SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-15366
CORTLAND FIRST FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
State of incorporation: New York
I.R.S. Employer Identification No.: 16-1276885
Address of principal executive offices: 65 Main Street, Cortland,
NY 13045
Registrant's telephone number including area code: (607) 756-2831
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $1.6667 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The aggregate market value of the voting stock held by non-
affiliates of the Registrant on February 28, 1998 was $54,719,116.
The number of shares outstanding of the Registrant's common stock
on December 31, 1997: Common Stock, $1.6667 Par Value --- 1,969,776
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders'
meeting to be held April 27, 1998, are incorporated by reference in
Part III.
Refer to Exhibit Index on Page 44.<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1997
CORTLAND FIRST FINANCIAL CORPORATION
Page
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
PART II
Item 5. Market for the Registrants Common Stock and
Related Shareholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the
Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial
Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 44
<PAGE>
PART I
Item 1 -- Business
Cortland First Financial Corporation (the Company) is a Bank
Holding Company and commenced business on October 1, 1986. First
National Bank of Cortland (the Bank) is a wholly owned subsidiary
of Cortland First Financial Corporation and its only operating
entity.
Government Regulation and Supervision
As a holding company, Cortland First Financial Corporation is
subject to supervision by the Federal Reserve system and is
required to file an annual report with the Federal Reserve Board,
and is subject to examination by that Board as well. Its
subsidiary bank, First National Bank of Cortland, is subject to
supervision by the Office of the Comptroller of the Currency as
well as the Federal Deposit Insurance Corporation (FDIC). The
administrative office of Cortland First Financial Corporation is
located at 65 Main Street, Cortland, New York, in Cortland County.
Service Area and Competition
The company conducts its banking operation primarily in Cortland
County and the surrounding areas. First National Bank of Cortland
currently employs 124 people in its eight banking offices located
in Cortland, Cortlandville[2], Marathon, McGraw, Cincinnatus, Tully,
and Whitney Point.
In 1997, we constructed a new facility to enhance the convenience
of our Cincinnatus branch by including a drive-up ATM. In
addition, First National Bank of Cortland opened the area's first
in-store, full service bank branch in the Cortlandville Wal-Mart.
Along with our network of traditional offices, ATMs, and off-site
ATMs, this in-store branch brings a new level of convenience to
current and new First National customers.
First National Bank of Cortland is an independent commercial bank
committed to serving the financial needs of customers in the local
communities. The bank is in competition 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.
Services Offered
In addition to providing the traditional loan and deposit services
to its customers, the Bank also provides several specialized
customer services including 24-hour automated teller machines in
six locations: Main Office, 65 Main Street, Cortland; Groton Avenue
Office, 1125 Groton Avenue, Cortlandville; Wal-Mart, 872 NYS Route
13, Cortlandville; Cincinnatus Office, 2743 NYS Route 26,
Cincinnatus; Tully Office, Route 80 at I-81, Tully; and the Express
Mart Mobil, Route 281, Homer; as well as 24-hour cash dispensing
machines in our Marathon Office located at 14 East Main Street,
Marathon; Cortland Memorial Hospital, 134 Homer Avenue, Cortland;
and the Pit Stop Travel Center at Exit 10 off of I-81. A full
range of trust services including investment management, retirement
plans, insurance trusts, financial planning, estate planning, and
custodial (agency) accounts are handled by the Bank. Other banking
services include safe deposit boxes, travelers checks, money
orders, wire transfers, collections, and foreign exchange.
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. We also offer a Loan-By-Phone service
("Anytime Loans") enabling customers to file consumer loan
applications from any telephone, anywhere, anytime 24 hours a
day, seven days a week using a toll-free telephone number.
First National Bank of Cortland has no foreign assets except for a
nominal amount of Canadian currency.
Management is not aware of any exposure to potential environmental
liability under the Superfund. Management is also not aware of any
known trends, events, or uncertainties that will have, or that are
reasonably likely to have, a material effect on the liquidity,
capital resources, or operations of the Company or its subsidiary.
The Next Generation of Convenience
Banking by phone and personal computer (PC), including the ability
to pay bills over the phone and computer lines, offers the next
generation of convenience for FNBC customers. Electronic Banking has
been around for several years now, but the surge of popularity
of touch tone phones and home PC's make it more attractive to banks
and more appealing to their customers. Accordingly, in 1997, a new
voice response system "Anytime Tele-Banker" was installed. This
allows customers to access their account information 24 hours a
day, seven days a week. The Wal-Mart in-store branch was opened in
March of 1997. This facility, open seven days a week, offers
shoppers personalized banking service for all types of customer
transactions, including loan applications, 76 hours per week. For
our business customers, corporate cash sweep accounts providing up-
to-date cash management tools were introduced. Our on-line
business banking product, scheduled to be introduced in early 1998,
offers cash management service for business customers from the
convenience of their own office via computer.
REVIEW OF 1997
It is a pleasure to report that your Company achieved solid results
in 1997. While hampered by a stubbornly stagnant core market
economy, total assets at year end stood at $219,368,926, virtually
unchanged from the prior year's record high of $219,072,278.
Average assets gained just over 3% or about $7 million throughout
the year.
Principally, as a result of a significant decline in loan
demand, earnings slipped about 7% in 1997 from the all-time record
earnings in 1996. Net income of $2,619,316 or $1.31 per share
compared to $2,846,162 or $1.41 per share last year. This
represents the first earnings reversal in more than ten years for
the Company. Even so, earnings were sufficient to provide a
respectable return on average assets of 1.18%.
Increased competition from various sorts many new to our
market banks, credit unions, insurance companies, pension funds
combined with declining interest margins and lack of economic
development, served to impede growth in 1997.
Seasonal loan sales and the Bank's first ever Auto Fair put
significant loan business on the books during these limited time
periods; however, sustained loan growth remained elusive.
A geographic expansion of the Bank's traditional marketing
area was launched mid-year in keeping with the overall growth plans
for the Bank. John Devlin was hired as a new commercial lending
officer with specific responsibilities to begin development of new
commercial markets in surrounding counties.
Despite the challenges, most observers agree that the Company
continues to be a good investment for the shareholders. The
Company remains strongly capitalized with capital ratios more than
double the regulatory guidelines for well-capitalized banks, and
loan quality remains good. The Veribanc and Bauer financial
institution rating firms again accorded the Bank their highest
ratings in 1997, powerful testimony to the quality of the
management, employees, directors, shareholders, and customers who
make the Bank the top notch institution it is.
As the Bank has grown, shareholders have been rewarded
accordingly. Dividends paid to shareholders were at an all-time
record high. We paid a total of $2,099,100 or $1.06 per share to
shareholders in 1997, producing a dividend yield of 5.4%. Total
return to shareholders in 1997 was 37%. Since 1990, the eight-year
cumulative total return to shareholders was 205.4% or 25.68% on
average.
In order to provide additional liquidity to shareholders
wishing to sell their shares, the Company offered to repurchase
shares through a procedure commonly referred to as a "Dutch
Auction." The Company acquired 30,538 shares in the transaction
and subsequently acquired an additional 18,000 shares in separate
transactions, of which 2,314 shares were used to meet the
requirements of the dividend reinvestment plan.
Continuing our plans to enhance customer convenience, we
installed a new voice response system "Anytime Tele-Banker" in
1997. It allows customers to access their account information 24
hours a day, seven days a week. This service has been extremely
well received and continues to grow. The Wal-Mart in-store branch
was opened in March of 1997. This facility, open seven days a
week, offers shoppers personalized banking service for all types of
customer transactions, including loan applications, 76 hours per
week. For our business customers, we introduced corporate cash
sweep accounts providing up-to-date cash management tools. Our on-
line business banking product, scheduled to be rolled out in the
first quarter of 1998, offers cash management service for business
customers from the convenience of their own office via computer.
Quality, convenience, and service continue to differentiate
financial service providers. This means people, and I am extremely
proud of the staff at First National Bank of Cortland. The
interest and skill levels of our people have never been higher.
The caliber of our people is maintained through an extensive
commitment to training and education.
There were several promotions in 1997: Christopher Hotchkiss
was promoted to Mortgage Officer; MaryAnn Piedigrossi was named
Branch Manager & Assistant Cashier; Judy Schultz, Assistant to the
President, was named Assistant Cashier; Dudley Shore, an
experienced banker, was hired as Branch Manager of our Marathon
Office; and Warren Spaulding became Sales Manager at our Wal-Mart
Office.
The Board of Directors deserves special mention for the key
role they have played guiding the Bank through uneasy competitive
waters. My confidence in our management team is equally strong. I
have no doubt about our strategies. And our mission is as valid as
ever. As an independent community bank, we are well positioned to
deliver on the promise of quality products, quality people, and
superior service.
Your Bank is listening, both to its customers and its
shareholders. The Year 2000 is just around the corner and the Bank
is continuously evolving to meet the challenges ahead. By
investing in technology to enhance customer convenience and
maximize operational efficiency, we've positioned the Bank to
compete effectively.
Innovations such as our Wal-Mart Office, aggressive marketing
initiatives such as our Social Security Deposit incentive, product
offerings such as the debit card, 24-hour telephone- and PC-
banking, plus personal service these are the strategies with
which community banks will thrive. As we move forward, it is
imperative that we continue to capitalize on those unique strengths
especially our professional, hometown service which
differentiate us from other financial service providers. And we
must use these strengths to our competitive advantage.
Yes, our work is cut out for us. But I'm here to assure you
that your Bank, Your Financial Services Center, is up to the task.
Information Concerning Executive Officers
Executive Officer
Name and Age Position Since
David R. Alvord (57) President, Chief Executive 1979
Officer and Director of Company;
President, Chief Executive
Officer and Director - First
National Bank of Cortland
Bob Derksen (64) Treasurer of Company; Vice 1991
President and Chief Financial
Officer - First National Bank
of Cortland
<PAGE>
Item 2 -- Properties
The Registrant operates the following branches:
Name of Office Location County Date Established
Home Office 65 Main Street Cortland March 1, 1869
Cortland, NY
Cincinnatus 2743 NYS Route 26 Cortland January 1, 1943
Cincinnatus, NY
Groton Avenue 1125 Groton Avenue Cortland June 22, 1987
Cortland, NY
Marathon 14 E. Main Street Cortland August 15, 1957
Marathon, NY
McGraw 30 Main Street Cortland May 1, 1967
McGraw, NY
Tully Route 80 at I-81 Onondaga January 26, 1989
Tully, NY
Whitney Point 2950 NYS Route 11 Broome April 7, 1994
Whitney Point, NY
Wal-Mart 872 NYS Route 13 Cortland March 10, 1997
Cortland, NY
The Tully, Whitney Point, and Wal-Mart offices are leased. The
other banking premises are owned.
Item 3 -- Legal Proceedings
There are no pending legal proceedings, other than routine
litigation incidental to the business of the Bank, to which the
Registrant or the Bank is a party or of which any of their property
is the subject. In management's opinion, no pending action, if
adversely decided, would materially affect the Bank's or the
Registrant's financial condition.
Item 4 -- Submission of Matters to a Vote of Security Holders
No matters were submitted for security holder vote during the
fourth quarter of 1997.
<PAGE>
PART II
Item 5 -- Market for Registrant's Common Stock and Related
Shareholders Matters
Common Stock Data:
The common stock of Cortland First Financial Corporation is
inactively traded in the over-the-counter market. Market makers
for the stock are Ryan, Beck & Company (800-342-2325), Monroe
Securities, Inc. (716-546-5560), and First Albany Corporation
(800-336-3245). There were 538 shareholders of record as of
December 31, 1997. Stock prices below are based on low "bid"
prices and high "bid" prices for the quarter.
1997 High Low Dividend Paid
1st Quarter $ 20.50 $ 20.00 $ .14
2nd Quarter 21.50 21.25 .14
3rd Quarter 22.50 22.25 .14
4th Quarter 26.00 22.25 .64
1996 High Low Dividend Paid
1st Quarter $ 17.00 $ 16.875 $ .117*
2nd Quarter 19.00 18.00 .12
3rd Quarter 19.00 18.875 .12
4th Quarter 19.75 19.00 .14
*Restated to reflect 3-for-1 stock split.
The transfer agent for the stock is American Stock Transfer & Trust
Company (ASTC). They can be contacted at the following address:
Registrar and Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, NY 10005
Automatic Dividend Reinvestment Plan
This plan is administered by ASTC, as your agent. It offers a
convenient way for shareholders to increase their investment in
CFFC. The plan enables certain shareholders to reinvest all or
part of their common stock dividends in additional shares of CFFC
common stock without paying brokerage commissions or service
charges. Shareholders who are interested in this program may
receive a Plan Prospectus and enrollment card by writing or calling
ASTC Dividend Reinvestment at 1-800-278-4353.
<PAGE>
Item 6 -- Selected Financial Data
Five Year Comparative Summary (In thousands of dollars)
Assets and Deposits 1997 1996 1995 1994 1993
Loans $111,932 $112,361 $111,028 $108,683 $104,619
Securities 88,256 84,128 75,262 70,380 67,587
Deposits 192,210 191,838 178,446 176,967 167,302
Total Assets 219,369 219,072 203,860 198,759 188,683
Trust Dept Assets 64,420 61,924 56,359 49,872 50,130
(not included in Total Assets)
Shareholders' Equity 25,007 25,378 23,654 20,424 20,063
(Capital, Surplus & Undivided Profits)
Operating Income & Expenses
Total Interest Income 15,985 15,632 15,224 14,314 14,292
Total Interest Exp 6,531 6,220 5,848 4,725 5,013
Net Interest Income 9,454 9,412 9,376 9,589 9,279
Provision for Possible
Loan Losses 390 283 300 300 300
Net Interest Income
after Provision for
Possible Loan Losses 9,064 9,129 9,076 9,289 8,979
Other Operating Inc 1,777 1,523 1,446 1,370 1,303
Total Operating Inc 10,841 10,652 10,522 10,659 10,282
Salaries & Benefits 3,909 3,625 3,695 3,596 3,343
Occupancy & Equipment
Expense 1,299 1,100 1,070 1,099 1,005
Other Operating Exp 2,094 1,953 1,935 2,096 2,042
Total Operating Exp 7,302 6,678 6,700 6,791 6,390
Income Before Taxes 3,539 3,974 3,822 3,868 3,892
Provision for Taxes 920 1,128 1,089 1,178 1,163
Net Income 2,619 2,846 2,733 2,690 2,729
Per-Share Statistics
(adjusted for stock split)
Net Income $ 1.31 $ 1.41 $ 1.36 $ 1.33 $ 1.35
Book Value at Year End 12.70 12.59 11.73 10.13 9.95
Cash Dividends Paid 1.06 .497 .433 .417 .400
<PAGE>
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Cortland First Financial Corporation 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 six offices in Cortland County
(Cortland, Cortlandville [2], Marathon, McGraw, and Cincinnatus),
one office in southern Onondaga County (Tully), and one office in
northern Broome County (Whitney Point). During 1997, we opened a
new in-store branch at Wal-Mart in Cortlandville. This full-
service branch features extended hours, including evenings,
weekends, and holidays. We also relocated our Cincinnatus office.
This relocation provides increased customer parking, easy access
from Route 26, the introduction of 24-hour banking with a drive-up
ATM, and a handicap-accessible customer service/teller station.
The primary regulator of Cortland First Financial Corporation is
the Federal Reserve Bank of New York in New York City, while its
subsidiary, First National Bank of Cortland, is regulated by the
Office of the Comptroller of the Currency in Washington, D.C.
The purpose of this discussion is to provide the reader with
information designed to understand the financial statements
included herewith and to provide information as to material events
or changes which affected the financial condition or results of
operation since December 31, 1996. This discussion will, in
general, not repeat numerical information contained in the
financial statement, since these changes are readily computable.
References below to the "Bank" refer to First National Bank of
Cortland.
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 the Bank, 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 stock in Cortland First Financial Corporation. The result of
this stock repurchase was the placement of 30,538 shares in
Treasury Stock. Later in the year, the Corporation purchased an
additional 18,000 shares and re-issued 2,314 shares to their
transfer agent, American Stock Transfer & Trust Company, to satisfy
the requirements of the dividend reinvestment plan.
In 1997, we added approximately 20% of our 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 continues 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 funds
will be available to meet their credit needs. The Bank was a net
seller of federal funds in the amount of $4,888,000 on a daily
average basis. The investment portfolio provides liquidity from
maturing instruments on a regular basis 97.2% is available for
sale and 75.9% matures in less than five years. The Bank continues
to have a credit facility with the Federal Home Loan Bank of New
York. With a stable deposit base, the Bank is not dependent on
volatile deposits such as jumbo CD's. 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 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, the 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 the Bank's capital or earnings. The
Office of the Comptroller of the Currency has defined several
categories of risk for supervisory purposes. Management assesses
and evaluates its exposure to these risk categories on a continuous
basis. Management believes 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% a year ago. Primarily due to the relatively
stagnant economy of our trading area, loan demand continued to be
soft in 1997.
Salaries, wages, and employee benefit costs increased $284,118 due
to our Wal-Mart in-store branch, the hiring of a loan officer to
expand our market area, and a large increase in our self-insured
medical program in 1997.
The expense for advertising, communications, and supplies increased
due to the production and promotion of a new telephone-banking
product offering. "Anytime Tele-Banker," a toll-free, automated
telephone banking system, provides our customers the convenience of
checking their balance, getting rate information, making transfers
between accounts, and more.
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 last year, gross debit card income of $39,542, insurance
commissions increase of $7,266, and ATM fee income of $12,136.
Our provision for possible loan losses was increased by $107,000 to
keep our 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 continues to be of
high quality when compared with industry peer groups.
On a daily average basis, total deposits during 1997 amounted to
$195,341,525 compared to $189,669,284, 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 we maintain 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 our 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. Any shareholder and Bank customer should give
serious consideration to what this department can do for them.
Year 2000
The Bank 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. To date,
confirmations have been received from the Bank's primary processing
vendors that plans are being developed to address processing of
transactions in the Year 2000. Based on the Bank's 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." This
Statement will require the Bank to report comprehensive income.
For the Bank, 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 its reportable business segments. Management
believes the Bank 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.
<PAGE>
Item 8 -- Financial Statements and Supplementary Data
The consolidated financial statements, footnotes, and supplementary
data follow:
CONSOLIDATED BALANCE SHEETS Dec. 31, 1997 Dec. 31, 1996
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
The accompanying notes are an integral part of the consolidated
financial statements.<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.<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)
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.
<TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY:
For the years ended Common Undivided
Dec. 31, 1997, 1996, 1995 Stock Surplus Profits
<S> <C> <C> <C>
Balance at January 1, 1995 $3,360,000 $3,360,000 $14,578,877
Net income for the year 2,732,868
Change in unrealized net
gain/(loss) on investment
securities
Cash dividends, (873,600)
$.4333 per share*
2,016,000 shares**
Balance at 3,360,000 3,360,000 16,438,145
December 31, 1995
Net income for the year 2,846,162
Change par value to $1.6667 67 (67)
Change in unrealized net
gain/(loss) on investment
securities
Cash dividends, (1,001,280)
$.4966 per share*
2,016,000 shares**
Balance at 3,360,067 3,360,000 18,282,960
December 31, 1996
Net income for the year 2,619,316
Change in unrealized net
gain/(loss) on investment
securities
Treasury stock purchased
Treasury stock sold 8,667
Cash dividends, (2,099,100)
$1.06 per share
1,994,240 shares**
Balance at $3,360,067 $3,360,000 $18,811,853
December 31, 1997
Unrealized
Investment
Securities Treasury
Gains/(Losses) Stock Total
Balance at January 1,1995 (875,320) $20,423,557
Net income for the year 2,732,868
Change in unrealized net
gain/(loss) on investment
securities 1,370,826 1,370,826
Cash dividends, (873,600)
$.4333 per share*
2,016,000 shares**
Balance at 495,506 23,653,651
December 31, 1995
Net income for the year 2,846,162
Change par value to $1.6667
Change in unrealized net
gain/(loss) on investment
securities (120,738) (120,738)
Cash dividends, (1,001,280)
$.4966 per share*
2,016,000 shares**
Balance at
December 31, 1996 374,768 25,377,795
Net income for the year 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 53,361 62,038
Cash dividends, (2,099,100)
$1.06 per share
1,994,240 shares**
Balance at $ 540,492 $(1,065,696) $25,006,716
December 31, 1997
*Restated to reflect 3-for-1 stock split 3/96.
**Weighted number of shares outstanding during the year.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.<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 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
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 assumption 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.
<PAGE>
The net approximate carrying amounts and fair values of financial instruments
are as follows:
<TABLE>
(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.
<PAGE>
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.
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 one additional
share 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.
<PAGE>
INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities at
December 31, 1997 and 1996 are as follows:
<TABLE>
Amortized Gross Unreal- Gross Unreal- Estimated
Cost ized Gains ized Losses Fair Value
Held-to-Maturity Portfolio - 1997
U.S. Treasury securities and
obligations of U.S. government
<S> <C> <C> <C> <C>
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>
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 investment 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>
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.
<PAGE>
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
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.
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
LINES OF CREDIT
At December 31, 1997, the Bank had available lines of credit
totaling $21,906,900 which were unused.<PAGE>
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). 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>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997 (>or=) (>or=)
Total Capital (to Risk-
<S> <C> <C> <C> <C> <C> <C>
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%<PAGE>
</TABLE>
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
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
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY:
The following table sets forth the amounts of the Corporation'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.
<TABLE>
<CAPTION>
1/97-12/97 1/96-12/96 1/95-12/95
(In Thousands) (In Thousands) (In Thousands)
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Rate Balance Rate Balance Rate
Interest Earning Assets
Investment Securities
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 Invest
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
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' 25,235 24,218 22,078
Equity 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>
<PAGE>
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)
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<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the amortized cost of investments
for the dates indicated:
December 31,
(In Thousands)
1997 1996 1995
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
<PAGE>
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 and
estimated fair value for available-for-sale securities. Yield 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.)
<TABLE>
Remaining Maturities December 31, 1997
(In Thousands)
Within After 1 Year After 5 Years
1 Year to 5 Years to 10 Years After 10 Years Total
Held to Maturity Portfolio Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
US Treasury Securities $ 1,947 6.24% 16,184 6.28% 0 0.00% 0 0.00% 18,131 6.28%
US 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>
<PAGE>
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)
<TABLE>
Average
Interest-Sensitive There- Interest
Assets: 1998 1999 2000 2001 2002 after Total Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
<PAGE>
Loan Portfolio Composition
The following table presents the composition by types of loans
within the Company's loan portfolio for the dates indicated:
Type of Loan December 31
(In Thousands)
1997 1996 1995 1994 1993
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
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.
Remaining Maturity at December 31, 1997
Within After 1 yr. but After
1 Year within 5 Yrs. 5 Years Total
(In Thousands)
Real Estate Loans $ 6,539 $17,487 $41,407 $ 65,433
Commercial & 18,556 2,922 1,035 22,513
Agricultural
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
Sensitivity of Loans Due
After One Year to Changes
in Interest Rates: Fixed Rate Variable Rate Total
(In Thousands)
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
<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 3.5 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.
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
Non-accruing Loans
The Company does not accrue interest on certain non-performing
loans. Non-accrual status is normally reserved for loans 90 days
or more past due unless both well secured and in the process of
collection.
Potential Problem Loans
At December 31, 1997, the Company 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 Registrant 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
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 our
local service area. We have no outside area loans in our
portfolio.
<PAGE>
Allocations of the Allowance for Loan Losses
<TABLE>
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%
Year Ended December 31,
1994 1993
% of Loans % of Loans
Amount to Total Amount to Total
(In Thousands)
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>
<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 our lending area. The Company
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.
<PAGE>
Summary of Loan Loss Experience
The following table summarizes the Company's loan loss experience for the five
years ended December 31, 1993, 1994, 1995, 1996 and 1997.
<TABLE>
Year Ended December 31,
1997 1996 1995 1994 1993
(In Thousands)
Loans, Net of unearned income
<S> <C> <C> <C> <C> <C>
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% O.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>
Deposits
The exhibit below presents daily average amounts and rates of deposits by type
for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
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.<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%
Item 9 -- Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable.
PART III
Item 10 -- Directors and Executive Officers of the Registrant
Directors are listed in the Annual Proxy Statement, dated March 18,
1998, pages 2 through 3, incorporated herein by reference.
Item 11 -- Executive Compensation
Annual Proxy Statement, dated March 18, 1998, pages 7 through 11,
incorporated herein by reference.
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management
Annual Proxy Statement, dated March 18, 1998, pages 2 through 4,
incorporated herein by reference.
Item 13 -- Certain Relationships and Related Transactions
Annual Proxy Statement, dated March 18, 1998, page 11, incorporated
herein by reference.
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as part of this report:
(1) The following financial statements are incorporated by
reference from Item 8 hereof:
Consolidated Statements of Condition at December 31, 1997
and 1996.
Consolidated Statements of Income For Each of the Three
Years in the Period Ended December 31, 1997.
Consolidated Statements of Shareholders' Equity For Each
of the Three Years in the Period Ended December 31, 1997.
Consolidated Statements of Cash Flows For Each of the
Three Years in the Period Ended December 31, 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial statement schedules are omitted from this Form
10-K since the required information is not applicable to
the Registrant.
(3) Listing of Exhibits:
The following documents are attached as Exhibits to this
Form 10-K as indicated by the page number or exhibit or
are incorporated by reference to the prior filings of the
Registrant with the Commission.
FORM 10-K
Exhibit
Number Exhibit Page
3.1 Certificate of Incorporation of
Cortland First Financial Corporation *
3.2 Bylaws of the Company *
3.3 Amendment to Certificate of Incorporation of
Cortland First Financial Corporation
incorporated by reference from Form 10Q for
the quarter ended March 31, 1996 filed by the
Company on May 14, 1996 with the Securities
and Exchange Commission. *
4 Specimen Stock Certificates *
21 List of Registrant's Subsidiary E-2
* Exhibit is incorporated herein by reference to the identically
numbered exhibit to the Form S-4 Registration Statement filed
by the Company with the Securities an Exchange Commission on
August 18, 1986.
Item 14 (b)
There were no reports filed on Form 8-K during the fourth
quarter of 1997.
Item 14 (c)
See Item 14 (a) (3) above.
Item 14 (d)
See Item 14 (a) (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORTLAND FIRST FINANCIAL CORPORATION
(Registrant)
Date March 24, 1998 By /s/ David R. Alvord
David R. Alvord, President and
Chief Executive Officer
Date March 24, 1998 By /s/ Bob Derksen
Bob Derksen, Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant, and in the capacities and on the dates
indicated.
/s/David R. Alvord Date March 24, 1998
David R. Alvord, President, CEO and Director
/s/Donald S. Ames Date March 24, 1998
Donald S. Ames, Director
/s/Mary Alice Bellardini Date March 24, 1998
Mary Alice Bellardini, Director
/s/John H. Buck Date March 24, 1998
John H. Buck, Director
Date
Robert M. Lovell, Director
/s/Harry D. Newcomb Date March 24, 1998
Harry D. Newcomb, Director
/s/Richard J. Shay Date March 25, 1998
Richard J. Shay, Director
/s/Charles H. Spaulding Date March 24, 1998
Charles H. Spaulding, Director
/s/David J. Taylor Date March 24, 1998
David J. Taylor, Director
/s/Stuart E. Young Date March 25, 1998
Stuart E.Young, Director<PAGE>
Exhibit 21 -- Subsidiaries
Subsidiary of the Registrant
First National Bank of Cortland is a wholly owned subsidiary of
Cortland First Financial Corporation.
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