<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 September 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
- ----------------------------------------------------------------------------
(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 Nov. 8, 1995
----- ----------------------------
Common Stock, No Par Value 996,411 Shares
- -------------------------- --------------
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - September 30,
1995 and December 31, 1994 2
Consolidated Statements of Income - Three and
nine months ended September 30, 1995 and 1994 3
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 4
Notes to Consolidated Financial Statements -
September 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>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,220 $ 11,567
Federal funds sold 1,900
-------- --------
Total cash and cash equivalents 11,120 11,567
Investment securities available for sale (Note 3) 83,175 69,573
Investment securities held to maturity
(Approximate market value of $91,717 in 1995 91,672 79,403
and $74,806 in 1994) (Note 3)
Total loans (Note 4) 155,989 150,680
Less allowance for loan losses (Note 4) (3,012) (3,081)
-------- --------
Net loans 152,977 147,599
-------- --------
Premises and equipment 6,542 6,475
Other assets 5,842 5,744
-------- --------
Total assets $351,328 $320,361
======== ========
LIABILITIES
Noninterest-bearing deposits $34,671 $34,358
Interest-bearing deposits 273,968 250,317
-------- --------
Total deposits 308,639 284,675
Short term borrowings under one year 4,207 7,062
Other borrowings over one year 5,026 29
Other liabilities 1,743 1,074
-------- --------
Total liabilities 319,615 292,840
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 997,235 shares
in 1995 and 977,971 in 1994 4,986 4,890
Additional paid in capital 8,456 8,028
Retained earnings 18,333 16,292
Net unrealized loss on available for sale
debt securities and marketable equity securities (62) (1,689)
-------- --------
Total shareholders' equity 31,713 27,521
-------- --------
Total liabilities and shareholders' equity $351,328 $320,361
======== ========
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 NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1995 1994 1995 1994
------------------ -------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,571 $3,323 $ 10,505 $ 9,760
Interest and dividends on investment securities:
Taxable interest income 1,370 1,171 3,705 3,267
Nontaxable interest income 175 170 511 501
Dividends 40 31 116 98
Interest on mortgage-backed securities 1,173 1,008 3,297 3,023
Interest on trading account securities 0 0 0 26
Other interest income 32 12 62 92
------ ------ ------- -------
Total interest income 6,361 5,715 18,196 16,767
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,895 2,369 8,018 6,940
Borrowed funds 143 29 271 83
------ ------ ------- -------
Total interest expense 3,038 2,398 8,289 7,023
------ ------ ------- -------
Net interest income 3,323 3,317 9,907 9,744
PROVISION FOR LOAN LOSSES 0 0 0 0
------ ------ ------- -------
Net interest income after provision
for loan losses 3,323 3,317 9,907 9,744
------ ------ ------- -------
OTHER INCOME
Fees for other customer services 246 239 718 719
Net gain (loss) on sale of loans 0 (1) 79 (33)
Trading securities gain (loss) 0 0 0 4
Net investment securities gains 1 0 1 12
Net gain (loss) on the sale of other real estate (2) (1) (32) 64
Other operating income 52 41 164 139
------ ------ ------- -------
Total other income 297 278 930 905
------ ------ ------- -------
OTHER EXPENSES
Salaries and employee benefits 1,278 1,196 3,756 3,609
Net occupancy expense 163 146 455 441
Equipment expense 259 245 736 689
State and local taxes 104 100 316 298
FDIC assessment (16) 161 306 485
Office supplies 120 111 332 318
Marketing expense 86 48 207 185
Collection, repossession and foreclosure expenses 31 21 85 91
Legal and litigation 43 68 197 199
Other operating expenses 268 311 874 884
------ ------ ------- -------
Total other expenses 2,336 2,407 7,264 7,199
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,284 1,188 3,573 3,450
FEDERAL INCOME TAXES 424 355 1,137 1,000
------ ------ ------- -------
NET INCOME $ 860 $ 833 $ 2,436 $ 2,450
====== ====== ======= =======
EARNINGS PER COMMON SHARE (Note 6) $ 0.86 $ 0.85 $ 2.45 $ 2.51
====== ====== ======= =======
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
MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
-----------------------
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 4,524 $ 1,235
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (20,653) (14,233)
Purchases of securities available for sale (21,750) (12,325)
Proceeds from sales of securities available for sale 1,000
Proceeds from call, maturity and principal
payments on securities available for sale 10,303 19,803
Proceeds from call, maturity and principal
payments on securities held to maturity 8,108 4,612
Net increase in loans made to customers (6,908) (6,333)
Proceeds from acquisition of deposits 10,605
Proceeds from disposition of other real estate 144 386
Proceeds from sale of loans 203 507
Proceeds from sale of fixed assets 64
Net increase in time deposits of other banks 100
Purchase of premises and equipment (653) (1,791)
-------- --------
Net cash from investing activities (20,601) (8,210)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 13,359 2,728
Net increase (decrease) in borrowings 2,142 (926)
Proceeds from sale of common stock 524 299
Dividends paid (395) (311)
Purchase of treasury stock (7)
-------- --------
Net cash from financing activities 15,630 1,783
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (447) (5,192)
CASH AND CASH EQUIVALENTS
Beginning of period 11,567 13,047
-------- --------
$ 11,120 $ 7,855
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 8,015 $ 7,065
Income taxes paid $ 485 $ 1,090
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 nine months
ended September 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 September 30, 1995, $5,200 of investment
securities held to maturity were called by the issuer prior to maturity
resulting in $1 in gains. Additionally, $1,500 of investment securities
available for sale were called by the issuer prior to maturity resulting in no
gains or losses. Finally, $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 $83,175
representing 47.6% of all investment securities, providing an adequate level of
liquidity in management's opinion. On October 18, 1995, the Financial
Accounting Standards Board (FASB) announced its intent to provide a one-time
opportunity for financial institutions to reclassify, without penalty, their
investment securities. The FASB Board will release a new directive in
mid-November to provide implementation guidance. Provided that the Securities
and Exchange Commission concurs with the new FASB directive, management will
review the Company's investment securities to determine whether any
reclassifications might prove beneficial.
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
September 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 9-30-95 9-30-95
-------- ------- -------
<S> <C> <C>
Due in one year or less $ 7,272 $ 7,290
Due after one year
through five years 17,093 17,124
Due after five years
through ten years 7,863 7,998
Due after ten years 1,668 1,673
-------- --------
33,896 34,085
Mortgage-Backed Securities 45,856 46,173
-------- --------
$ 79,752 $ 80,258
======== ========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
---------
Securities held AMORTIZED COST FAIR VALUE
-------------------- -------------- -----------
to Maturity 9-30-95 9-30-95
----------- ------- -------
<S> <C> <C>
Due in one year or less $ 1,397 $ 1,408
Due after one year
through five years 22,271 22,346
Due after five years
through ten years 33,205 33,327
Due after ten years 7,220 7,234
-------- --------
64,093 64,315
Mortgage-Backed Securities 27,455 27,287
Securities in default 124 115
-------- --------
$ 91,672 $ 91,717
======== ========
</TABLE>
Investment securities with a market value of approximately $39,515 at
September 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
<TABLE>
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 investment securities held to maturity
as of September 30, 1995, are as follows:
<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 $ 20,518 $ 76 $ 30 $ 20,564
U.S. Government
agencies and
corporations 13,128 150 7 13,271
Mortgage-backed
and related
securities 45,856 498 181 46,173
Corporate securities 250 -0- -0- 250
-------- -------- ------- --------
Total debt securities 79,752 724 218 80,258
Marketable equity
securities 2,216 32 252 1,996
Other securities 921 -0- -0- 921
-------- -------- ------- --------
Total available
for sale $ 82,889 $ 756 $ 470 $ 83,175
======== ======== ======== =========
</TABLE>
<TABLE>
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 $ 9,700 $ 74 $ 3 $ 9,771
U.S. Government
agencies and
corporations 38,929 372 126 39,175
Obligations of
states and
political
subdivisions 15,588 124 228 15,484
Mortgage-backed and
related securities 27,455 106 274 27,287
-------- -------- ------- --------
Total held to
maturity $ 91,672 $ 676 $ 631 $ 91,717
======== ======== ======== =========
</TABLE>
8
<PAGE> 10
<TABLE>
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
investment securities held to maturity as of December 31, 1994:
<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>
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
------------------
9-30-95 12-31-94
------- --------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit
Fixed rate $ 5,789 $ 4,806
Variable 21,374 18,471
Standby letters of credit 290 392
</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
twelve offices serving three counties. During the quarter just ended, the
Company opened its eleventh office, de novo, in the community of Niles, Ohio
located in southern Trumbull County. The Company also purchased a twelfth
office in North Bloomfield Ohio, in northern Trumbull County. The North
Bloomfield agreement included the purchase of approximately 11 million dollars
in deposits. Both events occurred 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 September 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
9-30-95 12-31-94
------- --------
<S> <C> <C>
1-4 Family residential mortgages 43.6% 45.1%
Commercial mortgages 24.3% 24.9%
Consumer loans 13.8% 11.5%
Commercial loans 10.2% 10.0%
Home equity loans 8.1% 8.5%
</TABLE>
Included in 1-4 Family residential mortgages as of September 30, 1995
are $586 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 September 30, 1995 and September 30, 1994:
<TABLE>
<CAPTION>
9-30-95 9-30-94
------- -------
<S> <C> <C>
Balance at beginning of period $ 3,081 $ 3,139
Loan charge-offs (314) (246)
Recoveries 245 167
------- -------
Net loan recoveries (charge-offs) (69) (79)
------- -------
Provision charged to operations -0- -0-
------- -------
Balance at end of period $ 3,012 $ 3,060
======= =======
</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 $238 while the related portion of the allowance for loan
losses was $56 at September 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").
Plaintiffs signed promissory notes furnished by these 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1995 1994 1995 1994
--------------- ---------------
<S> <C> <C>
Net income $ 860 $ 833 $ 2,436 $ 2,450
Average shares outstanding 996,987 977,015 991,491 973,566
Net income per share $ 0.86 $ 0.85 $ 2.45 $ 2.51
</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 9.3% for the nine months ended September 30, 1995, as compared to 10.7% for
the like period during 1994. Overall during the first nine months of 1995,
capital grew at the annual rate of 20.3%, 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 nine months of 1995, the Company issued 19,260 shares
of common stock which resulted in proceeds of $524. Of the 19,260 shares
issued, 15,950 shares were issued through the Company's dividend reinvestment
plan. The remaining 3,310 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 to ensure that they take adequate account of the following additional
risks: interest rate, concentration of credit, and nontraditional activities. A
new standard regarding interest rate risk (IRR) was issued during the quarter
ended September 30, 1995. While the standard establishes no specific benchmark
for IRR at this time, regulators will subjectively consider an institution's
"exposure to declines in the economic value of its capital due to changes in
interest rates" in evaluating capital adequacy. After gaining sufficient
experience with the new IRR measurement framework, it is the intent of the
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)
regulatory agencies to establish an explicit formula-based capital requirement
for IRR. The new rule is effective September 1, 1995.
The table below illustrates the Company's risk weighted capital ratios
at September 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Tier 1 Capital $ 31,113 $ 29,005
Tier 2 Capital 1,982 1,865
TOTAL QUALIFYING -------- --------
CAPITAL $ 33,095 $ 30,870
======== ========
Risk Adjusted
Total Assets (*) $157,552 $148,020
Tier 1 Risk-Based
Capital Ratio 19.75% 19.60%
Total Risk-Based
Capital Ratio 21.01% 20.86%
Total Leverage
Capital Ratio 9.09% 8.97%
<FN>
(*) Includes off-balance sheet exposures.
</TABLE>
First Nine Months of 1995 as Compared to First Nine Months of 1994
- ------------------------------------------------------------------
During the first nine months of 1995, net interest income increased by
$163 compared to the first nine months of 1994. Total interest income increased
by $1,429 or 8.5% from the level recorded in 1994. This increase was partially
offset by an increase in interest expense of $1,266 or 18.0%. The average rate
paid on interest sensitive liabilities increased by 63 basis points. The
average balance of interest sensitive liabilities was virtually unchanged
increasing by only $807 or 0.3%. The growth in average earning assets was also
moderate, increasing by $6,244, or 2.0%, from the same period last year. The
tax equivalent yield on earning assets during the first nine months of 1995
increased by 45 basis points when compared to the first three quarters of 1994.
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 dividend income on securities registered an increase of
$714 or 11.1% during the first nine months of 1995 when compared to 1994. The
average invested balances grew by 1.8%, increasing by $2,772. The increase in
the average balance of investment securities was accompanied by a 48 basis
point increase in portfolio yield, reflecting the impact of the Federal
Reserve's efforts to slow economic activity to a more sustainable pace by
pushing interest rates higher.
Interest and fees on loans increased by $745 for the first nine months
of 1995 compared to 1994, representing the combined effects of a $5,730
increase in the average balance of the loan portfolio and a 31 basis point
increase in yield due to the effect of rising interest rates.
Other interest income decreased by $30 from the same period a year ago.
This resulted from the Company being more fully invested, as evidenced by a
decline of $2,278 in the average balance of Federal Funds sold and other
interest bearing bank balances when compared to the first nine months of last
year.
Other income from all sources increased by $25 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $112 from the same period a year ago. However, the sale of
other real estate produced a $32 loss compared to a $64 gain in the same period
last year. All other sources of operating income were little changed,
increasing by $9, or 1.0%.
Loan charge-offs during the first nine months were $314 in 1995 and
$246 in 1994, while the recovery of previously charged-off loans amounted to
$245 in 1995 compared to $167 in 1994. The loan loss allowance of $3,012
represents 1.9% of outstanding loans. Non accrual loans at September 30, 1995
represented 1.0% of the loan portfolio compared to 1.3% at December 31, 1994.
Full time equivalent employment during the first nine months averaged
193 employees in 1995 and 190 in 1994. Salaries and benefits increased by $147
over the similar period a year ago, representing an increase of 4.1%.
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)
The FDIC dramatically reduced its premium rates retroactive to the end
of May 1995. As a result, the subsidiary Bank experienced a decrease in FDIC
Assessment expense of $179. State and local taxes increased by $18, or 6.1%.
Equipment expense increased by $47, or 6.8%, primarily due to increased
amortizing costs on new computer equipment and software systems installed
during 1994. Marketing expense increased by $22, which includes an additional
expenditure of $31 to promote the Company's two new branches. All other
expense categories increased by only $10 as a group.
Income before income tax expense amounted to $3,573 for the first nine
months of 1995 compared to $3,450 for the first nine months of 1994. The
effective tax rate for the first nine months was 31.8% in 1995 compared to
29.0% in 1994, resulting in income tax expense of $1,137 and $1,000,
respectively. Net income for the first nine months registered $2,436 in 1995
compared to $2,450 in 1994, representing a 2.4% decline in per share amounts
from the $2.51 earned in 1994 to the $2.45 recorded in 1995.
Third Quarter of 1995 as compared to Third Quarter 1994
- -------------------------------------------------------
During the third quarter of 1995, net interest income increased by $6
as compared to third quarter 1994. Average earning assets grew by 6.1% while
average interest-bearing liabilities increased by 4.5%. The tax equivalent
yield on earning assets increased by 39 basis points from the same quarter a
year ago. The rate paid on interest-bearing liabilities increased by 76 basis
points compared to a year ago, resulting in an increase in total interest
expense of $640 from that recorded during the same period of 1994. The net
effect of these changes was that the tax equivalent net interest margin
declined by 20 basis points to 4.2%.
Loans increased by $1,469 during the quarter, and are now $4,900
greater than at the end of the same quarter a year ago. Loans as a percentage
of earning assets stood at 47.2% as of September 30, 1995 as compared to 49.6%
on September 30, 1994. The loan to deposit ratio at the end of the third
quarter of 1995 was 50.6% compared to 52.1% at the end of the same period a
year ago. The investment portfolio increased by $21,140 or 13.8% from September
30, 1994 to September 30, 1995, and now represents 56.7% of each deposit
dollar, up from 53.0% a year ago.
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)
Loan charge-offs during the third quarter were $127 in 1995 and $116 in
1994, while the recovery of previously charged-off loans amounted to $35 during
the third quarter of 1995 compared to $48 in the same period of 1994.
Deposits increased by $17,686, benefiting from the purchase of some
$11,000 in deposits as part of the Company's purchase of the North Bloomfield
branch. The opening of the new Niles office added another $1,000 of deposits
(see Note 4).
Total other expenses in the third quarter were $2,336 in 1995 and
$2,407 in 1994, a decrease of $71 or 3.0%. Employee salaries and benefits
increased by $82 or 6.9%. Equipment expense increased by $114 or 5.7%. FDIC
expense decreased by $177 due to a significant decrease in premiums. Other
expenses as a group increased by $10 or 1.2% compared to the same period last
year.
Income before tax for the quarter was $1,284 in 1995 as compared to
$1,188 in 1994. Net income for the quarter of $860 represented a 3.3% increase
from the $833 a year ago.
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.
Statement of Financial Accounting Standards (SFAS) No. 122 "Accounting
for Mortgage Servicing Rights an Amendment of FASB Statement No. 65" is
required to be adopted by the Company by January 1, 1996. Management does not
expect this pronouncement to have any material effect on the Company.
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
- ------- ---------------------------------------------------
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
---------------------------
Note 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: Nov. 8, 1995 Lawrence A. Fantauzzi
------------ ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: Nov. 8, 1995 Dennis E. Linville
------------ ------------------
Executive Vice-President,
Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q, CALL
REPORT, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 9,220
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,175
<INVESTMENTS-CARRYING> 91,672
<INVESTMENTS-MARKET> 91,717
<LOANS> 155,989
<ALLOWANCE> 3,012
<TOTAL-ASSETS> 351,328
<DEPOSITS> 308,639
<SHORT-TERM> 4,207
<LIABILITIES-OTHER> 1,743
<LONG-TERM> 5,026
<COMMON> 4,986
0
0
<OTHER-SE> 26,727
<TOTAL-LIABILITIES-AND-EQUITY> 351,328
<INTEREST-LOAN> 10,505
<INTEREST-INVEST> 7,629
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 18,196
<INTEREST-DEPOSIT> 8,018
<INTEREST-EXPENSE> 8,289
<INTEREST-INCOME-NET> 9,907
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 7,264
<INCOME-PRETAX> 3,573
<INCOME-PRE-EXTRAORDINARY> 2,436
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,436
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 2.45
<YIELD-ACTUAL> 4.3
<LOANS-NON> 1,475
<LOANS-PAST> 11
<LOANS-TROUBLED> 196
<LOANS-PROBLEM> 275
<ALLOWANCE-OPEN> 3,081
<CHARGE-OFFS> 314
<RECOVERIES> 245
<ALLOWANCE-CLOSE> 3,012
<ALLOWANCE-DOMESTIC> 3,012
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
