<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, 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 No.)
incorporation or organization)
194 West Main Street
Cortland, Ohio 44410
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 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 of this Form 10-K [ x ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 12, 1996:
Common Stock, No Par Value - $37,664,149.
- ----------------------------------------
The number of shares outstanding of the issuer's classes of common stock
as of March 12, 1996:
Common Stock, No Par Value - 1,039,011 shares
- ---------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 1995 are incorporated by reference into Part II.
Portions of the proxy statement for the annual shareholders meeting to
be held April 9, 1996 are incorporated by reference into Part III.
<PAGE> 2
CORTLAND BANCORP
FORM 10-K
1995
INDEX
<TABLE>
<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 (also 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
offers discount brokerage services, while the 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 twelve offices, eight 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 Bank Insurance Fund (BIF)
administered 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 12, 1996, the Corporation and its subsidiaries had 161 full-time
and 56 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
------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash and due from banks $ 8,293 $ 7,555 $ 6,751
Interest-bearing deposits in other banks 0 658 100
Federal funds sold 2,485 2,489 8,075
Trading account securities 0 337 544
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 74,447 66,804 54,751
U.S. Government mortgage-backed
pass-through certificates 70,471 70,833 79,548
States of the U.S. and political subdivisions 15,436 15,362 10,778
Other securities 2,965 2,414 3,166
-------- -------- --------
TOTAL INVESTMENT SECURITIES 163,319 155,413 148,243
-------- ------- --------
Total loans 153,711 148,304 147,289
Less unearned income 9 16 26
Less allowance for loan losses 3,079 3,116 3,284
------- ------- -------
NET LOANS 150,623 145,172 143,979
------- ------- -------
Market Value (depreciation) of
securities available for sale (469) (91) 0
Premises and equipment 6,422 6,488 5,316
Other assets 4,929 5,314 5,397
-------- -------- --------
$335,602 $323,335 $318,405
======== ======== ========
</TABLE>
I-4
<PAGE> 6
AVERAGE BALANCE SHEETS (CONTINUED)
----------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Deposits (all domestic):
Noninterest-bearing demand deposits $ 33,716 $ 29,783 $ 25,927
Interest-bearing demand deposits 45,864 51,392 53,452
Savings 87,072 94,753 90,981
Time 129,320 113,444 116,112
-------- -------- --------
TOTAL DEPOSITS 295,972 289,372 286,472
-------- -------- --------
Borrowings:
U.S. Treasury interest-bearing demand note 756 623 692
Federal funds purchased 1,276 440 0
Securities sold under agreements to repurchase 2,390 2,324 2,426
Other Borrowings over one year 2,657 30 32
-------- -------- --------
TOTAL BORROWINGS 7,079 3,417 3,150
-------- -------- --------
Other liabilities 2,139 2,502 3,292
-------- -------- --------
TOTAL LIABILITIES 305,190 295,291 292,914
-------- -------- --------
Shareholders' equity:
Common stock 4,966 4,735 4,531
Additional paid-in capital 8,363 7,323 6,528
Retained earnings 17,726 16,439 14,718
Net unrealized loss on available for sale
debt and marketable equity securities (639) (453) (286)
Less cost of common shares in treasury (4) 0 0
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 30,412 28,044 25,491
-------- -------- --------
$335,602 $323,335 $318,405
======== ======== ========
</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, 1995 Outstanding or Paid Rate
- ---------------------------- ----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other banks $ 0 $ 0
Federal funds sold 2,485 146 5.9%
Trading account securities 0 0
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 74,447 5,051 6.8%
U.S. Government mortgage-backed
pass-through certificates 70,471 4,571 6.5%
States of the U.S. and political
subdivisions (1) (2) 15,436 1,024 6.6%
Other securities (1) 2,965 187 6.3%
-------- --------
Total investment securities (1) 163,319 10,833 6.6%
Loans (1) (2) (4) 153,702 14,175 9.2%
-------- --------
Total interest-earning assets $319,506 $ 25,154 7.9%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 45,864 $ 1,177 2.6%
Savings 87,072 2,406 2.8%
Time 129,320 7,452 5.8%
-------- --------
Total deposits 262,256 11,035 4.2%
-------- --------
Borrowings:
U.S. Treasury interest-bearing
demand note 756 41 5.4%
Federal funds purchased 1,276 78 6.1%
Securities sold under agreements
to repurchase 2,390 110 4.6%
Other borrowings over one year 2,657 157 5.9%
-------- --------
Total borrowings 7,079 386 5.5%
-------- --------
Total interest-bearing liabilities $269,335 $ 11,421 4.2%
======== ========
Net interest margin (3) $ 13,733 4.3%
======== =====
</TABLE>
I-6
<PAGE> 8
ANALYSIS OF NET INTEREST EARNINGS
---------------------------------
(In Thousands of Dollars)
<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 94,753 2,576 2.7%
Time 113,444 5,559 4.9%
--------- --------
Total deposits 259,589 9,372 3.6%
--------- --------
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 2,324 79 3.4%
Other borrowings over one year 30 1 3.3%
-------- --------
Total 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-7
<PAGE> 9
AVERAGE BALANCE SHEETS (CONTINUED)
----------------------------------
(In Thousands of Dollars)
<TABLE>
<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 90,981 2,767 3.0%
Time 116,112 5,776 5.0%
-------- --------
Total deposits 260,545 10,028 3.8%
-------- --------
Borrowings:
U.S. Treasury interest-bearing
demand note 692 20 2.9%
Federal funds purchased 0 0
Securities sold under agreements
to repurchase 2,426 78 3.2%
Other Borrowings over one year 32 1 3.1%
-------- --------
Total borrowings 3,150 99 3.1%
-------- --------
Total interest-bearing liabilities $263,695 $ 10,127 3.8%
======== ========
Net interest margin (3) $ 13,235 4.4%
======== =====
<FN>
(1) The amounts are reflected on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1995, 1994 and 1993. Tax-free income from states
of the U.S. and political subdivisions, other securities and loans amounted to
$656, $1 and $197, respectively, for 1995; $641, $14 and $206, respectively,
for 1994; $474, $14 and $180, respectively, for 1993.
(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 $72 in 1995, $333 in 1994
and $368 in 1993.
</TABLE>
I-8
<PAGE> 10
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:
<TABLE>
<CAPTION>
1995 Change from 1994
---------------------
Change Change
Total Due to Due to
Change Volume Rate
-------- -------- --------
<S> <C> <C> <C>
Interest Income
- ---------------
Interest-bearing deposits in other banks $ (18) $ (18) $ 0
Federal funds sold 51 0 51
Trading account securities (26) (26) 0
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 624 516 108
U.S. Government mortgage-backed
pass-through certificates 534 (21) 555
States of the U.S. and political
subdivisions (2) 5 (7)
Other securities 40 34 6
-------- --------- ---------
Total investment securities 1,196 534 662
Loans 1,028 489 539
-------- --------- ---------
Total interest income $ 2,231 $ 979 $ 1,252
======== ========= =========
Interest Expense
- ----------------
Deposits:
Interest-bearing demand deposits $ (60) $ (139) $ 79
Savings (170) (212) 42
Time 1,893 838 1,055
-------- -------- --------
Total deposits 1,663 487 1,176
-------- -------- --------
Borrowings:
U.S. Treasury interest-bearing
demand note 17 6 11
Federal funds purchased 56 51 5
Securities sold under agreements to repurchase 31 2 29
Other Borrowings over one year 156 155 1
-------- -------- --------
Total borrowings 260 214 46
-------- -------- --------
Total interest expense $ 1,923 $ 701 $ 1,222
======== ======== ========
</TABLE>
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.
I-9
<PAGE> 11
RATE AND VOLUME ANALYSIS
------------------------
(In Thousands of Dollars)
<TABLE>
<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 (191) 113 (304)
Time (217) (134) (83)
-------- -------- --------
Total deposits (656) (76) (580)
-------- -------- --------
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
Other Borrowings over one year 0 0 0
-------- -------- --------
Total borrowings 27 17 10
-------- -------- --------
Total interest expense $ (629) $ (59) $ (570)
======== ======== ========
</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:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 81,720 $ 65,777 $ 59,007
U.S. Government mortgage-backed
pass-through certificates 79,557 65,590 77,768
States of the U.S. and political subdivision 16,811 15,285 14,488
Other Securities 3,622 2,324 2,524
-------- -------- --------
$181,710 $148,976 $153,787
======== ======== ========
</TABLE>
A summary of securities held at December 31, 1995, 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.
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------
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 $ 17,601 6.49%
Maturing after one year but within five years 25,597 6.12
Maturing after five years but within ten years 32,370 7.43
Maturing after ten years 6,152 7.97
-------- -----
Total U.S. Treasury and other U.S.
Government agencies and corporations $ 81,720 6.86%
======== =====
U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's
Maturing within one year $ 51,734 6.49%
Maturing after one year but within five years 17,733 6.97
Maturing after five years but within ten years 7,639 7.36
Maturing after ten years 2,451 7.40
-------- -----
Total U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's $ 79,557 6.71%
======== =====
</TABLE>
I-11
<PAGE> 13
II. INVESTMENT PORTFOLIO (continued)
- ------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------
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 $ 740 7.85%
Maturing after one year but within five years 7,899 6.77
Maturing after five years but within ten years 6,903 6.91
Maturing after ten years 1,269 7.79
--------
Total States of the U.S. and
political subdivisions $ 16,811 6.95%
======== ========
Other securities:
Maturing within one year $ 1,911 6.14%
Maturing after one year but within five years 0
Maturing after five years but within ten years 0
Maturing after ten years 1,711 6.22
--------
Total Other securities $ 3,622 6.18%
======== ========
<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 $18, $168, $162 and
$34 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, 1995.
As of December 31, 1995, there were $17,516 in callable U.S. Government
Agencies, given current and expected interest rate environments, which are
likely to be called within the one year time horizon. These securities are
categorized according to their contractual maturities. $2,007 mature after one
year but within five years, $11,510 mature after five years but within ten
years and $3,999 mature after 10 years.
As of December 31, 1995, there were $17,018 in callable U.S. Government
Agencies that, given current and expected interest rate environments, are
likely to be called within the over 1-5 year time frame. These securities are
categorized according to their contractual maturities. $14,865 mature after
five years but within ten years and $2,153 mature after 10 years.
I-12
<PAGE> 14
III. LOAN PORTFOLIO (ALL DOMESTIC)
- ----------------------------------
TYPES OF LOANS
--------------
(In Thousands of Dollars)
The following schedule shows the types of loans at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 67,099 $ 66,069 $ 68,096 $ 71,085 $ 83,824
Commercial mortgage 38,371 37,554 35,014 37,385 41,252
Consumer loans 21,254 17,247 14,539 18,975 26,109
Commercial loans 16,658 15,101 12,898 10,963 13,832
Home equity loans 12,353 12,854 13,403 12,426 10,802
1 - 4 family residential
mortgages held for sale 473 1,855 1,877 889 0
-------- -------- -------- -------- --------
$156,208 $150,680 $145,827 $151,723 $175,819
======== ======== ======== ======== ========
</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, 1995:
<TABLE>
<CAPTION>
1 Year 1 to Over
Types of Loans or Less 5 Years 5 Years Total
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial loans $ 9,444 $ 2,871 $ 4,343 $ 16,658
Home Equity 12,353 0 0 12,353
-------- -------- -------- --------
Total loans (excluding
mortgage and consumer loans) $ 21,797 $ 2,871 $ 4,343 $ 29,011
======== ======== ======== ========
</TABLE>
The amounts of total loans (excluding mortgage and consumer loans)
as of December 31, 1995, 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 $ 20,832 $ 414 $ 21,246
Fixed rates of interest 965 6,800 7,765
-------- -------- --------
Total loans $ 21,797 $ 7,214 $ 29,011
======== ======== ========
</TABLE>
I-13
<PAGE> 15
RISK ELEMENTS
-------------
(In Thousands of Dollars)
The following table sets forth aggregate loans in each of the following
categories for the years indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $ 1,597 $ 1,909 $ 1,652 $ 1,979 $ 3,315
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 7 14 353 201 251
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 191 205 573 1,222 1,084
</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, 1995.
(In Thousands of Dollars)
<TABLE>
<S> <C>
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms $181
Interest income included in income on the loans 113
</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, 1995, there are $2,271 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 $357,
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.
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-funded with U.S. Treasury
securities financed by a subsequent bond issue of Northern Randolph County,
Alabama, which later defaulted. Holders of this refunding issue filed suit,
seeking to have the escrow unwound with proceeds distributed to the claimants.
The bond trustee suspended interest payments pending a ruling from the court on
this matter. On January 11, 1996, the United States District Court for the
Northeastern District of Alabama, ordered that the holders of the pre-refunded
issue were to immediately receive the proceeds of the escrow fund in full
satisfaction of the principal and accrued interest due on the bond, resulting
in the bond's early retirement. The Company expects to receive amounts due on
these bonds in the first quarter of 1996.
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 non accrual 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
- -----------------------------------
The following is an analysis of the allowance for loan losses for the
periods indicated:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,081 $ 3,139 $ 3,415 $ 3,203 $ 2,987
Loan losses:
1 - 4 family residential
mortgages (69) (72) (172) (108) (160)
Commercial mortgages 0 (27) (42) (834) (195)
Consumer loans (220) (141) (271) (438) (792)
Commercial loans (78) (48) (123) (198) (187)
Home equity loans 0 0 (7) (18) 0
-------- ------- ------- ------- -------
(367) (288) (615) (1,596) (1,334)
-------- ------- ------- ------- -------
Recoveries on previous
loan losses:
1 - 4 family residential
mortgages 4 4 26 55 17
Commercial mortgages 78 6 28 6 0
Consumer loans 152 156 202 273 321
Commercial loans 63 64 83 24 32
-------- ------- ------- ------- -------
297 230 339 358 370
-------- ------- ------- ------- -------
Net loan losses (70) (58) (276) (1,238) (964)
-------- ------- ------- ------- -------
Provision charged to
operations 0 0 0 1,450 1,180
-------- ------- ------- ------- -------
Balance at end of year $ 3,011 $ 3,081 $ 3,139 $ 3,415 $ 3,203
======== ======= ======= ======= =======
Ratio of net loan losses to
average net loans
outstanding .05% .04% .19% .75% .53%
===== ===== ===== ===== =====
</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 condition present in the lending area of the Corporation's bank
subsidiary.
I-15
<PAGE> 17
IV. SUMMARY OF LOAN LOSS EXPERIENCE (continued)
- -----------------------------------
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:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
Types of Loans 1995 1994 1993 1992 1991
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 351 $ 385 $ 405 $ 437 $ 419
Commercial mortgage 1,118 1,223 1,029 1,157 997
Consumer loans 416 407 424 591 1,019
Commercial loans 239 207 192 210 235
Home equity loans 61 63 67 62 52
Unallocated portion 826 796 1,022 958 481
------- -------- -------- ------- --------
$ 3,011 $ 3,081 $ 3,139 $ 3,415 $ 3,203
======= ======== ======== ======= ========
</TABLE>
The allocation 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 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.
The percentage of loans in each category to total loans is shown in the
following table:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
Types of Loans 1995 1994 1993 1992 1991
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage 43.3% 45.1% 48.0% 47.4% 47.7%
Commercial mortgages 24.6 24.9 24.0 24.7 23.5
Consumer loans 13.6 11.5 10.0 12.5 14.8
Commercial loans 10.6 10.0 8.8 7.2 7.9
Home equity loans 7.9 8.5 9.2 8.2 6.1
------- ------- ------- ------- -------
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. Fees are
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:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Average Balance 1995 1994 1993
--------------- -------- -------- --------
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 33,716 $ 29,783 $ 25,927
Interest-bearing demand deposits 45,864 51,392 53,452
Savings 87,072 94,753 90,981
Time deposits 129,320 113,444 116,112
-------- -------- --------
Total average deposits $295,972 $289,372 $286,472
======== ======== ========
</TABLE>
The following shows the average rate paid on the following deposit
categories for the periods indicated:
<TABLE>
<CAPTION>
Type 1995 1994 1993
---- -------- -------- --------
<S> <C> <C> <C>
Interest-bearing demand deposits 2.6% 2.4% 2.8%
Savings 2.8 2.7 3.0
Time deposits 5.8 4.9 5.0
</TABLE>
A summary of time deposits of $100,000 or more as of December 31, 1995 by
maturity range is shown below:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Other
Certificates Time
of Deposit Deposits Total
------------ -------- --------
<S> <C> <C> <C>
3 months or less remaining until maturity $ 9,957 $ 1,075 $ 11,032
3 to 6 months remaining until maturity 6,421 0 6,421
6 to 12 months remaining until maturity 6,833 0 6,833
Over 12 months remaining until maturity 5,394 1,530 6,924
-------- -------- --------
Total outstanding $ 28,605 $ 2,605 $ 31,210
======== ======== ========
</TABLE>
I-17
<PAGE> 19
VI. RETURN ON EQUITY AND ASSETS
- -------------------------------
Information for the years indicated is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Return on average total assets 1.0% 1.0% .7%
Return on average equity 10.8% 11.0% 8.8%
Cash dividend payout ratio 30.7% 26.7% 21.5%
Average equity to average total assets 9.1% 8.7% 8.0%
</TABLE>
I-18
<PAGE> 20
Item 2. Properties
- ------ ----------
CORTLAND BANCORP'S 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:
Popular Name Address
------------ -------
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
Niles Office 6050 Youngstown Warren Rd., Niles, Ohio
North Bloomfield Office 8837 State Route 45, North Bloomfield, Ohio
The Brookfield, Windham, Hubbard, Mantua, and Niles Offices are leased,
while all of the other above offices are owned by Cortland Banks.
Item 3. 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 alledge 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 a material effect on the Company.
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 1,
1996 are as follows:
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Rodger W. Platt 60 Chairman of the Board,
President and Director
Dennis E. Linville 45 Executive Vice President,
Secretary and Director
Lawrence A. Fantauzzi 48 Controller/Treasurer
James M. Gasior 36 Vice President and Chief
Operations Officer
</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 a Chairman of the Board of Cortland Bancorp and
the subsidiary bank since November 1987. 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 l987. He became Treasurer of Cortland Bancorp in
December 1992. He became a Director of New Resources Leasing Company in
November 1995.
James M. Gasior has been the Vice President and Chief Operations Officer
of Cortland Bancorp since April 1995. He has been the Vice President and Chief
Operations Officer of the subsidiary bank since June 1993. Previously, he had
been the General Audit Officer of the subsidiary bank since March 1990. He
became a Director of New Resources Leasing Company in November, 1995.
I-20
<PAGE> 22
PART II
-------
Information relating to Items 5, 6, 7 and 8 is set forth in the
Corporation's 1995 Annual Report to Shareholders under the captions and on the
pages indicated below and is incorporated herein by reference:
<TABLE>
<CAPTION>
Pages in 1995
Annual Report
Caption in 1995 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>
(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.
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 9, 1996. 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 9, 1996. 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 9, 1996. 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 9, 1996. Such information is incorporated herein by reference. Page 11
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 1995 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, 1995.
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 12, 1996 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 12, 1996
- -------------------------------- -------------------
Date
Executive Vice
President, Secretary
Dennis E. Linville and Director March 12, 1996
- -------------------------------- --------------------
Date
P. Bennett Bowers Director March 12, 1996
- -------------------------------- --------------------
Date
David C. Cole Director March 12, 1996
- -------------------------------- ---------------------
Date
George E. Gessner Director March 12, 1996
- -------------------------------- --------------------
Date
William A. Hagood Director March 12, 1996
- -------------------------------- --------------------
Date
James E. Hoffman, III Director March 12, 1996
- -------------------------------- --------------------
Date
Richard L. Hoover Director March 12, 1996
- -------------------------------- --------------------
Date
K. Ray Mahan Director March 12, 1996
- -------------------------------- --------------------
Date
Timothy K. Woofter Director March 12, 1996
- -------------------------------- --------------------
Date
Lawrence A. Fantauzzi Controller/Treasurer March 12, 1996
- -------------------------------- --------------------
Date
James M. Gasior Vice President & March 12, 1996
- -------------------------------- Chief Operations Officer --------------------
</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 (incorporated by
reference to Exhibit 3a of the Corporation's Report on Form S-1 filed
February 5, 1988).
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.
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
Exhibit 11
----------
CORTLAND BANCORP AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
-----------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Average shares outstanding 1,022,138 1,003,356 988,722
Net Income ($000 Omitted) $ 3,289 $ 3,083 $ 2,250
Earnings per share $ 3.22 $ 3.07 $ 2.28
</TABLE>
<PAGE> 1
Exhibit 13
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cortland Bancorp
Cortland, Ohio
We have audited the consolidated balance sheet of Cortland Bancorp as of
December 31, 1993, which is not separately presented herein, and the related
consolidated statements of income, changes in 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 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 the
year then ended, 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> 2
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> 3
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS:
All things considered, 1995 was a pretty good year. After 41 years of "just wait
'til next year" the Tribe was finally back in the World Series. Almost as rare,
the Federal Reserve may have actually guided the economy to the ever elusive
"soft landing" although the jury is still out on that one. Meanwhile, the FDIC
took the banking system's pulse one more time, found it to be in robust health,
slashed insurance premiums and issued refunds. Bank stocks, which at midyear had
begun to fall out of favor with savvy Wall Street investors as net interest
margins narrowed, suddenly were in vogue again, with many financial institutions
announcing record profits one more time. Life was no different in Cortland,
Ohio. Life was good.
Net income in 1995 of $3.289 million represented a 6.7% improvement over the
prior year, and the best year in the Company's history. Earnings per share
improved to $3.22 from the $3.07 earned last year. The leverage capital ratio
climbed from 9.0% to 9.5%, while the risk-based capital ratio topped 21%. With
both capital measures well in excess of the regulatory minimums, dividends were
again increased, this time by better than 20% to $0.99 per share. The year ended
on the upbeat, with fourth quarter net income of $853,000 gaining 35% from the
comparable quarter of 1994. All of this was reflected in the demand for the
Company's stock, which climbed in price throughout the year, closing out on a
high note.
You may recall that last year I wrote to you about plans to expand our market
coverage by opening an eleventh full service banking office. This new office,
located in Niles, Ohio, was to be highly focused on meeting the needs of small
business. Opened as planned during the month of August, this office has been
highly successful in identifying and attracting the commercial customers we
seek.
Also last year, I noted that "our strong capital base confers upon us sufficient
leverage potential to exploit attractive growth opportunities" should they
arise. Indeed, such an opportunity did arise quite unexpectedly. As a result of
our positioning, we were able to respond quickly and effectively, capitalizing
on an opportunity to expand market share in northern Trumbull County by
acquiring the office of another banking competitor. Thus, only two weeks after
opening our eleventh office in Niles, we were able to celebrate the addition of
our twelfth office, situated in the rural community of North Bloomfield, Ohio.
Early in the second quarter of 1995, we were accepted as a member of the Federal
Home Loan Bank (FHLB). Membership in the FHLB provides us with another source of
liquidity, enabling us to access an additional credit line of $16 million. As a
consequence of having this additional line available to us, we were able to more
aggressively compete for large certificates of deposit (Jumbos). We were
successful in this endeavor, as our Jumbos increased by better than $10 million
during the year.
All of these items -- the two new Community Bank offices, the borrowings
afforded by our FHLB membership and our increased success in competing for the
larger deposit -- helped fuel our growth in 1995, as we increased our total
assets by 12% to $358.7 million, a new record. However, as most of this growth
occurred in the second half of 1995, average assets grew by only 3.8%, so the
full impact of the growth won't be realized until 1996.
- --------------------------------------------------------------------------------
1 ---
<PAGE> 4
- --------------------------------------------------------------------------------
With interest rates beginning to decline in the second half of 1995, we began to
see signs of an increasing demand for credit. Although loan balances increased a
modest 3.7% over year-end 1994 levels, off balance sheet commitments surged late
in the year, finishing more than 50% above last year's mark. This foreshadows
more robust loan production early in 1996, which should continue throughout the
year barring any significant downturn in the economy.
Also during 1995, I appointed a Growth & Development Committee to provide
greater access to the Company's talent pool. With committee members representing
all areas of the organization, the Committee sought ways to re-engineer the Bank
that would enhance non-interest income and reduce non-interest expense while
maintaining the Company's commitment to affordable, quality customer service. A
number of the Committee's recommendations have already begun to be implemented
and will have a positive impact on the Company's 1996 performance.
Over the past several years, the Company has enjoyed considerable cost savings
by administering a self-insured group medical plan. However, late in 1995,
management identified a premium based preferred provider plan that increases
plan benefits while truncating and limiting the risk associated with
administering a self-insured plan. This new plan is scheduled for adoption and
implementation during the first quarter of 1996.
During the course of 1995, asset quality continued to remain a major strength of
the Company. Under-performing assets declined another 19.7% from 1994 levels and
now stand at only 0.59% of total assets. As a percentage of our total capital,
these potentially problematic assets represent only 5.9%, down from 8.6% last
year and 11.4% two years ago. Net loan charge-offs continue to be negligible,
with the ratio of net loan losses to average net outstanding loans registering
only 0.05%.
The wave of bank mergers that began in 1991 continues to roll on with new
mega-banks being formed as U.S. banking giants combine in an effort to better
compete with Asian and European competitors, while bolstering market share here
at home as well. Some forecast that at least one half of the existing 55,000
U.S. bank branches will disappear by the end of the 20th century, a scant five
years away.
Our perception is that there will always be a need for the smaller community
bank to meet the customer service and credit needs of those market niches that
cannot be adequately or economically serviced by the global reaching
mega-giants. Accordingly, we remain committed to ensuring that our customers and
communities continue to enjoy the finest banking services available anywhere. In
an era of unparalleled industry-wide consolidation, we remain fiercely dedicated
to the twin ideals of community and independence.
Just wait 'til next year.
Sincerely,
Rodger W. Platt
Chairman and President
- --------------------------------------------------------------------------------
2 ---
<PAGE> 5
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, credit card services, 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. Cortland Banks also offers discount brokerage services,
while 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 twelve offices, eight 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, 1995 the Company through its subsidiary, the Bank, employed
158 full-time and 61 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> 6
REPORT OF PACKER, THOMAS & CO.,
INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
Cortland Bancorp
We have audited the accompanying consolidated balance sheets of Cortland Bancorp
and subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, shareholders' equity and cash flows for the years 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 audits. The consolidated financial statements of
Cortland Bancorp and subsidiaries as of and for the year ended December 31, 1993
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 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 and
subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and cash flows for the years 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.
Packer, Thomas & Co.
Youngstown, Ohio
February 15, 1996
- --------------------------------------------------------------------------------
4 ---
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.............................. $ 14,117 $ 13,079 $ 13,554
Interest and dividends on investment securities:
Taxable.............................................. 5,112 4,502 3,713
Nontaxable........................................... 684 670 474
Dividends............................................ 175 135 199
Interest on mortgage-backed securities.................. 4,571 4,039 4,839
Interest on trading account securities.................. 26 32
Other interest income................................... 146 113 256
-------- -------- --------
Total interest income........................... 24,805 22,564 23,067
-------- -------- --------
INTEREST EXPENSE
Deposits................................................ 11,035 9,372 10,028
Borrowed funds.......................................... 386 126 99
-------- -------- --------
Total interest expense.......................... 11,421 9,498 10,127
-------- -------- --------
Net interest income.......................... 13,384 13,066 12,940
Provision for loan losses (Note 4)...........
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 13,384 13,066 12,940
-------- -------- --------
OTHER INCOME
Fees for other customer services........................ 973 977 977
Trading securities gains (losses)....................... 4 (18)
Investment securities gains (losses) - net.............. 5 20 (17)
Gain (loss) on sale of loans - net...................... 93 (47) 170
Gain (loss) on sale of other real estate - net.......... (32) 21 (341)
Other non-interest income............................... 272 175 114
-------- -------- --------
Total other income.............................. 1,311 1,150 885
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits.......................... 5,262 4,956 4,567
Net occupancy expense................................... 611 584 604
Equipment expense....................................... 1,004 922 752
State and local taxes................................... 414 398 365
FDIC assessment......................................... 334 647 681
Office supplies......................................... 473 435 427
Marketing expense....................................... 255 229 251
Collection, repossession and foreclosure................ 94 118 176
Legal and litigation expense............................ 263 294 1,704
Other operating expenses................................ 1,351 1,229 1,161
-------- -------- --------
Total other expenses............................ 10,061 9,812 10,688
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES........................ 4,634 4,404 3,137
Federal income taxes (Note 11)............................ 1,345 1,321 887
-------- -------- --------
NET INCOME................................................ $ 3,289 $ 3,083 $ 2,250
======== ======== ========
EARNINGS PER COMMON SHARE (Note 1)........................ $ 3.22 $ 3.07 $ 2.28
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5 ---
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 12,439 $ 11,567
Investment securities available for sale (Note 2)................. 117,689 69,573
Investment securities held to maturity (approximate
market value of $64,873 in 1995 and $74,806 in 1994) (Note 2)... 64,021 79,403
Total loans (Note 3).............................................. 156,208 150,680
Less allowance for loan losses (Note 4)......................... (3,011) (3,081)
---------- ----------
Net loans....................................................... 153,197 147,599
---------- ----------
Premises and equipment (Note 5)................................... 6,537 6,475
Other assets...................................................... 4,849 5,744
---------- ----------
TOTAL ASSETS............................................ $ 358,732 $ 320,361
========== ==========
LIABILITIES
Noninterest-bearing deposits...................................... $ 39,255 $ 34,358
Interest-bearing deposits (Note 7)................................ 276,674 250,317
---------- ----------
Total deposits.................................................. 315,929 284,675
---------- ----------
Short-term borrowings under one year (Note 8)..................... 3,191 7,062
Other borrowings over one year (Note 8)........................... 5,026 29
Other liabilities................................................. 1,970 1,074
---------- ----------
TOTAL LIABILITIES....................................... 326,116 292,840
---------- ----------
Commitments and contingent liabilities (Notes 9 and 16)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,026,707 shares in 1995 and
977,971 in 1994................................................. 5,134 4,890
Additional paid-in capital........................................ 9,171 8,028
Retained earnings................................................. 17,693 16,292
Net unrealized gain (loss) on available for sale debt and
marketable equity securities (Note 2)........................... 643 (1,689)
Treasury stock, at cost, 854 shares............................... (25)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (Note 15)....................... 32,616 27,521
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 358,732 $ 320,361
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
6 ---
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Net Un-
realized Total
Additional Gain 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, 1993.......... $ 4,486 $ 6,384 $ 13,754 $ 0 $ (353) $ 24,271
Net income........................ 2,250 2,250
Shares sold....................... 65 210 275
Cash dividends declared
($.49 per share)............... (481) (481)
3% stock dividend................. 134 538 (672)
Cash paid in lieu of
fractional shares.............. (11) (11)
Net change in unrealized loss on
marketable equity securities... 227 227
-------- ---------- --------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1993........ 4,685 7,132 14,840 0 (126) 26,531
-------- ---------- --------- -------- ---------- --------
Net income........................ 3,083 3,083
Shares sold....................... 65 250 315
Treasury shares purchased......... (7) (7)
Treasury shares sold.............. 1 7 8
Cash dividends declared
($.62 per share)............... (625) (625)
Special cash dividend
($.20 per share)............... (209) (209)
3% stock dividend................. 140 645 (785)
Cash paid in lieu of
fractional shares.............. (12) (12)
Net change in unrealized loss on
available for sale debt
securities and marketable
equity securities.............. (1,563) (1,563)
-------- ---------- --------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1994........ 4,890 8,028 16,292 0 (1,689) 27,521
-------- ---------- --------- -------- ---------- --------
Net income........................ 3,289 3,289
Shares sold....................... 97 428 525
Treasury shares purchased......... (25) (25)
Treasury shares sold..............
Cash dividends declared
($.78 per share)............... (794) (794)
Special cash dividend
($.21 per share)............... (219) (219)
3% stock dividend................. 147 715 (862)
Cash paid in lieu of
fractional shares.............. (13) (13)
Net change in unrealized gain
(loss) on available for sale
debt securities and marketable
equity securities.............. 2,332 2,332
-------- ---------- --------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1995........ $ 5,134 $ 9,171 $ 17,693 $ (25) $ 643 $ 32,616
======== ========== ========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
7 ---
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 3,289 $ 3,083 $ 2,250
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, amortization and accretion........... 1,552 1,668 1,290
Deferred tax (benefit) expense..................... (22) 718 (488)
Investment securities (gains) losses............... (5) (20) 17
Other real estate (gains) losses................... 32 (21) 341
(Gains) losses on sales of loans................... (93) 47 (170)
Loans originated for sale.......................... 1,473 (909) (8,477)
Proceeds from sale of loans originated for sale.... 878 7,659
Gain on sale of fixed assets....................... (23)
Trading account securities sales, maturities
and purchases................................... (4) 2,055
Changes in:
Interest and fees receivable................. (396) (215) 46
Interest payable............................. 330 41 (59)
Other assets and liabilities................. 509 (2,421) 1,652
-------- -------- --------
Net cash from operating activities......... 6,669 2,822 6,116
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities................................. (67,203)
Purchases of securities held to maturity................ (30,225) (18,633)
Proceeds from sales of securities....................... 1,755
Purchases of securities available for sale.............. (32,352) (22,386)
Proceeds from sales of securities available for sale.... 4,019
Proceeds from call, maturity and principal
payments on securities............................... 32,629 39,458 45,073
Net (increase) decrease in loans made to customers...... (7,366) (6,381) 5,589
Net proceeds from the acquisition of deposits........... 10,605
Proceeds from disposition of other real estate.......... 194 739 1,715
Proceeds from sale of loans............................. 330 1,148 501
Proceeds from sale of fixed assets...................... 65
Net decrease in deposits in other banks................. 100
Purchases of premises and equipment..................... (861) (1,945) (349)
-------- -------- --------
Net cash from investing activities......... (27,046) (3,816) (12,919)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts............. 20,649 (2,817) 4,074
Net increase (decrease) in borrowings................... 1,126 2,861 (193)
Dividends paid.......................................... (1,026) (846) (492)
Purchases of treasury stock............................. (25) (7)
Proceeds from sale of treasury stock.................... 8
Proceeds from sale of common stock...................... 525 315 275
-------- -------- --------
Net cash from financing activities......... 21,249 (486) 3,664
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................. 872 (1,480) (3,139)
-------- -------- --------
CASH AND CASH EQUIVALENTS
Beginning of year....................................... 11,567 13,047 16,186
-------- -------- --------
End of year............................................. $ 12,439 $ 11,567 $ 13,047
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
8 ---
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
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 Resources 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.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 $11,091,000, $9,457,000 and $10,186,000 in 1995,
1994 and 1993, respectively. Cash paid for income taxes was $936,000 in 1995,
$1,024,000 in 1994 and $1,253,00 in 1993. Transfers of loans to other real
estate were $58,000, $306,000 and $518,000 in 1995, 1994 and 1993, respectively.
Investment Securities: Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities,"
requires that investments in debt and equity securities be classified as held to
maturity, trading or available for sale. 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.
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: Effective January 1, 1995 the Company adopted SFAS No.
114, "Accounting by Creditors for Impairment of Loans," as amended by SFAS No.
188, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." 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.
- --------------------------------------------------------------------------------
(Continued)
9 ---
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Management plans to adopt this standard on January 1,
1996 and does not expect such adoption to have a material impact on the
Company's financial position or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights -- an amendment of FASB Statement No. 65." The Company is required to
adopt the provisions of this standard on January 1, 1996. Management does not
expect this pronouncement to have a material impact on the Company.
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, 1995.
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 and also offers a variety of saving
plans to customers located primarily in the Northeastern Ohio area. The
following represents the composition of the loan portfolio at December 31, 1995
and 1994:
<TABLE>
<CAPTION>
% of Total
Loans
-------------
1995 1994
---- ----
<S> <C> <C>
1 - 4 family residential mortgage..... 43.0% 43.9%
Commercial mortgage loans............. 24.6 24.9
Consumer loans........................ 13.6 11.5
Commercial loans...................... 10.6 10.0
Home equity loans..................... 7.9 8.5
1-4 family residential mortgage
loans held for sale................. 0.3 1.2
</TABLE>
Approximately 3.05% of total loans are unsecured at December 31, 1995, compared
to 2.28% at December 31, 1994.
- --------------------------------------------------------------------------------
(Continued)
10 ---
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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 or deed-in-lieu of
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.
Intangible Asset: In 1995, the Company acquired a branch office from another
financial institution receiving cash and other assets in an amount less than the
book value of the deposits recorded. The Company recorded the difference between
the proceeds received and the deposits acquired as an intangible asset which is
being amortized over a 15 year period. As of December 31, 1995, the intangible
asset net of accumulated amortization was $538,000 and is included in other
assets.
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, 1996, 1995 and 1994. The 3% common stock dividend
issued on January 1, 1996 resulted in the issuance of 29,471 shares of common
stock, which have been included in the 1,026,707 shares reported as issued at
December 31, 1995.
Earnings per share are based on weighted average shares outstanding. Weighted
average shares outstanding were 1,022,138 for 1995, 1,003,356 for 1994 and
988,722 for 1993. 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 1994 and 1993 consolidated financial
statements have been reclassified to conform with the current year presentation.
- --------------------------------------------------------------------------------
(Continued)
11 ---
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The following is a summary of investment securities:
(Amounts in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities................... $ 29,727 $ 405 $ 12 $ 30,120
U.S. Government agencies and
corporations............................. 15,966 229 2 16,193
Obligations of states and political
subdivisions............................. 7,034 62 44 7,052
Mortgage-backed and related securities..... 59,950 846 94 60,702
--------- ---------- ---------- ----------
Total............................ 112,677 1,542 152 114,067
Marketable equity securities............... 2,171 34 158 2,047
Other securities........................... 1,575 1,575
--------- ---------- ---------- ----------
Total available for sale......... $116,423 $1,576 $ 310 $117,689
========= ========= ========== ==========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government agencies and
corporations............................. $ 35,407 $ 660 $ 15 $ 36,052
Obligations of states and political
subdivisions............................. 9,759 170 74 9,855
Mortgage-backed and related securities..... 18,855 178 67 18,966
--------- ---------- ---------- ----------
Total held to maturity........... $ 64,021 $1,008 $ 156 $ 64,873
========= ========= ========== ==========
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
--------- ---------- ---------- ----------
Total............................. 69,228 115 1,844 67,499
Marketable equity securities................ 2,170 7 329 1,848
Other securities............................ 226 226
--------- ---------- ---------- ----------
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
========= ========= ========= =========
</TABLE>
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities" (Guide). The Guide provided a one-time opportunity
for management to reassess the classification of securities under SFAS No. 115.
On December 29, 1995, in accordance with the provisions of the Guide, management
reclassified securities with an amortized cost of $29,082,000 and an unrealized
net gain of $454,000 from held to maturity to available for sale.
- --------------------------------------------------------------------------------
(Continued)
12 ---
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December 31,
1995, 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.
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1995
-----------------------
Amortized Estimated
Cost Fair Value
-------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less........................ $ 10,666 $ 10,702
Due after one year through five years.......... 30,353 30,675
Due after five years through ten years......... 10,300 10,576
Due after ten years............................ 1,408 1,412
-------- ----------
Subtotal............................. 52,727 53,365
Mortgage-backed securities..................... 59,950 60,702
-------- ----------
Total................................ $112,677 $114,067
======== ==========
INVESTMENT SECURITIES HELD TO MATURITY
Due in one year or less........................ $ 1,924 $ 1,929
Due after one year through five years.......... 4,712 4,752
Due after five years through ten years......... 30,740 31,284
Due after ten years............................ 7,790 7,942
-------- ----------
Subtotal............................. 45,166 45,907
Mortgage-backed securities..................... 18,855 18,966
-------- ----------
Total................................ $ 64,021 $ 64,873
======== ==========
</TABLE>
The following are realized gains and losses on securities sold or called for the
years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Proceeds....................................... $2,146 $4,019 $1,755
Gross realized gains........................... 12 27 160
Gross realized losses.......................... 7 7 177
</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.
- --------------------------------------------------------------------------------
(Continued)
13 ---
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
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 non-accrual 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 later defaulted. Holders of this
refunding issue filed suit, seeking to have the escrow unwound with proceeds
distributed to the claimants. The bond trustee had suspended interest payments
pending a ruling from the court on this matter. On January 11, 1996, the United
States District Court for the Northeastern District of Alabama ordered that the
holders of the pre-refunded issue were to immediately receive the proceeds of
the escrow fund in full satisfaction of the principal and accrued interest due
on the bond, resulting in the bond's early retirement. The Company expects to
receive amounts due on these bonds in the first quarter of 1996.
Investment securities with a carrying value of approximately $38,689,000 at
December 31, 1995 and $24,117,000 at December 31, 1994 were pledged to secure
deposits and for other purposes.
NOTE 3 - LOANS RECEIVABLE
The following is a summary of loans:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
1-4 family residential mortgage loans................................ $ 67,099 $ 66,069
Commercial mortgage loans............................................ 38,371 37,554
Consumer loans....................................................... 21,254 17,247
Commercial loans..................................................... 16,658 15,101
Home equity loans.................................................... 12,353 12,854
1-4 family residential mortgage loans held for sale.................. 473 1,855
-------- --------
Total loans................................................ $156,208 $150,680
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $1,597,000,
$1,909,000, and $1,652,000 at December 31, 1995, 1994 and 1993, respectively.
Interest income on these loans, if accrued, would have been approximately
$63,000, $107,000 and $97,000 for 1995, 1994 and 1993, respectively.
Renegotiated loans for which interest has been reduced and that are still
accruing interest totaled approximately $191,000, $205,000 and $573,000 at
December 31, 1995, 1994 and 1993, respectively. Interest income recognized on
these loans was $20,000, $23,000 and $47,000 for 1995, 1994 and 1993,
respectively. Interest income that would have been recognized under the original
terms was $25,000, $28,000 and $81,000 for 1995, 1994 and 1993, respectively.
- --------------------------------------------------------------------------------
(Continued)
14 ---
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year......................... $3,081 $3,139 $3,415
Loan charge-offs..................................... (367) (288) (615)
Recoveries........................................... 297 230 339
------ ------ ------
Net loan charge-offs............................... (70) (58) (276)
Provision charged to operations...................... 0 0 0
------ ------ ------
Balance at end of year............................... $3,011 $3,081 $3,139
====== ====== ======
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
------ ------
<S> <C> <C>
Land................................................. $ 613 $ 605
Premises............................................. 4,985 4,791
Equipment............................................ 5,871 5,263
Leasehold improvements............................... 189 138
------ ------
11,658 10,797
Less accumulated depreciation........................ 5,121 4,322
------ ------
Net book value............................. $6,537 $6,475
====== ======
</TABLE>
Depreciation expense was $799,000 for 1995, $710,000 for 1994 and $472,000 for
1993.
- --------------------------------------------------------------------------------
(Continued)
15 ---
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 6 - OTHER REAL ESTATE
The following is a summary of other real estate:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Other real estate............................ $ 219 $ 423
Less allowance for losses.................... (4) (40)
-------- --------
$ 215 $ 383
======== ========
</TABLE>
Activity in the allowance for losses on other real estate is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of year................. $ 40 $ 142
Charge-offs.................................. (50) (125)
Provisions charged to operations............. 14 23
-------- --------
Balance at end of year....................... $ 4 $ 40
======== ========
</TABLE>
NOTE 7 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Demand....................................... $ 47,571 $ 47,637
Savings...................................... 86,855 90,814
Time:
In denominations under $100,000............ 111,038 91,025
In denominations of $100,000 or more....... 31,210 20,841
-------- --------
Total interest-bearing deposits.... $276,674 $250,317
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16 ---
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS (Continued)
The following is a summary of certificates of deposit of $100,000 or more by
remaining maturities:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Three months or less......................... $ 11,032 $ 7,571
Three to twelve months....................... 13,254 8,267
One through five years....................... 5,752 3,664
Over five years.............................. 1,172 1,339
-------- --------
Total.............................. $ 31,210 $ 20,841
======== ========
</TABLE>
NOTE 8 - SHORT-TERM AND OTHER BORROWINGS
The following is a summary of short-term borrowings:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Securities sold under repurchase
agreements................................. $ 2,511 $ 2,417
U.S. Treasury interest-bearing demand note... 480 645
Federal funds purchased...................... 200 4,000
-------- --------
Total.............................. $ 3,191 $ 7,062
======== ========
</TABLE>
The following is a summary of other borrowings over one year:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Federal Home Loan Bank borrowings............ $ 5,000 $
Other........................................ 26 29
-------- --------
Total.............................. $ 5,026 $ 29
======== ========
</TABLE>
The Federal Home Loan Bank (FHLB) borrowings mature June 23, 2000 and carry a
variable interest rate of 5.75% as of December 31, 1995. The FHLB advance is
collateralized by the FHLB stock owned by the Bank, with a carrying amount of
$1,350,000 at December 31, 1995, and a blanket lien against the Bank's qualified
mortgage loan portfolio. Maximum borrowing capacity from the FHLB totaled
$16,234,000 at December 31, 1995 and is based on the amount of FHLB stock owned
and the amount of qualifying mortgage loans and the amount of qualified
mortgage-backed securities in the Bank's portfolio.
- --------------------------------------------------------------------------------
(Continued)
17 ---
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
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 $181,000 for 1995, $161,000 for
1994 and $145,000 for 1993. 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, 1996................... $114
December 31, 1997................... 80
December 31, 1998................... 59
December 31, 1999................... 59
December 31, 2000................... 41
Later years........................... 219
----
Total............................ $572
====
</TABLE>
The Bank is required to maintain aggregate cash reserves amounting to $1,635,000
at December 31, 1995 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.
The following is a summary of such contract commitments:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate............................ $ 6,462 $ 4,806
Variable rate......................... 29,353 18,471
Standby letters of credit............... 1,252 392
</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
- --------------------------------------------------------------------------------
(Continued)
18 ---
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS (Continued)
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 BENEFIT PLAN
The Bank has a contributory defined contribution retirement plan (a 401(k) plan)
which covers substantially all employees. Total expense under the plan was
$141,000 for 1995, $130,000 for 1994 and $127,000 for 1993. 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:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current...................................... $ 1,367 $ 603 $ 1,375
Deferred..................................... (22) 718 (488)
-------- -------- --------
Total................................... $ 1,345 $ 1,321 $ 887
======== ======== ========
</TABLE>
The following is a summary of the net deferred tax asset included in other
assets:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Gross deferred tax assets:
Unrealized loss on available for sale
securities.............................. $ $ 870 $
Provision for loan and other real estate
losses.................................. 636 648 724
Losses on litigation....................... 612
Loan fees.................................. 118 57 115
Other...................................... 44 5 16
Gross deferred tax liabilities:
Unrealized gain on available for sale
securities.............................. (331)
Depreciation............................... (385) (326) (331)
Other...................................... (67) (60) (94)
-------- -------- --------
Net deferred tax asset............. $ 15 $ 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.
- --------------------------------------------------------------------------------
(Continued)
19 ---
<PAGE> 22
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES (Continued)
The following is a reconciliation between tax expense using the statutory tax
rate of 34% and actual taxes:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Statutory tax................................ $ 1,576 $ 1,497 $ 1,067
Effect of non-taxable interest and
dividends.................................. (231) (176) (180)
-------- -------- --------
Total income taxes................. $ 1,345 $ 1,321 $ 887
======== ======== ========
</TABLE>
The related income tax expense (benefit) on investment securities gains and
losses amounted to $2,000 for 1995, $7,000 for 1994 and $(6,000) for 1993, and
is included in the total federal income tax provision.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ 12,439 $ 12,439 $ 11,567 $ 11,567
Investment securities..................... 181,710 182,562 148,976 144,379
Loans, net of allowance for loan losses... 153,197 153,312 147,599 146,165
LIABILITIES:
Demand and savings deposits............... $ 173,681 $ 173,681 $ 172,809 $ 172,809
Time deposits............................. 142,248 144,274 111,866 111,505
Short-term borrowings..................... 3,191 3,191 7,062 7,062
Other borrowings.......................... 5,026 5,026 29 29
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1995 and 1994. 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 and
other 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,
1995 and 1994. The fair value of unrecorded commitments at December 31, 1995 and
1994, 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, non-financial 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 earning power
of core deposit accounts, the earnings potential of the Bank's trust department,
the trained work force, customer goodwill, and similar
- --------------------------------------------------------------------------------
(Continued)
20 ---
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 1995. Following is an analysis of such
loans:
(Amounts in thousands)
<TABLE>
<S> <C>
Total loans at December 31, 1994.................... $ 1,307
New loans........................................... 291
Repayments.......................................... (106)
--------
Total loans at December 31, 1995.......... $ 1,492
========
</TABLE>
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 the undistributed earnings of the subsidiaries since
inception.
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS:
Cash....................................... $ 557 $ 23
Investment securities...................... 136 118
Investment in bank subsidiary.............. 31,880 27,345
Investment in non-bank subsidiary.......... 15 15
Other assets............................... 29 21
-------- --------
$ 32,617 $ 27,522
======== ========
LIABILITIES:
Other liabilities.......................... $ 1 $ 1
SHAREHOLDERS' EQUITY:
Common stock............................... 5,134 4,890
Additional paid-in capital................. 9,171 8,028
Retained earnings.......................... 17,693 16,292
Net unrealized gain (loss) on available for
sale debt and marketable equity
securities.............................. 643 (1,689)
Treasury stock, at cost.................... (25)
-------- --------
TOTAL SHAREHOLDERS' EQUITY......... 32,616 27,521
-------- --------
$ 32,617 $ 27,522
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21 ---
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 14 - CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Dividends from bank subsidiary........................... $ 1,100 $ 500 $ 400
Interest and dividend income............................. 1
Investment securities losses............................. (3)
Other expenses........................................... (26) (31) (64)
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries........................................ 1,075 466 336
Equity in undistributed net income of
subsidiaries...................................... 2,214 2,617 1,914
-------- -------- --------
NET INCOME..................................... $ 3,289 $ 3,083 $ 2,250
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 3,289 $ 3,083 $ 2,250
Add (deduct) items not affecting cash:
Equity in undistributed net income of
subsidiaries...................................... (2,214) (2,617) (1,914)
Investment securities losses........................ 3
Change in other assets and liabilities.............. (14) 24 (32)
-------- -------- --------
Net cash from operating activities............. 1,061 493 304
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities..................... (1) (105)
-------- -------- --------
Net cash from investing activities............. (1) (105) 0
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid......................................... (1,026) (846) (492)
Proceeds from sale of common stock..................... 525 315 275
Proceeds from sale of treasury stock................... 8
Purchases of treasury stock............................ (25) (7)
-------- -------- --------
Net cash from financing activities............. (526) (530) (217)
-------- -------- --------
Net change in cash..................................... 534 (142) 87
CASH
Beginning of year...................................... 23 165 78
-------- -------- --------
End of year............................................ $ 557 $ 23 $ 165
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22 ---
<PAGE> 25
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
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, 1995 approximately $6,371,000 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
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 a material effect on the Company.
- --------------------------------------------------------------------------------
23 ---
<PAGE> 26
CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(In thousands of dollars, except for per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Total Interest Income................. $ 24,805 $ 22,564 $ 23,067 $ 26,151 $ 28,340
Total Interest Expense................ 11,421 9,498 10,127 13,079 17,023
-------- -------- -------- -------- --------
NET INTEREST INCOME................... 13,384 13,066 12,940 13,072 11,317
Provision for Loan Losses............. 1,450 1,180
Total Other Income.................... 1,311 1,150 885 1,237 477
Total Other Expenses.................. 10,061 9,812 10,688 8,848 8,163
-------- -------- -------- -------- --------
INCOME BEFORE TAX..................... 4,634 4,404 3,137 4,011 2,451
Federal Income Tax.................... 1,345 1,321 887 1,251 718
-------- -------- -------- -------- --------
NET INCOME............................ $ 3,289 $ 3,083 $ 2,250 $ 2,760 $ 1,733
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total Assets.......................... $358,732 $320,361 $321,269 $313,362 $308,085
Net Loans............................. 153,197 147,599 142,688 148,308 172,616
Deposits.............................. 315,929 284,675 287,492 283,418 282,601
Shareholders' Equity.................. 32,616 27,521 26,531 24,271 21,746
PER COMMON SHARE DATA (1)
Net Income............................ $ 3.22 $ 3.07 $ 2.28 $ 2.83 $ 1.81
Cash Dividends Declared............... .99 0.82 0.49 0.43 0.32
Book Value............................ 31.79 27.33 26.73 24.80 22.55
ASSET QUALITY RATIOS
Underperforming Assets as a
Percentage of:
Total Assets..................... 0.59% 0.82% 1.05% 1.85% 1.79%
Equity plus Allowance for Loan
Loss........................... 5.94 8.61 11.37 20.98 22.16
FINANCIAL RATIOS
Equity to Asset Ratio................. 9.09% 8.59% 8.26% 7.75% 7.06%
Return on Average Assets.............. 0.98 0.95 0.71 0.88 0.56
Return on Average Equity.............. 10.80 11.00 8.83 11.98 8.34
Net Interest Margin Ratio............. 4.30 4.37 4.35 4.39 3.92
</TABLE>
(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.
- --------------------------------------------------------------------------------
24 ---
<PAGE> 27
THREE YEAR SUMMARY
AVERAGE BALANCES, YIELDS AND RATES
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1995
--------------------------------------
Average Interest
Balance Earned Yield or
Outstanding Or Paid Rate
----------- -------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks... $ 0 $ 0
Federal funds sold......................... 2,485 146 5.9%
Trading account securities................. 0 0
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.......................... 74,447 5,051 6.8%
U.S. Government mortgage-backed
pass through certificates............. 70,471 4,571 6.5%
States of the U.S. and political
subdivisions (Note 1, 2, 3)........... 15,436 1,024 6.6%
Other securities........................ 2,965 187 6.3%
----------- --------
TOTAL INVESTMENT SECURITIES.................. 163,319 10,833 6.6%
LOANS (Note 2, 3, 4)......................... 153,702 14,175 9.2%
----------- --------
TOTAL INTEREST-EARNING ASSETS................ $ 319,506 $25,154 7.9%
=========== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits........ $ 45,864 $ 1,177 2.6%
Savings................................. 87,072 2,406 2.8%
Time.................................... 129,320 7,452 5.8%
----------- --------
TOTAL INTEREST-BEARING DEPOSITS.............. 262,256 11,035 4.2%
----------- --------
Borrowings:
U.S. Treasury interest-bearing demand
note.................................... 756 41 5.4%
Federal funds purchased.................... 1,276 78 6.1%
Securities sold under agreement to
repurchase.............................. 2,390 110 4.6%
Borrowings over one year................... 2,657 157 5.9%
----------- --------
TOTAL BORROWINGS............................. 7,079 386 5.5%
----------- --------
TOTAL INTEREST-BEARING LIABILITIES........... $ 269,335 $11,421 4.2%
=========== ========
Net interest margin.......................... $13,733 4.3%
======== ========
</TABLE>
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 1995, 1994 and 1993, and have been
adjusted to reflect the effect of disallowed interest expense related
to carrying tax exempt assets.
- --------------------------------------------------------------------------------
25 ---
<PAGE> 28
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1994 1993
-------------------------------------- --------------------------------------
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>
$ 658 $ 18 2.7% $ 100 $ 12 12.0%
2,489 95 3.8% 8,075 244 3.0%
337 26 7.7% 544 32 5.9%
66,804 4,427 6.6% 54,751 3,616 6.6%
70,833 4,037 5.7% 79,548 4,839 6.1%
15,362 1,026 6.7% 10,778 768 7.1%
2,414 147 6.1% 3,166 220 6.9%
----------- -------- ----------- --------
155,413 9,637 6.2% 148,243 9,443 6.4%
148,288 13,147 8.9% 147,263 13,631 9.3%
----------- -------- ----------- --------
$ 307,185 $22,923 7.5% $ 304,225 $23,362 7.7%
=========== ======== =========== ========
$ 51,392 $ 1,237 2.4% $ 53,452 $ 1,485 2.8%
94,753 2,576 2.7% 90,981 2,767 3.0%
113,444 5,559 4.9% 116,112 5,776 5.0%
----------- -------- ----------- --------
259,589 9,372 3.6% 260,545 10,028 3.8%
----------- -------- ----------- --------
623 24 3.9% 692 20 2.9%
440 22 5.0% 0 0
2,324 79 3.4% 2,426 78 3.2%
30 1 3.3% 32 1 3.1%
----------- -------- ----------- --------
3,417 126 3.7% 3,150 99 3.1%
----------- -------- ----------- --------
$ 263,006 $ 9,498 3.6% $ 263,695 $10,127 3.8%
=========== ======== =========== ========
$13,425 4.4% $13,235 4.4%
======== ====== ======== ======
</TABLE>
Note 3 - Average balance outstanding includes the average amount outstanding for
all nonaccrual investment securities and loans.
Note 4 - Interest earned on loans includes net loan fees of $72 in 1995, $333 in
1994 and $368 in 1993.
- --------------------------------------------------------------------------------
26 ---
<PAGE> 29
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
OVERVIEW
Net income for 1995 of $3,289 was the best in the Company's history and
constituted an increase of $206 from the $3,083 earned in 1994. Earnings per
share of $3.22 represented an improvement of $0.15 from the $3.07 per share
realized in 1994.
Capital ratios continued to strengthen further, facilitating a 21% increase in
dividends per share. As of December 31, 1995, the ratio of equity capital to
total assets was 9.09%, up from 8.59% a year ago; while risk-based capital
measured 21.07% compared to 20.86% at December 31, 1994. All capital ratios were
well in excess of required regulatory minimums.
During 1995, management sought to capitalize on the Company's strong asset
quality and equity capital positions by emphasizing growth. Accordingly, the
Company expanded its market presence by opening an office, de novo, in Niles and
by acquiring the North Bloomfield office of a competitor. Both offices are
located in Trumbull County, Ohio, and both events occurred in August, 1995.
To further facilitate management's growth objectives, the Company's bank
subsidiary became a member of the Federal Home Loan Bank (FHLB) of Cincinnati,
thereby establishing access to a credit line of $16.2 million, enabling the
subsidiary bank to more aggressively pursue large certificates of deposit in
excess of $100,000.
The result was that assets increased by $38 million, representing a rate of
growth of 12%. Asset deployment continued to emphasize loans that meet strict
underwriting standards and conservative investment products with little or no
credit risk. Loans increased by $5.5 million, representing a modest year-to-year
increase of 3.7%. Investments grew by $32.7 million, an increase of 22% over
prior year end. As a result, the loan to deposit ratio declined from 52.9% to
49.4% contributing to a slight narrowing in the net interest margin from 4.37%
to 4.30%.
ASSET QUALITY
Management closely monitors and evaluates trends and developments in asset
quality. Internal loan review systems require detailed monthly analysis of
delinquencies, nonperforming 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 table depicts
the trend in these potentially problematic asset categories.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans:
1-4 residential mortgage $ 553 $ 553 $ 627
Commercial mortgage 777 1,327 942
Secured by farmland 261 0 0
Other commercial loans 0 0 45
Consumer loans 6 8 14
Home equity loans 0 21 24
-----------------------------------------------------------
TOTAL NONACCRUAL LOANS 1,597 1,909 1,652
Investment securities 106 124 0
Other real estate owned 215 383 795
-----------------------------------------------------------
TOTAL NONPERFORMING ASSETS 1,918 2,416 2,447
Loans ninety days past due
and still accruing interest 7 14 353
Restructured loans 191 205 573
-----------------------------------------------------------
TOTAL UNDERPERFORMING ASSETS $2,116 $2,635 $3,373
</TABLE>
The table below provides a number of key control ratios based on the data
presented above. Overall, asset quality continued to improve during 1995.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Nonperforming loans as a
percentage of total loans 1.02% 1.27% 1.13%
Nonperforming assets as a
percentage of total assets 0.53% 0.75% 0.76%
Underperforming assets as a
percentage of total assets 0.59% 0.82% 1.05%
Underperforming assets as a
percentage of equity
capital plus allowance for
loan losses 5.94% 8.61% 11.37%
</TABLE>
- --------------------------------------------------------------------------------
27 ---
<PAGE> 30
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
LOAN LOSS EXPERIENCE
For each year 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 customers and the general economic condition of the communities in
which credit has been extended.
The following provides an analysis of the allowance for loan losses for the
periods indicated:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 3,081 $ 3,139 $ 3,415 $ 3,203 $ 2,987
Loan losses:
1-4 family residential mortgages...... (69) (72) (172) (108) (160)
Commercial mortgages.................. 0 (27) (42) (834) (195)
Consumer loans........................ (220) (141) (271) (438) (792)
Commercial loans...................... (78) (48) (123) (198) (187)
Home equity loans..................... 0 0 (7) (18) 0
------- ------- ------- ------- -------
(367) (288) (615) (1,596) (1,334)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1-4 family residential mortgages...... 4 4 26 55 17
Commercial mortgages.................. 78 6 28 6 0
Consumer loans........................ 152 156 202 273 321
Commercial loans...................... 63 64 83 24 32
------- ------- ------- ------- -------
297 230 339 358 370
------- ------- ------- ------- -------
Net loan losses............................ (70) (58) (276) (1,238) (964)
------- ------- ------- ------- -------
Provision charged to operations............ 0 0 0 1,450 1,180
------- ------- ------- ------- -------
Balance at end of year..................... $ 3,011 $ 3,081 $ 3,139 $ 3,415 $ 3,203
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans outstanding............ 0.05% 0.04% 0.19% 0.75% 0.53%
======= ======= ======= ======= =======
Ratio of loan loss allowance to total
loans.................................... 1.93% 2.04% 2.15% 2.25% 1.82%
======= ======= ======= ======= =======
</TABLE>
The improved level of asset quality achieved over the past several years has
resulted in a sharp decline in the ratio of net loan losses to average net
loans. The allowance for loan loss at 189% of nonperforming loans and 168% of
all underperforming loans continues to provide ample coverage. Management has
determined the allowance to be adequate, requiring no further provision in the
current year.
- --------------------------------------------------------------------------------
28 ---
<PAGE> 31
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
1-4 family residential mortgages.......... $ 351 $ 385 $ 405 $ 437 $ 419
Commercial mortgages...................... 1,118 1,223 1,029 1,157 997
Consumer loans............................ 416 407 424 591 1,019
Commercial loans.......................... 239 207 192 210 235
Home equity loans......................... 61 63 67 62 52
Unallocated portion....................... 826 796 1,022 958 481
------ ------ ------ ------ ------
$3,011 $3,081 $3,139 $3,415 $3,203
====== ====== ====== ====== ======
</TABLE>
The allocations of the allowance as shown in the table above should not be
interpreted as an indication that future loan losses 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 level of general economic activity remained firm throughout 1995. The
Company realized an increase of $5,528 in the loan portfolio from the level of
$150,680 recorded at December 31, 1994.
The composition of the portfolio changed slightly during 1995 with 1-4 family
residential mortgages declining from 45.1% to 43.3% of total loans. The portion
of the loan portfolio represented by commercial loans (including commercial real
estate) increased from 34.9% to 35.2%. Consumer loans (including home equity
loans) increased from 20% to 21.5%.
The following chart 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 43.3% of the portfolio, a decrease from its 47.7%
share in 1990. Meanwhile, home equity loans have grown from a 6.1% share in 1990
to 7.9% in 1995, offsetting the decline in traditional consumer installment
lending. The portfolio share claimed by commercial loans climbed to 35.2%, up
from 31.4% five years ago.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(In Percentages)
<S> <C> <C>
1995 1990
---- ----
1-4 Family Mortages 43.3 47.7
Commercial 35.2 31.4
Consumer 13.6 14.8
Home Equity 7.9 6.1
</TABLE>
During 1995, approximately $5.6 million in mortgage loans were originated by the
Company. As anticipated, this level of production was down considerably from
previous years, reflecting the impact of the higher interest rates orchestrated
by the Federal Reserve from early 1994 through mid 1995. Although no residential
mortgage loans were
- --------------------------------------------------------------------------------
29 ---
<PAGE> 32
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
sold in 1995, 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 retaining servicing rights.
With interest rates up and production levels down, management elected to hold
all mortgages originated in 1995. Management anticipates a more balanced
approach in the coming year, with some mortgages being sold during 1996.
Annualized service fee income derived from the portfolio is now approximately
$22.
During the past year, management continued its pursuit of community based small
business lending. The Company expanded its offering of business banking
products, recruited additional experienced lending officers, and further
strengthened the skills and capabilities of support staff. Management believes
that the Company 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 continues to weaken and lose momentum, consumer loan demand will
begin to flatten as well. Accordingly, management expects little growth in its
home equity products. Management remains alert to new opportunities in the area
of installment lending that would improve market penetration and counteract any
softening of 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
Since January 1, 1994 when the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities," investment securities have been segregated 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. The Company must have both
the intent and the ability to hold such securities to maturity. Trading
securities are 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 recorded as an adjustment to shareholders' equity.
One effect of SFAS 115 is to expose shareholders' equity to a significant new
source of volatility. The potential adverse impact of this volatility, however,
was mitigated when bank regulatory agencies announced during the fourth quarter
of 1994 their intent to measure capital adequacy for regulatory purposes without
regard to the effects of SFAS 115.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities" (Guide). The Guide provided a one-time opportunity
for management to reassess the classification of securities under SFAS No. 115.
On December 29, 1995, in accordance with the provisions of the Guide, management
reclassified securities with an amortized cost of $29,082 and an unrealized net
gain of $454 from held to maturity to available for sale.
At December 31, 1995, a net unrealized gain of $643, net of tax, was included in
shareholders' equity, as compared to a net unrealized loss of $1.7 million, net
of tax, as of December 31, 1994. This $2.3 million swing (net of tax) primarily
reflects the increase in the market value of debt securities as interest rates
declined throughout much of the year, and illustrates the volatile nature of
this component of shareholders' equity.
- --------------------------------------------------------------------------------
30 ---
<PAGE> 33
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 changing
economic conditions and shifts in the relative values of market sectors.
Available for sale securities tend to be more liquid investments and generally
exhibit less price volatility as interest rates fluctuate.
As of December 31, 1995, the carrying value of all investment securities, both
available for sale and held to maturity, tallied $181,710, an increase of
$32,734 or 22.0% from the prior year. The allocation between single maturity
investment securities and mortgage-backed securities remained at the same 56/44
split as the previous year. Mortgage-backed securities increased by $13,967 or
21.3%. Holdings of single maturity investments showed an increase of $17,219 or
21.2%.
The Company's holdings of obligations of states and political subdivisions
increased by $1.5 million. 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
$0.6 million, or 2.0%. Investments in U.S. government agencies and sponsored
corporations increased by $15.4 million, or 42.4%, primarily in high yielding
callable issues. Holdings of other securities increased by $1.349 million as the
Bank purchased stock in the Federal Home Loan Bank of Cincinnati as part of its
membership requirements.
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 1995 and 1994 is graphically depicted below.
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES
PORTFOLIO MIX
(In Percentages)
1995 1994
---- ----
<S> <C> <C>
Variable & Adjustable 58 60
Fixed Rate 42 40
</TABLE>
Included in the mortgage-backed securities portfolio are investments in
collateralized mortgage obligations which totalled $16,259 and $17,114 at
December 31, 1995 and 1994, respectively. These investments are monitored and
subjected to regulatory prescribed stress tests. At December 31, 1995, 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 increased 11% to $315,929
at December 31, 1995 as compared to $284,675 at December 31, 1994. Approximately
40% of this growth was due to the branch acquired in North Bloomfield and the
office opened, de novo, in Niles, Ohio.
The Company's deposit base consists of demand deposits, savings, money market
and time deposit accounts. Average non interest-bearing deposits increased 13.2%
during 1995, while average interest-bearing deposits increased by only 1.0%.
- --------------------------------------------------------------------------------
31 ---
<PAGE> 34
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
During 1995, non interest-bearing deposits averaged $33,716 or 11.4% of total
average deposits as compared to $29,783 or 10.3% in 1994. Core deposits averaged
$267,711 for the year ended December 31, 1995, a decrease of $5,109 or 1.9% from
the average level of 1994. During 1994, core deposits had averaged $272,820, an
increase of 2.3% over the preceding year.
Historically, the deposit base of the Company has been characterized by a
significant aggregate amount of core deposits. Core deposits represented 90.5%
of average total deposits in 1995 compared to 94.3% in 1994 and 93.1% in 1993.
The decline in core deposits during 1995 reflects the cumulative impact of
higher interest rates orchestrated by the Federal Reserve from early 1994 until
mid 1995. Money which customers had "parked" in low yielding savings and money
market accounts during the low interest rate environment of 1992 - 1993 began to
migrate toward U.S. Treasuries, mutual funds and high yielding CD "specials"
offered by competitors. These funds were replaced with higher cost Jumbo CD's
and borrowed funds.
Nevertheless, over the past five years, the Company has reduced its reliance on
large denomination certificates of deposit (Jumbo CD's) while simultaneously
increasing checking and savings account balances. The following depicts how the
deposit mix has shifted during this time frame.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT MIX
(In Percentages)
1995 1990
---- ----
<S> <C> <C>
Savings 29.4 21.3
Other CD's 34.1 44.6
Jumbo CD's 9.5 11.2
Checking 11.4 8.0
NOW 7.2 5.3
Money Market 8.4 9.6
</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 10.8%, 11.0% and 8.8% for 1995, 1994 and 1993, respectively, while the return
on average assets amounted to 1.0%, 1.0% and 0.7% 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 1995, net interest income on a fully taxable equivalent
basis registered 4.3%, compared to 4.4% for both 1994 and 1993.
<TABLE>
<CAPTION>
NEW INTEREST MARGIN RATIO
(In Percentages)
<S> <C>
1991 3.9
1992 4.4
1993 4.4
1994 4.4
1995 4.3
</TABLE>
(Note: Net Interest Margin is the difference between total interest earned on a
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 $319,506 during 1995, representing a 4.0%
increase over 1994. 1994 earning assets had averaged $307,185 for a 1.0%
increase over 1993. The yield on interest-earning assets was 7.9%, 7.5% and 7.7%
in 1995, 1994 and 1993, respectively. The average rate incurred on
interest-bearing liabilities was 4.2%, 3.6% and 3.8% for those same years.
Interest-bearing liabilities averaged $269,335 for 1995, increasing by 2.4% from
1994 levels which averaged $263,006.
- --------------------------------------------------------------------------------
32 ---
<PAGE> 35
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. Changes due to both rate and volume which cannot
be segregated have been allocated in proportion to the changes due to rate and
volume.
ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
-------------------------- ---------------------------
Volume Rate Total Volume Rate Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income
Interest-bearing deposits in other
banks............................... $ (18) $ 0 $ (18) $ 21 $ (15) $ 6
Federal funds sold.................... 0 51 51 (201) 52 (149)
Trading account securities............ (26) 0 (26) (14) 8 (6)
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations..................... 516 108 624 799 12 811
U.S. Government mortgage-backed
pass-through certificates........ (21) 555 534 (509) (293) (802)
States of the U.S. and political
subdivisions..................... 5 (7) (2) 309 (51) 258
Other securities.................... 34 6 40 (48) (25) (73)
Loans................................. 489 539 1,028 94 (578) (484)
-----------------------------------------------------------
Total Interest Income Change............. 979 1,252 2,231 451 (890) (439)
-----------------------------------------------------------
Increase (Decrease) in Interest Expense
Interest-bearing demand deposits...... (139) 79 (60) (55) (193) (248)
Savings deposits...................... (212) 42 (170) 113 (304) (191)
Time deposits......................... 838 1,055 1,893 (134) (83) (217)
U.S. Treasury interest-bearing
demand note......................... 6 11 17 (2) 6 4
Federal funds purchased............... 51 5 56 22 0 22
Securities sold under agreements to
repurchase.......................... 2 29 31 (3) 4 1
Other borrowings...................... 155 1 156 0 0 0
-----------------------------------------------------------
Total Interest Expense Change............ 701 1,222 1,923 (59) (570) (629)
------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME ON A TAXABLE EQUIVALENT BASIS.. $ 278 $ 30 $ 308 $ 510 $ (320) $ 190
============================================================
</TABLE>
33 ---
<PAGE> 36
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Total other income for 1995 increased $161, or 14.0% compared to an increase of
$265, or 30.0% in 1994. Fees for customer services remained stable. A net loss
of $32 was recorded on the disposition of other real estate in 1995 compared to
a net gain of $21 in 1994 and a net loss of $341 in 1993. Secondary market
operations showed gains of $93 and $170 in 1995 and 1993 while sustaining a loss
of $47 in 1994. Activity in trading securities and the sale of investment
securities resulted in modest gains during 1995 and 1994, as compared to modest
losses in 1993.
Other non-interest income increased by $97 during 1995, following a $61 increase
in 1994. The increases for both years were primarily the result of nonrecurring
income items. Non-interest income in 1995 benefited from a $69 refund on the
Alpine class action settlement and $21 in one-time vendor refunds and rebates.
<TABLE>
<CAPTION>
OTHER INCOME
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Fees for other customer
services $ 973 $ 977 $ 977
Gain (loss) on sale of
loans 93 (47) 170
Gain (loss) on sale of
other real estate (32) 21 (341)
Other operating income 272 175 114
-------------------------------
1,306 1,126 920
Trading securities net
gains (losses) 0 4 (18)
Investment securities net
gains (losses) 5 20 (17)
-------------------------------
Total other income $1,311 $1,150 $ 885
</TABLE>
Total other expenses increased by 2.5%, or $249 in 1995. This compares to a
decrease of $876, or 8.2% in 1994, which resulted from a decrease in litigation
expense. Expenditures for salaries and employee benefits increased by 6.2%,
reflecting, in good part, the staffing requirements of the Company's two newest
branch offices. Excluding these two new offices, the increase in salaries and
benefits was 3.6%.
The FDIC dramatically reduced premium rates retroactive to May 1995, reflecting
the improved condition of the banking system as FDIC reserves reached their
targeted funding level. As a result, the Bank experienced a year over year
decline in FDIC assessment expense of $313. All other categories of non-interest
expense increased by $256, or 6.1% in the aggregate.
Occupancy and equipment expense increased by 7.2%, or $109. The new office
openings accounted for 50% of this increase. The 11.4% increase in marketing
expense was entirely due to promotional efforts on behalf of the newly opened
offices. The increase in office supplies reflects the cost of stocking the new
offices and the increased cost of paper products. Other operating expense
increased 9.9% due to a provision for estimated expenses related to pending IRS
assessments.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Salaries and benefits $ 5,262 $4,956 $ 4,567
Net occupancy expense 611 584 604
Equipment expense 1,004 922 752
State and local taxes 414 398 365
FDIC assessment 334 647 681
Office supplies 473 435 427
Marketing expense 255 229 251
Collection, repossession
and foreclosure expense 94 118 176
Legal and litigation
expense 263 294 1,704
Other operating expense 1,351 1,229 1,161
------- ------ -------
Total other expenses $10,061 $9,812 $10,688
</TABLE>
Salaries and employee benefits represented 52.3% of all non-interest expenses in
1995. Exclusive of FDIC, legal and litigation expenses, salaries and employee
benefits share of non-interest expense was 55.6%, 55.9% and 55.0% in 1995, 1994
and 1993, respectively. Salaries and employee benefits increased by $306 in 1995
following an increase of
- --------------------------------------------------------------------------------
34 ---
<PAGE> 37
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
$389 in 1994. The following details components of these increases:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ANALYSIS OF CHANGES IN SALARIES & BENEFITS
Amounts Percent
--------------------------------------------------
1995 1994 1993 1995 1994 1993
--------------------------------------------------
Salaries $197 $182 $204 5.1% 5.0% 5.9%
Benefits 61 25 14 5.2 2.2 1.2
Profit Sharing 15 181 8.3
----------------------
273 388 218 5.3 8.0 4.7
Def'd Loan
Origination 33 1 (4) 13.1 0.4 1.6
----------------------
$306 $389 $214 6.2% 8.5% 4.9%
</TABLE>
During the period 1993 through 1995 the Company was self-insured for employee
medical and dental benefits. The Plan limited the Company's exposure to risk by
employing stop loss coverage both on an individual and aggregate claim basis.
While the Company generally experienced a favorable variance in medical claims
when compared to traditional premium based plans, management has identified a
premium based Preferred Provider Plan that offers additional savings and
benefits. This new plan will be adopted by the Company effective February 1,
1996.
Full-time equivalent employment averaged 194 employees in 1995, 192 in 1994 and
193 in 1993. Wage and salary expense per employee averaged $20,897 in 1995,
$20,086 in 1994 and $19,069 in 1993, exclusive of profit sharing, which averaged
$1,014 per employee in 1995 and $943 in 1994. Productivity ratios which measure
employee efficiency improved slightly. Average earning assets per employee
measured $1,647 in 1995, $1,600 in 1994 and $1,578 in 1993.
FOURTH QUARTER 1995 AS
COMPARED TO FOURTH QUARTER 1994
During the fourth quarter of 1995, net interest income increased by $155 as
compared to fourth quarter 1994. The yield on earning assets increased by 33
basis points while fourth quarter average earning assets increased by $30
million when compared to a year ago, resulting in an increase in total interest
income of $812. The rate paid on interest-bearing liabilities increased by 61
basis points while fourth quarter average interest-bearing liabilities increased
by $23 million when compared to a year ago, resulting in an increase in total
interest expense of $657. The net interest margin for the quarter declined to
4.2% from the 4.4% attained a year ago.
Loan charge-offs during the quarter were $53 in 1995 and $42 in 1994, while the
recovery of previously charged-off loans amounted to $52 during the fourth
quarter of 1995 compared to $63 in the same period of 1994.
Other income increased by $114 from the same period a year ago. This increase of
42.7% was primarily due to the following: a $43 loss in 1994 on the sale of OREO
with no gain or loss in 1995; a $14 gain on sale of loans in 1995 compared to a
$14 loss in the same period of 1994; and, a $69 refund on the Alpine class
action settlement.
Total other non-interest expenses in the fourth quarter were $2,797 in 1995
compared to $2,635 in 1994, an increase of $162, or 6.1%. Salaries and benefits
constituted $159 of the increase, with the newly opened offices in Niles and
North Bloomfield accounting for $74 of the increase. FDIC assessments declined
by $134 as premiums were lowered significantly for most banks. Other operating
expenses increased by $110 primarily due to a provision for expenses related to
IRS assessments.
Income before income tax during the fourth quarter amounted to $1,061 in 1995
compared to $954 in 1994. Income tax expense for the fourth quarter of 1995 was
$208 (after a $101 reduction of excess tax provision related to the IRS
assessment) as compared to $321 in 1994. Fourth quarter net income was $853 in
1995 compared to $633 in 1994, representing an increase of $220, or 35%.
Earnings per share for the fourth quarter, adjusted for the 3% stock dividend
paid January 1, 1996, amounted to $0.84 in 1995 and $0.63 in 1994. After tax
gains per share on investment securities in the fourth quarter of 1995 and 1994
were negligible.
- --------------------------------------------------------------------------------
35 ---
<PAGE> 38
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
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. The Company's goal is to produce
a net interest margin that is relatively stable despite 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>
<CAPTION>
GAP TABLE
December 31, 1995
Maturity of Repricing Interval
------------------------------------------------------------
Non Rate
Sensitive
or greater
3 Months 3 to 12 1 to 5 than 5
or Less Months Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investments....................... $ 51,808 $ 37,694 $ 66,240 $25,968 $181,710
Loans & Leases.................... 47,712 38,976 48,402 21,118 156,208
------- ------- ------- ------ -------
Total Earning Assets................ 99,520 76,670 114,642 47,086 337,918
Other Assets........................ 20,814 20,814
------- -------- -------- ------- --------
Total Assets........................ $ 99,520 $ 76,670 $114,642 $67,900 $358,732
======= ======== ======== ======= ========
Interest-Bearing Liabilities
NOW & Supernow Accounts........... $ 21,828 $ $ $ $ 21,828
Money Market Accounts............. 25,743 25,743
Passbook Savings.................. 86,855 86,855
Time Deposits less than 100,000... 28,580 40,639 29,650 12,169 111,038
Time Deposits greater than or
equal to 100,000................. 11,032 13,254 5,752 1,172 31,210
Federal Funds Purchased........... 2,711 2,711
U.S. Treasury Demand.............. 480 480
Other Borrowings.................. 5,000 26 5,026
------- -------- ------- ------- -------
Total Interest-Bearing
Liabilities....................... 182,229 53,893 35,428 13,341 284,891
Demand Deposits..................... 39,255 39,255
Other Liabilities................... 1,970 1,970
Shareholders' Equity................ 32,616 32,616
-------- -------- -------- ------- --------
Total Liabilities & Equity.......... $182,229 $ 53,893 $ 35,428 $87,182 $358,732
======== ======== ======== ======= ========
Rate Sensitivity Gap................ $(82,709) $ 22,777 $ 79,214 $33,745
Cumulative Gap...................... $(82,709) $(59,932) $ 19,282 $53,027
Cumulative Gap to Total Assets...... (23.1)% (16.7)% 5.4% 14.8%
</TABLE>
- --------------------------------------------------------------------------------
36 ---
<PAGE> 39
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
The preceding Gap Table 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 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 1995, the effective maturities of earning assets began to shorten as
interest rates peaked and began to decline, causing repayments on loans and
mortgage-backed securities to accelerate while heightening the probability that
certain callable investment securities would indeed be called. Meanwhile, the
impact on the maturity distribution of interest-bearing liabilities in 1995 was
reflected in the replacement of $6 million of low cost savings and money market
funds with more expensive certificates of deposit and borrowed funds.
While the preceding Gap Table provides a general indication of the potential
effect that changing interest rates may have on 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 pressures, 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
relatively stable in the range of 4.2% to 4.4% over the past four years, despite
significant shifts in the mix of earning assets and 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.
Principal sources of liquidity for the Company include assets considered
relatively liquid, such as interest-bearing deposits in other banks, federal
funds sold, 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 increased $872 compared to year end 1994. Investment
securities maturing, repricing or expected to be called in one year or less
amounted to $83,403 at December 31, 1995, representing 45.9% of the total
combined portfolio, as compared to $59,525 and 38.4% 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. During the
second quarter of 1995, the Company became a member of the Federal Home Loan
Bank of Cincinnati, which provides yet another source of liquidity.
- --------------------------------------------------------------------------------
37 ---
<PAGE> 40
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Operating activities provided cash of $6.7 million, $2.8 million and $6.1
million in 1995, 1994 and 1993, respectively. Refer to the Consolidated
Statement of Cash Flows for a summary of the sources and uses of cash in 1995,
1994 and 1993.
CAPITAL RESOURCES
Regulatory standards for measuring capital adequacy require banks and bank
holding companies to maintain capital based on "risk-adjusted" assets 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 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 following graph, which is not "risk-adjusted," indicates that Tier I 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>
<CAPTION> LEVERAGE RATIO
(In Percentages)
<S> <C>
1991 7.08
1992 7.69
1993 8.33
1994 8.97
1995 9.54
</TABLE>
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. The new rule is effective September 1,
1995.
The following table illustrates the Company's risk weighted capital ratios at
December 31, 1995 and 1994. 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 total risk-based capital well in excess of the required regulatory minimum
ratios.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
-------------------------------------------------
DECEMBER 31, December 31,
1995 1994
-------------- --------------
<S> <C> <C>
Tier 1 Capital $ 31,996 $ 29,005
Tier 2 Capital 2,031 1,865
-------------- --------------
QUALIFYING
CAPITAL $ 34,027 $ 30,870
=============== ===============
Risk-Adjusted
Total
Assets(*) $161,503 $148,020
=============== ===============
Tier 1 Risk-Based
Capital Ratio 19.81% 19.60%
Total Risk-Based
Capital Ratio 21.07% 20.86%
Total Leverage
Capital Ratio 9.54% 8.97%
</TABLE>
(*) Includes off-balance sheet exposures
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective for fiscal
- --------------------------------------------------------------------------------
38 ---
<PAGE> 41
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
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 information included herein has been prepared in
accordance with generally accepted 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 coincide with changes in interest rates.
- --------------------------------------------------------------------------------
39 ---
<PAGE> 42
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 within 90 days of the end 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: (330) 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. Shamrock
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 dividend paid as of January 1, 1996, 1995 and
1994. The Company currently has approximately 1,348 shareholders.
<TABLE>
<CAPTION>
Price Per Share
------------------------- Cash
Dividends
High Low Per Share
---------- ---------- ----------
<S> <C> <C> <C>
1995
FOURTH QUARTER...................................... 34 27 $ 0.60
THIRD QUARTER....................................... 29 26 3/4 0.00
SECOND QUARTER...................................... 29 1/8 26 1/2 0.39
FIRST QUARTER....................................... 28 5/8 25 0.00
1994
Fourth Quarter...................................... 28 1/4 26 $ 0.51
Third Quarter....................................... 27 3/4 23 1/2 0.00
Second Quarter...................................... 25 1/2 23 0.31
First Quarter....................................... 24 1/2 21 3/4 0.00
1993
Fourth Quarter...................................... 22 3/4 21 1/8 $ 0.25
Third Quarter....................................... 21 3/4 19 0.00
Second Quarter...................................... 21 5/8 20 1/8 0.24
First Quarter....................................... 20 1/8 18 0.00
</TABLE>
For the convenience of shareholders, the Company has established a plan whereby
shareholders 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: (330) 637-8040.
- --------------------------------------------------------------------------------
40 ---
<PAGE> 43
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
JAMES M. GASIOR
Vice President and Chief
Operations Officer
41
<PAGE> 44
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
President, Stan-Wade Metal Products
PAUL C. BOWERS
Director Emeritus
R. B. KNIGHT
Director Emeritus
JOHN F. GESSNER
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, Treasurer and Chief Financial Officer
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
FRANK R. SEDALL
Assistant Vice President
MARK J. MEDIATE
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
RUSSELL E. TAYLOR
Assistant Treasurer
CRAIG PHYTHYON
Assistant Treasurer
DEBORAH L. EAZOR
Assistant Treasurer
JOSEPH G. JOHNSON
Assistant Secretary
CAROLYN L. ROCK
Assistant Secretary
STEVE J. MACK
Assistant Secretary
42 ---
<PAGE> 45
OFFICES AND LOCATIONS
Twelve 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
NILES
6050 Youngstown-Warren Road
Niles, Ohio 44446
NORTH BLOOMFIELD
8837 State Route 45
North Bloomfield, Ohio 44450
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> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
The 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
CONSENT OF INDEPENDENT AUDITORS
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 LLP
Columbus, Ohio
March 22, 1996
<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 15, 1996 on the 1995 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 22, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,439
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,689
<INVESTMENTS-CARRYING> 64,021
<INVESTMENTS-MARKET> 64,873
<LOANS> 156,208
<ALLOWANCE> 3,011
<TOTAL-ASSETS> 358,732
<DEPOSITS> 315,929
<SHORT-TERM> 3,191
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<LONG-TERM> 5,026
<COMMON> 5,134
0
0
<OTHER-SE> 27,482
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<INTEREST-LOAN> 14,117
<INTEREST-INVEST> 10,542
<INTEREST-OTHER> 146
<INTEREST-TOTAL> 24,805
<INTEREST-DEPOSIT> 11,035
<INTEREST-EXPENSE> 11,421
<INTEREST-INCOME-NET> 13,384
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 10,061
<INCOME-PRETAX> 4,634
<INCOME-PRE-EXTRAORDINARY> 4,634
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> 3.22
<EPS-DILUTED> 3.22
<YIELD-ACTUAL> 4.3
<LOANS-NON> 1,597
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<LOANS-PROBLEM> 2,271
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<ALLOWANCE-CLOSE> 3,011
<ALLOWANCE-DOMESTIC> 2,185
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 826
</TABLE>
