<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 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 No.)
incorporation or organization)
l94 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 l2(b) of the Act: None
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 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 11, 1997:
Common Stock, No Par Value - $49,843,203
- ----------------------------------------
.
The number of shares outstanding of the issuer's classes of common stock as
of March 11, 1997:
Common Stock, No Par Value - 1,095,455 shares
- ---------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Shareholders Report for the year ended December
31, 1996 are incorporated by reference into Part II.
Portions of the Proxy Statement for the annual shareholders meeting to
be held April 8, 1997 are incorporated by reference into Part III.
<PAGE> 2
CORTLAND BANCORP
FORM 10-K
1996
INDEX
Part I Page
- ------ ----
Item l. Business:
General I-2
Statistical Disclosure I-4
Item 2. Properties I-l9
Item 3. Legal Proceedings I-l9
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-l
Item 6. Selected Financial Data II-l
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-l
Item 8. Financial Statements and Supplementary Data II-l
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures II-l
Part III
- --------
Item l0. Directors and Executive Officers of the Registrant III-l
Item ll. Executive Compensation III-l
Item l2. Security Ownership of Certain Beneficial Owners and
Management III-l
Item l3. Certain Relationships and Related Transactions III-l
Part IV
- -------
Item l4. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-l
Signatures IV-2
Index to Exhibits IV-3
I-l
<PAGE> 3
PART I
------
Item l. 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 l956, 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 l985, 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 l956, 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 11, l997, the Corporation and its subsidiaries had 160 full-time
and 55 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.
ASSETS
------
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash and due from banks $ 8,679 $ 8,293 $ 7,555
Interest-bearing deposits in other banks 0 0 658
Federal funds sold 843 2,485 2,489
Trading account securities 57 0 337
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 92,281 74,447 66,804
U.S. Government mortgage-backed
pass-through certificates 77,246 70,471 70,833
States of the U.S. and political subdivisions 16,995 15,436 15,362
Other securities 3,651 2,965 2,414
-------- --------- ---------
TOTAL INVESTMENT SECURITIES 190,173 163,319 155,413
-------- --------- ---------
Total loans 160,663 153,711 148,304
Less unearned income 6 9 16
Less allowance for loan losses 2,976 3,079 3,116
-------- --------- ---------
NET LOANS 157,681 150,623 145,172
-------- --------- ---------
Market Value appreciation (depreciation) of
securities available for sale 165 (469) (91)
Premises and equipment 6,287 6,422 6,488
Other assets 4,760 4,929 5,314
-------- --------- ---------
$368,645 $ 335,602 $ 323,335
======== ========= =========
</TABLE>
I-4
<PAGE> 6
AVERAGE BALANCE SHEETS (CONTINUED)
----------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Deposits (all domestic):
Noninterest-bearing demand deposits $ 37,999 $ 33,716 $ 29,783
Interest-bearing demand deposits 46,945 45,864 51,392
Savings 86,468 87,072 94,753
Time 146,628 129,320 113,444
--------- --------- ---------
TOTAL DEPOSITS 318,040 295,972 289,372
--------- --------- ---------
Borrowings:
U.S. Treasury interest-bearing demand note 681 756 623
Federal funds purchased 1,918 1,276 440
Securities sold under agreements to repurchase 2,747 2,390 2,324
Other Borrowings over one year 9,157 2,657 30
--------- --------- ---------
TOTAL BORROWINGS 14,503 7,079 3,417
--------- --------- ---------
Other liabilities 1,860 2,139 2,502
--------- --------- ---------
TOTAL LIABILITIES 334,403 305,190 295,291
--------- --------- ---------
Shareholders' equity:
Common stock 5,367 4,966 4,735
Additional paid-in capital 10,665 8,363 7,323
Retained earnings 18,292 17,726 16,439
Net unrealized loss on available for sale
debt and marketable equity securities (78) (639) (453)
Less cost of common shares in treasury (4) (4) 0
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 34,242 30,412 28,044
--------- --------- ---------
$ 368,645 $ 335,602 $ 323,335
========= ========= =========
</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 3l, l996 Outstanding or Paid Rate
- ---------------------------- ----------- -------- ---------
Interest-earning assets:
<S> <C> <C> <C>
Federal funds sold $ 843 $ 45 5.4%
Interest-bearing deposits
in other banks 0 0
Trading account securities 57 3 5.9%
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 92,281 6,075 6.6%
U.S. Government mortgage-backed
pass-through certificates 77,246 5,160 6.7%
States of the U.S. and political
subdivisions (l) (2) 16,995 1,145 6.7%
Other securities (l) 3,651 234 6.4%
-------- -------
Total investment securities (l) 190,173 12,614 6.6%
Loans (l) (2) (4) 160,657 14,809 9.2%
-------- -------
Total interest-earning assets $351,730 $27,471 7.8%
======== =======
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 46,945 $ 1,259 2.7%
Savings 86,468 2,319 2.7%
Time 146,628 8,395 5.7%
-------- -------
Total deposits 280,041 11,973 4.3%
-------- -------
Borrowings:
U.S. Treasury interest-bearing
demand note 681 35 5.1%
Federal funds purchased 1,918 108 5.6%
Securities sold under agreements
to repurchase 2,747 120 4.4%
Other borrowings over one year 9,157 505 5.5%
-------- -------
Total borrowings 14,503 768 5.3%
-------- -------
Total interest-bearing liabilities $294,544 $12,741 4.3%
======== =======
Net interest margin (3) $ 14,730 4.2%
======== ====
</TABLE>
I-6
<PAGE> 8
ANALYSIS OF NET INTEREST EARNINGS (CONTINUED)
---------------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Interest Average
Average Earned Yield or
Year ended December 3l, l995 Outstanding or Paid Rate
- ---------------------------- ----------- ------- --------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 2,485 $ 146 5.9%
Interest-bearing deposits
in other banks 0 0
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 (l) (2) 15,436 1,024 6.6%
Other securities (l) 2,965 187 6.3%
-------- -------
Total investment securities (l) 163,319 10,833 6.6%
Loans (l) (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-7
<PAGE> 9
ANALYSIS OF NET INTEREST EARNINGS (CONTINUED)
---------------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Interest Average
Average Earned Yield or
Year ended December 3l, l994 Outstanding or Paid Rate
- ---------------------------- ----------- ------- --------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 2,489 $ 95 3.8%
Interest-bearing deposits
in other banks 658 18 2.7%
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 (l) (2) 15,362 1,026 6.7%
Other securities (l) 2,414 147 6.1%
-------- -------
Total investment securities (l) 155,413 9,637 6.2%
Loans (l) (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%
======= =====
<FN>
(1) The amounts are reflected on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1996, 1995 and 1994. Tax-free income from states of
the U.S. and political subdivisions, other securities and loans amounted to
$743, $1 and $211, respectively, for 1996; $656, $1 and $197, respectively, for
1995; $641, $14 and $206 respectively, for 1994.
(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 $89 in 1996, $72 in 1995 and
$333 in 1994.
</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>
1996 Change from 1995
---------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ------
<S> <C> <C> <C>
Interest Income
- ---------------
Federal funds sold $ (101) $ (88) $ (13)
Interest-bearing deposits in other banks 0 0 0
Trading account securities 3 3 0
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 1,024 1,178 (154)
U.S. Government mortgage-backed
pass-through certificates 589 449 140
States of the U.S. and political
subdivisions 121 105 16
Other securities 47 44 3
------- ------- -----
Total investment securities 1,781 1,776 5
Loans 634 641 (7)
------- ------- -----
Total interest income $ 2,317 $ 2,332 $ (15)
======= ======= =====
Interest Expense
- ----------------
Deposits:
Interest-bearing demand deposits $ 82 $ 28 $ 54
Savings (87) (17) (70)
Time 943 991 (48)
------- ------- -----
Total deposits 938 1,002 (64)
------- ------- -----
Borrowings:
U.S. Treasury interest-bearing
demand note (6) (4) (2)
Federal funds purchased 30 36 (6)
Securities sold under agreements to repurchase 10 16 (6)
Other borrowings over one year 348 359 (11)
------- ------- -----
Total borrowings 382 407 (25)
------- ------- -----
Total interest expense $ 1,320 $ 1,409 $ (89)
======= ======= =====
</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 (CONTINUED)
------------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1995 Change from 1994
---------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ -------
<S> <C> <C> <C>
Interest Income
- ---------------
Federal funds sold $ 51 $ 0 $ 51
Interest-bearing deposits in other banks (18) (18) 0
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>
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,
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 98,538 $ 81,720 $ 65,777
U.S. Government mortgage-backed
pass-through certificates 74,869 79,557 65,590
States of the U.S. and political subdivision 17,228 16,811 15,285
Other Securities 3,739 3,622 2,324
-------- -------- --------
$194,374 $181,710 $148,976
======== ======== ========
</TABLE>
A summary of securities held at December 3l, l996, 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, 1996
---------------------------
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 $ 19,595 6.22%
Maturing after one year but within five years 33,574 6.06
Maturing after five years but within ten years 39,847 7.29
Maturing after ten years 5,522 8.04
--------
Total U.S. Treasury and other U.S.
Government agencies and corporations $ 98,538 6.70%
======== ======
U.S. Government mortgage-backed
pass-through certificates; REMICS & CMO's
Maturing within one year $ 44,511 6.47%
Maturing after one year but within five years 16,980 6.88
Maturing after five years but within ten years 8,582 7.25
Maturing after ten years 4,796 7.32
--------
Total U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's $ 74,869 6.71%
======== ======
</TABLE>
I-11
<PAGE> 13
II. INVESTMENT PORTFOLIO (continued)
---------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------
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 $ 1,321 7.38%
Maturing after one year but within five years 10,965 6.76
Maturing after five years but within ten years 3,930 7.32
Maturing after ten years 1,012 7.71
-------
Total States of the U.S. and
political subdivisions $17,228 6.99%
======= ====
Other securities:
Maturing within one year $ 1,828 5.53%
Maturing after one year but within five years 0 0
Maturing after five years but within ten years 0 0
Maturing after ten years 1,911 6.21
-------
Total Other securities $ 3,739 5.85%
======= ====
<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 $29, $243, $98 and $27 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, 1996.
As of December 31, 1996, there were $9,023 in callable U.S. Government
Agencies, that given current and expected interest rate environments, are likely
to be called within the one year time horizon. These securities are categorized
according to their contractual maturities, with $8,020 maturing after five years
but within ten years and $1,003 maturing after 10 years.
As of December 31, 1996, there were $17,379 in callable U.S. Government
Agencies and $1,061 in callable U. S. Treasury securities that, given current
and expected interest rate environments, are likely to be called within the time
frame defined as after one year but within five years. These securities are
categorized according to their contractual maturities, with $13,921 maturing
after five years but within ten years and $4,519 maturing 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,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 70,590 $ 67,099 $ 66,069 $ 68,096 $ 71,085
Commercial mortgage 42,367 38,371 37,554 35,014 37,385
Consumer loans 21,300 21,254 17,247 14,539 18,975
Commercial loans 19,355 16,658 15,101 12,898 10,963
Home equity loans 11,136 12,353 12,854 13,403 12,426
1 - 4 family residential
mortgages held for sale 1,361 473 1,855 1,877 889
-------- -------- -------- -------- --------
$166,109 $156,208 $150,680 $145,827 $151,723
======== ======== ======== ======== ========
</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 loans (excluding
mortgage and consumer loans) as of December 31, 1996:
<TABLE>
<CAPTION>
1 Year 1 to Over
Types of Loans or Less 5 Years 5 Years Total
-------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Commercial loans $11,091 $4,277 $3,987 $19,355
Home Equity 11,136 0 0 11,136
------- ------ ------ -------
Total loans (excluding
mortgage and consumer loans) $22,227 $4,277 $3,987 $30,491
======= ====== ====== =======
</TABLE>
The following schedule sets forth loans as of December 31, 1996 based on
next repricing opportunity for floating and adjustable interest rate products,
and by remaining scheduled principal payments for loan products with fixed rates
of interest. Mortgage and consumer loans have again been excluded.
<TABLE>
<CAPTION>
1 Year Over
Types of Loans or Less 1 Year Total
-------------- -------- -------- ------
<S> <C> <C> <C>
Floating or adjustable rates of interest $22,087 $4,430 $26,517
Fixed rates of interest 140 3,834 3,974
------- ------ -------
Total loans $22,227 $8,264 $30,491
======= ====== =======
</TABLE>
I-13
<PAGE> 15
RISK ELEMENTS
-------------
(In Thousands of Dollars)
The following table sets forth the aggregate balance of underperforming
loans for each of the following categories for the years indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $1,450 $1,597 $1,909 $1,652 $1,979
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 18 7 14 353 201
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 182 191 205 573 1,222
</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, 1996.
(In Thousands of Dollars)
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms $139
Interest income actually included in income on
the loans 106
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. When a loan is charged-off, any
interest that has been accrued and not collected on the loan is charged against
earnings.
As of December 3l, l996, there are $1,011 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 $97 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.
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,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,011 $ 3,081 $ 3,139 $ 3,415 $ 3,203
Loan losses:
1 - 4 family residential
mortgages (5) (69) (72) (172) (108)
Commercial mortgages 0 0 (27) (42) (834)
Consumer loans (167) (220) (141) (271) (438)
Commercial loans (4) (78) (48) (123) (198)
Home equity loans 0 0 0 (7) (18)
------- ------- ------- ------- -------
(176) (367) (288) (615) (1,596)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1 - 4 family residential
mortgages 3 4 4 26 55
Commercial mortgages 0 78 6 28 6
Consumer loans 72 152 156 202 273
Commercial loans 56 63 64 83 24
------- ------- ------- ------- -------
131 297 230 339 358
------- ------- ------- ------- -------
Net loan losses (45) (70) (58) (276) (1,238)
------- ------- ------- ------- -------
Provision charged to
operations 0 0 0 0 1,450
------- ------- ------- ------- -------
Balance at end of year $ 2,966 $ 3,011 $ 3,081 $ 3,139 $ 3,415
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans
outstanding .03% .05% .04% .19% .75%
======= ======= ======= ======= =======
</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:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
December 31,
-------------------------------------------------------------------------
Types of Loans 1996 1995 1994 1993 1992
-------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 387 $ 351 $ 385 $ 405 $ 437
Commercial mortgage 1,179 1,118 1,223 1,029 1,157
Consumer loans 410 416 407 424 591
Commercial loans 325 239 207 192 210
Home equity loans 55 61 63 67 62
Unallocated portion 610 826 796 1,022 958
------- -------- -------- -------- --------
$ 2,966 $ 3,011 $ 3,081 $ 3,139 $ 3,415
======= ======== ======== ======== ========
</TABLE>
The allocation of the allowance as shown in the table above should not be
interpreted as an indication that loan losses in l996 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 1996 1995 1994 1993 1992
-------------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage 43.3% 43.3% 45.1% 48.0% 47.4%
Commercial mortgages 25.5 24.6 24.9 24.0 24.7
Consumer loans 12.8 13.6 11.5 10.0 12.5
Commercial loans 11.7 10.6 10.0 8.8 7.2
Home equity loans 6.7 7.9 8.5 9.2 8.2
------- ------- ------- ------- ------
l00.0% 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:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Average Balance 1996 1995 1994
--------------- -------- -------- --------
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 37,999 $ 33,716 $ 29,783
Interest-bearing demand deposits 46,945 45,864 51,392
Savings 86,468 87,072 94,753
Time deposits 146,628 129,320 113,444
-------- -------- --------
Total average deposits $318,040 $295,972 $289,372
======== ======== ========
</TABLE>
The following shows the average rate paid on the following deposit
categories for the periods indicated:
<TABLE>
<CAPTION>
Type 1996 1995 1994
---- -------- -------- ------
<S> <C> <C> <C>
Interest-bearing demand deposits 2.7% 2.6% 2.4%
Savings 2.7 2.8 2.7
Time deposits 5.7 5.8 4.9
</TABLE>
A summary of time deposits of $l00,000 or more as of December 3l, l996 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 $12,250 $1,025 $13,275
3 to 6 months remaining until maturity 10,358 118 10,476
6 to l2 months remaining until maturity 4,646 0 4,646
Over l2 months remaining until maturity 5,180 1,456 6,636
------- ------ -------
Total outstanding $32,434 $2,599 $35,033
======= ====== =======
</TABLE>
I-17
<PAGE> 19
VI. RETURN ON EQUITY AND ASSETS
- -------------------------------
Information relating to Return on Equity and Assets is set forth in the
Corporation's 1996 Annual Report to Shareholders, page 27, Selected Financial
Data.
I-18
<PAGE> 20
Item 2. Properties
- ------- ----------
CORTLAND BANCORP'S PROPERTY
---------------------------
Cortland Bancorp owns no property. Operations are conducted at l94 West
Main Street, Cortland, Ohio.
CORTLAND BANKS' PROPERTY
------------------------
Cortland Banks' main office (as described in its charter) is located at l94
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 682l Wakefield Road, Hiram, Ohio
Warren Office 2935 Elm Road, Warren, Ohio
Hubbard Office 890 West Liberty Street, Hubbard, Ohio
Mantua Office l052l 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 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.
I-l9
<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, l997
are as follows:
Name Age Position Held
---- --- -------------
Rodger W. Platt 61 Chairman of the Board,
President and Director
Dennis E. Linville 46 Executive Vice President,
Secretary and Director
Lawrence A. Fantauzzi 49 Controller/Treasurer
James M. Gasior 37 Vice President and Chief
Operations Officer
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 l987. He has been a Director and President of
Cortland Bancorp since its formation in April of l985. He has been a Director of
the subsidiary bank since l974 and has been President since l976.
Dennis E. Linville has been Executive Vice President of Cortland Bancorp
and the subsidiary bank since November l987. 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 l985 and Secretary of the subsidiary bank since l984.
Lawrence A. Fantauzzi has been the Controller of Cortland Bancorp and the
subsidiary bank since April l987. He became Treasurer and Chief Financial
Officer of Cortland Bancorp and the subsidiary bank in December 1992. He became
a Director of New Resources Leasing Company in November 1995, and Senior Vice
President of the subsidiary bank in April 1996.
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. He became a
Director of New Resources Leasing Company in November, 1995, and Senior Vice
President of the subsidiary bank in April 1996.
I-20
<PAGE> 22
PART II
-------
Information relating to Items 5, 6, 7 and 8 is set forth in the
Corporation's l996 Annual Report to Shareholders under the captions and on the
pages indicated below and is incorporated herein by reference:
Pages in l996
Annual Report
Caption in l996 Annual Report to Shareholders to Shareholders
--------------------------------------------- ---------------
Item 5. Market for Registrant's Common Equity and
- ------- -----------------------------------------
Related Shareholder Matters 41
---------------------------
Discussion of Dividend Restrictions 24
-----------------------------------
Item 6. Selected Financial Data 27
- ------- -----------------------
Item 7. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 28-40
---------------------------------------------
Item 8. Financial Statements and Accompanying Information 4
- ------- -------------------------------------------------
Item 9. Changes in and Disagreements with Accountants
- ------- ---------------------------------------------
on Accounting and Financial Disclosures
---------------------------------------
None
II-l
<PAGE> 23
PART III
--------
Item l0. 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 8, 1997. Such information is incorporated herein by reference.
Information relating to executive officers of the Corporation is set forth in
Part I. Pages 2-6
Item ll. 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 8, 1997. Such information is incorporated herein by reference. Pages 6-8
Item l2. 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 8, 1997. Such information is incorporated herein by reference. Page 2
Item l3. 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 8, l997. Such information is incorporated herein by reference. Page 11
III-l
<PAGE> 24
PART IV
-------
Item l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) l. Financial Statements
--------------------
Included in Part II of this report:
Item 8., Financial Statements and Accompanying Information, is set
forth in the Corporation's l996 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 3l,
l996.
IV-l
<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 11, 1997 By /s/ 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>
<CAPTION>
<S> <C> <C>
Chairman of the Board,
/s/ Rodger W. Platt President and Director March 11, 1997
- -------------------------------- Principal Executive ------------------------
Officer Date
Executive Vice
President, Secretary
/s/ Dennis E. Linville and Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ P. Bennett Bowers Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ David C. Cole Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ George E. Gessner Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ William A. Hagood Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ James E. Hoffman, III Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ Richard L. Hoover Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ K. Ray Mahan Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ Timothy K. Woofter Director March 11, 1997
- -------------------------------- ------------------------
Date
/s/ Lawrence A. Fantauzzi Controller/Treasurer March 11, 1997
- -------------------------------- Principal Financial ------------------------
Officer Date
/s/ James M. Gasior Vice President & March 11, 1997
- -------------------------------- 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.l. 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-l filed February 5, l988).
3.2. Bylaws of the Corporation as currently in effect (incorporated by
reference to Exhibit 3a of the Corporation's Report on Form S-l filed
February 5, l988).
4 The rights of holders of equity securities are defined in portions of the
Articles of Incorporation and Bylaws as referenced in 3.l. and 3.2.
ll Statement regarding computation of earnings per share (filed herewith).
l3 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, l94 West Main Street, Cortland, Ohio 444l0.
IV-3
<PAGE> 1
Exhibit 11
----------
CORTLAND BANCORP AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
-----------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Average shares outstanding 1,075,621 1,052,366 1,033,028
Net Income ($000 Omitted) $4,110 $3,289 $3,083
Earnings per share $3.82 $3.13 $2.98
</TABLE>
<PAGE> 1
Exhibit 13
[CORTLAND BANCORP LOGO]
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, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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
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, 1996 and 1995, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Youngstown, Ohio /s/ Packer, Thomas & Co.
February 14, 1997 Packer, Thomas & Co.
4
<PAGE> 2
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.............................. $ 14,745 $ 14,117 $ 13,079
Interest and dividends on investment securities:
Taxable interest..................................... 6,118 5,112 4,502
Nontaxable interest.................................. 772 684 670
Dividends............................................ 233 175 135
Interest on mortgage-backed securities.................. 5,160 4,571 4,039
Interest on trading account securities.................. 3 26
Other interest income................................... 45 146 113
-------- -------- --------
Total interest income........................... 27,076 24,805 22,564
-------- -------- --------
INTEREST EXPENSE
Deposits................................................ 11,973 11,035 9,372
Borrowed funds.......................................... 768 386 126
-------- -------- --------
Total interest expense.......................... 12,741 11,421 9,498
-------- -------- --------
Net interest income.......................... 14,335 13,384 13,066
Provision for loan losses (Note 4)...........
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 14,335 13,384 13,066
-------- -------- --------
OTHER INCOME
Fees for other customer services........................ 1,219 973 977
Trading securities gains - net.......................... 12 4
Investment securities gains - net....................... 102 5 20
Gain (loss) on sale of loans - net...................... 15 93 (47)
Gain (loss) on sale of other real estate - net.......... 27 (32) 21
Other non-interest income............................... 223 272 175
-------- -------- --------
Total other income.............................. 1,598 1,311 1,150
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits.......................... 5,549 5,262 4,956
Net occupancy expense................................... 666 611 584
Equipment expense....................................... 1,048 1,004 922
State and local taxes................................... 473 414 398
FDIC assessment......................................... 2 334 647
Office supplies......................................... 488 473 435
Marketing expense....................................... 265 255 229
Collection, repossession and foreclosure................ 52 94 118
Legal and litigation expense............................ 277 263 294
Other operating expenses................................ 1,177 1,351 1,229
-------- -------- --------
Total other expenses............................ 9,997 10,061 9,812
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES........................ 5,936 4,634 4,404
Federal income taxes (Note 11)............................ 1,826 1,345 1,321
-------- -------- --------
NET INCOME................................................ $ 4,110 $ 3,289 $ 3,083
======== ======== ========
EARNINGS PER COMMON SHARE (Note 1)........................ $ 3.82 $ 3.13 $ 2.98
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5
<PAGE> 3
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 10,083 $ 12,439
Investment securities available for sale (Note 2)................. 119,088 117,689
Investment securities held to maturity (approximate
market value of $75,461 in 1996 and $64,873 in 1995) (Note 2)... 75,286 64,021
Total loans (Note 3).............................................. 166,109 156,208
Less allowance for loan losses (Note 4)......................... (2,966) (3,011)
---------- ----------
Net loans....................................................... 163,143 153,197
---------- ----------
Premises and equipment (Note 5)................................... 6,024 6,537
Other assets...................................................... 4,886 4,849
---------- ----------
TOTAL ASSETS............................................ $ 378,510 $ 358,732
========== ==========
LIABILITIES
Noninterest-bearing deposits...................................... $ 42,130 $ 39,255
Interest-bearing deposits (Note 7)................................ 277,900 276,674
---------- ----------
Total deposits.................................................. 320,030 315,929
---------- ----------
Short-term borrowings under one year (Note 8)..................... 7,648 3,191
Other borrowings over one year (Note 8)........................... 13,523 5,026
Other liabilities................................................. 1,389 1,970
---------- ----------
TOTAL LIABILITIES....................................... 342,590 326,116
---------- ----------
Commitments and contingent liabilities (Notes 9 and 17)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,081,817 shares in 1996 and
1,026,707 in 1995............................................... 5,409 5,134
Additional paid-in capital........................................ 10,938 9,171
Retained earnings................................................. 19,287 17,693
Net unrealized gain on available for sale debt and
marketable equity securities (Note 2)........................... 286 643
Treasury stock, at cost, 854 shares in 1995....................... 0 (25)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (Note 16)....................... 35,920 32,616
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 378,510 $ 358,732
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
6
<PAGE> 4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
(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, 1994............ $ 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 ($.60 per
share)........................... (625) (625)
Special cash dividend ($.19 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 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 ($.76 per
share)........................... (794) (794)
Special cash dividend ($.20 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 and
marketable equity securities..... 2,332 2,332
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995.......... 5,134 9,171 17,693 (25) 643 32,616
-------- -------- -------- -------- -------- --------
Net income.......................... 4,110 4,110
Shares sold......................... 120 680 800
Treasury shares sold................ 25 25
Cash dividends declared ($.87 per
share)........................... (941) (941)
Special cash dividend ($.29 per
share)........................... (315) (315)
3% stock dividend................... 155 1,087 (1,242)
Cash paid in lieu of fractional
shares........................... (18) (18)
Net change in unrealized gain on
available for sale debt and
marketable equity securities..... (357) (357)
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996.......... $ 5,409 $ 10,938 $ 19,287 $ 0 $ 286 $ 35,920
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
7
<PAGE> 5
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 4,110 $ 3,289 $ 3,083
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation, amortization and accretion........... 1,463 1,552 1,668
Deferred tax expense (benefit)..................... 69 (22) 718
Investment securities gains........................ (102) (5) (20)
Other real estate (gains) losses................... (27) 32 (21)
(Gains) losses on sales of loans................... (15) (93) 47
Loans originated for sale.......................... (1,421) 1,473 (909)
Proceeds from sale of loans originated for sale.... 539 878
Gain on sale of fixed assets....................... (23)
Trading account securities sales, maturities and
purchases....................................... (4)
Changes in:
Interest and fees receivable................. (123) (396) (215)
Interest payable............................. (62) 330 41
Other assets and liabilities................. (505) 509 (2,421)
-------- -------- --------
Net cash flows from operating activities... 3,926 6,669 2,822
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale.............. (37,738) (32,352) (22,386)
Purchases of securities held to maturity................ (20,696) (30,225) (18,633)
Proceeds from sales of securities available for sale.... 12,997 4,019
Proceeds from call, maturity and principal payments on
securities........................................... 31,703 32,629 39,458
Net increase in loans made to customers................. (10,149) (7,366) (6,381)
Net proceeds from the acquisition of deposits........... 10,605
Proceeds from disposition of other real estate.......... 225 194 739
Proceeds from sale of loans............................. 1,089 330 1,148
Proceeds from sale of fixed assets...................... 65
Net decrease in deposits in other banks................. 100
Purchases of premises and equipment..................... (319) (861) (1,945)
-------- -------- --------
Net cash flows from investing activities... (22,888) (27,046) (3,816)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts............. 4,101 20,649 (2,817)
Net increase in borrowings.............................. 12,954 1,126 2,861
Dividends paid.......................................... (1,274) (1,026) (846)
Purchases of treasury stock............................. (25) (7)
Proceeds from sale of treasury stock.................... 25 8
Proceeds from sale of common stock...................... 800 525 315
-------- -------- --------
Net cash flows from financing activities... 16,606 21,249 (486)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................. (2,356) 872 (1,480)
-------- -------- --------
CASH AND CASH EQUIVALENTS
Beginning of year....................................... 12,439 11,567 13,047
-------- -------- --------
End of year............................................. $ 10,083 $ 12,439 $ 11,567
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
8
<PAGE> 6
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
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. The Company, through its subsidiary bank,
grants residential, consumer, and commercial loans and offers a variety of
saving plans to customers located primarily in the Northeastern Ohio area.
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 FLOW: 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 $12,803,000, $11,091,000 and $9,457,000 in 1996,
1995 and 1994, respectively. Cash paid for income taxes was $1,571,000 in 1996,
$936,000 in 1995 and $1,024,000 in 1994. Transfers of loans to other real estate
were $11,000, $58,000 and $306,000 in 1996, 1995 and 1994, respectively.
INVESTMENT SECURITIES: Investments in debt and equity securities are 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.
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, 1996 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" and
SFAS No. 122, "Accounting for Mortgage Servicing Rights" -- an amendment to SFAS
No. 65. Adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
The Financial Accounting Standards Board" (FASB) also issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which requires an entity to
- --------------------------------------------------------------------------------
(Continued)
9
<PAGE> 7
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 will
supercede SFAS No. 122 discussed previously. The Company will apply the new
rules prospectively to transactions beginning in the first quarter of 1997.
Based on current circumstances, management anticipates the application of the
new rules will not have a material impact on the Company's financial position or
results of operations.
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, 1996.
CONCENTRATIONS OF CREDIT RISK: The following table represents the composition of
the loan portfolio as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
% of Total
Loans
-------------
1996 1995
---- ----
<S> <C> <C>
1 - 4 family residential mortgage..... 42.5% 43.0%
Commercial mortgage loans............. 25.5 24.6
Consumer loans........................ 12.8 13.6
Commercial loans...................... 11.7 10.6
Home equity loans..................... 6.7 7.9
1-4 family residential mortgage
loans held for sale................. 0.8 0.3
</TABLE>
Approximately 3.16% of total loans are unsecured at December 31, 1996, compared
to 3.05% at December 31, 1995.
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.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." These
standards require an allowance to be established as a component of the allowance
for loan losses for certain loans when it is probable that all amounts due
pursuant to the
- --------------------------------------------------------------------------------
(Continued)
10
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
contractual terms of the loan will not be collected and the recorded investment
in the loan exceeds the fair value. Fair value is measured using either the
present value of expected future cash flows based on the initial effective
interest rate on the loan, the observable market price of the loan or the fair
value of the collateral if the loan is collateral dependent. The adoption of
these standards did not have a material impact on the overall allowance for loan
losses and did not affect the Company's charge-off or income recognition
policies.
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. Subsequent receipts on nonaccrual loans, including those
considered impaired under the provisions of SFAS No. 114, as amended by SFAS No.
118, are recorded as a reduction of principal, and interest income is recorded
once principal recovery is reasonably assured.
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.
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. 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. The intangible asset net of accumulated
amortization which is included in other assets, was $501,000 and $538,000 at
December 31, 1996 and 1995, respectively.
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, 1997, 1996 and 1995. The 3% common stock dividend
issued on January 1, 1997 resulted in the issuance of 31,073 shares of common
stock, which have been included in the 1,081,817 shares reported as issued at
December 31, 1996.
- --------------------------------------------------------------------------------
(Continued)
11
<PAGE> 9
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per share are based on weighted average shares outstanding. Weighted
average shares outstanding were 1,075,621 for 1996, 1,052,366 for 1995 and
1,033,028 for 1994. 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.
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, 1996
INVESTMENT SECURITIES AVAILABLE FOR SALE
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
======== ====== ====== ========
INVESTMENT SECURITIES HELD TO MATURITY
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
======== ====== ====== ========
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
======== ====== ====== ========
</TABLE>
At December 31, 1996 and 1995, other securities consisted of $1,535,000 and
$1,349,000 in Federal Home Loan Bank (FHLB) Stock, respectively, and $226,000 in
Federal Reserve Board (FED) Stock. Each
- --------------------------------------------------------------------------------
(Continued)
12
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
investment is carried at cost, and the Company is required to hold such
investments as a condition of membership in order to transact business with the
FHLB and the FED.
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.
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below. Actual 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, 1996
------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less........................ $ 11,765 $ 11,795
Due after one year through five years.......... 36,959 37,178
Due after five years through ten years......... 8,427 8,519
Due after ten years............................ 1,873 1,878
-------- --------
Subtotal............................. 59,024 59,370
Mortgage-backed securities..................... 55,530 55,979
-------- --------
Total................................ $114,554 $115,349
======== ========
INVESTMENT SECURITIES HELD TO MATURITY
Due in one year or less........................ $ 1,543 $ 1,543
Due after one year through five years.......... 9,321 9,282
Due after five years through ten years......... 37,684 37,809
Due after ten years............................ 7,848 7,876
-------- --------
Subtotal............................. 56,396 56,510
Mortgage-backed securities..................... 18,890 18,951
-------- --------
Total................................ $ 75,286 $ 75,461
======== ========
</TABLE>
The following table sets forth the proceeds, gains and losses realized on
securities sold or called for each of the years ended December 31:
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Proceeds....................................... $16,479 $2,146 $4,019
Gross realized gains........................... 131 12 27
Gross realized losses.......................... 29 7 7
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
13
<PAGE> 11
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
Investment securities with a carrying value of approximately $40,645,000 at
December 31, 1996 and $38,689,000 at December 31, 1995 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,
----------------------
1996 1995
-------- --------
<S> <C> <C>
1-4 family residential mortgage loans...................... $ 70,590 $ 67,099
Commercial mortgage loans.................................. 42,367 38,371
Consumer loans............................................. 21,300 21,254
Commercial loans........................................... 19,355 16,658
Home equity loans.......................................... 11,136 12,353
1-4 family residential mortgage loans held for sale........ 1,361 473
-------- --------
Total loans...................................... $166,109 $156,208
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $1,450,000,
$1,597,000, and $1,909,000 at December 31, 1996, 1995 and 1994, respectively.
Interest income on these loans, if accrued, would have been approximately
$29,000, $63,000 and $107,000 for 1996, 1995 and 1994, respectively.
Renegotiated loans for which interest has been reduced and that are still
accruing interest totaled approximately $182,000, $191,000 and $205,000 at
December 31, 1996, 1995 and 1994, respectively. Interest income recognized on
these loans was $21,000, $20,000 and $23,000 for 1996, 1995 and 1994,
respectively. Interest income that would have been recognized under the original
terms was $25,000, $25,000 and $28,000 for 1996, 1995 and 1994, respectively.
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,
------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year......................... $3,011 $3,081 $3,139
Loan charge-offs..................................... (176) (367) (288)
Recoveries........................................... 131 297 230
------ ------ ------
Net loan charge-offs............................... (45) (70) (58)
Provision charged to operations...................... 0 0 0
------ ------ ------
Balance at end of year............................... $2,966 $3,011 $3,081
====== ====== ======
</TABLE>
Impaired loans are generally included in nonaccrual loans. Management does not
individually evaluate certain smaller balance loans for impairment as such loans
are evaluated on an aggregate basis. Loans deemed impaired were evaluated using
the fair value of collateral as the measurement method. At
- --------------------------------------------------------------------------------
(Continued)
14
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 1996 and 1995, the recorded investment in impaired loans was
$1,162,000 and $231,000 while the related portion of the allowance for loan
losses was $291,000 and $57,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Land......................................... $ 638 $ 613
Premises..................................... 5,010 4,985
Equipment.................................... 6,125 5,871
Leasehold improvements....................... 191 189
-------- --------
11,964 11,658
Less accumulated depreciation................ 5,940 5,121
-------- --------
Net book value..................... $ 6,024 $ 6,537
======== ========
</TABLE>
Depreciation expense was $832,000 for 1996, $799,000 for 1995 and $710,000 for
1994.
NOTE 6 - OTHER REAL ESTATE
The following is a summary of other real estate:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Other real estate............................ $ 28 $ 219
Less allowance for losses.................... (4)
-------- --------
Net other real estate........................ $ 28 $ 215
======== ========
</TABLE>
Activity in the allowance for losses on other real estate is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Balance at beginning of year................. $ 4 $ 40
Charge-offs.................................. (4) (50)
Provisions charged to operations............. 14
-------- --------
Balance at end of year....................... $ 0 $ 4
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15
<PAGE> 13
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Demand....................................... $ 45,943 $ 47,571
Savings...................................... 85,289 86,855
Time:
In denominations under $100,000............ 111,635 111,038
In denominations of $100,000 or more....... 35,033 31,210
-------- --------
Total interest-bearing deposits.... $277,900 $276,674
======== ========
</TABLE>
The following is a summary of certificates of deposit of $100,000 or more by
remaining maturities:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Three months or less......................... $ 13,275 $ 11,032
Three to twelve months....................... 15,122 13,254
One through five years....................... 5,675 5,752
Over five years.............................. 961 1,172
-------- --------
Total.............................. $ 35,033 $ 31,210
======== ========
</TABLE>
NOTE 8 - SHORT-TERM AND OTHER BORROWINGS
The following is a summary of short-term borrowings:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Securities sold under repurchase
agreements................................. $ 2,394 $ 2,511
U.S. Treasury interest-bearing demand note... 1,204 480
Federal funds purchased...................... 4,050 200
-------- --------
Total.............................. $ 7,648 $ 3,191
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 8 - SHORT-TERM AND OTHER BORROWINGS (Continued)
The following is a summary of other borrowings over one year:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Federal Home Loan Bank borrowings............ $ 13,500 $ 5,000
Other........................................ 23 26
-------- --------
Total.............................. $ 13,523 $ 5,026
======== ========
</TABLE>
Long-term advances from the Federal Home Loan Bank (FHLB) are at adjustable and
fixed rates ranging from 5.66% to 5.95% at December 31, 1996. FHLB advances of
$7,000,000, $1,500,000 and $5,000,000 mature in the years ending December 31,
1998, 1999 and 2000, respectively. The FHLB advances are collateralized by the
FHLB stock owned by the Bank, with a carrying amount of $1,535,000 at December
31, 1996, and a blanket lien against the Bank's qualified mortgage loan
portfolio. Maximum borrowing capacity from the FHLB totaled $18,980,000 at
December 31, 1996 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.
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 $199,000 for 1996, $181,000 for
1995 and $161,000 for 1994. The 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, 1997................... $ 80
December 31, 1998................... 59
December 31, 1999................... 59
December 31, 2000................... 41
December 31, 2001................... 34
Later years........................... 187
----
Total............................ $460
====
</TABLE>
The Bank is required to maintain aggregate cash reserves amounting to $2,167,000
at December 31, 1996 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
- --------------------------------------------------------------------------------
(Continued)
17
<PAGE> 15
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS (Continued)
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,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate............................ $ 7,168 $ 6,462
Variable rate......................... 28,061 29,353
Standby letters of credit............... 295 1,252
</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
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
$156,000 for 1996, $141,000 for 1995 and $130,000 for 1994. 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 a
maximum of 10% of gross wages or $9,500, whichever is less. 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,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current...................................... $ 1,757 $ 1,367 $ 603
Deferred..................................... 69 (22) 718
-------- -------- --------
Total................................... $ 1,826 $ 1,345 $ 1,321
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
18
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES (Continued)
The following is a summary of the net deferred tax asset included in other
assets:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Gross deferred tax assets:
Provision for loan and other real estate
losses.................................. $ 634 $ 636 $ 648
Unrealized loss on available for sale
securities.............................. 870
Loan origination fees...................... 94 118 57
Other items................................ 62 44 5
Gross deferred tax liabilities:
Unrealized gain on available for sale
securities.............................. (147) (331)
Depreciation............................... (404) (385) (326)
Other items................................ (109) (67) (60)
-------- -------- --------
Net deferred tax asset............. $ 130 $ 15 $ 1,194
======== ======== ========
</TABLE>
The Company has adequate recoverable taxes paid in prior years to warrant
recording the full deferred tax asset without a valuation allowance.
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,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory tax................................ $ 2,018 $ 1,576 $ 1,497
Effect of non-taxable interest and
dividends.................................. (192) (231) (176)
-------- -------- --------
Total income taxes................. $ 1,826 $ 1,345 $ 1,321
======== ======== ========
</TABLE>
The related income tax expense on investment and trading securities gains and
losses amounted to $39,000 for 1996, $2,000 for 1995 and $7,000 for 1994, and is
included in the total federal income tax provision.
- --------------------------------------------------------------------------------
(Continued)
19
<PAGE> 17
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
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, 1996 December 31, 1995
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ 10,083 $ 10,083 $ 12,439 $ 12,439
Investment securities..................... 194,374 194,549 181,710 182,562
Loans, net of allowance for loan losses... 163,143 163,088 153,197 153,312
LIABILITIES:
Demand and savings deposits............... $ 173,362 $ 173,362 $ 173,681 $ 173,681
Time deposits............................. 146,668 147,747 142,248 144,274
Short-term borrowings..................... 7,648 7,648 3,191 3,191
Other borrowings.......................... 13,523 13,503 5,026 5,026
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1996 and 1995. 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,
1996 and 1995. The fair value of unrecorded commitments at December 31, 1996 and
1995, 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 items. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
NOTE 13 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classifications are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
- --------------------------------------------------------------------------------
(Continued)
20
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain a minimum ratio of 4% both for total Tier I
risk-based capital to risk weighted assets and for Tier I risk-based capital to
average assets; and a minimum ratio of 8% for total risk-based capital to risk
weighted assets.
Under the regulatory framework for prompt corrective action, the Company is
categorized as well capitalized. As well capitalized, a financial institution
must maintain minimum ratios of 10% for total risk-based capital to risk
weighted assets; 6% for Tier I risk-based capital to risk weighted assets; and
5% for Tier I risk-based capital to average assets (the leverage ratio).
<TABLE>
<CAPTION>
(Amounts in thousands)
December 31, 1996 December 31, 1995
------------------ ------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C>
Total Risk-Based Capital.............. $37,118 $34,027
Ratio to Risk Weighted Assets....... 22.08% 21.07%
Tier I Risk-Based Capital............. $35,006 $31,996
Ratio to Risk Weighted Assets....... 20.82% 19.81%
Ratio to Average Assets............. 9.51% 9.53%
</TABLE>
Tier I capital is shareholders' equity less intangibles and the unrealized
market value adjustment of investment securities available for sale. Total
risk-based capital is Tier I capital plus the qualifying portion of the
allowance for loan losses. Assets and certain off balance sheet items adjusted
in accordance with risk classification comprise risk weighted assets of
$168,097,000 and $161,503,000 as of December 31, 1996 and 1995, respectively.
Assets less intangibles and the net unrealized market value adjustment of
investment securities available for sale averaged $368,015,000 and $335,723,000
for the years ended December 31, 1996 and 1995, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1996. The following is an analysis of such
loans:
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
Total loans at December 31, 1995.................... $ 1,492
New loans........................................... 93
Repayments.......................................... (77)
--------
Total loans at December 31, 1996.......... $ 1,508
========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21
<PAGE> 19
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 15 - 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, including equity in the undistributed earnings of the subsidiaries since
inception, adjusted for any unrealized gains or losses on available for sale
securities.
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS:
Cash....................................... $ 107 $ 557
Investment securities...................... 1,399 136
Investment in bank subsidiary.............. 34,366 31,880
Investment in non-bank subsidiary.......... 15 15
Other assets............................... 34 29
-------- --------
$ 35,921 $ 32,617
======== ========
LIABILITIES:
Other liabilities.......................... $ 1 $ 1
SHAREHOLDERS' EQUITY:
Common stock............................... 5,409 5,134
Additional paid-in capital................. 10,938 9,171
Retained earnings.......................... 19,287 17,693
Net unrealized gain on available for sale
debt and marketable equity securities... 286 643
Treasury stock, at cost.................... 0 (25)
-------- --------
TOTAL SHAREHOLDERS' EQUITY......... 35,920 32,616
-------- --------
$ 35,921 $ 32,617
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 15 - CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dividends from bank subsidiary........................... $ 1,275 $ 1,100 $ 500
Interest and dividend income............................. 17 1
Investment securities losses............................. (3)
Other expenses........................................... (32) (26) (31)
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries........................................ 1,260 1,075 466
Equity in undistributed net income of
subsidiaries...................................... 2,850 2,214 2,617
-------- -------- --------
NET INCOME..................................... $ 4,110 $ 3,289 $ 3,083
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 4,110 $ 3,289 $ 3,083
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in undistributed net income of
subsidiaries...................................... (2,850) (2,214) (2,617)
Investment securities losses........................ 3
Change in other assets and liabilities.............. (9) (14) 24
-------- -------- --------
Net cash flows from operating activities....... 1,251 1,061 493
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities..................... (1,252) (1) (105)
-------- -------- --------
Net cash flows from investing activities....... (1,252) (1) (105)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid......................................... (1,274) (1,026) (846)
Proceeds from sale of common stock..................... 800 525 315
Proceeds from sale of treasury stock................... 25 8
Purchases of treasury stock............................ 0 (25) (7)
-------- -------- --------
Net cash flows from financing activities....... (449) (526) (530)
-------- -------- --------
Net change in cash..................................... (450) 534 (142)
CASH
Beginning of year...................................... 557 23 165
-------- -------- --------
End of year............................................ $ 107 $ 557 $ 23
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE> 21
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 16 - 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, 1996 approximately $7,538,000 is available for the
payment of dividends by the Bank. In addition, dividend payments may not reduce
capital levels below minimum regulatory guidelines.
NOTE 17 - 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 the 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.
- --------------------------------------------------------------------------------
24
<PAGE> 22
THREE YEAR SUMMARY
AVERAGE BALANCES, YIELDS AND RATES
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1996
--------------------------------------
Average Interest
Balance Earned Yield or
Outstanding Or Paid Rate
----------- -------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold......................... $ 843 $ 45 5.4%
Interest-bearing deposits in other banks... 0 0
Trading account securities................. 57 3 5.9%
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.......................... 92,281 6,075 6.6%
U.S. Government mortgage-backed
pass through certificates............. 77,246 5,160 6.7%
States of the U.S. and political
subdivisions (Note 1, 2, 3)........... 16,995 1,145 6.7%
Other securities........................ 3,651 234 6.4%
--------- -------
TOTAL INVESTMENT SECURITIES.................. 190,173 12,614 6.6%
LOANS (Note 2, 3, 4)......................... 160,657 14,809 9.2%
--------- -------
TOTAL INTEREST-EARNING ASSETS................ $ 351,730 $27,471 7.8%
========= =======
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits........ $ 46,945 $ 1,259 2.7%
Savings................................. 86,468 2,319 2.7%
Time.................................... 146,628 8,395 5.7%
--------- -------
TOTAL INTEREST-BEARING DEPOSITS.............. 280,041 11,973 4.3%
--------- -------
Borrowings:
U.S. Treasury interest-bearing demand
note.................................... 681 35 5.1%
Federal funds purchased.................... 1,918 108 5.6%
Securities sold under agreement to
repurchase.............................. 2,747 120 4.4%
Borrowings over one year................... 9,157 505 5.5%
--------- -------
TOTAL BORROWINGS............................. 14,503 768 5.3%
--------- -------
TOTAL INTEREST-BEARING LIABILITIES........... $ 294,544 $12,741 4.3%
========= =======
Net interest margin.......................... $14,730 4.2%
======= ====
</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 1996, 1995 and 1994, and have been
adjusted to reflect the effect of disallowed interest expense related
to carrying tax exempt assets.
- --------------------------------------------------------------------------------
25
<PAGE> 23
[CORTLAND BANCORP LOGO]
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1995 1994
-------------------------------------- --------------------------------------
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>
$ 2,485 $ 146 5.9% $ 2,489 $ 95 3.8%
0 0 658 18 2.7%
0 0 337 26 7.7%
74,447 5,051 6.8% 66,804 4,427 6.6%
70,471 4,571 6.5% 70,833 4,037 5.7%
15,436 1,024 6.6% 15,362 1,026 6.7%
2,965 187 6.3% 2,414 147 6.1%
--------- ------- --------- -------
163,319 10,833 6.6% 155,413 9,637 6.2%
153,702 14,175 9.2% 148,288 13,147 8.9%
--------- ------- --------- -------
$ 319,506 $25,154 7.9% $ 307,185 $22,923 7.5%
========= ======= ========= =======
$ 45,864 $ 1,177 2.6% $ 51,392 $ 1,237 2.4%
87,072 2,406 2.8% 94,753 2,576 2.7%
129,320 7,452 5.8% 113,444 5,559 4.9%
--------- ------- --------- -------
262,256 11,035 4.2% 259,589 9,372 3.6%
--------- ------- --------- -------
756 41 5.4% 623 24 3.9%
1,276 78 6.1% 440 22 5.0%
2,390 110 4.6% 2,324 79 3.4%
2,657 157 5.9% 30 1 3.3%
--------- ------- --------- -------
7,079 386 5.5% 3,417 126 3.7%
--------- ------- --------- -------
$ 269,335 $11,421 4.2% $ 263,006 $ 9,498 3.6%
========= ======= ========= =======
$13,733 4.3% $13,425 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 $89 in 1996, $72 in
1995 and $333 in 1994.
- --------------------------------------------------------------------------------
26
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(In thousands of dollars, except for per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Interest Income.................... $ 27,076 $ 24,805 $ 22,564 $ 23,067 $ 26,151
Total Interest Expense................... 12,741 11,421 9,498 10,127 13,079
-------- -------- -------- -------- --------
NET INTEREST INCOME...................... 14,335 13,384 13,066 12,940 13,072
Provision for Loan Losses................ 1,450
Total Other Income....................... 1,598 1,311 1,150 885 1,237
Total Other Expenses..................... 9,997 10,061 9,812 10,688 8,848
-------- -------- -------- -------- --------
INCOME BEFORE TAX........................ 5,936 4,634 4,404 3,137 4,011
Federal Income Tax....................... 1,826 1,345 1,321 887 1,251
-------- -------- -------- -------- --------
NET INCOME............................... $ 4,110 $ 3,289 $ 3,083 $ 2,250 $ 2,760
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total Assets............................. $378,510 $358,732 $320,361 $321,269 $313,362
Investments.............................. 194,374 181,710 148,976 153,787 137,090
Net Loans................................ 163,143 153,197 147,599 142,688 148,308
Deposits................................. 320,030 315,929 284,675 287,492 283,418
Borrowings............................... 21,171 8,217 7,055 4,230 4,423
Shareholders' Equity..................... 35,920 32,616 27,521 26,531 24,271
PER COMMON SHARE DATA (1)
Net Income............................... $ 3.82 $ 3.13 $ 2.98 $ 2.21 $ 2.75
Cash Dividends Declared.................. 1.16 0.96 0.79 0.48 0.42
Book Value............................... 33.20 30.88 26.55 25.96 24.09
ASSET QUALITY RATIOS
Underperforming Assets as a
Percentage of:
Total Assets........................ 0.44% 0.59% 0.82% 1.05% 1.85%
Equity plus Allowance for Loan
Losses............................ 4.32 5.94 8.61 11.37 20.98
Tier I Capital...................... 4.79 6.61 9.08 12.72 23.93
FINANCIAL RATIOS
Return on Average Equity................. 12.00% 10.80% 11.00% 8.83% 11.98%
Return on Average Assets................. 1.11 0.98 0.95 0.71 0.88
Average Equity to Average Total Assets... 9.29 9.06 8.67 8.01 7.30
Equity to Asset Ratio.................... 9.50 9.09 8.59 8.26 7.75
Tangible Equity to Tangible Asset
Ratio.................................. 9.37 8.96 8.59 8.26 7.75
Cash Dividend Payout Ratio............... 30.4 30.7 26.5 21.7 15.3
Net Interest Margin Ratio................ 4.19 4.30 4.37 4.35 4.39
</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.
- --------------------------------------------------------------------------------
27
<PAGE> 25
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
OVERVIEW AND OUTLOOK
Net income for 1996 of $4,110 was the best in the Company's history and
constituted an increase of $821 from the $3,289 earned in 1995. Earnings per
share of $3.82 represented an improvement of $0.69 from the $3.13 per share
realized in 1995.
Capital ratios continued to strengthen, facilitating a 21% increase in dividends
per share. As of December 31, 1996, the ratio of equity capital to total assets
was 9.50%, up from 9.09% a year ago; while risk-based capital measured 22.08%
compared to 21.07% at December 31, 1995. All capital ratios were well in excess
of required regulatory minimums.
The year began with the Company introducing its new MAC ATM card, which offers
customers increased functionality while favorably impacting the Company's cost
structure. Similar mutual benefits led the Company to promote its new overdraft
protection product to qualified customers throughout the year. The year
concluded with the Company introducing its new VISA Checkcard product to
facilitate point-of-sale transactions.
During the coming year, the Company will add a new ATM location at the
Warren-Youngstown Regional Airport, while also updating most other existing ATM
machines to increase customer functionality while lowering the Company's
operating and maintenance costs.
The Company plans to open a new banking office in southern Mahoning County
during 1997, while also relocating its Mantua branch to a new facility at Mantua
Corners.
Management expects the economy in 1997 to exhibit moderate sustainable growth
with continued low inflation. Interest rates are expected to remain relatively
stable, but with continued volatility in the credit markets.
The Company remains firmly committed to new ideas, new products, and emerging
technologies that can enhance internal operating efficiencies and increase
customer satisfaction, strengthening franchise value.
Return on equity in 1996 rose to 12.0% while the return on assets climbed to
1.1%. Book value per share increased to $33.20. The price of the Company's
common stock increased during the year, trading in a range between a first
quarter low of $30 5/8 and a fourth quarter high of $42 3/4.
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans:
1-4 residential mortgage $ 622 $ 553 $ 553
Commercial mortgage 754 777 1,327
Secured by farmland 0 261 0
Consumer loans 17 6 8
Home equity loans 57 0 21
----------------------------------------------------------
TOTAL NONACCRUAL LOANS 1,450 1,597 1,909
Investment securities 0 106 124
Other real estate owned 28 215 383
----------------------------------------------------------
TOTAL NONPERFORMING ASSETS 1,478 1,918 2,416
Loans ninety days past due
and still accruing interest 18 7 14
Restructured loans 182 191 205
----------------------------------------------------------
TOTAL UNDERPERFORMING ASSETS $1,678 $2,116 $2,635
</TABLE>
The table below provides a number of asset quality ratios based on the data
presented above. Overall, asset quality continued to improve during 1996.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonperforming loans as a
percentage of total loans 0.87% 1.02% 1.27%
Nonperforming assets as a
percentage of total assets 0.39% 0.53% 0.75%
Underperforming assets as a
percentage of total assets 0.44% 0.59% 0.82%
Underperforming assets as a
percentage of equity
capital plus allowance for
loan losses 4.32% 5.94% 8.61%
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE> 26
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>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 3,011 $ 3,081 $ 3,139 $ 3,415 $ 3,203
Loan losses:
1-4 family residential mortgages...... (5) (69) (72) (172) (108)
Commercial mortgages.................. 0 0 (27) (42) (834)
Consumer loans........................ (167) (220) (141) (271) (438)
Commercial loans...................... (4) (78) (48) (123) (198)
Home equity loans..................... 0 0 0 (7) (18)
------- ------- ------- ------- -------
(176) (367) (288) (615) (1,596)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1-4 family residential mortgages...... 3 4 4 26 55
Commercial mortgages.................. 0 78 6 28 6
Consumer loans........................ 72 152 156 202 273
Commercial loans...................... 56 63 64 83 24
------- ------- ------- ------- -------
131 297 230 339 358
------- ------- ------- ------- -------
Net loan losses............................ (45) (70) (58) (276) (1,238)
------- ------- ------- ------- -------
Provision charged to operations............ 0 0 0 0 1,450
------- ------- ------- ------- -------
Balance at end of year..................... $ 2,966 $ 3,011 $ 3,081 $ 3,139 $ 3,415
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans outstanding............ 0.03% 0.05% 0.04% 0.19% 0.75%
======= ======= ======= ======= =======
Ratio of loan loss allowance to total
loans.................................... 1.78% 1.93% 2.04% 2.15% 2.25%
======= ======= ======= ======= =======
</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 205% of nonperforming loans and 180% 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.
- --------------------------------------------------------------------------------
29
<PAGE> 27
[CORTLAND BANCORP LOGO]
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>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
1-4 family residential mortgages.......... $ 387 $ 351 $ 385 $ 405 $ 437
Commercial mortgages...................... 1,179 1,118 1,223 1,029 1,157
Consumer loans............................ 410 416 407 424 591
Commercial loans.......................... 325 239 207 192 210
Home equity loans......................... 55 61 63 67 62
Unallocated portion....................... 610 826 796 1,022 958
------ ------ ------ ------ ------
$2,966 $3,011 $3,081 $3,139 $3,415
====== ====== ====== ====== ======
</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 1996. The
Company realized an increase of $9,901 in the loan portfolio from the level of
$156,208 recorded at December 31, 1995.
Residential lending's share of the portfolio remained the same during 1996 with
1-4 family residential mortgages representing 43.3% of total loans. The portion
of the loan portfolio represented by commercial loans (including commercial real
estate) increased from 35.2% to 37.2%. Consumer loans (including home equity
loans) decreased from 21.5% to 19.5%.
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 1991. Meanwhile, home equity loans have grown from a 6.1% share in 1991
to 6.7% in 1996, partially offsetting the decline in traditional consumer
installment lending. The portfolio share claimed by commercial loans (including
commercial real estate) climbed to 37.2%, up from 31.4% five years ago.
LOAN PORTFOLIO COMPOSITION
(In Percentages)
<TABLE>
<CAPTION>
1996 1991
<S> <C> <C>
1-4 Family Mortgages 43.3 47.7
Commercial 37.2 31.4
Consumer 12.8 14.8
Home Equity 6.7 6.1
</TABLE>
During 1996, approximately $9.6 million in new mortgage loans were originated by
the Company, an increase of $4.0 million from the prior year. Despite the
improvement, production was impacted by volatile mortgage rates throughout much
of the year as the credit markets anticipated a shift
- --------------------------------------------------------------------------------
30
<PAGE> 28
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
in interest rate policy on the part of the Federal Reserve that failed to
materialize.
With the yield and quality of mortgage loans favorable and production levels
still relatively moderate, management elected to hold most mortgages originated
in 1996. 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.
Annualized service fee income derived from the portfolio is now approximately
$26.
Management seeks to further stimulate production of residential mortgage loans
in 1997. An experienced mortgage banker will be hired to help further develop
and expand our market coverage. Renewed emphasis will also be placed on a
realtor call program. Management also intends to pursue additional outlets for
jumbo mortgage products (in the range of $250,000 and up) and other non standard
mortgage offerings. Management anticipates that a larger portion of originated
mortgages will be sold during the coming year.
Management also remains committed to expanding the Company's presence in the
small business sector. Over the past several years, management has expanded its
offering of business banking products, assembled a cadre of experienced
commercial loan officers, developed and strengthened the skills and capabilities
of support staff, and energetically gone about the business of building small
business market share. Despite increased competitive pressure from money center
and super-regional banks, loans to businesses continue to show steady growth. In
addition to increasing penetration within existing markets, management plans to
aggressively enter new markets, particularly southern Mahoning County.
Consumer lending is anticipated to remain flat. Increasingly consumers are
opting to lease rather than purchase personal vehicles. Management has been
reasonably successful in marketing fixed rate amortizing mortgage products that
consumers utilize for home improvements; the purchase of consumer goods of all
types; education, travel, and other personal expenditures; and the consolidation
of credit card and other existing debt into term payout. However, as this
consumer activity is collateralized by residential real estate, it is included
with 1-4 residential mortgage lending.
Additional information regarding the loan portfolio can be found in the Notes to
the Consolidated Financial Statements (NOTES 1, 3, 9, 12 and 14).
INVESTMENT SECURITIES
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," requires that investment
securities be 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. 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
- --------------------------------------------------------------------------------
31
<PAGE> 29
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
of $29,082 and an unrealized net gain of $454 from held to maturity to available
for sale.
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. The Company must have both the intent and the ability to hold such
securities to maturity.
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, 1996, the carrying value of all investment securities, both
available for sale and held to maturity, tallied $194,374, an increase of
$12,664 or 6.97% from the prior year. The allocation between single maturity
investment securities and mortgage-backed securities increased to a 61/39 split
versus the 56/44 division of the previous year. Mortgage-backed securities
decreased by $4,688 or 5.9%. Meanwhile, holdings of single maturity investments,
primarily U.S. Treasurys and Agencies, showed an increase of $17,235 or 17.5%.
The Company's holdings of obligations of states and political subdivisions
showed a net increase of just $417. The primary focus here remains 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
$9.9 million, or 32.8%. Emphasis was placed on developing a three year maturity
ladder, further enhancing liquidity and facilitating pledging requirements.
Investments in U.S. government agencies and sponsored corporations increased by
$6.9 million, or 13.4%, primarily in high yielding callable issues.
Holdings of other securities increased by $186 as the Bank both purchased stock
in, and received stock dividends from, 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, although increased emphasis was placed on the
fixed rate sector. Floating rate and adjustable rate mortgage-backed securities
provide some degree of protection against rising interest rates, while fixed
rate securities perform better in periods of stable to slightly declining
interest rates.
The portfolio mix of fixed rate and floating rate or adjustable rate
mortgage-backed securities for both 1996 and 1995 is graphically depicted below.
MORTGAGE-BACKED SECURITIES PORTFOLIO MIX
(In Percentages)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Variable & Adjustable 54 58
Fixed Rate 46 42
</TABLE>
Included in the mortgage-backed securities portfolio are investments in
collateralized mortgage obligations which totalled $12,632 and $16,259 at
December 31, 1996 and 1995, respectively. These investments are monitored and
subjected to regulatory prescribed stress tests. At December 31, 1996, 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.
At December 31, 1996, a net unrealized gain of $286, net of tax, was included in
shareholders' equity, as compared to a net unrealized gain of $643 net of tax,
as of December 31, 1995. This $357 swing (net of tax) primarily reflects the
decrease in the market value of debt securities as
- --------------------------------------------------------------------------------
32
<PAGE> 30
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
interest rates increased throughout much of the year, ending the year higher
than where they started. Higher interest rates generally translate into lower
market prices for debt securities; conversely falling interest rates generally
result in an appreciation in the market value of debt securities.
Additional information regarding investments can be found in the Notes to the
Consolidated Financial Statements (NOTES 1 and 2).
DEPOSITS
The Company's deposits are derived from the individuals and businesses located
in its primary market area. Total deposits at year-end exhibited a very modest
increase of 1.3% to $320,030 at December 31, 1996 as compared to $315,929 at
December 31, 1995.
The Company's deposit base consists of demand deposits, savings, money market
and time deposit accounts. Average non interest-bearing deposits increased 12.7%
during 1996, while average interest-bearing deposits increased by 6.8%.
During 1996, non interest-bearing deposits averaged $37,999 or 11.9% of total
average deposits as compared to $33,716 or 11.4% in 1995. Core deposits averaged
$283,622 for the year ended December 31, 1996, an increase of $15,911 or 5.9%
from the average level of 1995. During 1995, core deposits had averaged
$267,711, a decrease of 1.9% from the preceding year.
Historically, the deposit base of the Company has been characterized by a
significant aggregate amount of core deposits. Core deposits represented 89.2%
of average total deposits in 1996 compared to 90.5% in 1995 and 94.3% in 1994.
The decline in core deposits' share in 1996 and 1995 reflects the Company's more
aggressive use of large denomination certificates of deposit (Jumbo CD's) as a
funding source. The Company had reduced its reliance on Jumbo CD's during the
1990-1994 period as management restricted growth in order to strengthen asset
quality and capital ratios.
Over the past five years, the Company has successfully increased the share of
deposits represented by lower cost checking, NOW and savings account balances.
The following depicts how the deposit mix has shifted during this time frame.
AVERAGE DEPOSIT MIX
(In Percentages)
<TABLE>
<CAPTION>
1996 1991
<S> <C> <C>
Checking 11.9 7.9
NOW 7.3 5.7
Money Market 7.5 9.1
Savings 27.2 22.9
Jumbo CDs 10.8 9.3
Other CDs 35.3 45.1
</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 12.0%, 10.8% and 11.0% for 1996, 1995 and 1994, respectively, while the
return on average assets amounted to 1.1% in 1996 and 1.0% for both 1995 and
1994.
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 borrowed funds. For 1996, the net interest margin ratio registered 4.2%,
compared to 4.3% for 1995 and 4.4% for 1994.
- --------------------------------------------------------------------------------
33
<PAGE> 31
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
The following table provides a 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>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
-----------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Income
Federal funds sold.................... $ (88) $ (13) $ (101) $ 0 $ 51 $ 51
Interest-bearing deposits in other
banks............................... 0 0 0 (18) 0 (18)
Trading account securities............ 3 0 3 (26) 0 (26)
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations..................... 1,178 (154) 1,024 516 108 624
U.S. Government mortgage-backed
pass-through certificates........ 449 140 589 (21) 555 534
States of the U.S. and political
subdivisions..................... 105 16 121 5 (7) (2)
Other securities.................... 44 3 47 34 6 40
Loans................................. 641 (7) 634 489 539 1,028
- --------------------------------------------------------------------------------------------------------
Total Interest Income Change............. 2,332 (15) 2,317 979 1,252 2,231
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense
Interest-bearing demand deposits...... 28 54 82 (139) 79 (60)
Savings deposits...................... (17) (70) (87) (212) 42 (170)
Time deposits......................... 991 (48) 943 838 1,055 1,893
U.S. Treasury interest-bearing
demand note......................... (4) (2) (6) 6 11 17
Federal funds purchased............... 36 (6) 30 51 5 56
Securities sold under agreements to
repurchase.......................... 16 (6) 10 2 29 31
Other borrowings...................... 359 (11) 348 155 1 156
- --------------------------------------------------------------------------------------------------------
Total Interest Expense Change............ 1,409 (89) 1,320 701 1,222 1,923
- --------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME
ON A TAXABLE EQUIVALENT BASIS......... $ 923 $ 74 $ 997 $ 278 $ 30 $ 308
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE> 32
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Total other income for 1996 increased $287, or 21.9% compared to an increase of
$161, or 14.0% in 1995. Fees for customer services increased by $246 or 25.3%.
The increase reflects growth 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 net loss of $32 recorded on the disposition of
other real estate in 1995 was replaced with a net gain of $27 in 1996 similar to
the net gain of $21 recorded in 1994. Loans held for sale in the secondary
market showed gains of $15 and $93 in 1996 and 1995 with a loss of $47 sustained
in 1994. Activity in trading securities, the early call of held to maturity
securities, and transactions involving available for sale securities combined to
produce net gains for 1996 of $114, as compared to more modest gains of $5 and
$24 in 1995 and 1994, respectively.
Other non-interest income decreased by $49 during 1996, following a $97 increase
in 1995. This income category is subject to fluctuation due to nonrecurring
items, with non-interest income for 1995 having benefited from a $69 refund on
the Alpine class action settlement.
<TABLE>
<S> <C> <C> <C>
OTHER INCOME
1996 1995 1994
Fees for other customer
services $1,219 $ 973 $ 977
Gain (loss) on sale of
loans 15 93 (47)
Gain (loss) on sale of
other real estate 27 (32) 21
Other operating income 223 272 175
-------------------------------
1,484 1,306 1,126
Trading securities net
gains (losses) 12 0 4
Investment securities net
gains (losses) 102 5 20
-------------------------------
Total other income $1,598 $1,311 $1,150
</TABLE>
Total other non-interest expenses decreased by 0.6%, or $64 in 1996. This
compares to an increase of $249, or 2.5% in 1995. Expenditures for salaries and
employee benefits increased by 5.5%, reflecting, in part, the staffing
requirements of the Company's two newest branch offices opened in the second
half of 1995.
The FDIC dramatically reduced premium rates effective 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 $332 and $313 in 1996 and 1995, respectively.
Occupancy and equipment expense increased by a combined 6.1%, or $99, reflecting
a full year of operation for the two newest offices. All other categories of
non-interest expense decreased by $118, or 4.1% in the aggregate, as the Company
continued to emphasize expense control while realizing the benefits of improved
asset quality.
<TABLE>
<S> <C> <C> <C>
NON-INTEREST EXPENSE
1996 1995 1994
Salaries and benefits $ 5,549 $ 5,262 $ 4,956
Net occupancy expense 666 611 584
Equipment expense 1,048 1,004 922
State and local taxes 473 414 398
FDIC assessment 2 334 647
Office supplies 488 473 435
Marketing expense 265 255 229
Collection, repossession
and foreclosure expense 52 94 118
Legal and litigation
expense 277 263 294
Other operating expense 1,177 1,351 1,229
------- ------- -------
Total other expenses $ 9,997 $10,061 $ 9,812
</TABLE>
Salaries and employee benefits represented 55.5% of all non-interest expenses in
1996. Exclusive of FDIC, legal and litigation expenses, salaries and employee
benefits share of non-interest expense was 57.1%, 55.6% and 55.9% in 1996, 1995
and 1994, respectively. Salaries and employee benefits increased by $287 in 1996
following an increase of
- --------------------------------------------------------------------------------
35
<PAGE> 33
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
$306 in 1995. The following details components of these increases:
ANALYSIS OF CHANGES IN SALARIES & BENEFITS
<TABLE>
<CAPTION>
Amounts Percent
--------------------------------------------------
1996 1995 1994 1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $295 $197 $182 7.3% 5.1% 5.0%
Benefits 16 61 25 1.3 5.2 2.2
Profit Sharing 42 15 181 21.4 8.3
----------------------
353 273 388 6.4 5.3 8.0
Def'd Loan
Origination (66) 33 1 30.0 13.1 0.4
----------------------
$287 $306 $389 5.5% 6.2% 8.5%
</TABLE>
During 1994 and 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. The Company
generally experienced a favorable variance in medical claims when compared to
traditional premium based plans. However, in late 1995 management identified a
premium based Preferred Provider Plan that offered additional savings while
increasing benefits. This new plan was adopted by the Company effective February
1, 1996.
Full-time equivalent employment averaged 195 employees in 1996, 194 in 1995 and
192 in 1994. Wage and salary expense per employee averaged $22,306 in 1996,
$20,897 in 1995 and $20,086 in 1994, exclusive of profit sharing, which averaged
$1,144 per employee in 1996, $1,014 in 1995 and $943 in 1994. Productivity
ratios which measure employee efficiency continued to improve. Average earning
assets per employee measured $1,804 in 1996, $1,647 in 1995 and $1,600 in 1994.
FOURTH QUARTER 1996 AS
COMPARED TO FOURTH QUARTER 1995
During the fourth quarter of 1996, net interest income increased by $154 as
compared to fourth quarter 1995. The yield on earning assets declined by 10
basis points while fourth quarter average earning assets increased by $19
million when compared to a year ago, resulting in an increase in total interest
income of $280. The rate paid on interest-bearing liabilities declined by 2
basis points while fourth quarter average interest-bearing liabilities increased
by $13 million when compared to a year ago, resulting in an increase in total
interest expense of $126. The net interest margin for the quarter registered
4.2%, the same as that attained a year ago.
Loan charge-offs during the quarter were $38 in 1996 and $53 in 1995, while the
recovery of previously charged-off loans amounted to $36 during the fourth
quarter of 1996 compared to $52 in the same period of 1995.
Other income increased by $34 from the same period a year ago. The increase was
primarily due to the following: a $24 gain on sale of loans in 1996 compared to
a $10 gain in the same period of 1995, a $60 increase in fees for customer
services due to a change in the fee structure for all deposit customers
implemented during the first quarter of 1996, and a $35 decrease in other
non-interest income as 1995 benefited from a $69 refund on the Alpine class
action settlement.
Total other non-interest expenses in the fourth quarter were $2,684 in 1996
compared to $2,797 in 1995, a decrease of $113, or 4.0%. Salaries and benefits
constituted an $87 increase. FDIC assessments declined by $28 as premiums were
lowered significantly for most banks. Other operating expenses decreased by $172
primarily due to a provision for expenses related to IRS assessments recorded in
1995.
Income before income tax during the fourth quarter amounted to $1,362 in 1996
compared to $1,061 in 1995. Income tax expense for the fourth quarter of 1996
was $415 as compared to $208 in 1995 (after a $101 reduction of excess tax
provision related to the IRS assessment). Fourth quarter net income was $947 in
1996 compared to $853 in 1995, representing an increase of $94, or 11%.
Earnings per share for the fourth quarter, adjusted for the 3% stock dividend
paid January 1, 1997, amounted to $0.88 in 1996 and $0.81 in 1995. There were no
gains or losses on investment securities in the fourth quarter of 1996, while
after tax
- --------------------------------------------------------------------------------
36
<PAGE> 34
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
gains per share on investment securities in the fourth quarter of 1995 were
negligible.
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 an acceptable level of earnings.
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 asset
deployment strategies, different interest rate environments, various product
offerings and changing growth patterns.
GAP TABLE
December 31, 1996
<TABLE>
<CAPTION>
Maturity of Repricing Interval
------------------------------------------------------------
Non Rate
Sensitive
3 Months 3 to 12 1 to 5 or .5
or Less Months Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Investments....................... $40,878 $ 35,400 $ 79,960 $38,136 $194,374
Loans & Leases.................... 53,399 38,443 55,815 18,452 166,109
-------- -------- -------- ------- --------
Total Earning Assets................ 94,277 73,843 135,775 56,588 360,483
Other Assets........................ 0 0 0 18,027 18,027
-------- -------- -------- ------- --------
Total Assets........................ $94,277 $ 73,843 $135,775 $74,615 $378,510
======== ======== ======== ======= ========
Interest-Bearing Liabilities
NOW & Supernow Accounts........... $22,571 $ 0 $ 0 $ 0 $ 22,571
Money Market Accounts............. 23,372 0 0 0 23,372
Passbook Savings.................. 85,289 0 0 0 85,289
Time Deposits , 100,000........... 30,305 38,276 30,188 12,866 111,635
Time Deposits $ 100,000........... 13,275 15,122 5,675 961 35,033
Federal Funds Purchased........... 6,444 0 0 0 6,444
U.S. Treasury Demand.............. 1,204 0 0 0 1,204
Other Borrowings.................. 10,000 0 3,523 0 13,523
-------- -------- -------- ------- --------
Total Interest-Bearing
Liabilities....................... 192,460 53,398 39,386 13,827 299,071
Demand Deposits..................... 0 0 0 42,130 42,130
Other Liabilities................... 0 0 0 1,389 1,389
Shareholders' Equity................ 0 0 0 35,920 35,920
-------- -------- -------- ------- --------
Total Liabilities & Equity.......... $192,460 $ 53,398 $ 39,386 $93,266 $378,510
======== ======== ======== ======= ========
Rate Sensitivity Gap................ $(98,183) $ 20,445 $ 96,389 $42,761
Cumulative Gap...................... $(98,183) $(77,738) $ 18,651 $61,412
Cumulative Gap to Total Assets...... (25.9)% (20.5)% 4.9% 16.2%
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE> 35
[CORTLAND BANCORP LOGO]
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, although 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 considerably less severe
than inferred by this table.
During 1996, the effective maturities of earning assets lengthened somewhat as
management sought to take advantage of the spike in interest rates that occurred
between mid February and October, as investors in the capital markets grew
concerned that the economy would overheat, reigniting inflation. While these
fears abated by year-end, the resultant run-up in interest rates caused
prepayments on loans and mortgage-backed securities to slow while also
diminishing the probability that certain callable investment securities would
indeed be called. The escalation of interest rates also impacted the maturity
distribution of interest-bearing liabilities as some $3 million of low cost
savings and money market funds were replaced 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 decreased $2,356 compared to year end 1995. Investment
securities maturing, repricing or expected to be called in one year or less
amounted to $72,370 at December 31, 1996, representing 37.2% of the total
combined portfolio, as compared to $83,403 and 45.9% 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. The Company is
a member of
- --------------------------------------------------------------------------------
38
<PAGE> 36
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
the Federal Home Loan Bank of Cincinnati, which provides yet another source of
liquidity.
Operating activities provided cash of $3.9 million, $6.7 million and $2.8
million in 1996, 1995 and 1994, respectively. Refer to the Consolidated
Statement of Cash Flows for a summary of the sources and uses of cash in 1996,
1995 and 1994.
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 1 capital
as a percentage of total average assets has strengthened significantly over the
past several years. This measure of capital adequacy is known as the "leverage
ratio."
LEVERAGE RATIO
(In Percentages)
<TABLE>
<S> <C>
1992 7.69
1993 8.33
1994 8.97
1995 9.53
1996 9.51
</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 interest rate risk. 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.
The following table illustrates the Company's risk weighted capital ratios at
December 31, 1996 and 1995. 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,
1996 1995
-------------- --------------
<S> <C> <C>
Tier 1 Capital $ 35,006 $ 31,996
Tier 2 Capital 2,112 2,031
-------- --------
QUALIFYING CAPITAL $ 37,118 $ 34,027
======== ========
Risk-Adjusted Total Assets(*) $168,097 $161,503
======== ========
Tier 1 Risk-Based Capital Ratio 20.82% 19.81%
Total Risk-Based Capital Ratio 22.08% 21.07%
Total Leverage Capital Ratio 9.51% 9.53%
</TABLE>
(*) Includes off-balance sheet exposures
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
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, however, have decided 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.
Additional information regarding regulatory matters can be found in the Notes to
the Consolidated Financial Statements (NOTE 13.)
- --------------------------------------------------------------------------------
39
<PAGE> 37
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
NET INTEREST MARGIN
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 $351,730 during 1996, representing a 10.4%
increase over 1995. 1995 earning assets had averaged $319,506 for a 4.0%
increase over 1994. The yield on interest-earning assets was 7.8%, 7.9% and 7.5%
in 1996, 1995 and 1994, respectively. The average rate incurred on
interest-bearing liabilities was 4.3%, 4.2% and 3.6% for those same years.
Interest-bearing liabilities averaged $294,544 for 1996, increasing by 11.2%
from 1995 levels which averaged $269,335.
NET INTEREST MARGIN RATIO
(In Percentages)
<TABLE>
<S> <C>
1992 4.4
1993 4.4
1994 4.4
1995 4.3
1996 4.2
</TABLE>
The decline in the Net Interest Margin Ratio reflects the Company's renewed
emphasis on growth without sacrificing credit quality. As a result, a larger
share of earning assets are represented by investments which provide a smaller
gross margin than loans which entail greater credit risk and require more
underwriting and servicing expense. Investments in 1996 comprised 54.3% of
average earning assets, up from 38.1% five years ago.
Growth objectives for 1995 and 1996 required management to increase its
utilization of more expensive funding sources. Large denomination certificates
of deposit and borrowed funds represented 14.4% of average earning assets in
1996 compared to 9.6% two years ago, contributing to the narrowing of the Net
Interest Margin.
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.
OFFICES AND LOCATIONS
Twelve Offices Serving These Fine Communities
<TABLE>
<S> <C>
BRISTOL NILES
6090 State Route 45 6050 Youngstown-Warren Road
Bristolville, Ohio 44402 Niles, Ohio 44446
BROOKFIELD NORTH BLOOMFIELD
7325 Warren-Sharon Road 8837 State Route 45
Brookfield, Ohio 44403 North Bloomfield, Ohio 44450
CORTLAND VIENNA
194 West Main Street 4434 Warren-Sharon Road
Cortland, Ohio 44410 Vienna, Ohio 44473
HIRAM WARREN
6821 Wakefield Road 2935 Elm Road
Hiram, Ohio 44234 Warren, Ohio 44483
HUBBARD WILLIAMSFIELD
890 West Liberty Street 5917 U.S. Route 322
Hubbard, Ohio 44425 Williamsfield, Ohio 44093
MANTUA WINDHAM
10521 Main Street 9690 East Center Street
Mantua, Ohio 44255 Windham, Ohio 44288
</TABLE>
Member
Federal Reserve System
and
Federal Deposit Insurance Corporation
- --------------------------------------------------------------------------------
40
<PAGE> 38
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:
Community Banc Investments, Inc.
Columbus, Ohio
Contact: Greig A. McDonald
Telephone: 1-800-224-1013
Everen Securities, Inc.
201 E. Commerce Street
Youngstown, Ohio
Contact: Joseph E. Campana
Telephone: 1-800-541-5348
Smith Barney Inc.
Youngstown, Ohio
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, 1997, 1996 and
1995. The Company currently has approximately 1,394 shareholders.
<TABLE>
<CAPTION>
Price Per Share
------------------------- Cash
Dividends
High Low Per Share
---------- ---------- ----------
<S> <C> <C> <C>
1996
FOURTH QUARTER...................................... 42 3/4 38 5/8 $ 0.73
THIRD QUARTER....................................... 39 1/2 36 5/8 0.00
SECOND QUARTER...................................... 38 3/8 35 7/8 0.43
FIRST QUARTER....................................... 38 1/8 30 5/8 0.00
1995
Fourth Quarter...................................... 33 26 1/4 $ 0.58
Third Quarter....................................... 28 1/8 26 0.00
Second Quarter...................................... 28 1/4 25 3/4 0.38
First Quarter....................................... 27 3/4 24 1/4 0.00
1994
Fourth Quarter...................................... 27 3/8 25 1/4 $ 0.49
Third Quarter....................................... 27 22 3/4 0.00
Second Quarter...................................... 24 3/4 22 1/4 0.30
First Quarter....................................... 23 3/4 21 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.
- --------------------------------------------------------------------------------
41
<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 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 14, 1997 on the 1996 consolidated financial
statements of Cortland Bancorp and subsidiaries, which report is incorporated
by reference in this Form 10-K.
Youngstown, Ohio PACKER, THOMAS & CO.
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,083
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,088
<INVESTMENTS-CARRYING> 75,286
<INVESTMENTS-MARKET> 75,461
<LOANS> 166,109
<ALLOWANCE> 2,966
<TOTAL-ASSETS> 378,510
<DEPOSITS> 320,030
<SHORT-TERM> 7,648
<LIABILITIES-OTHER> 1,389
<LONG-TERM> 13,523
<COMMON> 5,409
0
0
<OTHER-SE> 30,511
<TOTAL-LIABILITIES-AND-EQUITY> 378,510
<INTEREST-LOAN> 14,745
<INTEREST-INVEST> 12,283
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 27,076
<INTEREST-DEPOSIT> 11,973
<INTEREST-EXPENSE> 12,741
<INTEREST-INCOME-NET> 14,335
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 102
<EXPENSE-OTHER> 9,997
<INCOME-PRETAX> 5,936
<INCOME-PRE-EXTRAORDINARY> 4,110
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,110
<EPS-PRIMARY> 3.82
<EPS-DILUTED> 3.82
<YIELD-ACTUAL> 4.2
<LOANS-NON> 1,450
<LOANS-PAST> 18
<LOANS-TROUBLED> 182
<LOANS-PROBLEM> 1,011
<ALLOWANCE-OPEN> 3,011
<CHARGE-OFFS> 176
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 2,966
<ALLOWANCE-DOMESTIC> 2,356
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 610
</TABLE>
