<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------
Commission file number 0-13814
-------
Cortland Bancorp
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1451118
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
194 West Main Street, Cortland, Ohio 44410
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(330) 637-8040
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 1996
----- -------------------------------
Common Stock, No Par Value 1,050,742 Shares
-------------------------- ----------------
<PAGE> 2
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
------------------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - September 30,
1996 and December 31, 1995 2
Consolidated Statements of Income - Three
and Nine months ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements -
September 30, 1996 5 - 12
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 13 - 18
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 19
- ------- -----------------
Item 2. Changes in Securities 19
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 19
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 19
- ------- ---------------------------------------------------
Item 5. Other Information 19
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 19
- ------- --------------------------------
Signatures 21
- ----------
</TABLE>
1
<PAGE> 3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,974 $ 12,439
Investment securities available for sale (Note 3) 117,256 117,689
Investment securities held to maturity (approximate market
value of $75,169 in 1996 and $64,873 in 1995) (Note 3) 75,889 64,021
Total loans (Note 4) 162,217 156,208
Less allowance for loan losses (Note 4) (2,968) (3,011)
--------- ---------
Net loans 159,249 153,197
--------- ---------
Premises and equipment 6,154 6,537
Other assets 5,632 4,849
--------- ---------
Total assets $ 375,154 $ 358,732
========= =========
LIABILITIES
Noninterest-bearing deposits $ 39,266 $ 39,255
Interest-bearing deposits 280,331 276,674
--------- ---------
Total deposits 319,597 315,929
Short term borrowings under one year 9,027 3,191
Other borrowings over one year 10,023 5,026
Other liabilities 1,330 1,970
--------- ---------
Total liabilities 339,977 326,116
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,050,100 shares
in 1996 and 1,026,707 in 1995 5,250 5,134
Additional paid-in capital 9,826 9,171
Retained earnings 20,388 17,693
Net unrealized gain (loss) on available for sale
debt securities and marketable equity securities (284) 643
Treasury stock, at cost, 155 shares in 1996 and 854 in 1995 (3) (25)
--------- ---------
Total shareholders' equity 35,177 32,616
--------- ---------
Total liabilities and shareholders' equity $ 375,154 $ 358,732
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
2
<PAGE> 4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1996 1995 1996 1995
-------------------- ----------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,721 $ 3,571 $ 11,014 $ 10,505
Interest and dividends on investment securities:
Taxable interest income 1,583 1,370 4,471 3,705
Nontaxable interest income 179 175 579 511
Dividends 56 40 170 116
Interest on mortgage-backed securities 1,247 1,173 3,907 3,297
Interest on trading account securities 0 0 3 0
Other interest income 0 32 43 62
------- ------- -------- --------
Total interest income 6,786 6,361 20,187 18,196
------- ------- -------- --------
INTEREST EXPENSE
Deposits 3,002 2,895 8,947 8,018
Borrowed funds 214 143 536 271
------- ------- -------- --------
Total interest expense 3,216 3,038 9,483 8,289
------- ------- -------- --------
NET INTEREST INCOME 3,570 3,323 10,704 9,907
Provision for loan losses 0 0 0 0
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,570 3,323 10,704 9,907
------- ------- -------- --------
OTHER INCOME
Fees for other customer services 335 246 904 718
Investment securities gains (loss) 28 1 102 1
Trading securities gains (loss) 0 0 12 0
Net gain (loss) on sale of loans 10 0 (9) 79
Net gain (loss) on the sale of other real estate (3) (2) 24 (32)
Other non-interest income 39 52 150 164
------- ------- -------- --------
Total other income 409 297 1,183 930
------- ------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 1,339 1,278 3,956 3,756
Net occupancy expense 171 163 503 455
Equipment expense 267 259 769 736
State and local taxes 120 104 363 316
FDIC assessment 1 (16) 2 306
Office supplies 124 120 360 332
Marketing expense 71 86 206 207
Collection, repossession and foreclosure expenses 8 31 41 85
Legal and litigation 33 43 241 197
Other operating expenses 286 268 872 874
------- ------- -------- --------
Total other expenses 2,420 2,336 7,313 7,264
------- ------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 1,559 1,284 4,574 3,573
Federal income taxes 478 424 1,411 1,137
------- ------- -------- --------
NET INCOME $ 1,081 $ 860 $ 3,163 $ 2,436
======= ======= ======== ========
EARNINGS PER COMMON SHARE (NOTE 6) $ 1.03 $ 0.84 $ 3.03 $ 2.39
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
3
<PAGE> 5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 1,932 $ 4,524
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (20,356) (20,653)
Purchases of securities available for sale (32,478) (21,750)
Proceeds from sale of securities available for sale 11,918
Proceeds from call, maturity and principal
payments on securities available for sale 19,309 10,303
Proceeds from call, maturity and principal
payments on securities held to maturity 8,378 8,108
Net increase in loans made to customers (6,031) (6,908)
Proceeds from acquisition of deposits 10,605
Proceeds from disposition of other real estate 185 144
Proceeds from sale of loans 1,089 203
Purchase of premises and equipment (237) (653)
-------- --------
Net cash from investing activities (18,223) (20,601)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 3,668 13,359
Net increase in borrowings 10,833 2,142
Proceeds from sale of common stock 771 524
Dividends paid on common stock (468) (395)
Proceeds from sale of treasury stock 22 0
-------- --------
Net cash from financing activities 14,826 15,630
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,465) (447)
CASH AND CASH EQUIVALENTS
Beginning of period 12,439 11,567
-------- --------
$ 10,974 $ 11,120
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 9,562 $ 8,015
Income taxes paid $ 1,160 $ 485
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
4
<PAGE> 6
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
2.) Reclassifications:
The financial statements for 1995 have been reclassified to conform
with the presentation for 1996. Such reclassifications had no effect on the net
results of operations.
3.) Investment Securities:
Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities classified as
available for sale are those that could be sold for liquidity, investment
management, or similar reasons, even though management has no present intentions
to do so. Trading securities are principally held with the intention of selling
in the near term.
5
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, with such amortization or
accretion included in interest income. Securities available for sale are carried
at fair value using the specific identification method. Unrealized gains and
losses on available for sale securities are recorded as a separate component of
shareholders' equity, net of tax effects. Trading securities are carried at fair
value with changes in fair value reported in the Consolidated Statements of
Income. Realized gains or losses on dispositions are based on net proceeds and
the adjusted carrying amount of securities sold, using the specific
identification method.
During the quarter ended September 30, 1996, $4,829 of investment
securities available for sale were sold resulting in $28 in net gains.
Securities sold primarily comprised mortgage-backed securities with small
remaining balances and U.S. Treasurys scheduled to mature within the next
several months.
On February 15, 1994, a pre-refunded escrowed municipal bond with a par
value of $100 and a book value of $124, issued by Northeast Randolph County,
Alabama, was placed on nonaccrual status by the Bank. These bonds were
pre-refunded with U.S. Treasury securities financed by a subsequent bond issue
of Northern Randolph County, Alabama, which 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 early retirement of
the bond during the first quarter of 1996 resulted in a loss of $18.
Securities available for sale, carried at fair value, totalled $117,256
representing 60.7% of all investment securities, providing an adequate level of
liquidity in management's opinion.
6
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated market value of debt securities at
September 30, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay certain obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Investment securities
- --------------------- AMORTIZED ESTIMATED
available for sale COST FAIR VALUE
- ------------------ --------- -----------
<S> <C> <C>
Due in one year or less $ 8,322 $ 8,348
Due after one year
through five years 39,458 39,399
Due after five years
through ten years 8,286 8,375
Due after ten years 2,030 2,024
-------- ----------
58,096 58,146
Mortgage-backed Securities 55,498 55,431
-------- ----------
$113,594 $ 113,577
======== ==========
<CAPTION>
Investment securities
- -------------------- AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- --------------- --------- -----------
Due in one year or less $ 553 $ 554
Due after one year
through five years 8,051 7,905
Due after five years
through ten years 40,005 39,627
Due after ten years 8,117 8,067
-------- ----------
56,726 56,153
Mortgage-backed Securities 19,163 19,016
-------- ----------
$ 75,889 $ 75,169
======== ==========
</TABLE>
Investment securities with a carrying value of approximately $38,964 at
September 30, 1996 and $38,689 at December 31, 1995 were pledged to secure
deposits and for other purposes.
7
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated fair value of investment securities available
for sale and investment securities held to maturity as of September 30, 1996,
are as follows:
<TABLE>
<CAPTION>
Investment
- ----------
securities available GROSS GROSS ESTIMATED
- -------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 39,844 $130 $158 $ 39,816
U.S. Government
agencies and
corporations 11,440 100 22 11,518
Obligations of states
and political
subdivisions 6,812 36 36 6,812
Mortgage-backed and
related securities 55,498 303 370 55,431
-------- ---- ---- --------
Total 113,594 569 586 113,577
Marketable equity
securities 2,170 54 279 1,945
Other securities 1,734 0 0 1,734
-------- ---- ---- --------
Total available
for sale $117,498 $623 $865 $117,256
======== ==== ==== ========
<CAPTION>
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government
agencies and
corporations $ 46,683 $117 $655 $ 46,145
Obligations of states
and political
subdivisions 10,043 72 107 10,008
Mortgage-backed and
related securities 19,163 78 225 19,016
-------- ---- ---- --------
Total held to
maturity $ 75,889 $267 $987 $ 75,169
======== ==== ==== ========
</TABLE>
8
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following provides a summary of the amortized cost and estimated fair value
of investment securities available for sale and investment securities held to
maturity as of December 31, 1995:
<TABLE>
<CAPTION>
Investment
- ----------
securities available GROSS GROSS ESTIMATED
- -------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 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
========= ====== ===== ========
<CAPTION>
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
========= ====== ===== ========
</TABLE>
9
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. Such instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
on the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to these financial instruments is represented by the contract or
notional amount of the instrument. The Company uses the same credit policies in
making commitments and conditional obligations as it does for instruments
recorded on the balance sheet. The amount and nature of collateral obtained, if
any, is based on management's credit evaluation.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
------------------
9-30-96 12-31-95
------- --------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 5,729 $ 6,462
Variable 28,142 29,353
Standby letters of credit 1,293 1,252
</TABLE>
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Generally these
financial arrangements have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
10
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
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 its immediate lending area. The following represents the
composition of the loan portfolio at September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
9-30-96 12-31-95
------- --------
<S> <C> <C>
1-4 family residential mortgages 44.4% 43.3%
Commercial mortgages 25.0% 24.6%
Consumer loans 13.3% 13.6%
Commercial loans 10.2% 10.6%
Home equity loans 7.1% 7.9%
</TABLE>
Included in 1-4 family residential mortgages as of September 30, 1996
are $1,585 of mortgage loans held for sale in the secondary market. Loans held
for sale at December 31, 1995 totaled $473. The estimated market value of these
loans approximates their carrying value.
The following is an analysis of changes in the allowance for loan
losses at September 30, 1996 and September 30, 1995:
<TABLE>
<CAPTION>
9-30-96 9-30-95
------- -------
<S> <C> <C>
Balance at beginning of period $ 3,011 $ 3,081
Loan charge-offs (138) (314)
Recoveries 95 245
------- -------
Net loan recoveries (charge-offs) (43) (69)
Provision charged to operations -0- -0-
Balance at end of period $ 2,968 $ 3,012
======= =======
</TABLE>
The recorded investment in loans for which impairment has been
recognized in accordance with Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of Loans," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures", was $220 while the related portion of the allowance for loan
losses was $56 at September 30, 1996.
11
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands, except per share data)
5.) Legal Proceedings:
On July 10, 1995, the United States District Court, Northern District
of Ohio, Eastern Division, certified FRANK SLENTZ, ET AL. V. CORTLAND SAVINGS
AND BANKING COMPANY as a class action suit against the Company's subsidiary bank
(Cortland).
Plaintiffs purchased interests in two campgrounds, Ponderosa Park
Resorts ("Ponderosa") and The Landing at Clay's Park ("The Landing"). Plaintiffs
signed promissory notes furnished by these campgrounds. Some of these notes were
subsequently sold to Cortland. Plaintiffs allege that the campgrounds were never
developed as promised. Instead, the campgrounds lapsed into insolvency and were
placed in bankruptcy.
Each plaintiff seeks recovery of amounts invested. Cortland collected
aggregate payments approximating $2.0 million and $2.3 million for principal,
interest, late charges, and other settlement charges relating to plaintiffs'
promissory notes purchased from The Landing and Ponderosa, respectively.
Cortland vigorously objects to plaintiffs' allegations and will
aggressively pursue all defenses available. The probability of an unfavorable
outcome is not known. As the ultimate outcome of this litigation cannot
presently be determined, no provision for any liability that may result from
resolution of this lawsuit has been made in the accompanying consolidated
financial statements.
The Bank is also involved in other legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of these
matters is not expected to have any material effect on the Company.
6.) Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,081 $ 860 $ 3,163 $ 2,436
Average common
shares outstanding 1,049,917 1,026,450 1,042,735 1,020,792
Earnings per share $ 1.03 $ 0.84 $ 3.03 $ 2.39
</TABLE>
Average shares outstanding and resultant per share amounts have been restated to
give retroactive effect to the 3% stock dividend of January 1, 1996.
12
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Dollars in thousands)
Liquidity
- ---------
The central role of the Company's liquidity management is to (1) ensure
the possession of and access to sufficient liquid funds to meet the normal
transaction requirements of its customers, (2) to take advantage of market
opportunities requiring flexibility and speed, and (3) to provide a cushion
against unforeseeable liquidity needs.
Principal sources of liquidity for the Company include assets
considered relatively liquid such as cash and due from other banks, as well as
cash flows from maturities and repayment of loans, investment securities and
mortgage-backed securities.
Along with its liquid assets, the Company has other sources of
liquidity available to it which help to ensure that adequate funds are available
as needed. These other sources include, but are not limited to, the ability to
obtain deposits through the adjustment of interest rates, the purchasing of
federal funds and borrowing on other credit facilities. Access to the Federal
Reserve Discount Window provides an additional source of funds to the Company.
The Company is also a member of the Federal Home Loan Bank of Cincinnati,
providing yet another source of liquidity.
Capital Resources
- -----------------
The capital management function is a continuous process which consists
of providing capital for both the current financial position and the anticipated
future growth of the Company. Central to this process is internal equity
generation, particularly through earnings retention. Internal capital generation
is measured as the annualized rate of return on equity, exclusive of any
appreciation or depreciation relating to available for sale securities,
multiplied by the percentage of earnings retained. Internal capital generation
was 11.2% for the nine months ended September 30, 1996, as compared to 9.3% for
the like period during 1995. Overall during the first nine months of 1996,
capital grew at the annual rate of 10.5%, a figure which reflects earnings,
common stock issued, and the net change in the estimated fair value of available
for sale securities.
13
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
During the first nine months of 1996, the Company issued 23,393 shares
of common stock which resulted in proceeds of $771. Of the 23,393 shares issued,
20,818 shares were issued through the Company's dividend reinvestment plan. The
remaining 2,575 shares were issued through the subsidiary bank's 401-k Plan
which offers employees the choice of investing in the common stock of the
Company as one of several participant directed investment options.
Risk-based standards for measuring capital adequacy require banks and
bank holding companies to maintain capital based on "risk-adjusted" assets.
Categories of assets with potentially higher credit risk require more capital
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as standby letters of credit and interest rate
swaps.
These standards also classify capital into two tiers, referred to as
Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity,
noncumulative and cumulative perpetual preferred stock, and minority interests
less goodwill. Tier 2 capital consists of allowance for loan and lease losses
(subject to certain limitations), perpetual preferred stock (not included in
Tier 1), hybrid capital instruments, term subordinated debt, and
intermediate-term preferred stock. Banks are required to meet a minimum ratio of
8% of qualifying total capital to risk-adjusted total assets with at least 4%
constituting Tier 1 capital. Capital qualifying as Tier 2 capital is limited to
100% of Tier 1 capital. All banks and bank holding companies are also required
to maintain a minimum leverage capital ratio (Tier 1 capital to total average
assets) in the range of 3% to 4%, subject to regulatory guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required banking regulatory agencies to revise risk-based capital
standards to ensure that they take adequate account of the following
additional risks: interest rate, concentration of credit, and nontraditional
activities. Accordingly, 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.
14
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
The table below illustrates the Company's risk weighted capital ratios
at September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Tier 1 Capital $ 34,801 $ 31,996
Tier 2 Capital 2,073 2,031
-------- --------
TOTAL QUALIFYING
CAPITAL $ 36,874 $ 34,027
======== ========
Risk Adjusted
Total Assets (*) $164,925 $161,503
Tier 1 Risk-Based
Capital Ratio 21.10% 19.81%
Total Risk-Based
Capital Ratio 22.36% 21.07%
Total Leverage
Capital Ratio 9.42% 9.54%
<FN>
(*) Includes off-balance sheet exposures
</TABLE>
First Nine Months of 1996 as Compared to First Nine Months of 1995
------------------------------------------------------------------
During the first nine months of 1996, net interest income increased by
$797 compared to the first nine months of 1995. Total interest income increased
by $1,991 or 10.9% from the level recorded in 1995. This was accompanied by an
increase in interest expense of $1,194 or 14.4%.
The average rate paid on interest sensitive liabilities increased by 12
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $29,481 or 11.2%, reflecting two new offices opened in
the second half of 1995, borrowings from the Federal Home Loan Bank and moderate
growth in the deposits of the Company's existing offices. This enabled average
earning assets to grow by $36,589, or 11.7%, from the same period last year,
while the tax equivalent yield on earning assets declined by five basis points.
The net effect of these changes was a narrowing in the Company's net interest
margin ratio from 4.3% at September 30th of last year to 4.2% this year.
15
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Interest and dividend income on securities registered an increase of
$1,498 or 19.6% during the first nine months of 1996 when compared to 1995. The
average invested balances grew by 18.9%, increasing by $29,909 over the levels
of a year ago. The increase in the average balance of investment securities was
accompanied by a 3 basis point increase in portfolio yield.
Interest and fees on loans increased by $509 for the first nine months
of 1996 compared to 1995, representing the combined effects of a $6,910 increase
in the average balance of the loan portfolio and a 3 basis point increase in
yield due to the effect of rising interest rates.
Other interest income decreased by $19 from the same period a year ago
due to a decrease in both the average balance of Federal Funds sold and the
Federal Funds rate itself. An increase in the average balance in the trading
account resulted in a $3 increase in interest income from trading securities.
There were no open trading positions as of quarter's end.
Other income from all sources increased by $253 from the same period
a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market decreased by $88 from the same period a year ago, reflecting less
favorable market conditions as mortgage rates generally rose during the nine
month period. This was offset by a $12 increase in net gains on trading
securities and an increase of $101 in net gains on available for sale investment
securities that were either called or sold. Fees for other customer services
increased by $186 due mainly to an increase in deposits and services at the
subsidiary bank's two newest branches brought on-stream during the second half
of 1995, combined with a change in the fee structure for all deposit customers
implemented during the first quarter of 1996. The first nine months of 1995
also reflected a $32 loss on the sale of other real estate compared to a $24
gain recorded in the same period of 1996.
Loan charge-offs during the first nine months were $138 in 1996 and
$314 in 1995, while the recovery of previously charged-off loans amounted to $95
in 1996 compared to $245 in 1995. The loan loss allowance of $2,968 represents
1.8% of outstanding loans. Non accrual loans at September 30, 1996 represented
0.9% of the loan portfolio compared to 1.0% at December 31, 1995.
16
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Total other expenses in the first nine months were $7,313 in 1996
compared to $7,264 in 1995, an increase of $49 or 0.7%. Full time equivalent
employment during the first nine months averaged 196 employees in 1996 and 193
in 1995. Salaries and benefits increased by $200 over the similar period a
year ago, representing an increase of 5.3%. This primarily reflects the
personnel expense associated with the two new community banking offices opened
during the second half of 1995.
For the first nine months of 1996, the FDIC dramatically reduced
premium rates. As a result, the subsidiary bank experienced a decrease in FDIC
Assessment expense of $304. State and local taxes increased by $47, or 14.9%.
Occupancy and equipment expense increased by $81, or 6.8%, primarily due to the
newly opened offices. All other expense categories increased by 1.5% or $25 as a
group.
Income before income tax expense amounted to $4,574 for the first nine
months of 1996 compared to $3,573 for the similar period of 1995. The effective
tax rate for the first nine months was 30.8% in 1996 compared to 31.8% in 1995,
resulting in income tax expense of $1,411 and $1,137, respectively. Net income
for the first nine months registered $3,163 in 1996 compared to $2,436 in 1995,
representing a 26.8% increase in per share amounts from the $2.39 earned in 1995
to the $3.03 recorded in 1996.
Third Quarter of 1996 as compared to Third Quarter 1995
- -------------------------------------------------------
During the third quarter of 1996 net interest income increased by $247
as compared to third quarter 1995. Compared to year ago levels, average earning
assets increased by 8.4% while average interest-bearing liabilities increased by
7.5%. Average loans exhibited growth of 4.7%, while average investments
increased by 13.1%.
The tax equivalent yield on earning assets decreased by 12 basis
points from the same quarter a year ago primarily due to the additional
concentration of earning assets invested in securities and a decline in the
yield on the investment portfolio. The tax equivalent yield on the investment
portfolio measured 6.6%, down fourteen basis points from the same quarter a year
ago, while the loan portfolio yielded 9.2%, down 2 basis points from last year's
rate. Meanwhile, the rate paid on interest-bearing liabilities decreased by 4
basis points compared to a year ago. The net effect of these changes was that
the tax equivalent net interest margin declined to 4.1% from the 4.2% achieved
during last year's third quarter.
17
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Loans decreased by $378 during the quarter. Loans as a percentage of
earning assets stood at 45.6% as of September 30, 1996 as compared to 47.2% on
September 30, 1995. The loan to deposit ratio at the end of the third quarter of
1996 was 50.8% compared to 50.6% at the end of the same period a year ago. The
investment portfolio represented 60.4% of each deposit dollar, up from 56.7% a
year ago.
Loan charge-offs during the third quarter were $41 in 1996 and $127 in
1995, while the recovery of previously charged-off loans amounted to $41 during
the third quarter of 1996 compared to $35 in the same period of 1995.
Other income for the quarter increased by $112 or 37.7% compared to the
same period a year ago. Fees for customer services were up $89 or 36.2% due to
opening of new branches, and a change in fee structure. Net gains on available
for sale securities sold during the quarter netted $28, while a $1 gain was
recorded in 1995.
Total other expenses in the third quarter were $2,420 in 1996 and
$2,336 in 1995, an increase of $84 or 3.6%. Employee salaries and benefits
increased by $61 or 4.8%. Occupancy and equipment expense increased by $16 or
3.8%. Other expenses as a group increased by $7 or 1.1% compared to the same
period last year.
Income before tax for the quarter increased by 21.4% to $1,559 in 1996
from the $1,284 recorded in 1995. Net income for the quarter of $1,081
represented a 25.7% increase from the $860 earned a year ago.
New Accounting Standards
- ------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived
Assets to be Disposed of" effective January 1, 1996. Adoption of this standard
did not have a material impact on the Company's financial position or results of
operations.
The Company also adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights - an amendment of FASB Statement No. 65," effective January 1,
1996. Adoption of this standard did not have a material impact on the Company.
18
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
See Note (5) of the financial statements.
Item 2. Changes in Securities
- ------- ---------------------
Not applicable
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable
Item 5. Other Information
- ------- -----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
---------------------------------
PART II - OTHER INFORMATION (CONTINUED)
---------------------------------------
Item 6. (continued)
- -------------------
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
(b) Reports on Form 8-K
-------------------
Not applicable
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cortland Bancorp
----------------
(Registrant)
DATED: November 8, 1996 Lawrence A. Fantauzzi
---------------- ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: November 8, 1996 Dennis E. Linville
---------------- ------------------
Executive Vice-President,
Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,974
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,256
<INVESTMENTS-CARRYING> 75,889
<INVESTMENTS-MARKET> 75,169
<LOANS> 162,217
<ALLOWANCE> 2,968
<TOTAL-ASSETS> 375,154
<DEPOSITS> 319,597
<SHORT-TERM> 9,027
<LIABILITIES-OTHER> 1,330
<LONG-TERM> 10,023
<COMMON> 5,250
0
0
<OTHER-SE> 29,927
<TOTAL-LIABILITIES-AND-EQUITY> 375,154
<INTEREST-LOAN> 11,014
<INTEREST-INVEST> 9,127
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 20,187
<INTEREST-DEPOSIT> 8,947
<INTEREST-EXPENSE> 9,483
<INTEREST-INCOME-NET> 10,704
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 102
<EXPENSE-OTHER> 7,313
<INCOME-PRETAX> 4,574
<INCOME-PRE-EXTRAORDINARY> 4,574
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,163
<EPS-PRIMARY> 3.03
<EPS-DILUTED> 3.03
<YIELD-ACTUAL> 4.2
<LOANS-NON> 1,503
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,028
<ALLOWANCE-OPEN> 3,011
<CHARGE-OFFS> 138
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 2,968
<ALLOWANCE-DOMESTIC> 2,282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 686
</TABLE>
