Restated
Bylaws the Board of Directors sets the time, date and place of the annual
meeting of shareholders.
Meeting Agenda. Matters to be placed on the agenda for consideration at an
annual meeting of shareholders must be made by notice in writing to Alliance
Financial Corporation not less than 45 days prior to the meeting, unless less
than 60 days notice of the meeting is given by Alliance Financial Corporation in
which case written notice must be given not less than 15 days following the date
of mailing of notice of the meeting.
Conduct of Shareholder Meetings. The Amended and Restated Bylaws give the
Chairman of the meeting broad authority to conduct an orderly meeting of
shareholders, including the power to temporarily adjourn or postpone a meeting.
Shareholder Nominations for Director. Shareholders desiring to nominate a
person for election as a director at an annual meeting of shareholders of
Alliance Financial Corporation must submit a written notice to the company not
less than 90 days nor more 120 days prior to the meeting. The notice must
specify certain biographical information with respect to the proposed nominee
and the nominating shareholder.
Mandatory Retirement of Directors. Except for Robert H. Fearon, Jr. (the
current Chairman of the Board of Directors of Oneida Valley), any person who has
attained the age of 71 shall not be eligible for election as a member of the
Board of Directors of Alliance Financial Corporation. Mr. Fearon is to be
grandfathered and will retire at the annual meeting in the year 2000 (at which
time he will be 72 years old).
Indemnification. The Amended and Restated Bylaws contain provisions,
similar to those contained in the present Bylaws of Cortland First and Oneida
Valley, providing for the indemnification of directors, officers, employees, and
agents of Alliance Financial Corporation to the maximum extent permissible by
New York law.
Amendment of Bylaws. The Amended and Restated Bylaws may be amended or
repealed by the Board of Directors by a 66-2/3 % vote of directors then in
office, subject to the ability of shareholders to amend the Bylaws by the
affirmative vote of 66 2/3% of the total votes which all shareholders are
entitled to cast.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
If the Merger is consummated, the Certificate of Incorporation and Bylaws
of Cortland First will be comprehensively amended and restated, and shall
thereafter serve as the Certificate of Incorporation and Bylaws of Alliance
Financial Corporation. See "-- Amendments to Certificate of Incorporation and
Bylaws"
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above. Both Cortland First and Oneida Valley are New York corporations, and the
holders of voting common stock of the respective corporations are subject to the
same privileges and restrictions under the NYBCL, as will be the shareholders of
Alliance Financial Corporation, but the shareholders of Cortland First, Oneida
Valley and Alliance Financial Corporation are or will be subject to certain
different corporate governance requirements under their respective Certificates
of Incorporation and Bylaws.
The following paragraphs briefly summarize material differences that will
exist between the rights of shareholders of Oneida Valley, Cortland First and
Alliance Financial Corporation. The description does not purport to be a
complete statement of all the differences between the rights of shareholders of
Cortland First, Oneida Valley and Alliance Financial Corporation, and the
identification of certain differences is not meant to indicate that other
differences do not exist. The following summary is qualified in its entirety by
reference to the NYBCL, the proposed Amended and Restated Certificate and Bylaws
of Alliance Financial Corporation (which are included as Appendices D and E,
respectively) and Cortland First's and Oneida Valley's existing Certificates of
Incorporation and Bylaws.
Authorized Common Stock. Under its Certificate of Incorporation, Cortland
First is authorized to issue 3,000,000 shares of Cortland First Common Stock,
par value $1.6667 per share, 1,969,776 shares of which were issued and
outstanding as of ________, 1998. Oneida Valley is authorized by its Certificate
of Incorporation to issue 2,000,000 shares of Oneida Valley Common Stock, par
value $2.50 per share, 902,877 shares of which were issued and outstanding as of
________, 1998. Both Cortland First's and Oneida Valley's Boards of Directors
may, subject to applicable law, authorize the issuance of additional common
stock at such times, for such purposes and for such consideration as they may
deem advisable without further shareholder approval. Under the Amended and
Restated Certificate of Incorporation, Alliance Financial Corporation will be
authorized to issue 10,000,000 shares of common stock, par value $1.00 per
share, of which up to 3,775,530 shares are expected to be outstanding or
reserved for issuance upon consummation of the Merger, based on the Cortland
First and Oneida Valley Common Stock outstanding or reserved for issuance at
_________, 1998. Shares of authorized but unissued common stock may be issued by
the Board of Directors without further shareholder approval (consistent with its
fiduciary responsibilities), and could be used to deter future attempts to gain
control of Alliance Financial Corporation.
Issuance of Authorized Preferred Stock. Neither Cortland First nor Oneida
Valley is presently authorized to issue shares of preferred stock under its
Certificate of Incorporation. Under the Amended and Restated Certificate of
Incorporation, Alliance Financial Corporation will be authorized to issue,
without shareholder approval, up to 1,000,000 shares of "blank check" preferred
stock, par value $25.00 per share. Shares of authorized but unissued preferred
stock may be issued by the Board of Directors without further shareholder
approval (consistent with its fiduciary responsibilities), and could be used to
deter future attempts to gain control of Alliance Financial Corporation.
Preemptive Rights. Holders of common stock in both Cortland First and
Oneida Valley do not have preemptive rights for the purchase of additional
shares of any class of stock and are not subject to any liability for further
calls or assessments. The Certificate of Incorporation of Alliance Financial
Corporation does not provide shareholders with any preemptive rights with
respect to new issuances that may affect shareholders' voting or dividend
rights.
Amendment of Certificate of Incorporation. In general, Oneida Valley's
Certificate of Incorporation can be amended, altered, changed or repealed,
provided that any such amendment, alteration, change or repeal is approved first
by a majority vote of the Board of Directors and then by the shareholders by the
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affirmative vote of a majority of the total votes eligible to be cast. However,
certain provisions of Oneida Valley's Certificate of Incorporation, including
those related to anti-takeover protections, may not be repealed or amended
unless approved by the affirmative vote of holders of 75% of the outstanding
voting stock thereof. Cortland First's Certificate of Incorporation can be
amended, altered, changed or repealed, provided that any such amendment,
alteration, change or repeal is approved first by a majority vote of the Board
of Directors and then by the shareholders by the affirmative vote of a majority
of the total votes eligible to be cast.
The requirements for amending Alliance Financial Corporation's Certificate
of Incorporation differ from that of Cortland First and Oneida Valley. Amending,
altering or repealing Alliance Financial Corporation's Certificate of
Incorporation will require the approval of a majority of the Board of Directors
and, unless otherwise required by law or the Certificate of Incorporation,
holders of a majority of Alliance Common Stock. Amending certain provisions of
Alliance Financial Corporation's Certificate of Incorporation will require
shareholder votes in excess of a majority. Specifically, provisions set forth in
Articles 6, 7, 8, 9, 10, 11 and 12 (relating to the absence of preemptive
rights, classification of directors, the number of directors, the board's
authority to oppose a tender or other offer, supermajority voting requirements
for certain business combinations, limitation of director liability and
amendment of the Certificate of Incorporation) cannot be amended unless the
amendment is approved by the affirmative vote of shareholders entitled to cast
at least 80% of all votes which all shareholders are then entitled to cast;
provided, however, that this 80% voting requirement shall not apply (and any
such amendment shall require only the shareholder vote specified by New York
law) if such amendment shall have been approved by two thirds the full Board of
Directors, if all of such Directors are persons who would be eligible to serve
as Alliance "continuing directors." See "-- Business Combinations/Fair Price
Provisions."
Amendment of Bylaws. Cortland First's and Oneida Valley's Bylaws may each
be altered, amended or repealed, in whole or in part, by the affirmative vote of
a majority of the Board of Directors present and voting at a duly constituted
meeting at which a quorum is present, or by the shareholders by the affirmative
vote of a majority of all of the votes present and voting (in person or by
proxy) at a duly constituted meeting at which a quorum is present and held to
consider such matter. Alliance Financial Corporation's Bylaws may be amended or
repealed, in whole or in part, by a 66 2/3% vote of directors then in office or
by the affirmative vote of 66 2/3% of the total votes which all shareholders are
entitled to cast at a duly constituted meeting at which a quorum is present and
held to consider such matter.
Special Meetings of Shareholders. Cortland First's Bylaws provide that a
special meeting of shareholders may be called by the Chairman of the Board, the
President, a majority of the Board of Directors or shareholders entitled to cast
at least 20% of the votes that all shareholders are entitled to cast at a
particular meeting. Oneida Valley's Bylaws provide that a special meeting of
shareholders may be called by the President, a majority of the Board of
Directors or shareholders entitled to cast at least 10% of the votes that all
shareholders are entitled to cast at such meeting. At an Oneida Valley special
meeting no business other than that specified in the notice of meeting may be
transacted. The Bylaws of Alliance Financial Corporation will provide that a
special meeting of the shareholders may be called at any time by the Board of
Directors, a Chief Executive Officer or either of the Co-CEO's, a President if
there is no CEO or Co-CEO, or by the shareholders entitled to cast at least 25%
of the votes which all shareholders are entitled to cast at the meeting. At a
special meeting no business other than that specified in the notice of meeting
may be transacted.
Cumulative Voting. Oneida Valley's Certificate of Incorporation provides
holders of Oneida Valley Common Stock with cumulative voting rights in the
election of directors. This means that each shareholder
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may cast a total number of votes for election of directors equal to the number
of shares of Oneida Valley Common Stock owned by the shareholder multiplied by
the number of directors to be elected. The shareholder may cast all of his or
her votes for one or more of the directors on the slate, thus "weighting" his or
her vote for certain directors. This may promote minority shareholder
representation on the Board by allowing minority shareholders to focus their
efforts on electing a smaller number of directors in situations where they would
be unable to control a non-cumulative vote for an entire slate of directors
because of their minority status. Owners of Cortland First Common Stock are not
entitled to cumulative voting rights in the election of directors. The Amended
and Restated Certificate will not provide cumulative voting rights for holders
of Alliance Common Stock.
The Board of Directors. Cortland First's Certificate of Incorporation and
Bylaws provide that the Board of Directors shall consist of not less than five
nor more than 15 directors, as fixed by the Board or the shareholders, and that
the directors are to be divided into three classes as nearly equal in number as
possible, each class serving staggered three-year terms with one class subject
to election or reelection each year at the annual shareholders meeting. Pursuant
to the NYBCL, Cortland First directors may be removed without cause by a
majority of all of the votes present and voting (in person or by proxy) at a
duly constituted meeting at which a quorum is present.
Oneida Valley's Certificate of Incorporation and Bylaws provide that the
Board of Directors shall consist of a not less than one director, as fixed by
the Board or the shareholders, and that the directors are to be divided into
three classes as nearly equal in number as possible, each class serving
staggered three-year terms with one class subject to election or reelection each
year at the annual shareholders meeting. Directors may be removed without cause
upon the affirmative vote of a majority of the shares entitled to vote generally
in the election of directors.
The Certificate of Incorporation and Bylaws of Alliance Financial
Corporation will provide that the Board will not consist of less than nine nor
more than 25 directors. Cortland First and Oneida Valley have agreed that the
Board of Alliance Financial Corporation will initially consist of the 22 persons
who are currently serving as directors of the respective corporations, or such
replacement directors as Cortland First (with respect to current Cortland First
directors) or Oneida Valley (with respect to current Oneida Valley directors)
may designate. The directors are to be divided into three classes as nearly
equal in number as possible, each class serving staggered three-year terms with
one class subject to election or reelection each year at the annual shareholders
meeting. Directors may only be removed without cause upon the affirmative vote
of not less than 80% of the shares entitled to vote generally in the election of
directors. A classified board helps to assure continuity and stability of
corporate leadership and policy by extending the time required to elect a
majority of the directors to at least two successive annual meetings. This
extension of time may also tend to discourage a hostile tender offer or takeover
bid by making it more difficult for a majority of shareholders to change the
composition of the Board of Directors.
Vacancies on the Board of Directors. Cortland First's Bylaws provide that
vacancies in the Board of Directors, including vacancies due to an increase in
the number of directors, shall be filled by majority vote of the then remaining
directors, regardless of whether the number of such remaining directors is
sufficient to constitute a quorum. Increases in the Board of Directors between
annual meetings of shareholders shall be limited to not more than two members
per year. Directors elected by the Board to fill vacancies generally become
members of the class of directors in which the vacancy existed and hold office
until their successors have been elected by the shareholders, who may make such
election at the next annual
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meeting of shareholders or at any special meeting called for that purpose
(regardless of whether the term of office of such directors will expire at such
meeting).
Oneida Valley's Certificate of Incorporation provides that vacancies in the
Board of Directors shall be filled by majority vote of the remaining directors
in the class in which the vacancy occurs, or by majority vote of the directors
in the other two classes if there is no remaining member of the class in which
the vacancy occurs. Directors so elected hold office until the next meeting of
shareholders at which election of directors is in the regular order of business
and until their successors have been elected and qualified.
The Bylaws of Alliance Financial Corporation will provide that vacancies in
the Board of Directors, including vacancies resulting from an increase in the
number of directors, shall be filled by at least a two-thirds vote of the
remaining members of the Board. Increases in the Board of Directors between
annual meetings of shareholders shall be limited to not more than three members
per year. Any director elected to fill a vacancy in the Board of Directors shall
become a member of the same class of directors in which the vacancy existed and
shall serve out the remaining unexpired term accordingly; but if the vacancy is
due to an increase in the number of directors, the new director shall be
designated as belonging in a specific class so as to maintain the three classes
of directors as nearly equal in number as possible.
Shareholder Nominations for Directors and Proposals for New Business.
Cortland First's Bylaws set forth procedures to be followed by shareholders
seeking to make nominations for directors. The Bylaws provide that nominations
by shareholders of individuals for election to the Board of Directors shall be
made by delivering written notice to the Secretary not less than 90 days before
the annual meeting at which directors will be elected. Such notice must set
forth certain background information about the persons to be nominated and the
nominating shareholder. The presiding officer of the shareholders' meeting may
disregard any nomination not made in accordance with these procedures and may
instruct the vote tellers to disregard all votes cast for such nominee. Cortland
First's Certificate of Incorporation and Bylaws do not set forth procedures to
be followed by shareholders seeking to propose new business for consideration at
an annual or special meeting of shareholders.
Oneida Valley's Certificate of Incorporation and Bylaws do not set forth
procedures to be followed by shareholders seeking (i) to propose new business
for consideration at an annual or special meeting of shareholders or (ii) to
make nominations for directors. Oneida Valley's Bylaws provide that at a special
meeting of shareholders, no business other than that specified in the notice of
meeting shall be transacted.
The Bylaws of Alliance Financial Corporation will provide that a
shareholder seeking to bring any business before an annual meeting of
shareholders must give written notice to the Secretary at least 45 prior to the
date of any such meeting; provided, however, that if less than 60 days' notice
of the meeting is given to shareholders, such written notice must be received by
Alliance Financial Corporation not later than the close of business on the 15th
day following the day on which notice of the meeting was mailed to shareholders.
Each such notice given by a shareholder with respect to proposals to be brought
before an annual meeting must set forth in writing as to each matter: (i) a
brief description of the business desired to be brought before the meeting; (ii)
the name and address of the shareholder proposing such business; (iii) the class
and number of shares of Alliance Financial Corporation which are beneficially
owned by the shareholder; (iv) any material interest of the shareholder in such
business; and (v) the same information required by clauses (i), (ii), (iii), and
(iv) with respect to any other shareholder that, to the knowledge of the
shareholder proposing such business, supports such proposal.
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In addition, the Bylaws of Alliance Financial Corporation will provide that
a shareholder seeking to nominate a director for election at an annual meeting
of shareholders must give written notice to the Secretary at least 90 but not
more than 120 days prior to the date of any such meeting. Such notice must
specify (i) the name, age, business address and residence address of each
nominee proposed in such notice, (ii) the principal occupation and employment of
each such nominee, (iii) the number of shares of Alliance Common Stock which are
beneficially owned by each such nominee, (iv) the name and residence address of
the nominating shareholder, (v) the number of shares of Alliance Common stock
which are beneficially owned by the nominating shareholder, and (vi) any other
information relating to such person that is required to be disclosed in
solicitations or proxies for election of directors, or otherwise required,
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as
amended. Nominations not made in accordance with this procedure may be
disregarded by the presiding officer of the meeting in his/her discretion.
Finally, the Bylaws of Alliance Financial Corporation will provide that at
a special meeting of shareholders, no business other than that specified in the
notice of meeting shall be transacted.
Business Combinations/Fair Price Provisions. Both Oneida Valley and
Cortland First are subject to provisions of the NYBCL governing "business
combinations" with "interested shareholders," which provide that a New York
corporation may not engage in a business combination with an interested
shareholder for a period of five years after such interested shareholder became
an interested shareholder unless the business combination or the purchase of
stock by the interested shareholder causing him to become such was approved in
advance by the Board of Directors. Other business combinations with an
interested shareholder are prohibited at any time unless certain requirements
are met. Alliance Financial Corporation will also be subject to these
provisions.
In addition, Cortland First's Certificate of Incorporation contains a
provision that requires that the affirmative vote of either (i) not less than
75% of the outstanding shares of all voting stock and not less than 66 2/3% of
the entire Board of Directors, or (ii) not less than 66 2/3% of the outstanding
shares of all voting stock and not less than 80% of the entire Board of
Directors, is necessary to approve any merger, consolidation, liquidation,
dissolution or sale of all or substantially all of the assets of Cortland First.
In addition, any such transaction must provide that the cash or fair market
value of the consideration to be received per share by holders of Cortland First
Common Stock is not less than the higher of (a) the highest per share price
(with appropriate adjustments for recapitalizations, stock splits, stock
dividends and like distributions) paid by a 5% shareholder (or an affiliate
thereof) in the acquisition of any of its holdings of Cortland First Common
Stock; or (b) the market value per share of the Cortland First Common Stock on
the date that the transaction is publicly announced.
Oneida Valley's Certificate of Incorporation contains a provision that
neither Oneida Valley nor Oneida Valley National Bank shall be a party to a
merger, consolidation, sale of all or substantially all of their respective
assets or similar transaction with a "major stockholder" unless (i) the
transaction is approved by Oneida Valley's Board of Directors prior to the date
that the major stockholder becomes a major stockholder; (ii) the major
stockholder seeks and obtains the unanimous approval of the Oneida Valley Board
of Directors to become a major stockholder, and the transaction is approved by a
majority of Oneida Valley "continuing directors;" (iii) the transaction is
approved by at least 75% of the Oneida Valley continuing directors; or (iv) the
transaction is approved by a vote of at least 75% of the Oneida Valley Common
Stock and by at least 75% of the Oneida Valley Common Stock beneficially owned
by shareholders other than the major stockholder. Moreover, during the time a
major stockholder exists, a
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resolution to voluntarily dissolve Oneida Valley may only be adopted upon (x)
the vote of at least 75% of the Oneida Valley continuing directors; or (y) the
vote of at least 75% percent of the outstanding Oneida Valley Common Stock and
at least 75% percent of the outstanding Oneida Valley Common Stock beneficially
owned by shareholders other than any major stockholder. For purposes of Oneida
Valley's Certificate of Incorporation, a "major stockholder" is any person or
entity which, together with its affiliates and associates, is the beneficial
owner of 10% or more of the votes held by owners of the outstanding shares of
the Oneida Valley Common Stock. An Oneida Valley "continuing director" is (a) a
person who was a member of the Oneida Valley Board of Directors immediately
prior to the time that any person or entity became a major stockholder, or (b) a
person designated as a continuing director by a majority of the then continuing
directors.
The Amended and Restated Certificate requires the affirmative vote of
two-thirds of the entire Alliance Financial Corporation Board of Directors to
approve an extraordinary corporate transaction such as a merger, consolidation,
share exchange, sale or transfer of assets, liquidation or dissolution, other
than in the ordinary course of business. In addition, the Amended and Restated
Certificate provides that a business combination with an "interested
shareholder" shall require the affirmative vote of at least 80% of the votes
entitled to be cast by the holders of all then outstanding Alliance Common Stock
unless the transaction (i) has been approved by at least two-thirds of the
Alliance "continuing directors," and (ii) meets certain fair price and
operational continuity requirements set forth in the Amended and Restated
Certificate, in which case the transaction must be approved by two-thirds of the
vote entitled to be cast by the holders of all then outstanding shares of
Alliance Common Stock. For purposes of the Amended and Restated Certificate, an
"interested shareholder" is a person or entity (or affiliate or associate of
such person or entity) who is (i) the beneficial owner of Alliance Common Stock
representing three percent or more of the vote entitled to be cast by the
holders of all outstanding shares of Alliance Common Stock, (ii) an affiliate or
associate of Alliance Financial Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner of
Alliance Common Stock representing three percent or more of the vote entitled to
be cast by the holders of all then outstanding shares of Alliance Common Stock;
or (iii) is an assignee of or otherwise has succeeded to any shares of Alliance
Common Stock which were at any time within the two-year period immediately prior
to the date in question beneficially owned by any interested shareholder, if
such assignment or succession shall have occurred in the course of a transaction
not involving a public offering within the meaning of the Securities Act. An
Alliance "continuing director" is any member of the Alliance Financial
Corporation Board of Directors who is not an affiliate, associate or
representative of an interested shareholder and who was a member of the Board
prior to the time that the interested shareholder became an interested
shareholder, as well as any successor of an Alliance continuing director while
such person is a member of the Board, who is not an affiliate, associate or
representative of an interested shareholder and who is recommended or elected to
succeed the Alliance continuing director by a majority of the then continuing
directors.
Consideration of Noneconomic Factors. Cortland First's Certificate of
Incorporation provides that, in considering whether to oppose a tender or other
offer for Cortland First's securities, the Board of Directors may consider any
pertinent issues including, but not limited to: (i) whether the offer price is
acceptable, based on historical and present operating results and the financial
condition of Cortland First; (ii) whether a more favorable price could be
obtained for the Cortland First's securities in the future; (iii) the impact of
such transaction on employees, depositors and customers of Cortland First and
its subsidiaries in the communities that they serve; (iv) the reputation and
business practices of the offeror and its management and affiliates as they
would affect the employees, depositors and customers of the corporation and its
subsidiaries and the future value of Cortland First's stock; (v) the value of
any securities offered in exchange
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for Cortland First's securities, based on an analysis of the worth of Cortland
First as compared to the entity whose securities are being offered; and (vi) any
antitrust or other legal or regulatory issues raised by the offer. If the Board
of Directors of Cortland First determines that an offer should be rejected, it
is permitted to take any lawful action to accomplish its purpose of opposing or
not recommending such offer or proposal, including but not limited to advising
shareholders not to accept the offer; litigation against the offeror; filing
complaints with governmental and regulatory authorities; acquiring the
authorized but unissued securities or treasury stock or granting options with
respect thereto; acquiring a company to create an antitrust or other regulatory
problem for the offeror; and obtaining a more favorable offer from other
entities or individuals.
Oneida Valley's Certificate of Incorporation has no comparable provision.
However, both Oneida Valley and Cortland First are governed by provisions of the
NYBCL relating to the duty of directors. Under the NYBCL, directors are
permitted to consider the effects of a corporation's actions on various
constituencies which include employees, customers, creditors and communities in
which the corporation does business.
Alliance Financial Corporation's Certificate of Incorporation will have
similar requirements to that of Cortland First.
DISSENTERS' RIGHTS OF APPRAISAL
Sections 623 and 910 of the NYBCL provide that if the Merger is
consummated, Cortland First and Oneida Valley shareholders who object to the
Merger and who follow the procedures specified in Section 623 will have the
right to receive cash payment of the fair value of their shares. A copy of
Section 623 of the NYBCL is attached to this Proxy Statement/Prospectus as
Appendix C. THE EXPRESS PROCEDURES OF NEW YORK LAW MUST BE FOLLOWED PRECISELY;
IF THEY ARE NOT, SHAREHOLDERS MAY LOSE THEIR RIGHT TO DISSENT. As described more
fully below, such "fair value" would potentially be determined in judicial
proceedings, the result of which cannot be predicted. THERE CAN BE NO ASSURANCE
THAT SHAREHOLDERS EXERCISING DISSENTERS' RIGHTS OF APPRAISAL WILL RECEIVE
CONSIDERATION EQUAL TO OR GREATER THAN THE VALUE OF THE ALLIANCE COMMON STOCK TO
BE OWNED BY THEM FOLLOWING CONSUMMATION OF THE MERGER.
THE STATUTORY PROCEDURES OUTLINED BELOW ARE COMPLEX. SHAREHOLDERS WISHING
TO EXERCISE THEIR DISSENTERS' RIGHTS SHOULD CONSULT THEIR OWN LEGAL ADVISORS.
Any shareholder who is entitled to vote on the Merger will have the right
to receive cash payment of the fair value of his or her shares and the other
rights and benefits provided in Section 623 if such shareholder does not vote in
favor of the Merger and (before the applicable vote of shareholders on the
Merger) files with Cortland First (with respect to Cortland First shareholders)
or Oneida Valley (with respect to Oneida Valley shareholders) written objection
to the Merger, including in that written objection notice of his or her election
to dissent, his or her name and residence address, the number of shares as to
which he or she dissents, and a demand for payment of the fair value of such
shares if the Merger is consummated. A vote against the Merger will not satisfy
the requirement of filing a written objection. Failure to vote against the
Merger will not waive a shareholder's right to payment if the shareholder has
filed a written objection and has not voted in favor of the Merger. If a
shareholder abstains from voting on the Merger, this will not waive dissenter's
rights so long as the appropriate written objection to the Merger is properly
and
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timely filed. All notices of election to dissent should be addressed to David R.
Alvord at Cortland First or to John C. Mott at Oneida Valley, at the applicable
address set forth above under "--The Companies."
If an executed proxy is received but no direction is indicated as to how
such proxy is to be voted, the shares represented by such proxy will be voted in
favor of the Merger. Accordingly, the submission of such an unmarked proxy,
unless revoked prior to its being voted, will serve to waive dissenter's rights.
Within ten days after the date the Merger is approved by the shareholders
of Cortland First or Oneida Valley (as applicable), Cortland First or Oneida
Valley (as applicable) will give written notice of such approval by registered
mail to each shareholder who filed written objection, except for any shareholder
who voted in favor of the Merger. A shareholder may not dissent as to fewer than
all of his or her shares, held by him or her of record, that he or she owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner of shares as to fewer than all of said shares of such owner held of record
by such nominee or fiduciary.
Upon consummation of the Merger, a dissenting shareholder will cease to
have any rights of a shareholder, except the right to be paid the fair value of
his or her dissenting shares. A shareholder's notice of election may be
withdrawn at any time prior to his or her acceptance in writing of an offer to
purchase his or her dissenting shares by Alliance Financial Corporation, but in
no case may such notice of election be withdrawn later than 60 days after the
Effective Date (unless the company does not make a timely offer) without the
consent of Alliance Financial Corporation. Within one month after the filing of
the notice of election to dissent, a dissenting shareholder must submit the
certificates representing his or her dissenting shares to Cortland First, Oneida
Valley or Alliance Financial Corporation (as applicable), or its transfer agent,
which shall note conspicuously on the certificates that such notice of election
has been filed, and will then return the certificates to the shareholder. Any
shareholder who fails to submit his or her certificates for such notation within
45 days from the date of filing such notice of election to dissent will lose his
or her dissenter's rights unless a court, for good cause shown, otherwise
directs.
Within 15 days after the expiration of the period within which shareholders
may file their notices of election to dissent, or within 15 days after the
Effective Date, whichever is later (but in no case later than 90 days after the
date of the applicable Meeting), Alliance Financial Corporation must make a
written offer by registered mail to each shareholder who has filed such notice
of election to pay for his or her dissenting shares at a specified price which
the company considers to be the fair value and, if the Merger has been
consummated, must accompany such offer by advance payment to each shareholder
who has submitted his or her certificates of an amount equal to 80% of the
amount of such offer. Such offer must be made at the same price per share to all
the dissenting shareholders of Cortland First and at the same price per share to
all the dissenting shareholders of Oneida Valley. If, within 30 days after the
making of such offer, Alliance Financial Corporation and any dissenting
shareholders agree on the price to be paid for dissenting shares, the balance of
payment therefor must be made within 60 days after the making of such offer or
the Effective Date, whichever is later, and upon surrender of the certificates
representing such shares.
If Alliance Financial Corporation fails to make such offer within the 15
day period described above, or if it makes the offer and any dissenting
shareholder fails to agree within the period of 30 days thereafter upon the
price to be paid for his or her shares, the company is required within 20 days
after the expiration of whichever is the applicable of the two periods to
institute a special proceeding in the Supreme Court of the State of New York,
County of Cortland (with respect to Cortland First shareholders) or Madison
(with respect to Oneida Valley shareholders), to determine the rights of
dissenting shareholders and to fix the fair
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value of their dissenting shares. If Alliance Financial Corporation fails to
institute such proceeding within such 20 day period, any dissenting shareholder
may institute a proceeding for the same purpose not later than 30 days after the
expiration of such 20 day period. If the dissenting shareholder does not
institute such a proceeding within such 30 day period, his or her dissenter's
rights are lost unless the court, for good cause shown, otherwise directs.
During each proceeding, the court will determine whether each dissenting
shareholder is entitled to receive payment for his or her shares and, if so,
will fix the value of such shares as of the close of business on the day prior
to the applicable Meeting, taking into consideration the nature of the Merger
transaction giving rise to the shareholder's right to receive payment for his or
her dissenting shares and other relevant factors. The court will also award
interest on such amount to be paid from the Effective Date to the date of
payment unless the court finds that a shareholder's refusal to accept an offer
for payment was arbitrary, vexatious, or otherwise not in good faith. Each party
to such proceeding will bear its own costs unless the court finds that such
refusal by any shareholder was arbitrary, vexatious, or otherwise not in good
faith, in which case Alliance Financial Corporation's costs will be assessed
against such shareholder. The court, in its discretion, may also apportion or
assess any part of the dissenting shareholder's costs against Alliance Financial
Corporation if it finds that the fair value of the shares determined materially
exceeds the amount which the company offered to pay, or that no offer or advance
payment was made by the company, or that the company failed to institute such
special proceeding, or that the actions of the company in complying with its
obligations under Section 623 were arbitrary, vexatious, or otherwise not in
good faith. Within 60 days following the final determination of the applicable
proceeding, Alliance Financial Corporation shall pay to each dissenting
shareholder the amount found to be due him or her upon the shareholder's
surrender of all certificates representing dissenting shares.
The enforcement by a shareholder of his or her right to receive payment for
shares in accordance with Section 623 excludes the enforcement by such
shareholder of any other right to which he or she might otherwise be entitled by
virtue of his or her ownership of shares (unless such shareholder withdraws his
or her notice of election as provided in Section 623 or the Merger is
abandoned), except that such shareholder will retain the right to bring or
maintain an appropriate action to obtain relief on the grounds that the Merger
will be or is unlawful or fraudulent as to him or her.
FEDERAL INCOME TAX CONSEQUENCES
As of the date of this Proxy Statement/Prospectus, Bond, Schoeneck & King, LLP,
counsel to Cortland First, has advised Cortland First and Oneida Valley,
respectively, that, in its opinion:
(i) no gain or loss will be recognized by Cortland First or Oneida Valley
in the Merger;
(ii) no gain or loss will be recognized by holders of shares of Oneida
Valley Common Stock upon their receipt of Alliance Common Stock in
exchange for their Oneida Valley Common Stock, except that
shareholders who receive cash proceeds for fractional interests in
Oneida Valley Common Stock will recognize gain or loss equal to the
difference between such proceeds and the tax basis allocated to their
fractional share interests, and such gain or loss will constitute
capital gain or loss if their Oneida Valley Common Stock is held as a
capital asset at the Effective Date;
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(iii) the tax basis of the shares of Alliance Common Stock (including
fractional share interests) received by the shareholders of Oneida
Valley will be the same as the tax basis of their Oneida Valley Common
Stock exchanged therefor; and
(iv) the holding period of Alliance Common Stock in the hands of the Oneida
Valley shareholders will include the holding period of their Oneida
Valley Common Stock exchanged therefor, provided such Oneida Valley
Common Stock is held as a capital asset at the Effective Date.
Consummation of the Merger is conditioned upon there being delivered to
Cortland First and to Oneida Valley an opinion of Bond, Schoeneck & King, LLP,
dated as of the Effective Date, similar in effect to the opinion described
above. Under the Merger Agreement, the condition that Bond, Schoeneck & King,
LLP deliver the opinion described above on the Effective Date can be waived by
Cortland First and Oneida Valley. Neither Cortland First nor Oneida Valley
presently intend to waive receipt of such opinion; however, in the event that
the delivery of such opinion of counsel is waived, or such opinion would
otherwise set forth tax consequences materially different to a shareholder than
those described above, Cortland First and Oneida Valley intend to resolicit
proxies as required in accordance with the rules and regulations of the
Commission.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS
BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED
TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS AND COURT
DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD
AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION IS NOT A
COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
AND, IN PARTICULAR, DOES NOT ADDRESS TAX CONSIDERATIONS THAT MAY AFFECT THE
TREATMENT OF SHAREHOLDERS WHICH ARE EXEMPT ORGANIZATIONS, WHO ARE NOT CITIZENS
OR RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TAX
TREATMENT. EACH SHAREHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE STATE, LOCAL, OR FOREIGN LAWS. ACCORDINGLY, EACH ONEIDA VALLEY
SHAREHOLDER IS ADVISED TO CONSULT A TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER.
RESALE OF ALLIANCE COMMON STOCK
The shares of Alliance Financial Corporation Common Stock issuable upon
consummation of the Merger have been registered under the Securities Act. Such
shares may be traded freely by those shareholders not deemed to be "affiliates"
of Cortland First or Oneida Valley and/or Alliance Financial Corporation as that
term is defined under the Securities Act. The term "affiliate" generally means
each person who, or is a member of a group that, controls, is controlled by or
is under common control with the respective company, and for purposes hereof
could be deemed to include all executive officers, directors and 10%
shareholders of Cortland First or Oneida Valley and/or Alliance Financial
Corporation.
Alliance Common Stock received and beneficially owned by those shareholders
who are deemed to have been affiliates of Cortland First or Oneida Valley and/or
are deemed to be affiliates of Alliance
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Financial Corporation may be resold without registration as provided by Rule 145
or 144, respectively, or as otherwise permitted, under the Securities Act. Such
affiliates may publicly resell Alliance Common Stock received by them in the
Merger subject to certain limitations, principally as to the number of shares
and the manner of sale. Such affiliates who do not become affiliates of Alliance
Financial Corporation will be subject to these limitations for a period of one
year following the Effective Date and thereafter generally may resell their
shares without restriction. In addition, shares of Alliance Common Stock issued
to affiliates of Cortland First or Oneida Valley in the Merger will not be
transferable until financial results covering at least 30 days of post-Merger
combined operations of Cortland First and Oneida Valley have been published, in
order to satisfy certain requirements of the Commission applicable to
transactions, such as the Merger, to be accounted for using pooling-of-interests
accounting treatment.
The Agreement provides that Cortland First and Oneida Valley each shall
cooperate and use its best efforts to identify those persons who may be deemed
to be affiliates of Cortland First or Oneida Valley under Rule 144 or 145
promulgated by the Commission under the Securities Act, and shall use its best
efforts to cause each person so identified to deliver to Cortland First or
Oneida Valley, no later than 30 days prior to the Effective Date, a written
agreement providing that such person will not dispose of any Cortland First
Common Stock, Oneida Valley Common Stock or Alliance Common Stock except in
compliance with the Securities Act, the rules and regulations promulgated
thereunder and the Commission's rules relating to pooling-of-interests
accounting treatment. Receipt of such a written agreement shall not affect the
restriction on transfer, as discussed in the preceding paragraph, which exists
prior to the publication of certain post-Merger financial results. As of the
date of this Proxy Statement/Prospectus, all directors of Cortland First and
Oneida Valley have entered into written agreements to the effect described in
this paragraph.
EXPENSES
Except as described in the following paragraph, each party to the Agreement
has agreed to bear and pay all costs and expenses incurred by it in connection
with the transactions contemplated thereby, including fees and expenses of its
own financial consultants, accountants and counsel, except that Cortland First
and Oneida Valley each have agreed to bear and pay half of all printing costs
relating to the Registration Statement and this Proxy Statement/Prospectus.
In the event that the Merger is not consummated and the Agreement is
terminated for any reason other than breach by either party, Cortland First and
Oneida Valley have agreed to share equally the following fees and expenses
incurred in connection with or related to the Merger or Bank Merger: (i) legal
fees and expenses, (ii) accounting fees and expenses, and (iii) fees and
expenses of Capital Formation Group, Jamesson Associates and Empire Valuation.
In the event the Agreement is terminated due to a breach by either party of any
material covenant or obligation between the parties, each party shall be free to
pursue any and all legal remedies available at law or equity, including the
recovery of costs, damages and expenses.
ACCOUNTING TREATMENT
It is a condition precedent to Cortland First's and Oneida Valley's
obligations to consummate the Merger that no event shall have occurred that will
preclude the Merger from being accounted for as a "pooling-of-interests" and
that the parties shall have received a letter from their independent accountants
to the effect that they are not aware of any reason that would preclude the
Merger from being accounted for as a pooling of interests.
See "--Representations and Warranties; Conditions to the Merger; Waiver."
Under the pooling-of-interests method of accounting, the historical basis of the
assets and liabilities of Cortland
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First and Oneida Valley will be combined and carried forward at their previously
recorded amounts, and revenue and expenses of Cortland First and Oneida Valley
will be combined at their historically recorded amounts. See "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS." Cortland First , Oneida Valley,
First National Bank of Cortland and Oneida Valley National Bank have agreed that
they will not take, cause or to the best of their respective abilities permit to
be taken or caused, any action that would adversely affect the qualification of
the Merger for pooling-of-interests accounting treatment.
STOCK OPTION AGREEMENTS
The Cortland First Stock Option Agreement provides for the grant to Oneida
Valley by Cortland First of an option to purchase up to 391,985 shares of
Cortland First Common Stock at an exercise price of $28.50 per share upon the
occurrence of certain events (each, a "Purchase Event"), provided, however,
that, in the event Cortland First issues or agrees to issue any shares of
Cortland First Common Stock (other than as permitted under the Agreement) at a
price less than $28.50 per share (adjusted as described below), the exercise
price shall be equal to such lesser price (the "Cortland First Option"). The
Oneida Valley Stock Option Agreement provides for the grant to Cortland First by
Oneida Valley of an option to purchase up to 180,150 shares of Oneida Valley
Common Stock at an exercise price of $52.50 per share, upon the occurrence of a
Purchase Event, provided, however, that in the event Oneida Valley issues or
agrees to issue any shares of Oneida Valley Common Stock (other than as
permitted under the Agreement) at a price less than $52.50 per share (adjusted
as described below), the exercise price shall be equal to such lesser price (the
"Oneida Valley Option").
The purpose of the options is to increase the likelihood that the Merger
will be consummated by making it more difficult and more expensive for a third
party to acquire control of Cortland First or Oneida Valley. Accordingly, the
options are exercisable only upon the occurrence of certain events that might
jeopardize consummation of the Merger pursuant to the terms of the Agreement.
Although the shares issuable upon exercise of the Cortland First Option and the
Oneida Valley Option represent approximately 16.6% of the Cortland First Common
Stock and Oneida Valley Common Stock, respectively, that would be outstanding
after such exercise, Oneida Valley and Cortland First may not acquire more than
5% of the stock of Cortland First and Oneida Valley, respectively, pursuant to
the exercise of the options or otherwise, without prior approval of the Federal
Reserve Board.
PROPOSAL II -- APPROVAL OF LONG TERM INCENTIVE PLAN
The Cortland First and Oneida Valley Boards of Directors have approved the
Alliance Financial Corporation 1998 Long Term Incentive Compensation Plan (the
"Incentive Plan"), subject to approval by the shareholders at the Cortland First
Meeting and the Oneida Valley Meeting. The purpose of the Incentive Plan is to
promote the interests of Alliance Financial Corporation by providing a
comprehensive equity-based incentive compensation program designed to enable
Alliance Financial Corporation to attract, retain, and reward key employees and
directors through performance based incentives. To the extent that officers,
directors and key employees have an equity interest in Alliance Financial
Corporation, the interests of such persons will be more closely aligned with the
interests of shareholders, and their compensation will bear, in part, a direct
relationship to shareholder gains.
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The Boards of Directors believe that adoption of the proposed Incentive
Plan is necessary if Alliance Financial Corporation is to be able to attract,
retain, and motivate highly qualified and talented individuals. The following is
a summary of the material provisions of the Incentive Plan. This summary is
qualified in its entirety by reference to the specific provisions of the
Incentive Plan, the full text of which is available upon written request to
David R. Alvord at Cortland First or John C. Mott at Oneida Valley, at the
applicable address set forth above under "PROPOSAL I--APPROVAL OF MERGER--The
Companies."
GENERAL FEATURES OF THE INCENTIVE PLAN
The Incentive Plan would empower Alliance Financial Corporation to award or
grant, from time to time, to officers, other key employees and directors of
Alliance Financial Corporation and Alliance Bank, N.A. (i) Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code, (ii)
Non-Qualified Stock Options, and (iii) Restricted Stock (further described
below), and any combination of such awards. The Incentive Plan is designed to
provide Alliance Financial Corporation with flexibility in the grant of
equity-based incentive compensation to achieve the overall goals of the Plan.
The term of the Incentive Plan is for ten years unless earlier terminated by the
Board of Directors in accordance with the terms of the Plan.
The Compensation Committee of Alliance Financial Corporation's Board of
Directors will be responsible for making recommendations to the full Board
regarding administration of the Incentive Plan. The Incentive Plan will be
administered by the Board of Directors, which shall have the authority, acting
upon recommendation of the Compensation Committee, to select participants from
those persons eligible under the Incentive Plan, to establish the terms and
conditions of any awards, to authorize awards under the Incentive Plan, and to
interpret and construe any provision of the Plan.
Officers, other key employees and directors of Alliance Financial
Corporation or its subsidiaries shall be eligible to participate in the
Incentive Plan. Participants, who may receive awards under the Incentive Plan,
shall be selected by the Board based upon such factors as the employee's or
director's past and potential contributions to the success, profitability, and
growth of the company. Whether an award may be exercised after a participant's
termination of employment or service on the Board shall be determined by the
Board, subject to limits set forth below with respect to different types of
awards under the Incentive Plan.
Subject to adjustments noted below, 400,000 shares of Alliance Common Stock
will be available for issuance over the 10 year term of the Incentive Plan, to
be divided among the various components of the Incentive Plan in such manner as
the Board shall determine. Shares of Alliance Common Stock issued under the
Incentive Plan may be newly issued shares, treasury shares, or any combination
thereof. Such maximum number of shares is subject to adjustment in the event of
a reorganization, stock split, stock dividend, combination of shares, merger,
consolidation or other recapitalization of Alliance Financial Corporation.
No award granted under the Incentive Plan, and no right or interest
therein, shall be assignable or transferable by a participant, except that
Option rights may be transferred by will or the laws of descent and
distribution. The Board of Directors may amend or terminate the Incentive Plan
at any time, except that the Board of Directors may not, without approval by the
shareholders, make any amendment that would (i) increase the number of available
shares under the Plan, or (ii) change the definition of eligible persons under
the Plan.
Stock Options. Options designated as Incentive Stock Options within the
meaning of Section 422 of the Internal Revenue Code may be granted under the
Incentive Plan to eligible employees. The exercise
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price of an Incentive Stock Option shall be at least 100% of the fair market
value of Alliance Common Stock on the date of grant. Thus, an employee who is
granted an Incentive Stock Option must pay a price per share upon exercising the
option which is at least equal to the fair market price of a share at the time
the option was granted. The number of shares of Alliance Common Stock in respect
of which Incentive Stock Options are first exercisable by any optionee during
any calendar year shall not have a fair market value (determined at the date of
grant) in excess of $100,000. Incentive Stock Options shall be exercisable for
such period or periods not in excess of 10 years after the date of grant as
shall be determined by the Board, except that no Incentive Stock Option shall be
exercisable earlier than one year following the date the option is granted.
Non-Qualified Stock Options may also be granted under the Incentive Plan to
eligible employees and directors and will be exercisable for such period or
periods and at such price as the Board shall determine as of the date the option
is granted.
The Board shall have the authority, in its discretion, to accelerate the
time at which a stock option becomes exercisable, provided that no Incentive
Stock Option shall be exercisable earlier than one year following the date the
option is granted.
Stock options shall be exercisable only upon the payment in full to
Alliance Financial Corporation of the entire option exercise price (i) in cash,
(ii) by the transfer to the company of shares of Alliance Common Stock (at the
fair market value thereof on the date of exercise), or (iii) by a combination of
such methods of payment. Payment may not be made with stock issued by Alliance
Financial Corporation upon exercise of an option under the Incentive Plan or
other stock option plan unless the stock has been held for at least one year.
Each grant of stock options shall be evidenced by an agreement between
Alliance Financial Corporation and the optionee and shall contain such terms and
provisions, consistent with the Incentive Plan, as the Board may approve.
Restricted Stock. An award of Restricted Stock consists of a specified
number of shares of Alliance Common Stock that are transferred to a participant
and subject to forfeiture to Alliance Financial Corporation under such
conditions and for such periods of time as the Board may determine. A
participant may vote and receive dividends on the shares of Restricted Stock
awarded, but may not sell, assign, transfer, pledge or otherwise encumber such
shares of Restricted Stock during the forfeiture period. Certificates for
Restricted Stock shall bear a legend specifying the restrictions and conditions
which will cause forfeiture of the stock. The Board may also require that the
Restricted Stock be held in escrow until all restrictions and events of
forfeiture have lapsed.
If a participant's employment or Board service terminates for any reason
except death or disability prior to the expiration of the forfeiture period, all
of the participant's Restricted Stock not already vested will be forfeited and
surrendered to Alliance Financial Corporation. If a participant dies or
terminates employment or Board service because of a disability prior to the
expiration of the forfeiture period, the forfeiture period shall lapse on the
date of death or date of disability, provided that such date is at least four
years following the date of the award. Notwithstanding the foregoing, the Board
shall have the authority to accelerate the time at which any or all restrictions
applying to the Restricted Stock shall lapse.
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FEDERAL INCOME TAX CONSEQUENCES
The anticipated federal income tax consequences relating to the different
types of awards under the Incentive Plan are as described below.
Upon Grant of Options. An optionee will not recognize any taxable income at
the time a stock option is granted, and Alliance Financial Corporation will not
be entitled to a federal income tax deduction at that time.
Incentive Stock Options. No ordinary income will be recognized by the
holder of an Incentive Stock Option at the time of exercise. The excess of the
fair market value of the shares at the time of exercise over the aggregate
option price will be an adjustment to alternative minimum taxable income for
purposes of the federal "alternative minimum tax" at the date of exercise. If
the optionee holds the shares for the greater of two years after the date the
option was granted and one year after the acquisition of such shares, the
difference between the aggregate option price and the amount realized upon
disposition of the shares will constitute a long term capital gain or loss, as
the case may be, and Alliance Financial Corporation will not be entitled to a
federal income tax deduction. If the shares are disposed of in a sale, exchange
or other "disqualifying disposition" within two years after the date of grant or
within one year after the date of exercise, the optionee will realize taxable
ordinary income in an amount equal to the excess of the fair market value of the
shares purchased at the time of exercise over the aggregate option price (the
bargain purchase element), and Alliance Financial Corporation will be entitled
to a federal income tax deduction equal to such amount. The amount of any gain
in excess of the bargain purchase element realized upon a "disqualifying
disposition" will be recognized as capital gain to the holder. Alliance
Financial Corporation will not be entitled to a federal income tax deduction for
the capital gain amount.
Non-Qualified Stock Options. Upon the exercise of a Non-Qualified Stock
Option, ordinary income will be recognized by the holder in an amount equal to
the excess of the fair market value of the shares purchased at the time of such
exercise over the aggregate option price. Alliance Financial Corporation will be
entitled to a corresponding federal income tax deduction. Upon any subsequent
sale of the shares, the optionee will generally recognize a taxable capital gain
or loss based upon the difference between the per share fair market value at the
time of exercise and the per share selling price at the time of the subsequent
sale of the shares.
Restricted Stock. Unless a participant makes the election described below,
a participant receiving a grant of Restricted Stock will not recognize income,
and Alliance Financial Corporation will not be allowed a deduction, at the time
such shares of Restricted Stock are granted. While the restrictions on the
shares are in effect, a participant will recognize ordinary income equal to the
amount of any dividends received. When the restrictions on the shares are
removed or lapse, the excess of fair market value of the shares over the amount
paid, if any, by the participant for the shares will be ordinary income to the
participant and will be allowed as a deduction for federal income tax purposes
to Alliance Financial Corporation. Upon disposition of the shares, the gain or
loss realized by the participant will be taxable as capital gain or loss.
However, by filing a Section 83(b) election with the Internal Revenue Service
within 30 days after the date of grant, a participant's ordinary income will be
determined as of the date of grant. In such a case, the amount of ordinary
income recognized by such a participant and deductible by Alliance Financial
Corporation will be equal to the excess of the fair market value of the shares
as of the date of grant over the amount paid, if any, by the participant for the
shares. If such election is made and a participant
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thereafter forfeits his or her stock, no deduction will be allowed for the
amount previously included in such participant's income.
GRANTS PRESENTLY CONTEMPLATED
The following table sets forth information regarding the initial grants
that will be made under the Incentive Plan upon consummation of the Merger, if
the Incentive Plan is approved by the shareholders.
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
- ----------------- ------------------
David R. Alvord 50,000
Co-Chief Executive Officer
John C. Mott 50,000
Co-Chief Executive Officer
Options granted to Messrs. Alvord and Mott will include both Incentive
Stock Options and Non-Qualified Stock Options. All options granted will have an
exercise price equal to the per share fair market value of Alliance Common Stock
on the Effective Date, and will vest in equal installments on the first, second
and third anniversaries of the Effective Date. Options will remain exercisable
until three years after the optionee's separation from employment with Alliance
Financial Corporation.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the votes cast in person or by proxy
at the Cortland First Meeting and a majority of the votes cast in person or by
proxy at the Oneida Valley Meeting is required for approval of the Incentive
Plan.
THE BOARDS OF DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE "FOR" THIS PROPOSAL.
INFORMATION WITH RESPECT TO CORTLAND FIRST
DESCRIPTION OF BUSINESS
General. Cortland First is a one-bank holding company that was formed in
1986. Its only subsidiary and operating entity is First National Bank of
Cortland. Chartered in 1869, First National Bank of Cortland is an independent
commercial bank delivering financial services from branch locations in Cortland,
Cortlandville (2), Marathon, McGraw, Cincinnatus, Tully and Whitney Point, New
York.
As a bank holding company, Cortland First is subject to supervision by the
Federal Reserve system, is required to file an annual report with the Federal
Reserve Board, and is subject to examination by that Board as well. First
National Bank of Cortland is subject to supervision by the OCC as well as the
FDIC. The administrative offices of Cortland First are located at 65 Main
Street, Cortland, New York 13045. The telephone number is (607) 756-2831.
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Banking Services. First National Bank of Cortland provides a wide range of
retail and commercial banking services for individual, business and municipal
customers, including demand, savings and time deposits, commercial, mortgage and
installment loans, consumer banking and trust services. Traditional deposit
products include checking accounts, negotiable order of withdrawal (NOW) savings
accounts, time deposits, and individual retirement accounts. Lending services
include residential, farm, business loans, Small Business Administration loans,
installment loans, home equity loans, biweekly mortgages, auto, and student
loans. Trust services include investment management, retirement plans, insurance
trusts, financial planning, estate planning, and custodial (agency) accounts.
Other banking services include safe deposit boxes, travelers checks, money
orders, wire transfers, collections, and foreign exchange. First National Bank
of Cortland's approach is that of a community-oriented bank focusing on the
development of long term customer relationships, personalized service,
convenient locations and meeting the needs of individuals and businesses in its
market area.
Service Area and Competition. First National Bank of Cortland is an
independent commercial bank committed to serving the financial needs of
customers in its local communities. Currently, the bank conducts its banking
operation primarily in Cortland, Southern Onondaga and Northern Broome Counties
in the State of New York. The bank competes with other financial institutions in
the area, many of which are branches of large institutions such as Marine
Midland, Fleet, and Key Bank. Other organizations compete for deposits and loans
as well, and include insurance companies, money market funds, federal credit
unions, and other local independent banking operations.
Employees. As of ___________, 199__, First National Bank of Cortland
employs approximately 130 full time equivalent employees. The bank provides a
variety of employee benefits and considers its relationship with its employees
to be good.
Properties. First National Bank of Cortland operates the following branch
locations:
NAME OF OFFICE LOCATION DATE ESTABLISHED
-------------- -------- ----------------
Home Office 65 Main Street March, 1869
Cortland, NY
Cincinnatus 2743 NYS Route 26 January, 1943
Cincinnatus, NY
Groton Avenue 1125 Groton Avenue June, 1987
Cortland, NY
Marathon 14 E. Main Street August, 1957
Marathon, NY
McGraw 30 Main Street May, 1967
McGraw, NY
Tully Route 80 at I-81 January, 1989
Tully, NY
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Whitney Point 2950 NYS Route 11 April, 1994
Whitney Point, NY
Wal-Mart 872 NYS Route 13 March, 1997
Cortland, NY
The Tully, Whitney Point, and Wal-Mart locations are leased. The other
banking premises are owned.
Legal Proceedings. First National Bank of Cortland is subject to various
routine litigation incidental to its banking business. Management does not
anticipate that the ultimate liability, if any, arising out of such litigation
will have a material effect on Cortland First's or First National Bank of
Cortland's business, financial condition or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion describes the major factors affecting Cortland
First's results of operations and financial condition. These comments should be
read in conjunction with the consolidated financial statements and the notes
relating thereto appearing elsewhere in this Proxy Statement/Prospectus.
JUNE 30, 1998 COMPARED TO JUNE 30, 1997
Effective January 1, 1998, Cortland First implemented Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." For Cortland First, comprehensive income is determined by adding
unrealized investment holdings, gains or losses during the period to net income.
Comparison of the Results of Operations. Net income was $556,000, or $.28
per share, for the second quarter of 1998, compared with $617,000, or $.31 per
share, for the same period in 1997. Net interest income decreased by $64,000
when compared to the second quarter of 1997, and was partially offset by a
decrease in the provision for loan losses of $55,000 when compared to the same
quarter a year ago. Other operating income increased by $62,000 but was offset
by an increase in other operating expenses of $172,000 compared to the second
quarter of 1997.
Net interest income is the difference between the yield earned on interest
earning assets and rates paid on interest bearing deposits and borrowings. The
relative amounts of interest earning assets, interest bearing deposits, and
borrowings also impact net interest income levels. Net interest income was $2.3
million for the three months ended June 30, 1998, compared with $2.4 million for
the same period in 1997. For the first six months of 1997, net interest income
was $4.6 million, compared to $4.7 million in the first half of 1997. The
decrease is due to lower than anticipated yields being earned on commercial
loans and investments and decreases in outstanding consumer loans as a result of
weak loan demand.
The average costs of interest bearing liabilities for the first six months
of 1998 were 3.77% and were comparable to 3.78% for the first half of 1997. The
net interest margin for the first half of 1998 was 4.78%, down slightly from
4.86% for the same period in 1997.
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Other Operating Income and Expenses. Total other operating income was
$431,000 in the second quarter of 1998, an increase of $62,000, or 16.8%, from
the second quarter of 1997. Other operating income for the first half of 1998
was $870,000, up $106,000, or 13.9%, from the same period in the prior year. The
increase is due primarily to increased service fees collected on demand and
savings accounts which increased by $107,000 and increased ATM fees of $36,000.
This was partially offset by loss of credit card interest income due to the sale
of the credit card portfolio. Other operating expenses were $2.0 million for the
three months ended June 30, 1998, compared to $1.8 million for the same period
in 1997. This is an increase of $172,000, or 9.5%. For the first half of 1998
other operating expenses were $3.9 million, compared to $3.6 million for the
same period a year ago. Salary and benefits increased by $185,000 for the first
half of 1998 when compared to 1997. This is due primarily to staffing changes
and normal merit increases to First National Bank of Cortland's employees, along
with higher than expected insurance claims on the bank's self insured medical
program. Also contributing to the increase are higher than expected expenses for
the bank's post-retirement program, which increased by $19,000 compared to the
same period a year ago. Loan origination and collection expense increased by
$41,000 for the first half of 1998 compared to the same period in 1997. The
increase is due primarily to increased mortgage originations and higher than
expected collection costs on delinquent loans. Expenses related to Cortland
First increased by $26,000 for the first half of 1998 compared to 1997, due
primarily to consulting costs in anticipation of the Merger.
Changes in Financial Condition. Consolidated assets of Cortland First were
$233.6 million at June 30, 1998, a $14.2 million, or 6.5%, increase from
December 31, 1997. Net loans receivable were $113.7 million at June 30, 1998, an
increase of $1.8 million from December 31, 1997. Loan demand remains weak due
primarily to economic conditions within First National Bank of Cortland's
geographic area. Mortgage loans and commercial loans outstanding increased by
$2.7 million and $2.6 million, respectively, since December 31,1997. This was
partially offset by a decrease in consumer loans of $2.6 million. The bank plans
to implement a new indirect lending program sometime late in the third quarter
of 1998, through which it expects to receive consumer loan applications from
bank-approved automobile dealers on behalf of their customers to finance their
purchases. The loans will be subject to the bank's normal consumer loan
underwriting standards.
The reserve for loan losses was $1,268,000 at June 30, 1998. Loan loss
provisions of $125,000 in the first half of 1998 were offset by net charge-offs
totaling $97,000.This compares to loan loss provisions of $180,000 for the same
period of 1997 being offset by net charge-offs of $229,000 for the first half of
1997. The lower provision in 1998 is a result of the bank's improved
underwriting standards resulting in a lower loss experience factor. In
management's opinion, the allowance for loan losses is adequate as of June 30,
1998. Nonperforming assets (nonaccrual loans and real estate owned) totaled
$523,000, or .20% of total gross loans, at June 30, 1998. This is down from
$581,000, or .24% of total gross loans, as of year end 1997.
Total deposit liabilities were $206.0 million at June 30, 1998, an increase
of $13.8 million, or $7.18%, from December 31, 1997 which totaled $192.2
million. The increase is due primarily to a $10.2 million increase in NOW
accounts as a result of increased deposits by municipalities and Noninterest
bearing demand deposits have grown by $3.3 million in the first half of 1998.
Capital adequacy remained strong at the end of the second quarter.
Stockholder's equity at June 30, 1998 was $25.5 million, or $12.94 per share,
compared to $25 million, or $12.40 per share at December 31, 1997. Cortland
First's capital leverage ratio was 11.20%, which compares favorably with 11.38%
for the year ended December 31, 1997. Tier 1 and Total Risk-based capital ratios
were 21.63% and 22.72%,
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respectively. All of Cortland First's capital ratios are well above regulatory
minimums to qualify as "well capitalized".
Liquidity. Liquidity describes the ability of First National Bank of
Cortland to meet financial obligations that arise out of the ordinary course of
business. Liquidity is primarily needed to meet the borrowing and deposit
withdrawal requirements of the bank's customers and to fund current and planned
expenditures. The bank derives liquidity from increased customer deposits, the
maturity distribution of the investment portfolio, loan repayments, and income
from earning assets. The bank also maintains a line of credit with the FHLBNY
which provides additional liquidity. Additionally, the bank's securities
classified as available-for-sale, which totaled $85.9 million at June 30, 1998,
were available for the management of liquidity and interest rate risk. At June
30, 1998, the ratio of net liquid assets to net deposits amounted to 30.47%,
indicating a high level of liquidity. Management is not aware of any trends,
demands, commitments, or uncertainties that are reasonably likely to result in
material changes in liquidity.
Risk Assessment. Risk is the potential that unexpected and unanticipated
events may have an adverse impact on First National bank of Cortland's capital
or earnings. The OCC has defined several categories of risk for supervisory
purposes. The Asset and Liability Committee of the bank is responsible for
assessing these risks. Management of the composition and maturity configurations
of the earning assets and funding sources contributes to maintaining an
appropriate balance between the maturity and repricing characteristics of assets
and liabilities that is consistent with liquidity, growth, and capital adequacy
goals. A forward looking assessment regarding the impact of interest rate
movement may have on net interest income is performed on a monthly basis. Based
on current analysis, the bank believes that it is well positioned with minimal
impact on income when subjected to a 200 basis point (2%) shock, the equivalent
of an immediate increase or decrease of 2% in all interest rates on both assets
and liabilities. Management believes its exposure in each of the risk categories
is low.
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Shareholders' Equity. Unrealized net gain on investment securities
resulting from changes in the investment portfolio and general market conditions
increased from $374,768 at year-end 1996 to $540,492 at year-end 1997.
Due to the continued success of First National Bank of Cortland and its
solid capital position, on May 28, 1997, the Board of Directors decided to offer
an opportunity to all shareholders desiring to sell some or all of their
Cortland First Common Stock by commencing a stock repurchase program. The result
of this stock repurchase was the placement of 30,538 shares in treasury stock.
Later in the year, Cortland First purchased an additional 18,000 shares and
re-issued 2,314 shares to its transfer agent, American Stock Transfer & Trust
Company, to satisfy the requirements of its dividend reinvestment plan.
In 1997, Cortland First added approximately 20% of its net income to
retained earnings, with the remainder being paid in the form of dividends to
shareholders. An all-time high of $2,099,100 was paid in cash dividends in 1997
compared to $1,001,280 in 1996. Book value increased from $12.59 to $12.70 per
share at year-end 1997. The ratio of capital to risk-weighted assets at December
31, 1997 continued to exceed the regulatory requirements for well-capitalized
banks.
Liquidity. Liquidity management involves the ability to meet cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient
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funds will be available to meet their credit needs. First National Bank of
Cortland was a net seller of federal funds in the amount of $4,888,000 on a
daily average basis during fiscal 1997. The investment portfolio provides
liquidity from maturing instruments on a regular basis -- During 1997 97.2% of
the portfolio was available for sale and 75.9% matured in less than five years.
The bank continues to have a credit facility with the FHLBNY. With a stable
deposit base, the bank is not dependent on volatile deposits such as jumbo CDs.
At year end, the ratio of net liquid assets to net deposits amounted to 32.89%,
further indicating a high level of liquidity. The volatile liability ratio was
1.52%, well within company policy.
Asset-Liability Management. Managing the asset and liability sensitivity
position to achieve an acceptable balance of risk versus return is achieved
through loans, investments, and retail deposits rather than reliance on swaps,
futures, or off balance sheet derivative products. Based on forecasts of loan
demand and funding sources, First National Bank of Cortland's Asset-Liability
Committee will assess liability and loan pricing strategies, monitor earnings
spread, asset/liability distributions and maturities in addition to liquidity
and capital levels, review budget variances, and develop action plans based on
the causes of these variances. Interest rate risk management provides a forward
looking assessment of the impact that movement in rates may have on net interest
income. When subjected to an immediate change in interest rates of 200 basis
points, the impact on the net income of the bank is far below the targeted range
of 10% for one year.
Risk Assessment. Risk is the potential that unexpected and unanticipated
events may have an adverse impact on First National Bank of Cortland's capital
or earnings. The OCC has defined several categories of risk for supervisory
purposes. The bank assesses and evaluates its exposure to these risk categories
on a continuous basis. The bank believes that its exposure in each of the risk
categories is low.
Results of Operations. Net income per share decreased from $1.41 in 1996 to
$1.31 in 1997, mainly due to the continuing decrease of net interest margins.
Yield on earnings assets declined from 8.04% in 1996 to 8.00% in 1997, while
cost of funds increased from 3.74% in 1996 to 3.78% in 1997. The net interest
margin for the year 1997 was 4.87%, compared to 4.98% for 1996. Primarily due to
the relatively stagnant economy of First National Bank of Cortland's trading
area, loan demand continued to be soft in 1997.
Salaries, wages, and employee benefit costs increased $284,118 due to the
opening of the bank's Wal-Mart in-store branch, the hiring of a loan officer to
expand its market area, and a large increase in its self-insured medical program
in 1997. Expenses for advertising, communications, and supplies increased due to
the production and promotion of a new telephone-banking product offering.
A new computer, installed in November 1996, has resulted in increased
computer and equipment expenses. Increased legal, audit, and outside services
expenses were attributed to the employment of consultants and an increase in
expenses of $22,024 for debit card processing. An $18,185 increase in education
expense is also included, and payroll service fees increased $5,849.
Non-interest income of $1,777,223 increased by $254,320, mainly due to
investment securities gains of $114,757 in 1997 compared to losses of $23,907 in
1996, gross debit card income of $39,542, insurance commissions increase of
$7,266, and ATM fee income of $12,136.
The bank's provision for possible loan losses was increased by $107,000 in
1997 to keep its reserve at an acceptable level, after net charge offs for 1997
increased by $232,449. The adequacy of the allowance for loan losses is
evaluated quarterly and is judged to be sufficient to absorb any inherent losses
in the portfolio. The loan portfolio in 1997 continued to be of high quality
when compared with industry peer groups.
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On a daily average basis, total deposits during 1997 amounted to
$195,341,525, compared to $189,669,284 in 1996, an increase of $5,672,241 or 3%.
$2,520,000 of this increase came from certificates of deposit over $100,000;
$1,368,000 from NOW and savings deposits; and the remainder in certificates of
deposit less than $100,000.
The bank's securities portfolio continues to be rated AAA or better with
the exception of a very small non-rated portion consisting of local municipal
bonds for which it maintains financial data. There are no derivatives or
structured notes in the investment portfolio. The bank does not have a trading
portfolio and does not anticipate having one in the future.
At year-end 1997, the book value of the assets held in the bank's Trust
Department amounted to $64,420,062 compared to $61,924,177 in 1996. Staffed by
well-trained, highly competent people, this department offers a full spectrum of
fiduciary services on a highly personalized basis. Trust assets are not part of
the consolidated balance sheets.
Year 2000. First National Bank of Cortland is aware of the issues
associated with the programming code in existing computer systems as the
millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and
complex as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to "00." The issue is whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The bank has identified the systems which may be affected by the Year 2000
problem and assigned a risk factor to each system. Both internal and external
resources are being utilized to correct or replace and test the systems for Year
2000 compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. The bank has
received confirmations from its primary processing vendors that plans are being
developed to address processing of transactions in the Year 2000. Based on
progress to date, it is not anticipated that Year 2000 compliance expenses will
have a material impact on the bank's earnings or financial position.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
For Cortland First, comprehensive income is determined by adding unrealized
investment holding gains or losses during the period to net income.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement requires
companies to disclose financial and descriptive information about their
reportable business segments. Cortland First believes that it operates in only
one segment, which is the banking segment. Therefore, disclosures required under
this pronouncement will not affect Cortland First's financial statements.
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Shareholders' Equity. At the Annual Meeting of Shareholders held on March
25, 1996, a proposal to amend Cortland First's Certificate of Incorporation to
reduce the par value of the then authorized 3,000,000 shares of Cortland First
Common Stock, both issued and unissued, from $5.00 per share to
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$1.6667 per share, and to split each share of Cortland First Common Stock then
issued into three shares of common stock at $1.6667 per share, was approved.
During 1996, Cortland First continued to add approximately 65% of its net
income to retained earnings with the remainder being paid in the form of
dividends to shareholders. Cash dividends paid to shareholders in 1995 and 1996
were $873,600 and $1,001,280, respectively.
Unrealized net gains on investment securities resulting from changes in the
investment portfolio and general market conditions were reduced from $495,506 at
year-end 1995 to $374,768 at year-end 1996. Changes in the unrealized
gains/losses affect the capital ratios even though they are, in fact, not
realized.
Changes in the components of Cortland First's capital resulted in an
increase in book value per share from $11.73 at year-end 1995 to $12.59 at
year-end 1996. The ratio of capital to risk weighted assets continues to exceed
the regulatory requirements for well-capitalized banks as indicated.
Liquidity. First National Bank of Cortland was a net seller of federal
funds in the amount of $9,049,000 on a daily average basis during 1996. The
investment portfolio provides liquidity from maturing instruments on a regular
basis - as of December 31, 1996, 97.2% was available for sale, and 70.6% matured
in less than five years. The bank also enjoys a nearly $22 million credit
facility with the FHLBNY. With a stable deposit base, the bank is not dependent
on volatile deposits (certificates of deposit greater than $100,000, also known
as jumbo CD's) which tend to be more market sensitive. Investments maturing in
one year exceeded the total jumbo certificates of deposit at December 31, 1996,
thereby providing adequate coverage for any reduction in funding from this
source. At year-end 1996, the ratio of net liquid assets to net deposits
amounted to 31.10%, further indicating a high level of liquidity.
Asset-liability Management. Managing the asset and liability sensitivity
position to achieve an acceptable balance of risk versus return is achieved
through loans, investments, and retail deposits rather than reliance on swaps,
futures, or off-balance-sheet derivative products. The Asset-Liability Committee
of the bank manages the position in addition to its role in assessing interest
rate risk. Interest rate risk management provides a forward looking assessment
of the impact that movement in rates may have on net interest income. An
analysis, performed monthly, indicates that the bank was positioned at December
31, 1996 so as to minimize the impact on income when rates are subjected to an
immediate increase or decrease of 200 basis points in all interest rates on
assets and liabilities.
Results of Operations. Net income per share increased from $1.36 in 1995 to
$1.41 in 1996. Several factors affected this 4.15% increase in net income.
Salaries, wages, and employee benefit costs were reduced in 1996, due in large
measure to reduced health benefit costs and implementation of the planned
outsourcing of internal audit activities. The expense for advertising,
communications, and supplies increased due to the production and promotion of
new product offerings - principally the Anytime Banker(sm) Check Card and the
Loan-By-Phone service. The new computer installed in November 1996 is
responsible for increased computer and equipment expense between 1995 and 1996.
An increase in audit, legal, and outside services expense was attributed to the
employment of consultants to perform internal audit activities and to the cost
of expansion of the ATM network. A decrease in FDIC insurance of $201,578 was
part of the nationwide reduction in FDIC insurance costs for well-capitalized
banks.
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First National Bank of Cortland planned the sale of certain securities in
1996 realizing a loss of $23,907; however, this was offset by increased yields
on new investments which were expected to further enhance income in succeeding
years.
Net interest margins were impacted unfavorably in 1996 by general movements
in the market. During the year the yield on earning assets declined more rapidly
than the cost of funds, resulting in an overall reduction in the net interest
margin of 25 basis points. The net interest margin for the year was 4.98%. Loan
demand in the markets served by the bank continued to be soft in 1996 due
principally to the continuing relatively soft economy of the area.
The loan portfolio continues to be of high quality when compared with
industry peer groups. The adequacy of the allowance for loan and lease losses is
evaluated quarterly and is judged to be sufficient to absorb any inherent losses
in the portfolio.
Trust and Investment services provide substantial income to the bank and
are considered important to further revenue growth. Income from this department
increased 19.4% in 1996. Trust assets are not part of the consolidated balance
sheets.
On a daily average basis, total deposits during 1996 amounted to
$189,669,284, compared to $179,981,471 in 1995, an increase of $9,687,813, or
5.4%. Much of the gain was in higher cost certificates of deposit.
Investment quality remained high at year-end 1996, with 90% of the bank's
securities portfolio rated AAA or better. Of the remaining 10%, 6% were rated A
or better with the balance consisting of non-rated, local municipal bonds for
which the bank maintains financial data. There were no derivatives or structured
notes in the investment portfolio. The bank did not have a trading portfolio at
year end 1996.
In a continuing commitment to provide the technology necessary to compete
in the marketplace, the bank's mainframe computer was upgraded in November 1996,
allowing for expanded capacity. Among other benefits, this will allow the bank
to begin the networking process to link its locations which will enhance its
customer service capabilities. The new computer will also allow for more
efficient processing of data and provide increased capacity for growth.
Risk Assessment. Risk is the potential that unexpected and unanticipated
events may have an adverse impact on First National Bank of Cortland's capital
or earnings. The OCC has defined several categories of risk for supervisory
purposes. Management assesses and evaluates its exposure to these risk
categories.
Credit risk: Credit risk arises from an obligor's potential failure to meet
the terms of any loan or contract with the bank or otherwise fail to perform as
agreed. The bank has determined that credit risk is low due to the quality of
the loan and investment portfolio.
Interest rate risk: Interest rate risk arises from the movement in market
interest rates and the impact that such movement may have on the bank's capital
and earnings. The most recent internal analysis indicates that net income would
decrease by $322,000 if interest rates increase by 200 basis points, and
increase by $154,000 if interest rates decrease by 200 basis points. The bank's
risk-based capital
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would continue to be sufficient to be regarded as a well-capitalized bank in the
scenario described above; therefore, the bank deems the risk exposure to be low.
Liquidity risk: Liquidity risk arises from a bank's inability to meet its
obligations when they become due, without incurring unacceptable losses.
Liquidity risk is considered low.
Transaction risk: Transaction risk arises from problems with service or
product delivery. The bank's systems and procedures are deemed adequate to
assess transaction risk as low.
Compliance risk: Compliance risk arises from failure to comply with laws
and regulations. Again, system and procedures combined with ongoing internal
surveillance are deemed sufficient to assess the risk as low.
Strategic risk: Strategic risk arises from adverse business decisions or
improper implementation of those decisions. The bank's Board of Directors,
President, and all Vice Presidents are involved in the strategic planning
process. Managerial capacities and capabilities, and Board oversight are deemed
adequate to mitigate strategic risk.
Reputation risk: Reputation risk arises from serious negative public
opinion. The bank exercises an abundance of caution and diligence in managing
its affairs so as to minimize consequences of reputation risk.
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<TABLE>
<CAPTION>
OTHER FINANCIAL INFORMATION
Distribution of Assets, Liabilities, and Shareholders' Equity. The
following table sets forth the amounts of Cortland First's daily average assets,
liabilities, and shareholders' equity for the period indicated, the amounts of
the interest earned and interest paid thereon, the average interest rate earned
for each type of earning asset, and the average rate paid for each type of
interest bearing liability. Interest earned on non-accruing loans is included in
the interest earned on loans only when collected. The average balances of
non-accruing loans are included in the average balances of loans. Taxable
equivalent adjustments have been made based on applicable marginal federal and
state tax rates. Yields on investment securities are based on historical cost.
1/97-12/97 1/96-12/96 1/95-12/95
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ----- ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Investment Securities
Taxable $ 63,748 $ 4,108 6.44% $ 56,999 $ 3,576 6.27% $ 51,918 $ 3,291 6.34%
Tax Exempt 26,110 1,851 7.09% 23,864 1,671 7.00% 20,864 1,507 7.22%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Investment
Securities 89,858 5,959 6.63% 80,863 5,247 6.49% 72,782 4,798 6.59%
Federal Funds Sold 4,980 269 5.40% 9,049 480 5.30% 7,830 456 5.83%
Loans
Real Estate Mortgages 65,041 5,664 8.71% 63,742 5,685 8.92% 61,912 5,650 9.13%
Commercial &
Agricultural 23,679 2,355 9.95% 22,891 2,245 9.81% 22,962 2,432 10.59%
Consumer 21,790 2,133 9.79% 22,637 2,292 10.13% 22,021 2,165 9.83%
Municipal 3,148 309 9.82% 3,383 360 10.64% 3,140 310 9.87%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Loans 113,658 10,461 9.20% 112,653 10,582 9.39% 110,035 10,557 9.59%
Total Int Earning
Assets 208,496 16,689 8.00% 202,565 16,309 8.05% 190,647 15,811 8.29%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Non-Interest Earning Assets
Non-Earning Assets 15,625 14,476 14,266
Allowance for Loan
Losses (1,215) (1,229) (1,212)
-------- ------- -------
Total Assets 222,906 215,812 203,701
======== ======= =======
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Bearing Liabilities
Savings Rate Deposits 46,024 1,369 2.97% 45,858 1,381 3.01% 44,789 1,346 3.00%
Market Rate Deposits 126,766 5,157 4.07% 120,611 4,839 4.01% 112,330 4,502 4.01%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Deposits 172,790 6,526 3.78% 166,469 6,220 3.74% 157,119 5,848 3.72%
Borrowed Funds 92 5 5.39% 0 0 0% 0 0 0%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Int Bearing
Liabilities 172,882 6,531 3.78% 166,469 6,220 3.74% 157,119 5,848 3.72%
Non-Interest Bearing
Liabilities 24,789 25,125 24,504
Shareholders' Equity 25,235 24,218 22,078
-------- -------- --------
50,024 49,343 46,582
Total Liabilities
and Shareholders'
Equity $222,906 $215,812 $203,701
======== ======== ========
Net Interest Income $ 10,158 $ 10,089 $ 9,963
======== ======== ========
Net Yield on Interest
Earning Assets 4.87% 4.98% 5.23%
==== ==== ====
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Interest Rates and Interest Differential. The following table sets forth for the
periods indicated a survey of the changes in interest earned and interest paid
resulting from changes in volume and changes in rates. Interest earned on
non-accruing loans is included in the interest earned on loans only when
collected, i.e., on the cash basis, but the average balances of such loans are
included in the average balances of loans. The change in interest due to both
rate and volume has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- ----------------------------
RATE VOLUME NET RATE VOLUME NET
---- ------ --- ---- ------ ---
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investment Securities:
Taxable $ 100 432 532 $ (81) 365 384
Tax-Exempt 15 108 123 (38) 143 105
----- ---- ----- ----- ---- ----
Total Investment
Securities 115 540 655 (119) 508 389
Federal Funds Sold 8 (219) (211) (46) 69 23
Loans:
Real Estate
Mortgages (132) 114 (18) (138) 172 34
Commercial & Agric. 33 78 111 (178) (11) (189)
Consumer (67) (84) (151) 67 60 127
Municipal (18) (16) (34) 23 2 25
----- ---- ----- ----- ---- ----
Total Loans (184) 92 (92) (226) 223 (3)
Total Int Income (61) 413 352 (391) 800 409
----- ---- ----- ----- ---- ----
INTEREST BEARING LIABILITIES:
Deposits:
Savings Rate $(17) $ 5 $(12) $ 4 31 35
Market Rate 68 250 318 (45) 383 338
----- ---- ----- ----- ---- ----
Total Deposits 51 255 306 (41) 414 373
Borrowed Funds 2 3 5 0 0 0
Total Int Expense 53 258 311 (41) 414 373
----- ---- ----- ----- ---- ----
Net Change in Net
Interest Income $(114) $155 $ 41 $(350) $386 $ 36
===== ==== ===== ===== ==== ====
</TABLE>
83
<PAGE>
Investment Portfolio. The following table sets forth the amortized cost of
investments for the dates indicated:
December 31,
------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
HELD-TO-MATURITY PORTFOLIO:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 999 $ 0 $ 0
Obligations of States and
Political Subdivisions 1,435 2,377 3,306
------- ------- -------
$ 2,434 $ 2,377 $ 3,306
------- ------- -------
AVAILABLE-FOR-SALE PORTFOLIO:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $35,600 $41,852 $40,521
Obligations of States and
Political Subdivisions 27,684 24,567 19,702
Mortgage-backed Securities 20,771 13,888 10,441
Other Debt Securities 865 819 461
------- ------- -------
$84,920 $81,126 $71,125
------- ------- -------
$87,354 $83,503 $74,431
======= ======= =======
84
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - Maturity Schedule. The following schedule sets forth
the maturities of both available-for-sale and held-to-maturity securities at
December 31, 1997. Amounts and weighted average yields of such securities are
based on amortized cost for held-to-maturity securities and estimated fair value
for available-for-sale securities. Yields of tax exempt securities have been
computed on a tax equivalent basis using a marginal federal and state income tax
rate. (Excludes Federal Reserve Bank and other stock of $865,175.)
REMAINING MATURITIES DECEMBER 31, 1997
(IN THOUSANDS)
AFTER 1 YEAR AFTER 5 YEARS
WITHIN TO 5 YEARS TO 10 YEARS AFTER 10 YEARS TOTAL
1 YEAR ---------------- --------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity Portfolio
U.S. Government Agencies $ 0 0.00% 999 6.85% 0 0.00% 0 0.00% 999 6.85%
Obligations of States and
Political Subdivisions 100 6.08% 406 6.32% 930 7.17% 0 0.00% 1,436 6.85%
------ ---- ------ ---- ------ ---- ----- ---- ------ ----
Total Held-To-Maturity 100 6.08% 1,405 6.70% 930 7.17% 0 0.00% 2,435 6.85%
Available for Sale
Portfolio
U.S. Treasury Securities $1,947 6.24% 16,184 6.28% 0 0.00% 0 0.00% 18,131 6.28%
U.S. Government Corporation
and Agency Securities 3,394 5.82% 7,582 6.44% 5,043 6.81% 1,599 6.91% 17,618 6.47%
Obligations of States and
Political Subdivisions 2,339 7.21% 14,315 6.93% 8,901 6.98% 2,720 7.28% 28,275
Mortgage Backed Securities 460 6.14% 7,519 6.84% 8,364 6.91% 4,589 7.02% 20,932 6.89%
------ ---- ------ ---- ------ ---- ----- ---- ------ ----
Total Available-for-Sale $8,140 6.33% 45,600 6.60% 22,308 6.91% 8,908 7.08% 84,956 6.71%
GRAND TOTAL $8,240 6.33% 47,005 6.60% 23,238 6.92% 8,908 7.08% 87,391 6.71%
====== ==== ====== ==== ====== ==== ===== ==== ====== ====
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997, 99% of the state and municipal securities portfolio, based
upon par value, was rated "A" or higher, and 81% "AA" or higher. Obligations of
the State of New York and its political subdivisions constituted $20,219,917 par
value, or 23% of the total securities portfolio at that date, with a market
value of $21,088,408. With the exception of U.S. government and agencies, there
were no securities of a single issuer which constituted more than 10% of
shareholders equity as of December 31, 1997.
BALANCE SHEET GAP ANALYSIS
DECEMBER 31, 1997
(IN THOUSANDS)
Average
There- Interest
1998 1999 2000 2001 2002 after Total Rate
------ ------- ------- ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Total Securities $12,998 $16,107 $16,892 $10,501 $6,474 $25,284 $ 88,256 6.76%
Short-Term Investments 1,100 0 0 0 0 0 1,100 5.68%
Total Loans 41,092 15,833 9,321 26,799 1,846 18,282 113,173 9.07%
------ ------- ------- ------- ------ ------- --------
TOTAL INTEREST-
SENSITIVE ASSETS $55,190 $31,940 $26,213 $37,300 $8,320 $43,566 $202,529
======= ======= ======= ======= ====== ======= ========
INTEREST-SENSITIVE
LIABILITIES:
NOW Savings & Money
Market Deposits 27,602 23,348 28,409 0 0 32,242 111,601 3.14%
Certificates of Deposit 41,926 8,143 93 5,609 0 330 56,101 5.06%
------ ------- ------- ------- ------ ------- --------
TOTAL INTEREST-
SENSITIVE LIABILITIES $69,528 $31,491 $28,502 $ 5,609 $ 0 $32,572 $167,702
======= ======= ======= ======= ====== ======= ========
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Loan Portfolio - Composition. The following table presents the composition
by types of loans within First National Bank of Cortland's loan portfolio for
the dates indicated:
December 31,
---------------------------------------------------------------------
Type of Loan 1997 1996 1995 1994 1993
- ------------ -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Loan $ 65,433 $ 64,739 $ 63,415 $ 63,127 $ 62,075
Commercial &
Agricultural 22,513 20,892 22,036 21,806 21,468
Installment 22,384 25,612 24,646 23,306 18,557
Municipal & Other 5,914 6,163 5,770 5,014 6,389
-------- -------- -------- -------- --------
Total $116,244 $117,406 $115,867 $113,253 $108,489
======== ======== ======== ======== ========
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates. The
loan portfolio maturity schedule shows the amount of loans outstanding as of
December 31, 1997 according to the remaining scheduled payment of principal for
the periods indicated. The amounts due after one year are classified according
to the sensitivity to changes in the interest rates.
<TABLE>
<CAPTION>
Remaining Maturity at December 31, 1997
Within After 1 yr. but After
1 Year within 5 Yrs. 5 Years Total
------ ------------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans $ 6,539 $17,487 $41,407 $ 65,433
Commercial & Agricultural 18,556 2,922 1,035 22,513
Installment 2,484 19,607 293 22,384
Municipal & Other 1,643 2,553 1,718 5,914
------- ------- ------- --------
Total $29,222 $42,569 $44,453 $116,244
<CAPTION>
Sensitivity of Loans Due
After One Year to Changes
in Interest Rates: Fixed Rate Variable Rate Total
---------- ------------- -----
(In Thousands)
<S> <C> <C> <C>
Due after 1 year but
within 5 years $38,603 $3,967 $42,570
Due after 5 years $44,424 $ 29 $44,453
------- ------ -------
$83,027 $3,996 $87,023
</TABLE>
87
<PAGE>
Gap analysis indicates the sensitivity to fluctuations in interest rates by
providing information regarding maturity repricing and cash flows for both
assets and liabilities. Cash and federal funds sold are assigned to immediate
repricing since they represent overnight sales. Investment securities are
scheduled according to the final maturity date in the case of fixed rate issues
and by next repricing date for variable rate securities. Loans are assigned by
final maturity for fixed rate loans with no scheduled amortizing payments, while
loans with amortizing payments are scheduled according to amortized payback
since this would represent a repricing opportunity on funds received as
payments. Variable rate loans are assigned to the next repricing date. Demand
loans are categorized as immediately repricable. Non-interest bearing deposits
repricing within three months represent approximately 50% of commercial demand
balances. The remaining interest bearing, savings, and money market accounts
which represent core deposits are spread across the Gap buckets to yield a 3 1/2
year average maturity. Fixed rate certificates of deposit are assigned by final
maturity date, while variable rates are assigned as of the next repricing date.
Fixed assets, other assets, other liabilities, and equity are assigned to the
over five year category since they represent stable, non-repricing components.
Changes in interest rates affect a bank's earnings by changing its net interest
income. As of December 31, 1997, the most recent interest rate risk model
indicates that the bank's net interest income would decrease by $530,000 if
interest rates increase by 200 basis points and increase by $381,000 if interest
rates decline by 200 basis points.
Non-Performing Assets.
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
Non-Accruing Loans:
Real estate mortgages ................ $121 $393 $128 $ 64 $436
Commercial & Agricultural ............ 41 121 106 52 22
Consumer ............................. 13 0 29 4 2
Municipal ............................ 0 0 0 0 0
---- ---- ---- ---- ----
Total Non-Accruing Loans ............ $175 $514 $263 $120 $460
Loans past due 90 days or more
and still accruing:
Real Estate Mortgages ................ $ 63 $ 0 $ 3 $124 $ 0
Commercial & Agricultural ............ 30 0 0 3 0
Consumer ............................. 7 63 17 31 24
Municipal ............................ 0 0 0 0 0
---- ---- ---- ---- ----
Total past-due loans 90 days
or more ............................ $100 $ 63 $ 20 $158 $ 24
Restructured loans ..................... 0 0 0 0 0
Other Real Estate Owned ................ 275 0 135 0 0
---- ---- ---- ---- ----
Total Restructured and OREO ......... $275 $ 0 $135 $ 0 $ 0
Total Non-Performing Assets ......... $550 $577 $418 $278 $484
==== ==== ==== ==== ====
Percent of total net loans ............. 0.49% 0.51% 0.37% 0.26% 0.46%
Income that would have been
accrued at original
Contract rates on non-accruing
loans ................................ $ 23 $ 29 $ 15 $ 8 $ 44
Amount recognized as income ............ 6 10 6 4 0
---- ---- ---- ---- ----
Interest income not accrued ............ $ 17 $ 19 $ 9 $ 4 $ 44
==== ==== ==== ==== ====
88
<PAGE>
Non-acruing Loans. First National Bank of Cortland does not accrue interest
on certain non-performing loans. Non-accrual status is normally reserved for
loans 90 days or more past due unless a loan is both well secured and in the
process of collection.
Potential Problem Loans. At December 31, 1997, First National Bank of
Cortland had $1,190,000 in commercial and consumer loans for which payments are
presently current, but the borrowers are currently experiencing financial
difficulties. Those loans are subject to constant management attention and are
reviewed weekly. The bank had no restructured loans as defined by FASB 114 in
the portfolio. Loans which are current for which collection is doubtful are not
normally placed in non-accrual status. Such loans are on a watch list to allow
monitoring by management.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that are not included above, do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, nor do they
represent material credits about which management is aware of information which
causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
Loan Concentration. As of December 31, 1997, there are no concentrations of
loans which amount to more than 10% of total loans other than those which have
been separately disclosed, i.e., real estate, consumer, commercial,
agricultural, and municipal. All loans granted are to entities within Cortland
County and those immediately adjoining counties which are in the bank's local
service area. The bank has no outside area loans in its portfolio.
89
<PAGE>
Allocations of the Allowance for Loan Losses.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
% of Loans % of Loans % of Loans
Amount to Total Amount to Total Amount to Total
------ -------- ------ -------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Mortgage $ 276 57% $ 254 55% $ 240 57%
Commercial, Municipal
& Agricultural $ 453 24% $ 493 23% 498 22%
Consumer 511 19% 524 22% 438 21%
------ ------ ------ ------ ------ ------
Total Allocation $1,240 100% $1,271 100% $1,176 100%
====== ====== ====== ====== ====== ======
<CAPTION>
Year Ended December 31,
1994 1993
% of Loans % of Loans
Amount to Total Amount to Total
------ -------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C>
Real Estate Mortgage $ 341 58% $ 270 59%
Commercial, Municipal
& Agricultural $ 467 24% $ 292 23%
Consumer 418 18% 518 18%
------ ------ ------ ------
Total Allocation $1,226 100% $1,080 100%
====== ====== ====== ======
</TABLE>
90
<PAGE>
Allowance for Possible Loan Losses. The allowance for possible loan losses
is maintained at a level considered adequate to provide for potential loan
losses. The allowance is increased by provisions charged to operating expenses
and reduced by net charge-offs. The adequacy of the allowance is based on
management evaluation of the last three years historical loss experience,
specific allocations for losses detailed in the loan loss review, and an
additional allocation based on the total outstandings in the loan portfolio.
Additional factors considered in the evaluation include the levels and trends in
delinquencies and non-accruals, underwriting guidelines and collection
procedures, the experience and ability of the lending staff, and current
economic conditions within First National Bank of Cortland's lending area. The
bank has a diverse customer base with no known significant concentrations of
credit that would affect the allowance.
As of December 31, 1997 and 1996, the bank had no impaired loans for which
significant specific valuation allowances were recorded.
91
<PAGE>
Summary of Loan Loss Experience. The following table summarizes First
National Bank of Cortland's loan loss experience for the five years ended
December 31, 1993, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans, Net of unearned income
at end of period $113,172 $113,632 $112,204 $109,909 $105,699
Average amount of net loans $113,658 $112,652 $110,035 $106,708 $102,133
Balance of allowance for possible
loan losses at beginning of period $ 1,271 $ 1,176 $ 1,226 $ 1,080 $ 1,025
Additions:
Provisions for losses 390 283 300 300 300
Deductions:
Charge offs:
Real estate mortgages 57 0 10 0 25
Commercial and agricultural 76 79 209 126 75
Consumer loans 345 183 194 119 205
Municipal loans 0 0 0 0 0
-------- -------- -------- -------- --------
Total charge offs $ 478 $ 262 $ 413 $ 245 $ 305
Recoveries:
Real estate mortgages 0 0 0 0 0
Commercial and agricultural 0 12 21 10 19
Consumer loans 57 62 42 81 41
Municipal loans 0 0 0 0 0
Total recoveries $ 57 $ 74 $ 63 $ 91 $ 60
Net charge offs $ 421 $ 188 $ 350 $ 154 $ 245
-------- -------- -------- -------- --------
Allowance for possible loan losses-
end of period $ 1,240 $ 1,271 $ 1,176 $ 1,226 $ 1,080
======== ======== ======== ======== ========
Ratio of net charge offs to
average loans 0.37% 0.17% 0.32% 0.14% 0.24%
Ratio of reserve for loan losses to
loans outstanding at end of period 1.10% 1.12% 1.05% 1.12% 1.02%
Ratio of provisions for losses
to net charge offs 92.64% 150.53% 85.71% 194.80% 121.95%
</TABLE>
92
<PAGE>
Deposits. The table below presents daily average amounts and rates of deposits
by type for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
Amount Rate Amount Rate Amount Rate
-------- ----------- -------- ----------- -------- -----------
(In Thousands) (In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings Deposits $ 44,977 2.98% $ 44,750 3.02% $ 43,677 3.00%
Money Market Savings 36,445 4.51 36,302 4.36 36,898 4.63
Time Open 1,048 2.74 1,108 2.76 1,113 2.99
Interest Bearing Checking 32,237 1.75 31,095 1.75 31,795 1.75
Time Deposits 58,083 5.08 53,214 5.09 43,636 5.13
-------- ----------- -------- ----------- -------- -----------
Total Interest Bearing $172,790 3.78% $166,469 3.74% $157,119 3.72%
Demand Deposits 22,551 23,200 22,862
-------- -------- --------
Total Deposits $195,341 $189,669 $179,981
======== ======== ========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997, are summarized as follows:
Amount
------
(In Thousands)
3 months or less $ 6,146
Over 3 through 6 months 2,662
Over 6 through 12 months 1,315
Over 12 months 2,129
-------
Total $12,252
=======
Non-interest bearing deposits disclosed represent all demand deposits which
are non-interest bearing. These deposits are held by individuals, partnerships,
corporations, and municipalities. There are no significant deposits from Trust
activities.
93
<PAGE>
Return on Equity and Assets. The following table shows operating and
capital ratios for the last two years.
Year Ended December 31,
1997 1996 1995
---- ---- ----
Return on Assets
Net Income/Average Total Assets 1.18% 1.32% 1.34%
Return on Equity
Net Income/Average Shareholder Equity 10.38% 11.75% 12.38%
Dividend Payout Ratio
Cash Dividends Declared/Net Income 80.14% 35.18% 31.97%
Capital Ratio
Average Shareholder Equity/
Average Total Assets 11.32% 11.17% 10.84%
Management
Executive Compensation
The following table sets forth information concerning compensation paid by
Cortland First to the Chief Executive Officer and the other most highly
compensated executive officers whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Payouts
------------------------------ ------------- All Other
LTIP Compensation
Name and Principal Position Year Salary ($) Bonus($)(1) Payouts($)(2) ($)(3)
- --------------------------- ---- ---------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C>
David R. Alvord 1997 165,000 16,500 -- 93,084
President & 1996 153,000 16,830 -- 77,247
Chief Executive Officer 1995 150,000 15,000 20,000 105,220
</TABLE>
(1) Paid to Mr. Alvord under the one year Executive Incentive Compensation
Plan.
(2) Paid to Mr. Alvord under the three year Executive Incentive Compensation
Plan.
(3) Includes the following amounts for Mr. Alvord for 1997: $8,000 for the 1997
contribution to the Employee Salary Savings Plan - 401K; $6,400 for the
1997 contribution to the pension plan; $74,484 for the 1997 contribution to
his Excess Benefit Plan; and $4,200 for Director meeting fees during 1997.
94
<PAGE>
Board Compensation Committee
Report on Executive Compensation
First National Bank of Cortland's Compensation Committee meets
semi-annually to conduct a comprehensive performance review of all officers and
to recommend the annual base remuneration for the bank's officers to the Board
of Directors. The Committee considers each officer's performance as measured
against that individual's job description.
In recommending the base annual salary for the chief executive officer, the
Committee considers overall asset quality, earnings, capital adequacy, peer
group and industry comparisons, general economic trends and total return to
Cortland First's shareholders. The Committee believes that Mr. Alvord has
performed exceptionally well in each of the above measurable categories, and
that Cortland First's (and the bank's) success is due, in large part, to his
efforts. Mr. Alvord does not participate in the determination of his annual
compensation.
The Committee meets separately to consider award payments under First
National Bank of Cortland's Executive Incentive Compensation Plan. Under this
plan, certain designated officers are considered for annual and three year
incentive payments based on prior goals established by the Board of Directors
for return on assets. See "-- Executive Incentive Compensation Plan."
The Compensation Committee is appointed by the President and is approved by
the Board of Directors. Its members presently consist of:
Donald S. Ames
David J. Taylor
Harry D. Newcomb
John H. Buck
Stuart E. Young
Stock Performance Graph
The following graph compares cumulative total returns (assuming
reinvestment of dividends) on the Cortland First Common Stock against the
Standard & Poor's Composite 500 Stock Index (S&P 500) and the National
Association of Securities Dealers Automated Quote System (NASDAQ) bank stocks
for the five-year period ended December 31, 1997.
[GRAPHIC PRESENTATION OF PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NASDAQ Banks 100 114 114 169 223 377
S&P 500 100 110 111 153 189 252
CFFC 100 168 248 250 298 408
</TABLE>
95
<PAGE>
Employment Agreement
Effective January 1, 1994, Cortland First and First National Bank of
Cortland entered into an agreement with Mr. Alvord providing for his continued
services through December 31, 2000, at a minimum base salary of $133,000 per
year. The agreement provides that it may be terminated by Mr. Alvord at any time
during the first six months following a "Change in Control" of Cortland First or
First National Bank of Cortland. A Change in Control is defined as (i) the sale,
exchange or other disposition by either Cortland First or First National Bank of
Cortland of all or substantially all of its assets either to a single purchaser
or to a group of affiliated purchasers in one transaction or a series of related
transactions pursuant to a common plan; (ii) the sale, exchange or other
disposition in one transaction or in a series of related transactions pursuant
to a common plan by either Cortland First or First National Bank of Cortland of
at least 25% of its issued and outstanding shares; or (iii) the merger,
consolidation or other combination of either Cortland First or First National
Bank of Cortland, where the existing shareholders receive less than 51% of the
outstanding voting stock of the new or continuing entity. In the event of such a
termination, Mr. Alvord would be entitled to receive an amount equal to three
(3) times his then base salary, plus the amount of any taxes or other charges
which may be imposed upon Mr. Alvord pursuant to the Internal Revenue Code as a
result of any "excess parachute payments." In connection with the termination of
his existing employment agreement and the execution of his planned new
employment agreement upon consummation of the Merger, Mr. Alvord is expected to
consent to the Merger pursuant to the terms of his existing agreement, so that
no payment will be made to Mr. Alvord under his existing agreement in connection
with the Merger. See "PROPOSAL I --APPROVAL OF MERGER -- Effect of the Merger on
Employees and Management."
Pension Benefits
First National Bank of Cortland has a non-contributory defined contribution
plan, in which an employee is eligible to participate upon attaining age 21 and
completion of 12 months consecutive service during which the employee worked
1,000 or more hours of service. The bank's contribution is determined according
to a formula based on years of service. The bank's contribution to the Plan in
1997 and 1996 totaled $123,273 and $109,295, respectively. Contributions to the
plan in 1997 were $6,400 for Mr. Alvord.
Excess Benefit Plan
Effective January 1, 1991, the Board of Directors of First National Bank of
Cortland approved the adoption of an Excess Benefit Plan for Mr. Alvord (the
"Excess Plan"). Its purpose is to provide Mr. Alvord with supplemental
retirement benefits in addition to those benefits provided pursuant to the
bank's pension plan. Under Mr. Alvord's employment agreement with Alliance
Financial Corporation, Mr. Alvord will receive supplemental retirement benefits
on terms at least equivalent to those set forth in the Excess Plan.
Under the terms of the Excess Plan, Mr. Alvord is entitled to receive, upon
retirement at age 65, an amount equal to 80% of his then Average Base
Compensation increased by the amount of the Accumulated Fund expressed as a
straight life annuity and reduced by the sum of: (a) the annual benefit to be
provided Mr. Alvord pursuant to the bank's pension plan expressed as a straight
life annuity; (b) the annual benefit to be provided from the vested portion of
the bank's contributions to Mr. Alvord's account balance in the bank's 401-K
Plan as if such balance were to be paid in the straight life annuity; and (c) an
amount equal to Mr. Alvord's primary social security benefit expressed in the
form of a straight life annuity. The Accumulated Fund is the amount that would
have been contributed to the bank's pension plan on Mr. Alvord's behalf, but for
the limitation imposed by Section 401(a)(4) of the Internal Revenue Code. The
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<PAGE>
Accumulated Fund is deemed to have earned interest each year at the same rate of
return actually earned for such year by the bank's pension plan.
Under the original terms of the Excess Plan, the amount of the benefit to
be paid to Mr. Alvord was to be reduced in the event he retired before age 65.
The amount of the reduction was based on a fraction, the numerator of which was
the number of years remaining until Mr. Alvord reaches age 65, and the
denominator of which was the total number of years of service Mr. Alvord would
have had if he had continued to work until such age. In addition, certain
actuarial reductions were to be applied to reflect the early commencement of
payments. Effective January 1, 1994, the Excess Plan was amended to provide that
no reduction will be made, whether to reflect remaining years of service to age
65 or to reflect the early commencement of payments, in the event such
retirement is the result of Mr. Alvord's retirement on or after the expiration
of his Employment Agreement (presently December 31, 2000), Mr. Alvord's
disability, a termination of Mr. Alvord's employment by the bank without cause,
the occurrence of an event which gives Mr. Alvord the right to terminate his
employment under the Employment Agreement (e.g., a Change in Control or a
material reduction in Mr. Alvord's authority), or Mr. Alvord's death. If Mr.
Alvord retires before age 60, no benefits are payable under the Excess Plan
unless such retirement is the result of a Change in Control, a material
reduction in Mr. Alvord's authority, Mr. Alvord's disability, or a termination
by the bank of Mr. Alvord's employment without cause.
For purposes of the Excess Plan, the term "Change in Control" means a sale
by Cortland First or First National Bank of Cortland of all or substantially all
of its assets, or any individual or entity acquiring at least 25% of those
securities of First National Bank of Cortland entitled to vote for the election
of directors. "Average Base Compensation" is generally defined as Mr. Alvord's
average salary for the 36 month period immediately preceding his retirement,
including any elective contributions to the 401-K Plan and annual bonus, but
excluding any bonuses paid pursuant to the bank's Executive Incentive
Compensation Plan and the value of any employee benefits paid on Mr. Alvord's
behalf.
In order to fund its liability under the Excess Plan, effective January 1,
1995, First National Bank of Cortland established the "First National Bank of
Cortland Excess Benefit Trust for the Benefit of David R. Alvord." Each year the
bank contributes such amount to the Trust so that the balance of the Trust will
equal the actuarial value of the estimated benefit payable to Mr. Alvord
pursuant to the Excess Plan. The initial contribution to the Trust was $118,000.
The contribution for 1997 was $74,484.
Employee 401K Savings Plan
First National Bank of Cortland has an Employee Salary Savings Plan - 401K.
The bank's contributions to the 401K Plan are made according to a schedule of
matching employee contributions and are made as accrued. The bank's
contributions to the Plan for 1997 and 1996 were $106,309 and $98,072,
respectively. Contributions to the plan in 1997 were $8,000 for Mr. Alvord.
Executive Incentive Compensation Plan
In 1987, the Board of Directors of First National Bank of Cortland approved
the adoption of an Executive Incentive Compensation Plan (the "Plan"). Its
purpose is to enhance the bank's performance and to further its long-term
objectives by providing certain key employees with financial incentives. The
Plan was implemented beginning in calendar year 1989.
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<PAGE>
Under the terms of the Plan, at the beginning of each year the Board of
Directors establishes target performance goals for the bank for both the current
year and for the next three years. If, in the opinion of the Board, the one year
goal is met, eligible employees could be entitled to receive such awards as are
determined by the Board of Directors. The annual award fund for distribution to
plan participants may not exceed 15% of participating base payroll, exclusive of
any overtime pay, bonuses or fringe benefits. Similarly, if the three year goal
is met, participants could be entitled to an additional award payment as
determined by the Board of Directors. Such award fund may not exceed 15% of the
average base salaries during the three year performance period.
Participation in the Plan is designed to include First National Bank of
Cortland's President, Chief Executive Officer, Function Managers, and those
other employees who, in the opinion of the Board, contribute significantly to
the profitability of the bank. Plan awards are paid either in cash at the end of
the applicable one year or three year performance period or, at the election of
the participating employee, may be deferred until a later specified date.
A total of $65,530 was accrued for the year 1997 in connection with the one
year goal for all executive officers as a group. Of this amount, a total of
$16,500 was earned by Mr. Alvord. The total accrual in connection with the Plan
for both the one and three year goals was $108,990 for 1996 and $60,030 for
1995.
Transactions with Management
First National Bank of Cortland has had, and expects to have in the future,
banking transactions in the ordinary course of business with many of its
directors, officers and their associates. The maximum aggregate extensions of
credit to directors and executive officers and their related interests since the
beginning of 1997 was $4,181,378 or 15.69% of the bank's total equity capital.
As of December 31, 1997, such indebtedness totaled $2,578,836 or 9.85% of the
bank's equity capital. All extensions of credit to such persons have been made
in the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and in the opinion of the management, do not
involve more than a normal risk of collectibility or present other unfavorable
features.
Board of Directors Fees
The Directors of Cortland First receive no compensation for serving in such
capacity. Each Director of Cortland First is also a Director of First National
Bank of Cortland. For the year 1997, members of the bank's Board of Directors
were compensated at the rate of $350.00 per meeting attended; members of the
Board's Executive Committee were compensated $100.00 per committee meeting
attended; and members of the Board's Compensation Committee were compensated
$200.00 per meeting attended. For the year 1998, members of the bank's Board of
Directors are being compensated at the rate of $350.00 per meeting attended;
members of the Executive Committee, other than Mr. Alvord, are being compensated
$100.00 per meeting attended; and members of the Compensation Committee are
being compensated $200.00 per meeting attended. In addition, beginning in 1997,
Directors' compensation was increased by $1,000, in the form of an annual
retainer fee. This retainer fee does not apply to Mr. Alvord.
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<PAGE>
Deferred Compensation Agreement
Effective December 31, 1991, First National Bank of Cortland adopted a
Deferred Compensation Agreement with its Directors. The purpose of the Agreement
is to provide Directors with the option to defer the receipt of all or a portion
of their director's fees. The election must be made on or before December 31st
of the year preceding the year in which the fees are to be paid. Once made, the
election will remain in effect until revoked by the individual Director. All
amounts deferred pursuant to the Agreement will be credited with interest each
month at the rate being paid on one (1) year U.S. Treasury Notes as of January
1st of the particular year.
Upon a Director no longer being a member of the bank's Board, all amounts
deferred by the Director plus any earnings thereon shall be paid, at the
Director's election, over a period of ten years or in a lump sum. A Director may
elect to defer commencement of any installment payments for up to five years
following his or her termination as a member of the Board.
During 1997, three Directors participated in the deferred compensation
arrangement. These Directors deferred a total of $20,700 in director's fees.
Market Price And Dividends on Cortland First Common Stock
Cortland First Common Stock is not listed or traded on a recognized
securities exchange and is inactively traded. On _______ 1998, there were
approximately 550 record holders of Cortland First Common Stock and 1,969,776
shares of Cortland First Common Stock issued and outstanding.
The following table sets forth the cash dividends declared by Cortland
First on the Cortland First Common Stock and the range of high and low sales
prices of the Cortland First Common Stock during the two most recent fiscal
years and through _________, 1998. The range of sale prices are based on high
bid and low bid prices for the quarter.
Price
Cash Dividends ----------------------
Per Share High Low
--------- ---- ---
1996
First Quarter $.117 $17.00 $16.85
Second Quarter .12 19.00 18.00
Third Quarter .12 19.00 18.875
Fourth Quarter .14 19.75 19.00
1997
First Quarter $.14 $20.00 $20.00
Second Quarter .14 21.50 21.25
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Price
Cash Dividends ----------------------
Per Share High Low
--------- ---- ---
Third Quarter .14 22.50 22.25
Fourth Quarter .64 26.00 22.25
1998
First Quarter $.14 $33.00 $29.50
Second Quarter .14 32.00 29.50
Third Quarter (through
_______, 1998)
On July 10, 1998, the last business day preceding public announcement of
the Merger, the last sale price for Cortland First Common Stock was $29.50. On
___________, 1998, the last sale price for Cortland First Common Stock was
$_____.
INFORMATION WITH RESPECT TO ONEIDA VALLEY
Description of Business
General. Oneida Valley is a one-bank holding company that was formed in
1984. Its only subsidiary and operating entity is Oneida Valley National Bank.
Originally chartered in 1851, Oneida Valley National Bank is an independent
commercial bank delivering financial services from branch locations in Oneida
(4), Canastota, Hamilton (2), Manlius and Sherrill, New York.
As a bank holding company, Oneida Valley is subject to supervision by the
Federal Reserve system, is required to file an annual report with the Federal
Reserve Board, and is subject to examination by that Board as well. Oneida
Valley National Bank is subject to supervision by the OCC as well as the FDIC.
The administrative offices of Oneida Valley are located at 160 Main Street,
Oneida, New York 13421. The telephone number is (315) 363-4500.
Banking Services. Oneida Valley National Bank provides a wide range of
retail and commercial banking services for individual, business and municipal
customers, including demand, savings and time deposits, commercial, mortgage and
installment loans, consumer banking and trust services. Traditional deposit
products include checking accounts, negotiable order of withdrawal (NOW) savings
accounts, time deposits, and individual retirement accounts. Lending services
include residential, farm, business loans, Small Business Administration loans,
installment loans, home equity loans, biweekly mortgages, auto, and student
loans. Trust services include investment management, retirement plans, insurance
trusts, financial planning, estate planning, and custodial (agency) accounts.
Other banking services include safe deposit boxes, travelers checks, money
orders, wire transfers, collections, and foreign exchange. The bank's approach
is that of a community-oriented bank focusing on the development of long term
customer relationships, personalized service, convenient locations and meeting
the needs of individuals and businesses in its market area.
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Service Area and Competition. Oneida Valley National Bank is an independent
commercial bank committed to serving the financial needs of customers in its
local communities. Currently, the bank conducts its banking operations primarily
in Madison, Western Oneida and Eastern Onondaga Counties in the State of New
York. The bank competes with other financial institutions in the area, many of
which are branches of large institutions such as M&T Bank, Chase Bank, and Key
Bank. Other organizations compete for deposits and loans as well include
insurance companies, money market funds, federal credit unions, and other local
independent banking operations.
Employees. As of June 30, 1998, Oneida Valley National Bank employs
approximately 130 full time equivalent employees. The bank provides a variety of
employee benefits and considers its relationship with its employees to be good.
Properties. Oneida Valley National Bank operates the following branch
locations:
Name of Office Location Date Established
- -------------- -------- ----------------
Main Office 160 Main Street December, 1851
Oneida, NY
North Main Street North Main Street September, 1966
Oneida, NY
TOPS Plaza Rte. 5 and Rte 46 November, 1988
Oneida, NY
Wal-Mart 1294 Lenox Ave. July, 1996
Oneida, NY
Canastota Stroud Street and Rte. 5 December, 1974
Canastota, NY
Hamilton 1 Madison Street December, 1949
Hamilton, NY
Hamilton Drive-In 38-40 Utica Street January, 1976
Hamilton, NY
Manlius 201 Fayette Street October, 1994
Manlius, NY
Sherrill 628 Sherrill Road April, 1954
Sherrill, NY
The Wal-Mart location is leased. The bank owns the building in which the
TOPS Plaza branch is located, but leases the land pursuant to a long term lease.
The other banking premises are owned.
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Legal Proceedings. Oneida Valley National Bank is subject to various
routine litigation incidental to its banking business. Management does not
anticipate that the ultimate liability, if any, arising out of such litigation
will have a material effect on Oneida Valley's or Oneida Valley National Bank's
business, financial condition or results of operations.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion describes the major factors affecting Oneida
Valley's results of operations and financial condition. These comments should be
read in conjunction with the consolidated financial statements and the notes
relating thereto appearing elsewhere in this Proxy Statement/Prospectus.
Results of Operations
Net income for 1997 was $2.514 million, or $2.72 per share, compared to
$2.508 million, or $2.63 per share, in 1996. 1996's net income increased 4.3%
over the 1995 total of $2.405 million, with earnings per share up 14 cents from
$2.49. The modest growth in 1997's net income reflects Oneida Valley National
Bank's ability to offset a shrinking net interest margin by increasing its
non-interest income while, at the same time, maintaining and controlling
operating expenses. A competitive marketplace offered little opportunity to
increase asset yields which pushed the cost of retaining deposits higher. In the
second quarter of 1997, the bank introduced tiered-rates on money market
savings, Certificates of Deposit, and on all municipal deposit accounts to
improve its competitive market position and grow its depositor base.
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage of net income to
average total assets 1.18% 1.20% 1.19%
Percentage of net income to
average shareholders equity 10.13% 10.34% 10.58%
Percentage of dividends declared
to net income 43.75% 43.22% 43.33%
Percentage of average shareholders'
equity to average total assets 11.38% 11.85% 11.43%
</TABLE>
Net Interest Income. Net interest income is the Oneida Valley National
Bank's principal source of operating income for payment of overhead and
providing for possible loan losses. It is the amount that
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<PAGE>
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 declined $59,000, to $9.657
million in 1997. The bank's lack of growth in net interest income resulted from
its inability to grow asset yields necessary to offset the increases in the
bank's cost of interest bearing liabilities. In contrast, tax equivalent net
interest income increased in 1996 by $370,000, primarily the result of a decline
in the cost of interest-bearing liabilities.
Loans represented the majority of the bank's interest earning assets and
increased in 1997 to 66.6% of average earning assets. Although average loans
increased $5.998 million in 1997, yields declined 2 basis points to 9.02%. An
increase in commercial loan yields of 17 basis points helped offset declines in
mortgage loan yields of 11 basis points and consumer loan yields of 20 basis
points. Compared to 1996, interest income on loans was up $518,000 in 1997.
Average loans were 64.5% of average earning assets in 1996, increasing $6.346
million compared to 1995. Average loan yields declined 16 basis points primarily
due to the decline in the real estate mortgage loan portfolio in 1996. Interest
income on loans was up $380,000 in 1996.
Average investments declined by $3.451 million in 1997, and as a result,
tax equivalent income from investments was $121,000 less than 1996. In
comparison, average investment securities declined $633,000 in 1996 with tax
equivalent interest income down $166,000 compared to 1995. Tax equivalent
interest income for 1997 at $16.110 million was $421,000 more than 1996, and the
1997 tax equivalent yield on average earning assets was 8.10%, 10 basis points
above 1996. Average earnings assets for 1997 were $198.835 million, up $2.839
million compared to 1996, and represented 93.6% of total average assets in 1997.
Average earning assets in 1996 were 94.0% of total assets.
During 1997, average interest-bearing liabilities increased by $3.231
million to $157.828 million. The cost of interest-bearing liabilities increased
23 basis points from 3.86% in 1996, to 4.09% in 1997. The bank's interest
expense, which is a function of the volume of, and rates paid for, interest
bearing liabilities, increased $480,000, or 8% in 1997. The increase was
primarily a result of volume increases in time deposits and higher rates paid on
both time and money market savings deposit accounts. In contrast, interest
expense declined $192,000, or 3.1% in 1996 as lower rates paid on savings and
time deposits reduced the cost of interest-bearing liabilities by 20 basis
points. Average interest-bearing liabilities increased $2.717 million, or 1.8%
in 1996.
The bank's net interest margin (federal tax equivalent net interest income
divided by average earning assets) declined 10 basis points, from 4.96% in 1996,
to 4.86% in 1997.
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 loan balances. Securities are shown at average
amortized cost.
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<PAGE>
Average Balances And Net Interest Income
<TABLE>
<CAPTION>
Year Ended December 31,
==========================================================================================
1997 1996 1995
==========================================================================================
(000's omitted except yields and rates) 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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal Funds Sold $ 4,167 $ 225 5.40% $ 3,875 $ 201 5.19% $ 4,090 $ 237 5.78%
Taxable investment securities 53,685 3,332 6.21% 56,737 3,421 6.03% 58,720 3,634 6.19%
Nontaxable investment securities 8,624 611 7.08% 9,023 643 7.12% 7,673 596 7.77%
Loans (net of unearned discount) 132,359 11,942 9.02% 126,361 11,424 9.04% 120,015 11,044 9.20%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 198,835 16,110 8.10% 195,996 15,689 8.00% 190,498 15,511 8.14%
Noninterest earning assets:
Other Assets 15,466 14,566 14,414
Less: Allowance for loan losses (1,765) (1,734) (1,691)
Net unrealized gains/(losses)
on available for-sale portfolio (152) (298) (1,025)
-------- -------- --------
Total $212,384 $208,530 $202,196
======== ======== ========
Liabilities and Shareholders' Equity:
Interest Bearing Liabilities:
Demand deposits $ 22,256 $ 472 2.12% $ 21,411 $ 399 1.86% $ 20,787 $ 409 1.97%
Savings deposits 58,619 1,817 3.10% 61,152 1,748 2.86% 62,995 2,011 3.19%
Time deposits 75,579 4,089 5.41% 71,085 3,784 5.32% 66,098 3,632 5.50%
Short-term borrowings 1,374 75 5.48% 949 42 4.43% 2,000 113 5.65%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
liabilities 157,828 6,453 4.09% 154,597 5,973 3.86% 151,880 6,165 4.06%
Noninterest bearing liabilities:
Demand deposits 27,087 27,079 25,518
Other liabilities 2,645 2,570 2,073
Shareholders' equity 24,824 24,284 22,725
-------- -------- --------
Total $212,384 $208,530 $202,196
======== ======== ========
</TABLE>
104
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net interest earnings (FTE) $9,657 $9,716 $9,346
Net yield on interest-earning assets 4.86% 4.96% 4.91%
</TABLE>
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 have
been allocated equally between the volume and rate variances.
<TABLE>
<CAPTION>
Volume And Rate Variances
---------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
---------------------------------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
to Change in (1) to Change in (1)
(000's omitted) 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 $ 15 $ 9 $ 24 ($ 12) ($ 23) ($ 35)
Taxable investment securities (187) 99 (88) (121) (92) (213)
Nontaxable investment securities (28) (4) (32) 100 (53) 47
Loans (net of unearned discount(s)) 542 (25) 517 581 (202) 379
----- ----- ----- ----- ----- -----
Total interest earning assets $ 342 $ 79 $ 421 $ 548 ($370) $ 178
===== ===== ===== ===== ===== =====
Interest paid on:
Interest bearing demand deposits $ 16 $ 56 $ 72 $ 12 ($ 22) ($ 10)
Savings deposits (76) 144 68 (56) (207) (263)
Time deposits 240 65 305 273 (121) 152
Short-term borrowings 22 13 35 (53) (18) (71)
----- ----- ----- ----- ----- -----
Total interest bearing liabilities $ 202 $ 278 $ 480 $ 176 ($368) ($ 192)
===== ===== ===== ===== ===== =====
Net interest earnings (FTE) $ 140 ($199) ($ 59) $ 372 ($ 2) $ 370
</TABLE>
Non-interest Income. Non-interest income for 1997 was $2.089 million, which
was up 12.1%, or $225,000, compared to 1996. Non-interest income increased 8.2%,
or $142,000 in 1996. Oneida Valley National Bank'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 $861,000, up 8.6% from
the prior year, following a 5.3% increase in 1996, was the principal source of
the bank's non-interest income. Trust Department income increased 18%, or
$53,000, to $353,000, compared to a 20%, or $49,000 increase in 1996, and
service fee income from Data Processing Department contracts totaled $244,000 in
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<PAGE>
1997, an increase of 2.1%, following an 18.3% increase in 1996. Significant
contributions to the bank's non-interest income were derived from electronic
banking services, the sale of mortgages and associated servicing fees, and
dividends received from the bank's credit insurance programs.
The following table sets forth certain information on non-interest income
for the years indicated.
Non-Interest Income
Years ended December 31,
(000's omitted) 1997 1996 1995
------ ------ ------
Trust Department Income $ 353 $ 300 $ 251
Service Charges on Deposit Accounts 861 793 753
Data Processing Services 244 239 202
Other Operating Income 631 532 516
------ ------ ------
Total operating (non-interest) income $2,089 $1,864 $1,722
====== ====== ======
Non-interest Expense. Operating expense in 1997 increased $283,000, or
4.0%, to $7.393 million, compared to a $229,000, or 3.3% increase in 1996.
Salaries and associated benefit expenses were up $227,000, or 5.6%, compared to
a 5.8% increase in 1996, and represented the majority of the increase. The first
full year's operation at Oneida Valley National Bank's Wal-Mart Office, and the
associated staff expense, contributed to the increase. Occupancy expense, which
increased $41,000, or 7.5%, was principally the result of the new lease expense
at the Wal-Mart location, with other occupancy costs equal to 1996. Equipment
expense declined $92,000, or 14.8%, in contrast to a $25,000 increase in 1996,
as the bank achieved savings in 1997 service contracts.
Other operating expenses were up $81,000, or 4.3%, in 1997 compared to a
9.4% increase in 1996, due to increases in professional consulting fees,
telephone expense resulting from an upgrade in the bank's phone system, and
education expense as the bank commenced its bank-wide sales, service, and
leadership training program.
Non-Interest Expense
Years ended December 31,
(000's omitted) 1997 1996 1995
------ ------ ------
Salaries and Employee Benefits $4,297 $4,070 $3,848
Net Occupancy Expense 585 544 523
Equipment Expense 528 620 595
FDIC Insurance 28 2 202
Other Operating Expense 1,955 1,874 1,713
------ ------ ------
Total operating (non-interest) expense $7,393 $7,110 $6,881
====== ====== ======
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<PAGE>
Analysis of Financial Condition
Investment Securities. Oneida Valley National Bank's investment portfolio
is designed to meet the bank's liquidity needs when loans expand or deposits
contract while, at the same time, generating a favorable return on low-risk,
high quality investments.
Investment securities increased $2.618 million in the 12 months ending
December 31, 1997, to a total of $63.745 million, compared to a decline of
$5.770 million in 1996. During 1997 the yield curve flattened as the Federal
Funds Rate remained at 5.50% for the last nine months of the year. Interest
rates on U.S. Government securities with maturities of one to 30 years declined
significantly. The yield on 30-year U.S. Treasury Bonds at year-end was 5.93%,
compared to 6.64% at year-end 1996. Among the strategies employed by the bank
during 1997 was the purchase of U.S. Agency collateralized mortgage obligations
with an average life of four to five years.
The bank's portfolio continued to retain its short-term character with a
year-end average maturity of three years and four months, compared to three
years and five months at year-end 1996. The average tax equivalent yield of the
portfolio increased 15 basis points, from 6.18% in 1996, to 6.33% in 1997. The
portfolio yield declined 20 basis points in 1996. The composition of the
portfolio as of December 31, 1997 consisted of U.S. Treasury and Agency
Securities representing 31% of the total, mortgage-backed securities at 49%,
tax-exempt investments at 14%, and other securities representing 6% of the
total. 90% of the bank's investment securities are rated AA or better. As of
December 31, 1997, 59% of the portfolio was classified as available-for-sale
with the remaining 41% held-to maturity, compared to 55% and 45% respectively at
December 31, 1996.
The following table sets forth the amortized cost and market value for the
bank's held to maturity investment securities portfolio:
<TABLE>
<CAPTION>
Years ended December 31,
=========================================================================
1997 1996 1995
=========================================================================
(000's omitted) Amortized Amortized Amortized
Cost/Book Market Cost/Book Market Cost/Book Market
Value Value Value Value Value Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of $ 9,029 $ 9,072 $10,074 $10,068 $11,661 $11,757
U.S. government corporations and
agencies
Mortgage-backed securities 6,070 6,104 6,296 6,279 7,618 7,628
Obligations of states and political 8,386 8,576 8,983 9,092 8,980 9,105
subdivisions
Other securities 2,516 2,538 1,947 1,935 2,503 2,511
------- ------- ------- ------- ------- -------
TOTAL $26,001 $26,290 $27,300 $27,374 $30,762 $31,001
======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
The following table sets forth the amortized cost and market value for the
bank's available-for-sale investment portfolio:
<TABLE>
<CAPTION>
Years ended December 31,
===========================================================================
1997 1996 1995
===========================================================================
(000's omitted) Amortized Market Amortized Market Amortized Market
Cost/Book Value Cost/Book Value Cost/Book Value
Value Value Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of $10,934 $10,944 $9,660 $9,648 $10,114 $10,102
U.S. government corporations and
agencies
Mortgage-backed securities 24,693 24,775 22,737 22,612 25,092 24,951
Obligations of states and political 446 446 0 0 0 0
subdivisions
Other securities 1,571 1,579 1,563 1,567 1,082 1,082
------- ------- ------- ------- ------- -------
TOTAL $37,644 $37,744 $33,960 $33,827 $36,288 $36,135
======= ======= ======= ======= ======= =======
Net unrealized gains/(losses) on
available-for-sale portfolio $100 ($133) ($153)
------- ------- -------
Total Carrying Value $63,745 $61,127 $66,897
======= ======= =======
</TABLE>
The following table sets forth as of December 31, 1997, 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, 1997
==========================================================================================
Amount Maturing Amount Maturing Amount Maturing Amount Maturing Total
Within One Year After One Year After Five Years After Ten Years Cost Book
or Less but Within Five Within Ten Years Value
(000's omitted) Years
==========================================================================================
<S> <C> <C> <C> <C> <C>
Held-To-Maturity Portfolio
U.S. Treasury and other U.S. Government
agencies $995 $8,034 $0 $0 $9,029
Mortgage-backed securities 200 5,001 869 0 6,070
States and political subdivisions 753 5,325 2,173 135 8,386
Other 600 1,677 239 0 2,516
------- ------- ------- ------- -------
Total held-to-maturity portfolio value $2,548 $20,037 $3,281 $135 $26,001
======= ======= ======= ======= =======
Weighted average yield at year end (1) 6.30% 6.54% 7.19% 7.63% 6.61%
</TABLE>
108
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Available-for-Sale Portfolio
U.S. Treasury and other U.S. Government
agencies $2,996 $5,786 $2,152 $0 $10,934
Mortgage-backed securities 4,748 14,783 3,474 1,688 24,693
States and political subdivisions 0 0 360 86 446
Other 1,071 500 0 0 1,571
------- ------- ------- ------- -------
Total available-for-sale portfolio value
$8,815 $21,069 $5,986 $1,774 $37,644
======= ======= ======= ======= =======
Weighted average yield at year end (1)
5.92% 6.28% 6.94% 5.86% 6.28%
</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 accrued income divided by average
balance; they may differ from the yield to maturity which considers time value
of money.
Loans. The following table sets forth the composition of Oneida Valley
National Bank's loan portfolio at the dates indicated.
Composition of Loan Portfolio
<TABLE>
<CAPTION>
Years ended December 31,
========================================================================================
1997 1996 1995
========================================================================================
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial, Agricultural $35,985 26.5% $29,976 23.4% $25,843 21.5%
Real Estate Mortgage 64,844 47.7% 66,178 51.6% 64,934 54.1%
Consumer 36,792 27.1% 33,877 26.4% 31,069 25.9%
--------- ----- --------- ----- --------- -----
Gross Loans 137,621 101.3% 130,031 101.4% 121,846 101.5%
Less:
Unearned Discount (15) (0.0%) (35) (0.0%) (69) (0.1%)
Allowance for Loan Losses (1,717) (1.3%) (1,754) (1.4%) (1,691) (1.4%)
--------- ----- --------- ----- --------- -----
Net Loans $135,889 100.0% $128,242 100.0% $120,086 100.0%
========= ===== ========= ===== ========= =====
<CAPTION>
Years ended December 31,
=================================================================
1994 1993
=================================================================
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial, Financial, Agricultural $24,680 21.3% $19,517 18.7%
Real Estate Mortgage 65,503 56.4% 64,347 61.7%
Consumer 27,710 23.8% 22,273 21.4%
--------- ----- --------- -----
Gross Loans 117,893 101.5% 106,137 101.8%
Less:
Unearned Discount (153) (0.1%) (328) (0.3%)
Allowance for Loan Losses (1,610) (1.4%) (1,578) (1.5%)
--------- ----- --------- -----
Net Loans $116,130 100.0% $104,231 100.0%
========= ===== ========= =====
</TABLE>
The loan portfolio is the largest component of earning assets and accounts
for the greatest portion of total interest income. Loans are internally
generated and lending activity is primarily confined to Madison, Eastern
Onondaga, and Western Oneida counties. The bank does not engage in highly
leveraged transactions or foreign lending activities. On December 31, 1997 gross
loans were $137.621 million, increasing $7.590 million, or 5.8%, during the
year. This marks the fifth consecutive year of loan portfolio growth during
which period the bank has placed emphasis on its commercial and consumer
business lines while reducing the emphasis on its residential mortgages.
109
<PAGE>
The majority of the bank's loans continue to be residential mortgage loans
on its customers' primary residences. Residential mortgage loans declined $1.334
million, or 2% during 1997. The mortgage portfolio consists of 75% fixed-rate
loans, and 25% with rates that adjust on an annual basis. The bank originated
$13 million in mortgage loans during 1997, selling $3.1 million in the secondary
market. As of December 31, 1997, the bank was servicing mortgage loans sold in
the secondary market with balances of $7.637 million.
Consumer loans, including home equity and revolving credit loans, increased
by 8.6%, or $2.915 million, to $36.792 million. The bank experienced strong
demand during the spring and summer for both automobile and fixed rate home
equity loans.
Loans in the commercial category, as well as commercial real estate
mortgages, consist primarily of short-term and/or floating rate loans made to
small and medium-sized companies. Commercial loans in 1997 increased $6.009
million, or 20%. Commercial loans include short-term notes to local
municipalities of $6.0 million, or 16.9% of commercial loans, while 25.3%, or
$9.1 million, are secured by commercial real estate. The commercial loan
portfolio reported no loan concentrations in any one industry or to any one
borrower.
The following table shows the amount of loans outstanding as of December
31, 1997, which, based on remaining scheduled payments of principal, are due in
the periods indicated.
<TABLE>
<CAPTION>
==============================================================================
At December 31, 1997
==============================================================================
Maturing After
(000's omitted) Maturing in One One but Within Maturing After Total Book
Year or Less Five Years Five Years Value
==============================================================================
<S> <C> <C> <C> <C>
Commercial, Financial, Agricultural $16,945 $9,993 $9,047 $35,985
Real Estate Mortgage fixed rate 3,551 14,219 31,183 48,953
Real Estate Mortgage variable rate 959 4,396 10,536 15,891
Consumer, net of unearned discount 8,610 22,109 6,058 36,777
-------- -------- -------- --------
Total loans of net unearned discount $30,065 $50,717 $56,824 $137,606
======== ======== ======== ========
</TABLE>
The following table sets forth the sensitivity of the loan amounts due
after one year to changes in interest rates:
At December 31, 1997
-------------------------------
(000's omitted) Fixed Rate Variable Rate
Due after one year, but within five years $37,007 $13,710
Due after five years $37,934 $18,890
110
<PAGE>
Nonperforming Assets. The following table represents information concerning
the aggregate amount of nonperforming assets:
<TABLE>
<CAPTION>
======================================================
Years ended December 31,
======================================================
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $293 $305 $319 $424 $450
Accruing loans which are contractually past due 90
days or more as to principal or interest payments 1,104 534 369 74 228
------ ------ ------ ------ ------
Total nonperforming loans and assets $1,397 $839 $688 $498 $678
====== ====== ====== ====== ======
Ratio of allowance for loan losses to period-end
nonperforming loans 122.91% 209.06% 245.78% 323.29% 232.74%
Ratio of nonperforming assets to period-end total
loans and other real estate owned 1.03% 0.65% 0.57% 0.43% 0.65%
</TABLE>
Nonperforming loans, defined as nonaccruing loans plus loans 90 days or
more past due, increased substantially during the fourth quarter of 1997.
Nonperforming loans as of December 31, 1997 totaled $1.397 million, or 1.03% of
total loans, compared to 0.65% on December 31, 1996, and an average of 0.59% for
the first three quarters of 1997. A small number of large balance residential
real estate mortgage and commercial real estate mortgage loans reached 90 days
past due during the fourth quarter of 1997. The loans have all been reviewed by
management and are considered well-secured, in the process of collection, or the
real estate is pending the customer's sales, with minimal loss potential. These
loans represent 75% of total nonperforming loans. The ratio of nonperforming
loans to total is expected to return to 1996 levels during 1998.
Oneida Valley National Bank's policy is to place a loan on nonaccrual
status and recognize income on a cash basis when it is more than 90 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.
Provision and Allowance for Loan Losses. Management determines the
allowance for loan losses based on a number of factors including reviewing and
evaluating Oneida Valley National 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 bank'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.
Over the past five years, the bank's average rate of net charge-offs to
total loans of 0.15% compared very favorably with its peers. 1997 net
charge-offs of $272,000 were slightly above the five year average of 0.20% of
total
111
<PAGE>
loans. Consumer loan charge-offs represented 80% of net charge-offs with a large
number due to bankruptcies, reflecting the national trend. Loan losses in the
residential mortgage and commercial portfolios remained very low.
A loan is considered impaired, based on current information and events, if
it is probable that the bank 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. The total of impaired loans as of December 31,
1997 was insignificant.
Criticized loans, those loans identified by the bank as having some level
of credit weakness or potential for loss, are continually evaluated by the
bank's Independent Loan Review System, and have declined during the year from
2.07% to 1.71% of total loans. The ratio has declined over the last three years
and, in management's opinion, reflects a low-risk loan portfolio.
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.
Summary of Loan Loss Allowance
<TABLE>
<CAPTION>
================================================================
Years ended December 31,
================================================================
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of period (Gross Loans) $137,621 $130,013 $121,846 $117,893 $106,137
======== ======== ======== ======== ========
Daily average amount of loans (net of unearned discounts) 132,359 126,361 120,015 109,678 107,094
======== ======== ======== ======== ========
Balance of allowance for possible loan losses at beginning of
period $1,754 $1,691 $1,610 $1,578 $1,465
-------- -------- -------- -------- --------
Loans charged off:
Commercial, financial, and agricultural 72 139 4 4 26
Real Estate Mortgage 0 0 0 0 0
Consumer 257 202 146 85 326
-------- -------- -------- -------- --------
Total loans charged off 329 341 150 89 352
-------- -------- -------- -------- --------
</TABLE>
112
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 17 24 25 29 57
Real estate mortgage 0 0 0 0 0
Consumer 40 30 31 52 48
-------- -------- -------- -------- --------
Total recoveries 57 54 56 81 105
-------- -------- -------- -------- --------
Net loans charged off $272 $287 $94 $8 $247
Additions to allowance charged to expense 235 350 175 40 360
--------
Balance at end of period $1,717 $1,754 $1,691 $1,610 $1,578
======== ======== ======== ======== ========
Ratio of allowance for loan losses to period end loans 1.25% 1.35% 1.39% 1.37% 1.49%
Ratio of net charge offs to average loans outstanding 0.21% 0.23% 0.08% 0.01% 0.23%
</TABLE>
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.
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Years ended December 31,
========================================================================================
1997 1996 1995
========================================================================================
Amt. of Percent of Amt. of Percent of Amt. of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in
Each Each Each
(000's omitted) Category to Category to Category to
Total Loans Total Loans Total Loans
========================================================================================
Commercial, $412 26.2% $303 23.0% $292 21.2%
financial, &
agricultural
Real estate mortgage 348 47.1% 355 50.9% 363 53.3%
Consumer 395 26.7% 325 26.1% 286 25.5%
Unallocated 562 N/A 771 N/A 750 N/A
------ ----- ------ ----- ------ -----
Total $1,717 100.0% $1,754 100.0% $1,691 100.0%
====== ===== ====== ===== ====== =====
1994 1993
=======================================================
Amt. of Percent of Amt. of Percent of
Allowance Loans in Allowance Loans in
Each Each
(000's omitted) Category to Category to
Total Loans Total Loans
=======================================================
<S> <C> <C> <C> <C>
Commercial, $202 20.9% $496 18.4%
financial, &
agricultural
Real estate mortgage 298 55.6% 364 60.6%
Consumer 192 23.5% 182 21.0%
Unallocated 918 N/A 536 N/A
------ ------ ------ ------
Total $1,610 100.0% $1,578 100.0%
====== ====== ====== ======
</TABLE>
Deposits. Oneida Valley National Bank's deposit accounts represent its
primary source of funds. The deposit base is comprised of demand deposits,
savings and money market accounts, and other time deposits which are provided by
individuals, businesses, and local governments within the communities served.
The bank continuously monitors market pricing, competitors' rates, and internal
interest rate spreads to maintain and promote growth and profitability.
113
<PAGE>
Average deposits for 1997 increased $2.813 million, or 1.6%, to $183.541
million, compared to a 3.0% increase in 1996. Compared to December 31, 1996,
deposits as of December 31, 1997 of $185.717 million were up $4.967 million. The
bank's deposit mix has been relatively stable over three years, with changes in
1997 reflecting approximately 2% of total deposits shifting from savings to time
deposits as customers looked to lock in the higher time deposit rates. Time
deposits in excess of $100,000, which are more volatile and sensitive to
interest rates, totaled $27.259 million at year-end, or 34.9% of time deposits
and 14.7% of total deposits, compared to 36.1% and 14.8%, respectively, at year
end 1996. The ownership of these larger balance time deposits by individuals and
businesses increased dramatically in 1997. In the past, these deposits were
primarily owned by municipalities; however, as of December 31, 1997, 64.3% were
owned by individuals and businesses. The bank's total municipal deposits of
$25.678 million on December 31, 1997, compared to total deposits, declined to
13.8% compared to 15.1% on December 31, 1996, and 19.3% on December 31, 1995.
During 1997, the bank frequently reduced its bid rate on high-cost,
large-balance municipal certificates of deposit when its liquidity position was
strong, which resulted in the lower municipal deposit total. The reduction in
municipal deposits was more than offset by an increase in more diversified
consumer and business deposits, which were up $6.556 million.
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>
1997 1996 1995
==============================================================================================
Avg. Avg. Percent of Avg. Avg. Percent of Avg. Avg. Percent of
(000's omitted) Balance Rate Paid Deposits Balance Rate Paid Deposits Balance Rate Paid Deposits
==============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $27,087 0.00% 14.76% $27,079 0.00% 14.98% $25,518 0.00% 14.55%
Interest-bearing demand deposits 22,256 2.12% 12.13% 21,411 1.86% 11.85% 20,786 1.97% 11.85%
Regular savings accounts 38,801 2.73% 21.14% 40,150 2.81% 22.22% 41,384 3.05% 23.59%
Money Market savings 19,818 3.82% 10.80% 21,002 2.96% 11.62% 21,610 3.47% 12.32%
Time deposits 75,579 5.41% 41.18% 71,085 5.32% 39.33% 66,098 5.50% 37.68%
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total average daily amount of domestic
deposits $183,541 3.47% 100.00% $180,727 3.28% 100.00% $175,398 3.45% 100.00%
======== ====== ====== ======== ====== ====== ======== ====== ======
</TABLE>
The following table indicates the amount of the bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of the dates
indicated.
At December 31,
-------------------------
(000's omitted) 1997 1996
------- -------
Less than three months $13,908 $19,774
Three months to six months 5,916 1,938
Six months to one year 4,753 2,432
Over one year 2,682 2,676
------- -------
Total $27,259 $26,820
======= =======
114
<PAGE>
Capital. Shareholders' equity, as reported on the Consolidated Statement of
Condition as of December 31, 1997, was $24.743 million, $56,000 less than the
December 31, 1996 total. The December 31, 1997 shareholders' equity reflects the
addition of retained earnings in the amount of $1.414 million and the net
after-tax effect of unrealized gains on available-for-sale investment securities
in the amount of $154,000 as required by FAS 115. Total shareholders' equity was
reduced by $1.624 million when Oneida Valley repurchased 44,461 shares of its
own stock in 1997. The shares are being held at cost as treasury stock.
The bank continued to be extremely well-capitalized as indicated by the
following ratios:
1997 1996
---- ----
Capital to average assets 11.3 11.9
Risk-based capital 20.9 22.7
Footnote 17 in the Notes to Oneida Valley's Consolidated Financial
Statements appearing elsewhere in this Proxy Statement/Prospectus compares
Oneida Valley's capital ratios to regulatory guidelines.
During 1997, Oneida Valley declared cash dividends of $1.20 per share,
compared to $1.14 per share in 1996, and $1.08 per share in 1995.
Liquidity. Liquidity is the ability of Oneida Valley National Bank to
generate and maintain sufficient cash flows to fund its operations and to meet
customers' loan demands or deposit withdrawals. It is the bank'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 bank 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 correspondent and the FHLBNY as
of year-end were $13.1 million, with advances against such lines in the amount
of $1.9 million. All internal liquidity measures used by the bank were in excess
of its established policy levels as of December 31, 1997.
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. Oneida
Valley National Bank's market risk arises principally from interest rate risk in
its lending, deposit and borrowing activities. Other types of market risks do
not arise in the normal course of the bank's business activities. Management
actively monitors and manages its interest rate risk exposure. Although the bank
manages other risks, such as credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the bank's financial condition and results of operations. The bank'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 bank'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 bank 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, 1997, an instantaneous 200 basis point increase in market interest
rates was estimated to have a negative impact of 3.8% 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 4.1% on the bank's net
interest income.
115
<PAGE>
The potential change in net interest income resulting from this analysis falls
within the bank's interest rate risk policy guidelines.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit rate changes, and should not be relied upon
as indicative of actual results.
The following table shows the bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
Expected Maturity/Principal Repayments at December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================
1998 1999 2000 2001 2002 Thereafter Total Average
Interest Fair
(000's Omitted) Rate Value
=================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets
Loans $39,809 $23,717 $13,044 $11,206 $7,486 $42,345 $137,606 8.99% $139,184
Investments 17,385 13,143 14,677 4,975 4,697 8,867 63,745 6.20% 64,034
Federal Funds 0 0 0 0 0 0 0 0.00% 0
------- ------- ------- ------- ------- ------- -------- --------
Total Rate Sensitive Assets $57,194 $36,860 $27,721 $16,181 $12,183 $51,212 $201,351 $203,218
======= ======= ======= ======= ======= ======= ======== ========
Rate Sensitive Liabilities
Savings, Money Market, and NOW $16,098 $ 0 $ 0 $ 0 $ 0 $62,906 $79,004 2.94% $79,004
Accounts
Time Deposits 61,150 9,060 6,559 825 470 0 78,064 5.53% 78,166
Short Term Borrowings 4,008 0 0 0 0 0 4,008 5.85% 4,008
------- ------- ------- ------- ------- ------- -------- --------
Total Rate Sensitive Liabilities $81,256 $9,060 $6,559 $825 $470 $62,906 $161,076 $161,178
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments of
principal. The bank 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 bank's historical experience. The
actual maturities and run-off loans could vary substantially if future
prepayments differ from the bank's historical experience. For liabilities,
Savings, Money Market, and NOW Accounts of individuals, partnerships and
corporations are considered to be 90% core (maturing in over five years), with
10% assumed to mature in one year. Savings, Money Market and NOW Accounts of
municipalities are considered 50% core (maturing in over five years), with 50%
assumed to mature in one year.
Other Information. The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of Oneida Valley National Bank's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. Left unresolved, the year 2000 issue could result in a system failure or
miscalculations causing disruptions of operations including, but not limited to,
a temporary inability to process transactions, calculate interest, or engage in
similar normal business activities.
116
<PAGE>
In early 1997, the bank formed a year 2000 committee to address the issues
surrounding the problem. The committee has developed a year 2000 project plan to
identify, correct, test, and implement solutions to ensure that the bank's
systems are ready to process in the year 2000 and beyond.
During 1997, the bank completed its assessment phase and has identified its
computer software systems that will require modification or replacement. The
committee has determined that the required changes are minimal, and that the
implementation of such changes will resolve the bank's year 2000 computer system
issues. Testing and implementation of solutions will continue through 1998 with
a plan goal to be fully tested by December 31, 1998. The bank will utilize both
internal and external resources to program, replace, and test the software for
year 2000 modifications.
The bank has also communicated with its third party data processing and
payment system providers, as well as it significant suppliers and large
customers, to determine the bank's exposure should any of these parties fail to
resolve their own year 2000 issues. During 1998, the committee will evaluate the
risk from these third parties and establish action plans to reduce or eliminate
the risk. In some cases, the bank will be relying on third party information
which may be inaccurate and unverifiable. There can be no assurance that such
parties (including, without limitation, federal and state governments and
agencies) will be able to solve their own year 2000 problems, and no assurance
that such problems will not have a material adverse effect on the bank's
business, financial condition and results of operations.
The costs of the project, and the date on which the bank plans to complete
the year 2000 modifications, are based on management's best estimates and
assumptions including the continued availability of third party services, their
modification plans, and other factors. To date, the cost of the project has been
minimal, and the bank expects the total cost of completing the project to have
no material effect on the bank's earnings or financial condition.
New Accounting Pronouncements
Reporting Comprehensive Income. On June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" effective 1998. This statement will require
Oneida Valley to report comprehensive income. For Oneida Valley, comprehensive
income is determined by adding unrealized investment holding gains or losses
during the period to net income. This statement was implemented in the first
quarter of 1998.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of and
Enterprise and Related Information." This statement requires companies to
disclose financial and descriptive information about its reportable business
segments. Management believes that Oneida Valley operates only one segment,
which is the banking segment. Therefore, disclosure required under this
pronouncement will not affect the financial statements of the company.
Results of Operations and Financial Condition
For the Quarter Ending June 30, 1998
Results of Operations
Oneida Valley had net income of $547,000 and $1.065 million for the second
quarter and the six months ending June 30, 1998, respectively, down 8.4% and
13.0% compared to the same 1997 periods. The declines in net income for the 1998
periods are attributable to a declining net interest margin, increases in Oneida
Valley National
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Bank's provision for loan loss expense, and increased operating expenses which
have been partially offset by increases in non-interest income.
Net Interest Income. Net interest income on a tax equivalent basis totaled
$2.444 million for the three months ended June 30, 1998 compared to $2.410
million for the quarter ending June 30, 1997. The increase of approximately
$34,000, or a minimal 1.4%, is the result of a decline in Oneida Valley National
Bank's net interest margin to 4.69% from 4.95%, which offset a $13.173 million
increase in average interest-earning assets. The quarterly changes in net
interest income were similar to the changes and trends for the six months ending
June 30, 1998 and 1997. Net interest income on a tax equivalent basis for the
six months ending June 30, 1998 in the amount of $4.796 million, was $38,000
less than the same period ending June 30, 1997, and was the result of a 32 basis
point decline in the net interest margin from 4.98% to 4.66% which offset the
$11.833 million increase in average earning assets.
Tax equivalent interest income totaled $4.204 million for the quarter ended
June 30, 1998, as compared to $3.996 million for the quarter ended June 30,
1997, an increase of $208,000 or 5.2%. The increase in average interest-earning
assets offset a reduction in the yield on average interest-earning assets which
declined to 8.07% from 8.21%
Interest income on loans totaled $3.113 million and $2.944 million for the
three months ended June 30, 1998 and 1997 respectively. The $169,000, or 5.7%,
increase resulted primarily from an $11.337 million increase in the average
balance of loans outstanding which offset a decline in the yield on average
loans to 8.94% from 9.19%. The increase in average loans was the result of an
$8.724 million increase in commercial loans and a $2.030 million increase in
consumer installment loans. The decrease in the yield on average loans was
attributable to the lower yields on residential mortgage loans which declined
from 8.42% to 8.20% due to significant refinances at lower market interest
rates. Competitive pressures reduced yields on commercial loans from 10.39% to
9.68% and consumer installment loans from 9.93% to 9.81%. In general, market
interest rates were significantly lower than the same period in 1997.
Interest income on investment securities increased $16,000 for the three
months ended June 30, 1998 to $997,000, from $981,000 for the same period in
1997. The increase resulted from an increase in the average balance of
investment securities of $806,000, as well as an increase in the average yield
to 6.42% from 6.40% for the quarters ended June 30, 1998 and 1997 respectively.
Interest expense for the quarter ended June 30, 1998 increased by $174,000,
or 11.0%, to $1.760 million compared to the same quarter for 1997. The increase
in interest expense for the period was the result of an increase in the average
balances of Certificates of Deposit over $100,000, which increased from $25.821
million on June 30, 1997 to $32.503 million on June 30, 1998, along with an
increase in the rate paid on those deposits from 5.64% to 5.71%. The combination
of the increase in balances and rate paid resulted in an increase of $99,000 in
interest expense. Increases in rates paid on Municipal Now and Municipal Money
Market savings accounts resulted in an increase of $39,000 in interest expense.
The increase in rates paid resulted in growth in the average municipal deposit
balances of $2.608 million, or 18.1%.
Non-interest Income. Non-interest income increased approximately $50,000,
or 11.3%, to $492,000 for the three months ended June 30, 1998, and was up
$104,000, or 11.0%, to $1.045 million for the first six months of 1998.
Significant increases in the six month figures were the result of Trust
Department income up $32,000, or 21.8%, gains on the sales of mortgage loans and
the associated servicing fee income which was up $22,000, along with steady
growth in loan fees, service charges on deposits, and data processing contract
fees.
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Non-interest Expense. Non-interest expense increased $142,000, or 7.8%, to
$1.959 million for the three months ended June 30, 1998, and was up $295,000, or
a similar 8.1%, to $3.914 million for the first six months of 1998. The six
month increase stemmed primarily from a $114,000, or 5.3%, increase in salaries
and employee benefits, a $53,000, or 19.8%, increase in occupancy expenses, and
a $136,000, or 17.0%, increase in other expenses. The increase in salaries and
employee benefits is partially due to a $38,000, or 31.2%, increase in
hospitalization expense. The increase in occupancy expense is due to the fact
that 1997 property taxes were paid in the forth quarter of 1996 and 1998
property taxes of $32,000 were paid in the first quarter of 1998. The increase
in other expenses were primarily due to an increase of $19,000 in professional
consulting fees connected with strategic planning, an increase of $18,000 in
training and education costs, a $14,000 increase in mortgage recording taxes, a
new telephone system which increased other expenses by $11,000, and other real
estate expenses and losses which were $27,000 above the previous year.
Income Taxes. Income tax expense decreased approximately $71,000 for the
quarter ended June 30, 1998 and $145,000 for the first six months of 1998
compared to the comparable 1997 periods. This decrease was directly attributed
to a decline in the bank's pretax income.
Analysis of Financial Condition
Assets. Total assets increased $16.250 million, or 7.5%, to $233.749
million at June 30, 1998 from $217.499 million at December 31, 1997. For the
three months ended June 30, 1998, loans increased $2.226 million, or 1.6%, to
$141.436 million from $139.210 million at March 31, 1998. The second quarter
increase followed an increase of $1.589 million, or 1.2%, in the first quarter
of 1998. Emphasis on commercial lending resulted in loan growth in both the
Oneida and Manlius markets with commercial loans increasing $4.375 million
during the first six months. Consumer loans declined $292,000 during the first
half of 1998 as Oneida Valley National Bank tightened its underwriting standards
in the consumer portfolio to improve credit quality. The residential mortgage
loan portfolio remained flat during the first six months as the bank increased
sales of such mortgage loans to the secondary market. The bank sold mortgage
loans totaling $4.064 million in the six months ending June 30, 1998 compared to
$874,000 for the comparable 1997 period.
Investment securities in the amount of $63.814 million as of June 30, 1998
were nearly equal to the December 31, 1997 balance of $63.745 million. Maturing
investment securities were reinvested in the portfolio during the first half of
1998 as increases in deposits funded loan growth. Federal Funds sold at June 30,
1998 of $13.900 million compared to a $900,000 Federal Funds purchased position
at December 31, 1997. The Federal Funds were available to cover time deposits
maturing within 30 days. There was little change in the composition or average
life of the investment portfolio during the first half of 1998.
Provision and Allowance for Loan Losses. The balance in the Allowance for
Loan Losses account declined $7,000 during the quarter from $1.651 million on
March 31, 1998 to $1.644 million on June 30, 1998. Net charge-offs for the
quarter ended June 30, 1998 of $106,000 were $71,000 over the $35,000 total for
the quarter ended June 30, 1997. For the six months ending June 30, 1998, net
charge-offs of $271,000 were $182,000 above the comparable period in 1997. Over
90% of the 1998 charge-offs were consumer loans, with a significant percentage
due to personal bankruptcies. Commercial and residential loan losses continued
to be insignificant. During the six months ending June 30, 1998, the provision
expense of $198,000 was $48,000, or 32%, above the expense for the comparable
1997 period. The ratio of the Allowance for Loan Losses to total loans was 1.16%
as of June 30, 1998. With additional and more aggressive collection efforts in
the second quarter, non-performing loans as a percentage of total loans declined
to 0.74% on June 30, 1998 compared to 1.01% on December 31, 1997, and the
delinquency rate improved to 1.71% compared to 3.10% for the same periods.
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Deposits. Total deposits increased $17.517 million to $203.234 million at
June 30, 1998 from $185.717 million at December 31, 1997. A large percentage of
the increase in deposits is reflected in Now and Money Market Savings accounts.
Municipal Now accounts as of June 30, 1998 increased $4.811 million compared to
December 31, 1997. Average balances over the first six months of 1998 do not
reflect the same growth rate and indicate that the balances are short-term. IPC
accounts in both the Now and Money Market categories have increased $4.479
million in the six months ending June 30, 1998 and have exhibited steady growth
during 1998. Certificates of Deposit in excess of $100,000 as of June 30, 1998
are $8.363 million greater than year end 1997, with the majority of the increase
in short-term maturities owned by local municipalities.
Capital. Stockholders' equity as of June 30, 1998 was $25.316 million,
$573,000 more than the December 31, 1997 total. The June 30, 1998 stockholders'
equity reflects the addition of retained earnings in the amount of $613,000 and
an increase in the net-after-tax effect of unrealized gains on
available-for-sale investment securities in the amount of $46,000.
Liquidity. Oneida Valley National Bank 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. As of June 30, 1998, the bank has borrowed $1 million against its $13.1
million line of credit with the FHLBNY and has a Federal Funds sold position of
$13.9 million. These balances, along with scheduled cash flows, provide
sufficient liquidity to meet expected maturities of Certificates of Deposits and
other deposit withdrawals, as well as loan demand.
Market Risk. Oneida Valley National Bank's market risk arises principally
from interest rate risk in its lending, deposit, and borrowing activities.
Management actively monitors and manages its interest rate risk exposure using a
computer simulation model which measures the impact of changes in interest rates
in its interest income. As of June 30, 1998, an instantaneous 200 basis point
increase in market interest rates was estimated to have a positive impact of
6.4% 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 negative impact
of 5.1% on the bank's net interest income. 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 and
mix changes, and should not be relied upon as indicative of actual results.
Year 2000 Disclosure
The State of Readiness. Oneida Valley National Bank has been evaluating its
Year 2000 readiness through the utilization of a six-phase approach since early
1997. The process is overseen by a management committee chaired by the bank's
Senior Vice President who reports monthly progress to the Board of Directors.
The Awareness and Organization phase, which included creating a Year 2000
committee and explaining the problem to the Board of Directors and Senior
Management, was completed on December 31, 1997. The Inventory and Assessment
phase, which identified all equipment, software, and related venders that could
have a potential adverse effect on the bank's service or operations, was
completed on March 31, 1998. The Analysis and Recommendation phase has been
completed as of June 30, 1998. In this phase, the bank completed an analysis of
all data obtained in the Assessment phase and created a prioritized list of
systems to be validated and tested. The prioritization resulted in ten systems
which the bank considered critical to its continued operations. The two most
critical systems relate to the operation of the bank's data processing
facilities which utilize Unisys Computer Systems and Information Technology,
Inc. software systems. This phase also involved communications with all vendors
who
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provide systems that may cause the bank a Year 2000 problem, a tracking system
to monitor responses, and vendor responses indicating the state of their
systems' or equipments' Year 2000 compliance.
The Customer Notification and Awareness phase is considered approximately
70% complete. The bank has provided all of its customers information regarding
the Year 2000 potential problems. By September 30, 1998, it is expected that
bank officers will have completed personal contacts. The bank will then make
assessments of Year 2000 risk in connection with credit extensions to its larger
commercial customers to determine if the loan portfolio quality will be
adversely affected. By the same date, the bank's largest deposit customers will
have been surveyed in an effort to determine if the Year 2000 issues present any
liquidity problems to the bank. Upon completion of these assessments and
surveys, action plans will be developed to manage these risks to reasonable
levels.
The Validation and Testing phase, as of June 30, 1998, is considered 80%
complete. The bank has been able to test both its information technology systems
and non-information technology systems without significant added cost utilizing
both its primary and backup data processing centers. Testing for all mission
critical systems is expected to be completed by December 31, 1998.
The Implementation phase, which places into service all of the systems and
equipment necessary to reduce the Year 2000 risk to a minimum, is considered 80%
complete as of June 30, 1998. Implementation is expected to be 95% complete by
December 31, 1998 with only low-risk systems to be modified in early 1999.
Year 2000 Costs. As of June 30, 1998, the bank estimates that it has
expensed $10,000 in connection with testing and software purchases. Based on
management's best estimates, additional costs for remediation that are expected
to be expensed over 1998 and 1999 are $20,000. In addition to these costs, the
bank will be capitalizing $40,000 over three years in connection with the
purchase of software that had not been previously budgeted. The bank has
accelerated the purchase of six replacement ATM machines which had been
previously scheduled for purchase in 1999 and 2000. The purchase and
installation will now take place in 1998 and the equipment will be capitalized
over five years. The bank expects the total costs of completing the project to
have no material affect on the results of operations and financial condition,
although actual results may differ pending the completion of the Validation,
Testing and Implementation phases.
Risk Assessment and Contingency Plans. As of June 30, 1998, the bank
believes that the progress that it has made to date, along with the expected
completion of mission critical systems testing by year end, will result in the
bank being well prepared to meet the Year 2000. The reliance on third party
information, however, which may be inaccurate and unverifiable, such as the
continuation of a reliable power source, will require contingency planning. The
bank has established contingency plans for its mission critical systems as of
June 30, 1998 and will evaluate the implementation of such plans during the
first quarter of 1999.
New Accounting Pronouncements
Effective January 1, 1998, Oneida Valley adopted statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." This
pronouncement requires Oneida Valley to report the effects of unrealized
investment holding gains or losses on comprehensive income. Oneida Valley's
comprehensive income for the period ending March 31, 1998 includes unrealized
investment holding.
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Management
Executive Compensation
The following table sets forth information concerning compensation paid by
Oneida Valley to the Chief Executive Officer and the other most highly
compensated executive officers whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual All Other
Name and Principal Position Year Salary ($) Bonus($) Compensation ($) (1) Compensation ($) (2)
- --------------------------- ---- ---------- -------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
John C. Mott 1997 139,125 49,765 7,350 32,633
President & 1996 132,500 47,751 7,000 11,653
Chief Executive Officer 1995 125,000 41,738 6,300 12,799
David P. Kershaw 1997 89,000 26,458 7,350 5,226
Executive Vice President 1996 85,000 24,665 7,000 6,487
1995 77,500 22,011 6,300 7,039
</TABLE>
(1) For 1997, represents director fees earned by Messrs. Mott and Kershaw for
service on the Oneida Valley National Bank Board of Directors.
(2) Includes the following amounts for Mr. Mott for 1997: $2,242 contribution
to the Pension Plan; $5,191 matching contribution to the 401K Plan; $23,000
expense associated with Mr. Mott's Supplemental Retirement Plan; and $2,200
in premiums on a life insurance policy owned by Mr. Mott. Includes the
following amounts for Mr. Kershaw for 1997: $1,434 contribution to the
Pension Plan; $3,160 matching contribution to the 401K Plan; and $632 in
premiums on a life insurance policy owned by Mr. Kershaw.
Board Compensation Committee
Report on Executive Compensation
Oneida Valley National Bank's Compensation Committee meets annually to
conduct a comprehensive performance review of all officers and to recommend the
annual base remuneration for the bank's officers to the Board of Directors. The
Committee considers each officer's performance as measured against that
individual's job description.
In recommending the base annual salary for the chief executive officer, the
Committee considers overall asset quality, earnings, capital adequacy, peer
group and industry comparisons, general economic trends and total return to
Oneida Valley's shareholders. The Committee believes that Mr. Mott has performed
exceptionally well in each of the above measurable categories, and that Oneida
Valley's (and Oneida Valley National Bank's) success is due, in large part, to
his efforts. Mr. Mott does not participate in the determination of his annual
compensation.
The Compensation Committee is appointed by the President and is approved by
the Board of Directors. Its
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members presently consist of:
John W. Bailey
Donald H. Dew
Robert H. Fearon, Jr.
Samuel J. Lanzafame
Richard G. Smith
Edward W. Thoma
Change in Control Agreement
Oneida Valley National Bank has a change in control agreement with Mr.
Mott. The agreement provides that if Oneida Valley National Bank were to engage
in a merger, acquisition or other "change in control" to which Mr. Mott did not
consent, the bank would thereafter be obligated to employ Mr. Mott for a term of
three years or, if later, until he reaches age 65, at a compensation level not
less than his then current base salary. In addition, if Mr. Mott chooses to
terminate his employment following the occurrence of a "change in control," he
would be entitled to receive a severance payment at the rate of his highest base
salary paid at any time under the agreement plus any applicable bonus or
incentive compensation, to be paid by Oneida Valley National Bank over the
remaining unexpired term of the Agreement. In connection with the termination of
his existing change in control agreement and the execution of his planned new
employment agreement upon consummation of the Merger, Mr. Mott is expected to
waive his right to payment under the existing agreement in connection with the
Merger. See "PROPOSAL I -- APPROVAL OF MERGER -- Effect of the Merger on
Employees and Management."
Pension Benefits
Oneida Valley National Bank is a member of the New York State Bankers
Retirement System, and thereby makes available to eligible employees a qualified
non-contributory defined benefit pension plan. All bank employees who have
completed 1,000 hours of service and who are 21 years of age or older are
eligible to participate in the pension plan. Benefits under the plan are
computed based upon the average annual compensation for the highest consecutive
five years during the employee's creditable service. For purposes of calculating
the benefit, an employee may not be credited with more than 40 years of service.
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The following table sets forth the estimated annual benefits under the
pension plan. Messrs. Mott and Kershaw have been credited with 7 and 28 years of
service, respectively, under the plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Creditable Service
=======================================================================================
Annual
Average
Compensation 15 20 25 30 35
=======================================================================================
<S> <C> <C> <C> <C> <C>
$50,000 $11,250 $15,000 $18,750 $22,500 $26,250
75,000 16,875 22,500 28,125 33,750 39,375
100,000 22,500 30,000 37,500 45,000 52,500
125,000 28,125 37,500 46,875 56,250 65,625
150,000 33,750 45,000 56,250 67,500 78,750
175,000 36,000 48,000 60,000 72,000 84,000
200,000 36,000 48,000 60,000 72,000 84,000
</TABLE>
For 1997, the Internal Revenue Code limits the total compensation that may be
taken into account in calculating benefits to $160,000.
Supplemental Retirement Benefits
Mr. Mott is covered by two separate arrangements that will provide
supplemental retirement income to Mr. Mott. Under the first arrangement, entered
into in 1991, Mr. Mott is entitled to receive annual payments of $10,000 for ten
years following his retirement upon or after attaining age 65. Under the second
arrangement, effective as of September 1, 1997, Mr. Mott is entitled to receive
a monthly benefit (following retirement at or after age 62) generally equal to
the difference between (i) 55% of Mr. Mott's monthly base salary, and (ii) the
sum of monthly retirement benefits Mr. Mott is entitled to receive from Oneida
Valley, Social Security, and his prior employment with Merchants National Bank.
The benefit payable under the 1997 arrangement may be paid in various straight
life annuity or joint and survivor annuity forms. The annual expense associated
with Mr. Mott's supplemental retirement benefit is approximately $23,000 per
year. Under Mr. Mott's new employment agreement with Alliance Financial
Corporation, he will receive supplemental retirement benefits on terms that are
at least equivalent to the terms of the 1991 and 1997 arrangements.
Transactions with Management
Oneida Valley National Bank has had, and expects to have in the future,
banking transactions in the ordinary course of business with many of its
directors, officers and their associates. All extensions of credit to such
persons have been made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and in the opinion of the
management, do not involve more than a normal risk of collectibility or present
other unfavorable features.
Oneida Valley National Bank has a consulting agreement with Robert H.
Fearon, Jr., pursuant to which Mr. Fearon has agreed to provide consulting
services to the bank through 1999. Mr. Fearon received compensation in the
amount of $6,000 for services rendered pursuant to the consulting agreement in
1997, and is
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scheduled to receive compensation of $6,000 per year for services to be rendered
under the agreement in 1998 and 1999.
The law firm of Dunn, Vindigni & Bruno, of which Director Peter M. Dunn is
a principal, provided legal services to Oneida Valley National Bank in 1997. The
amount received by Dunn, Vindigni & Bruno for such services was less than 5% of
the gross revenues of the law firm for its last fiscal year.
Board of Directors Fees
The directors of Oneida Valley receive no compensation for serving in such
capacity. Each director of Oneida Valley is also a director of Oneida Valley
National Bank. Members of the bank's Board of Directors receive an annual
retainer of $2,800.00, plus $350.00 per meeting attended. Members of Board
committees receive $150.00 per committee meeting attended.
Oneida Valley has a Deferred Compensation Plan which provides Directors
with the option to defer receipt of all or a portion of their director's fees.
Amounts deferred under the Plan shall be credited to a reserve account and
deemed to be invested in Oneida Valley Common Stock based on the book value of
the stock for the year ending preceding the date of the deferral.
Upon the date selected by a participating Director to commence receiving
deferred payments, the reserve account value shall be determined based on the
increase or decrease in the book value of Oneida Valley Common Stock as of the
preceding year end, provided that in no event will the Director's payments be
less than the amounts actually deferred by the Director.
Market Price And Dividends on Oneida Valley Common Stock
Oneida Valley Common Stock is not listed or traded on a recognized
securities exchange and is inactively traded. On _______ 1998, there were
approximately 430 record holders of Oneida Valley Common Stock and 902,877
shares of Oneida Valley Common Stock issued and outstanding.
The following table sets forth the cash dividends declared by Oneida Valley
on the Oneida Valley Common Stock and the range of high and low sales prices of
the Oneida Valley Common Stock during the two most recent fiscal years and
through _________, 1998. The range of sale prices are based on
___________________________.
Price
Cash Dividends ----------------------
Per Share High Low
--------- ---- ---
1996
First Quarter $.22 $36.50 $35.00
Second Quarter .22 36.00 34.75
Third Quarter .25 34.00 31.50
Fourth Quarter .45 34.00 30.00
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1997
First Quarter $.25 $35.00 $32.38
Second Quarter .25 37.00 33.13
Third Quarter .25 38.00 34.25
Fourth Quarter .45 39.00 36.75
1998
First Quarter $.25 $43.00 $37.00
Second Quarter .25 40.50 37.00
Third Quarter (through
__________, 1998)
On July 10, 1998, the last business day preceding public announcement of
the Merger, the last sale price for Oneida Valley Common Stock was $40.50. On
___________, 1998, the last sale price for Oneida Valley Common Stock was
$_____.
DESCRIPTION OF CAPITAL STOCK
Cortland First
Cortland First's authorized capital stock consists of 3,000,000 shares of
Common Stock, par value $1.6667 per share. As of _____________, 1998, there were
1,969,776 shares of Cortland First Common Stock issued and outstanding held of
record, with approximately 550 shareholders of record.
Holders of Cortland First Common Stock are entitled to one vote per share
on all matters to be voted upon by the shareholders of the company. The holders
of Cortland First Common Stock are entitled to a ratable distribution of any
dividends that may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the company, the holders of Cortland First Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities. The Cortland First
Common Stock has no preemptive, redemption or conversion rights. The outstanding
shares of Cortland First Common Stock are fully paid and nonassessable.
Cortland First has adopted a Dividend Reinvestment Plan that allows
shareholders to receive Cortland First Common Stock in lieu of cash dividends,
subject to the terms and limitations of the Plan. The Dividend Reinvestment Plan
is administered by American Stock Transfer & Trust Company.
Oneida Valley
Oneida Valley's authorized capital stock consists of 2,000,000 shares of
Common Stock, par value $2.50 per share. As of ____________, 1998, there were
902,877 shares of Oneida Valley Common Stock issued and outstanding held of
record, with approximately 430 shareholders of record.
Holders of Oneida Valley Common Stock are entitled to one vote per share on
all matters to be voted upon by the shareholders of the company, and have
cumulative voting rights with respect to the election of directors. The
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holders of Oneida Valley Common Stock are entitled to a ratable distribution of
any dividends that may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the company, the holders of Oneida Valley Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
The Oneida Valley Common Stock has no preemptive, redemption or conversion
rights. The outstanding shares of Oneida Valley Common Stock are fully paid and
nonassessable.
Alliance Financial Corporation
The authorized capital stock of Alliance Financial Corporation will be
11,000,000 shares of capital stock, 10,000,000 of which shall be common shares,
par value $1.00 per share, and 1,000,000 of which will be preferred shares, par
value $25.00 per share. Upon consummation of the Merger, there will be
approximately 3,549,811 shares of Alliance Common Stock outstanding assuming an
Exchange Ratio of 1.75 and 3,775,530 shares assuming an Exchange Ratio of 2.00,
held by approximately 980 record owners. There will be no shares of preferred
stock outstanding upon consummation of the Merger.
Holders of Alliance Common Stock will be entitled to one vote per share on
all matters to be voted upon by the shareholders of the company, and will not
have cumulative voting rights with respect to the election of directors. The
holders of Alliance Common Stock will be entitled to a ratable distribution of
any dividends that may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the company, the holders of Alliance Common Stock will be entitled
to share ratably in all assets remaining after payment of liabilities. Holders
of Alliance Common Stock will have no preemptive, redemption or conversion
rights. The shares of Alliance Common Stock, when issued in the manner described
in this Proxy Statement/Prospectus, will be fully paid and nonassessable.
Alliance Common Stock is expected to be listed on the Nasdaq National
Market under the symbol "____". Alliance Financial Corporation will pay
dividends at a rate to be determined by its Board of Directors. There can be no
assurance that the dividend policy of Alliance Financial Corporation will
continue that of either Cortland First or Oneida Valley. The declaration and
payment of dividends by Alliance Financial Corporation will depend upon business
conditions, operating results of Alliance Financial Corporation and Alliance
Bank, N.A., capital and reserve requirements and the consideration by the Board
of Directors of other relevant factors. It is anticipated that the annual
dividends paid to shareholders of Alliance Financial Corporation will be roughly
equivalent to the annual historical dividends received by the shareholders prior
to the Merger. See "COMPARATIVE PER SHARE DATA."
Shares of the preferred stock of Alliance Financial Corporation may be
issued from time to time in one or more series for any proper corporate purpose
without further action by the shareholders. The designation, number, preferences
and other rights and limitations or restrictions of the preferred stock of each
series (other than as fixed by the Amended and Restated Certificate) may be
fixed by the Board of Directors and stated or expressed in resolutions adopted
by the Board providing for the original issuance of preferred stock of each
series.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
present the condensed financial position of Cortland First and Oneida Valley as
of June 30, 1998 assuming that the Merger had occurred as of June 30, 1998 and
giving effect to the Merger by combining the results of operations of Cortland
First and Oneida Valley for the years ended December 31, 1997, 1996 and 1995 and
for the six months ended June 30, 1998. Pro forma earnings per common share and
weighted average common shares are based on an assumed Exchange Ratio ranging
from 1.75 to 2.00.
The unaudited pro forma condensed combined financial statements were
prepared giving effect to the Merger on the pooling-of-interests accounting
method. For a description of the pooling-of-interests accounting method with
respect to the Merger and the related effects on the historical financial
statements of Cortland First and Oneida Valley, see "PROPOSAL I - APPROVAL OF
MERGER -- Accounting Treatment." All adjustments necessary to arrive at a fair
presentation of the combined financial condition and results of operations of
Cortland First and Oneida Valley, in the opinion of the managements of the
respective companies, have been included and are of a normal recurring nature.
The data in the financial tables and statements in this Proxy
Statement/Prospectus do not reflect possible adjustments for expenses related to
the Merger (see "PROPOSAL I -- APPROVAL OF MERGER--Management and Operations
After the Merger"), or any potential cost savings or revenue enhancements
resulting from the Merger. Accordingly, the financial condition and results of
operations of Alliance Financial Corporation as of the Effective Date and
thereafter may be materially different from that reflected in the pro forma
information below. See "AVAILABLE INFORMATION," "COMPARATIVE PER SHARE DATA,"
"SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" and "PROPOSAL I - APPROVAL OF
MERGER -- Management and Operations after the Merger."
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements and notes thereto
of Cortland First and Oneida Valley appearing elsewhere in this Proxy
Statement/Prospectus. The unaudited pro forma condensed combined financial
statements are presented for informational purposes only. These statements are
not necessarily indicative of the combined financial position and results of
operations that would have occurred if the Merger had been consummated on
December 31, 1997 or at the beginning of the periods or that may be attained in
the future.
128
<PAGE>
HISTORIAL AND PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $24,071 $21,978 $46,049
Investment securities 88,277 63,814 $152,091
Total loans 114,995 141,427 $256,422
Allowance for possible loan losses (1,268) (1,644) ($2,912)
--------- --------- ---------
Net loans 113,727 139,783 $253,510
--------- --------- ---------
Bank premises and equipment 3,345 5,096 $8,441
Other assets 4,146 3,078 $7,224
--------- --------- ---------
Total assets $233,566 $233,749 $467,315
========= ========= =========
Liabilities and Shareholders' Equity
Deposits $205,956 $203,234 $409,190
Short term borrowings 0 2,068 $2,068
Other liabilities 2,127 3,131 $5,258
--------- --------- ---------
Total liabilities 208,083 208,433 416,516
--------- --------- ---------
Common stock and surplus 6,720 4,824 $11,544
Undivided profits 19,383 22,616 $41,999
Other comprehensive income 446 112 $558
Treasury stock (1,066) (2,236) ($3,302)
--------- --------- ---------
Total shareholders' equity 25,483 25,316 50,799
========= ========= =========
Total liabilities and shareholders' equity $233,566 $233,749 $467,315
========= ========= =========
</TABLE>
129
<PAGE>
HISTORIAL AND PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31, 1997
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 10,360 11,845 22,205
Interest on investment securities 5,356 3,736 9,092
Interest on federal funds sold 269 225 494
--------- --------- ---------
Total interest income 15,985 15,806 31,791
--------- --------- ---------
Interest expense:
Interest on deposits 6,526 6,378 12,904
Interest on short-term borrowings 5 75 80
--------- --------- ---------
Total interest expense 6,531 6,453 12,984
--------- --------- ---------
Net interest income 9,454 9,353 18,807
Provision for possible loan losses 390 235 625
--------- --------- ---------
Net interest income after provision for loan
losses 9,064 9,118 18,182
--------- --------- ---------
Other income:
Trust department services 422 353 775
Service charges on deposit accounts 689 861 1,550
Investment securities gains/losses 115 0 115
Other operating income 551 875 1,426
--------- --------- ---------
Total other income 1,777 2,089 3,866
--------- --------- ---------
Total operating income 10,841 11,207 22,048
--------- --------- ---------
Other expenses:
Salaries, wages and employee benefits 3,909 4,297 8,206
Supplies, advertising and communications
expense 689 678 1,367
Occupancy expense of bank premises 513 585 1,098
Computer and equipment expense 786 528 1,314
Legal, audit and outside services 1,083 774 1,857
Other operating expenses 322 531 853
--------- --------- ---------
Total other expenses 7,302 7,393 14,695
--------- --------- ---------
Income before income taxes 3,539 3,814 7,353
Provision for income taxes 920 1,300 2,220
--------- --------- ---------
Net income $2,619 $2,514 $5,133
========= ========= =========
Net income per share - Basic and Diluted:
Historical $1.31 $2.72
========= =========
Proforma at an exchange rate of 1.75 shares $1.42
=========
Pro forma at an exchange rate of 2 shares $1.33
=========
</TABLE>
130
<PAGE>
HISTORIAL AND PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31, 1996
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 10,453 11,338 21,791
Interest on investment securities 4,700 3,845 8,545
Interest on federal funds sold 479 201 680
--------- --------- ---------
Total interest income 15,632 15,384 31,016
--------- --------- ---------
Interest expense:
Interest on deposits 6,220 5,932 12,152
Interest on short-term borrowings 0 42 42
--------- --------- ---------
Total interest expense 6,220 5,974 12,194
--------- --------- ---------
Net interest income 9,412 9,410 18,822
Provision for possible loan losses 283 350 633
--------- --------- ---------
Net interest income after provision for loan
losses 9,129 9,060 18,189
--------- --------- ---------
Other income:
Trust department services 440 300 740
Service charges on deposit accounts 641 793 1,434
Investment securities gains/losses (23) (4) (27)
Other operating income 465 775 1,240
--------- --------- ---------
Total other income 1,523 1,864 3,387
--------- --------- ---------
Total operating income 10,652 10,924 21,576
--------- --------- ---------
Other expenses:
Salaries, wages and employee benefits 3,625 4,070 7,695
Supplies, advertising and communications
expense 600 662 1,262
Occupancy expense of bank premises 503 544 1,047
Computer and equipment expense 598 620 1,218
Legal, audit and outside services 967 667 1,634
Other operating expenses 385 547 932
--------- --------- ---------
Total other expenses 6,678 7,110 13,788
--------- --------- ---------
Income before income taxes 3,974 3,814 7,788
Provision for income taxes 1,128 1,306 2,434
--------- --------- ---------
Net income $2,846 $2,508 $5,354
========= ========= =========
Net income per share - Basic and Diluted:
Historical $1.41 $2.63
========= =========
Proforma at an exchange rate of 1.75 shares $1.45
=========
Pro forma at an exchange rate of 2 shares $1.37
=========
</TABLE>
131
<PAGE>
HISTORIAL AND PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31, 1995
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 10,456 10,961 21,417
Interest on investment securities 4,311 4,028 8,339
Interest on federal funds sold 456 236 692
--------- --------- ---------
Total interest income 15,223 15,225 30,448
--------- --------- ---------
Interest expense:
Interest on deposits 5,847 6,051 11,898
Interest on short-term borrowings 0 114 114
--------- --------- ---------
Total interest expense 5,847 6,165 12,012
--------- --------- ---------
Net interest income 9,376 9,060 18,436
Provision for possible loan losses 300 175 475
--------- --------- ---------
Net interest income after provision for loan
losses 9,076 8,885 17,961
--------- --------- ---------
Other income:
Trust department services 369 251 620
Service charges on deposit accounts 612 753 1,365
Investment securities gains/losses 0 6 6
Other operating income 465 712 1,177
--------- --------- ---------
Total other income 1,446 1,722 3,168
--------- --------- ---------
Total operating income 10,522 10,607 21,129
--------- --------- ---------
Other expenses:
Salaries, wages and employee benefits 3,695 3,848 7,543
Supplies, advertising and communications
expense 567 629 1,196
Occupancy expense of bank premises 523 523 1,046
Computer and equipment expense 547 595 1,142
Legal, audit and outside services 867 672 1,539
Other operating expenses 501 614 1,115
--------- --------- ---------
Total other expenses 6,700 6,881 13,581
--------- --------- ---------
Income before income taxes 3,822 3,726 7,548
Provision for income taxes 1,089 1,321 2,410
--------- --------- ---------
Net income $2,733 $2,405 $5,138
========= ========= =========
Net income per share - Basic and Diluted:
Historical $1.36 $2.49
========= =========
Proforma at an exchange rate of 1.75 shares $1.39
=========
Pro forma at an exchange rate of 2 shares $1.30
=========
</TABLE>
132
<PAGE>
HISTORIAL AND PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 5,148 6,067 11,215
Interest on investment securities 2,497 1,870 4,367
Interest on federal funds sold 191 142 333
--------- --------- ---------
Total interest income 7,836 8,079 15,915
--------- --------- ---------
Interest expense:
Interest on deposits 3,235 3,407 6,642
Interest on short-term borrowings 0 59 59
--------- --------- ---------
Total interest expense 3,235 3,466 6,701
--------- --------- ---------
Net interest income 4,601 4,613 9,214
Provision for possible loan losses 125 198 323
--------- --------- ---------
Net interest income after provision for loan
losses 4,476 4,415 8,891
--------- --------- ---------
Other income:
Trust department services 198 179 377
Service charges on deposit accounts 406 428 834
Investment securities gains/losses 0 (9) (9)
Other operating income 266 447 713
--------- --------- ---------
Total other income 870 1,045 1,915
--------- --------- ---------
Total operating income 5,346 5,460 10,806
--------- --------- ---------
Other expenses:
Salaries, wages and employee benefits 2,148 2,283 4,431
Supplies, advertising and communications
expense 324 345 669
Occupancy expense of bank premises 267 321 588
Computer and equipment expense 397 264 661
Legal, audit and outside services 358 422 780
Other operating expenses 363 279 642
--------- --------- ---------
Total other expenses 3,857 3,914 7,771
--------- --------- ---------
Income before income taxes 1,489 1,546 3,035
Provision for income taxes 366 481 847
--------- --------- ---------
Net income $1,123 $1,065 $2,188
========= ========= =========
Net income per share - Basic and Diluted:
Historical $0.57 $1.18
========= =========
Proforma at an exchange rate of 1.75 shares $0.62
=========
Pro forma at an exchange rate of 2 shares $0.58
=========
</TABLE>
133
<PAGE>
HISTORIAL AND PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended June 30, 1997
---------------------------------------
Historical
------------------------ Pro Forma
Cortland Oneida Combined
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 5,119 5,773 10,892
Interest on investment securities 2,687 1,847 4,534
Interest on federal funds sold 182 107 289
--------- --------- ---------
Total interest income 7,988 7,727 15,715
--------- --------- ---------
Interest expense:
Interest on deposits 3,259 3,029 6,288
Interest on short-term borrowings 0 20 20
--------- --------- ---------
Total interest expense 3,259 3,049 6,308
--------- --------- ---------
Net interest income 4,729 4,678 9,407
Provision for possible loan losses 180 150 330
--------- --------- ---------
Net interest income after provision for loan
losses 4,549 4,528 9,077
--------- --------- ---------
Other income:
Trust department services 196 147 343
Service charges on deposit accounts 316 412 728
Investment securities gains/losses 0 0 0
Other operating income 252 382 634
--------- --------- ---------
Total other income 764 941 1,705
--------- --------- ---------
Total operating income 5,313 5,469 10,782
--------- --------- ---------
Other expenses:
Salaries, wages and employee benefits 1,963 2,169 4,132
Supplies, advertising and communications
expense 277 327 604
Occupancy expense of bank premises 261 268 529
Computer and equipment expense 378 248 626
Legal, audit and outside services 407 358 765
Other operating expenses 287 249 536
--------- --------- ---------
Total other expenses 3,573 3,619 7,192
--------- --------- ---------
Income before income taxes 1,740 1,850 3,590
Provision for income taxes 464 626 1,090
--------- --------- ---------
Net income $1,276 $1,224 $2,500
========= ========= =========
Net income per share - Basic and Diluted:
Historical $0.63 $1.30
========= =========
Proforma at an exchange rate of 1.75 shares $0.68
=========
Pro forma at an exchange rate of 2 shares $0.64
=========
</TABLE>
134
<PAGE>
EXPERTS
The consolidated financial statements of Cortland First and Oneida Valley
as of December 31, 1997 and 1996 and for each of the three years in the period
then ended, appearing elsewhere herein, have been included in reliance upon the
report of PricewaterhouseCoopers LLP, independent public accountants, and upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Alliance Common Stock to be issued in the Merger,
certain federal income tax consequences of the Merger, and certain other legal
matters relating to the Merger are being passed upon for Cortland First by the
law firm of Bond, Schoeneck & King, LLP, counsel to Cortland First.
SHAREHOLDER PROPOSALS
The 1999 Annual Meeting of Shareholders of Alliance Financial Corporation
(or, if the Merger is not yet consummated, the 1999 Annual Meeting of
Shareholders of Cortland First Financial Corporation) will be held on or about
_______, 1999. In order to be eligible for inclusion in the proxy materials of
Alliance Financial Corporation or Cortland First Financial Corporation (as
applicable) for the 1999 Annual Meeting of Shareholders, shareholder proposals
to take action at such meeting must be received at
_____________________________________________ by no later than ___________,
1998. Any such proposals shall be subject to the requirements of the proxy rules
adopted under the Exchange Act.
135
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,139,317 $ 10,499,851
Federal funds sold 1,100,000 4,900,000
Total Cash and Cash Equivalents 11,239,317 15,399,851
Held to maturity investment securities 2,434,774 2,377,788
Available-for-sale investment securities 85,821,482 81,750,581
Total Investment Securities 88,256,256 84,128,369
(fair value - $88,300,955 for 1997
and $84,141,362 for 1996)
Commercial and agricultural loans 22,512,710 20,892,312
Real estate loans 65,433,326 64,738,861
Installment loans 22,384,182 25,611,633
Other loans 5,914,449 6,163,608
Total Loans 116,244,667 117,406,414
Less: Unearned income 3,072,275 3,774,128
Less: Allowance for possible
loan losses 1,240,188 1,270,798
Net Loans 111,932,204 112,361,488
Bank premises, furniture
and equipment 3,762,590 3,640,316
Accrued interest receivable 1,538,492 1,588,702
Other real estate owned 275,342 --
Other assets 2,364,725 1,953,552
Total Assets $ 219,368,926 $ 219,072,278
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 24,508,501 $ 22,802,077
Interest bearing deposits 167,701,131 169,035,872
Total Deposits 192,209,632 191,837,949
Accrued interest, taxes and
other liabilities 1,270,590 1,021,505
Accrued postretirement benefits 881,988 835,029
Total Liabilities 194,362,210 193,694,483
Shareholders' equity: Common stock - par value $1.6667 a share;
3,000,000 shares authorized;
2,016,000 shares issued;
1,969,776 and 2,016,000 shares
outstanding for 1997 and 1996,
respectively 3,360,067 3,360,067
Surplus 3,360,000 3,360,000
Undivided profits 18,811,853 18,282,960
Unrealized net gain on investment
securities 540,492 374,768
Treasury stock, at cost; 46,224 shares (1,065,696) --
Total Shareholders' Equity 25,006,716 25,377,795
Total Liabilities and
Shareholders' Equity $ 219,368,926 $ 219,072,278
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME:
INTEREST INCOME Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
Interest and fees on loans $ 10,360,436 $ 10,453,073 $ 10,456,163
Interest on investment securities:
U.S. Treasury 1,597,296 1,728,913 1,731,430
U.S. Government Agencies 2,329,926 1,679,912 1,457,322
State and political
subdivisions 1,371,383 1,255,577 1,108,042
Other 56,714 35,642 14,361
Interest on federal
funds sold 268,903 479,227 456,177
Total Interest Income 15,984,658 15,632,344 15,223,495
INTEREST EXPENSE
Interest on deposits 6,525,980 6,220,102 5,847,933
Interest on short-term
borrowings 4,973 -- --
Total Interest Expense 6,530,953 6,220,102 5,847,933
Net Interest Income 9,453,705 9,412,242 9,375,562
Provision for possible
loan losses 390,000 283,000 300,000
Net Interest Income After
Provision For Loan Losses 9,063,705 9,129,242 9,075,562
OTHER INCOME
Trust department services 422,196 440,260 368,716
Service charges on deposit
accounts 689,334 641,484 612,448
Investment securities
gains/(losses) 114,757 (23,907) --
Other operating income 550,936 465,066 464,946
Total Other Income 1,777,223 1,522,903 1,446,110
Total Operating Income 10,840,928 10,652,145 10,521,672
OTHER EXPENSES
Salaries, wages and
employee benefits 3,908,687 3,624,569 3,694,682
Supplies, advertising and
communications expense 689,175 600,344 567,019
Occupancy expense of bank
premises 512,988 503,282 522,673
Computer and equipment
expense 786,414 597,640 547,230
Legal, audit and outside
services 1,082,788 967,309 867,075
Other operating expense 321,762 385,039 501,525
Total Other Expenses 7,301,814 6,678,183 6,700,204
Income Before Income Taxes 3,539,114 3,973,962 3,821,468
Provision for income taxes 919,798 1,127,800 1,088,600
Net Income $ 2,619,316 $ 2,846,162 $ 2,732,868
Net Income Per Common
Share - Basic $ 1.31 $ 1.41 $ 1.36
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS:
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES
Year ended: Dec. 31, 1997 1996 1995
---- ---- ----
Net income $ 2,619,316 $ 2,846,162 $ 2,732,868
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 390,000 283,000 300,000
Provision for depreciation 591,039 445,511 383,486
(Benefit) Provision for
deferred income taxes (19,492) (89,805) 15,198
Amortization of investment
security premiums
(discounts), net 283,490 380,592 391,207
Realized investment security
(gains) losses (114,758) 23,907 --
Loss (gain) on disposal of
bank equipment 9,921 17,800 --
Loss (gain) on disposal of
other real estate -- 57,006 --
(Increase) decrease in
interest receivable 50,210 112,406 10,128
(Increase) decrease in
other assets (391,681) 50,321 (293,608)
Increase (decrease) in
interest payable (9,642) 7,999 37,301
Increase (decrease) in other
liabilities 194,776 173,088 19,205
Net Cash Provided by
Operating Activities $ 3,603,179 $ 4,307,987 $ 3,595,785
INVESTING ACTIVITIES
Proceeds from maturities of
investment securities,
available-for-sale $ 15,598,817 $ 17,544,275 $ 13,159,859
Proceeds from maturities of
investment securities,
held-to-maturity 1,587,289 6,633,032 7,250,998
Proceeds from sales of
investment securities 13,393,289 975,390 --
Purchase of investment securities,
available-for-sale (33,060,342) (29,897,388) (20,254,059)
Purchase of investment securities,
held-to-maturity (1,539,037) (4,731,598) (3,119,163)
Net increase in loans (236,059) (1,616,123) (2,645,378)
Purchases of premises and
equipment (773,745) (639,757) (483,664)
Proceeds from disposition of
other real estate -- 78,395 --
Proceeds from disposition of
bank equipment 50,511 -- --
Net Cash Used by Investing
Activities (4,979,277) (11,653,774) (6,091,407)
F-3
<PAGE>
FINANCING ACTIVITIES
Year ended: Dec. 31, 1997 1996 1995
---- ---- ----
Net increase (decrease) in
demand deposits, NOW accounts
and savings accounts (741,873) 8,142,380 (8,042,267)
Net increase (decrease) in
certificates of deposit 1,113,556 5,250,017 9,520,416
Treasury stock purchased (1,119,057) -- --
Treasury stock sold 62,038 -- --
Cash dividends (2,099,100) (1,001,280) (873,600)
Net Cash Provided (Used)
by Financing Activities (2,784,436) 12,391,117 604,549
Increase (Decrease) in Cash
and Cash Equivalents (4,160,534) 5,045,330 (1,891,073)
Cash and Cash Equivalents at
Beginning of Year 15,399,851 10,354,521 12,245,594
Cash and Cash Equivalents
at End of Year 11,239,317 15,399,851 10,354,521
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for:
Interest on deposits and
short-term borrowings 6,540,595 6,212,103 5,810,632
Income taxes 933,749 1,083,086 1,260,503
Non-cash investing activity:
Change in unrealized gain/
(losses) on available-for-sale
securities 276,634 (205,635) 2,311,005
Transfer to other real estate
owned 275,342 -- --
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY:
Unrealized
Investment
For the years ended Common Undivided Securities Treasury
Dec. 31, 1997, 1996, 1995 Stock Surplus Profits Gains/(Losses) Stock Total
- ------------------------- ----- ------- ------- -------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $3,360,000 $3,360,000 $14,578,877 $ (875,320) $20,423,557
Net income for the year 2,732,868 2,732,868
Change in unrealized net
gain/(loss) on investment
securities 1,370,826 1,370,826
Cash dividends, $.4333 per share* (873,600) (873,600)
2,016,000 shares**
Balance at December 31,1995 3,360,000 3,360,000 16,438,145 495,506 23,653,651
Net income for the year 2,846,162 2,846,162
Change par value to $1.6667 67 (67)
Change in unrealized net
gain/(loss) on investment
securities (120,738) (120,738)
Cash dividends, $.4966 per share* (1,001,280) (1,001,280)
2,016,000 shares**
Balance at December 31,1996 3,360,067 3,360,000 18,282,960 374,768 25,377,795
Net income for the year 2,619,316 2,619,316
Change in unrealized net
gain/(loss) on investment
securities 165,724 165,724
Treasury stock purchased $(1,119,057) (1,119,057)
Treasury stock sold 8,667 53,361 62,038
Cash dividends, $1.06 per share (2,099,100) (2,099,100)
1,994,240 shares**
Balance at December 31,1997 $3,360,067 $3,360,000 $18,811,853 $540,492 $(1,065,696) $25,006,716
</TABLE>
* Restated to reflect 3-for-1 stock split 3/96.
** Weighted number of shares outstanding during the year.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended Dec. 31, 1997, 1996, 1995
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Cortland First Financial Corporation (the Company) is a
one-bank holding company whose only subsidiary and operating entity, First
National Bank of Cortland (the Bank), delivers commercial banking services from
eight branches in Cortland, Onondaga, and Broome counties.
Principles of Consolidation: The accompanying financial statements include the
accounts of Cortland First Financial Corporation (the Company) and its
wholly-owned subsidiary, First National Bank of Cortland (the Bank).
Intercompany accounts and transactions have been eliminated in consolidation.
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.
Cash and cash equivalents: Cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods.
Accounting For Postretirement Benefits: The Bank provides postretirement medical
and life insurance plans that cover substantially all of its employees. The
plans are non-contributory; however, retiree contributions may be required if
certain age and length of service criteria are not met.
The following sets forth the plan's funded status reconciled with the amounts
reported in the Company's statement of financial position at December 31, for
the combined medical and life insurance plans:
Accumulated postretirement benefit obligation (APBO):
1997 1996
---- ----
Retirees $302,683 $317,024
Fully eligible active plan
participants 173,755 109,686
Other active plan participants 368,409 416,015
Total APBO 844,847 842,725
Plan assets at fair value -- --
Unrecognized net loss/gain 37,141 (7,696)
Accrued postretirement benefit
obligation $881,988 $835,029
Net periodic postretirement
benefit cost included the
following components: 1997 1996 1995
---- ---- ----
Service cost $ 31,728 $ 35,638 $ 31,778
Interest cost 57,273 56,187 53,314
Net periodic postretirement
benefit cost $ 89,001 $ 91,825 $ 85,092
F-6
<PAGE>
A 9.5% annual rate of increase in the per capita costs of covered health care
benefits was assumed for December 31, 1997, gradually decreasing to 5.0% by the
year 2022. Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997, by $126,811 and increase the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost for 1997 by $15,029. A discount rate of 7.25% was used to determine
the accumulated postretirement benefit obligation.
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 about financial instruments, whether or not
recognized in the balance sheet, 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 Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
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: These funds reprice daily and, therefore, current book
value was used as an estimate of fair value.
Off-balance sheet instruments: Off-balance sheet financial instruments consist
of standby letters of credit, with fair value based on fees currently charged to
enter into agreements with similar terms and credit quality.
F-7
<PAGE>
The net approximate carrying amounts and fair values of financial instruments
are as follows:
<TABLE>
<CAPTION>
(In Thousands)
Dec. 31, 1997 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1996
Financial Assets: Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 11,239 $ 11,239 $ 15,400 $ 15,400
Investment securities 88,256 88,301 84,128 84,141
Loans 113,172 ---- 113,632 ----
Allowances for loan losses (1,240) ---- (1,271) ----
Net Loans 111,932 112,791 112,361 111,070
Total Financial Assets $211,427 $212,331 $211,889 $210,611
Financial Liabilities:
Deposits $192,210 $181,365 $191,838 $187,665
Total Financial Liabilities $192,210 $181,365 $191,838 $187,665
</TABLE>
The fair value of off-balance sheet financial instruments, principally standby
letters of credit, is not significant.
Trust Assets: Property (other than cash deposits) held by the Bank in fiduciary
or agency capacities for its customers is not included in the accompanying
balance sheets, since such items are not assets of the Bank.
Investment Securities: The Bank classifies its investments in debt securities as
held-to-maturity or available-for-sale. Held-to-maturity securities are those
for which the Bank has the positive intent and ability to hold to maturity, and
are reported at cost, adjusted for amortization of premiums and accretion of
discounts. Debt securities not classified as held-to-maturity are classified as
available-for-sale and reported at fair value, with net unrealized gains and
losses reflected as a separate component of shareholders' equity, net of the
applicable income tax effect. None of the Bank's investment securities are
classified as trading securities.
Purchases and sales of investment securities are recorded as of settlement date;
gains and losses on the sale of securities are based on identification of
specific securities. Premiums and discounts on securities are amortized and
accreted into income using the interest method over the period of maturity.
Fees on Loans: Loan origination fees and certain direct loan origination costs
are deferred and the net amount is amortized as a yield adjustment. The Bank is
generally amortizing these amounts over the contractual life of the related
loans. However, for fixed-rate mortgage loans that are generally made for a
20-year term, the Bank has anticipated prepayments and used an estimated life of
7.5 years.
F-8
<PAGE>
Interest on Loans: 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 principal or interest is doubtful, at
which time the accrual of interest on the loan is discontinued.
Allowance for Possible Loan Losses: The allowance for possible loan losses is
maintained at a level considered adequate to provide for potential loan losses.
The allowance is increased by provisions charged to operating expenses and
reduced by net charge-offs. The level of the allowance is based on management's
evaluation of potential losses in the loan portfolio, as well as prevailing
economic conditions. Substantially all of the Bank's borrowers are concentrated
within Cortland and adjacent counties.
Bank Premises, Furniture and Equipment: Bank premises, furniture and equipment
are stated at cost less accumulated depreciation. Annual provisions for
depreciation are computed by the straight-line or declining balance methods over
the estimated useful lives of the assets. Repairs and maintenance are charged to
expenses as incurred, whereas capital additions and betterments are capitalized.
Other Real Estate: Other real estate is comprised of property acquired through
foreclosure and is carried at the lower of the recorded investment in the loan
or fair value less estimated disposal costs.
Income Taxes: Income tax expense consists of currently payable and deferred
income taxes which are based upon temporary differences between financial
accounting and tax bases of assets and liabilities as measured by tax rates
which are anticipated to be in effect when these differences are reversed. The
deferred tax provision is the result of the net change in the deferred tax
assets and liabilities.
Reclassification: Certain amounts from 1996 and 1995 have been reclassified to
conform to the current year presentation.
Retirement Benefits: The Bank has a defined contribution pension plan,
administered by its Trust Department, for all eligible employees. Contributions
to the plan are determined based upon percentages of compensation for eligible
employees and are funded as accrued. Pension expense for 1997, 1996, and 1995
was $123,273, $109,295, and $128,129, respectively.
The Bank also has a defined contribution 401(k) savings plan, administered
by its Trust Department, for all eligible employees. Contributions to the plan
are determined by the Board of Directors, at its discretion, and are funded as
accrued. Up to certain limitations, employees may also contribute to this plan.
Expense under this plan was $106,309 in 1997, $98,072 in 1996, and $94,752 in
1995.
The Bank maintains a supplemental retirement plan for its President and
Chief Executive Officer. The Bank has segregated assets, which are managed by
its Trust Department, to fund the estimated benefit liability upon retirement.
Plan expense of $74,484, $59,547, and $80,213 was recognized for the years ended
December 31, 1997, 1996, and 1995, respectively.
Stock Split: During March 1996, the Company effected a three-for-one stock split
through the issuance of two additional shares of $1.6667 par value common stock
for every share then outstanding.
Per-Share Amounts: Earnings per share are computed on the basis of weighted
average shares outstanding, retroactively adjusted for the stock split
(1,994,240 for 1997, and 2,016,000 for 1996 and 1995). Cash dividends per share
are based on declared rates. The Bank adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," in 1997, which had no effect on
quarterly or annual earnings per share as previously reported.
F-9
<PAGE>
INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Amortized Gross Unreal- Gross Unreal- Estimated
Cost ized Gains ized Losses Fair Value
---- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Held-to-Maturity Portfolio - 1997
U.S. Treasury securities and
obligations of U.S. government
corporation and agencies $ 999,335 $ 5,351 $ --- $ 1,004,686
Obligations of states and
political subdivisions 1,435,439 39,477 129 1,474,787
Totals $ 2,434,774 $ 44,828 $ 129 $ 2,479,473
Available-for-Sale Portfolio - 1997
U.S. Treasury securities and
obligations of U.S. government
corporation and agencies $35,599,563 $ 201,663 $ 51,205 $35,750,021
Obligations of states and
political subdivisions 27,683,436 613,682 22,602 28,274,516
Other debt securities 865,175 ---- ---- 865,175
Mortgage-backed securities 20,771,132 194,886 34,248 20,931,770
Totals 84,919,306 1,010,231 108,055 85,821,482
Grand total $87,354,080 $1,055,059 $ 108,184 $88,300,955
Held-to-Maturity Portfolio - 1996
Obligations of states and
political subdivisions $ 2,377,788 $ 13,818 $ 825 $ 2,390,781
Totals $ 2,377,788 $ 13,818 $ 825 $ 2,390,781
Available-for-Sale Portfolio - 1996
U.S. Treasury securities and
obligations of U.S. government
corporation and agencies $41,851,768 $ 311,468 $ 75,560 $42,087,676
Obligations of states and
political subdivisions 24,566,311 439,691 94,234 24,911,768
Other debt securities 819,475 ---- ---- 819,475
Mortgage-backed securities 13,887,486 124,796 80,620 13,931,662
Totals 81,125,040 875,955 250,414 81,750,581
Grand total $83,502,828 $ 889,773 $ 251,239 $84,141,362
</TABLE>
F-10
<PAGE>
At December 31, 1997, securities having a book value of $42,797,610 were pledged
to collaterize public fund deposits as required by law. The amortized cost and
estimated market value of debt securities at December 31, 1997, by contractual
maturity, are shown in the following section. 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>
Held-to-Maturity Portfolio Available-for-Sale Portfolio
Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
-------------- -------------------- -------------- --------------------
<S> <C> <C> <C> <C>
Due in one year $ 99,813 $ 99,880 $ 8,115,141 $ 8,139,812
Due after one year
through five years 1,405,344 1,414,818 45,116,750 45,600,779
Due after five years
through ten years 929,617 964,775 22,022,496 22,308,269
Due after ten years -- -- 9,664,919 9,772,622
Total $ 2,434,774 $ 2,479,473 $84,919,306 $85,821,482
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the loan loss allowance during the years ended December 31, 1997,
1996 and 1995 are summarized as follows:
1997 1996 1995
---- ---- ----
Balance at January 1 $ 1,270,798 $ 1,175,959 $ 1,225,737
Provision for the year 390,000 283,000 300,000
Recoveries on loans 57,124 73,363 63,140
Subtotal 1,717,922 1,532,322 1,588,877
Less: Loans charged off 477,734 261,524 412,918
Balance at December 31 $ 1,240,188 $ 1,270,798 $ 1,175,959
As of December 31, 1997 and 1996, the Bank had no impaired loans for which
significant specific valuation allowances were recorded.
BANK PREMISES, FURNITURE AND EQUIPMENT
Bank premises, furniture and equipment are comprised of the following:
1997 1996
---- ----
Land $ 527,409 $ 506,975
Bank premises 3,758,466 3,446,314
Furniture and equipment 3,648,482 3,290,199
Subtotal 7,934,357 7,243,488
Less: Accumulated depreciation 4,171,767 3,603,172
Total $3,762,590 $3,640,316
F-11
<PAGE>
COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The Bank 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 balance sheet. The contract
amount of those commitments and letters of credit reflects the extent of
involvement the Bank has in those particular classes of financial instruments.
The Bank'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 Bank 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
1997 1996
---- ----
Commitments to extend credit $18,254,740 $17,169,306
Standby letters of credit $ 1,424,140 $ 1,003,814
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
Bank 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 Bank 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, 1997,
aggregate future minimum lease payments under non-cancelable operating leases
with initial or remaining terms equal to or exceeding one year consist of the
following: 1998 - $69,620; 1999 - $46,000; 2000- $46,000; 2001 - $46,000; 2002 -
$31,000; and $7,000 thereafter. Total rental expense amounted to $68,120 in
1997; $51,620 in 1996, and $51,620 in 1995.
The Bank is subject to legal limitation on the amount of dividends that can
be paid to the Company. Dividends are limited to retained net profits, as
defined. At December 31, 1997, approximately $4,200,000 was available for the
declaration of dividends by the Bank.
F-12
<PAGE>
INCOME TAXES
The income tax provision for 1997, 1996, and 1995 is summarized as follows:
1997 1996 1995
---- ---- ----
Currently payable $ 939,290 $ 1,217,605 $ 1,073,402
Deferred (credit) (19,492) (89,805) 15,198
Total $ 919,798 $ 1,127,800 $ 1,088,600
The provision for income taxes includes the following:
1997 1996 1995
---- ---- ----
Federal income tax $ 671,170 $ 837,100 $ 798,900
New York State
franchise tax 248,628 290,700 289,700
Total $ 919,798 $ 1,127,800 $ 1,088,600
The components of deferred income taxes at December 31, 1997 and 1996 are as
follows:
1997 1996
---- ----
Assets:
Allowance for possible loan losses $ 244,760 $ 257,024
Postretirement benefits 353,590 334,751
Deferred compensation 218,722 163,566
Other 8,688 29,734
Total Assets $ 825,760 $ 785,075
Liabilities:
Investment securities $ 361,682 $ 250,773
Accretion 67,911 55,952
Total Liabilities $ 429,593 $ 306,725
A reconciliation between the statutory federal income tax rate and the effective
income tax rate for 1997, 1996, and 1995 is as follows:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State franchise tax, net of
federal tax benefit 4.6 4.8 5.0
Tax exempt income (12.7) (11.7) (10.1)
Other, net .1 1.3 (.4)
Total 26.0% 28.4% 28.5%
RELATED PARTY TRANSACTIONS
Directors and executive officers of the Bank and their affiliated companies were
customers of, and had other transactions with, the Bank in the ordinary course
of business during 1997. It is the Bank'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:
Balance at December 31, 1996 $ 4,182,612
New loans and advances 358,455
Loan payments (1,962,231)
Balance at December 31, 1997 $ 2,578,836
F-13
<PAGE>
LINES OF CREDIT
At December 31, 1997, the Bank had available lines of credit totaling
$21,906,900 which were unused.
REGULATORY MATTERS
The Bank is 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 Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank'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 Bank to maintain minimum amounts and ratios (set forth in the table
below) and Tier 1 capital (as defined in the regulations)to risk-weighted
assets. Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the Bank believes it is well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk-
Weighted Assets) $25,706,412 21.02% $ 9,425,931 >=8.0% $11,782,414 >=10.0%
Tier 1 Capital (to Risk-
Weighted Assets) 24,466,224 20.77% 4,712,966 >=4.0% 7,069,448 >= 6.0%
Tier 1 Capital (to
Average Assets) 24,466,224 11.11% 8,810,187 >=4.0% 11,012,733 >= 5.0%
As of December 31, 1996
Total Capital (to Risk-
Weighted Assets) $26,273,825 23.98% $ 8,765,774 >=8.0% $10,957,217 >=10.0%
Tier 1 Capital (to Risk-
Weighted Assets) 25,003,027 22.82% 4,382,887 >=4.0% 6,574,330 >= 6.0%
Tier 1 Capital (to
Average Assets) 25,003,027 11.46% 8,724,279 >=4.0% 10,905,250 >= 5.0%
</TABLE>
F-14
<PAGE>
PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statement information of Cortland First Financial
Corporation is as follows:
Balance Sheet Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Assets
Investment in subsidiary bank $ 24,939,766 $ 25,375,097
Cash 41,950 2,698
Other assets 25,000 --
Total Assets $ 25,006,716 $ 25,377,795
Shareholders' Equity
Common Stock $ 3,360,067 $ 3,360,067
Surplus 3,360,000 3,360,000
Undivided profits 18,811,853 18,282,960
Unrealized net gains on
investment securities 540,492 374,768
Treasury stock (1,065,696) --
Total Shareholders' Equity $ 25,006,716 $ 25,377,795
Statement of Income Year ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
Dividend income from
subsidiary bank $ 3,276,205 $ 1,071,280 $ 903,600
Operating expenses (55,834) (68,745) (32,530)
3,220,371 1,002,535 871,070
Equity in undistributed
income of subsidiary (601,055) 1,843,627 1,861,798
Net Income $ 2,619,316 $ 2,846,162 $ 2,732,868
Statement of Cash Flows Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
Operating Activities:
Net Income $ 2,619,316 $ 2,846,162 $ 2,732,868
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
net income of
subsidiary (601,055) (1,843,627) (1,861,798)
Increase in other assets (25,000) -- --
Net Cash Provided by
Operating Activities 3,195,371 1,002,535 871,070
Financing Activities:
Treasury stock purchased (1,119,057) -- --
Cash dividends paid (2,099,100) (1,001,280) (873,600)
Treasury stock sold 62,038 -- --
Net Cash Used by
Financing Activities (3,156,119) (1,001,280) (873,600)
Increase (Decrease) in
Cash and Cash
Equivalents 39,252 1,255 (2,530)
Cash and Cash Equivalents
at Beginning of year 2,698 1,443 3,973
Cash and Cash Equivalents
at End of Year $ 41,950 $ 2,698 1,443
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cortland First Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Cortland First
Financial Corporation and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cortland First
Financial Corporation and Subsidiary at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, LLP
Syracuse, New York
January 16, 1998
F-16
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(000's Omitted)
December 31,
June 30, 1998 1997
(Unaudited) (Note)
ASSETS
Cash and Due From Banks $ 12,771 $ 10,139
Federal Funds Sold 11,300 1,100
--------- ---------
Total Cash and Cash Equivalents 24,071 11,239
Investment Securities
Held to Maturity 2,408 2,435
Available for Sale 85,869 85,821
--------- ---------
Total Investment Securities
(Fair Value 88,316 & 88,301, respectively) 88,277 88,256
Loans (Net of Unearned Discount of
(2,663 & 3,072) 114,995 113,173
Allowance for Possible Loan Losses (1,268) (1,240)
--------- ---------
Net Loans 113,727 111,933
Bank Premises, Furniture, and Equipment 3,345 3,516
Other Real Estate 275 275
Other Assets 3,871 4,150
--------- ---------
TOTAL ASSETS $ 233,566 $ 219,369
========= =========
LIABILITIES
Non-Interest Bearing Deposits $ 27,639 24,509
Interest Bearing Deposits 178,317 167,701
--------- ---------
Total Deposits 205,956 192,210
Accrued Int, Taxes, & Other Liabilities 1,199 1,271
Accrued Post-Retirement Benefits 928 882
--------- ---------
TOTAL LIABILITIES 208,083 194,363
SHAREHOLDERS' EQUITY
Common Stock (par value $1.6667)
2,016,000 shares issued;
1,969,776 shares outstanding 3,360 3,360
Surplus 3,360 3,360
Undivided Profits 19,383 18,812
Accumulated other comprehensive income 446 540
Treasury Stock, at cost; 46,224 shares (1,066) (1,066)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 25,483 25,006
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 233,566 $ 219,369
========= =========
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
CORTLAND FIRST FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(000's Omitted)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income:
Interest & fees on loans $ 2,630 $ 2,578 $ 5,148 $ 5,119
Interest on investment securities 1,220 1,412 2,497 2,687
Interest on Federal Funds sold 100 78 191 182
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME $ 3,950 $ 4,068 $ 7,836 $ 7,988
Interest Expense:
Interest on deposits 1,621 1,675 3,235 3,259
---------- ---------- ---------- ----------
NET INTEREST INCOME $ 2,329 $ 2,393 $ 4,601 $ 4,729
Provision for loan losses 50 105 125 180
---------- ---------- ---------- ----------
INTEREST INCOME AFTER PROV
FOR LOSSES $ 2,279 $ 2,288 $ 4,476 $ 4,549
Other Income 431 369 870 764
---------- ---------- ---------- ----------
TOTAL OPERATING INCOME $ 2,710 $ 2,657 $ 5,346 $ 5,313
Non-interest expenses 1,974 1,802 3,857 3,573
---------- ---------- ---------- ----------
INCOME BEFORE INC TAXES $ 736 $ 855 $ 1,489 $ 1,740
Income Taxes 180 238 366 464
---------- ---------- ---------- ----------
NET INCOME $ 556 $ 617 $ 1,123 $ 1,276
========== ========== ========== ==========
Net Income per Common Share $ .28 $ .31 $ .57 $ .63
========== ========== ========== ==========
Weighted average shares
outstanding 1,969,776 2,016,000 1,969,776 2,016,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
(000's Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Six Months Ended Common Undivided Comprehensive Treasury
June 30, 1998 and 1997 Stock Surplus Profits Income Stock Total
- ---------------------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 3,360 $ 3,360 $18,283 $ 375 -- $25,378
Net Income 1,276 1,276
Cash Dividend Declared (564) (564)
Net Unrealized Gains on
Securities (171) (171)
------- ------- ------- ------- ---------- -------
Balance at June 30, 1997 $ 3,360 $ 3,360 $18,995 $ 204 -- $25,919
======= ======= ======= ======= ========== =======
Balance at December 31, 1997 $ 3,360 $ 3,360 $18,812 $ 540 $ (1,066) $25,006
Net Income 1,123 1,123
Cash Dividend Declared (552) (552)
Net Unrealized Gains on
Securities (94) (94)
------- ------- ------- ------- ---------- -------
Balance at June 30, 1998 $ 3,360 $ 3,360 $19,383 $ 446 $ (1,066) $25,483
======= ======= ======= ======= ========== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income
(000's Omitted)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net Income $ 556 $ 617 $ 1,123 $ 1,276
Other Comprehensive Income
net of taxes: Unrealized net
gain (loss) on securities (95) 378 (94) (171)
------- ------- ------- -------
Comprehensive Income $ 461 $ 995 $ 1,029 $ 1,105
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
Consolidated Statements of Cash Flow
(000's OMITTED)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,123 $ 1,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 125 180
Provision for depreciation 218 222
Provision (Benefit) for deferred income taxes 64 (64)
Amortization of investment security premiums, net 114 153
Decrease in interest receivable (69) (107)
Decrease (Increase) in other assets 347 (159)
Decrease in interest payable (1) (8)
(Decrease) Increase in other liabilities (24) 187
Loss on disposal of fixed assets -- 3
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,897 1,683
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 14,813 10,570
Purchase of investment securities (15,106) (20,652)
Net (increase) decrease in loans (1,919) 429
Purchase of premises and equipment, net (47) (449)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (2,259) (10,102)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW & savings 14,409 4,143
Net (decrease) increase of certificates of deposits (663) 1,451
Cash dividends (552) (564)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,194 5,030
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,832 (3,389)
Cash and cash equivalents at beginning of year 11,239 15,400
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,071 $ 12,011
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and short term borrowings $ 3,236 $ 3,267
Income taxes 325 514
Non Cash Investing Activities:
Change in net unrealized losses on investment securities (158) (285)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. The foregoing financial statements are unaudited; however, in the opinion
of Management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of the Corporation's significant accounting policies is
set forth in Note 1 to the Consolidated Financial Statements in the
Corporation's Annual Report to Shareholders on Form 10-K, for the year
ended December 31, 1997. The balance sheet at December 31, 1997, has been
derived from the audited financial statements at that date.
B. On July 13, 1998 the Company announced that they had agreed to merge with
Oneida Valley Bancshares, Inc. to create an independent bank holding
company named Alliance Financial Corporation to serve the community banking
market of Central New York State. The Bank and Oneida Valley National Bank
will also merge, taking the name Alliance Bank, N.A. The merger is expected
to close in the fourth quarter of 1998, subject to the approval of the
shareholders of both companies, as well as regulatory approvals. The
combined market will cover the Central New York region and will allow the
new company to offer its customers enhanced products and services through
its 16 branches located in Cortland, Broome, Madison, Onondaga, and Oneida
Counties.
C. Effective January 1, 1998, the Bank adopted Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." This
pronouncement requires the Bank to report the effects of unrealized
investment holding gains or losses on comprehensive income.
D. In June of 1998, the Financial Accounting Standards Account Board (FASB)
issued FAS No. 133. This statement requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. This statement is effective for
all fiscal quarters of fiscal year beginning after June 30, 1999. Since the
Company does not have any derivative instruments or hedges, management
believes there will be no effect on the Company.
E. Investment Securities
June 30, 1998
(000's Omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $32,669 $ 999
Obligations of State & Political
subdivisions 29,810 1,409
Other debt securities 3,961 0
Mortgage backed securities 19,429 0
------- -------
TOTAL INVESTMENT SECURITIES $85,869 $ 2,408
======= =======
December 31, 1997
(000's Omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $35,750 $ 999
Obligations of State & Political
subdivisions 28,274 1,436
Other debt securities 865 0
Mortgage backed securities 20,932 0
------- -------
TOTAL INVESTMENT SECURITIES $85,821 $ 2,435
======= =======
F. Allowance for Possible Loan Loss
June 30, 1998 June 30, 1997
(000's Omitted)
Balance at January 1 $ 1,240 $ 1,271
Provision for the period 125 180
Recoveries on loans 37 43
------- -------
Sub Total 1,402 1,494
Less loans charged off (134) (272)
------- -------
Balance at June 30, $ 1,268 $ 1,222
======= =======
The appropriateness of the allowance for loan losses is determined by
quarterly detailed review of the loan portfolio.
F-22
<PAGE>
1997 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
ONEIDA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1997 and 1996
(Thousands of Dollars)
1997 1996
ASSETS
Cash and cash equivalents
Cash and due from banks $9,750 $10,956
Federal funds sold 0 1,800
-----------------------
Total cash and cash equivalents 9,750 12,756
Investment securities 63,745 61,127
Loans 137,621 130,031
Less: Allowance for possible loan losses 1,717 1,754
Less: Unearned income 15 35
-----------------------
Net loans 135,889 128,242
Bank premises and equipment 5,192 4,607
Other assets 2,923 2,506
-----------------------
TOTAL ASSETS $217,499 $209,238
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-Interest Bearing $28,649 $30,048
Interest Bearing 157,068 150,702
-----------------------
Total deposits 185,717 180,750
Short-term borrowings 4,008 839
Accrued taxes and other liabilities 3,031 2,850
-----------------------
Total liabilities 192,756 184,439
-----------------------
Stockholders' equity
Common stock, par value $2.50 per share;
2,000,000 shares authorized, 964,740 issued 2,412 2,412
Surplus 2,412 2,412
Undivided profits 22,003 20,589
Unrealized holding gain (loss) on securities, net 66 (88)
Treasury stock, at cost: 59,461 and 15,000 shares (2,150) (526)
-----------------------
Total stockholders' equity 24,743 24,799
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $217,499 $209,238
=======================
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
1997 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (Con't)
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $11,845 $11,338 $10,961
Interest and dividends on investment securities:
U.S. government agency obligations 2,960 3,059 3,221
State and municipal obligations 403 424 394
Other 373 362 413
Interest on federal funds sold and balances with banks 225 201 236
----------------------------
Total interest income 15,806 15,384 15,225
----------------------------
INTEREST EXPENSE Interest on deposits:
Regular savings, NOW, money market 2,288 2,148 2,419
Time deposits 4,090 3,784 3,632
Interest on short term borrowings 75 42 114
----------------------------
Total interest expense 6,453 5,974 6,165
----------------------------
Net interest income 9,353 9,410 9,060
PROVISION FOR POSSIBLE LOAN LOSSES 235 350 175
----------------------------
Net interest income after provision for possible
loan losses 9,118 9,060 8,885
----------------------------
OTHER OPERATING INCOME
Trust Department income 353 300 251
Service charges on deposit accounts 861 793 753
Computer service 244 239 202
Other 631 532 516
----------------------------
Total other operating income 2,089 1,864 1,722
----------------------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 4,297 4,070 3,848
Net occupancy expense of bank premises 585 544 523
Furniture and equipment expense 528 620 595
Printing stationery and supplies 192 212 208
FDIC insurance expense 28 2 202
Other 1,763 1,662 1,505
----------------------------
Total other operating expense 7,393 7,110 6,881
----------------------------
Income before income taxes 3,814 3,814 3,726
APPLICABLE INCOME TAXES 1,300 1,306 1,321
----------------------------
NET INCOME $2,514 $2,508 $2,405
============================
BASIC EARNINGS PER COMMON SHARE $2.72 $2.63 $2.49
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
1997 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (Con't)
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unrealized holding Treasury
Common Surplus Undivided Gain (loss) on Stock At Total
Stock Profits Securities, net Cost
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $2,412 $2,412 $17,802 ($1,585) $21,041
Net income - 1995 2,405 2,405
Dividends ($1.08 per share) (1,042) (1,042)
Changes in unrealized holding
gain (loss) on securities, net 1,484 1,484
-----------------------------------------------------------------------------
Balance at December 31, 1995 $2,412 $2,412 $19,165 ($101) $23,888
Net income - 1996 2,508 2,508
Dividends ($1.14 per share) (1,084) (1,084)
Changes in unrealized holding
gain on securities, net 13 13
Treasury stock transactions
15,000 shares (526) (526)
-----------------------------------------------------------------------------
Balance at December 31, 1996 $2,412 $2,412 $20,589 ($88) ($526) $24,799
Net income - 1997 2,514 2,514
Dividends ($1.20 per share) (1,100) (1,100)
Changes in unrealized holding
gain on securities, net 154 154
Treasury stock transactions
44,461 shares (1,624) (1,624)
-----------------------------------------------------------------------------
Balance at December 31, 1997 $2,412 $2,412 $22,003 $66 ($2,150) $24,743
=============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
1997 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (Con't)
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,514 $2,508 $2,405
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 468 460 505
Provision for possible loan losses 235 350 175
Provision for deferred taxes (50) 9 57
Loss on sale of securities 0 4 (6)
Amortization of bond premium, net 32 (3) 23
Changes in other assets and liabilities: (245) 452 (86)
----------------------------------------------
Net cash provided by operating activities 2,954 3,780 3,073
----------------------------------------------
Cash flows from investing activities:
Proceeds from investment activities 18,705 13,692 16,593
Purchase of investment securities (21,122) (7,905) (15,170)
Net increase in loans (7,882) (8,506) (4,131)
Capital expenditures (1,053) (736) (334)
----------------------------------------------
Net cash used in investing activities (11,352) (3,455) (3,042)
----------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits (1,399) 688 3,054
Net increase (decrease) in Regular savings, NOW, Money Market 2,613 (4,877) (10,204)
Net increase in Certificates of deposit 3,753 3,009 12,892
Net increase (decrease) in short term borrowings 3,169 314 (581)
Purchases of treasury stock (1,624) (526) 0
Dividends paid (1,120) (1,062) (1,042)
----------------------------------------------
Net cash provided by (used in) financing activities 5,392 (2,454) 4,119
----------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,006) (2,129) 4,150
Cash and cash equivalents at beginning of year 12,756 14,885 10,735
----------------------------------------------
Cash and cash equivalents at end of year $9,750 $12,756 $14,885
==============================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $6,333 $6,306 $6,050
Income taxes $1,330 $1,229 $1,226
Non-cash investing activity:
Unrealized gains on investment securities, net $233 $20 $2,248
Non-cash financing activity:
Dividends declared and unpaid $407 $427 $405
</TABLE>
Included in proceeds from investment securities is $10,106, $9,931, and $7,678
of proceeds resulting from maturities and principal payments of securities
designated as held to maturity for 1997, 1996, and 1995, respectively.
Investment securities purchased includes $3,481, $3,223, and $11,512 for
purchases of held-to-maturity securities for 1997, 1996, and 1995, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
ONEIDA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Oneida Valley Bancshares, Inc. (the Company) is a one-bank holding company
whose only subsidiary and operating entity, Oneida Valley National Bank
(the Bank), delivers commercial banking services from nine branches in
Madison, Oneida, and Onondaga counties.
Basis of Presentation
The consolidated financial statements of the Oneida Valley Bancshares, Inc.
and subsidiary, The Oneida Valley National Bank, conform to generally
accepted accounting principles and general banking practices prescribed by
the Comptroller of the Currency. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary after elimination of inter-company 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
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments and in
determining the unrealized holding gain or loss on securities:
Cash and Cash Equivalents: The carrying amount reported in the balance
sheet for cash and short term instruments approximate those assets' fair
values.
Investment Securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair value for all other loans is estimated using discounted
cash flow analysis, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
value of accrued interest approximates its fair value.
Deposit Liabilities: The fair values disclosed for non-interest bearing
accounts, and accounts with no stated maturity date, 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
F-27
<PAGE>
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 values.
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 investment securities are based on the specific
identification method.
Loans
Loans are reported at their principal outstanding balance net of
charge-offs and unearned income. Interest income is generally recognized
when income is earned using the interest method. Loan origination fees and
certain loan origination costs are deferred and the net amounts are
amortized as adjustments of the loans' yields.
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 rats 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 principle 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
F-28
<PAGE>
future collectibility of the recorded loan balance is doubtful, collections
of interest and principal are generally applied as a reduction to principal
outstanding.
Bank Premises and Equipment
Bank premises 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 income.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes). FAS
109 requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding throughout each year
(925,930, 952,919, and 964,740 for 1997, 1996, and 1995, respectively).
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" in 1997, which had no affect on quarterly or
annual earnings as previously reported.
Retirement Benefit Plans
The Company has contributory and non-contributory benefit plans covering
substantially all employees. The majority of the employees are covered by a
defined benefit plan, with benefits based upon an employee's years of
service and average final salary.
Additionally, the Company provides certain medical and life insurance
postretirement benefits.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Accounting Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income" effective 1998. This
statement will require the Company to report comprehensive income.
Comprehensive income is determined by adding unrealized investment holding
gains or losses during the period to net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement requires companies
to disclose financial and descriptive information about its reportable
business segments. Management believes the Company only operates in one
segment, which is the banking segment. Therefore, disclosures required
under this pronouncement will not affect the financial statements of the
Company.
F-29
<PAGE>
2. INVESTMENT SECURITIES
As discussed in Note 1, the amortized cost and approximate fair value of
investment securities at December 31, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated Carrying
Cost Unrealized Unrealized Fair Value Value
1997 Gains Losses
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and other U.S.
government agencies $10,934 $26 $16 $10,944 $10,944
Mortgage-backed securities 24,693 193 111 24,775 24,775
States and political subdivisions 446 0 0 446 446
Other securities 1,571 8 0 1,579 1,579
----------------------------------------------------------------------
Total 37,644 227 127 37,744 37,744
----------------------------------------------------------------------
HELD TO MATURITY
U.S. Treasury and other U.S.
government agencies 9,029 53 10 9,072 9,029
Mortgage-backed securities 6,070 53 19 6,104 6,070
States and political subdivisions 8,386 190 0 8,576 8,386
Other securities 2,516 25 3 2,538 2,516
----------------------------------------------------------------------
Total 26,001 321 32 26,290 26,001
----------------------------------------------------------------------
Total investment securities $63,645 $548 $159 $64,034 $63,745
======================================================================
1996
AVAILABLE FOR SALE
U.S. Treasury and other U.S.
government agencies $9,660 $26 $38 $9,648 $9,648
Mortgage-backed securities 22,737 132 275 22,612 22,612
Other securities 1,563 4 0 1,567 1,567
----------------------------------------------------------------------
Total 33,960 162 295 33,827 33,827
----------------------------------------------------------------------
HELD TO MATURITY
U.S. Treasury and other U.S.
government agencies 10,074 31 37 10,068 10,074
Mortgage-backed securities 6,296 52 69 6,279 6,296
States and political subdivisions 8,983 135 26 9,092 8,983
Other securities 1,947 3 15 1,935 1,947
----------------------------------------------------------------------
Total 27,300 221 147 27,374 27,300
----------------------------------------------------------------------
Total investment securities $61,260 $383 $442 $61,201 $61,127
======================================================================
</TABLE>
The carrying value and estimated market value of debt securities at
December 31, 1997, 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.
F-30
<PAGE>
<TABLE>
<CAPTION>
Available for sale Held to maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $8,815 $8,810 $2,548 $2,554
Due after one year through five years 21,069 21,151 20,037 20,237
Due after five years through ten years 5,986 6,063 3,281 3,364
Due after ten years 1,774 1,720 135 135
--------------------------------------------------------------
Total investment securities $37,644 $37,744 $26,001 $26,290
--------------------------------------------------------------
</TABLE>
At December 31, 1997, and 1996, investment securities carried at $47,544
and $47,616, respectively, were pledged as collateral for certain deposits
and other purposes as required or permitted by law. Included in States and
political subdivisions at December 31, 1997 and 1996 are $1,397 and $357,
respectively, of securities of New York State and its agencies.
3. LOANS
Major classifications of loans at December 31, are as follows:
1997 1996
Commercial, financial and agricultural $35,985 $29,976
Real estate mortgage fixed rate 48,953 50,167
Real estate mortgage variable rate 15,891 16,011
Consumer 35,668 32,713
Credit card 1,124 1,164
--------------------------
Total 137,621 130,031
--------------------------
Less: Allowance for possible loan losses 1,717 1,754
Less: Unearned income 15 35
--------------------------
Net loans $135,889 $128,242
==========================
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 $7,637 and $4,700 at December 31,
1997 and 1996, respectively.
F-31
<PAGE>
PAST DUE AND NONACCRUAL LOANS
Loans past due 90 days or more and nonaccrual loans consisted of the
following at December 31:
1997 1996
Loans past due 90 days or more
Commercial, financial and agricultural $479 $150
Real estate mortgage 419 216
Consumer 200 157
Credit card 6 11
--------------------
Total 1,104 534
--------------------
Nonaccrual loans
Commercial, financial and agricultural 137 102
Real estate mortgage 119 136
Consumer 37 67
Credit card 0 0
--------------------
Total 293 305
--------------------
Total past due and nonaccrual loans $1,397 $839
====================
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the Allowance for Possible Loan Losses for the years ended
December 31 are presented in the following summary:
1997 1996 1995
----------------------------------
Balance at beginning of year $1,754 $1,691 $1,610
Recoveries credited 57 54 56
Provision for possible loan losses 235 350 175
Loans charged-off (329) (341) (150)
----------------------------------
Balance at end of year 1,717 1,754 1,691
==================================
For the years ended December 31, 1997, and 1996, the average recorded
investment in impaired loans did not exceed $500 and $250, respectively.
None of these loans had a specific valuation allowance recorded. The
Company recognized no interest income on impaired loans during 1997 and
1996.
F-32
<PAGE>
5. LOANS TO RELATED PARTIES
At December 31, the subsidiary Bank had loans to directors and executive
officers of the Company and its subsidiary, and to entities in which they
owned or controlled 10% or more of the voting stock as follows:
1997 1996
---------------
Balance at beginning of year $829 $935
New loans and advances 259 72
Loan payments (264) (178)
---------------
Balance at end of year $824 $829
===============
6. BANK PREMISES
Bank premises and equipment at December 31, consist of the following:
1997 1996
----------------------
Land $386 $386
Premises 4,802 4,558
Equipment 4,602 3,793
----------------------
9,790 8,737
Less: Accumulated depreciation 4,598 4,130
----------------------
Balance at end of year $5,192 $4,607
======================
Depreciation expense was $468 and $460 for 1997 and 1996.
7. DEPOSITS
The carrying amounts of deposits consisted of the following at December 31:
1997 1996
Non-interest bearing checking $28,649 $30,048
Interest bearing checking 22,108 19,638
Savings accounts 35,947 39,558
Money market accounts 20,949 17,195
Time certificates of deposit 78,064 74,311
---------------------------
Total deposits $185,717 $180,750
===========================
F-33
<PAGE>
The following table indicates the maturities of the Company's time deposits
at December 31:
1997 1996
Due in one year $61,150 $52,508
Due in two years 9,060 13,824
Due in three years 6,559 4,422
Due in four years 825 2,675
Due in five years or more 470 882
--------------------------
$78,064 $74,311
==========================
Total time deposits in excess of $100 thousand as of December 31, 1997 and
1996 were $27,259 and $26,820, respectively.
8. BORROWINGS
The following is a summary of borrowings at December 31:
<TABLE>
<CAPTION>
1997 1996
Amount Rate Original Amount Rate Original
Term Term
<S> <C> <C> <C> <C> <C> <C>
Short-term borrowings:
Treasury Tax and Loan $1,108 5.20% Demand $839 6.00% Demand
Federal Home Loan Bank advances 1,000 5.87% Six months 0
Securities sold under repurchase agreements 1,000 5.88% One year 0
Federal funds purchased 900 6.63% Overnight 0
---------- ----------
$4,008 $839
========== ==========
</TABLE>
Information related to short-term borrowings at December 31 is as follows:
1997 1996
Maximum outstanding at any month end $4,008 $1,307
Average amount outstanding during the year $1,377 $951
Average interest rate during the year 5.47% 4.42%
Average amounts outstanding and average interest rates are computed using
monthly averages.
At December 31, 1997 and 1996, the Bank had available a line of credit with
the Federal Home Loan Bank of New York of $10,600 and $10,000,
respectively, $1,900 and $0 of which was outstanding as of December 31,
1997 and 1996, respectively.
At December 31, 1997 and 1996, the Bank also had available a $2,500 line of
credit with another financial institution which was unused.
F-34
<PAGE>
9. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Current portion:
Federal $1,011 $1,019 $967
State 278 278 297
----------------------------
Total current 1,289 1,297 1,264
Deferred portion 11 9 57
----------------------------
Total consolidated provision for income taxes $1,300 $1,306 $1,321
============================
</TABLE>
A reconciliation of the statutory rate to the effective income tax rate for
the years ended December 31 is as follows:
1997 1996 1995
----------------------------
Statutory federal income tax rate
Variances from statutory rate: 34% 34% 34%
State income tax
net of federal tax benefit 5 5 5
Tax exempt income (5) (4) (4)
----------------------------
Effective tax rate 34% 35% 35%
============================
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
Deferred tax
Assets (liabilities)
1997 1996
-------------------
Allowance for possible loan losses $491 $503
Benefit plans 360 317
Accretion (30) (38)
Depreciation (162) (154)
Unrealized (gain) loss on securities, net (34) 45
Other, net 15 17
-------------------
Total deferred taxes net, included in other assets $640 $690
===================
F-35
<PAGE>
10. RETIREMENT PLANS
The Company, through its Bank subsidiary, is a participant in the New York
State Bankers Retirement System. Substantially, all full-time employees who
meet minimum service requirements are covered.
The following table sets forth the plan's funded status and amounts
recognized in the Company's Statement of Financial Condition at December
31:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $3,229 and $3,084 ($3,244) ($3,101)
-----------------------------
Projected benefit obligation for service
rendered to date ($4,090) ($4,169)
Plan assets at fair value, primarily listed
stocks and U.S. bonds 6,167 5,127
-----------------------------
Excess of plan assets over
projected plan benefit obligation 2,077 958
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (1,140) (22)
Prior service cost not yet recognized in net
periodic pension cost, being recognized over
18 years (70) (78)
Unrecognized net asset at January 1,
being recognized over 18 years (304) (348)
-----------------------------
Prepaid pension cost included in other assets $563 $510
==============================
<CAPTION>
Net pension cost included the following components: 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $236 $228 $199
Interest cost on projected benefit obligation 325 308 286
Actual return on plan assets (426) (393) (343)
Net amortization and deferral (82) (53) (38)
-----------------------------------------
Net periodic pension expense $53 $90 $104
=========================================
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in 1997 and 1996 in determining the actuarial
present value of the projected benefit obligation were 8.0%, and 4.0% in
1997, and 8.0% and 5.0% in 1996. The expected long-term rate of return on
assets was 8.5% for 1997 and 1996.
The actuarial present value of accumulated plan benefits represents the
liability of the pension plan at the plan year-end. Net assets available
for benefits includes funds anticipated to be necessary to provide for
future increases in earnings between the plan year-end and the normal
retirement date of participants. The plan is funded on the expected level
of benefits at retirement, whereas the present value is only a snapshot at
a point in time.
The Company has a deferred profit sharing/401(k) plan. Contributions to the
deferred profit sharing plan are determined semi-annually by the Board of
Directors. Contributions by the Company to the 401(k) and profit sharing
trust, including payments directly to employees, were $317 and $343 in 1997
and 1996, respectively.
F-36
<PAGE>
11. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides post-retirement medical and life insurance benefit
plans covering substantially all employees. Medical benefits are provided
to retirees and their dependents and supplements coverage provided by
Medicare. The life insurance plan is non-contributory and is provided in a
fixed amount based on the level of compensation at retirement. The Company
pays health premiums for retirees based on a fixed percentage up to a
predetermined level.
The following table sets forth the status of the Company's post-retirement
plans, which are unfunded, at December 31:
Accumulated Post-retirement Benefit Obligation (APBO):
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Retirees $551 $495
Active plan participants fully eligible 30 63
Other active plan participants not yet fully eligible 342 336
---------------------------
Total APBO 923 894
Unrecognized prior service cost 121 135
Unrecognized net loss (68) (53)
---------------------------
Accrued post-retirement benefit obligation $976 $976
===========================
<CAPTION>
Net periodic post-retirement benefit cost
included the following components: 1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Service cost-benefits attributed to service during
the period $23 $22 $24
Amortization of unrecognized prior service
cost (11.8 years) (14) (14) (14)
Interest cost on accumulated post-retirement
benefit obligation 62 63 58
----------------------------------------
Net post-retirement benefit cost $71 $71 $68
========================================
</TABLE>
A 9.5% annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 5.5% by the
year 2005. Increasing the assumed health care cost trend rates by one
percentage point would not have a significant impact on the accumulated
post-retirement benefit obligation or the aggregate service and interest
cost components of the net periodic post-retirement benefit for 1997. A
discount rate of 7.0% and 7.5% for 1997 and 1996 was used to determine the
accumulated post-retirement benefit obligation.
12. 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, 1997, additional dividends totaling $4,199 could have been
paid without prior regulatory approval. There were no loans or advances
from the subsidiary Bank to the Company as of December 31, 1997.
F-37
<PAGE>
13. COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financial needs of its
customers. These financial instruments consist primarily of commitments to
extend credit which involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the statement of condition. The contract
amount of those commitments to extend credit reflects the extent of
involvement the Company has in this particular class of financial
instruments. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of
the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Contract Amount
Financial instruments whose contract 1997 1996
amounts represent credit risk: -------------------------
Commitments to extend credit $19,597 $17,012
The fair value of these commitments to extend credit is not
significantly different than the contract amount.
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 commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
residential real estate and income-producing commercial properties.
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, 1997 was $1,281 of
which $600 was required to be on deposit with the Federal Reserve Bank of
New York. The remaining $681 was represented by cash on hand.
F-38
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the fair value of the Company's financial
instruments:
<TABLE>
<CAPTION>
1997 1997 1996 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $9,750 $9,750 $12,756 $12,756
Investment securities 63,745 64,034 61,127 61,201
Loans 137,606 139,184 129,996 129,650
Allowance for loan losses (1,717) (1,754)
----------------------------------------------------------
Net loans 135,889 139,184 128,242 129,650
----------------------------------------------------------
Total financial assets $209,384 $212,968 $202,125 $203,607
==========================================================
Financial liabilities
Deposits $185,717 $185,820 $180,750 $180,902
Short term borrowings 4,008 4,008 839 839
----------------------------------------------------------
Total financial liabilities $189,725 $189,828 $181,589 $181,741
==========================================================
</TABLE>
Please refer to the appropriate footnotes that contain the related
disclosures for the above financial instruments.
15. OTHER OPERATING EXPENSE
Other expense at December 31 includes:
1997 1996 1995
-----------------------------------
Outside services $685 $529 $518
Advertising and marketing 214 211 193
Office supplies 192 212 208
Postage and shipping 133 139 135
FDIC insurance 28 2 202
Other 731 783 659
------------------------------------
Total other operating expense $1,983 $1,876 $1,915
====================================
16. DISCLOSURES REQUIRED BY THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
This annual report includes all of the information required by the Office
of the Comptroller of the Currency for the annual disclosure statement
required of national banks. The Office of the Comptroller of the Currency
has not verified or confirmed the accuracy of the data presented.
17. CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and
F-39
<PAGE>
classification 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 Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Bank meets all the
requirements to which it is subject.
As of September 30, 1997, 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 minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
To Be Well-
For Capital Capitalized Under
Actual Adequacy Prompt Corrective
Purposes Action Provisions
(Thousands of dollars) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) 26,245 20.9% 10,037 8.0% 12,546 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 24,677 19.7% 5,018 4.0% 7,527 6.0%
Tier 1 Capital
(to Average Assets) 24,677 11.3% 8,721 4.0% 10,901 5.0%
As of December 31, 1996
Total Capital
(to Risk Weighted Assets) 26,348 22.7% 9,285 8.0% 11,606 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 24,887 21.4% 4,643 4.0% 6,964 6.0%
Tier 1 Capital
(to Average Assets) 24,887 11.9% 8,341 4.0% 10,427 5.0%
</TABLE>
F-40
<PAGE>
18. PARENT COMPANY FINANCIAL INFORMATION
CONDENSED FINANCIAL STATEMENT INFORMATION OF
ONEIDA VALLEY BANCSHARES, INC. IS AS FOLLOWS:
<TABLE>
<CAPTION>
BALANCE SHEET
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $6 $6
Investment in subsidiary, at equity 24,710 24,765
Dividend receivable from subsidiary 407 427
Other assets 27 28
------------------------
TOTAL ASSETS $25,150 $25,226
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Dividends payable $407 $427
------------------------
TOTAL LIABILITIES $407 $427
------------------------
Stockholders' equity:
Common stock, $2.50 par value;
2,000,000 shares authorized,
964,740 shares issued 2,412 2,412
Surplus 2,412 2,412
Retained earnings 22,003 20,589
Unrealized holding gain (loss) on securities, net 66 (88)
Treasury stock (2,150) (526)
------------------------
TOTAL STOCKHOLDERS' EQUITY $24,743 $24,799
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,150 $25,226
========================
</TABLE>
F-41
<PAGE>
STATEMENT OF INCOME
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Revenue:
Dividends from The Oneida Valley National Bank $2,724 $1,612 $1,042
Other dividends 2 2 2
-----------------------------
Total revenue 2,726 1,614 1,044
-----------------------------
Expenses:
Other expense 2 2 2
-----------------------------
Total other expenses 2 2 2
-----------------------------
Income before equity in undistributed 2,724 1,612 1,042
income of subsidiary
Equity in undistributed net income of (210) 896 1,363
subsidiary bank
-----------------------------
NET INCOME $2,514 $2,508 $2,405
=============================
</TABLE>
STATEMENT OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,514 $2,508 $2,405
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries 210 (896) (1,363)
Net cash provided by operating activities 2,724 1,612 1,042
-----------------------------
Cash flows from financing activities:
Purchases of treasury stock (1,624) (526) 0
Dividends paid (1,100) (1,084) (1,042)
-----------------------------
Net cash provided by (used in) financing activities (2,724) (1,610) (1,042)
Net (decrease) increase in cash and cash equivalents 0 2 0
Cash and cash equivalents at beginning of year 6 4 4
-----------------------------
Cash and cash equivalents at end of year $6 $6 $4
=============================
</TABLE>
F-42
<PAGE>
ONEIDA VALLEY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 1998 and December 31, 1997 (Thousands of Dollars)
Unaudited
<TABLE>
<CAPTION>
June 30, 1998 December 31,1997
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 8,078 $ 9,750
Federal funds sold 13,900 0
----------------------------
Total cash and cash equivalents 21,978 9,750
Investment securities 63,814 63,745
Loans 141,436 137,621
Less: Allowance for possible loan losses 1,644 1,717
Less: Unearned income 9 15
----------------------------
Net loans 139,783 135,889
Bank premises and equipment 5,096 5,192
Other assets 3,078 2,923
----------------------------
TOTAL ASSETS $ 233,749 $ 217,499
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interset bearing $ 28,164 $ 28,649
Interest bearing 175,070 157,068
----------------------------
Total deposits 203,234 185,717
Short-term borrowings 2,068 4,008
Accrued taxes and other liabilities 3,131 3,031
----------------------------
Total liabilities 208,433 192,756
----------------------------
Stockholders' equity
Common stock, par value $2.50 per share;
2,000,000 shares authorized, 964,740 issued 2,412 2,412
Surplus 2,412 2,412
Undivided profits 22,616 22,003
Accumulated other comprehensive income 112 66
Treasury stock, at cost: 61,863 and 59,461 shares (2,236) (2,150)
----------------------------
Total stockholders' equity 25,316 24,743
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 233,749 $ 217,499
============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,074 $2,924 $6,067 $5,773
Interest and dividends on investment securities:
U.S. government and agency obligations 750 $749 1,515 1,501
State and municipal obligations 114 103 219 208
Other 73 76 136 138
Interest on federal funds sold and balances with banks 94 71 142 107
---------------------------------------------------------------
Total interest income 4,105 3,923 8,079 7,727
---------------------------------------------------------------
INTEREST EXPENSE Interest on deposits:
Regular savings, NOW, money market 604 582 1,194 1094
Time deposits 1,134 994 2,213 1935
Interest on short term borrowings 23 11 59 20
---------------------------------------------------------------
Total interest expense 1,761 1,587 3,466 3,049
---------------------------------------------------------------
Net interest income 2,344 2,336 4,613 4,678
PROVISION FOR POSSIBLE
LOAN LOSSES 99 62 198 150
---------------------------------------------------------------
Net interest income after provision
for possible loan losses 2,245 2,274 4,415 4,528
---------------------------------------------------------------
OTHER OPERATING INCOME
Trust Department income 86 57 179 147
Service charges on deposit accounts 217 210 429 412
Computer service 57 58 124 118
Other 135 117 322 264
Investment security losses (3) 0 (9) 0
---------------------------------------------------------------
Total other operating income 492 442 1,045 941
---------------------------------------------------------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 1,137 1,082 2,283 2169
Net occupancy expense of bank premises 144 134 321 268
Furniture and equipment expense 139 127 264 248
Printing stationary and supplies 51 38 92 93
FDIC insurance expense 6 6 15 38
Other 482 430 939 803
---------------------------------------------------------------
Total other operating expense 1,959 1,817 3,914 3,619
---------------------------------------------------------------
Income before income taxes 778 899 1,546 1,850
APPLICABLE INCOME TAXES 231 302 481 626
---------------------------------------------------------------
NET INCOME $547 $597 $1,065 $1,224
===============================================================
BASIC EARNINGS PER COMMON SHARE
Weighted average shares outstanding 903,272 949,740 904,509 949,740
---------------------------------------------------------------
Net Income per share $0.61 $0.64 $1.18 $1.30
===============================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income before comprehensive income $547 $597 $1,065 $1,224
Other comprehensive income net of taxes:
Unrealized net gains on securities:
Unrealized net holdings gains arising during period 14 $159 37 (10)
Reclassification adjustment for losses included in net income 5 0 9 0
---------------------------------------------------------------
Comprehensive income $566 $756 $1,111 $1,214
===============================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE>
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1997 and 1998
(Thousands of Dollars)
Unaudited
<TABLE>
<CAPTION>
Accumulated Treasury
Common Undivided Comprehensive Stock
Stock Surplus Profits Income At Cost Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $2,412 $2,412 $22,003 $66 ($2,150) $24,743
Net income 1,065 1,065
Dividends ($.50 per share) (452) (452)
Changes in unrealized holding
gain on securities, net 46 46
Treasury stock transactions
2,402 shares (86) (86)
-------------------------------------------------------------------------------------------
Balance at June 30,1998 $2,412 $2,412 $22,616 $112 ($2,236) $25,316
===========================================================================================
</TABLE>
F-46
<PAGE>
ONEIDA VALLEY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
(unaudited)
June 30 June 30
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $1,065 $1,224
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 232 226
Provision for possible loan losses 198 150
Loss on sale of securities 9 0
Amortization of bond premium, net 29 11
Changes in other assets and liabilities: 102 (348)
--------------------
Net cash provided by operating activities 1,635 1,263
--------------------
Cash flows from investing activities:
Proceeds from investment securities 17,042 6,949
Purchase of investment securities (17,079) (8,469)
Net increase in loans (4,092) (761)
Capital expenditures (136) (769)
--------------------
Net cash used in investing activities (4,265) (3,050)
--------------------
Cash flows from financing activities:
Net decrease in demand deposits (485) (2,073)
Net increase in Regular savings, NOW, Money Market 10,041 10,353
Net increase (decrease) in Certificates of deposit 7,961 (1,056)
Net (decrease) increase in short term borrowings (1,940) 224
Purchase of treasury stock (86) (1,306)
Dividends paid (633) (664)
--------------------
Net cash provided by financing activities 14,858 5,478
--------------------
Net increase in cash and cash equivalents 12,228 3,691
Cash and cash equivalents at beginning of year 9,750 12,756
--------------------
Cash and cash equivalents at end of year $21,978 $16,447
====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $3,343 $2,987
Income taxes $614 $657
Non-cash investing activity:
Unrealized gains (losses) on investment securities, net $70 ($15)
Non- cash financing activity:
Dividends declared and unpaid $226 $229
</TABLE>
Included in proceeds from investment securities is $2,626 and $5,239 of proceeds
resulting from maturities and principal payments of securities designated as
held-to-maturity for 1998 and 1997, respectively. Investment securities
purchased includes $703, and $2,214 for purchases of held-to-maturity securities
for 1998, and 1997, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
<PAGE>
ONEIDA VALLEY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
Basis of Presentation
The foregoing consolidated financial statements are unaudited; however, in the
opinion of Management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of the Bank's significant accounting policies is set forth
in note 1 to the Financial Statements in the Bank's Annual Report to
Shareholders for the year ended December 31, 1997. The balance sheet at December
31, 1997, has been derived from the audited financial statements at that date.
New Accounting Pronouncements
Effective January 1, 1998, the Bank adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income." This pronouncement
requires the Bank to report the effects of unrealized investment holding gains
or losses on comprehensive income.
In June of 1998 the Financial Accounting Standards Board (FASB) issued SFAS No.
133. This statement requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for fiscal quarters of fiscal years beginning
after June 30, 1999. Since the Company does not have any derivative instruments
or hedges, management believes there will be no effect on the Company.
On July 13,1998 the Company announced that they had agreed to merge with
Cortland First Financial Corporation to create an independent bank holding
company named Alliance Financial Corporation. The combined company would serve
the community banking market of Central New York State. The Bank and First
National Bank of Cortland will also merge, taking the name Alliance Bank, N.A.
The merger is expected to close in the fourth quarter of 1998, subject to the
approval of the shareholders of both companies, as well as regulatory approvals.
The combined Company's market area will cover the Central New York region and
will allow the new company to offer its customers enhanced products and services
through its sixteen branches located in Cortland, Broome, Madison, Oneida, and
Onondaga counties.
F-48
<PAGE>
APPENDIX A
CAPITAL FORMATION GROUP OF ROCHESTER, L.P.
FAIRNESS OPINION
_______________, 1998
Board of Directors
Cortland First Financial Corporation
65 Main Street
Cortland, NY 13045
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, of the consideration offered to the shareholders of Oneida Valley
Bancshares, Inc. ("OVB") by Cortland First Financial Corporation ("CFF"),
pursuant to the Agreement and Plan of Reorganization between CFF and OVB as
proposed at the CFF Board of Directors meeting held on July 8, 1998 (the
"Agreement"). Capitalized terms defined in the Agreement and used herein, shall
have the same meaning as set forth in the Agreement unless otherwise stated
specifically herein.
As more specifically set forth in the Agreement, the OVB shareholders will
exchange their shares in OVB for shares in CFF on the Effective Date of the
Merger. The Exchange Ratio will be set on the Effective Date based upon the
recent average closing bid price for CFF common shares. The Exchange Ratio will
be not less than 1.75 CFF shares for each OVB share, at or above $30 per share
of CFF, nor more than 2.00 shares of CFF for each OVB share, at or below $26.25
per share of CFF. Between $26.25 and $30.00 per share of CFF, the Exchange Ratio
will be set to provide approximately $52.50 of CFF stock per share of OVB.
Capital Formation Group of Rochester, L.P. ("CFG") has acted as financial
advisor to the Board of Directors of CFF and to the Board of Directors of OVB in
connection with the Merger and will receive a fee for its services. In addition,
CFG has been retained to provide advice to the Continuing Corporation regarding
its strategic plan and implementation of certain strategies. CFG will receive
additional fees for its services under such retainer agreement. CFF has retained
an affiliate of one of CFG's limited partners as a consultant with respect to
the transaction covered by the Agreement.
In connection with rendering our opinion, we have reviewed and analyzed, among
other things, the following: (i) the Agreement; (ii) the related agreements and
contracts to be executed by the parties to the Merger ("Related Agreements");
(iii) certain business and historical financial information relating to OVB and
CFF; (iv) certain financial forecasts and other data provided to us by OVB and
CFF relating to the business and prospects of OVB, CFF and the Continuing
Corporation; (v) valuation analyses prepared by management of OVB, CFF or
consultants retained by OVB and CFF; (vi) reports of consultants related to the
condition of the loan and investment portfolios of OVB and CFF and the
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adequacy of loan loss reserves; (vii) publicly available financial and stock
market data with respect to certain other companies we believe to be generally
comparable to OVB, CFF and the Continuing Corporation; (viii) the financial
terms of certain recent business combinations and other transactions in the
banking industry we believe to be comparable in certain respects; and (ix)
current market and financial conditions. We also held discussions with the
management of OVB and CFF regarding the past and current business operations,
financial condition and future prospects of OVB, CFF and the Continuing
Corporation. We also considered such other matters and made such other financial
analyses and investigations as we deemed appropriate.
In preparing our opinion, we have relied upon and assumed the accuracy and
completeness of the financial and other information publicly available or
provided to us by or on behalf of OVB or CFF and upon the representations,
warranties, and covenants contained in the Agreement. We have not been engaged
to, nor have we assumed any responsibility to independently verify such
information, including financial information, nor have we made any independent
evaluation or appraisal of any of the assets or liabilities of OVB or CFF,
Further, our opinion is based upon economic, monetary and market conditions
existing on the date hereof. Our opinion is, in any event, limited to the
fairness, from a financial point of view, of the consideration offered by CFF to
the shareholders of OVB and does not address CFF's underlying business decision
to effect the Merger.
This opinion is provided solely for reliance upon by CFF's Board of Directors
and may not be reproduced, summarized, transmitted to any other person or
otherwise utilized by CFF or any of its affiliates without our prior written
consent.
Based upon and subject to the foregoing, we are of the opinion that the
consideration offered by CFF to the shareholders of OVB pursuant to the
Agreement is fair, from a financial point of view, to the shareholders of CFF.
Very truly yours,
CAPITAL FORMATION GROUP OF ROCHESTER, L.P.
David H. Waterman
Executive Managing Director
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APPENDIX B
EMPIRE VALUATION CONSULTANTS, INC. FAIRNESS OPINION
__________, 1998
Board of Directors of Oneida Valley Bancshares, Inc.
160 Main Street
Oneida, New York 13421
Dear Sirs:
You, the Board of Directors of Oneida Valley Bancshares, Inc. ("OVB"), a New
York Corporation, have asked Empire Valuation Consultants, Inc. ("Empire") to
render a financial opinion as to whether the Exchange Ratio and other terms (the
"Consideration") of the proposed merger with Cortland First Financial
Corporation ("CFFC"), a New York State corporation, is fair to the shareholders
of OVB from a financial point of view. Capitalized terms defined in the Merger
Agreement and used herein shall have the same meanings as set forth in the
Merger Agreement unless otherwise specifically define herein.
Merger Description
Under the terms of the proposed Agreement and Plan of Reorganization Between
Cortland First Financial Corporation and Oneida Valley Bancshares, Inc. ("Merger
Agreement"), dated July 1998, OVB will merge into CFFC under the name Alliance
Financial Corporation ("Alliance"). The intent of both Boards, as stated in the
Merger Agreement, is that the combination shall be a merger of equals. The
issued and outstanding common stock of OVB shareholders shall be converted into
and exchanged for shares of common stock of Alliance and the issued and
outstanding common shares of CFFC shall continue to be issued and outstanding
shares of capital stock of Alliance.
The proposed Exchange Ratio ("Consideration") for the OVB shareholders is to be
compiled from the average closing bid price1 of CFFC's common stock as published
by the Nasdaq Automatic Quotation System for the 30 calendar days preceding the
effective date of the merger ("Exchange Price"). If the Exchange Price is $26.25
or lower, OVB shareholders will receive 2.00 Exchange Shares of Alliance for
each issued and outstanding OVB common share. If the Exchange Price is $30.00 or
higher, OVB shareholders will receive 1.75
- ----------
1 The average price will be rounded to the nearest $0.125 to determine the
Exchange Price. For example $27.58 will be rounded to $27.625 and $27.60
will be rounded to $27.50.
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Board of Directors of Oneida Valley Bancshares, Inc.
August 21, 1998
Page B-2
Exchange Shares of Alliance. For Exchange Prices falling between $26.25 and
$30.00, the Exchange Ratio will be based off of an OVB equivalent price of
$52.50.
Qualification of Empire Valuation Consultants, Inc.
Empire in its regular course of business provides merger & acquisition and
valuation serves to, and renders fairness opinions on behalf of, corporate
clients, corporate trustees, attorneys, accountants, investors, financial
institutions, the courts, and participants of employees benefit plans. Empire's
consultants have prepared or managed the preparation of over 5,000 appraisals
for a broad range of purposes, covering a broad range of industries, both
domestic and overseas, and for corporate clients of all sizes. Empire's five
principal and/or managing directors have cumulatively over 110 years of
experience in investment banking and valuation experience. Empire's consultants
have extensive experience in providing expert testimony; have and currently hold
national and regional officer and leadership positions with the American Society
of Appraisers; and have significant experience in the banking and financial
industries.
Due Diligence Review Process
In conducting our investigation and analysis, we have considered such financial
and other factors as we deemed appropriate under the circumstances. In this
connection, we have, among other things, done the following:
Regarding Oneida Valley Bancshares, Inc.:
(1) Reviewed OVB's annual financial statements for the years ending
December 31, 1993 through 1997;
(2) Reviewed, OVB's quarterly financial statements for the periods ending
March 31, 1995 through June 30, 1998;
(3) Reviewed call reports for Oneida Valley National Bank ("OVNB") for the
years ending December 31, 1993 through 1997 and for the quarters
ending September 30, 1996 through March 31, 1998;
(4) Reviewed the "peer group" comparative financial ratio analysis of OVNB
for 1997 and 1996;
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Board of Directors of Oneida Valley Bancshares, Inc.
August 21, 1998
Page B-3
(5) Reviewed OVB's Strategic Plan 1998 - 2000 and its revised Base Line
assumptions in the Strategic Plan developed for the merger; its
corporate articles of association, Bylaws and Board minutes; and
various other financial analysis work papers;
(6) Visited OVB's corporate office and held discussions with management
and its financial advisors concerning the past, current, and planned
operations, financial condition, and business prospects of OVB; and
(7) Reviewed the report, and associated work papers, prepared by Jamesson
Associates titled OVNB Due Diligence: Financial Factors and Investment
Portfolio; and
(8) Analyzed OVB's current stock prices, historical stock prices, trading
volumes and liquidity.
Regarding Cortland First Financial Corporation:
(1) Reviewed CFFC's annual financial statements for the years ending
December 31, 1993 through 1997;
(2) Reviewed various Securities and Exchange Commission filings between
December 1996 and August 1998;
(3) Reviewed call reports for First National Bank of Cortland ("FNBC") for
the years ending December 31, 1993 through 1997 and for the quarters
ending September 30, 1996 through March 31, 1998;
(4) Reviewed the "peer group" comparative financial ratio analysis of FNBC
for 1997 and 1996;
(5) Reviewed CFFC's Strategic Plan 1998 - 2000 and its revised Base Line
assumptions in the Strategic Plan developed for the merger and various
other financial analysis work papers;
(6) Reviewed the report, and associated work papers, prepared by Jamesson
Associates titled CFFC Due Diligence: Financial Factors and Investment
Portfolio; and
(7) Analyzed CFFC's current stock prices, historical stock prices, trading
volumes and liquidity.
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Board of Directors of Oneida Valley Bancshares, Inc.
August 21, 1998
Page B-4
Regarding the Merger:
(1) Reviewed and discussed the Agreement and Plan of Reorganization
Between Cortland First Financial Corporation and Oneida Valley
Bancshares, Inc. with OVB's and CFFC's management and their legal and
financial representatives;
(2) Reviewed the Proposed Agreement to Merge between Oneida Valley
National Bank and First National Bank of Cortland;
(3) Reviewed the Plan of Merger of Oneida Valley Bancshares, Inc. with and
into Cortland First Financial Corporation;
(4) Reviewed the draft Certificate of Incorporation and Bylaws of
Alliance, a New York Corporation;
(5) Reviewed the "Discussion Draft" Employment Agreements between Alliance
and John C. Mott and David R. Alvord;
(6) Reviewed the proposed July 13, 1998 press release announcing the
Merger Agreement;
(7) Reviewed and analyzed the Exchange Ratios and pricing of the Merger
Agreement relative to OVB's shareholders;
(8) Reviewed and discussed the Strategic Plan with OVB's and CFFC's
management together with the banks' financial and legal advisors;
(9) Reviewed the draft mutual cross option agreements between OVB and CFFC
and a draft copy of the lock-up agreements for the officers and
directors;
(10) Considered the implied valuation multiples for OVB and CFFC using the
stated exchange Consideration in the Merger Agreement and using the
banks' historical financial data;
(11) Prepared a comparative analysis of OVB's and CFFC's selected valuation
multiples and performance ratios with a group of five NYS bank holding
companies;
(12) Reviewed the implied valuation multiples for OVB and CFFC relative to
valuation multiples reported for 1997 and 1998 for commercial banks
around the country;
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Board of Directors of Oneida Valley Bancshares, Inc.
August 21, 1998
Page B-5
(13) Considered such other information, financial studies, and analyses as
we deemed relevant, and performed such analyses, studies, and
investigations as we deemed appropriate.
Underlying Assumptions
In rendering this opinion, Empire has relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information obtained by us from both OVB and CFFC and from their financial
and legal advisors, as well as from public sources. We have assumed that the
representations of OVB's and CFFC's management and financial advisors regarding
the operational benefits of the merger to both banks were made in good faith and
that they represent reasonable assumptions.
The following opinion is intended solely for the use of OVB's Board of Directors
and its management. Empire has given permission to OVB's Board of Directors to
disclose this letter in a joint proxy/prospectus statement to be filed publicly
with CFFC; however, it is understood and agreed that no other person other than
OVB, its officers and its Directors shall be allowed to use or rely upon this
opinion. Also, Empire reserves the right to review and approve the joint
proxy/prospectus statement prior to its filing.
Our opinion is necessarily based upon economic, market, and other conditions as
in effect on, and the information made available to us as of, the date of this
letter. Our opinion is limited to the fairness of the Consideration as of the
date hereof, from a financial point of view. Empire has agreed to re-issue this
opinion in connection with its review and approval of the joint proxy/prospectus
statement. Empire's re-issued fairness opinion will incorporate any additional
pertinent information discovered in the ongoing due diligence between the date
of this letter and the date of the re-issued fairness opinion, which shall occur
within five (5) days of the mailing of the joint proxy/prospectus statement.
We make no representations with respect to the business decision to enter the
Merger Agreement, or any other terms of the Merger Agreement. We are expressing
no opinion as to the control value of OVB or CFFC as of the date of this letter
or as of the date of its re-issuance.
We understand that in considering the Merger Agreement, the Board of Directors
of OVB will consider a wide range of financial and nonfinancial factors, many of
which may be beyond the scope of this letter. This letter is not intended to
substitute for the Board's exercise of its own business judgement in reviewing
the Merger Agreement.
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<PAGE>
Board of Directors of Oneida Valley Bancshares, Inc.
August 21, 1998
Page B-6
Fairness Opinion
Based upon the foregoing, and in reliance thereon, it is our opinion, as
financial advisors to OVB's Board of Directors, that the Consideration in the
Merger Agreement is fair to OVB's shareholders, from a financial viewpoint.
Respectfully submitted,
EMPIRE VALUATION CONSULTANTS, INC.
By:______________________________
Terence L. Griswold, ASA
Principal
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APPENDIX C
NEW YORK BUSINESS CORPORATION LAW SECTION 623
ss. 623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but
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in no case later than sixty days from the date of consummation of the corporate
action except that if the corporation fails to make a timely offer, as provided
in paragraph (g), the time for withdrawing a notice of election shall be
extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of
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his certificates. If the corporate action has not been consummated at the time
of the making of the offer, such advance payment or statement as to advance
payment shall be sent to each shareholder entitled thereto forthwith upon
consummation of the corporate action. Every advance payment or statement as to
advance payment shall include advice to the shareholder to the effect that
acceptance of such payment does not constitute a waiver of any dissenters'
rights. If the corporate action has not been consummated upon the expiration of
the ninety day period after the shareholders' authorization date, the offer may
be conditioned upon the consummation of such action. Such offer shall be made at
the same price per share to all dissenting shareholders of the same class, or if
divided into series, of the same series and shall be accompanied by a balance
sheet of the corporation whose shares the dissenting shareholder holds as of the
latest available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not less
than a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
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(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
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vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as provided in
clause (A), the court may consider the dollar amount or the percentage, or
both, by which the fair value of the shares as determined exceeds the
corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph
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(e), and except that this section shall not exclude the right of such
shareholder to bring or maintain an appropriate action to obtain relief on the
ground that such corporate action will be or is unlawful or fraudulent as to
him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
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APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ALLIANCE FINANCIAL CORPORATION
(Under Section 807 of the Business Corporation Law)
ARTICLE 1. Name. The name of the corporation is Alliance Financial
Corporation (the "Corporation").
ARTICLE 2. Purposes. Subject to any limitation provided in the Business
Corporation Law or any other statute of the State of New York, and except as
otherwise specifically provided in this Certificate, the purpose for which the
Corporation is formed is to engage in any lawful act or activity for which
corporations may be organized under the New York Business Corporation Law,
provided, however, that the Corporation shall not engage in any act or activity
requiring the consent or approval of any state official, department, board,
agency or other body without such consent or approval first being obtained.
ARTICLE 3. Office. The Corporation shall maintain an office in Cortland
County, State of New York, and in such other locations within or without the
State of New York as the Board of Directors may determine.
ARTICLE 4. Number of Shares.
(a) The aggregate number of shares which the Corporation shall have
authority to issue is: Eleven Million (11,000,000) shares, of which Ten
Million (10,000,000) shares shall be Common Stock with a par value of One
Dollar ($1.00) per share, and One Million (1,000,000) shares shall be
Preferred Stock with a par value of Twenty-Five Dollars ($25.00) per share.
(b) (1) The Preferred Stock may be issued from time to time in one or
more series for any proper corporate purpose without further action by the
shareholders. The designation, number, preferences and other rights and
limitations or restrictions of the Preferred Stock of each series (other
than such as are stated and expressed
D-1
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
herein) shall be such as may be fixed by the Board of Directors (authority
so to do being hereby expressly granted) and stated and expressed in a
resolution or resolutions adopted by the Board of Directors providing for
the initial issue of Preferred Stock of such series. Such resolution or
resolutions shall (i) fix the designation of such series, (ii) fix the
number of shares of stock which shall constitute the initial issue of such
series, (iii) fix the dividend rights of holders of stock of such series,
including the dividend rate or rates thereon, the time or times at which
such dividends shall be paid or payable, whether such dividends shall be
cumulative, and if so, on what terms, (iv) fix the terms on which stock of
such series may be redeemed, including amounts payable upon redemption if
the shares of such series are to be redeemable, (v) fix the rights of the
holders of stock of such series upon dissolution, liquidation and
distribution of assets or winding up of the affairs of the Corporation,
(vi) fix the terms or amount of the sinking fund, if any, to be provided
for the purchase or redemption of stock of such series, (vii) fix the terms
upon which the stock of such series may be converted into or exchanged for
stock of any other class or classes or of any one or more series of
Preferred Stock, if the shares of such series are to be convertible or
exchangeable, (viii) fix the voting rights, if any, of the stock of such
series, and (ix) fix such other powers, preferences and relative,
participating, optional or other special rights of such series, and the
qualifications, limitations or restrictions of such preferences and/or
rights desired to be so fixed.
(2) Except to the extent otherwise provided in the resolution or
resolutions of the Board of Directors providing for the initial issue of
shares of a particular series or expressly required by law, holders of
shares of Preferred Stock of any series shall not be entitled to vote such
shares with respect to any matter which is put to a vote of the
shareholders. The number of shares of Preferred Stock which the Corporation
shall have authority to issue may be increased from time to time by the
affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote, and the holders of the Preferred Stock, if
entitled to vote on any such increase or decrease, shall not be entitled to
vote separately as a class or series of a class thereon.
(3) All shares of any one series of Preferred Stock shall be identical
with each other in all respects except that shares of any one series issued
at different times may differ as to the dates from which dividends thereon
shall accumulate, and all series of Preferred Stock shall rank equally and
be identical in all respects except as specified in the respective
resolutions of the Board of Directors providing for the initial issue
thereof. Subject to the prior and superior rights of the Preferred Stock as
set forth in any resolution or resolutions of the Board of Directors
providing for the initial issue of a particular series of Preferred Stock,
such dividends (payable in cash, stock or otherwise) as may be determined
by
D-2
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
the Board of Directors may be declared and paid on the Common Stock
from time to time out of any fund legally available therefor, and the
Preferred Stock shall not be entitled to participate in any such
dividend.
ARTICLE 5. Designation of Secretary of State: Mailing Address. The
Secretary of State is designated as the agent of the Corporation upon whom
process in any action or proceeding against the Corporation may be served, and
the address to which the Secretary of State shall mail a copy of process in any
action or proceeding against the Corporation which may be served upon the
Secretary is:
Alliance Financial Corporation
65 Main Street
Cortland, New York 13045
Attn: Chief Executive Officer
ARTICLE 6. Preemptive Rights. No holder of shares of any class of the
Corporation shall have any preemptive right to subscribe for, purchase or
receive any shares of the Corporation, whether now or hereafter authorized, or
any obligations or other securities convertible into or carrying options to
purchase any such shares of the Corporation, or any options or rights to
purchase any such shares or securities, issued or sold by the Corporation for
cash or any other form of consideration, and any such shares, securities or
rights may be issued or disposed of by the Board of Directors to such persons
and on such terms as the Board in its discretion shall deem advisable.
ARTICLE 7. Directors: Election and Classification. The Board of Directors,
consisting of not less than 9 members and not more than 25 members, shall be
divided into three (3) classes. The number of directors of the first class shall
equal one-third (1/3) of the total number of directors, with fractional
remainders to count as one (1); the number of directors of the second class
shall equal one-third (1/3) of said total number of directors (or the nearest
whole number thereto); and the number of directors of the third class shall
equal the total number of directors minus the aggregate number of directors of
the first and second classes. At the election of the first Board of Directors,
the class of each of the members then elected shall be designated. The term of
office of each member then designated as a director of the first class shall
expire at the annual meeting of the shareholders next ensuing, that of each
member then designated as a director of the second class at the annual meeting
of shareholders one (1) year thereafter, and that of each member then designated
as a director of the third class at the annual meeting of shareholders two (2)
years thereafter. At each annual meeting of shareholders held after the election
and classification of the first Board of
D-3
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Directors, directors shall be elected for a full term of three (3) years to
succeed those members whose terms then expire. Any or all of the directors of
any class may be removed without cause only upon the affirmative vote of holders
of not less than eighty percent (80%) of the shares entitled to vote generally
in the election of directors.
ARTICLE 8. Opposition of Tender (or Other) Offer.
(a) The Board of Directors may, if it deems advisable, oppose a tender
or other offer for the Corporation's securities, whether the offer is in
cash or in the securities of a corporation or otherwise. When considering
whether to oppose an offer, the Board of Directors may, but is not legally
obligated to, consider any relevant issue. By way of illustration, but not
to be considered any limitation on the power of the Board of Directors to
oppose a tender or other offer for this Corporation's securities, the Board
of Directors may, but shall not be legally obligated to, consider any or
all of the following:
(1) whether the offer price is acceptable based on the
historical, present, or projected operating results or financial
condition of the Corporation;
(2) whether a more favorable price could be obtained for the
Corporation's securities in the future;
(3) the social and economic effects of the offer or transaction
on the Corporation and any of its subsidiaries, and their respective
employees, depositors, loan and other customers, creditors,
shareholders and other elements of the communities in which the
Corporation and any of its subsidiaries operate or are located;
(4) the reputation and business practice of the offeror and its
management and affiliates as they would affect the shareholders,
employees, depositors and customers of the Corporation and its
subsidiaries and the future value of the Corporation's stock;
(5) the value of the securities (if any) which the offeror is
offering in exchange for the Corporation's securities, based on an
analysis of the worth of the corporation or other entity whose
securities are being offered;
(6) the business and financial condition and earnings prospects
of the offeror, including, but not limited to, debt service and other
existing or likely
D-4
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
financial obligations of the offeror, and the possible effect of such
elements of the communities in which the Corporation and any of its
subsidiaries operate or are located; and
(7) any antitrust or other legal and regulatory issues that are
raised by the offer.
(b) If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its purpose,
including, but not limited to, any or all of the following: advising
shareholders not to accept the offer; litigation against the offeror;
filing complaints with all governmental and regulatory authorities;
acquiring the offeror corporation's securities; selling or otherwise
issuing authorized but unissued securities or treasury stock of the
Corporation or granting options with respect thereto; acquiring a company
to create an antitrust or other regulatory problem for the offeror; and
obtaining a more favorable offer from another individual or entity.
ARTICLE 9. Shareholder Approval of Certain Business Combinations.
(a) Except as otherwise expressly provided in paragraph (b) of this
Article, a Business Combination (as defined below) shall require the
affirmative vote of not less than eighty percent (80%) of the votes
entitled to be cast by the holders of all then outstanding shares of Common
Stock of the Corporation.
(b) The provisions of paragraph (a) of this Article shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is
required by law or by any other provision of this Certificate of
Incorporation or the Bylaws of the Corporation, if all of the conditions
specified in paragraphs (b)(1) and (b)(2) are met.
(1) The Business Combination shall have been approved by
sixty-six and two-thirds percent (66-2/3%) or more of the Continuing
Directors (as defined below) whether such approval is given prior to
or subsequent to the acquisition of beneficial ownership of the Common
Stock that caused the Interested Shareholder (as defined below) to
become an Interested Shareholder.
(2) a. The aggregate amount of cash, and the Fair Market Value
(as defined below) of consideration other than cash, as of the date of
the consummation of the Business Combination, to be received per share
by holders of Common Stock in such Business Combination shall be at
least equal to the higher amount of (i) the highest per share
D-5
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
price paid by or on behalf of the Interested Shareholder for any share
of Common Stock in connection with the acquisition by the Interested
Shareholder of beneficial ownership of shares of Common Stock within
the two-year period immediately prior to the first public announcement
of the proposed Business Combination (the "Announcement Date"), or
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Shareholder
became an Interested Shareholder (the "Determination Date").
b. The consideration to be received by holders of outstanding
Common Stock shall be in cash or in the same form as previously was
paid by or on behalf of the Interested Shareholder in connection with
its direct or indirect acquisition of beneficial ownership of shares
of such Common Stock. If the consideration so paid for shares of
Common Stock varied as to form, the form of consideration for such
Common Stock shall be either cash or the form used to acquire
beneficial ownership of the largest number of shares of such Common
Stock previously acquired by the Interested Shareholder.
c. After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination
(i) there shall have been no reduction in the annual rate of dividends
paid on the Common Stock (except as necessary to reflect any stock
split, stock dividend or subdivision of the Common Stock), except as
approved by a majority of the Continuing Directors; (ii) there shall
have been an increase in the annual rate of dividends paid on the
Common Stock as necessary to reflect any reclassification (including
any reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of
outstanding shares of Common Stock unless the failure so to increase
such annual rate is approved by a majority of the Continuing
Directors; and (iii) such Interested Shareholder shall not have become
the beneficial owner of any additional shares of Common Stock except
as part of the transaction that results in such Interested Shareholder
becoming an Interested Shareholder and except in a transaction that,
after giving effect thereto, would not result in any increase in the
Interested Shareholder's percentage of beneficial ownership of any
Common Stock.
d. After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a
shareholder of the Corporation), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Corporation, whether in anticipation of or
in connection with such Business Combination or otherwise.
D-6
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
e. Such Interested Shareholder shall not have made any major
change in the Corporation's business or equity capital structure
without the approval of a majority of the Continuing Directors.
(c) For the purposes of this Article:
(1) The term "Affiliate" shall mean a person that directly or
indirectly through one or more intermediaries, controls, is controlled
by, or is under common control with, the person specified.
(2) The term "Associate" of a person shall mean:
a. any corporation or organization (other than the
Corporation or a majority-owned subsidiary of the Corporation) of
which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of ten percent or more of any
class of equity securities;
b. any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity; and
c. any relative or spouse of such person, or any relative of
such spouse, who has the same home as such person or who is a
director or officer of the Corporation or any of its parents or
subsidiaries.
(3) A person shall be a "beneficial owner" of any Common Stock
that:
a. such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly;
b. such person or any of its Affiliates or Associates has,
directly or indirectly, (i) the right to acquire (whether such
right is exercisable immediately or subject only to the passage
of time), pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote
pursuant to any agreement, arrangement or understanding; or
D-7
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
c. are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any
shares of Common Stock.
(4) The term "Business Combination" shall mean:
a. any merger or consolidation of the Corporation or any
Subsidiary with (i) any Interested Shareholder or (ii) any other
corporation (whether or not itself an Interested Shareholder)
which is or after such merger or consolidation would be an
Affiliate or Associate of an Interested Shareholder;
b. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder involving
any assets or securities of the Corporation or any Subsidiary
having an aggregate Fair Market Value of $3,000,000 or more;
c. the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on behalf of an
Interested Shareholder or any Affiliate or Associate of any
Interested Shareholder;
d. any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any other transaction (whether or not with or
otherwise involving an Interested Shareholder) that has the
effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which
is beneficially owned by any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder; or
e. any agreement, contract or other arrangement providing
for any one or more of the actions specified in the foregoing
clauses (a) to (d).
(5) The term "Continuing Director" shall mean any member of the
Board of Directors of the Corporation (the "Board"), while such person
is a member of the Board, who is not an Affiliate or Associate or
representative of an Interested Shareholder and who was a member of
the Board prior to the time that the Interested Shareholder became an
Interested Shareholder, and any successor of a Continuing Director,
while such successor is
D-8
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
a member of the Board, who is not an Affiliate or Associate or
representative of the Interested Shareholder and who is recommended or
elected to succeed the Continuing Director by a majority of Continuing
Directors.
(6) The term "Fair Market Value" shall mean:
a. in the case of cash, the amount of such cash;
b. in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in
question of a share of such stock on the Composite Tape for New
York Stock Exchange Listed Stocks, or, if such stock is not
listed on such Exchange, on the principal national securities
exchange registered under the Securities Exchange Act of 1934 on
which such stock is listed, or if such stock is not listed on any
such exchange, the highest closing bid quotation with respect to
a share of such stock during the 30-day period preceding the date
in question on the National Association of Securities Dealers,
Inc. Automated Quotation System or any similar system then in
use, or if no such quotations are available, the fair market
value on the date in question of a share of such stock as
determined by a majority of the Continuing Directors in good
faith; and
c. in the case of property other than cash or stock, the
fair market value of such property on the date in question as
determined in good faith by a majority of the Continuing
Directors.
(7) The term "Interested Shareholder" shall mean any person
(other than the Corporation or any Subsidiary and other than any
profit-sharing, employee stock ownership or other employee benefit
plan of the Corporation or any Subsidiary or any trustee or fiduciary
of such plan when acting in such capacity) who:
a. is the beneficial owner of Common Stock representing
three percent or more of the votes entitled to be cast by the
holders of all the outstanding shares of Common Stock;
b. is an Affiliate or Associate of the Corporation and at
any time within the two-year period immediately prior to the date
in question was the beneficial owner of Common Stock representing
three percent or more of the votes entitled to be cast by the
holders of all then outstanding shares of Common Stock; or
D-9
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
c. is an assignee of or has otherwise succeeded to any
shares of Common Stock which were at any time within the two-year
period immediately prior to the date in question beneficially
owned by any Interested Shareholder, if such assignment or
succession shall have occurred in the course of transactions not
involving a public offering within the meaning of the Securities
Act of 1933.
(8) The term "person" shall mean any individual, firm,
corporation or other entity and shall include any group comprised of
any person and any other person with whom such person has any
agreement, arrangement or understanding, directly or indirectly, for
the purpose of acquiring, holding, voting or disposing of Common
Stock.
(9) The term "Subsidiary" shall mean any corporation of which a
majority of any class of equity security is beneficially owned by the
Corporation; provided, however, that for the purposes of the
definition of Interested Shareholder set forth in paragraph (c)(7),
the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is beneficially owned by the
Corporation.
(10) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in the context of paragraphs 9(b)(2)(a) and
9(b)(2)(b) shall include the shares of Common Stock and/or the shares
of any other class or series of capital stock of the Corporation
retained by the holders of such shares.
(d) The Board shall have the power and duty to determine for
the purposes of this Article, on the basis of information known
to them after reasonable inquiry:
(1) whether a person is an Interested Shareholder;
(2) the number of shares of Common Stock or other
securities beneficially owned by any person;
(3) whether a person is an Affiliate or Associate of
another person; and
(4) whether the assets that are the subject of any
Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the
Corporation or any Subsidiary in any Business Combination
has, an aggregate Fair Market Value of $3,000,000 or more.
D-10
<PAGE>
Any such determination made in good faith shall be binding and conclusive on all
parties.
(e) Nothing contained in this Article shall be construed to
relieve any Interested Shareholder from any fiduciary obligation
imposed by law.
(f) The fact that any Business Combination complies with the
provisions of paragraph 9(b) of this Article shall not be
construed to impose any fiduciary duty, obligation or
responsibility on the Board, or any member thereof, to approve
such Business Combination or recommend its adoption or approval
to the shareholders of the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board, or
any member thereof, with respect to evaluations of or actions and
responses taken with respect to such Business Combination.
ARTICLE 10. Board Approval of Certain Transactions. In addition to any
shareholder approvals required pursuant to Article 9 hereof, any of the
following shall require the affirmative vote of not less than sixty-six and
two-thirds percent (66-2/3%) of the entire Board of Directors of the
Corporation, regardless of whether such transaction(s) would constitute a
Business Combination as defined in Article 9:
(a) any merger, consolidation or share exchange of the Corporation or
any Subsidiary (as defined in Article 9);
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) of all or
substantially all of the assets, or a majority of any class of equity
securities, of the Corporation or any Subsidiary;
(c) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation;
(d) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries; or
(e) any agreement, contract or other arrangement providing for any one
or more of the actions specified in the foregoing clauses (a) to (d).
ARTICLE 11. Director Liability. To the fullest extent that the Business
Corporation Law of the State of New York, as the same exists or may hereafter be
amended,
D-11
<PAGE>
APPENDIX D
PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
permits elimination or a limitation of the liabilities of directors, no director
of the Corporation shall be liable to the Corporation, or its shareholders, for
any breach of duty in such capacity. Any repeal or modification of this Article
by the shareholders of the Corporation shall be prospective only and shall not
adversely affect any elimination or limitation of the personal liability of a
director of the Corporation for acts or omissions occurring prior to the
effective date of such repeal or modification.
ARTICLE 12. Amendments to Articles. Notwithstanding any other provisions of
this Certificate of Incorporation or the Bylaws of the Corporation, the
affirmative vote of the holders of not less than eighty percent (80%) of the
votes entitled to be cast by the holders of all then outstanding shares of
Common Stock shall be required to amend or repeal, or adopt any provisions
inconsistent with, Articles 6, 7, 8, 9, 10, 11 and 12; provided, however, that
this Article shall not apply to, and such eighty percent (80%) vote shall not be
required for, any amendment, repeal or adoption approved by sixty-six and two
thirds percent (66-2/3%) of the Board of Directors, if all of such directors are
persons who would be eligible to serve as Continuing Directors within the
meaning of paragraph (c)(5) of Article 9.
D-12
<PAGE>
APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
BYLAWS
OF
ALLIANCE FINANCIAL CORPORATION
E-1
<PAGE>
APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
INDEX
TO
BYLAWS
OF
ALLIANCE FINANCIAL CORPORATION
ARTICLE I - MEETINGS OF SHAREHOLDERS
Section 101. Place of Meetings
Section 102. Annual Meetings
Section 103. Special Meetings
Section 104. Conduct of Shareholders' Meetings
Section 105. Inspectors of Election
Section 106. Business at Annual Meeting
Section 107. Postponement of Meeting
ARTICLE II - DIRECTORS AND BOARD MEETINGS
Section 201. Management by Board of Directors
Section 202. Nomination for Directors
Section 203. Directors Must be Shareholders
Section 204. Number of Directors
Section 205. Vacancies
Section 206. Compensation of Directors
Section 207. Organization Meeting
Section 208. Regular Meetings
Section 209. Special Meetings
Section 210. Participation without Physical Presence
Section 211. Consent Without a Meeting
Section 212. Committees
Section 213. Eligibility and Mandatory Retirement
E-2
<PAGE>
APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
ARTICLE III - OFFICERS
Section 301. Officers
Section 302. Co-CEOs and Chief Executive Officer Status
Section 303. Chair of the Board
Section 304. President
Section 305. Vice Presidents
Section 306. Secretary
Section 307. Treasurer
Section 308. Assistant Officers
Section 309. Compensation
Section 310. General Powers
ARTICLE IV - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 401. Mandatory Indemnification
Section 402. Optional Indemnification
ARTICLE V - SHARES OF CAPITAL STOCK
Section 501. Authority to Sign Share Certificates
Section 502. Lost or Destroyed Certificates
ARTICLE VI - GENERAL
Section 601. Fiscal Year
Section 602. Corporate Headquarters
Section 603. Record Date
Section 604. Emergency Bylaws
Section 605. Severability
ARTICLE VII - AMENDMENT OR REPEAL
Section 701. Amendment or Repeal of Bylaws
Section 702. Recording Amendments and Repeals
E-3
<PAGE>
APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
BYLAWS
OF
ALLIANCE FINANCIAL CORPORATION
These Bylaws are supplemental to the New York Business Corporation Law
and other applicable provisions of law, as the same shall from time to time be
in effect.
ARTICLE I. MEETINGS OF SHAREHOLDERS
Section 101. Place of Meetings. All meetings of the shareholders shall be
held at such place or places, within or without the State of New York, as shall
be determined by the Board of Directors from time to time.
Section 102. Annual Meetings. The annual meeting of the shareholders for
the election of directors and the transaction of such other business as may
properly come before the meeting shall be held at such date or hour as may be
fixed by the Board of Directors. Any business which is a proper subject for
shareholder action may be transacted at the annual meeting, regardless of
whether the notice of the meeting contains any reference to the business, except
as otherwise provided by these Bylaws or applicable law.
Section 103. Special Meetings. Special meetings of the shareholders may be
called at any time by the Board of Directors, a Chief Executive Officer or
either of the Co-CEO's, a President if there is no CEO or Co-CEO, or by the
shareholders entitled to cast at least twenty-five percent (25%) of the vote
which all shareholders are entitled to cast at the meeting. At a special meeting
no business other than that specified in the notice of meeting shall be
transacted.
Section 104. Conduct of Shareholders' Meetings. The Co-CEO's (or if there
is only one CEO, the CEO) shall preside at all shareholders' meetings. In the
absence of Co-CEO's or one CEO, the President shall preside or, in his/her
absence, any officer designated by the Board of Directors. The officer presiding
over the shareholders' meeting may establish such rules and regulations for the
conduct of the meeting as he/she may deem to be reasonably necessary or
desirable for the orderly and expeditious conduct of the meeting. Unless the
officer presiding over the shareholders' meeting otherwise requires,
shareholders need not vote by ballot on any question.
E-4
<PAGE>
APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
Section 105. Inspectors of Election. Two or more inspectors of election
shall be appointed by the Board prior to each meeting of shareholders to oversee
the counting of the shareholder vote. In the event any person appointed by the
Board fails to appear or act in such capacity, the officer presiding over the
meeting may select a replacement.
Section 106. Business at Annual Meeting. At an annual meeting of
shareholders, only such business or proposals ("Business") shall be conducted as
shall have been properly brought before the annual meeting. To be properly
brought before an annual meeting, the Business must be: (a) specified in the
notice of annual meeting (or any supplement thereto) given by or at the
direction of the Board of Directors; (b) otherwise properly brought before an
annual meeting by or at the direction of the Board of Directors; or (c)
otherwise properly brought before the annual meeting in accordance with this
Section.
For Business to be properly brought before an annual meeting by a
shareholder of the Corporation, the shareholder must give timely written notice
of the Business to be brought before the annual meeting to the Secretary of the
Corporation. To be timely, a shareholder's written notice must be delivered or
mailed to and actually received at the Company's principal headquarters at least
45 days prior to the date of the annual meeting, provided, however, that if less
than 60 days notice of the annual meeting is given, then the shareholder's
written notice of the Business to be brought before the annual meeting must be
so received not later than the close of business on the 15th day following the
date on which such notice of the date of annual meeting was mailed. A
shareholder's written notice to the Secretary of the Corporation of the Business
to be brought before the annual meeting shall set forth as to each matter: (a) a
brief description of the Business desired to be brought before the annual
meeting; (b) the name and address of the shareholder proposing the business to
be brought before the annual meeting; (c) the class and number of shares of the
Corporation held by the shareholder proposing to bring business before an annual
meeting; (d) any material interest of the shareholder making the written
submission in the business to be brought before the annual meeting; and (e) the
same information required by clauses (b), (c) and (d) above with respect to any
other shareholder that, to the knowledge of the shareholder proposing such
Business, supports such proposal.
Notwithstanding anything in the Corporation's Bylaws to the contrary, no
Business shall be conducted at an annual meeting except in accordance with the
provisions and procedures set forth in this Section of the Corporation's Bylaws.
The presiding officer of an annual meeting shall, if the facts warrant,
determine and declare to the annual meeting that the Business was not properly
brought before the meeting, and, in accordance with the provisions of this
Section of the Corporation's Bylaws, any such Business not properly brought
before the meeting shall not be transacted.
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PROPOSED AMENDED
AND RESTATED BYLAWS
Section 107. Postponement of Meeting. Any annual meeting of shareholders or
any special meeting of shareholders called by the Board of Directors may be
postponed at any time or from time to time after written notice of the meeting
has been delivered to shareholders by action of the Board of Directors or a duly
authorized committee thereof. Any such postponement or postponements shall be
disclosed in any public filing with the Securities and Exchange Commission or by
means of a press release to Dow Jones & Company or any similar service promptly
following such postponement, and promptly thereafter written notice of such
postponement stating the place, day and hour to which the meeting was postponed
shall be delivered to each shareholder of record entitled to notice of and to
vote at such meeting.
ARTICLE II. DIRECTORS AND BOARD MEETINGS
Section 201. Management by Board of Directors. The business and affairs of
the corporation shall be managed by its Board of Directors. The Board of
Directors may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute, regulation, the Certificate of
Incorporation or these Bylaws directed or required to be exercised or done by
the shareholders.
Section 202. Nomination for Directors. Nominations for directors to be
elected at an annual meeting of shareholders, except those made by the Board of
Directors of the Corporation, must be submitted to the Secretary of the
Corporation in writing not less than 90 days nor more than 120 days immediately
preceding the date of the meeting. Such notification by a shareholder shall
contain the following information: (a) the name, age and business address and
residence address of each proposed nominee; (b) the principal occupation and
employment of each proposed nominee; (c) the total number of shares of capital
stock of the Corporation owned by each proposed nominee; (d) the name and
residence address of the notifying shareholder; (e) the number of shares of
capital stock of the Corporation owned by the notifying shareholder and (f) any
other information relating to such person that is required to be disclosed in
solicitations or proxies for election of directors, or otherwise required,
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as
amended. Nominations not made in accordance with this Section may be disregarded
by the presiding officer of the meeting in his/her discretion.
Section 203. Directors Must be Shareholders. Every director must be a
shareholder of the Corporation and shall own in his/her own right the number of
shares required by law in order to qualify as such director and shall be at
least equal to $1,000.00 in par value or market value. Any director shall
forthwith cease to be a director when he/she no longer holds such shares, which
fact shall be reported to the Board of Directors by the Secretary, whereupon the
Board of Directors shall declare the seat of such director vacated.
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PROPOSED AMENDED
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Section 204. Number of Directors; Classified Board. The Board of Directors
shall consist of not less than nine (9) nor more than twenty-five (25)
directors, the exact number to be fixed and determined from time to time by a
two-thirds vote of the full Board of Directors or by resolution approved by an
affirmative vote of at least two-thirds of the total votes eligible to be voted
at a duly constituted meeting of shareholders called for such purpose. The Board
shall be classified into 3 classes as nearly equal in number as possible in
accordance with the provision in the Certificate of Incorporation and applicable
law.
Section 205. Vacancies. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of directors, shall be filled
by at least a two-thirds vote of the remaining members of the Board. Increases
in the Board of Directors between annual meetings of shareholders shall be
limited to not more than three members per year. Any director elected to fill a
vacancy in the Board of Directors shall become a member of the same Class of
directors in which the vacancy existed; but if the vacancy is due to an increase
in the number of directors, the new director shall be designated as belonging in
Class 1, Class 2, or Class 3 so as to maintain the three classes of directors as
nearly equal in number as possible.
Section 206. Compensation of Directors. No director shall be entitled to
any salary as such; but the Board of Directors may fix, from time to time,
reasonable compensation for acting as a director and reasonable compensation to
be paid each director for his/her services in attending meetings of the Board
and meetings of committees appointed by the Board. The Corporation may reimburse
directors for expenses related to their duties as a member of the Board.
Section 207. Organization Meeting. The President or Secretary, upon
receiving the result of any election, shall notify the directors-elect of their
election and of the time at which they are required to meet for the purpose of
organizing the new Board and electing and appointing officers of the Corporation
for the succeeding year. Such meeting shall be held on the day of the election
or as soon thereafter as practicable, and in any event within thirty days. If,
at the time fixed for such meeting, there shall not be a quorum present, the
directors present may adjourn the meeting, from time to time, until a quorum is
obtained.
Section 208. Regular Meetings. Regular meetings of the Board of Directors
shall be held on such day, at such hour, and at such place, consistent with
applicable law, as the Board shall from time to time designate or as may be
designated in any notice from the Secretary calling the meeting. Notice need not
be given of regular meetings of the Board of Directors which are held at the
time and place designated by the Board of Directors. If a regular meeting is not
to be held at the time and place designated by the Board of Directors, notice of
such meeting (which need not specify the business to be transacted and which may
be either verbal or in writing) shall be given by the Secretary to each member
of the Board at least twenty-four hours before the time of the meeting.
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PROPOSED AMENDED
AND RESTATED BYLAWS
A majority of the full Board of Directors shall constitute a quorum for the
transaction of business. If at the time fixed for the meeting, including the
meeting to organize the new Board following the annual meeting of shareholders,
a quorum is not present, the directors in attendance may adjourn the meeting
from time to time until a quorum is obtained.
Except as otherwise provided herein or in the Certificate of Incorporation,
a majority of those directors present and voting at any meeting of the Board of
Directors at which a quorum is present shall decide each matter considered. A
director cannot vote by proxy, or otherwise act by proxy at a meeting of the
Board of Directors.
Section 209. Special Meetings. Special meetings of the Board of Directors
may be called by a Chief Executive Officer, either of the Co-CEO's, the Chair of
the Board, the President if there is no CEO or Co-CEO, or at the request of
three or more members of the Board of Directors. A special meeting of the Board
of Directors shall be deemed to be any meeting other than the regular meeting of
the Board of Directors. Notice of the time and place of every special meeting,
which need not specify the business to be transacted and which may be either
verbal or in writing, shall be given by the Secretary to each member of the
Board at least twenty-four hours before the time of such meeting excepting the
Organization Meeting following the election of directors.
Section 210. Participation Without Physical Presence. One or more directors
may participate in a meeting of the Board of Directors, or of a Committee of the
Board by a conference telephone or similar communications equipment, by means of
which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
Section 211. Consent Without a Meeting. Any action required or permitted to
be taken by the Board of Directors or any Committee of the Board may be taken
without a meeting if all members of the Board or the Committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consent shall be filed with the minutes of the proceedings of
the Board or the Committee.
Section 212. Committees.
(a) General. The Board of Directors may establish executive and other
committees, provided that the establishment, composition, functions and
structure of such committees shall be in accordance with the terms of these
Bylaws and applicable law, and shall be subject to approval by a two-thirds vote
of the full Board. Committees established under this section may be authorized
to act on any matter not specifically prohibited by New York Business
Corporation Law ss. 712. Committees shall consist of three or more directors
(along with any
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
alternate members selected by the Board), and may be altered or disbanded by
subsequent Board resolution approved by at least a two-thirds vote of the full
Board. The members of any committees shall be composed so as to include on each
committee as nearly equal as possible numbers of directors who previously served
with Cortland First Financial Corporation and Oneida Valley Bancshares, Inc.,
and any chairs of such committees will be designated so that as nearly equal as
possible numbers of directors who previously served with Cortland First
Financial Corporation and Oneida Valley Bancshares, Inc. will serve in such
positions.
(b) Executive Committee. The Executive Committee shall conduct business
with respect to any matter not specifically prohibited by New York Business
Corporation Law ss. 712 between regularly scheduled meetings of the full Board.
The Executive Committee shall consist of: (i) the CEO or co-CEOs; (ii) two
directors who previously served Cortland First Financial Corporation and two
directors who previously served Oneida Valley Bancshares, Inc., each of whom
shall serve an Executive Committee term of one year; and (iii) two directors who
previously served Cortland First Financial Corporation and two directors who
previously served Oneida Valley Bancshares, Inc., each of whom shall serve an
Executive Committee term of three months. Removal of an Executive Committee
member during his or her term, as well as election or re-election of Executive
Committee members upon expiration of an existing member's term or removal of a
member from the Executive Committee, shall be by two-thirds vote of the full
Board.
Section 213. Eligibility and Mandatory Retirement. Commencing with the
annual meeting of the shareholders in 1999, no person shall be eligible to be
newly elected or appointed as a director if he/she shall have attained the age
of seventy-one (71) years on or prior to the date of his/her election. Any
director of this Corporation, who attains the age of seventy-one (71) years
shall cease to be a director (without any action on his/her part) at the close
of business on the day prior to the date of the next shareholders' meeting at
which directors are to be elected regardless of whether or not his/her term as a
director would otherwise expire at such shareholders' meeting. Notwithstanding
the foregoing, Robert H. Fearon, Jr. who is currently 71 shall be grandfathered
consistent with current policy and shall retire as of the annual shareholders
meeting in 2000. The Board of Directors may designate one or more persons who
have retired from the Board as emeritus members of the Board. Such emeritus
members may attend meetings of the Board upon invitation by the Board, but shall
not receive compensation nor be entitled to vote as directors.
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
ARTICLE III. OFFICERS
Section 301. Officers. The officers of the corporation shall include one or
more chief executive officers, a president, one or more vice presidents, a
secretary, a treasurer, and such other officers and assistant officers as the
Board of Directors may from time to time deem advisable. Except for the
provisions in Section 302 and the positions of the president, secretary and
treasurer, the Board may refrain from filling any of the offices at any time.
Except as otherwise required by Section 302, (i) the officers shall be elected
by the Board of Directors at the annual organization meeting, in the manner and
for such terms as the Board of Directors from time to time shall determine; (ii)
any officer may be removed at any time, with or without cause, and regardless of
the term for which such officer was elected, but without prejudice to any
contract right of such officer; and (iii) each officer shall hold his/her office
for the current year for which he/she was elected or appointed by the Board
unless he/she shall resign, become disqualified, or be removed at the pleasure
of the Board of Directors.
Section 302. Co-CEOs and Chief Executive Officer Status. In accordance with
and consistent with the merger of Cortland First Financial Corporation and
Oneida Valley Bancshares, Inc. to form the Corporation, Messrs. Alvord and Mott
shall serve as Co-CEO's, and in such position shall share the functions and
powers of the president as described in Section 304 and elsewhere in these
Bylaws, for at least the duration of their employment agreements.
Notwithstanding anything to the contrary in these Bylaws, any removal or change
in the status, authority, or general responsibilities of Messrs. Alvord or Mott
shall require at least a two-thirds vote of the full Board of Directors.
Section 303. Chair of the Board. The Board of Directors may elect a Chair
of the Board at the organization meeting of the Board following each annual
meeting of shareholders at which directors are elected, provided that such
action shall require at least a two-thirds vote of the full Board of Directors.
The Chair of the Board shall be a member of the Board of Directors and shall
preside at the meetings of the Board and perform such other duties as may be
prescribed by the Board of Directors. Notwithstanding the foregoing: (i) for so
long as Messrs. Alvord and Mott serve as Co-CEOs, they shall also serve as
Co-Chairs of the Board of Directors sharing the duties and responsibilities of
such office; and (ii) at any time that Mr. Alvord or Mr. Mott serves as sole CEO
of the Corporation, he shall also serve as Chair of the Board.
Section 304. President. The president, subject to the appointment of
Co-CEO's under Section 302, shall have general supervision of all of the
departments and business of the Corporation and shall prescribe the duties of
the other officers and employees and see to the proper performance thereof. The
President shall be responsible for having all orders and resolutions of the
Board of Directors carried into effect. The President shall execute on behalf of
the Corporation and may affix
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
or cause to be affixed a seal to all authorized documents and instruments
requiring such execution, except to the extent that signing and execution shall
have been delegated to some other officer or agent of the Corporation by the
Board of Directors or by the President. In the absence or disability of the
Chairperson of the Board or his/her refusal to act, the President shall preside
at meetings of the Board. In general, the President shall perform all the duties
and exercise all the powers and authorities incident to such office or as
prescribed by the Board of Directors.
Section 305. Vice Presidents. The Vice Presidents shall perform such
duties, do such acts and be subject to such supervision as may be prescribed by
the Board of Directors or the President. In the event of the absence or
disability of the President and CEO(s) or his/her/their refusal to act, the Vice
Presidents, in the order of their rank, and within the same rank in the order of
their authority, shall perform the duties and have the powers and authorities of
the President, except to the extent inconsistent with applicable law.
Section 306. Secretary. The Secretary shall act under the supervision of
the President or such other officers as the President may designate. Unless a
designation to the contrary is made at a meeting, the Secretary shall attend all
meetings of the Board of Directors and all meetings of the shareholders and
record all of the proceedings of such meetings in a book to be kept for that
purpose, and shall perform like duties for the standing Committees when required
by these Bylaws or otherwise. The Secretary shall give, or cause to be given,
notice of all meetings of the shareholders and of the Board of Directors to the
extent required by these Bylaws or applicable law. The Secretary shall keep a
seal of the Corporation, and, when authorized by the Board of Directors or the
President, cause it to be affixed to any documents and instruments requiring it.
The Secretary shall keep, or cause to be kept, accurate and complete records of
the ownership of shares of the Corporation. The Secretary shall perform such
other duties as may be prescribed by the Board of Directors, President, or such
other supervising officer as the President may designate.
Section 307. Treasurer. The Treasurer shall act under the supervision of
the President or such other officer as the President may designate. The
Treasurer shall have custody of the Corporation's funds and perform such other
duties as may be prescribed by the Board of Directors, President or such other
supervising officer as the President may designate.
Section 308. Assistant Officers. Unless otherwise provided by the Board of
Directors, each assistant officer shall perform such duties as shall be
prescribed by the Board of Directors, the President or the officer to whom
he/she is an assistant. In the event of the absence or disability of an officer
or his/her refusal to act, his/her assistant officers shall, in the order of
their rank, and within the same rank in the order of their seniority, have the
powers and authorities of such officer.
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
Section 309. Compensation. The salaries and compensation of all officers
and assistant officers shall be fixed by or in the manner designated by the
Board of Directors.
Section 310. General Powers. The officers are authorized to do and perform
such corporate acts as are necessary in the carrying on of the business of the
Corporation, subject always to the direction of the Board of Directors.
ARTICLE IV. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 401. Mandatory Indemnification. The Corporation shall, to the full
extent permitted by the New York Business Corporation Law, as amended from time
to time, indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he/she is or was a director, officer or employee of the Corporation or of
any of its subsidiaries, and as otherwise required by Section 4.13 of the
Reorganization Agreement dated July 10, 1998 among Cortland First Financial
Corporation, Oneida Valley Bancshares, Inc., First National Bank of Cortland and
Oneida Valley National Bank.
Section 402. Optional Indemnification. In all situations in which
indemnification is not mandatory under Section 401 hereof, the Corporation may,
to the full extent permitted by the New York Business Corporation Law, as
amended from time to time, indemnify all persons whom it is empowered to
indemnify pursuant thereto.
ARTICLE V. SHARES OF CAPITAL STOCK
Section 501. Authority to Sign Share Certificates. Every share certificate
of the Corporation shall be signed by the President (or by a Chief Executive
Officer acting in such capacity pursuant to Section 302) and by the Secretary.
Section 502. Lost or Destroyed Certificates. Any person claiming a share
certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if such person shall have:
(a) requested such replacement certificate before the Corporation has
notice that the shares have been acquired by a bona fide purchaser;
(b) provided the Corporation with an indemnity agreement satisfactory
in form and substance to the Board of Directors, or the President or the
Secretary; and,
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
(c) satisfied any other reasonable requirements (including providing
an affidavit and a surety bond) fixed by the Board of Directors, or the
President or the Secretary.
ARTICLE VI. GENERAL
Section 601. Fiscal Year. The fiscal year of the Corporation shall begin on
the first day of January in each year and end on the thirty-first day of
December on each year.
Section 602. Corporate Headquarters. A decision of the Board of Directors
not to maintain headquarters offices in both Oneida and Cortland shall require
at least a two-thirds vote of the full Board.
Section 603. Record Date. The Board of Directors may fix any time
whatsoever (but not more than fifty days) prior to the date of any meeting of
shareholders, or the date for the payment of any dividend or distribution, or
the date for the allotment of rights, or the date when any change or conversion
or exchange of shares will be made or will go into effect, as a record date for
the determination of the shareholders entitled to notice of, or to vote at, any
such meetings, or entitled to receive payment of any such dividend or
distribution or to receive any such allotment of rights, or to exercise the
rights in respect to any such change, conversion or exchange of shares.
Section 604. Emergency Bylaws. In the event of any emergency resulting from
a nuclear attack or similar disaster, and during the continuance of such
emergency, the following Bylaw provision shall be in effect, notwithstanding any
other provisions of the Bylaws:
(a) A meeting of the Board of Directors or of any committee thereof
may be called by an officer or director upon one hour's notice to all
persons entitled to notice whom, in the sole judgment of the notifier, it
is feasible to notify;
(b) The director or directors in attendance at the meeting of the
Board of Directors or of any Committee thereof shall constitute a quorum;
and
(c) These Bylaws may be amended or repealed, in whole or in part, by a
majority vote of the directors attending any meeting of the Board of
Directors, provided such amendment or repeal shall be effective only for
the duration of such emergency.
Section 605. Severability. If any provision of these Bylaws is illegal or
unenforceable as such, such illegality or unenforceability shall not affect any
other provision of these Bylaws and such other provisions shall continue in full
force and effect.
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APPENDIX E
PROPOSED AMENDED
AND RESTATED BYLAWS
ARTICLE VII. AMENDMENT OR REPEAL
Section 701. Amendment or Repeal of Bylaws. The Board of Directors or the
shareholders may from time to time amend the bylaws of the Corporation. Such
action by the Board of Directors shall require the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
Board of Directors called for such purpose. Such action by the shareholders
shall require the affirmative vote of at least two-thirds of the total votes
eligible to be voted at a duly constituted meeting of shareholders called for
such purpose.
Section 702. Recording Amendments and Repeals. The text of all amendments
and repeals to these Bylaws shall be attached to the Bylaws with a notation of
the date and vote of such amendment or repeal.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
NEW YORK BUSINESS CORPORATION LAW.
Under the New York Business Corporation Law ("NYBCL"), a corporation may
indemnify its directors and officers made, or threatened to be made, a party to
any action or proceeding, except for stockholder derivative suits, if such
director or officer acted in good faith, for a purpose which he or she
reasonably believed to be in or, in the case of service to another corporation
or enterprise, not opposed to, the best interests of the corporation, and, in
criminal proceedings, had no reasonable cause to believe his or her conduct was
unlawful. In the case of stockholder derivative suits, the corporation may
indemnify a director or officer if he or she acted in good faith for a purpose
which he or she reasonably believed to be in or, in the case of service to
another corporation or enterprise, not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of (i) a
threatened action, or a pending action which is settled or otherwise disposed
of, or (ii) any claim, issue or matter as to which such person has been adjudged
to be liable to the corporation, unless and only to the extent that the court in
which the action was brought, or, if no action was brought, any court of
competent jurisdiction, determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such portion of the settlement amount and expenses as the court
deems proper.
Any person who has been successful on the merits or otherwise in the
defense of a civil or criminal action or proceeding will be entitled to
indemnification. Except as provided in the preceding sentence, unless ordered by
a court pursuant to the NYBCL, any indemnification under the NYBCL pursuant to
the above paragraph may be made only if authorized in the specific case and
after a finding that the director or officer met the requisite standard of
conduct by (i) the disinterested directors if a quorum is available, (ii) the
board upon the written opinion of independent legal counsel or (iii) the
stockholders.
The indemnification described above under the NYBCL is not exclusive of
other indemnification rights to which a director or officer may be entitled,
whether contained in the certificate of incorporation or bylaws or when
authorized by (i) such certificate of incorporation or bylaws; (ii) a resolution
of stockholders, (iii) a resolution of directors or (iv) an agreement providing
for such indemnification, provided that no indemnification may be made to or on
behalf of any director or officer if a judgment or other final adjudication
adverse to the director or officer establishes that his or her acts were
committed in bad faith or were the result of active and deliberate dishonesty
and were material to the cause of action so adjudicated, or that he or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled.
The foregoing statement is qualified in its entirety by reference to
Sections 715, 717, 721 through 725 of the NYBCL.
CORTLAND FIRST CERTIFICATE OF INCORPORATION AND BYLAWS.
The Certificate of Incorporation and Bylaws of Cortland First provide that
Cortland First shall, to the fullest extent permitted by the NYBCL, indemnify
any person who was or is made or is threatened to be
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made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director, officer or employee of the registrant or of
any of its subsidiaries. The Bylaws also provide that in all situations in which
indemnification is not mandatory as described in the preceding sentence, the
Cortland First may, to the fullest extent permitted by the NYBCL, indemnify any
person whom it is empowered to indemnify pursuant to the NYBCL.
If the Merger is consummated, the Bylaws of Alliance Financial Corporation
will contain provisions comparable to those described above.
MERGER AGREEMENT.
Section 4.13 of the Merger Agreement provides as follows:
"(a) From and after the Effective Date, [Alliance Financial
Corporation] shall indemnify, defend and hold harmless each person who is
now, or who has been at any time before the date hereof or who becomes
before the Effective Date, an officer or director of either [Oneida Valley
or Cortland First] or any of their respective subsidiaries (the
"Indemnified Parties") against all losses, claims, damages, costs, expenses
(including attorneys' fees), liabilities or judgments or amounts that are
paid in settlement (which settlement shall require the prior written
consent of [Alliance Financial Corporation], which consent shall not be
unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, or administrative
(each, a "Claim"), in which an Indemnified Party is, or is threatened to be
made, a party or witness in whole or in part on or arising in whole or in
part out of the fact that such person is or was a director or officer of
either [Oneida Valley or Cortland First] or any of their respective
subsidiaries if such Claim pertains to any matter or fact arising, existing
or occurring before the Effective Date (including without limitation the
Merger and the other transactions contemplated hereby), regardless of
whether such Claim is asserted or claimed before, or at or after, the
Effective Date (the "Indemnified Liabilities"), to the fullest extent
permitted under applicable state or federal law in effect as of the date
hereof or as amended applicable to a time before the Effective Date and
under [Oneida Valley's or Cortland First's] governing corporate documents,
and [Alliance Financial Corporation] shall pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified
Party to the full extent permitted by applicable state or federal law in
effect as of the date hereof or as amended applicable to a time before the
Effective Date upon receipt of any undertaking required by applicable law.
Any Indemnified Party wishing to claim indemnification under this Section
4.13(a), upon learning of any Claim, shall notify [Alliance Financial
Corporation] (but the failure so to notify [Alliance Financial Corporation]
shall not relieve it from any liability which it may have under this
Section 4.13(a), except to the extent such failure materially prejudices
[Alliance Financial Corporation]) and shall deliver to [Alliance Financial
Corporation] the undertaking, if any, required by applicable law. [Alliance
Financial Corporation] shall ensure, to the extent permitted under
applicable law, that all limitations of liability existing in favor of the
Indemnified Parties as provided in [Oneida Valley's or Cortland First's]
governing corporation documents, as in effect as of the date hereof, or
allowed under applicable state or federal law as in effect as of the date
hereof or as amended applicable to a time before the Effective Date, with
respect to claims or liabilities arising from facts or events existing or
occurring before the Effective Date (including without limitation, the
transactions contemplated hereby), shall survive the Merger. In the event
of any such Claim (whether arising before or after the Effective Date), (1)
[Alliance Financial Corporation] shall have the right to assume the defense
thereof (in which event the Indemnified Parties will cooperate in the
defense of any such matter) and upon such assumption [Alliance Financial
Corporation] shall not be liable to any Indemnified Party for any legal
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expenses of other counsel or anyother expenses subsequently incurred by any
Indemnified Party in connection with the defense thereof, except that if
[Alliance Financial Corporation] elects not to assume such defense, or
counsel for the Indemnified Parties reasonably advises the Indemnified
Parties that there are or may be (whether or not any have yet actually
arisen) issues which raise conflicts of interest between [Alliance
Financial Corporation] and the Indemnified Parties, the Indemnified Parties
may retain counsel reasonably satisfactory to them, and [Alliance Financial
Corporation] shall pay the reasonable fees and expenses of such counsel for
the Indemnified Parties, (2) [Alliance Financial Corporation] shall be
obligated pursuant to this paragraph to pay for only one firm of counsel
for all Indemnified Parties whose reasonable fees and expenses shall be
paid promptly as statements are received, (3) [Alliance Financial
Corporation] shall not be liable for any settlement effected without its
prior written consent (which consent shall not be unreasonably withheld)
and (4) [Alliance Financial Corporation] shall have no obligation hereunder
to any Indemnified Party when and if a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final
and nonappealable, that indemnification of such Indemnified Party in the
manner contemplated hereby is prohibited by applicable law.
(b) From and after the Effective Date, the directors, officers and
employees of [Oneida Valley and Cortland First] or any of their respective
subsidiaries who become directors or officers of [Alliance Financial
Corporation] or any of its subsidiaries, except for the indemnification
rights provided pursuant to any indemnification agreements between
[Cortland First and Oneida Valley] and their respective directors and as
set forth in paragraph (a) of this Section 4.13, shall have indemnification
rights having prospective application only. The prospective indemnification
rights shall consist of such rights to which directors and officers of
[Alliance Financial Corporation] and its subsidiaries are entitled under
the provisions of the governing corporation documents of [Alliance
Financial Corporation] and its subsidiaries, as in effect from time to time
after the Effective Date, as applicable, and provisions of applicable state
and federal law as in effect from time to time after the Effective Date.
(c) For a period of six years from and after the Effective Date,
[Alliance Financial Corporation] shall cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained
by [Oneida Valley] (provided that [Alliance Financial Corporation] may
substitute therefor policies from financially capable insurers of at least
the same coverage and amounts containing terms and conditions which are
substantially no less advantageous) with respect to Claims arising from
facts or events which occurred before the Effective Date. Following
consummation of the Merger, the directors and officers of [Alliance
Financial Corporation] shall be covered by the directors' and officers'
liability insurance maintained by [Alliance Financial Corporation].
(d) The obligations of [Alliance Financial Corporation] provided under
paragraphs (a), (b) and (c) of this Section 4.13 are intended to be
enforceable against [Alliance Financial Corporation] directly by the
Indemnified Parties and shall be binding on all respective successors and
permitted assigns of [Alliance Financial Corporation].
(e) In the event [Alliance Financial Corporation] or any of its
successors or assigns (i) consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each such
case, to the extent necessary, proper provision shall be made so that the
successors and assigns of [Alliance Financial Corporation] shall assume the
obligations set forth in this Section 4.13.
II-3
<PAGE>
(f) As a condition to receiving indemnification under this Section
4.13, the party claiming indemnification shall assign, by separate writing,
to [Alliance Financial Corporation] all right, title and interest to and in
proceeds of any insurance maintained or provided by [Oneida Valley or
Cortland First] or any of their respective affiliates for the benefits of
the claiming party, to the extent of indemnification actually received from
[Alliance Financial Corporation] hereunder and shall send such notices as
[Alliance Financial Corporation] may reasonably request under any
applicable directors' and officers' liability or blanket bond insurance
coverage to preserve claims of which the claiming party is aware.
(g) No person shall be entitled to indemnification under this Section
4.13 if such person is seeking indemnification based on a claim (other than
a claim arising as a supplier to, customer of or borrower from [Cortland
First, First National Bank of Cortland, Oneida Valley or Oneida Valley
National Bank]) brought by such person or by an entity of which such person
is a general partner, executive officer, director, trustee, beneficiary or
controlling person unless such person has waived any right to participate
in any damage or other award to such claiming party or other entity in any
such action, suit or proceeding."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
2.1 Agreement and Plan of Reorganization dated July 10, 1998 among
Cortland First Financial Corporation, Oneida Valley Bancshares,
Inc., First National Bank of Cortland and Oneida Valley National
Bank, previously filed with the Commission on July 22, 1998 as
Exhibit 2.1 to Cortland First Financial Corporation's Report on
Form 8-K, and incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of Cortland First
Financial Corporation (included as Appendix D to the Proxy
Statement/Prospectus).
3.2 Bylaws of Cortland First Financial Corporation (included as
Appendix E to the Proxy Statement/Prospectus).
5.1 Opinion of Bond, Schoeneck & King, LLP as to Validity of Shares
to be Issued.*
8.1 Opinion of Bond, Schoeneck & King, LLP as to Tax Matters.*
10.1 Stock Option Agreement, dated as of July 10, 1998, between
Cortland First (as the issuer) and Oneida Valley (as the
grantee), previously filed with the Commission on July 22, 1998
as Exhibit 10.1 to Cortland First Financial Corporation's Report
on Form 8-K, and incorporated herein by reference.
10.2 Stock Option Agreement, dated as of July 10, 1998, between Oneida
Valley (as the issuer) and Cortland First (as the grantee),
previously filed with the Commission on July 22, 1998 as Exhibit
10.2 to Cortland First Financial Corporation's Report on Form
8-K, and incorporated herein by reference.
II-4
<PAGE>
10.3 Form of Voting Agreement between Cortland First Directors and
Oneida Valley, previously filed with the Commission on July 22,
1998 as Exhibit 10.3 to Cortland First Financial Corporation's
Report on Form 8-K, and incorporated herein by reference.
10.4 Form of Voting Agreement between Oneida Valley Directors and
Cortland First, previously filed with the Commission on July 22,
1998 as Exhibit 10.4 to Cortland First Financial Corporation's
Report on Form 8-K, and incorporated herein by reference.
10.5 Proposed Employment Agreement between Alliance Financial
Corporation and David R. Alvord.*
10.6 Proposed Employment Agreement between Alliance Financial
Corporation and John C. Mott.*
10.7 Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Bond, Schoeneck & King, LLP. (contained in Exhibit
5.1).*
23.4 Consent of Bond, Schoeneck & King, LLP re Tax Opinion (contained
in Exhibit 8.1).*
23.5 Consent of Capital Formation Group of Rochester, L.P.
23.6 Consent of Empire Valuation Consultants, Inc.
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Form of Proxy for the Special Meeting of Shareholders of Cortland
First Financial Corporation*
99.2 Form of Proxy for the Special Meeting of Shareholders of Oneida
Valley Bancshares, Inc.*
99.3 Opinion of Capital Formation Group of Rochester, L.P. dated
_______, 1998 (included as Appendix A to Proxy
Statement/Prospectus).
99.4 Opinion of Empire Valuation Consultants, Inc. dated _______, 1998
(included as Appendix B to Proxy Statement/Prospectus).
- -----------
* To be filed by Amendment.
(b) Financial Statement Schedules.
II-5
<PAGE>
None required.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to andmeeting the requirements of Rule 14a-3
or Rule 14c-3 under the Securities Exchange Act of 1934; and,
where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus,
to deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to
provide such interim financial information.
(c) (1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other Items of
the applicable form.
II-6
<PAGE>
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or
(ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and
will not be used until such amendment is effective, and
that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the bylaws
of the registrant, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.
(f) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that waZs not the subject of and included in the registration
statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cortland, State of New
York, on August 31, 1998.
CORTLAND FIRST FINANCIAL CORPORATION
By: /s/ David R. Alvord
----------------------------------
David R. Alvord
President and Chief Executive Officer
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David R. Alvord and John C. Mott, and each of
them, his or her true and lawful attorney-in-fact, as agent with full power of
substitution and resubstitution for him or her and in his or name, place and
stead, in any and all capacity, to sign any or all amendments to this
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done i and about the premises, as fully and to all intents and purposes as
they might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID R. ALVORD Director, President and CEO August 31, 1998
- ----------------------------- (Principal Executive Officer)
David R. Alvord
/s/ BOB DERKSEN TREASURER August 31, 1998
- --------------------------------- (Principal Financial Officer/ Principal
Bob Derksen Accounting Officer)
/s/ DONALD S. AMES Director August 31, 1998
- ---------------------------------
Donald S. Ames
August 31, 1998
/s/ MARY ALICE BELLARDINI Director
- ---------------------------------
Mary Alice Bellardini
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN H. BUCK Director August 31, 1998
- ---------------------------------
John H. Buck
/s/ ROBERT M. LOVELL Director August 31, 1998
- ---------------------------------
Robert M. Lovell
/s/ GARRISON A. MARSTED Director August 31, 1998
- ---------------------------------
Garrison A. Marsted
/s/ HARRY D. NEWCOMB Director August 31, 1998
- ---------------------------------
Harry D. Newcomb
/s/ CHARLES E. SHAFER Director August 31, 1998
- --------------------------------
Charles E. Shafer
/s/ RICHARD J. SHAY Director August 31, 1998
- --------------------------------
Richard J. Shay
/s/ CHARLES H. SPAULDING Director August 31, 1998
- --------------------------------
Charles H. Spaulding
/s/ DAVID J. TAYLOR Director August 31, 1998
- --------------------------------
David J. Taylor
/s/ STUART E. YOUNG Director August 31, 1998
- --------------------------------
Stuart E. Young
II-9
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibits Description
- -------- -----------
2.1 Agreement and Plan of Reorganization dated July 10, 1998 among
Cortland First Financial Corporation, Oneida Valley Bancshares,
Inc., First National Bank of Cortland and Oneida Valley National
Bank, previously filed with the Commission on July 22, 1998 as
Exhibit 2.1 to Cortland First Financial Corporation's Report on
Form 8-K, and incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of Cortland First
Financial Corporation (included as Appendix D to the Proxy
Statement/Prospectus).
3.2 Bylaws of Cortland First Financial Corporation (included as
Appendix E to the Proxy Statement/Prospectus).
5.1 Opinion of Bond, Schoeneck & King, LLP as to Validity of Shares
to be Issued.*
8.1 Opinion of Bond, Schoeneck & King, LLP as to Tax Matters.*
10.1 Stock Option Agreement, dated as of July 10, 1998, between
Cortland First (as the issuer) and Oneida Valley (as the
grantee), previously filed with the Commission on July 22, 1998
as Exhibit 10.1 to Cortland First Financial Corporation's Report
on Form 8-K, and incorporated herein by reference.
10.2 Stock Option Agreement, dated as of July 10, 1998, between Oneida
Valley (as the issuer) and Cortland First (as the grantee),
previously filed with the Commission on July 22, 1998 as Exhibit
10.2 to Cortland First Financial Corporation's Report on Form
8-K, and incorporated herein by reference.
10.3 Form of Voting Agreement between Cortland First Directors and
Oneida Valley, previously filed with the Commission on July 22,
1998 as Exhibit 10.3 to Cortland First Financial Corporation's
Report on Form 8-K, and incorporated herein by reference.
10.4 Form of Voting Agreement between Oneida Valley Directors and
Cortland First, previously filed with the Commission on July 22,
1998 as Exhibit 10.4 to Cortland First Financial Corporation's
Report on Form 8-K, and incorporated herein by reference.
10.5 Proposed Employment Agreement between Alliance Financial
Corporation and David R. Alvord.*
10.6 Proposed Employment Agreement between Alliance Financial
Corporation and John C. Mott.*
10.7 Alliance Financial Corporation 1998 Long Term Incentive
Compensation Plan.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Bond, Schoeneck & King, LLP. (contained in Exhibit
5.1).*
23.4 Consent of Bond, Schoeneck & King, LLP re Tax Opinion (contained
in Exhibit 8.1).*
23.5 Consent of Capital Formation Group of Rochester, L.P.
23.6 Consent of Empire Valuation Consultants, Inc.
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Form of Proxy for the Special Meeting of Shareholders of Cortland
First Financial Corporation*
99.2 Form of Proxy for the Special Meeting of Shareholders of Oneida
Valley Bancshares, Inc.*
99.3 Opinion of Capital Formation Group of Rochester, L.P. dated
_______, 1998 (included as Appendix A to Proxy
Statement/Prospectus).
99.4 Opinion of Empire Valuation Consultants, Inc. dated _______, 1998
(included as Appendix B to Proxy Statement/Prospectus).
- -----------
* To be filed by Amendment.
[PRICEWATERHOUSE COOPERS LOGO]
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated January 16, 1998, on our audits of the financial statements of
Cortland First Financial Corporation. We also consent to the references to our
firm under the caption "EXPERTS".
/s/ PRICEWATERHOUSE COOPERS LLP
Syracuse, NY
August 31, 1998
PRICEWATERHOUSE COOPERS [LOGO]
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated January 16, 1998, on our audits of the financial statements of
Oneida Valley Bancshares, Inc. We also consent to the references to our firm
under the caption "EXPERTS".
/s/ PRICEWATERHOUSE COOPERS LLP
Syracuse, NY
August 31, 1998
EXHIBIT 23.5
August 28, 1998
Board of Directors
Cortland First Financial Corporation
65 Main Street
Cortland, NY 13045
Ladies and Gentlemen:
We hereby consent to the inclusion of our Fairness Opinion issued to the Board
of Directors of Cortland First Financial Corporation in this Registration
Statement on Form S-4, and to the discussion of such opinion letter and of our
firm in the Joint Proxy Statement/Prospectus forming a part thereof. In giving
such consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
Capital Formation Group of Rochester, L.P.
David H. Waterman
Executive Managing Director
EXHIBIT 23.6
PRIVATE & CONFIDENTIAL
August 27, 1998
Board of Directors
Oneida Valley Bancshares, Inc.
160 Main Street
Oneida, New York 13421
Ladies and Gentlemen:
We hereby consent to the inclusion of our Fairness Opinion issued to the Board
of Directors of Oneida Valley Bancshares, Inc. in this Registration Statement on
Form S-4, and to the discussion of such opinion letter and of our firm in the
Joint Proxy Statement/Prospectus forming a part thereof. In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder, nor do we
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Sincerely,
Terence L. Griswold, ASA
Principal
TLG/mmc/Encs.