<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
---------------
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
incorporation or organization) Number)
194 West Main Street, Cortland, Ohio 44410
------------------------------------------------------------------------------
(Address of principal executive offices) (zip Code)
(216) 637-8040
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at Aug. 8, 1995
----- ---------------------------
Common Stock, No Par Value 997,235 Shares
-------------------------- --------------
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - June 30,
1995 and December 31, 1994 2
Consolidated Statements of Income - Three and
six months ended June 30, 1995 and 1994 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1995 and 1994 4
Notes to Consolidated Financial Statements -
June 30, 1995 5 - 12
Item 2. Management's Discussion and Analysis of
------- ---------------------------------------
Financial Condition and Results of Operations 13 - 18
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings 19
------- -----------------
Item 2. Changes in Securities 19
------- ---------------------
Item 3. Defaults Upon Senior Securities 19
------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 19
------- ---------------------------------------------------
Item 5. Other Information 19
------- -----------------
Item 6. Exhibits and Reports on Form 8-K 20
------- --------------------------------
Signatures 21
----------
1
<PAGE> 3
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands except per share data)
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $9,248 $11,567
Investment securities available for sale (Note 3) 76,177 69,573
Investment securities held to maturity
(Approximate market value of $84,932 in 1995 85,072 79,403
and $74,806 in 1994) (Note 3)
Total loans (Note 4) 154,520 150,680
Less allowance for loan losses (Note 4) (3,104) (3,081)
--------- ---------
Net loans 151,416 147,599
--------- ---------
Premises and equipment 6,208 6,475
Other assets 5,180 5,744
--------- ---------
Total assets $333,301 $320,361
========= =========
LIABILITIES
Noninterest-bearing deposits $35,144 $34,358
Interest-bearing deposits 255,809 250,317
--------- ---------
Total deposits 290,953 284,675
Short term borrowings under one year 5,477 7,062
Other borrowings over one year 5,029 29
Other liabilities 1,209 1,074
--------- ---------
Total liabilities 302,668 292,840
--------- ---------
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 989,355 shares
in 1995 and 977,971 in 1994 4,947 4,890
Additional paid in capital 8,274 8,028
Retained earnings 17,473 16,292
Net unrealized loss on available for sale
debt securities and marketable equity securities (61) (1,689)
--------- ---------
Total shareholders' equity 30,633 27,521
--------- ---------
Total liabilities and shareholders' equity $333,301 $320,361
========= =========
<FN>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
</TABLE>
2
<PAGE> 4
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except for per share data)
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1995 1994 1995 1994
-------------------- --------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,513 $3,242 $6,934 $6,437
Interest and dividends on investment securities:
Taxable interest income 1,188 1,111 2,335 2,096
Nontaxable interest income 167 168 336 331
Dividends 45 36 76 67
Interest on mortgage-backed securities 1,106 995 2,124 2,015
Interest on trading account securities 0 6 0 26
Other interest income 30 40 30 80
------- ------- ------- -------
Total interest income 6,049 5,598 11,835 11,052
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,687 2,300 5,123 4,571
Borrowed funds 52 32 128 54
------- ------- ------- -------
Total interest expense 2,739 2,332 5,251 4,625
------- ------- ------- -------
Net interest income 3,310 3,266 6,584 6,427
PROVISION FOR LOAN LOSSES 0 0 0 0
------- ------- ------- -------
Net interest income after provision
for loan losses 3,310 3,266 6,584 6,427
------- ------- ------- -------
OTHER INCOME
Fees for other customer services 243 245 472 480
Net gain (loss) on sale of loans 24 (35) 79 (32)
Trading securities gain (loss) 0 (5) 0 4
Net investment securities gains (1) 10 0 12
Net gain (loss) on the sale of other real estate (17) 16 (30) 65
Other operating income 39 67 112 98
------- ------- ------- -------
Total other income 288 298 633 627
------- ------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 1,251 1,215 2,478 2,413
Net occupancy expense 150 149 292 295
Equipment expense 242 230 477 444
State and local taxes 106 98 212 198
FDIC assessment 161 162 322 324
Office supplies 94 110 212 207
Marketing expense 65 67 121 137
Collection, repossession and foreclosure expenses 31 32 54 70
Legal and litigation 77 68 154 131
Other operating expenses 298 317 606 573
------- ------- ------- -------
Total other expenses 2,475 2,448 4,928 4,792
------- ------- ------- -------
Income before federal income taxes 1,123 1,116 2,289 2,262
FEDERAL INCOME TAXES 360 316 713 645
------- ------- ------- -------
NET INCOME $763 $800 $1,576 $1,617
======= ======= ======= =======
EARNINGS PER COMMON SHARE (Note 6) $0.77 $0.82 $1.59 $1.66
======= ======= ======= =======
<FN>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
</TABLE>
3
<PAGE> 5
<TABLE>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands except per share data)
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1994
---------- ---------
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $3,745 $418
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (7,812) (11,229)
Purchases of securities available for sale (8,971) (9,609)
Proceeds from call, maturity and principal
payments on securities available for sale 4,602 15,420
Proceeds from call, maturity and principal
payments on securities held to maturity 1,962 1,928
Net increase in loans made to customers (5,518) (3,304)
Proceeds from disposition of other real estate 16 386
Proceeds from sale of loans 177 473
Proceeds from sale of fixed assets 64
Net increase in time deposits of other banks 100
Purchase of premises and equipment (121) (1,678)
------- -------
Net cash from investing acitivities (15,665) (7,449)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 6,278 1,894
Net increase (decrease) in borrowings 3,415 (397)
Proceeds from sale of common stock 303 174
Dividends paid (395) (311)
Purchase of treasury stock (7)
------- -------
Net cash from financing activities 9,601 1,353
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,319) (5,678)
CASH AND CASH EQUIVALENTS
Beginning of period 11,567 13,047
------- -------
$9,248 $7,369
======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid $5,159 $4,628
Income taxes paid $235 $790
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
</TABLE>
4
<PAGE> 6
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended June 30, 1995 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1994.
2.) Reclassifications:
The financial statements for 1994 have been reclassified to conform
with the presentation for 1995. Such reclassifications had no effect on the
net results of operations.
3.) Investment Securities:
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.
5
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
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 using the specific identification method. Unrealized
gains and losses on available for sale securities are 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.
During the quarter ended June 30, 1995, $15 of municipal housing bonds
classified as held to maturity were called by the issuer due to mortgage
prepayments, resulting in losses of $1. No securities were sold during the
quarter.
On February 15, 1994 a pre-refunded, escrowed municipal bond with a par
value of $100 and a current book value of $124, 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 defaulted 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. Accordingly, management is unable to determine if any writedown will be
required of the bond.
Securities available for sale, carried at fair value, totalled $76,177
representing 47.2% of all investment securities, providing an adequate level of
liquidity in management's opinion.
6
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in Thousands)
The amortized cost and estimated market value of debt securities at
June 30, 1995, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to call
or prepay certain obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
---------
Securities available AMORTIZED COST FAIR VALUE
-------------------- ---------------- ---------------
for sale 6-30-95 6-30-95
-------- ------- -------
<S> <C> <C>
Due in one year or less $ 7,822 $ 7,830
Due after one year
through five years 14,596 14,670
Due after five years
through ten years 6,792 6,946
Due after ten years 1,681 1,686
-------- --------
30,891 31,132
Mortgage-Backed Securities 41,852 42,160
-------- --------
$ 72,743 $ 73,292
======== ========
</TABLE>
<TABLE>
ESTIMATED
---------
Securities held AMORTIZED COST FAIR VALUE
--------------- ---------------- ---------------
to maturity 6-30-95 6-30-95
----------- ------- -------
<S> <C> <C>
Due in one year or less $ 4,663 $ 4,669
Due after one year
through five years 20,511 20,564
Due after five years
through ten years 30,323 30,498
Due after ten years 1,711 1,601
------- -------
57,208 57,332
Mortgage-Backed Securities 27,740 27,487
Securities in default 124 113
------- -------
$85,072 $84,932
======= =======
</TABLE>
Investment securities with a market value of approximately $29,216
at June 30, 1995 and a carrying value of $27,029 at December 31, 1994 were
pledged to secure deposits and for other purposes.
7
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in Thousands)
The amortized cost and estimated fair value of investment securities available
for sale and held to maturity as of June 30, 1995, are as follows:
<TABLE>
<CAPTION>
Investment
----------
Securities available GROSS GROSS ESTIMATED
-------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 16,558 $ 90 $ 27 $ 16,621
U.S. Government
agencies and
corporations 14,083 189 11 14,261
Mortgage-backed
and related
securities 41,852 481 173 42,160
Corporate securities 250 -0- -0- 250
--------- --------- --------- ---------
Total debt securities 72,743 760 211 73,292
Marketable equity
securities 2,216 10 250 1,976
Other securities 909 -0- -0- 909
--------- --------- --------- ---------
Total available
for sale $ 75,868 $ 770 $ 461 $ 76,177
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Investment
----------
Securities held GROSS GROSS ESTIMATED
--------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury
securities 11,968 85 4 12,049
U.S. Government
agencies and
corporations 29,695 359 84 29,970
Obligations of
states and
political
subdivisions 15,668 123 365 15,426
Mortgage-backed and
related securities 27,741 96 350 27,487
--------- --------- --------- ---------
Total held to
maturity $ 85,072 $ 663 $ 803 $ 84,932
========= ========= ========= =========
</TABLE>
8
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in Thousands)
The following provides a summary of the amortized cost and estimated fair value
of investment securities available for sale and held to maturity as of December
31, 1994:
<TABLE>
<CAPTION>
Investment
----------
Securities available GROSS GROSS ESTIMATED
-------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
-------- -------- -------- --------
Total debt securities 69,228 115 1,844 67,499
Marketable equity
securities 2,170 7 329 1,848
Other securities 226 -0- -0- 226
-------- -------- -------- --------
Total available
for sale $ 71,624 $ 122 $ 2,173 $ 69,573
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Investment
---------------
Securities held GROSS GROSS ESTIMATED
--------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
9
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in Thousands)
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized on the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented
by the contract or notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The amount and nature of collateral
obtained, if any, is based on management's credit evaluation.
<TABLE>
<CAPTION>
CONTRACT OR
-------------------
NOTIONAL AMOUNT
-------------------
6-30-95 12-31-94
--------- --------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit
Fixed rate $ 5,034 $ 4,806
Variable 20,075 18,471
Standby letters of credit 302 392
</TABLE>
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
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. Generally
these financial arrangements have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of these commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
10
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
(Dollars in Thousands)
Most of the Company's business activity is conducted with customers
located within Northeastern Ohio, where the Company maintains a network of ten
offices serving three counties. The Company will open an eleventh office, de
novo, in the community of Niles, Ohio located in southern Trumbull County. The
Company has agreed to purchase a twelfth office in North Bloomfield Ohio, also
in Trumbull County. Both events are expected to occur during the month of
August 1995.
The Company grants residential, consumer and commercial loans, to
customers located primarily in its immediate lending area. The following
represents the composition of the loan portfolio at June 30, 1995 and December
31, 1994:
<TABLE>
<CAPTION>
6-30-95 12-31-94
------- --------
<S> <C> <C>
1-4 Family residential mortgages 44.0% 45.1%
Commercial mortgages 24.5% 24.9%
Consumer loans 13.0% 11.5%
Commercial loans 10.3% 10.0%
Home equity loans 8.2% 8.5%
</TABLE>
Included in 1-4 Family residential mortgages as of June 30, 1995 are
$389 of mortgage loans held for sale in the secondary market. Loans held for
sale at December 31, 1994 totaled $1,855. The estimated market value of these
loans approximates their carrying value.
The following is an analysis of changes in the allowance for loan
losses at June 30, 1995 and June 30, 1994:
<TABLE>
<CAPTION>
6-30-95 6-30-94
------- -------
<S> <C> <C>
Balance at beginning of period $ 3,081 $ 3,139
Loan charge-offs (187) (130)
Recoveries 210 119
------- -------
Net loan recoveries (charge-offs) 23 (11)
------- -------
Provision charged to operations -0- -0-
------- -------
Balance at end of period $ 3,104 $ 3,128
======= =======
</TABLE>
The recorded investment in loans for which impairment has been
recognized in accordance with Financial Accounting Standards (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", was $358 while the related portion of the allowance for loan
losses was $158 at June 30, 1995.
11
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
5.) Legal Proceedings:
On July 10, 1995, the United States District Court, Northern District
of Ohio, Eastern Division, certified FRANK SLENTZ, ET AL. V. CORTLAND SAVINGS
AND BANKING COMPANY as a class action suit against the Company's subsidiary
bank (Cortland).
Plaintiffs purchased interests in two campgrounds, Ponderosa Park
Resorts ("Ponderosa") and The Landing at Clay's Park ("The Landing").
Plantiffs signed promissory notes furnished by the campgrounds. Some of
these notes were subsequently sold to Cortland. Plaintiffs allege that the
campgrounds were never developed as promised. Instead, the campgrounds lapsed
into insolvency and were placed in bankruptcy.
Each plaintiff seeks recovery of amounts invested. Cortland
collected aggregate payments approximating $2.0 million and $2.3 million for
principal, interest, late charges, and other settlement charges relating to
plaintiffs' promissory notes purchased from The Landing and Ponderosa,
respectively.
Cortland vigorously objects to plaintiffs' allegations and will
aggressively pursue all defenses available. The probability of an unfavorable
outcome is not known. As the ultimate outcome of this litigation cannot
presently be determined, no provision for any liability that may result from
resolution of this lawsuit has been made in the accompanying consolidated
financial statements.
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 any material effect on the Company.
6.) Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------- --------
1995 1994 1995 1994
------------------ -----------------
<S> <C> <C>
Net income $ 763 $ 800 $ 1,576 $ 1,617
Average shares outstanding 989,107 971,971 988,698 971,813
Net income per share $ 0.77 $ 0.82 $ 1.59 $ 1.66
</TABLE>
Average shares outstanding and resultant per share amounts have been restated
to give retroactive effect to the 3% stock dividend of January 1, 1995.
12
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Dollars in thousands)
Liquidity
---------
The central role of the Company's liquidity management is to (1)
ensure the possession of and access to sufficient liquid funds to meet the
normal transaction requirements of its customers, (2) to take advantage of
market opportunities requiring flexibility and speed, and (3) to provide a
cushion against unforeseeable liquidity needs.
Principal sources of liquidity for the Company include assets
considered relatively liquid such as investment securities available for sale,
trading account securities, interest-bearing deposits in other banks, federal
funds sold, and cash and due from banks; as well as cash flows from maturities
and repayment of loans, investment securities and mortgage backed securities.
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 borrowing on other credit facilities. Access
to the Federal Reserve Discount Window provides an additional source of funds
to the Company. During the second quarter of 1995, the Company became a member
of the Federal Home Loan Bank of Cincinnati, which represents yet another
source of liquidity.
Capital Resources
-----------------
The capital management function is a continuous process which consists
of providing capital for both the current financial position and the
anticipated future growth of the Company. Central to this process is internal
equity generation, particularly through earnings retention. Internal capital
generation is measured as the annualized rate of return on equity, exclusive of
any appreciation or depreciation relating to available for sale securities,
multiplied by the percentage of earnings retained. Internal capital generation
was 8.1% for the six months ended June 30, 1995, as compared to 9.8% for the
like period during 1994. Overall during the first six months of 1995, capital
grew at the annual rate of 22.8%, a figure which reflects earnings, common
stock issued, and the net change in the estimated fair value of available for
sale securities.
13
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
During the first six months of 1995, the Company issued 11,386 shares
of common stock which resulted in proceeds of $303. Of the 11,386 shares
issued, 9,179 shares were issued through the Company's dividend reinvestment
plan. The remaining 2,207 shares were issued through the subsidiary bank's
401-k Plan which offers employees the choice of investing in the common stock
of the Company as one of several participant directed investment options.
In January 1989, the Federal Reserve Board adopted risk-based
standards for measuring capital adequacy for U.S. banking organizations. In
general, the standards require banks and bank holding companies to maintain
capital based on "risk-adjusted" assets so that categories of assets with
potentially higher credit risk will 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.
These standards also classify capital into two tiers, referred to as
Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity,
noncumulative and cumulative perpetual preferred stock, and minority interests
less goodwill. Tier 2 capital consists of allowance for loan and lease losses
(subject to certain limitations), perpetual preferred stock (not included in
Tier 1), hybrid capital instruments, term subordinated debt, and
intermediate-term preferred stock. Banks are required to meet a minimum ratio
of 8% of qualifying total capital to risk-adjusted total assets with at least
4% constituting Tier 1 capital. Capital qualifying as Tier 2 capital is
limited to 100% of Tier 1 capital. All banks and bank holding companies are
also required to maintain a minimum leverage capital ratio (Tier 1 capital to
total average assets) generally in the range of 3% to 4%, which is subject to
regulatory guidelines.
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, and
nontraditional activities. Banks with relatively high levels of such risks, as
compared to industry averages, will be required to hold risk-based capital
above the 8% requirement or reduce their exposure to such risks. These new
standards have not yet been issued in their final form.
14
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
The table below illustrates the Company's risk weighted capital ratios
at June 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Tier 1 Capital $ 30,565 $ 29,005
Tier 2 Capital 1,952 1,865
-------- --------
TOTAL QUALIFYING
CAPITAL $ 32,517 $ 30,870
======== ========
Risk Adjusted
Total Assets (*) $155,016 $148,020
Tier 1 Risk-Based
Capital Ratio 19.72% 19.60%
Total Risk-Based
Capital Ratio 20.98% 20.86%
Total Leverage
Capital Ratio 9.38% 8.97%
(*) Includes off-balance sheet exposures.
</TABLE>
First Six Months of 1995 as Compared to First Six Months of 1994
----------------------------------------------------------------
During the first six months of 1995, net interest income increased by
$157 compared to the first six months of 1994. Total interest income increased
by $783 or 7.1% from the level recorded in 1994. This increase was partially
offset by an increase in interest expense of $626 or 13.6%. The average rate
paid on interest sensitive liabilities increased by 56 basis points. The
average balance of interest sensitive liabilities declined by 1.8%, decreasing
by $4,844. The change in average earning assets was less pronounced, declining
by only $145, or 0.1%, from the same period last year. The tax equivalent
yield on earning assets during the first six months of 1995 increased by 51
basis points when compared to the first half of 1994.
Interest and dividend income on securities registered an increase of
$362 or 8.0% during the first six months of 1995 when compared to 1994. The
average invested balances declined by 0.9%, dropping by $1,368. The decline in
the average balance of investment securities was more than offset by a 52 basis
point increase in portfolio yield, as rates ratcheted up in response to the
Federal Reserve's efforts to slow economic activity to a more sustainable pace.
15
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Interest and fees on loans increased by $497 for the first six months
of 1995 compared to 1994, representing the combined effects of a $5,905
increase in the average balance of the loan portfolio and a 33 basis point
increase in yield due to the effect of rising interest rates.
Other interest income decreased by $76 from the same period a year ago.
The Company did not have any trading activity during the first half of 1995.
The Company was also more fully invested, resulting in a decline of $2,675 in
the average balance of Federal Funds sold when compared to the first half of
last year.
Other income from all sources increased by $6 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $110 from the same period a year ago. However, the sale of
other real estate produced a $30 loss compared to a $65 gain in the same period
last year. All other sources of operating income were little changed, declining
by $10, or 1.7%.
Loan charge-offs during the first six months were $187 in 1995 and $130
in 1994, while the recovery of previously charged-off loans amounted to $210 in
1995 compared to $119 in 1994. The loan loss allowance of $3,104 represents
2.0% of outstanding loans. Non accrual loans at June 30, 1995 represented
1.0% of the loan portfolio compared to 1.3% at December 31, 1994.
Full time equivalent employment during the first six months averaged
194 employees in 1995 and 190 in 1994. Salaries and benefits increased by $65
over the similar period a year ago, representing an increase of 2.7%.
FDIC assessment remained basically unchanged, reflecting the Company's
relatively stable deposit base. State and local taxes increased by $14, or
7.1%. Equipment expense increased by $33, or 7.5%, primarily due to increased
amortizing costs on new computer equipment and software systems installed
during 1994. Legal and litigation expense increased by $23. All other expense
categories increased by only $3 as a group.
Income before income tax expense amounted to $2,289 for the first six
months of 1995 compared to $2,262 for the first six months of 1994. The
effective tax rate for the first six months was 31.1% in 1995 compared to 28.5%
in 1994, resulting in income tax expense of $713 and $645, respectively. Net
income for the first six months registered $1,576 in 1995 compared to $1,617 in
1994, representing a 4.2% decline in per share amounts from the $1.66 earned in
1994 to the $1.59 recorded in 1995.
16
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Second Quarter of 1995 as compared to Second Quarter 1994
---------------------------------------------------------
During the second quarter of 1995, net interest income increased by
$44 as compared to second quarter 1994. Average earning assets increased
modestly by 0.5% while average interest-bearing liabilities declined by 1.6%.
The tax equivalent yield on earning assets increased by 53 basis points from
the same quarter a year ago. The rate paid on interest-bearing liabilities
increased by 69 basis points compared to a year ago, resulting in an increase
in total interest expense of $407 from that recorded during the same period of
1994. The net effect of these changes was that the tax equivalent net interest
margin remained unchanged at 4.4%.
Loans continued to rebound, adding $3,589 during the quarter, and are
now $6,076 greater than at the end of the same quarter a year ago. Loans as a
percentage of earning assets stood at 48.9% as of June 30, 1995 as compared to
48.6% on June 30, 1994. The loan to deposit ratio at the end of the second
quarter of 1995 was 53.1% compared to 51.3% at the end of the same period a
year ago. The investment portfolio increased by $4,300 or 2.7% from June 30,
1994 to June 30, 1995, and now represents 55.4% of each deposit dollar, up from
54.2% a year ago.
Loan charge-offs during the second quarter were $83 in 1995 and $52 in
1994, while the recovery of previously charged-off loans amounted to $62 during
the second quarter of 1995 compared to $67 in the same period of 1994.
Other income for the quarter declined by 3.4% compared to the same
period a year ago. The $24 gain on loan sales for the period was in contrast
to the $35 loss recognized a year ago, reflecting the sharp shift in the
mortgage rate environment. The sale of other real estate resulted in a loss of
$17 compared to the $16 gain generated a year ago. Other operating income of
$39 was down from last year when gains of $24 were realized on the sale of
obsolete EDP equipment.
17
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Total other expenses in the second quarter were $2,475 in 1995 and
$2,448 in 1994, an increase of $27 or 1.1%. Employee salaries and benefits
increased by $36 or 3.0%. Equipment expense increased by $12 or 5.2%. Legal
expense increased by $9 or 13.2%. Other expenses as a group decreased by $30 or
3.2% compared to the same period last year.
Income before tax for the quarter was $1,123 in 1995 as compared to
$1,116 in 1994. Net income for the quarter of $763 represented a 4.6% decline
from the $800 a year ago due to a higher effective tax rate.
New Accounting Standards
------------------------
The Company adopted Statement of Financial Accounting Standards (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 have been 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. Adoption of the standard
did not have a material impact on the Company's financial position or results
of operations.
18
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------- -----------------
See Note (5) of the financial statements.
Item 2. Changes in Securities
------- ---------------------
Not applicable
Item 3. Defaults upon Senior Securities
------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
(a). On April 11, 1995, Cortland Bancorp held its annual meeting of
shareholders. At the close of business on the record date 988,745
Cortland Bancorp shares were outstanding and entitled to vote. At the
meeting 571,720 or 57.8% of the outstanding shares entitled to vote
were represented by proxy or in person.
(b). The following directors were elected for three year terms ending in
1998.
William A. Hagood
Richard L. Hoover
K. Ray Mahan
Rodger W. Platt
Directors whose term of office continued after the annual meeting:
George E. Gessner
James E. Hoffman III
Timothy K. Woofter
P. Bennett Bowers
David C. Cole
Dennis E. Linville
(c). Not Applicable
(d). Not Applicable
Item 5. Other Information
------- -----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES PART
II - OTHER INFORMATION (CONTINUED)
----------------------------------
Item 6. Exhibits and Reports on Form 8-K (continued)
------- --------------------------------------------
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
(b) Reports on Form 8-K
-------------------
Not applicable
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements 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
----------------
(Registrant)
DATED: Aug. 8, 1995 Lawrence A. Fantauzzi
------------ ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: Aug. 8, 1995 Dennis E. Linville
------------ ---------------------
Executive Vice-President,
Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 9,248
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,177
<INVESTMENTS-CARRYING> 85,072
<INVESTMENTS-MARKET> 84,932
<LOANS> 154,520
<ALLOWANCE> 3,104
<TOTAL-ASSETS> 333,301
<DEPOSITS> 290,953
<SHORT-TERM> 5,477
<LIABILITIES-OTHER> 1,209
<LONG-TERM> 5,029
<COMMON> 4,947
0
0
<OTHER-SE> 25,686
<TOTAL-LIABILITIES-AND-EQUITY> 333,301
<INTEREST-LOAN> 6,934
<INTEREST-INVEST> 4,871
<INTEREST-OTHER> 30
<INTEREST-TOTAL> 11,835
<INTEREST-DEPOSIT> 5,123
<INTEREST-EXPENSE> 5,251
<INTEREST-INCOME-NET> 6,584
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,928
<INCOME-PRETAX> 2,289
<INCOME-PRE-EXTRAORDINARY> 2,289
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,576
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 4.4
<LOANS-NON> 1,526
<LOANS-PAST> 4
<LOANS-TROUBLED> 202
<LOANS-PROBLEM> 296
<ALLOWANCE-OPEN> 3,081
<CHARGE-OFFS> 187
<RECOVERIES> 210
<ALLOWANCE-CLOSE> 3,104
<ALLOWANCE-DOMESTIC> 3,104
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
