<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 March 31, 1997
----------------
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 May 7, 1997
----- --------------------------
Common Stock, No Par Value 1,095,939 Shares
- -------------------------- ----------------
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
<S> <C> <C>
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - March 31,
1997 and December 31, 1996 2
Consolidated Statements of Income - Three
months ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements -
March 31, 1997 5 - 12
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 13 - 17
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 18
- ------- -----------------
Item 2. Changes in Securities 18
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 18
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 18
- ------- ---------------------------------------------------
Item 5. Other Information 18
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 18
- ------- --------------------------------
Signatures 20
- ---------
</TABLE>
1
<PAGE> 3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,382 $ 10,083
Federal funds sold 100 0
--------- ---------
Total cash and cash equivalents 9,482 10,083
--------- ---------
Investment securities available for sale (Note 3) 117,212 119,088
Investment securities held to maturity (approximate market
value of $72,326 in 1997 and $75,461 in 1996) (Note 3) 73,263 75,286
Total loans (Note 4) 170,040 166,109
Less allowance for loan losses (Note 4) (2,947) (2,966)
--------- ---------
Net loans 167,093 163,143
--------- ---------
Premises and equipment 5,946 6,024
Other assets 5,389 4,886
--------- ---------
Total assets $ 378,385 $ 378,510
========= =========
LIABILITIES
Noninterest-bearing deposits $ 40,366 $ 42,130
Interest-bearing deposits 279,639 277,900
--------- ---------
Total deposits 320,005 320,030
--------- ---------
Short term borrowings under one year 11,829 7,648
Other borrowings over one year 8,023 13,523
Other liabilities 1,804 1,389
--------- ---------
Total liabilities 341,661 342,590
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,095,455 shares in 1997
and 1,018,817 in 1996 5,477 5,409
Additional paid-in capital 11,428 10,938
Retained earnings 20,354 19,287
Net unrealized gain (loss) on available for sale
debt securities and marketable equity securities (535) 286
--------- ---------
Total shareholders' equity 36,724 35,920
--------- ---------
Total liabilities and shareholders' equity $ 378,385 $ 378,510
========= =========
</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)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- ------
<S> <C> <C>
Interest income
Interest and fees on loans $ 3,755 $3,634
Interest and dividends on investment securities:
Taxable interest income 1,600 1,358
Nontaxable interest income 189 213
Dividends 55 52
Interest on mortgage-backed securities 1,232 1,335
Interest on trading account securities 0 3
Other interest income 3 25
------- ------
Total interest income 6,834 6,620
------- ------
Interest expense
Deposits 2,948 2,975
Borrowed funds 264 123
------- ------
Total interest expense 3,212 3,098
------- ------
Net interest income 3,622 3,522
Provision for loan losses 0 0
------- ------
Net interest income after provision for loan losses 3,622 3,522
------- ------
Other income
Fees for other customer services 305 247
Trading securities gains - net 0 16
Investment securities gains - net 12 30
Gain (loss) on sale of loans - net (10) 1
Other non-interest income 70 66
------- ------
Total other income 377 360
------- ------
Other expenses
Salaries and employee benefits 1,383 1,313
Net occupancy expense 162 166
Equipment expense 270 256
State and local taxes 135 123
Office supplies 114 122
Marketing expense 62 57
Legal and litigation expense 42 78
Other operating expenses 292 310
------- ------
Total other expenses 2,460 2,425
------- ------
Income before federal income taxes 1,539 1,457
Federal income taxes 472 454
------- ------
Net income $ 1,067 $1,003
======= ======
Earnings per common share (Note 6) $ 0.98 $ 0.94
======= ======
</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)
(Amounts in thousands)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 2,206 $ 163
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (1,999) (12,728)
Purchases of securities available for sale (10,439) (9,288)
Proceeds from sales of securities available for sale 7,631
Proceeds from call, maturity and principal
payments on securities 7,328 13,517
Net increase in loans made to customers (4,371) (2,476)
Proceeds from sale of loans 853
Purchase of premises and equipment (171) (55)
-------- --------
Net cash flows from investing activities (2,021) (10,177)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (25) 702
Net increase (decrease) in borrowings (1,319) 6,147
Proceeds from sale of common stock 558 382
Proceeds from sale of treasury stock 22
-------- --------
Net cash flows from financing activities (786) 7,253
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (601) (2,761)
CASH AND CASH EQUIVALENTS
Beginning of period 10,083 12,439
-------- --------
End of period $ 9,482 $ 9,678
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 3,221 $ 3,158
Income taxes paid $ 53 $ 0
</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 three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
2.) Reclassifications:
Certain items contained in the 1996 financial statements have been
reclassified to conform with the presentation for 1997. 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 held to maturity
are stated at cost, adjusted for amorization of premiums and accretion of
discounts, with such amortization or accretion included in interest income.
Securities classified as available for sale are those that could be
sold for liquidity, investment management, or similar reasons. 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 principally held with the intention of selling
in the near term. Trading securities are carried at fair value with changes in
fair value reported in the Consolidated Statements of Income.
5
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
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 March 31, 1997, $7,631 of
investment securities available for sale were sold resulting in $12 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.
The following table sets forth the proceeds, gains and losses realized
on securities sold or called for the period ended:
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Proceeds $12,191
Gross realized gains 18
Gross realized losses 6
</TABLE>
Securities available for sale, carried at fair value, totalled $117,212
at March 31, 1997 and $119,088 at December 31, 1996 representing 61.5% and
61.3%, respectively, of all investment securities. These levels were deemed to
provide an adequate level of liquidity in management's opinion.
Investment securities with a carrying value of approximately $42,927 at
March 31, 1997 and $40,645 at December 31, 1996 were pledged to secure deposits
and for other purposes.
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
March 31, 1997, 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 $ 7,715 $ 7,712
Due after one year
through five years 37,451 37,246
Due after five years
through ten years 10,837 10,797
Due after ten years 1,862 1,855
-------- --------
57,865 57,610
Mortgage-backed Securities 56,046 55,869
-------- --------
$113,911 $113,479
======== ========
</TABLE>
<TABLE>
<CAPTION>
Investment securities
- --------------------- AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ---------------- -------- ------------
<S> <C> <C>
Due in one year or less $ 1,506 $ 1,512
Due after one year
through five years 9,187 9,000
Due after five years
through ten years 36,602 36,049
Due after ten years 7,730 7,648
------- -------
55,025 54,209
Mortgage-backed Securities 18,238 18,117
------- -------
$73,263 $72,326
======= =======
</TABLE>
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 March 31,
1997, 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 $ 35,452 $ 44 $ 239 $ 35,257
U.S. Government
agencies and
corporations 15,228 80 96 15,212
Obligations of states
and political
subdivisions 7,185 22 66 7,141
Mortgage-backed and
related securities 56,046 323 500 55,869
-------- ------ ------ --------
Total 113,911 469 901 113,479
Marketable equity
securities 2,171 76 301 1,946
Other securities 1,787 1,787
-------- ------ ------ --------
Total available
for sale $117,869 $ 545 $1,202 $117,212
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government
agencies and
corporations $45,454 $ 55 $ 782 $44,727
Obligations of states
and political
subdivisions 9,571 51 140 9,482
Mortgage-backed and
related securities 18,238 95 216 18,117
------- ---- ------ -------
Total held to
maturity $73,263 $201 $1,138 $72,326
======= ==== ====== =======
</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, 1996:
<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 $ 39,813 $ 265 $ 68 $ 40,010
U.S. Government
agencies and
corporations 11,740 119 5 11,854
Obligations of states
and political
subdivisions 7,471 45 10 7,506
Mortgage-backed and
related securities 55,530 610 161 55,979
-------- ------ ---- --------
Total 114,554 1,039 244 115,349
Marketable equity
securities 2,170 63 255 1,978
Other securities 1,761 1,761
-------- ------ ---- --------
Total available
for sale $118,485 $1,102 $499 $119,088
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government
agencies and
corporations $46,674 $298 $232 $46,740
Obligations of states
and political
subdivisions 9,722 100 52 9,770
Mortgage-backed and
related securities 18,890 171 110 18,951
------- ---- ---- -------
Total held to
maturity $75,286 $569 $394 $75,461
======= ==== ==== =======
</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
------------------
3-31-97 12-31-96
------- --------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $12,501 $ 7,168
Variable 30,938 28,061
Standby letters of credit 250 295
</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 March 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
3-31-97 12-31-96
------- --------
<S> <C> <C>
1-4 family residential mortgages 42.3% 43.3%
Commercial mortgages 26.4% 25.5%
Consumer loans 12.2% 12.8%
Commercial loans 12.6% 11.7%
Home equity loans 6.5% 6.7%
</TABLE>
Included in 1-4 family residential mortgages as of March 31, 1997 are
$940 of mortgage loans held for sale in the secondary market. Loans held for
sale at December 31, 1996 totaled $1,361. 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 March 31, 1997 and March 31, 1996:
<TABLE>
<CAPTION>
3-31-97 3-31-96
------- -------
<S> <C> <C>
Balance at beginning of period $ 2,966 $ 3,011
Loan charge-offs (49) (61)
Recoveries 30 20
------- -------
Net loan recoveries (charge-offs) (19) (41)
Provision charged to operations 0 0
------- -------
Balance at end of period $ 2,947 $ 2,970
======= =======
</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 $1,113 while the related portion of the allowance for loan
losses was $290 at March 31, 1997.
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
MARCH 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net Income $ 1,067 $ 1,003
Average common
shares outstanding 1,094,645 1,069,336
Earnings per share $ 0.98 $ 0.94
</TABLE>
Average shares outstanding and resultant per share amounts have been restated to
give retroactive effect to the 3% stock dividend of January 1, 1997.
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: (1) to
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 cash items due from banks, as well
as cash flows from maturities and repayment of loans and investment 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 and the Federal Home Loan Bank of Cincinnati provide the
Company with additional sources 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 11.8% for the three months ended March 31, 1997, as compared to 12.6% for
the like period during 1996. Overall during the first three months of 1997,
capital grew at the annual rate of 9.0%, 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 three months of 1997, the Company issued 13,638 shares
of common stock which resulted in proceeds of $558. Of the 13,638 shares issued,
12,333 shares were issued through the Company's dividend reinvestment plan. The
remaining 1,305 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 March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Tier 1 Capital $ 36,618 $ 35,006
Tier 2 Capital 2,197 2,112
-------- --------
TOTAL QUALIFYING
CAPITAL $ 38,815 $ 37,118
======== ========
Risk Adjusted
Total Assets (*) $175,020 $168,097
Tier 1 Risk-Based
Capital Ratio 20.92% 20.82%
Total Risk-Based
Capital Ratio 22.18% 22.08%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 9.79% 9.51%
</TABLE>
(*) Includes off-balance sheet exposures.
Assets less intangibles and the net unrealized market value adjustment
of investment securities available for sale averaged $374,031 for the quarter
ended March 31, 1997 and $368,015 for the year ended December 31, 1996.
First Quarter of 1997 as Compared to First Quarter of 1996
- -----------------------------------------------------------
During the first three months of 1997, net interest income increased by
$100 compared to the first three months of 1996. Total interest income increased
by $214 or 3.2% from the level recorded in 1996. This was accompanied by an
increase in interest expense of $114 or 3.7%.
The average rate paid on interest sensitive liabilities increased by 5
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $9,755 or 3.4%, primarily reflecting an $8,335 increase
in average borrowings from the Federal Home Loan Bank. Average earning assets
grew by $16,595, or 4.9%, from the same period last year, with the tax
equivalent yield on earning assets declining by 15 basis points. The Company's
net interest margin ratio narrowed from 4.3% in the first quarter of last year
to 4.1% 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
$118 or 4.0% during the first three months of 1997 when compared to 1996. The
average invested balances grew by 4.7%, increasing by $8,589 over the levels of
a year ago. The increase in the average balance of investment securities was
accompanied by a 9 basis point decline in portfolio yield.
Interest and fees on loans increased by $121 for the first three months
of 1997 compared to 1996, representing the net effect of a $9,583 increase in
the average balance of the loan portfolio and a 25 basis point decline in yield.
Other interest income decreased by $25 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.
Other income from all sources increased by $17 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market decreased by $11 from the same period a year ago, reflecting less
favorable market conditions as mortgage rates generally rose during the period.
Trading securities gains showed a decrease of $16 as the Company had no trading
activity in the first quarter of 1997. Gains on securities called and gains on
the sale of available for sale investment securities also showed a decrease of
$18. These decreases were offset by an increase in fees for other customer
services of $58 due mainly to changes in the fee structure for all deposit
customers implemented late in the first quarter of 1996.
Loans increased by $3,931 during the quarter. Loans as a percentage of
earning assets stood at 47.6% as of March 31, 1997 as compared to 45.5% on March
31, 1996. The loan to deposit ratio at the end of the first quarter of 1997 was
53.1% compared to 49.9% at the end of the same period a year ago. The investment
portfolio represented 59.5% of each deposit dollar, down slightly from 59.8% a
year ago.
Loan charge-offs during the first three months were $49 in 1997 and $61
in 1996, while the recovery of previously charged-off loans amounted to $30 in
1997 compared to $20 in 1996. At March 31, 1997, the loan loss allowance of
$2,947 represented 1.7% of outstanding loans. Non accrual loans at March 31,
1997 represented 1.0% of the loan portfolio compared to 0.9% at December 31,
1996.
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 three months were $2,460 in 1997
compared to $2,425 in 1996, an increase of $35 or 1.4%. Full time equivalent
employment during the first three months averaged 195 employees in 1997 and 194
in 1996. Salaries and benefits increased by $70 over the similar period
a year ago, representing an increase of 5.3%.
For the first three months of 1997, state and local taxes increased by
$12 or 9.8%. Occupancy and equipment expense increased by $10 or 2.4%. These
increases were offset by a $36 or 46.2% decrease in legal expenses. All other
expense categories declined by 4.3% or $21 as a group.
Income before income tax expense amounted to $1,539 for the first three
months of 1997 compared to $1,457 for the similar period of 1996. The effective
tax rate for the first three months was 30.7% in 1997 compared to 31.2% in 1996,
resulting in income tax expense of $472 and $454, respectively. Net income for
the first three months registered $1,067 in 1997 compared to $1,003 in 1996,
representing a 4.3% increase in per share amounts from the $0.94 earned in 1996
to the $0.98 recorded in 1997.
New Accounting Standards
- ------------------------
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standards (SFAS) No.125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to eliminate financial assets when control has been
surrendered in accordance with the criteria provided in the standard. This
standard supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" an
amendment to SFAS No. 65. Application of the new rules did not have a material
impact on the Company's financial position or results of operations.
17
<PAGE> 19
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
18
<PAGE> 20
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
19
<PAGE> 21
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: May 7, 1997 Lawrence A. Fantauzzi
------------------- ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: May 7, 1997 Dennis E. Linville
------------------- ---------------------
Executive Vice-President,
Secretary
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,382
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,212
<INVESTMENTS-CARRYING> 73,263
<INVESTMENTS-MARKET> 72,326
<LOANS> 170,040
<ALLOWANCE> 2,947
<TOTAL-ASSETS> 378,385
<DEPOSITS> 320,005
<SHORT-TERM> 11,829
<LIABILITIES-OTHER> 1,804
<LONG-TERM> 8,023
<COMMON> 5,477
0
0
<OTHER-SE> 31,247
<TOTAL-LIABILITIES-AND-EQUITY> 36,724
<INTEREST-LOAN> 3,755
<INTEREST-INVEST> 3,076
<INTEREST-OTHER> 3
<INTEREST-TOTAL> 6,834
<INTEREST-DEPOSIT> 2,948
<INTEREST-EXPENSE> 3,212
<INTEREST-INCOME-NET> 3,622
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 2,460
<INCOME-PRETAX> 1,539
<INCOME-PRE-EXTRAORDINARY> 1,067
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1067
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 4.12
<LOANS-NON> 1,699
<LOANS-PAST> 73
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 954
<ALLOWANCE-OPEN> 2,966
<CHARGE-OFFS> 49
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 2,947
<ALLOWANCE-DOMESTIC> 2,475
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 472
</TABLE>
