<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee required]
For the fiscal year ended December 31, 1994.
Commission file number 0-13814
-------
Cortland Bancorp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1451118
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
194 West Main Street
Cortland, Ohio 44410
- --------------------------------- ---------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (216) 637-8040
---------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of Class)
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 shorter periods that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of the chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K
or any amendment to this Form 10-K [ x ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 7, 1995:
Common Stock, No Par Value - $27,684,860
- ----------------------------------------
The number of shares outstanding of the issuer's classes of common stock
as of March 7, 1995:
Common Stock, No Par Value - 988,745 shares
- -------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 1994 are incorporated by reference into Part II.
Portions of the proxy statement for the annual shareholders meeting to
be held April 11, 1995 are incorporated by reference into Part III.
<PAGE> 2
<TABLE>
CORTLAND BANCORP
FORM 10-K
1994
INDEX
<CAPTION>
Part I Page
- ------ --------
<S> <C>
Item 1. Business:
General I-2
Statistical Disclosure I-4
Item 2. Properties I-19
Item 3. Legal Proceedings I-19
Item 4. Submission of Matters to a Vote of Security Holders I-20
Executive Officers of the Registrant I-20
Part II
- -------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 8. Financial Statements and Supplementary Data II-1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures II-1
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management III-1
Item 13. Certain Relationships and Related Transactions III-1
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
</TABLE>
I-1
<PAGE> 3
PART I
------
Item 1. Business
- ------- --------
General
- --------
THE CORPORATION
---------------
The registrant, Cortland Bancorp (herein sometimes referred to as the
"Corporation"), is a bank holding company which was incorporated under the laws
of the State of Ohio in 1984, and is registered under the Bank Holding Company
Act of 1956, as amended. Its subsidiaries are The Cortland Savings and Banking
Company ("Cortland Banks" or the "Bank"), which was acquired at the
Corporation's inception in 1985, and New Resources Leasing Company, which was
formed in 1988. The Corporation and its subsidiaries operate in one industry,
domestic banking.
The Corporation conducts no business activities except for investment in
securities as permitted under the Bank Holding Company Act.
The business of the Corporation and its subsidiaries is not seasonal to
any significant extent and is not dependent on any single customer or group of
customers.
CORTLAND BANKS
--------------
Cortland Banks is a full service, state chartered bank engaged in
commercial and retail banking and trust services. Cortland Banks' commercial
and consumer banking services include checking accounts, savings accounts, time
deposit accounts, commercial, mortgage and installment loans, leasing, night
depository, automated teller services, safe deposit boxes, money order
services, travelers checks, utility bill payments and other miscellaneous
services normally offered by commercial banks. In addition, Cortland Banks
participates in bank charge card plans and discount brokerage services with
correspondent banks. Cortland Banks' Trust Department offers a broad range of
fiduciary services, including the administration of decedent and trust estates
and other personal and corporate fiduciary services. Business is conducted at
a total of ten offices, six of which are located in Trumbull County, Ohio.
Three offices are located in the communities of Hiram, Windham and Mantua,
Portage County, Ohio and one office is located in the community of
Williamsfield, Ashtabula County, Ohio. Chartered by the State of Ohio,
Cortland Banks is also a member of the Federal Reserve System.
NEW RESOURCES LEASING COMPANY
-----------------------------
New Resources Leasing Company was formed in December 1988 as a separate
entity to handle the function of commercial and consumer leasing. The company
has been inactive since incorporation.
SUPERVISION AND REGULATION
--------------------------
The Corporation is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant
to the Bank Holding Company Act of 1956, as amended. Generally, this Act
limits the business of bank holding companies to owning or controlling banks
and engaging in such other activities as the Federal Reserve Board may
determine to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
I-2
<PAGE> 4
Supervision and Regulation (Continued):
- --------------------------------------
Cortland Banks, as a state banking organization, is subject to periodic
examination and regulation by the Federal Reserve Bank of Cleveland and the
State of Ohio Division of Banks. Cortland Banks is a member of the Federal
Reserve System and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC).
COMPETITION
-----------
Cortland Banks actively competes with state and national banks located in
the Ohio counties of Trumbull, Portage and Ashtabula. It also competes with a
large number of other financial institutions, such as savings and loan
associations, insurance companies, consumer finance companies, credit unions
and commercial finance and leasing companies, for deposits, loans and service
business. Money market mutual funds, brokerage houses and similar institutions
provide in a relatively unregulated environment many of the financial services
offered by banks. In the opinion of management, the principal methods of
competition are the rates of interest charged for loans, the rates of interest
paid for funds, the fees charged for services and the availability of services.
EMPLOYEES
---------
At March 7, 1995, the Corporation and its subsidiaries had 158 full-time
and 52 part-time employees. The Corporation considers its relations with its
employees to be satisfactory.
I-3
<PAGE> 5
Statistical Disclosure
- -----------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
- ----------------------------------------------------------------
INTEREST RATES AND INTEREST DIFFERENTIAL
----------------------------------------
AVERAGE BALANCE SHEETS
----------------------
(In Thousands of Dollars)
The following shows consolidated balances of average assets, liabilities
and shareholders' equity for the years indicated. The averages are based on
daily balances.
<TABLE>
<CAPTION>
ASSETS 1994 1993 1992
------ -------- -------- --------
<S> <C> <C> <C>
Cash and due from banks $ 7,555 $ 6,751 $ 6,540
Interest-bearing deposits in other banks 658 100 434
Federal funds sold 2,489 8,075 7,654
Trading account securities 337 544 186
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 66,804 54,751 47,507
U.S. Government mortgage-backed
pass-through certificates 70,833 79,548 72,026
States of the U.S. and political subdivisions 15,362 10,778 5,310
Other securities 2,414 3,166 3,587
-------- -------- --------
TOTAL INVESTMENT SECURITIES 155,413 148,243 128,430
-------- -------- --------
Total loans 148,304 147,289 165,527
Less unearned income 16 26 47
Less allowance for loan losses 3,116 3,284 3,526
------- ------- -------
NET LOANS 145,172 143,979 161,954
------- ------- -------
Market Value (depreciation) of
securities available for sale (91) -0- -0-
Premises and equipment 6,488 5,316 5,576
Other assets 5,314 5,397 4,692
-------- -------- --------
$323,335 $318,405 $315,466
======== ======== ========
</TABLE>
I-4
<PAGE> 6
<TABLE>
AVERAGE BALANCE SHEETS (CONTINUED)
----------------------------------
(In Thousands of Dollars)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993 1992
------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Deposits (all domestic):
Noninterest-bearing demand deposits $ 29,783 $ 25,927 $ 23,227
Interest-bearing demand deposits 51,392 53,452 51,089
Savings 95,096 91,308 81,636
Time 113,101 115,785 130,862
-------- -------- --------
TOTAL DEPOSITS 289,372 286,472 286,814
-------- -------- --------
Short-term borrowings:
U.S. Treasury interest-bearing demand note 623 692 608
Federal funds purchased 440 -0- -0-
Securities sold under agreements to repurchase 2,354 2,458 2,381
-------- -------- --------
TOTAL SHORT-TERM BORROWINGS 3,417 3,150 2,989
-------- -------- --------
Other liabilities 2,502 3,292 2,624
-------- -------- --------
TOTAL LIABILITIES 295,291 292,914 292,427
-------- -------- --------
Shareholders' equity:
Common stock 4,735 4,531 4,341
Additional paid-in capital 7,323 6,528 5,829
Retained earnings 16,439 14,718 13,217
Net unrealized loss on available for sale
debt and marketable equity securities (453) (286) (345)
Less cost of common shares in treasury -0- -0- (3)
--------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 28,044 25,491 23,039
--------- -------- --------
$323,335 $318,405 $315,466
======== ======== ========
</TABLE>
I-5
<PAGE> 7
ANALYSIS OF NET INTEREST EARNINGS
---------------------------------
(In Thousands of Dollars)
The following schedules show the average amounts of interest-earning
assets and interest-bearing liabilities, the related amounts of interest earned
or paid and the related average yields or interest rates paid for the year
indicated:
<TABLE>
<CAPTION>
Interest Average
Average Earned Yield or
Year ended December 31, 1994 Outstanding or Paid Rate
- ---------------------------- ----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other banks $ 658 $ 18 2.7%
Federal funds sold 2,489 95 3.8
Trading account securities 337 26 7.7
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 66,804 4,427 6.6
U.S. Government mortgage-backed
pass-through certificates 70,833 4,037 5.7
States of the U.S. and political
subdivisions (1) (2) 15,362 1,026 6.7
Other securities (1) 2,414 147 6.1
-------- --------
Total investment securities (1) 155,413 9,637 6.2
Loans (1) (2) (4) 148,288 13,147 8.9
-------- --------
Total interest-earning assets $307,185 $ 22,923 7.5%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 51,392 $ 1,237 2.4%
Savings 95,096 2,586 2.7
Time 113,101 5,549 4.9
-------- --------
Total deposits 259,589 9,372 3.6
-------- --------
Short-term borrowings:
U.S. Treasury interest-bearing
demand note 623 24 3.9
Federal funds purchased 440 22 5.0
Securities sold under agreements
to repurchase 2,354 80 3.4
-------- --------
Total short-term borrowings 3,417 126 3.7
-------- --------
Total interest-bearing liabilities $263,006 $ 9,498 3.6%
======== ========
Net interest margin (3) $ 13,425 4.4%
======== ====
</TABLE>
I-6
<PAGE> 8
<TABLE>
ANALYSIS OF NET INTEREST EARNINGS
---------------------------------
(In Thousands of Dollars)
<CAPTION>
Interest Average
Average Earned Yield or
Year ended December 31, 1993 Outstanding or Paid Rate
- ---------------------------- ----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other banks $ 100 $ 12 12.0%
Federal funds sold 8,075 244 3.0
Trading account securities 544 32 5.9
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 54,751 3,616 6.6
U.S. Government mortgage-backed
pass-through certificates 79,548 4,839 6.1
States of the U.S. and political
subdivisions (1) (2) 10,778 768 7.1
Other securities (1) 3,166 220 6.9
-------- --------
Total investment securities (1) 148,243 9,443 6.4
Loans (1) (2) (4) 147,263 13,631 9.3
-------- --------
Total interest-earning assets $304,225 $ 23,362 7.7%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 53,452 $ 1,485 2.8%
Savings 91,308 2,778 3.0
Time 115,785 5,765 5.0
--------- --------
Total deposits 260,545 10,028 3.8
--------- --------
Short-term borrowings:
U.S. Treasury interest-bearing
demand note 692 20 2.9
Federal funds purchased -0- -0- -0-
Securities sold under agreements
to repurchase 2,458 79 3.2
-------- --------
Total short-term borrowings 3,150 99 3.1
-------- --------
Total interest-bearing liabilities $263,695 $ 10,127 3.8%
======== ========
Net interest margin (3) $ 13,235 4.4%
======== =====
</TABLE>
I-7
<PAGE> 9
<TABLE>
ANALYSIS OF NET INTEREST EARNINGS
---------------------------------
(In Thousands of Dollars)
<CAPTION>
Interest Average
Average Earned Yield or
Year ended December 31, 1992 Outstanding or Paid Rate
- ---------------------------- ----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other banks $ 434 $ 34 7.8%
Federal funds sold 7,654 272 3.6
Trading account securities 186 14 7.5
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 47,507 3,386 7.1
U.S. Government mortgage-backed
pass-through certificates 72,026 5,307 7.4
States of the U.S. and political
subdivisions (1) (2) 5,310 453 8.5
Other securities (1) 3,587 280 7.8
-------- --------
Total investment securities (1) 128,430 9,426 7.3
Loans (1) (2) (4) 165,480 16,585 10.0
-------- --------
Total interest-earning assets $302,184 $ 26,331 8.7%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 51,089 $ 1,918 3.8%
Savings 81,636 3,211 3.9
Time 130,862 7,843 6.0
-------- --------
Total deposits 263,587 12,972 4.9
-------- --------
Short-term borrowings:
U.S. Treasury interest-bearing
demand note 608 18 3.0
Federal funds purchased -0- -0- -0-
Securities sold under agreements
to repurchase 2,381 89 3.7
-------- --------
Total short-term borrowings 2,989 107 3.6
-------- --------
Total interest-bearing liabilities $266,576 $ 13,079 4.9%
======== ========
Net interest margin (3) $ 13,252 4.4%
======== =====
<FN>
(1) The amounts are reflected on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1994, 1993 and 1992. Tax-free income from states
of the U.S. and political subdivisions, other securities and loans amounted to
$641, $14 and $206, respectively, for 1994; $474, $14 and $180, respectively,
for 1993; $270, $14 and $104, respectively, for 1992.
(2) Average outstanding includes the average balance outstanding of all
nonaccrual investment securities and loans. States and political subdivisions
consist of average total principal adjusted for amortization of premium and
accretion of discount less average allowance for estimated losses, and include
both taxable and tax exempt securities. Loans consist of average total loans
less average unearned income.
(3) Net interest margin is calculated by dividing the difference between total
interest earned and total interest expensed by total interest-earning assets.
(4) Interest earned on loans includes loan fees of $333 in 1994, $368 in 1993
and $334 in 1992.
</TABLE>
I-8
<PAGE> 10
<TABLE>
RATE AND VOLUME ANALYSIS
------------------------
(In Thousands of Dollars)
The following tables analyze by rate and volume the dollar amount of changes in the components of the interest differential:
<CAPTION>
1994 Change from 1993
---------------------------------
Change Change
Total Due to Due to
Change Volume Rate
-------- -------- --------
<S> <C> <C> <C>
Interest Income
- ---------------
Interest-bearing deposits in other banks $ 6 $ 21 $ (15)
Federal funds sold (149) (201) 52
Trading account securities (6) (14) 8
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 811 799 12
U.S. Government mortgage-backed
pass-through certificates (802) (509) (293)
States of the U.S. and political
subdivisions 258 309 (51)
Other securities (73) (48) (25)
--------- --------- ---------
Total investment securities 194 551 (357)
Loans (484) 94 (578)
--------- --------- ---------
Total interest income $ (439) $ 451 $ (890)
========= ========= =========
Interest Expense
- ----------------
Deposits:
Interest-bearing demand deposits $ (248) $ (55) $ (193)
Savings (192) 112 (304)
Time (216) (133) (83)
--------- --------- --------
Total deposits (656) (76) (580)
--------- --------- --------
Short-term borrowings:
U.S. Treasury interest-bearing
demand note 4 (2) 6
Federal funds purchased 22 22 0
Securities sold under agreements
to repurchase 1 (3) 4
--------- -------- ---------
Total short-term borrowings 27 17 10
--------- -------- ---------
Total interest expense $ (629) $ (59) $ (570)
========= ======== =========
<FN>
The change in interest due to both rate and volume has been allocated to rate
and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
</TABLE>
I-9
<PAGE> 11
<TABLE>
RATE AND VOLUME ANALYSIS
------------------------
(In Thousands of Dollars)
<CAPTION>
1993 Change from 1992
---------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
-------- -------- --------
<S> <C> <C> <C>
Interest Income
- ---------------
Interest-bearing deposits in other banks $ (22) $ (34) $ 12
Federal funds sold (28) 14 (42)
Trading account securities 18 22 (4)
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 230 491 (261)
U.S. Government mortgage-backed
pass-through certificates (468) 518 (986)
States of the U.S. and political
subdivisions 315 400 (85)
Other securities (60) (31) (29)
--------- --------- ---------
Total investment securities 17 1,378 (1,361)
Loans (2,954) (1,743) (1,211)
--------- --------- ---------
Total interest income $ (2,969) $ (363) $ (2,606)
========= ========= =========
Interest Expense
- ----------------
Deposits:
Interest-bearing demand deposits $ (433) $ 86 $ (519)
Savings (433) 351 (784)
Time (2,078) (842) (1,236)
--------- --------- ---------
Total deposits (2,944) (405) (2,539)
--------- --------- ---------
Short-term borrowings:
U.S. Treasury interest-bearing
demand note 2 2 0
Federal funds purchased 0 0 0
Securities sold under agreements
to repurchase (10) 3 (13)
--------- --------- ---------
Total short-term borrowings (8) 5 (13)
--------- --------- ---------
Total interest expense $ (2,952) $ (400) $ (2,552)
========= ========= =========
</TABLE>
I-10
<PAGE> 12
II. INVESTMENT PORTFOLIO
- ------------------------
The following table shows the book value of investment securities by type
of obligation at the dates indicated:
<TABLE>
(In Thousands of Dollars)
<CAPTION>
December 31,
-------------------------------
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 65,777 $ 59,007 $ 53,339
U.S. Government mortgage-backed
pass-through certificates 65,590 77,768 74,646
States of the U.S. and political subdivision 15,285 14,488 5,873
Other Securities 2,324 2,524 3,232
-------- -------- --------
$148,976 $153,787 $137,090
======== ======== ========
</TABLE>
A summary of securities held at December 31, 1994, classified according to
the earlier of next repricing or the maturity date and the weighted average
yield for each range of maturities, is set forth below. Fixed rate
mortgage-backed securities are classified by their estimated contractual cash
flow, adjusted for current prepayment assumptions. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
(In Thousands of Dollars)
<CAPTION>
December 31, 1994
--------------------------------------
Book Weighted
Type and Maturity Grouping Value Average Yield (1)
- -------------------------- -------- ------------------
<S> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations:
Maturing within one year $ 8,024 6.92%
Maturing after one year but within five years 27,977 6.46
Maturing after five years but within ten years 29,776 7.40
Maturing after ten years -0- 0.00
-------- ------
Total U.S. Treasury and other U.S.
Government agencies and corporations $ 65,777 6.94%
======== ======
U.S. Government mortgage-backed
pass-through certificates; REMICS & CMO's
Maturing within one year $ 43,800 5.33%
Maturing after one year but within five years 14,081 6.99
Maturing after five years but within ten years 5,698 8.03
Maturing after ten years 2,011 8.03
-------- ------
Total U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's $ 65,590 6.00%
======== ======
</TABLE>
I-11
<PAGE> 13
<TABLE>
(In Thousands of Dollars)
<CAPTION>
December 31, 1994
---------------------------------
Book Weighted
Type and Maturity Grouping Value Average Yield (1)
-------------------------- -------- -----------------
<S> <C> <C>
States of the U.S. and political subdivisions:
Maturing within one year $ 770 9.70%
Maturing after one year but within five years 4,686 6.65
Maturing after five years but within ten years 9,265 6.97
Maturing after ten years 564 7.96
-------- ------
Total States of the U.S. and
political subdivisions $ 15,285 7.05%
======== ======
Other securities:
Maturing within one year $ 1,980 6.64%
Maturing after one year but within five years -0- 0.00
Maturing after five years but within ten years -0- 0.00
Maturing after ten years 344 3.94
-------- ------
Total Other securities $ 2,324 6.24%
======== ======
<FN>
(1) The weighted average yield has been computed by dividing the total
interest income adjusted for amortization of premium or accretion of
discount over the life of the security by the par value of the securities
outstanding. The weighted average yield of tax-exempt obligations of
states of the U.S. and political subdivisions has been calculated on a
fully taxable equivalent basis. The amounts of adjustments to interest
which are based on the statutory tax rate of 34% were $24, $92, $218 and
$15 for the four ranges of maturities.
</TABLE>
Excluding obligations of the U.S. Treasury and other agencies and
corporations of the U.S. government, there were no investment or mortgage-
backed securities of any one issuer which exceeded 10% of consolidated
shareholders' equity at December 31, 1994.
As of December 31, 1994, there were $2,287 in callable U.S. Treasury
Securities and $3,957 in callable U.S. Government Agencies, that are likely to
be called within the next twelve months, given current and expected interest
rate environments. However, these securities have been categorized according
to their contractual maturities, with $1,996 scheduled to mature after one year
but within five years and $4,248 scheduled to mature after five years but
within ten years.
Also, as of December 31, 1994, there were $2,079 in callable U.S. Government
Agencies that, given current and expected interest rate environments, are
likely to be called during the next 1-5 year period. These securities have
also been categorized according to their contractual maturities, with $2,079
scheduled to mature after five years but within ten years.
I-12
<PAGE> 14
III. LOAN PORTFOLIO (ALL DOMESTIC)
- ----------------------------------
<TABLE>
TYPES OF LOANS
--------------
(In Thousands of Dollars)
The following schedule shows the types of loans at the dates indicated:
<CAPTION>
December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1-4 Family residential
mortgage $ 66,069 $ 68,096 $ 71,085 $ 83,824 $ 85,943
Commercial mortgage 37,554 35,014 37,385 41,252 42,761
Consumer loans 17,247 14,539 18,975 26,109 33,061
Commercial loans 15,101 12,898 10,963 13,832 16,945
Home equity loans 12,854 13,403 12,426 10,802 8,211
1-4 Family residential
mortgages held for sale 1,855 1,877 889 -0- -0-
-------- -------- -------- -------- --------
$150,680 $145,827 $151,723 $175,819 $186,921
======== ======== ======== ======== ========
</TABLE>
MATURITIES AND SENSITIVITIES OF LOANS TO INTEREST RATES
-------------------------------------------------------
(In Thousands of Dollars)
The following schedule sets forth maturities based on remaining scheduled
repayments of principal or next repricing opportunity for various categories of
loans listed above as of December 31, 1994:
<TABLE>
<CAPTION>
1 Year 1 to 1 to Over
Types of Loans or Less 5 Years 5 Years Total
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial loans $ 6,599 $ 6,666 $ 1,836 $ 15,101
Home Equity 12,854 -0- -0- 12,854
-------- -------- -------- --------
Total loans (excluding
mortgage and consumer loans) $ 19,453 $ 6,666 $ 1,836 $ 27,955
======== ======== ======== ========
</TABLE>
The amounts of total loans (excluding mortgage and consumer loans)
as of December 31, 1994, based on remaining scheduled repayments of principal,
are shown in the following table:
<TABLE>
<CAPTION>
1 Year Over
Types of Loans or Less 1 Year Total
-------------- -------- -------- --------
<S> <C> <C> <C>
Floating or adjustable rates of interest $ 14,885 $ 5,982 $ 20,867
Fixed rates of interest 4,568 2,520 7,088
-------- -------- --------
Total loans $ 19,453 $ 8,502 $ 27,955
======== ======== ========
</TABLE>
I-13
<PAGE> 15
<TABLE>
RISK ELEMENTS
-------------
(In Thousands of Dollars)
The following table sets forth aggregate loans in each of the following
categories for the years indicated:
<CAPTION>
December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $ 1,909 $ 1,652 $ 1,979 $ 3,315 $ 3,350
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 14 353 201 251 105
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 205 573 1,222 1,084 1,902
</TABLE>
The following shows the amounts of contractual interest income and
interest income actually reflected in income on loans accounted for on a
nonaccrual basis and loans considered troubled debt restructuring as of
December 31, 1994.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
<S> <C>
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms $236
Interest income included in income on the loans 124
</TABLE>
A loan is placed on a nonaccrual basis whenever sufficient information is
received to question the collectibility of the loan or any time legal
proceedings are initiated involving a loan. Once a loan is charged-off, any
interest that may be accrued and not collected on the loan is charged against
earnings.
As of December 31, 1994, there are $2,416 in loans, not included in the
above categories, which may be considered potential problem loans. Management
has established specific allocations of the allowance for loan loss of $350,
which it considers adequate, based on current information, to cover potential
loss related to these credits.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed above do not (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which management is aware
of any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
As of December 31, 1994, the Bank had $124 in investment securities
accounted for on a nonaccrual basis. On February 15, 1994 a pre-refunded,
escrowed municipal bond with a par value of $100 issued by Northeast Randolph
County, Alabama, was placed on nonaccrual status by the Bank. These bonds were
pre-refunded with U.S. treasury securities financed by a subsequent bond issue
of Northern Randolph County, Alabama, which has since defaulted. Holders of
this issue have filed suit, seeking to have the escrow unwound with proceeds
distributed to the claimants. The bond trustee has suspended interest payments
pending a ruling from the court on this matter. The probability of an
unfavorable outcome regarding this litigation cannot be ascertained at this
time; management is unable to determine if any write-down will be required.
On December 31, 1992 the Bank had investment securities with a carrying
value of $74, and a par value of $500 accounted for on a nonaccrual basis.
During 1993, the LTV Corporation reached an agreement with its creditors and
emerged from chapter XI bankruptcy proceedings. As a result of the settlement,
in which the Bank received cash, common stock and other securities in exchange
for its debt securities of the LTV Corporation, the bank realized a gain of
$106 on LTV related securities in its investment portfolio.
I-14
<PAGE> 16
IV. SUMMARY OF LOAN LOSS EXPERIENCE
- -----------------------------------
<TABLE>
The following is an analysis of the allowance for loan losses for the
periods indicated:
(In Thousands of Dollars)
<CAPTION>
December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,139 $ 3,415 $ 3,203 $ 2,987 $ 1,865
Loan losses:
1 - 4 Family residential
mortgage (72) (172) (108) (160) (216)
Commercial mortgage (27) (42) (834) (195) (456)
Consumer loans (141) (271) (438) (792) (1,375)
Commercial loans (48) (123) (198) (187) (633)
Home equity loans -0- (7) (18) -0- -0-
--------- -------- -------- -------- --------
(288) (615) (1,596) (1,334) (2,680)
--------- -------- -------- -------- --------
Recoveries on previous
loan losses:
1 - 4 Family residential
mortgage 4 26 55 17 24
Commercial mortgage 6 28 6 -0- -0-
Consumer loans 156 202 273 321 582
Commercial loans 64 83 24 32 27
--------- -------- -------- -------- --------
230 339 358 370 633
--------- -------- -------- -------- --------
Net loan losses (58) (276) (1,238) (964) (2,047)
--------- -------- -------- -------- --------
Provision charged to
operations -0- -0- 1,450 1,180 3,169
--------- -------- -------- -------- --------
Balance at end of year $ 3,081 $ 3,139 $ 3,415 $ 3,203 $ 2,987
======== ======== ======== ======== ========
Ratio of net loan losses to
average loans outstanding .04% .19% .75% .53% 1.07%
===== ===== ===== ===== ========
</TABLE>
For each of the periods presented above, the provision for loan losses
charged to operations is based on management's judgment after taking into
consideration all known factors connected with the collectibility of the
existing portfolio. Management evaluates the portfolio in light of economic
conditions, changes in the nature and volume of the portfolio, industry
standards and other relevant factors. Specific factors considered by
management in determining the amounts charged to operations include previous
loan loss experience, the status of past due interest and principal payments,
the quality of financial information supplied by the customers and the general
economic conditions present in the corporation's lending area.
I-15
<PAGE> 17
The following is an allocation of the allowance for loan losses. The
allowance 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 as of the dates indicated:
<TABLE>
(In Thousands of Dollars)
<CAPTION>
December 31,
----------------------------------------------------------------------
Types of Loans 1994 1993 1992 1991 1990
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 Family residential
mortgage $ 385 $ 405 $ 437 $ 419 $ 216
Commercial mortgage 1,223 1,029 1,157 997 681
Consumer loans 407 424 591 1,019 1,028
Commercial loans 207 192 210 235 178
Home equity loans 63 67 62 52 20
Unallocated portion 796 1,022 958 481 864
------- -------- -------- -------- --------
$ 3,081 $ 3,139 $ 3,415 $ 3,203 $ 2,987
======= ======== ======== ======== ========
</TABLE>
The allocation of the allowance as shown in the table above should not be
interpreted as an indication that loan losses in l995 will occur in the same
proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total
amount available for future losses that might occur within such categories
since the total allowance is a general allowance applicable to the entire
portfolio.
<TABLE>
The percentage of loans in each category to total loans is shown in the
following table:
<CAPTION>
December 31,
----------------------------------------------------------------------
Types of Loans 1994 1993 1992 1991 1990
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 Family residential
mortgage 45.1% 48.0% 47.4% 47.7% 46.0%
Commercial mortgage 24.9 24.0 24.7 23.5 22.9
Consumer loans 11.5 10.0 12.5 14.8 17.7
Commercial loans 10.0 8.8 7.2 7.9 9.0
Home equity loans 8.5 9.2 8.2 6.1 4.4
------ ------- ------ ------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
====== ======= ====== ======= =======
</TABLE>
LOAN COMMITMENTS AND LINES OF CREDIT
------------------------------------
In the normal course of business, the bank subsidiary has extended various
commitments for credit. Commitments for mortgages, revolving lines of credit
and letters of credit generally are extended for a period of one month up to
one year. Normally, no fees are charged on any unused portion. A fee of 1% is
typically charged for the issuance of a letter of credit.
I-16
<PAGE> 18
V. DEPOSITS (ALL DOMESTIC)
- --------------------------
The following table shows the classification of average deposits for the
periods indicated:
<TABLE>
(In Thousands of Dollars)
<CAPTION>
Average Balance 1994 1993 1992
--------------- -------- -------- --------
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 29,783 $ 25,927 $ 23,227
Interest-bearing demand deposits 51,392 53,452 51,089
Savings 95,096 91,308 81,636
Time deposits 113,101 115,785 130,862
-------- -------- --------
Total average deposits $289,372 $286,472 $286,814
======== ======== ========
</TABLE>
<TABLE>
The following shows the average rate paid on the following deposit
categories for the periods indicated:
<CAPTION>
Type 1994 1993 1992
---- -------- -------- --------
<S> <C> <C> <C>
Interest-bearing demand deposits 2.4% 2.8% 3.8%
Savings 2.7 3.0 3.9
Time deposits 4.9 5.0 6.0
</TABLE>
<TABLE>
A summary of time deposits of $l00,000 or more as of December 31, 1994 by
maturity range is shown below:
(In Thousands of Dollars)
<CAPTION>
Other
Certificates Time
of Deposit Deposits Total
------------ -------- --------
<S> <C> <C> <C>
3 months or less remaining until maturity $ 6,258 $ 1,313 $ 7,571
3 to 6 months remaining until maturity 2,997 -0- 2,997
6 to 12 months remaining until maturity 5,270 -0- 5,270
Over 12 months remaining until maturity 3,702 1,301 5,003
-------- -------- --------
Total outstanding $ 18,227 $ 2,614 $ 20,841
======== ======== ========
</TABLE>
I-17
<PAGE> 19
VI. RETURN ON EQUITY AND ASSETS
- -------------------------------
<TABLE>
Information for the years indicated is as follows:
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Return on average total assets 1.0% .7% .9%
Return on average equity 11.0 8.8 12.0
Dividend payout ratio 26.9 21.4 15.1
Average equity to average total assets 8.7% 8.0% 7.3%
====== ====== =======
</TABLE>
I-18
<PAGE> 20
Item 2. Properties
- ------- ----------
CORTLAND BANCORPS' PROPERTY
---------------------------
Cortland Bancorp owns no property. Operations are conducted at 194 West
Main Street, Cortland, Ohio.
CORTLAND BANKS' PROPERTY
------------------------
Cortland Banks' main office (as described in its charter) is located at
194 West Main Street, Cortland, Ohio. Administrative offices are located at
the main office. The other offices are:
<TABLE>
<CAPTION>
Popular Name Address
------------ -------
<S> <C>
Brookfield Office 7325 Warren-Sharon Road, Brookfield, Ohio
Vienna Office 4434 Warren-Sharon Road, Vienna, Ohio
Windham Office 9690 East Center Street, Windham, Ohio
Bristol Office 6090 State Route 45, Bristolville, Ohio
Williamsfield Office State Routes 322 and 7, Williamsfield, Ohio
Hiram Office 6821 Wakefield Road, Hiram, Ohio
Warren Office 2935 Elm Road, Warren, Ohio
Hubbard Office 890 West Liberty Street, Hubbard, Ohio
Mantua Office 10521 Main Street, Mantua, Ohio
</TABLE>
The Brookfield, Windham, Hubbard and Mantua Offices are leased, while all
of the other above offices are owned by Cortland Banks.
Item 3. Legal Proceedings
- ------- -----------------
The subsidiary Bank was a defendant in a consumer class action lawsuit,
filed on June 8, 1990 in the Court of Common Pleas of Fayette County,
Pennsylvania involving the demise of a campground real estate development known
as Alpine Valley Resorts, Inc. While the Bank denied liability, it negotiated
a settlement agreement dated February 2, 1994. Payment on the settlement,
which was fully provided for as of December 31, 1993, was fully disbursed
during the quarter ended June 30, 1994.
The Bank is also involved in other legal actions arising in the ordinary
course of business. In the opinion of management, the outcome of these matters
is not expected to have a material effect on the Corporation.
I-19
<PAGE> 21
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
- ------------------------------------
The names, ages and positions of the executive officers as of March 7,
1995 are as follows:
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Rodger W. Platt 59 Chairman of the Board,
President and Director
Dennis E. Linville 44 Executive Vice President,
Secretary and Director
Lawrence A. Fantauzzi 47 Controller/Treasurer
</TABLE>
All of the officers listed above will hold office until the next annual
meeting of shareholders and until their successors are duly elected and
qualified.
Principal Occupation and Business Experience of Executive Officers
- ------------------------------------------------------------------
During the past five years the business experience of each of the
executive officers has been as follows:
Rodger W. Platt has been Chairman of the Board of Cortland Bancorp and
the subsidiary bank since November 1987. He became Chairman of the Board of
New Resources Leasing Company in December of 1988. He has been a Director and
President of Cortland Bancorp since its formation in April of 1985. He has
been a Director of the subsidiary bank since 1974 and has been President since
1976.
Dennis E. Linville has been Executive Vice President of Cortland Bancorp
and the subsidiary bank since November 1987. He became a Director of the
subsidiary bank in June of 1989. He has been a Director of Cortland Bancorp
and New Resources Leasing Company since December 1988. He has been the
Secretary of Cortland Bancorp since 1985 and has been Vice President and
Secretary of the subsidiary bank since 1984.
Lawrence A. Fantauzzi has been the Controller of Cortland Bancorp and the
subsidiary bank since April 1987. He became Treasurer of Cortland Bancorp in
December 1992.
I-20
<PAGE> 22
PART II
-------
Information relating to Items 5, 6, 7 and 8 is set forth in the
Corporation's 1994 Annual Report to Shareholders under the captions and on the
pages indicated below and is incorporated herein by reference:
<TABLE>
<CAPTION>
Pages in 1994
Annual Report
Caption in 1994 Annual Report to Shareholders to Shareholders
--------------------------------------------- ---------------
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and
- ------- -----------------------------------------
Related Shareholder Matters 40
---------------------------
Discussion of Dividend Restrictions 23
------------------------------------
Item 6. Selected Financial Data 24
- ------- -----------------------
Item 7. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 27
---------------------------------------------
Item 8. Financial Statements and Accompanying Information 5
- ------- -------------------------------------------------
Item 9. Changes in and Disagreements with Accountants
- ------- ---------------------------------------------
on Accounting and Financial Disclosures
---------------------------------------
</TABLE>
<TABLE>
<S> <C>
(a) (1) (i) Crowe Chizek, the independent accounting firm engaged as the
principal accountants to audit Cortland Bancorp's financial
statements for the two years ended December 31, 1993 and
1992, was informed on February 22, 1994 that they were being
dismissed as of the completion of their audit of the December
31, 1993 financial statements.
(a) (1) (ii) The former accountant's report on financial statements for
the years ended December 31, 1993 and 1992 did not contain any
adverse opinions, disclaimers nor were they qualified as to
uncertainty.
(a) (1) (iii) The decision to change accounting firms was made by the
Audit Committee of the Board of Directors, at a meeting held
on February 8, 1994.
(a) (1) (iv) During the two most recent fiscal years and the subsequent
period to date, there have not been any disagreements with the
former accountants on any matters of audit, accounting
principles or practices, financial statement disclosures, or
audit scope or procedures.
(a) (2) At a meeting held on February 8, 1994, the Board of Directors
of Cortland Bancorp engaged the accounting firm of Packer
Thomas & Company to serve as independent public accountants for
Cortland Bancorp for the twelve month periods ending December
31, 1994 through 1996. The newly engaged accountants were not
consulted prior to engagement on the application of any
accounting principles or the type of opinion that it might have
rendered on the Corporation's financial statements.
(a) (3) Cortland Bancorp has requested the former accountant to
furnish it with a letter addressed to the Commission stating
that it agrees with the statements made by Cortland Bancorp in
response to this item and, if not, stating the respects in
which the former accountant does not agree. Such letter was
filed with the commission on February 26, 1994.
</TABLE>
II-1
<PAGE> 23
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information relating to directors of the Corporation will be set forth in
the Corporation's definitive proxy statement to be filed with the Securities
and Exchange Commission in connection with its annual meeting of shareholders
to be held April 11, 1995. Such information is incorporated herein by
reference. Information relating to executive officers of the Corporation is
set forth in Part I. Pages 3-6
Item 11. Executive Compensation
- -------- ----------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held
April 11, 1995. Such information is incorporated herein by reference. Pages
6-9
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held
April 11, 1995. Such information is incorporated herein by reference. Page 2
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held
April 11, l995. Such information is incorporated herein by reference. Page 12
III-1
<PAGE> 24
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) 1. Financial Statements
--------------------
Included in Part II of this report:
Item 8., Financial Statements and Accompanying Information,
is set forth in the Corporation's 1994 Annual Report to
Shareholders and is incorporated by reference in Part II
of this report.
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report as Exhibit 23:
Independent Accountants' Consent
Schedules:
All schedules are omitted because they are not
applicable.
(a) 3. Exhibits
--------
The exhibits filed or incorporated by reference as a part of
this report are listed in the Index to Exhibits which appears
at page IV-3 hereof and is incorporated herein by reference.
(b) Report on Form 8-K
------------------
No reports on Form 8-K were filed for the three months ended
December 31, 1994.
IV-1
<PAGE> 25
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 BANCORP
March 7, 1995 By Rodger W. Platt, President
- ---------------------- ------------------------------
Date
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.
<TABLE>
<S> <C> <C>
Chairman of the Board,
Rodger W. Platt President and Director March 7, 1995
- -------------------------------- ------------------
Date
Executive Vice
President, Secretary
Dennis E. Linville and Director March 7, 1995
- -------------------------------- -------------------
Date
P. Bennett Bowers Director March 7, 1995
- -------------------------------- -------------------
Date
David C. Cole Director March 7, 1995
- -------------------------------- --------------------
Date
George E. Gessner Director March 7, 1995
- -------------------------------- -------------------
Date
William A. Hagood Director March 7, 1995
- -------------------------------- -------------------
Date
James E. Hoffman, III Director March 7, 1995
- -------------------------------- -------------------
Date
Richard L. Hoover Director March 7, 1995
- -------------------------------- -------------------
Date
K. Ray Mahan Director March 7, 1995
- -------------------------------- -------------------
Date
Timothy K. Woofter Director March 7, 1995
- -------------------------------- -------------------
Date
Lawrence A. Fantauzzi Controller/Treasurer March 7, 1995
- -------------------------------- -------------------
Date
</TABLE>
IV-2
<PAGE> 26
INDEX TO EXHIBITS
-----------------
The following exhibits are filed or incorporated by reference as part of
this report:
3.1. Articles of Incorporation of the Corporation as currently in effect and
any amendments thereto (incorporated by reference to Exhibit 3 of the
Corporation's Report on Form S-1 filed February 5, 1988).
3.2. Bylaws of the Corporation as currently in effect and any amendments
thereto (incorporated by reference to Exhibit 3a of the Corporation's
Report on Form S-1 filed February 5, l988).
4 The rights of holders of equity securities are defined in portions of
the Articles of Incorporation and Bylaws as referenced in 3.1. and
3.2.
11 Statement regarding computation of earnings per share (filed herewith).
13 Annual Report to security holders (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consents of experts and counsel - Consent of independent accountants
(filed herewith).
27 Financial Data Schedule (filed herewith).
Copies of any exhibits will be furnished to shareholders upon written
request. Requests should be directed to Dennis E. Linville, Secretary,
Cortland Bancorp, 194 West Main Street, Cortland, Ohio 44410.
IV-3
<PAGE> 1
<TABLE>
Exhibit 11
----------
CORTLAND BANCORP AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
-----------------------------------------------------
<CAPTION>
Years ended December 31,
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Average shares outstanding 974,556 960,342 946,827
Net Income ($000 omitted) $ 3,083 $ 2,250 $ 2,760
Earnings per share $ 3.16 $ 2.34 $ 2.91
</TABLE>
<PAGE> 1
EXHIBIT 13
- --------------------------------------------------------------------------------
CONTENTS
Chairman's Message
----------------------------------------------
1
Brief Description of the Business
----------------------------------------------
3
Report of Independent Auditors
----------------------------------------------
4
Consolidated Statements of Income
----------------------------------------------
5
Consolidated Balance Sheets
----------------------------------------------
6
Consolidated Statements of
Shareholders' Equity
----------------------------------------------
7
Consolidated Statements of Cash Flows
----------------------------------------------
8
Notes to the Consolidated Financial
Statements
----------------------------------------------
9
Selected Financial Data
----------------------------------------------
24
Three Year Summary
Average Balances, Yields and Rates
----------------------------------------------
25
Management's Discussion and Analysis
----------------------------------------------
27
Information as to Stock Prices and
Dividends
----------------------------------------------
40
Cortland Bancorp
Directors and Officers
----------------------------------------------
41
Cortland Savings & Banking
Directors and Officers
----------------------------------------------
42
Offices and Locations
----------------------------------------------
43
- --------------------------------------------------------------------------------
<PAGE> 2
CHAIRMAN'S MESSAGE TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
Bankers all across America are reporting record profits. The results at Cortland
Bancorp are no less impressive. We have just concluded our best year ever in the
102 year history of Cortland Banks, eclipsing by 12% our previous best effort.
Net income for 1994 registered $3.083 million, a 37% improvement over last year.
Earnings per share increased to $3.16 from the $2.34 earned a year ago. Our
leverage capital ratio climbed to 9% while our risk-based capital ratio topped
20%. These solid financial results enabled us to undertake several initiatives
for the benefit of shareholders, employees and customers.
The performance achieved in 1994 is a reflection of the dedication and
commitment of all the Company's employees. In recognition, the Board of
Directors awarded the first profit sharing distribution since 1987. All
employees, full time and part time alike, participated. The remarkable progress
achieved over the past several years testifies to the talented and hard-working
nature of our employees. The very positive trends now in place indicate that
everyone is pulling together to make Cortland Banks one of the best community
banks anywhere.
For shareholders, the benefits of an enhanced earnings stream and an improved
capital base were just as tangible. With capital ratios now at levels widely
recognized as among the best in the business, and with a return on equity in
excess of that needed to support current growth rates, the Board of Directors
voted to increase the regular cash dividends by more than 28%. Then, in a type
of profit sharing for shareholders, a special one-time cash dividend was awarded
as well. When combined, the regular and special dividends represented a 70%
increase over 1993.
For our customers, we were very busy behind the scenes. Capital expenditures
totalled nearly $2 million as we made extensive improvements to our
infrastructure to enhance customer service. The conversion of both our hardware
and software mainframe computer systems represented the culmination of many
months of research, training and testing. Accomplished with a minimum number of
problems and complications, we continue to move up the "learning curve,"
convinced that these new systems enable us to better serve customers while
upgrading our internal management capabilities.
In addition, we implemented an automated telephone system to improve current
communications while providing for potential new customer services
down-the-road. We continued to expand our network of personal computers, adding
new loan and deposit platform systems that facilitate compliance with bank
policy, laws and regulations. We also planned our switch to the MAC ATM Network
which promises to provide customers with more flexible service and capabilities
than were previously available.
Also during 1994, we applied for and received regulatory approval to add an
eleventh branch location. This branch will be located in the community of Niles,
Ohio and is expected to open by the middle of 1995. This new office will feature
changes in our small business and commercial lending areas intended to provide
customers with even greater access and responsiveness.
The many changes we had previously put in place in our commercial lending area
enabled us to take advantage of the improved economic conditions in 1994
affecting the small business community. Indeed, our portfolio of commercial
loans increased by nearly 10%, and now represents 35% of our total loan
portfolio. This important segment of the market had been long ignored by the
nation's largest banks, super regional and money center banks. Only recently
have they posed any serious competitive threat for the small business market.
Nevertheless, confident in our philosophy and approach, we will continue to be
successful by demonstrating to small business owners the many unique advantages
of dealing with Cortland Banks.
Consumer loan demand also evidenced solid strength, as this sector of the loan
portfolio increased by better than 18%. Installment loans were the primary
focus, as we targeted a select network of preferred dealerships through which to
increase our market penetration. Yet, despite strong growth
- --------------------------------------------------------------------------------
1 ---
<PAGE> 3
- --------------------------------------------------------------------------------
in both the consumer and commercial loan sectors, overall loan growth for the
year was a modest 3.3%. Home Equity and residential mortgage loans, sources of
strength the past several years, suffered sharp setbacks when the Federal
Reserve reversed its policy directives on interest rates. Indeed, residential
mortgage loan originations declined by 35% compared to the prior year, as second
half 1994 volume shrunk to less than 50% of the first half's production.
Meanwhile, a series of hikes in the prime lending rate encouraged consumers to
pay down home equity lines rather than take down new draws.
Despite the modest overall loan growth, we have no plans to relax our stringent
quality standards for the sake of encouraging more rapid loan growth. Over the
past five years we have worked very hard to reduce our problem assets. As a
result of these efforts, underperforming assets have been reduced by more than
65%. As of December 31, 1994, underperforming assets represented only 8.6% of
our total capital compared to 35.3% five years ago. Net loan charge-offs
declined from 1.81% of loans in 1989 to a negligible 0.04% in 1994. Having
wrestled with the expenses associated with problem assets -- some obvious, but
many, much more subtle and pervasive throughout the cost structure -- our
preference is for a steady and gradual improvement in our loan-to-deposit ratio
rather than a more aggressive strategy that would risk dilution of asset
quality.
The economy in 1994 grew at its quickest pace in ten years. Despite repeated
warnings by economists that the best news on inflation was behind us, inflation
continued to ease, as solid productivity gains and global competition held price
increases in check. With real investment up, inflation down, and productivity on
the increase, the economy began to create new jobs, resulting in an impressive
drop in the unemployment rate. Yet against the backdrop of all this good news,
the outlook for 1995 remains cloudy. What happened?
Fearful of "too much of a good thing" and mindful of the long lags between
changes in monetary policy and their eventual effect on the economy, the Federal
Reserve implemented new directives designed to slow the rate of economic
expansion to a sustainable pace. The result has been seven interest rate hikes
and a significant slowing in the growth of the money supply aggregates. Capital
investment, housing and retail sales are all now slowing, while inventories,
unemployment and loan delinquencies are all beginning to climb.
So what lies ahead -- boom, bust, stagflation or sustainable growth? Our view is
that we are at or near a turning point. In pursuit of continued success, we have
constructed a defensive yet opportunistic position. The emphasis we have placed
on asset quality cushions us against the worst in the event of a serious
economic downturn; while our strong capital base confers upon us sufficient
leverage potential to exploit attractive growth opportunities.
We look forward to our continued success, and to sharing the fruits of that
success with shareholders, employees and customers, alike. Together may we
continue to provide our communities with some of the finest banking services
anywhere.
Sincerely,
/s/ Rodger W. Platt
Rodger W. Platt
Chairman and President
- --------------------------------------------------------------------------------
2 ---
<PAGE> 4
BRIEF DESCRIPTION OF THE BUSINESS
- --------------------------------------------------------------------------------
CORTLAND BANCORP
Cortland Bancorp (the "Company") was incorporated under the laws of the State of
Ohio in 1984. The Company is a one bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The principal activity of the
Company is to own, manage and supervise the Cortland Savings and Banking Company
("Cortland Banks" or the "Bank"). The Company presently owns all of the
outstanding shares of the Bank. The Company provides managerial resources to,
and coordinates and evaluates the activities of, the Bank.
The Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended. Generally, this Act limits the business
of bank holding companies to owning or controlling banks and engaging in such
other activities as the Federal Reserve Board may determine to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Company conducts no other business activities except for investments in
securities as permitted under the Bank Holding Company Act. The business of the
Company and the Bank is not seasonal to any significant extent and is not
dependent on any single customer or group of customers.
THE CORTLAND SAVINGS
AND BANKING COMPANY
The Cortland Savings and Banking Company is a full service state bank engaged in
commercial and retail banking and trust services. The Bank's services include
checking accounts, savings accounts, time deposit accounts, commercial, mortgage
and installment loans, leasing, night depository, automated teller services,
safe deposit boxes, money order services, traveler's checks, utility bill
payments and other miscellaneous services normally offered by commercial banks.
In addition, Cortland Banks participates in bank charge card plans and discount
brokerage services with correspondent banks. The Bank's trust department offers
a broad range of fiduciary services, including the administration of decedent
and trust estates and other personal and corporate fiduciary services.
Business is conducted at a total of ten offices, six of which are located in
Trumbull County, Ohio. Three offices are located in the communities of Hiram,
Windham and Mantua, all in Portage County, Ohio while one office is located in
the community of Williamsfield, Ashtabula County, Ohio.
The Bank, as a state chartered banking organization and member of the Federal
Reserve System, is subject to periodic examination and regulation by both the
Federal Reserve Bank of Cleveland and the State of Ohio Division of Banks. These
examinations, which include such areas as capital, liquidity, asset quality,
management practices and other aspects of the Bank's operations, are primarily
for the protection of the Bank's depositors and not for its stockholders. In
addition to these regular examinations, the Bank must furnish periodic reports
to the regulatory authorities containing a full and accurate statement of its
affairs. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) up to the statutory limit of $100,000 per customer.
COMPETITION
Cortland Banks actively competes with state and national banks located in
Northeast Ohio and Western Pennsylvania. It also competes for deposits, loans
and other service business with a large number of other financial institutions,
such as savings and loan associations, credit unions, insurance companies,
consumer finance companies and commercial finance and leasing companies. Also,
money market mutual funds, brokerage houses and similar institutions provide in
a relatively unregulated environment many of the financial services offered by
banks. In the opinion of management, the principal methods of competition are
the rates of interest charged on loans, the rates of interest paid on deposit
funds, the fees charged for services, and the convenience, availability,
timeliness and quality of the customer services offered.
EMPLOYEES
As of December 31, 1994 the Company through its subsidiary, the Bank, employed
158 full-time and 52 part-time employees. The Company provides its employees
with a full range of benefit plans, and considers its relations with its
employees to be satisfactory.
- --------------------------------------------------------------------------------
3 ---
<PAGE> 5
REPORT OF PACKER, THOMAS & CO.,
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
SHAREHOLDERS AND BOARD OF DIRECTORS
Cortland Bancorp
Cortland, Ohio
We have audited the accompanying consolidated balance sheet of Cortland Bancorp
and subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit. The consolidated financial statements of Cortland
Bancorp and subsidiaries as of and for the years ended December 31, 1993 and
1992 were audited by other auditors whose report dated February 4, 1994
expressed an unqualified opinion on those financial statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Cortland Bancorp and
subsidiaries at December 31, 1994, and the consolidated results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company changed its method of accounting for investments in 1994.
/s/ Packer, Thomas & Co.
Packer, Thomas & Co.
Youngstown, Ohio
February 8, 1995
- --------------------------------------------------------------------------------
4 ---
<PAGE> 6
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.............................. $ 13,079 $ 13,554 $ 16,539
Interest and dividends on investment securities:
Taxable.............................................. 4,502 3,713 3,495
Nontaxable........................................... 670 474 271
Dividends............................................ 135 199 219
Interest on mortgage-backed securities.................. 4,039 4,839 5,307
Interest on trading account securities.................. 26 32 14
Other interest income................................... 113 256 306
-------- -------- --------
Total interest income........................... 22,564 23,067 26,151
-------- -------- --------
INTEREST EXPENSE
Deposits................................................ 9,372 10,028 12,972
Short-term borrowings................................... 126 99 107
-------- -------- --------
Total interest expense.......................... 9,498 10,127 13,079
-------- -------- --------
Net interest income.......................... 13,066 12,940 13,072
Provision for loan losses (Note 4)........... 1,450
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 13,066 12,940 11,622
-------- -------- --------
OTHER INCOME
Fees for other customer services........................ 999 977 976
Trading securities gains (losses)....................... 4 (18) 6
Investment securities gains (losses) - net.............. 20 (17) 196
Gain (loss) on sale of loans - net...................... (47) 170 54
Gain (loss) on sale of other real estate - net.......... 21 (341) (106)
Other operating income.................................. 175 114 111
-------- -------- --------
Total other income.............................. 1,172 885 1,237
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits.......................... 4,956 4,567 4,353
Net occupancy expense................................... 584 604 585
Equipment expense....................................... 922 752 737
State and local taxes................................... 398 365 325
FDIC assessment......................................... 647 681 645
Office supplies......................................... 435 427 406
Marketing expense....................................... 229 251 239
Collection, repossession and foreclosure................ 118 176 338
Legal and litigation expense............................ 294 1,704 216
Other operating expenses................................ 1,251 1,161 1,004
-------- -------- --------
Total Other expenses............................ 9,834 10,688 8,848
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES........................ 4,404 3,137 4,011
Federal income taxes (Note 11)............................ 1,321 887 1,251
-------- -------- --------
NET INCOME................................................ $ 3,083 $ 2,250 $ 2,760
======== ======== ========
EARNINGS PER COMMON SHARE (Note 1)........................ $ 3.16 $ 2.34 $ 2.91
======== ======== ========
- --------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
5 ---
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and 1993
<TABLE>
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 11,567 $ 8,972
Federal funds sold................................................ 4,075
---------- ----------
Total cash and cash equivalents......................... 11,567 13,047
---------- ----------
Interest-bearing deposits in other banks.......................... 100
Trading account securities........................................ 1,015
Investment securities (approximate market value of $156,619)
(Note 2)........................................................ 153,787
Investment securities available for sale (Note 2)................. 69,573
Investment securities held to maturity (approximate
market value of $74,806) (Note 2)............................... 79,403
Total loans (Note 3).............................................. 150,680 145,827
Less allowance for loan losses (Note 4) (3,081) (3,139)
---------- ----------
Net loans....................................................... 147,599 142,688
---------- ----------
Premises and equipment (Note 5)................................... 6,475 5,282
Other assets...................................................... 5,744 5,350
---------- ----------
TOTAL ASSETS............................................ $ 320,361 $ 321,269
========== ==========
LIABILITIES
Noninterest-bearing deposits...................................... $ 34,358 $ 27,793
Interest-bearing deposits (Note 7)................................ 250,317 259,699
---------- ----------
Total deposits.................................................. 284,675 287,492
---------- ----------
Short-term borrowings (Note 8).................................... 7,091 4,230
Other liabilities................................................. 1,074 3,016
---------- ----------
TOTAL LIABILITIES....................................... 292,840 294,738
---------- ----------
Commitments and contingent liabilities (Notes 9 and 16)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 977,971 shares in 1994 and
936,990 in 1993................................................. 4,890 4,685
Additional paid-in capital........................................ 8,028 7,132
Retained earnings................................................. 16,292 14,840
Net unrealized loss on available for sale debt and
marketable equity securities (Note 2)........................... (1,689) (126)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (Note 15)....................... 27,521 26,531
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 320,361 $ 321,269
========== ==========
<FN>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
6 ---
<PAGE> 8
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<CAPTION>
Net Un- Total
Additional realized Share-
Common Paid-In Retained Treasury Loss on holders'
Stock Capital Earnings Stock Securities Equity
-------- ---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992......... $ 4,293 $ 5,712 $ 12,056 $ (4) $ (311) $ 21,746
Net income....................... 2,760 2,760
Shares sold...................... 66 163 229
Treasury shares sold............. 4 4
Cash dividends declared
($.44 per share).............. (408) (408)
3% stock dividend................ 127 509 (636)
Cash paid in lieu of
fractional shares............. (18) (18)
Net change in unrealized loss on
marketable equity securities.. (42) (42)
-------- ---------- --------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1992....... 4,486 6,384 13,754 0 (353) 24,271
-------- ---------- --------- -------- ---------- --------
Net income....................... 2,250 2,250
Shares sold...................... 65 210 275
Cash dividends declared
($.50 per share).............. (481) (481)
3% stock dividend................ 134 538 (672)
Cash paid in lieu of
fractional shares............. (11) (11)
Net change in unrealized loss on
marketable equity securities.. 227 227
-------- ---------- --------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1993....... 4,685 7,132 14,840 0 (126) 26,531
-------- ---------- --------- -------- ---------- --------
Net income....................... 3,083 3,083
Shares sold...................... 65 250 315
Treasury shares purchased........ (7) (7)
Treasury shares sold............. 1 7 8
Cash dividends declared
($.64 per share).............. (625) (625)
Special cash dividend
($.21 per share).............. (209) (209)
3% stock dividend................ 140 645 (785)
Cash paid in lieu of
fractional shares............. (12) (12)
Net change in unrealized loss on
available for sale debt
securities and marketable
equity securities............. (1,563) (1,563)
-------- ---------- --------- -------- ---------- --------
BALANCES AT DECEMBER 31, 1994...... $ 4,890 $ 8,028 $ 16,292 $ 0 $ (1,689) $ 27,521
======== ========== ========= ======== ========= ========
<FN>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
7 ---
<PAGE> 9
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
(Amounts in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 3,083 $ 2,250 $ 2,760
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, amortization and accretion........... 1,668 1,290 865
Provision for loan losses.......................... 1,450
Deferred tax expense (benefit)..................... 718 (488) (309)
Investment securities (gains) losses............... (20) 17 (196)
Other real estate (gains) losses................... (21) 341 107
Losses (gains) on sales of loans................... 47 (170) (54)
Loans originated for sale.......................... (909) (8,477) (3,793)
Proceeds from sale of loans originated for sale.... 878 7,659 2,958
Gain on sale of fixed assets....................... (23)
Trading account securities sales, maturities
and purchases................................... (4) 2,055
Changes in:
Interest and fees receivable................. (215) 46 76
Interest payable............................. 41 (59) (367)
Other assets and liabilities................. (2,421) 1,652 14
-------- -------- --------
Net cash from operating activities......... 2,822 6,116 3,511
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities................................. (67,203) (65,750)
Purchases of securities held to maturity................ (18,633)
Proceeds from sales of securities....................... 1,755 2,828
Purchases of securities available for sale.............. (22,386)
Proceeds from sales of securities available for sale.... 4,019
Proceeds from call, maturity and principal
payments on securities............................... 39,458 45,073 40,211
Net (increase) decrease in loans made to customers...... (6,381) 5,589 20,869
Proceeds from disposition of other real estate.......... 739 1,715 586
Proceeds from sale of loans............................. 1,148 501 726
Proceeds from sale of fixed assets...................... 65
Net decrease in deposits in other banks................. 100 500
Purchases of premises and equipment..................... (1,945) (349) (235)
-------- -------- --------
Net cash from investing activities......... (3,816) (12,919) (265)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts............. (2,817) 4,074 817
Net increase (decrease) in short-term borrowings........ 2,861 (193) 2,328
Dividends paid.......................................... (846) (492) (426)
Purchases of treasury stock............................. (7)
Proceeds from sale of treasury stock.................... 8 4
Proceeds from sale of common stock...................... 315 275 229
-------- -------- --------
Net cash from financing activities......... (486) 3,664 2,952
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................. (1,480) (3,139) 6,198
-------- -------- --------
CASH AND CASH EQUIVALENTS
Beginning of year....................................... 13,047 16,186 9,988
-------- -------- --------
End of year............................................. $ 11,567 $ 13,047 $ 16,186
======== ======== ========
<FN>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
8 ---
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Cortland Bancorp (the Company) and its wholly-owned subsidiaries,
Cortland Savings and Banking Company (the Bank) and New Resource Leasing Co. All
significant intercompany balances and transactions have been eliminated.
Industry Segment Information: The Company and its subsidiaries operate in the
domestic banking industry which accounts for substantially all of the Company's
assets, revenues and operating income.
Cash and Cash Equivalents: 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. The Company reports net cash flows for
customer loan transactions, deposit transactions and deposits made with other
financial institutions.
The Company paid interest of $9,457,000, $10,186,000, and $13,447,000 in 1994,
1993 and 1992, respectively. Cash paid for income taxes was $1,024,000 in 1994,
$1,253,000 in 1993 and $1,620,000 in 1992. Transfers of loans to other real
estate were $306,000, $518,000 and $2,343,000 in 1994, 1993 and 1992,
respectively.
Investment Securities: Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments in debt and equity securities be classified as held to
maturity, trading or available for sale. In accordance with the statement, prior
period financial statements have not been restated to reflect the change in
accounting principle.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities classified as
available for sale are those that could be sold for liquidity, investment
management, or similar reasons, even though management has no present intentions
to do so. Trading securities are principally held with the intention of selling
in the near term.
Prior to 1994, the Company recorded investment securities, other than trading
securities, at amortized cost. With the adoption of SFAS No. 115, securities
held to maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts, with such amortization or accretion included in interest
income. Securities available for sale are carried at fair value with unrealized
gains and losses recorded as a separate component of shareholders' equity, net
of tax effects. Changes in fair values of trading securities are reported in the
consolidated statements of income. Realized gains or losses on dispositions are
based on net proceeds and the adjusted carrying amount of securities sold, using
the specific identification method.
New Accounting Standards: The Company will adopt SFAS No. 114, "Accounting by
Creditors for Impairment of Loans," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures,"
effective January 1, 1995. As a result of applying new rules, certain impaired
loans will be reported at the present value of expected future cash flows using
the loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Company does not expect the adoption of the standard
to have a material impact on the Company's financial position or results of
operations.
- --------------------------------------------------------------------------------
(Continued)
9 ---
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: The Company originates certain residential mortgage loans
for sale in the secondary mortgage loan market. In addition, the Company
periodically identifies other loans which will be sold. These loans are
classified as loans held for sale and carried at the lower of cost or estimated
market value in the aggregate. To mitigate interest rate risk, the Company may
obtain fixed commitments at the time loans are originated or identified as being
held for sale. No such commitments existed as of December 31, 1994.
Revenue Recognition: Interest on loans and securities is accrued and credited to
operations based on the principal balance outstanding.
Whenever serious doubt arises as to the collectibility of interest or principal
on a loan or security, the accrual of interest is discontinued and previously
accrued interest which is not in the process of collection is reversed by a
charge to operations.
The Company defers loan origination fees and certain direct loan origination
costs. The amounts deferred are reported in the balance sheet as a part of loans
and are recognized into interest income over the term of the loan using the
level yield method.
Concentrations of Credit Risk: The Company, through its subsidiary bank, grants
residential, consumer, and commercial loans to customers located primarily in
the Northeastern Ohio area.
The following represents the composition of the loan portfolio at December 31,
1994 and 1993:
<TABLE>
<CAPTION>
% of Total
Loans
-------------
1994 1993
---- ----
<S> <C> <C>
1 - 4 family residential mortgage..... 43.9% 46.7%
Commercial mortgage loans............. 24.9 24.0
Consumer loans........................ 11.5 10.0
Commercial loans...................... 10.0 8.8
Home equity loans..................... 8.5 9.2
1-4 family residential mortgage
loans held for sale................. 1.2 1.3
</TABLE>
Approximately 2.18% of total loans are unsecured at December 31, 1994, compared
to 2.63% at December 31, 1993.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations,
including their financial position and collateral values, and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem situations,
the entire allowance is available for any charge-offs that occur. A
- --------------------------------------------------------------------------------
(Continued)
10 ---
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
loan is charged off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed generally on the
straight-line method over the estimated useful lives of the various assets.
Maintenance and repairs are expensed and major improvements are capitalized.
Other Real Estate: Real estate acquired through foreclosure, deed-in-lieu of
foreclosure, or in-substance foreclosure is included in other assets. Such real
estate is carried at the lower of cost or fair value less estimated costs to
sell. Any reduction from the carrying value of the related loan to fair value at
the time of acquisition is accounted for as a loan loss. Any subsequent
reduction in fair market value is reflected as a valuation allowance through a
charge to income.
Income taxes: A deferred tax liability or asset is determined at each balance
sheet date. It is measured by applying enacted tax laws to future amounts that
will result from differences in the financial statement and tax basis of assets
and liabilities.
Per Share Amounts: The board of directors declared 3% common stock dividends
payable as of January 1, 1995, 1994 and 1993. The 3% common stock dividend
issued on January 1, 1995 resulted in the issuance of 28,051 shares of common
stock, which have been included in the 977,971 shares reported as issued at
December 31, 1994.
Earnings per share are based on weighted average shares outstanding. Weighted
average shares outstanding were 974,556 for 1994, 960,342 for 1993 and 946,827
for 1992. Average shares outstanding, per share amounts and references to number
of shares in the consolidated financial statements have been restated to give
retroactive effect to the stock dividends declared.
Reclassifications: Certain items in the 1993 and 1992 consolidated financial
statements have been reclassified to conform with the current year presentation.
- --------------------------------------------------------------------------------
(Continued)
11 ---
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
<TABLE>
Following is a summary of investment securities:
(Amounts in thousands)
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities.......... $ 17,338 $ 17 $ 341 $ 17,014
U.S. Government agencies
and corporations................ 11,816 15 189 11,642
Mortgage-backed and
related securities.............. 39,824 83 1,314 38,593
Corporate securities.............. 250 250
Other debt securities............. 226 226
------- ------- ------- -------
Total................... 69,454 115 1,844 67,725
Marketable equity securities...... 2,170 7 329 1,848
------- ------- ------- -------
Total available for
sale................. $ 71,624 $ 122 $2,173 $ 69,573
======== ======== ======== ========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury securities.......... $ 12,519 $ $ 563 $ 11,956
U.S. Government agencies
and corporations................ 24,602 1,346 23,256
Obligations of states
and political subdivisions...... 15,285 24 834 14,475
Mortgage-backed and
related securities.............. 26,997 1 1,879 25,119
------- ------- ------- -------
Total held to
maturity............. $ 79,403 $ 25 $4,622 $ 74,806
======== ======== ======== ========
DECEMBER 31, 1993
INVESTMENT SECURITIES
U.S. Treasury securities.......... $ 24,566 $1,112 $ 4 $ 25,674
U.S. Government agencies
and corporations................ 34,441 598 52 34,987
Mortgage-backed and
related securities.............. 77,768 1,303 325 78,746
Obligations of states
and political subdivisions...... 14,488 299 99 14,688
Corporate securities.............. 250 250
Other debt securities............. 226 226
------- ------- ------- -------
Total................... 151,739 3,312 480 154,571
Marketable equity securities...... 2,048 2,048
------- ------- ------- -------
Total investment, mortgage-backed
and related securities.......... $153,787 $3,312 $ 480 $156,619
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1994, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
(Continued)
12 ---
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
<TABLE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
(Amounts in thousands)
<CAPTION>
December 31, 1994
-----------------------
Amortized Estimated
Cost Fair Value
-------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less........................ $ 3,976 $ 3,978
Due after one year through five years.......... 19,250 18,877
Due after five years through ten years......... 4,483 4,360
Due after ten years............................ 1,921 1,917
-------- ---------
Subtotal............................. 29,630 29,132
Mortgage-backed securities..................... 39,824 38,593
-------- ---------
Total................................ $ 69,454 $ 67,725
======== =========
INVESTMENT SECURITIES HELD TO MATURITY
Due in one year or less........................ $ 1,036 $ 1,041
Due after one year through five years.......... 15,657 15,007
Due after five years through ten years......... 34,614 32,677
Due after ten years............................ 975 872
-------- ---------
Subtotal............................. 52,282 49,597
Mortgage-backed securities..................... 26,997 25,119
Securities in default.......................... 124 90
-------- ---------
Total................................ $ 79,403 $ 74,806
======== =========
</TABLE>
The following is a summary of sales of investment securities for the years ended
December 31,
<TABLE>
<CAPTION>
(Amounts in thousands)
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Sale proceeds......................... $ 4,019 $ 1,755 $ 2,828
Gross realized gains.................. 27 160 234
Gross realized losses................. (7) (177) (38)
</TABLE>
During 1993, LTV Corporation reached an agreement with its creditors and emerged
from Chapter XI Bankruptcy proceedings. As a result of the settlement, the
Company realized a gain of $106,000 on LTV related securities in its investment
portfolio. These securities, which had an original par value of $500,000, had
previously been reduced by the company to a carrying value of $74,000.
The Company also realized a loss of $173,000 in 1993 on the redemption of all
its shares in a mutual fund that had failed to meet the Company's performance
objectives. The balance of the gains and losses in 1993 resulted primarily from
bonds and notes that were called by the issuer prior to maturity.
On February 15, 1994 a pre-refunded, escrowed municipal bond with a par value of
$100,000 and a current book value of $124,000, issued by Northeast Randolph
County, Alabama, was placed on nonaccrual status by the Bank. These bonds were
pre-refunded with U.S. Treasury securities financed by a subsequent bond issue
of Northeast Randolph County, Alabama, which has since defaulted. Holders of
this previous issue
- --------------------------------------------------------------------------------
(Continued)
13 ---
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
have filed suit, seeking to have the escrow unwound with proceeds distributed to
the claimants. The bond trustee has suspended interest payments pending a ruling
from the court on this matter. The probability of an unfavorable outcome
regarding this litigation cannot be ascertained at this time; management is
unable to determine if any write-down of the bond will be required.
Investment securities with a carrying value of approximately $24,117,000 at
December 31, 1994 and $27,029,000 at December 31, 1993 were pledged to secure
deposits and for other purposes.
NOTE 3 - LOANS RECEIVABLE
Following is a summary of loans:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
1-4 family residential mortgage loans............................. $ 66,069 $ 68,096
Commercial mortgage loans......................................... 37,554 35,014
Consumer loans.................................................... 17,247 14,539
Commercial loans.................................................. 15,101 12,898
Home equity loans................................................. 12,854 13,403
1-4 family residential mortgage loans held for sale............... 1,855 1,877
---------- ----------
Total loans............................................. $ 150,680 $ 145,827
========== ==========
</TABLE>
Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $1,909,000,
$1,652,000, and $1,979,000 at December 31, 1994, 1993, and 1992, respectively.
Interest income on these loans, if accrued, would have been approximately
$107,000, $97,000, and $52,000 for 1994, 1993, and 1992, respectively.
Renegotiated loans for which interest has been reduced and that are still
accruing interest totalled approximately $205,000, $573,000 and $1,222,000 at
December 31, 1994, 1993 and 1992, respectively. Interest income recognized on
these loans was $23,000, $47,000 and $103,000 for 1994, 1993 and 1992,
respectively. Interest income that would have been recognized under the original
terms was $28,000, $81,000 and $139,000 for 1994, 1993 and 1992, respectively.
- --------------------------------------------------------------------------------
(Continued)
14 ---
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
Following is an analysis of changes in the allowance for loan losses:
(Amounts in thousands)
<CAPTION>
December 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................... $ 3,139 $ 3,415 $ 3,203
Loan charge-offs............................... (288) (615) (1,596)
Recoveries..................................... 230 339 358
------- ------- -------
Net loan charge-offs......................... (58) (276) (1,238)
Provision charged to operations................ 1,450
------- ------- -------
Balance at end of year......................... $ 3,081 $ 3,139 $ 3,415
======= ======= =======
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Land........................................... $ 605 $ 605
Premises....................................... 4,791 4,790
Equipment...................................... 5,263 4,231
Leasehold improvements......................... 138 138
-------- --------
10,797 9,764
Less accumulated depreciation.................. 4,322 4,482
-------- --------
Net book value....................... $ 6,475 $ 5,282
======== ========
</TABLE>
Depreciation expense was $710,000 for 1994, $472,000 for 1993, and $496,000 for
1992.
NOTE 6 - OTHER REAL ESTATE
Following is a summary of other real estate:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Other real estate................................... $ 423 $ 937
Less allowance for losses........................... (40) (142)
-------- --------
$ 383 $ 795
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15 ---
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 6 - OTHER REAL ESTATE (Continued)
<TABLE>
Activity in the allowance for losses on other real estate is as follows:
(Amounts in thousands)
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Balance at beginning of year........................ $ 142 $ 313
Charge-offs......................................... (125) (499)
Provisions charged to operations.................... 23 328
-------- --------
Balance at end of year.............................. $ 40 $ 142
======== ========
</TABLE>
NOTE 7 - DEPOSITS
Following is a summary of interest-bearing deposits:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Demand.............................................. $ 47,637 $ 50,961
Savings............................................. 90,814 94,874
Time:
In denominations under $100,000................... 91,025 94,108
In denominations of $100,000 or more.............. 20,841 19,756
-------- --------
Total interest-bearing deposits........... $250,317 $259,699
======== ========
</TABLE>
Following is a summary of certificates of deposit of $100,000 or more by
remaining maturities:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Three months or less................................ $ 7,571 $ 6,034
Three to twelve months.............................. 8,267 8,567
One through five years.............................. 3,664 3,412
Over five years..................................... 1,339 1,743
-------- --------
Totals.................................... $ 20,841 $ 19,756
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16 ---
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 8 - SHORT-TERM BORROWINGS
<TABLE>
Following is a summary of short-term borrowings:
(Amounts in thousands)
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Securities sold under repurchase agreements......... $ 2,417 $ 2,657
U.S. Treasury interest-bearing demand note.......... 645 1,542
Federal funds purchased............................. 4,000
Other borrowings.................................... 29 31
-------- --------
Totals.................................... $ 7,091 $ 4,230
======== ========
</TABLE>
NOTE 9 - COMMITMENTS
The Bank occupies office facilities under operating leases extending to 2007.
Most of these leases contain an option to renew at the then fair rental value
for periods of five and ten years. These options enable the Bank to retain use
of these facilities in desirable operating areas. In most cases, management
expects that in the normal course of business, leases will be renewed or
replaced by other leases. Rental expenses were $161,000 for 1994, $145,000 for
1993, and $136,000 for 1992. Following is a summary of remaining future minimum
lease payments under current operating leases for office facilities:
(Amounts in thousands)
<TABLE>
<S> <C>
Year ending -
December 31, 1995................... $ 90
December 31, 1996................... 90
December 31, 1997................... 56
December 31, 1998................... 35
December 31, 1999................... 35
Later years........................... 253
----
Total............................ $559
====
</TABLE>
The Bank is required to maintain aggregate cash reserves amounting to $1,446,000
at December 31, 1994 to satisfy federal regulatory requirements. These amounts
do not earn interest.
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 include commitments to extend credit, standby letters of
credit and financial guarantees. The Bank's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is
represented by the contractual amount of the instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
instruments recorded on the balance sheet.
- --------------------------------------------------------------------------------
(Continued)
17 ---
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS (Continued)
<TABLE>
Following is a summary of such contract commitments:
(Amounts in thousands)
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate................................... $ 4,806 $ 9,280
Variable rate................................ 18,471 13,207
Standby letters of credit...................... 392 263
</TABLE>
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. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
NOTE 10 - EMPLOYEE BENEFITS
The Bank has a contributory defined contribution retirement plan (a 401(k) plan)
which covers substantially all employees. Total expense under the plan was
$130,000 for 1994, $127,000 for 1993, and $119,000 for 1992. The Bank is
obligated to contribute 2% of the gross pay of each eligible participant. In
addition, the Bank matches participants' voluntary contributions up to 2% of
gross pay. Participants may make voluntary contributions to the plan up to 10%
of gross wages. The Bank makes monthly contributions to this plan equal to
amounts accrued for plan expense.
NOTE 11 - FEDERAL INCOME TAXES
The composition of income tax expense is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current...................... $ 603 $ 1,375 $ 1,560
Deferred..................... 718 (488) (309)
-------- -------- --------
Totals.................. $ 1,321 $ 887 $ 1,251
======== ======== ========
</TABLE>
The Company adopted SFAS No. 109, "Accounting for Income Taxes" on January 1,
1993. The cumulative effect of this change in accounting method was not
material.
- --------------------------------------------------------------------------------
(Continued)
18 ---
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES (Continued)
The impact on the comparability between periods presented on the consolidated
statements of income was also not material.
<TABLE>
The following is a summary of the net deferred tax asset included in other
assets:
(Amounts in thousands)
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Gross deferred tax assets:
Unrealized loss on available for sale
securities..................................... $ 870 $
Provision for loan and other real estate losses... 648 724
Losses on litigation.............................. 612
Loan fees......................................... 57 115
Other............................................. 5 16
Gross deferred tax liabilities:
Depreciation...................................... (326) (331)
Other............................................. (60) (94)
-------- --------
Net deferred tax asset.................... $ 1,194 $ 1,042
======== ========
</TABLE>
The Company has adequate recoverable taxes paid in prior years to warrant
recording the full deferred tax asset without a valuation allowance.
Prior to the change in accounting method discussed above, deferred taxes
(credit) resulted from timing differences in recognition of certain income or
expenses for financial reporting and income tax purposes. The source of
differences for the year ended December 31, 1992 is as follows:
(Amounts in thousands)
<TABLE>
<S> <C>
Provision for loan and other real estate losses..... $ (169)
Other than temporary decline in value of
securities........................................ (9)
Other............................................... (131)
--------
Totals.................................... $ (309)
========
</TABLE>
Following is a reconciliation between tax expense using the statutory tax rate
of 34% and actual taxes:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Statutory tax.............................. $ 1,497 $ 1,067 $ 1,364
Effect of non-taxable interest and
dividends................................ (176) (180) (113)
-------- -------- --------
Total income taxes............... $ 1,321 $ 887 $ 1,251
======== ======== ========
</TABLE>
The related income tax expense (benefit) on investment securities gains and
losses amounted to $7,000 for 1994, $(6,000) for 1993, and $67,000 for 1992, and
is included in the total federal income tax provision.
- --------------------------------------------------------------------------------
(Continued)
19 ---
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
The carrying amounts and estimated fair values of the Company's financial
instruments is as follows:
<CAPTION>
DECEMBER 31, 1994 December 31, 1993
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 11,567 $ 11,567 $ 13,047 $ 13,047
Interest-bearing deposits................. 100 100
Trading securities........................ 1,015 1,015
Investment securities..................... 148,976 144,379 153,787 156,619
Loans, net of allowance for loan losses... 147,599 146,165 142,688 144,422
Demand and savings deposits............... (172,809) (172,809) (173,628) (173,628)
Time deposits............................. (111,866) (111,505) (113,864) (117,055)
Short-term borrowings..................... (7,091) (7,091) (4,230) (4,230)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1994 and 1993. The estimated fair value
for cash and cash equivalents is considered to approximate cost. The estimated
fair value for securities is based on quoted market values for individual
securities or for equivalent securities when specific quoted prices are not
available. Carrying value is considered to approximate fair value for loans that
contractually reprice at intervals less than six months, for short-term
borrowings and for deposit liabilities subject to immediate withdrawal. The fair
values of fixed rate loans, loans that reprice less frequently than every six
months, and time deposits are approximated by a discount rate valuation
technique utilizing estimated market interest rates as of December 31, 1994 and
1993. The fair value of unrecorded commitments at December 31, 1994 and 1993, is
not material.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposits accounts, the earnings potential of loan servicing
rights, the earnings potential of the Bank's trust department, the trained work
force, customer goodwill, and similar items. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
NOTE 13 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1994. Following is an analysis of such
loans:
(Amounts in thousands)
<TABLE>
<S> <C>
Total loans at December 31, 1993.................... $ 1,375
New loans........................................... 67
Repayments.......................................... (65)
Other changes....................................... (70)
--------
Total loans at December 31, 1994.......... $ 1,307
========
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
- --------------------------------------------------------------------------------
(Continued)
20 ---
<PAGE> 22
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 14 - CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Cortland Bancorp (parent company
only). In this information, the parent's investment in subsidiaries is stated at
cost plus equity in undistributed earnings of the subsidiaries since
acquisition.
<TABLE>
(Amounts in thousands)
BALANCE SHEETS
--------------
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS:
Cash............................................................ $ 23 $ 165
Investment securities........................................... 118 25
Investment in bank subsidiary................................... 27,345 26,286
Investment in non-bank subsidiary............................... 15 15
Other assets.................................................... 21 41
-------- --------
$ 27,522 $ 26,532
======== ========
LIABILITIES:
Other liabilities............................................... $ 1 $ 1
SHAREHOLDERS' EQUITY:
Common Stock.................................................... 4,890 4,685
Additional paid-in capital...................................... 8,028 7,132
Retained earnings............................................... 16,292 14,840
Net unrealized loss on available for sale
debt and marketable equity securities........................ (1,689) (126)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 27,521 26,531
-------- --------
$ 27,522 $ 26,532
======== ========
</TABLE>
(Amounts in thousands)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Dividends from bank subsidiary............................ $ 500 $ 400 $ 150
Interest and dividend income.............................. 4
Investment securities (losses)............................ (3)
Other expenses............................................ (31) (64) (21)
-------- -------- --------
Income before equity in
undistributed earnings of subsidiaries............... 466 336 133
Equity in undistributed net income of subsidiaries........ 2,617 1,914 2,627
-------- -------- --------
NET INCOME...................................... $ 3,083 $ 2,250 $ 2,760
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21 ---
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 14 - CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
(Amounts in thousands)
STATEMENTS OF CASH FLOWS
------------------------
<CAPTION>
Years ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net income.............................................. $ 3,083 $ 2,250 $ 2,760
Add (deduct) items not affecting cash:
Equity in undistributed net income of subsidiaries... (2,617) (1,914) (2,627)
Investment securities losses......................... 3
Accretion on securities.............................. (4)
Change in other assets and liabilities............... 24 (32) (12)
-------- -------- --------
Net cash from operating activities.............. 493 304 117
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of investment
securities........................................... 330
Purchase of investment securities....................... (105) (230)
-------- -------- --------
Net cash from investing activities.............. (105) 0 100
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.......................................... (846) (492) (426)
Proceeds from sale of common stock...................... 315 275 229
Proceeds from sale of treasury stock.................... 8 4
Purchase of treasury stock.............................. (7)
-------- -------- --------
Net cash from financing activities.............. (530) (217) (193)
-------- -------- --------
Net change in cash.............................. (142) 87 24
CASH
Beginning of year....................................... 165 78 54
-------- -------- --------
End of year............................................. $ 23 $ 165 $ 78
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22 ---
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 15 - DIVIDEND RESTRICTIONS
The Company is generally dependent on the receipt of cash dividends from the
Bank in order to pay cash dividends to shareholders. The Bank is subject to
regulations of the Ohio Division of Banks which restrict dividends to retained
earnings (as defined) of the current and prior two years. Under this restriction
at December 31, 1994 approximately $7,066,000 is available for the payment of
dividends by the Bank. In addition, dividend payments may not reduce capital
levels below minimum regulatory guidelines.
NOTE 16 - LITIGATION
The subsidiary Bank was a defendant in a consumer class action lawsuit filed on
June 8, 1990 in the Court of Common Pleas of Fayette County, Pennsylvania
involving the demise of a campground real estate development known as Alpine
Valley Resorts, Inc. While the Bank denied liability, it negotiated a settlement
agreement dated February 2, 1994. Payment on the settlement, which was fully
provided for as of December 31, 1993, was fully disbursed during the quarter
ended June 30, 1994.
The Bank is also involved in other legal actions arising in the ordinary course
of business. In the opinion of management, the outcome of these matters is not
expected to have a material effect on the Company.
- --------------------------------------------------------------------------------
23 ---
<PAGE> 25
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(In thousands of dollars, except for per share amounts)
<CAPTION>
SUMMARY OF OPERATIONS Years ended December 31,
- --------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Total Interest Income............... $ 22.564 $ 23,067 $ 26,151 $ 28,340 $ 28,880
Total Interest Expense.............. (9,498) (10,127) (13,079) (17,023) (18,475)
-------- -------- -------- -------- --------
NET INTEREST INCOME................. 13,066 12,940 13,072 11,317 10,405
Provision for Loan Losses........... (1,450) (1,180) (3,169)
Total Other Income.................. 1,172 885 1,237 477 802
Total Other Expenses................ (9,834) (10,688) (8,848) (8,163) (8,010)
-------- -------- -------- -------- --------
INCOME BEFORE TAX................... 4,404 3,137 4,011 2,451 28
Federal Income Tax (Credit)......... 1,321 887 1,251 718 (107)
-------- -------- -------- -------- --------
NET INCOME.......................... $ 3,083 $ 2,250 $ 2,760 $ 1,733 $ 135
======== ======== ======== ======== ========
BALANCE SHEET DATA AT YEAR END
- ------------------------------
Total Assets........................ $320,361 $321,269 $313,362 $308,085 $302,448
Net Loans........................... 147,599 142,688 148,308 172,616 183,934
Deposits............................ 284,675 287,492 283,418 282,601 276,074
Shareholders' Equity................ 27,521 26,531 24,271 21,746 19,977
PER COMMON SHARE DATA (1)
- -------------------------
Net Income.......................... $ 3.16 $ 2.34 $ 2.91 $ 1.86 $ 0.16
Cash Dividends Declared............. 0.85 0.50 0.44 0.33 0.25
Book Value.......................... 28.14 27.52 25.53 23.22 21.60
ASSET QUALITY RATIOS
- --------------------
Underperforming Assets as a
Percentage of:
Total Assets........................ 0.82% 1.05% 1.85% 1.79% 2.16%
Equity plus Allowance for Loan Loss. 8.61 11.37 20.98 22.16 28.50
FINANCIAL RATIOS
- ----------------
Equity to Asset Ratio............... 8.59% 8.26% 7.75% 7.06% 6.61%
Return on Average Assets............ 0.95 0.71 0.88 0.56 0.04
Return on Average Equity............ 11.00 8.83 11.98 8.34 0.68
Net Interest Margin Ratio........... 4.37 4.35 4.39 3.92 3.65
<FN>
(1) Net income per common share is based on weighted average shares outstanding
adjusted retroactively for stock dividends. Cash dividends per common share are
based on actual cash dividends declared, adjusted retroactively for the stock
dividends. Book value per common share is based on shares outstanding at each
period, adjusted retroactively for the stock dividends.
</TABLE>
- --------------------------------------------------------------------------------
24 ---
<PAGE> 26
<TABLE>
THREE YEAR SUMMARY
AVERAGE BALANCES, YIELDS AND RATES
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<CAPTION>
1994
--------------------------------------
Average Interest
Balance Earned Yield or
Outstanding Or Paid Rate
----------- -------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks... $ 658 $ 18 2.7%
Federal funds sold......................... 2,489 95 3.8%
Trading account securities................. 337 26 7.7%
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.......................... 66,804 4,427 6.6%
U.S. Government mortgage-backed
pass through certificates............. 70,833 4,037 5.7%
States of the U.S. and political
subdivisions (Note 1, 2, 3)........... 15,362 1,026 6.7%
Other Securities........................ 2,414 147 6.1%
--------- ---------
TOTAL INVESTMENT SECURITIES.................. 155,413 9,637 6.2%
LOANS (Note 2, 3, 4)......................... 148,288 13,147 8.9%
--------- ---------
TOTAL INTEREST-EARNING ASSETS................ $ 307,185 $22,923 7.5%
========= =========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits........ $ 51,392 $ 1,237 2.4%
Savings................................. 95,096 2,586 2.7%
Time.................................... 113,101 5,549 4.9%
--------- ---------
TOTAL INTEREST-BEARING DEPOSITS.............. 259,589 9,372 3.6%
--------- ---------
Short-term borrowings:
U.S. Treasury interest-bearing demand
note.................................... 623 24 3.9%
Federal funds purchased.................... 440 22 5.0%
Securities sold under agreement to
repurchase.............................. 2,354 80 3.4%
--------- ---------
TOTAL SHORT-TERM BORROWINGS.................. 3,417 126 3.7%
--------- ---------
TOTAL INTEREST-BEARING LIABILITIES........... $ 263,006 $ 9,498 3.6%
========= =========
Net interest margin.......................... $13,425 4.4%
========= ========
<FN>
Note 1 - Includes both taxable and tax exempt securities.
Note 2 - The amounts are presented on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1994, 1993 and 1992, and have been
adjusted to reflect the effect of disallowed interest expense related
to carrying tax exempt assets.
</TABLE>
- --------------------------------------------------------------------------------
25 ---
<PAGE> 27
<TABLE>
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<CAPTION>
1993 1992
-------------------------------------- --------------------------------------
Average Interest Average Interest
Balance Earned Yield or Balance Earned Yield or
Outstanding Or Paid Rate Outstanding Or Paid Rate
----------- -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 100 $ 12 12.0% $ 434 $ 34 7.8%
8,075 244 3.0% 7,654 272 3.6%
544 32 5.9% 186 14 7.5%
54,751 3,616 6.6% 47,507 3,386 7.1%
79,548 4,839 6.1% 72,026 5,307 7.4%
10,778 768 7.1% 5,310 453 8.5%
3,166 220 6.9% 3,587 280 7.8%
---------- --------- ---------- ---------
148,243 9,443 6.4% 128,430 9,426 7.3%
147,263 13,631 9.3% 165,480 16,585 10.0%
---------- --------- ---------- ---------
$ 304,225 $23,362 7.7% $ 302,184 $26,331 8.7%
========== ========= ========== =========
$ 53,452 $ 1,485 2.8% $ 51,089 $ 1,918 3.8%
91,308 2,778 3.0% 81,636 3,211 3.9%
115,785 5,765 5.0% 130,862 7,843 6.0%
---------- --------- ---------- ---------
260,545 10,028 3.8% 263,587 12,972 4.9%
---------- --------- ---------- ---------
692 20 2.9% 608 18 3.0%
0 0 0% 0 0 0%
2,458 79 3.2% 2,381 89 3.7%
---------- --------- ---------- ---------
3,150 99 3.1% 2,989 107 3.6%
---------- --------- ---------- ---------
$ 263,695 $10,127 3.8% $ 266,576 $13,079 4.9%
========== ========= ========== =========
$13,235 4.4% $13,252 4.4%
========= ======== ========= ========
<FN>
Note 3 - Average balance outstanding includes the average amount outstanding for
all nonaccrual investment securities and loans.
Note 4 - Interest earned on loans includes loan fees of $333 in 1994, $368 in
1993 and $334 in 1992.
</TABLE>
- --------------------------------------------------------------------------------
26 ---
<PAGE> 28
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
OVERVIEW
Net income for 1994 of $3,083 was the best in the Company's 102 year history,
and constituted an increase of $833 from the $2,250 earned in 1993. Earnings per
share of $3.16 represented an improvement of $0.82 from the $2.34 per share
realized in 1993.
Capital ratios continued to grow even stronger facilitating a 70% increase in
dividends per share over 1993. As of December 31, 1994, the ratio of equity
capital to total assets was 8.59%, up from 8.26% a year ago, while risk-based
capital measured 20.86% compared to 19.89% at December 31, 1993. All capital
ratios were well in excess of required regulatory minimums.
During 1994, management continued its emphasis on asset quality. Total assets
remained relatively stable, decreasing by $908 to $320 million, representing a
modest decrease of 0.3%. Emphasis continued to be placed on reinvesting cash
flows into loans meeting strict underwriting standards and conservative
investment products with little or no credit risk. Higher cost volatile
liabilities, which have been replaced over the past several years with more
stable and lower cost core deposits, represented a moderate 8.72% and 7.47% of
total assets at year end 1994 and 1993, respectively.
Management's insistence that quality and profitability not be sacrificed for the
sake of volume has resulted in very modest growth over the past several years.
Average assets, which have been adjusted by adding back the allowance for loan
loss, provide a more meaningful picture of the underlying trend.
<TABLE>
AVERAGE ASSETS
(In Millions of Dollars)
<S> <C>
1990 309
1991 310
1992 319
1993 322
1994 326
</TABLE>
ASSET QUALITY
Management closely monitors and evaluates trends and developments in asset
quality. Internal loan review systems require detailed monthly analysis of
delinquencies, non-performing assets and other sensitive credits. Generally, all
mortgage, commercial and consumer loans are moved to nonaccrual status once they
reach 90 days past due or when analysis of a borrower's creditworthiness
indicates the collection of interest and principal is in doubt.
In addition to nonperforming loans, total nonperforming assets include
nonperforming investment securities and real estate acquired in satisfaction of
debts previously contracted. Total underperforming assets add to this amount
loans which have been restructured to provide for a reduction of interest or
principal because of a deterioration in the financial condition of the borrower.
Also included as underperforming assets are loans which are more than 89 days
past due that continue to accrue interest income. The following provides a
comparison of nonperforming and underperforming assets by category for the past
three years:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans:
1-4 residential mortgage $ 553 $ 627 $1,168
Commercial mortgage 1,327 942 652
Other commercial loans 0 45 58
Consumer loans 8 14 62
Home Equity Loans 21 24 39
----------------------------------------------------------
TOTAL NONACCRUAL LOANS 1,909 1,652 1,979
Investment securities 124 0 74
Other real estate owned 383 795 2,333
----------------------------------------------------------
TOTAL NONPERFORMING ASSETS 2,416 2,447 4,386
Loans ninety days past due
and still accruing interest 14 353 201
Restructured loans 205 573 1,222
----------------------------------------------------------
TOTAL UNDERPERFORMING ASSETS $2,635 $3,373 $5,809
</TABLE>
The table below provides a number of key control ratios based on the data
presented above. Overall, asset quality continued to improve during 1994.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Nonperforming loans as a
percentage of total loans 1.27% 1.13% 1.30%
Nonperforming assets as a
percentage of total assets 0.75% 0.76% 1.40%
Underperforming assets as a
percentage of total assets 0.82% 1.05% 1.85%
Underperforming assets as a
percentage of equity
capital plus allowance for
loan losses 8.61% 11.37% 20.98%
</TABLE>
- --------------------------------------------------------------------------------
27 ---
<PAGE> 29
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
LOAN LOSS EXPERIENCE
For each of the loan periods presented below, the provision for loan losses
charged to operations is based on management's judgment after taking into
consideration all known factors connected with the collectibility of the
existing portfolio. Management evaluates the portfolio in light of economic
conditions, changes in the nature and volume of the portfolio, industry
standards and other relevant factors. Specific factors considered by management
in determining the amounts charged to operations include previous loan loss
experience, the status of past due interest and principal payments, the quality
of financial information supplied by the customers and the general economic
condition of the communities in which loans have been made.
The following provides an analysis of the allowance for loan losses for the
periods indicated:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,139 $ 3,415 $ 3,203 $ 2,987 $ 1,865
Loan losses:
1-4 family residential mortgages...... (72) (172) (108) (160) (216)
Commercial mortgages.................. (27) (42) (834) (195) (456)
Consumer loans........................ (141) (271) (438) (792) (1,375)
Commercial loans...................... (48) (123) (198) (187) (633)
Home equity loans..................... 0 (7) (18) -0- -0-
------- ------- ------- ------- -------
(288) (615) (1,596) (1,334) (2,680)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1-4 family residential mortgages...... 4 26 55 17 24
Commercial mortgages.................. 6 28 6
Consumer loans........................ 156 202 273 321 582
Commercial loans...................... 64 83 24 32 27
------- ------- ------- ------- -------
230 339 358 370 633
------- ------- ------- ------- -------
Net loan losses............................ (58) (276) (1,238) (964) (2,047)
------- ------- ------- ------- -------
Provision charged to operations............ -0- -0- 1,450 1,180 3,169
------- ------- ------- ------- -------
Balance at end of year..................... $ 3,081 $ 3,139 $ 3,415 $ 3,203 $ 2,987
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans outstanding............ 0.04% 0.19% 0.75% 0.53% 1.07%
======= ======= ======= ======= =======
Ratio of loan loss allowance to total loans. 2.04% 2.15% 2.25% 1.82% 1.60%
======= ======= ======= ======= =======
</TABLE>
The improvement in asset quality engineered over the past several years is now
reflected in a significantly reduced ratio of net loan losses to average net
loans. With the allowance for loan loss at 161% of nonperforming loans and 145%
of all underperforming loans, management determined the allowance to be
adequate, requiring no further provision in the current year.
- --------------------------------------------------------------------------------
28 ---
<PAGE> 30
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
The following is an allocation of the allowance for loan losses. The allowance
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 as of December 31, for the years indicated:
<CAPTION>
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
1-4 family residential mortgages.......... $ 385 $ 405 $ 437 $ 419 $ 216
Commercial mortgages...................... 1,223 1,029 1,157 997 681
Consumer loans............................ 407 424 591 1,019 1,028
Commercial loans.......................... 207 192 210 235 178
Home equity loans......................... 63 67 62 52 20
Unallocated portion....................... 796 1,022 958 481 864
------ ------ ------ ------ ------
$3,081 $3,139 $3,415 $3,203 $2,987
====== ====== ====== ====== ======
</TABLE>
The allocations of the allowance as shown in the table above should not be
interpreted as an indication that loan losses in 1995 will occur in the same
proportions or that the allocations indicate future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is applicable to the entire portfolio.
LOAN PORTFOLIO
The pickup in the level of general economic activity that began in the fourth
quarter of 1993 continued throughout 1994. The Company realized an increase of
$4,853 in the loan portfolio, from the level of $145,827 recorded at December
31, 1993.
The composition of the portfolio changed slightly during 1994 with 1-4 family
residential mortgages decreasing from 48.0% to 45.1% as new originations and
refinancing activity slowed as expected in response to significantly higher
mortgage rates. The portion of the loan portfolio represented by commercial
loans (including commercial real estate) increased from 32.8% to 34.9%. Consumer
loans (including home equity loans) increased from 19.2% to 20.0%.
The following indicates changes that have occurred in the composition of the
loan portfolio over the past five years. Residential lending, excluding home
equity loans, now comprises 45.1% of the portfolio very similar to its 44.6%
share in 1989, despite the advent of secondary mortgage operations in 1992.
Meanwhile, home equity loans have grown from a 3.9% share in 1989 to 8.5% in
1994, partially offsetting the decline in traditional consumer installment
lending.
<TABLE>
LOAN PORTFOLIO COMPOSITION
(In Percentages)
<S> <C> <C>
1994 1989
---- ----
1-4 Family Mortgages 45.1 44.6
Commercial 34.9 31.3
Consumer 11.5 20.2
Home Equity 8.5 3.9
</TABLE>
During 1994, approximately $14 million in mortgage loans were originated by the
Company. As anticipated, this level of production was down considerably from
1993's record levels. As 1994 progressed and interest rates rose, mortgage
originations declined, with the first six months of 1994 far outperforming the
second half of the year: $9.4 million, as compared to $4.6 million,
respectively.
Management intends to continue to sell a portion of both newly originated and
refinanced fixed rate residential mortgage loans to the Federal Home Loan
Mortgage Corporation (FHLMC), while re-
- --------------------------------------------------------------------------------
29 ---
<PAGE> 31
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
taining servicing rights. Management elected to hold the majority of new
originations during 1994. Management anticipates a return to the selling
strategies of 1992 and 1993 during 1995.
Management plans to continue this activity as a means of expanding the Company's
share of the local mortgage market, yet limiting interest rate risk, while
building service fee income. Annualized service fee income derived from the
portfolio is now approximately $28. During 1995 management intends to increase
the Company's penetration of the residential mortgage market by affiliating with
the Federal Home Loan Bank, the Federal National Mortgage Corporation and other
purchasers of mortgage loans. These affiliations will allow the Company to
provide customers with an even wider range of product choices for mortgage
loans, particularly in more rural markets.
During the past year, management continued its pursuit of community based small
business lending. The Company added new business banking products at competitive
prices, and further strengthened technical capabilities of support staff. Also
during 1994, the Company converted to a new mainframe system, which will allow
the Company to develop and expand customer products and services. The Company
believes that it remains well positioned to take advantage of opportunities in
the small business community despite growing competition from money center and
super regional banks for this segment of the market.
As the economy begins to level out and lose momentum, consumer loan demand will
begin to flatten as well. Accordingly, management expects little growth in its
Home Equity products. Management plans to continue to sharpen its focus in the
area of installment lending in order to improve market penetration and
counteract softening economic conditions.
Additional information regarding the loan portfolio can be found in the Notes to
the Consolidated Financial Statements (NOTES 1, 3, 9, 12, 13).
INVESTMENT SECURITIES
Effective January 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." This statement significantly alters the manner in which
financial institutions account for securities. The Statement segregates
investments into three separate portfolios, Held-to-Maturity, Available-for-Sale
and Trading, each with its own method of accounting.
Held-to-Maturity securities are recorded at historical cost, adjusted for
amortization of premiums and accretion of discounts. Under the new rules, the
Company must have both the intent and the ability to hold such securities to
maturity, as these securities are not to be sold prior to maturity except under
the rarest of circumstances, which are strictly defined. Trading Securities
continue to be marked-to-market, with any gain or loss reflected in the
determination of income. Securities designated as Available-for-Sale are
similarly carried at their fair market value. However, any gain or loss (net of
tax) is to be recorded as an adjustment to shareholders' equity.
One effect of SFAS 115 is to expose shareholders' equity to a significant new
source of additional potential volatility. (The potential adverse impact of this
volatility, however, was mitigated when bank regulatory agencies announced
during the fourth quarter of 1994 that they intend to continue to measure
capital adequacy for regulatory purposes without regard to the effects of SFAS
115.) At December 31, 1994, a net unrealized loss of $1.7 million, net of tax,
was included in shareholders' equity, as compared to a net unrealized gain of
$1.8 million, net of tax, as of January 1, 1994 when the SFAS statement was
adopted. This $3.5 million swing (net of tax) reflects the significant decline
in the market value of debt securities as interest rates climbed throughout the
year and illustrates the volatile nature of this new component of shareholders'
equity.
- --------------------------------------------------------------------------------
30 ---
<PAGE> 32
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Securities designated by the Company as Held-to-Maturity, tend to be higher
yielding but less liquid either due to maturity, size or other characteristics
of the issue.
Securities the Company has designated as Available-for-Sale may be sold prior to
maturity in order to fund loan demand, to adjust for interest rate sensitivity,
to reallocate bank resources, or to reposition the portfolio to reflect the
shifting economic conditions and relative values. These securities tend to be
more liquid investments and generally exhibit less price volatility to interest
rate fluctuations.
As of December 31, 1994, the carrying value of all investment securities, both
Available-for-Sale and Held-to-Maturity, tallied $148,976, a decrease of $4,811
or 3.1% from the prior year. The allocation between single maturity investment
securities and mortgage-backed securities, which had been at parity, shifted as
single maturity securities increased to 56% of the total portfolio. Mortgage-
backed securities declined by $12,178 or 15.7% as funds were shifted to meet
increased loan demand and to increase holdings of single maturity investments by
$7,567.
The Company's holdings of obligations of states and political subdivisions
increased by $797. The primary focus here remained in the area of pre-refunded
municipals that are fully escrowed in U.S. Government obligations.
The Company increased its holdings of U.S. Treasury securities by approximately
$5 million, or 20.2%, while investments in U.S. government agencies and
sponsored corporations increased by $1.8 million, or 5.2%. Holdings of corporate
securities and other debt securities remained negligible, totalling a modest
$0.5 million.
The mix of mortgage-backed securities remained weighted in favor of floating
rate and adjustable rate products. Floating rate and adjustable rate
mortgage-backed securities provide some degree of protection against rising
interest rates.
The portfolio mix of fixed rate and floating rate or adjustable rate
mortgage-backed securities for both 1994 and 1993 is graphically depicted below.
<TABLE>
MORTGEGE-BACKED SECURITIES
PORTFOLIO MIX
(In Percentages)
1994 1993
---- ----
<S> <C> <C>
Variable & Adjustable 60 62
Fixed Rate 40 38
</TABLE>
Included in the mortgage-backed securities portfolio are investments in
collateralized mortgage obligations which totalled $17,114 and $21,942 at
December 31, 1994 and 1993, respectively. These investments are monitored and
subjected to regulatory prescribed stress tests. At December 31, 1994, none of
these investments were considered "high risk" under regulatory definitions. The
Company has no investments in structured notes, inverse floaters or other high
risk derivative products.
Additional information regarding investments can be found in the Notes to the
Consolidated Financial Statements (NOTES 1-2).
DEPOSITS
The Company's deposits are derived from the individuals and businesses located
in its primary market area. Total deposits at year-end decreased a modest 1.0%
to $284,675 at December 31, 1994 as compared to $287,492 at December 31, 1993.
During the course of the year deposit growth was relatively flat, with deposits
averaging $289,372 compared to $286,472 the prior year, an increase of 1.0%.
The Company's deposit base consists of demand deposits, savings and money market
accounts and other time deposits. Average non interest-bearing deposits
increased 14.9% during 1994, while average interest-bearing deposits decreased
by 0.4%.
- --------------------------------------------------------------------------------
31 ---
<PAGE> 33
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
During 1994 non interest-bearing deposits averaged $29,783 or 10.3% of total
average deposits as compared to $25,927 or 9.1% in 1993. Core deposits averaged
$272,820 for the year ended December 31, 1994, an increase of $6,048 or 2.3%
from the average level of 1993. During 1993, core deposits had averaged
$266,772, a decrease of 0.4% over the preceding year.
Historically, the deposit base of the Company has been characterized by a
significant aggregate amount of core deposits. Although the types of accounts
have changed as a result of deregulation, the Company has been able to retain
its customers' loyalty by providing products responsive to changing market
conditions while emphasizing convenient and quality service in meeting
customers' needs.
Over the past five years, the Company has sought to decrease its reliance on
large denomination certificates of deposit (Jumbo CD's) while simultaneously
seeking to increase checking and savings account balances. The following depicts
how the deposit mix has shifted during this time frame.
<TABLE>
AVERAGE DEPOSIT MIX
(In Percentages)
1994 1989
---- ----
<S> <C> <C>
Savings 32.9 20.4
Other CD's 33.4 42.0
Jumbo CD's 5.7 14.1
Checking 10.3 7.8
NOW 7.1 5.1
Money Market 10.6 10.6
</TABLE>
Additional information regarding interest bearing deposits is presented in the
Notes to the Consolidated Financial Statements (NOTE 7).
RESULTS OF OPERATIONS
Common comparative ratios for results of operations are the return on average
equity and the return on average assets. The return on average equity amounted
to 11.0%, 8.8% and 12.0% for 1994, 1993, and 1992, respectively, while the
return on average assets amounted to 1.0%, 0.7% and 0.9% for those same years.
Net interest income, the principal source of the Company's earnings, is the
amount by which interest and fees generated by interest-earning assets,
primarily loans and investment securities, exceed the interest cost of deposits
and purchased funds. For 1994 net interest income on a fully taxable equivalent
basis, registered 4.4%, the same as both 1992 and 1993.
<TABLE>
NET INTEREST MARGIN RATIO
(In Percentages)
<S> <C>
1990 3.7
1991 3.9
1992 4.4
1993 4.4
1994 4.4
</TABLE>
(NOTE: Net Interest Margin is the difference between total interest earned on
fully taxable equivalent basis and total interest expensed. The Net Interest
Margin Ratio expresses this difference as a percentage of average earning
assets.)
Interest-earning assets averaged $307,185 during 1994 representing a 1.0%
increase over 1993. 1993 earning assets had averaged $304,225 for a 0.7%
increase over 1992. The yield on interest-earning assets was 7.5%, 7.7% and 8.7%
in 1994, 1993, and 1992, respectively. The average rate incurred on
interest-bearing liabilities was 3.6%, 3.8% and 4.9% for those same years.
Interest-bearing liabilities averaged $263,006 for 1994, declining by 0.3% from
1993 levels which averaged $263,695.
- --------------------------------------------------------------------------------
32 ---
<PAGE> 34
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
The following table provides a more detailed analysis of changes in net interest
income, identifying that portion of the change that is due to a change in the
volume of average assets and liabilities outstanding versus that portion which
is due to a change in the average yields on earning assets and average rates on
interest-bearing liabilities. As the Company has been pursuing a policy of slow,
controlled growth, changes in net interest income have been principally due to
changes in interest rate levels and the mix of assets and liabilities. Changes
due to both rate and volume which cannot be segregated have been allocated in
proportion to the changes due to rate and volume.
<TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
1994 Compared to 1993 1993 Compared to 1992
--------------------------- ----------------------------
Volume Rate Total Volume Rate Total
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income
Interest-bearing deposits in other
banks............................... $ 21 $ (15) $ 6 $ (34) $ 12 $ (22)
Federal funds sold.................... (201) 52 (149) 14 (42) (28)
Trading account securities............ (14) 8 (6) 22 (4) 18
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations..................... 799 12 811 491 (261) 230
U.S. Government mortgage-backed
pass-through certificates........ (509) (293) (802) 518 (986) (468)
States of the U.S. and political
subdivisions..................... 309 (51) 258 400 (85) 315
Other Securities.................... (48) (25) (73) (31) (29) (60)
Loans................................. 94 (578) (484) (1,743) (1,211) (2,954)
-----------------------------------------------------------
Total Interest Income Change............. 451 (890) (439) (363) (2,606) (2,969)
-----------------------------------------------------------
Increase (Decrease) in Interest Expense
Interest-bearing demand deposits...... (55) (193) (248) 86 (519) (433)
Savings deposits...................... 112 (304) (192) 351 (784) (433)
Time deposits......................... (133) (83) (216) (842) (1,236) (2,078)
U.S. Treasury interest-bearing demand
note................................ (2) 6 4 2 0 2
Federal funds purchased............... 22 0 22 0 0 0
Securities sold under agreements to
repurchase.......................... (3) 4 1 3 (13) (10)
-----------------------------------------------------------
Total Interest Expense Change............ (59) (570) (629) (400) (2,552) (2,952)
-----------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME ON A TAXABLE EQUIVALENT BASIS.. $ 510 $ (320) $ 190 $ 37 $ (54) $ (17)
-----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
33 ---
<PAGE> 35
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Total other income for 1994 increased $287, or 32.4% compared to a decrease of
$352 or 28.5% in 1993. Fees for customer services remained relatively stable. A
net gain of $21 was recorded on the disposition of other real estate in 1994
compared to net losses of $341 and $106 in 1993 and 1992, respectively.
Secondary market operations suffered the effects of rapidly escalating mortgage
loan rates, sustaining a net loss of $47 in 1994 compared to gains of $170 and
$54 in 1993 and 1992, respectively. Other operating income benefited from the
sale of data processing equipment which was replaced with more current
technology. Activity in trading securities and the sale of investment securities
resulted in modest gains during 1994 as compared to modest losses in 1993.
<TABLE>
<CAPTION>
OTHER INCOME
------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Fees for other customer
services $ 999 $ 977 $ 976
Gain (loss) on sale of
loans (47) 170 54
Gain (loss) on sale of
other real estate 21 (341) (106)
Other operating income 175 114 111
-------------------------------
1,148 920 1,035
Trading securities net
gains (losses) 4 (18) 6
Investment securities net
gains (losses) 20 (17) 196
-------------------------------
Total other income $1,172 $ 885 $1,237
</TABLE>
Total other expenses decreased by 8.0%, or $854 in 1994 compared to an increase
of $1,840, or 20.8% in 1993. This improvement was due to a decrease in
litigation expense (see NOTE 16). Expenditures for salaries and employee
benefits increased by 8.5%, while all other categories of non-interest expense
increased by 3.8% in the aggregate.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
--------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Salaries and employee
benefits $4,956 $ 4,567 $4,353
Net occupancy expense 584 604 585
Equipment expense 922 752 737
State and local taxes 398 365 325
FDIC assessment 647 681 645
Office supplies 435 427 406
Marketing expense 229 251 239
Collection, repossession
and foreclosure expense 118 176 338
Legal and litigation
expense 294 1,704 216
Other operating expense 1,251 1,161 1,004
------ ------- ------
Total other expenses $9,834 $10,688 $8,848
</TABLE>
<TABLE>
Salaries and employee benefits represented 50.4% of all non-interest expenses in
1994. Exclusive of legal and litigation expense, salaries and employee benefits
share of non-interest expense was 51.9%, 50.8%, and 50.4% in 1994, 1993 and
1992, respectively. Salaries and employee benefits increased by $389 in 1994
following an increase of $214 in 1993. The following details components of these
increases:
<CAPTION>
ANALYSIS OF CHANGES IN SALARIES & BENEFITS
------------------------------------------
Dollars Percent
--------------------------------------------------
1994 1993 1992 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $182 $204 $326 5.0% 5.9% 10.4%
Benefits 25 14 90 2.2 1.2 8.7
Profit Sharing 181
----------------------
388 218 416 8.0 4.7 9.9
Def'd Loan
Origination 1 (4) 89 0.4 1.6 26.3
----------------------
$389 $214 $505 8.5% 4.9% 13.1%
</TABLE>
Factors influencing the 1994 increase in salaries include an average wage
increase of 5% effective March of 1994 and profit sharing expense of $181. The
profit sharing payout was the first since the fiscal year ended December 31,
1987.
- --------------------------------------------------------------------------------
34 ---
<PAGE> 36
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
The Company is self-insured for employee medical and dental benefits. The Plan
limits the Company's exposure to risk by employing stop loss coverage both on an
individual and aggregate claim basis. During 1994 and 1993, the Company
experienced a favorable variance in medical claims. Medical and dental claims
increased by only 0.5% in 1994 helping to contain the increase in total benefits
to only 2.2%.
Full-time equivalent employment averaged 192 employees in 1994 and 193 in 1993.
Wage and salary expense per employee averaged $20,086 in 1994, $19,069 in 1993
and $17,989 in 1992, exclusive of profit sharing, which averaged $945 per
employee in 1994. Productivity ratios which measure employee efficiency improved
slightly. Average earning assets per employee measured $1,600 in 1994, $1,578 in
1993, and $1,566 in 1992.
FOURTH QUARTER 1994 AS
COMPARED TO FOURTH QUARTER 1993
During the fourth quarter of 1994, net interest income increased by $136 as
compared to fourth quarter 1993. The yield on earning assets increased by 19
basis points compared to a year ago, resulting in an increase in total interest
income of $185 from that recorded during the fourth quarter 1993. The rate paid
on interest-bearing liabilities increased by 11 basis points compared to a year
ago, resulting in an increase in total interest expense of $49 from that
recorded during the same period of 1993. The net interest margin for the quarter
increased to 4.4% from the 4.2% attained a year ago.
Loan charge-offs during the quarter were $42 in 1994 and $106 in 1993, while the
recovery of previously charged-off loans amounted to $63 during the fourth
quarter of 1994 compared to $86 in the same period of 1993.
Other income, excluding gains and losses on trading and investment securities,
decreased by $89 from the same period a year ago. This decrease of 25.6% was
primarily due to losses on 1-4 residential mortgage loans held for sale in the
secondary market resulting from increasing interest rates, and from losses
recognized on the sale of other real estate.
Total other non-interest expenses in the fourth quarter were $2,635 in 1994
compared to $2,298 in 1993, an increase of $337 or 14.7%. Salaries and benefits
constituted 72% of the increase, of which profit sharing represented $181 of the
increase. Meanwhile, the new computer systems helped push equipment expense up
$53 over the same quarter a year ago. Other operating expenses increased by $58.
This was due primarily to a $27 increase in consultant fees and a $28 increase
in telephone expenses.
Income before income tax during the fourth quarter amounted to $954 in 1994
compared to $1,150 in 1993. Income tax expense for the fourth quarter of 1994
was $321 as compared to $334 in 1993. Fourth quarter net income was $663 in 1994
compared to $816 in 1993, a decline of $183. The profit sharing awarded to
employees was fully expensed in the fourth quarter, reducing net income $120 net
of the tax effect.
Earnings per share for the fourth quarter, adjusted for the 3% stock dividend
paid January 1, 1995, amounted to $0.65 in 1994 and $0.85 in 1993. After tax
losses on investment and trading securities were $0.06 per share in the fourth
quarter of 1993 versus gains of $0.01 per share in the fourth quarter of 1994.
ASSET-LIABILITY MANAGEMENT
The Company's Asset/Liability Committee, comprised of members of both senior
management and the Board of Directors, meets periodically to review the
Company's balance sheet structure and liquidity needs. The Company has defined a
set of key control parameters which provide various measures of the balance
sheet's exposure to changes in interest rates. Although the Company does not
match each of its assets with specific liabilities, it does monitor all of its
assets and liabilities to determine the overall interest rate sensitivity to
varying conditions. The Company's goal is to produce a net interest margin that
is less vulnerable to
- --------------------------------------------------------------------------------
35 ---
<PAGE> 37
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
interest rate volatility while maintaining earnings at an acceptable level of
profitability.
Included among the various measurement techniques used by the Company to
identify and manage exposure to changing interest rates is the use of computer
based simulation models. Computerized simulation techniques enable the Company
to explore and measure net interest income volatility under alternative interest
rate environments, various product offerings and changing growth patterns.
<TABLE>
GAP TABLE
December 31, 1994
<CAPTION>
Maturity of Repricing Interval
------------------------------------------------------------
Non Rate
Sensitive
3 months 3 to 12 1 to 5 or >5
or less months years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investments....................... $37,350 $ 23,468 $ 46,827 $41,331 $148,976
Loans & Leases.................... 47,401 38,993 45,655 18,631 150,680
------- -------- -------- ------- --------
Total Earning Assets................ 84,751 62,461 92,482 59,962 299,656
Other Assets........................ 20,705 20,705
------- -------- -------- ------- --------
Total Assets........................ $84,751 $ 62,461 $ 92,482 $80,667 $320,361
======== ======== ======== ======= ========
Interest-Bearing Liabilities
NOW & Supernow Accounts........... $19,861 $ 19,861
Money Market Accounts............. 27,776 27,776
Passbook Savings.................. 90,814 90,814
Time Deposits <100,000............ 24,818 31,088 24,170 10,949 91,025
Time Deposits >=100,000........... 7,571 8,267 3,664 1,339 20,841
Federal Funds Purchased........... 6,417 6,417
U.S. Treasury Demand.............. 645 645
Other Borrowings.................. 29 29
------- -------- -------- ------- --------
Total Interest-Bearing
Liabilities....................... 177,902 39,355 27,863 12,288 257,408
Demand Deposits................... 34,358 34,358
Other Liabilities................. 1,074 1,074
Shareholder's Equity.............. 27,521 27,521
------- -------- -------- ------- --------
Total Liabilities & Equity.......... $177,902 $ 39,355 $ 27,863 $75,241 $320,361
======== ======== ======== ======= ========
Rate Sensitivity Gap................ $(93,151) $ 23,106 $ 64,619 $47,674
Cumulative Gap...................... (93,151) (70,045) (5,426) 42,248
Cumulative Gap to Total Assets...... (29.1)% (21.9)% (1.7)% 13.2 %
</TABLE>
The Gap Table shown above presents an analysis of the Company's earliest
repricing opportunity for each of its interest-earning assets and interest-
bearing liabilities. Assets are distributed according to the earlier of interest
rate repricing opportunity or expected cash flows. Time deposits and liabilities
with defined maturities are distributed according to the earlier of the
repricing interval or
- --------------------------------------------------------------------------------
36 ---
<PAGE> 38
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
contractual maturity. Other core deposit accounts (NOW, Supernow, Money Market
and Savings accounts) are shown as being available for repricing in the earliest
time frame. However, management can exert considerable influence over the timing
and manner of repricing these core deposits. Therefore, these accounts may
reprice in later time intervals and reflect smaller incremental changes than
other interest earning assets and interest bearing liabilities. Since management
may reprice these accounts at its discretion, the impact of changing rates on
net interest income is likely to be less severe than inferred by this table.
During 1994, the effective maturities of earning assets lengthened, as rising
interest rates caused repayments on loans and mortgage-backed securities to slow
while certain callable investment securities moved "out of the money."
Meanwhile, the impact of rising interest rates on the maturity distribution of
interest-bearing liabilities in 1994 was much less pronounced, as the primary
change reflected the replacement of $6.5 million of interest-bearing funds with
an equal increase in noninterest-bearing demand deposit accounts.
While the preceding analysis is a general indicator of the potential effect that
changing interest rates may have on the net interest income, it does not by
itself present a complete picture of interest rate sensitivity. Because the
repricing of the various categories of assets and liabilities is subject to
competitive pressure, customer preferences and other factors, such assets and
liabilities may in fact reprice in different time periods and in different
increments than assumed.
The computerized simulation techniques utilized by management provide a more
sophisticated measure of the degree to which the Company's interest-sensitive
assets and liabilities may be impacted by changes in the general level of
interest rates. These analyses show the Company's net interest income remaining
relatively neutral within the economic and interest rate scenarios anticipated
by management. In fact, the Company's net interest margin has remained stable at
4.4% the past three years, despite a significant shift in the direction and
level of interest rates.
LIQUIDITY
The central role of the Company's liquidity management is to (1) ensure
sufficient liquid funds to meet the normal transaction requirements of its
customers, (2) take advantage of market opportunities requiring flexibility and
speed, and (3) provide a cushion against unforeseen liquidity needs.
Principle sources of liquidity for the Company include assets considered
relatively liquid, such as interest-bearing deposits in other banks, federal
funds sold, and cash and due from banks, as well as cash flows from maturities
and repayments of loans, investment securities and mortgage-backed securities.
Cash and due from banks, including federal funds sold, decreased $1,480 compared
to year end 1993. Investment securities maturing, repricing or expected to be
called in one year or less amounted to $59,525 at December 31, 1994,
representing 39.4% of the total combined portfolio, as compared to $84,380 and
54.9% a year ago.
Along with its liquid assets, the Company has other sources of liquidity
available to it which help to ensure that adequate funds are available as
needed. These other sources include, but are not limited to, the ability to
obtain deposits through the adjustment of interest rates, the purchasing of
federal funds, and access to the Federal Reserve Discount Window. The Company is
also in the process of establishing membership in the Federal Home Loan Bank
system.
Operating activities provided cash of $2.8 million, $6.1 million and $3.5
million in 1994, 1993, and 1992, respectively. Refer to the Consolidated
Statement of Cash Flows for a summary of the sources and uses of cash in 1994,
1993, and 1992.
CAPITAL RESOURCES
Regulatory standards for measuring capital adequacy require banks and bank
holding companies to maintain capital based on "risk-adjusted" assets
- --------------------------------------------------------------------------------
37 ---
<PAGE> 39
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
so that categories of assets of potentially higher credit risk require more
capital backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance sheet activities such as standby letters of credit and
interest rate swaps.
The following graph, which is not "risk-adjusted", indicates that Tier 1 capital
as a percentage of total average assets has increased significantly over the
past several years. This measure of capital adequacy is known as the "leverage
ratio".
<TABLE>
LEVERAGE RATIO
(In Percentages)
<S> <C>
1990 6.55
1991 7.08
1992 7.69
1993 8.33
1994 8.97
</TABLE>
This increase in equity capital is important as the risk-based standards
classify capital into two tiers. Tier 1 capital consists of common shareholders'
equity, noncumulative and cumulative perpetual preferred stock, and minority
interests less goodwill. Tier 2 capital consists of a limited amount of the
allowance for loan and lease losses, perpetual preferred stock (not included in
Tier 1), hybrid capital instruments, term subordinated debt, and
intermediate-term preferred stock.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required banking regulatory agencies to revise risk-based capital standards by
June 19, 1993 to ensure that they take adequate account of the following
additional risks:
- interest rate
- concentration of credit
- nontraditional activities
Implementation of these new regulations has been delayed until 1995.
The following table illustrates the Company's risk weighted capital ratios at
December 31, 1994 and 1993. Banks are required to maintain a minimum ratio of 8%
of qualifying total capital to risk-adjusted total assets. The Tier 1 capital
ratio must be at least 4%. Capital qualifying as Tier 2 capital is limited to
100% of Tier 1 capital. As the table indicates, the Company maintains both Tier
1 and Tier 2 capital well in excess of these required regulatory minimum ratios.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
-------------------------------------------------
DECEMBER 31, December 31,
1994 1993
-------------- --------------
<S> <C> <C>
Tier 1 Capital $ 29,005 $ 26,531
Tier 2 Capital 1,865 1,797
-------------- --------------
QUALIFYING
CAPITAL $ 30,870 $ 28,328
============== ==============
Risk Adjusted
Total
Assets(*) $148,020 $142,447
============== ==============
Tier 1
Risk-Based
Capital Ratio 19.60% 18.63%
Total Risk-Based
Capital Ratio 20.86% 19.89%
Total Leverage
Capital Ratio 8.97% 8.33%
</TABLE>
(*) Includes off-balance sheet exposures
FASB Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December 15, 1993,
requires that investments designated as available for sale be marked-to-market
with corresponding entries to the deferred tax account and shareholders' equity.
Regulatory agencies decided during the fourth quarter of 1994 to exclude these
adjustments in computing risk-based capital, as their inclusion would tend to
potentially increase the volatility of this important measure of capital
adequacy.
IMPACT OF INFLATION
Consolidated financial data included herein have been prepared in accordance
with generally ac-
- --------------------------------------------------------------------------------
38 ---
<PAGE> 40
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
cepted accounting principles (GAAP). Presently, GAAP requires the Company to
measure financial position and operating results in terms of historical dollars.
Changes in the relative value of money due to inflation are generally not
considered.
The effects of price changes vary considerably between a financial institution
and an industrial organization. Changes in the price of goods and services are
the primary determinant of an industrial company's profit, whereas changes in
interest rates have a major impact on a financial institution's profitability.
Inflation affects the growth of total assets, but it is difficult to assess its
impact because neither the timing nor the magnitude of the changes in the
consumer price index directly coincides with changes in interest rates.
- --------------------------------------------------------------------------------
39 ---
<PAGE> 41
INFORMATION AS TO STOCK PRICES AND DIVIDENDS OF CORTLAND BANCORP
- --------------------------------------------------------------------------------
OTHER INFORMATION
The Company files quarterly reports (Forms 10-Q) as well as an annual report
(Form 10-K) with the Securities and Exchange Commission. The quarterly reports
are filed within 45 days of the end of each quarter, while the annual report is
filed before March 31st of each year. Any individual requesting copies of such
reports may obtain these by writing to:
Deborah L. Eazor
Cortland Bancorp
194 West Main Street, Cortland, Ohio 44410
The market for the common stock of the Company is not highly active and trading
has historically been limited. The following brokerage firms are known to be
relatively active in trading the Company's stock:
Butler, Wick & Co Inc.
Youngstown, Ohio
Contact: Ellen Watson
Telephone: (216) 744-4351
Outside Ohio: 1-800-541-1643
Community Banc Investments, Inc.
Columbus, Ohio
Contact: Greig A. McDonald
Telephone: 1-800-224-1013
Smith Barney Inc.
Youngstown, Ohio
Contact: Diane L. Drissen-Hideg
Telephone: 1-800-535-0017
The following table shows the prices at which the common stock of the Company
has actually been purchased and sold in market transactions during the periods
indicated. The range of market price is compiled from data provided by brokers
based on limited trading. Also shown in the table are the dividends per share on
the outstanding common stock. All figures shown have been adjusted to give
retroactive effect to the 3% stock dividends declared as of January 1, 1995,
1994 and 1993.
The Company currently has approximately 1,355 holders of its only class of
common stock.
<TABLE>
<CAPTION>
Price Per Share
------------------------- Cash
Dividends
High Low Per Share
---------- ---------- ----------
<S> <C> <C> <C>
1994
FOURTH QUARTER...................................... 29 1/8 26 3/4 $ 0.53
THIRD QUARTER....................................... 28 5/8 24 1/4 0.00
SECOND QUARTER...................................... 26 1/4 23 3/4 0.32
FIRST QUARTER....................................... 25 1/4 22 3/8 0.00
1993
Fourth Quarter...................................... 23 1/2 21 3/4 $ 0.26
Third Quarter....................................... 22 3/8 19 1/2 0.00
Second Quarter...................................... 22 1/4 20 3/4 0.24
First Quarter....................................... 20 3/4 18 1/2 0.00
1992
Fourth Quarter...................................... 20 5/8 18 $ 0.22
Third Quarter....................................... 20 5/8 17 1/4 0.00
Second Quarter...................................... 20 5/8 15 1/2 0.22
First Quarter....................................... 17 1/2 14 1/2 0.00
</TABLE>
For the convenience of stockholders, the Company has established a plan whereby
stockholders may have their dividends automatically reinvested in the common
stock of Cortland Bancorp. In addition, shareholders may elect to supplement
their dividends with cash contributions to fund additional purchases.
Participation in the plan is completely voluntary and shareholders may withdraw
at any time.
For more information on the dividend reinvestment plan, you may contact Deborah
L. Eazor at the following telephone number: (216) 637-8040.
- --------------------------------------------------------------------------------
40 ---
<PAGE> 42
CORTLAND BANCORP
BOARD OF DIRECTORS
RODGER W. PLATT
Chairman
P. BENNETT BOWERS
DAVID C. COLE
GEORGE E. GESSNER
WILLIAM A. HAGOOD
JAMES E. HOFFMAN III
RICHARD L. HOOVER
DENNIS E. LINVILLE
K. RAY MAHAN
TIMOTHY K. WOOFTER
OFFICERS
RODGER W. PLATT
President
DENNIS E. LINVILLE
Executive Vice President
and Corporate Secretary
LAWRENCE A. FANTAUZZI
Treasurer and Controller
41 ---
<PAGE> 43
THE CORTLAND SAVINGS AND BANKING COMPANY
BOARD OF DIRECTORS
P. BENNETT BOWERS
Bowers Insurance Agency
DAVID C. COLE
General Manager
Cole Valley Motor Company
GEORGE E. GESSNER
Attorney
WILLIAM A. HAGOOD
President, Tri-City Mobile Homes, Inc.
JAMES E. HOFFMAN III
Attorney
RICHARD L. HOOVER
Consultant
DENNIS E. LINVILLE
Executive Vice President
K. RAY MAHAN
President, Mahan Packing Co.
RODGER W. PLATT
President and Chairman
TIMOTHY K. WOOFTER
Executive Vice President,
Stan-Wade Metal Products
PAUL C. BOWERS
Director Emeritus
R. B. KNIGHT
Director Emeritus
JOHN F. GESSNER
Director Emeritus
JAMES A. PURDY
Director Emeritus
STANLEY L. WOOFTER
Director Emeritus
* * * * *
OFFICERS
RODGER W. PLATT
President and Chairman
DENNIS E. LINVILLE
Executive Vice President and Corporate Secretary
LAWRENCE A. FANTAUZZI
Controller and Corporate Treasurer
JAMES M. GASIOR
Vice President and Chief Operations Officer
CHARLES J. COMMONS
Vice President
GERALD L. THOMPSON
Vice President
MARLENE LENIO
Vice President
EMMA JEAN WOLLAM
Vice President
TED BANGERT
Vice President
ROBERT J. HORVATH
Vice President
T. WILLIAM ELLIOTT
Vice President
DANNY L. WHITE
Assistant Vice President
GERARD F. KANE
Assistant Vice President
MARK GOVERNOR
Assistant Vice President
MARCEL P. ARNAL
Assistant Vice President
JAMES A. REA
Assistant Vice President
STEPHEN A. TELEGO, SR.
Assistant Vice President
JUDY RUSSELL
Assistant Vice President
GRACE J. BACOT
Assistant Vice President
JAMES DUFF
Assistant Vice President
BEVERLY KOSTOFF
Assistant Vice President
PIETRO PASCALE
Assistant Vice President
KEITH MROZEK
Assistant Vice President
CARLO A. CICCONE
Internal Auditor
JOYCE P. RATCLIFF
Trust Officer
ROSE A. STROUD
Assistant Secretary-Treasurer
JANET K. HOUSER
Assistant Secretary-Treasurer
MARY A. FISHER
Assistant Treasurer
RUSSELL E. TAYLOR
Assistant Treasurer
CRAIG PHYTHYON
Assistant Treasurer
DEBORAH L. EAZOR
Assistant Treasurer
KEVIN CORDNER
Assistant Secretary
42 ---
<PAGE> 44
OFFICES AND LOCATIONS
Ten Offices Serving These Fine Communities
BRISTOL
6090 State Route 45
Bristolville, Ohio 44402
BROOKFIELD
7325 Warren-Sharon Road
Brookfield, Ohio 44403
CORTLAND
194 West Main Street
Cortland, Ohio 44410
HIRAM
6821 Wakefield Road
Hiram, Ohio 44234
HUBBARD
890 West Liberty Street
Hubbard, Ohio 44425
MANTUA
10521 Main Street
Mantua, Ohio 44255
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
WARREN
2935 Elm Road
Warren, Ohio 44483
WILLIAMSFIELD
5917 U.S. Route 322
Williamsfield, Ohio 44093
WINDHAM
9690 East Center Street
Windham, Ohio 44288
Member
Federal Reserve System
and
Federal Deposit Insurance Corporation
43 ---
<PAGE> 45
Exhibit 13
CROWE CHIZEK [LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cortland Bancorp
Cortland, Ohio
We have audited the accompanying consolidated balance sheet of Cortland Bancorp
as of December 31, 1993, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1993. 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 misstatements. 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 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Cortland Bancorp as
of December 31, 1993, and the results of operations and its cash flows for each
of the two years in the period ended Deember 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Notes 11 and 12 to the financial statements, the Company
changed its methods of accounting for postretirement benefits and income taxes
in 1993 to conform to new accounting guidance.
CROWE, CHIZEK AND COMPANY
Columbus, Ohio
February 4, 1994
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
Following lists the subsidiaries of the registrant and the state of
incorporation of each:
NAME INCORPORATED
---- ------------
1) The Cortland Savings and Banking Company Ohio
2) New Resources Leasing Company Ohio
<PAGE> 1
Exhibit 23
CROWE CHIZEK [LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 for the Cortland
Savings and Banking 401(k) Plan and Form S-3 for the Cortland Bancorp Dividend
Reinvestment Plan of our report dated February 4, 1994 on the 1993
consolidated financial statements of Cortland Bancorp, which report is
incorporated by reference in this Form 10-K.
CROWE, CHIZEK AND COMPANY
Columbus, Ohio
March 17, 1995
<PAGE> 2
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectuses constituting
part of the Registration Statements on Form S-8 for the Cortland Savings and
Banking 401(k) Plan and Form S-3 for the Cortland Bancorp Dividend Reinvestment
Plan of our report dated February 8, 1995 on the 1994 consolidated financial
statements of Cortland Bancorp and subsidiaries, which report is incorporated
by reference in this Form 10-K.
PACKER, THOMAS & CO.
Youngstown, Ohio
March 17, 1995
C\CORT401.DOC
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 11,567
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,573
<INVESTMENTS-CARRYING> 79,403
<INVESTMENTS-MARKET> 74,806
<LOANS> 150,680
<ALLOWANCE> 3,081
<TOTAL-ASSETS> 320,361
<DEPOSITS> 284,675
<SHORT-TERM> 7,091
<LIABILITIES-OTHER> 1,074
<LONG-TERM> 0
<COMMON> 4,890
0
0
<OTHER-SE> 22,631
<TOTAL-LIABILITIES-AND-EQUITY> 320,361
<INTEREST-LOAN> 13,079
<INTEREST-INVEST> 9,372
<INTEREST-OTHER> 113
<INTEREST-TOTAL> 22,564
<INTEREST-DEPOSIT> 9,372
<INTEREST-EXPENSE> 9,498
<INTEREST-INCOME-NET> 13,066
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 9,834
<INCOME-PRETAX> 4,404
<INCOME-PRE-EXTRAORDINARY> 4,404
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,083
<EPS-PRIMARY> 3.16
<EPS-DILUTED> 3.16
<YIELD-ACTUAL> 4.4
<LOANS-NON> 1,909
<LOANS-PAST> 14
<LOANS-TROUBLED> 205
<LOANS-PROBLEM> 2,416
<ALLOWANCE-OPEN> 3,139
<CHARGE-OFFS> 288
<RECOVERIES> 230
<ALLOWANCE-CLOSE> 3,081
<ALLOWANCE-DOMESTIC> 2,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 796
</TABLE>
