<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1997.
Commission file number 0-13814
-------
Cortland Bancorp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1451118
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
194 West Main Street
Cortland, Ohio 44410
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 637-8040
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of the chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment of this Form 10-K [ x ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 10, 1998:
Common Stock, No Par Value - $66,686,254
- ----------------------------------------
The number of shares outstanding of the issuer's classes of common stock as
of March 10, 1998:
Common Stock, No Par Value - 1,149,763 shares
- ---------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Shareholders Report for the year ended December
31, 1997 are incorporated by reference into Part I, Item VI and Part
II.
Portions of the Proxy Statement for the annual shareholders meeting to
be held April 14, 1998 are incorporated by reference into Part III.
<PAGE> 2
CORTLAND BANCORP
FORM 10-K
1997
INDEX
Part I Page
- ------ ----
Item 1. Business:
General I-2
Statistical Disclosure I-4
Item 2. Properties I-19
Item 3. Legal Proceedings I-19
Item 4. Submission of Matters to a Vote of Security Holders I-20
Executive Officers of the Registrant I-20
Part II
- -------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 7A. Quantitative and Qualitative Disclosure About Market Risk II-1
Item 8. Financial Statements and Supplementary Data II-1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures II-1
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management III-1
Item 13. Certain Relationships and Related Transactions III-1
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
I-1
<PAGE> 3
PART I
------
Item 1. Business
- ------- --------
General
- -------
THE CORPORATION
---------------
The registrant, Cortland Bancorp (also referred to as the "Corporation" or
the "Company"), is a bank holding company which was incorporated under the laws
of the State of Ohio in 1984, and is registered under the Bank Holding Company
Act of 1956, as amended. Its subsidiaries are the Cortland Savings and Banking
Company ("Cortland Banks" or the "Bank"), which was acquired at the
Corporation's inception in 1985, and New Resources Leasing Company, which was
formed in 1988. The Corporation and its subsidiaries operate in one industry,
domestic banking.
The Corporation conducts no business activities except for investment in
securities as permitted under the Bank Holding Company Act.
The business of the Corporation and its subsidiaries is not seasonal to any
significant extent and is not dependent on any single customer or group of
customers.
CORTLAND BANKS
--------------
Cortland Banks is a full service, state chartered bank engaged in
commercial and retail banking and trust services. Cortland Banks' commercial and
consumer banking services include checking accounts, savings accounts, time
deposit accounts, commercial, mortgage and installment loans, leasing, night
depository, automated teller services, safe deposit boxes, money order services,
travelers checks, utility bill payments and other miscellaneous services
normally offered by commercial banks. In addition, Cortland Banks offers
discount brokerage services, while the Bank's Trust Department offers a broad
range of fiduciary services, including the administration of decedent and trust
estates and other personal and corporate fiduciary services. Business is
conducted at a total of thirteen 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, one office is located in the community of
Williamsfield, Ashtabula County, Ohio, and the newest office is located in the
community of Boardman, Mahoning 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 wholly
owned subsidiary has been inactive since incorporation.
SUPERVISION AND REGULATION
--------------------------
The Corporation is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant
to the Bank Holding Company Act of 1956, as amended. Generally, this Act limits
the business of bank holding companies to owning or controlling banks and
engaging in such other activities as the Federal Reserve Board may determine to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
I-2
<PAGE> 4
Supervision and Regulation (Continued):
Cortland Banks, as a state banking organization, is subject to periodic
examination and regulation by the Federal Reserve Bank of Cleveland and the
State of Ohio Division of Banks. Cortland Banks is a member of the Federal
Reserve System and its deposits are insured by the Bank Insurance Fund (BIF)
administered by the Federal Deposit Insurance Corporation (FDIC).
Competition:
Cortland Banks actively competes with state and national banks located in
the Ohio counties of Trumbull, Portage, Ashtabula and Mahoning. 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 10, 1998, the Corporation and its subsidiaries had 155 full-time
and 54 part-time employees. The Corporation considers its relations with its
employees to be satisfactory.
I-3
<PAGE> 5
Statistical Disclosure
----------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
- ----------------------------------------------------------------
INTEREST RATES AND INTEREST DIFFERENTIAL
----------------------------------------
AVERAGE BALANCE SHEETS
----------------------
(In Thousands of Dollars)
The following shows consolidated balances of average assets, liabilities
and shareholders' equity for the years indicated. The averages are based on
daily balances.
<TABLE>
<CAPTION>
ASSETS
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash and due from banks $ 8,671 $ 8,679 $ 8,293
Federal funds sold 3,196 843 2,485
Trading account securities 116 57 0
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 92,366 92,281 74,447
U.S. Government mortgage-backed
pass-through certificates 74,491 77,246 70,471
States of the U.S. and political subdivisions 17,503 16,995 15,436
Other securities 3,822 3,651 2,965
------- ------- --------
TOTAL INVESTMENT SECURITIES 188,182 190,173 163,319
------- ------- --------
Total loans 175,518 160,663 153,711
Less unearned income 3 6 9
Less allowance for loan losses 2,911 2,976 3,079
------- ------- -------
NET LOANS 172,604 157,681 150,623
------- ------- -------
Market Value appreciation (depreciation) of
securities available for sale 479 165 (469)
Premises and equipment 5,919 6,287 6,422
Other assets 4,418 4,760 4,929
-------- -------- --------
$383,585 $368,645 $335,602
======== ======== ========
</TABLE>
I-4
<PAGE> 6
AVERAGE BALANCE SHEETS (CONTINUED)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deposits (all domestic):
Noninterest-bearing demand deposits $ 42,199 $ 37,999 $ 33,716
Interest-bearing demand deposits 47,544 46,945 45,864
Savings 84,291 86,468 87,072
Time 146,263 146,628 129,320
-------- -------- --------
TOTAL DEPOSITS 320,297 318,040 295,972
-------- -------- --------
Borrowings:
U.S. Treasury interest-bearing demand note 819 681 756
Federal funds purchased 618 1,918 1,276
Securities sold under agreements to repurchase 3,726 2,747 2,390
Other borrowings under one year 4,800 0 0
Other borrowings over one year 12,572 9,157 2,657
-------- -------- --------
TOTAL BORROWINGS 22,535 14,503 7,079
-------- -------- --------
Other liabilities 2,436 1,860 2,139
-------- -------- --------
TOTAL LIABILITIES 345,268 334,403 305,190
-------- -------- --------
Shareholders' Equity:
Common stock 5,507 5,367 4,966
Additional paid-in capital 11,668 10,665 8,363
Retained earnings 20,926 18,292 17,726
Net unrealized gain (loss) on available for sale
debt and marketable equity securities 216 (78) (639)
Less cost of common shares in treasury 0 (4) (4)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 38,317 34,242 30,412
-------- -------- --------
$383,585 $368,645 $335,602
======== ======== ========
</TABLE>
I-5
<PAGE> 7
ANALYSIS OF NET INTEREST EARNINGS
---------------------------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
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:
Interest Average
Average Earned Yield or
Year ended December 31, 1997 Outstanding or Paid Rate
- ---------------------------- ----------- ------- ----
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 3,196 $ 178 5.6%
Trading account securities 116 7 6.4%
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 92,366 6,162 6.7%
U.S. Government mortgage-backed
pass-through certificates 74,491 4,982 6.7%
States of the U.S. and political
subdivisions (1) (2) 17,503 1,152 6.6%
Other securities (1) 3,822 245 6.4%
-------- --------
Total investment securities (l) 188,182 12,541 6.7%
Loans (1) (2) (4) 175,515 16,057 9.1%
-------- --------
Total interest-earning assets $367,009 $ 28,783 7.8%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 47,544 $ 1,386 2.9%
Savings 84,291 2,255 2.7%
Time 146,263 8,440 5.8%
--------- --------
Total deposits 278,098 12,081 4.3%
--------- --------
Borrowings:
U.S. Treasury interest-bearing
demand note 819 42 5.1%
Federal funds purchased 618 35 5.7%
Securities sold under agreements
to repurchase 3,726 177 4.8%
Other borrowings under one year 4,800 277 5.8%
Other borrowings over one year 12,572 735 5.8%
-------- --------
Total borrowings 22,535 1,266 5.6%
-------- --------
Total interest-bearing liabilities $300,633 $ 13,347 4.4%
======== ========
Net interest margin (3) $ 15,436 4.2%
======== =====
</TABLE>
I-6
<PAGE> 8
ANALYSIS OF NET INTEREST EARNINGS (CONTINUED)
---------------------------------------------
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Interest Average
Average Earned Yield or
Year ended December 31, 1996 Outstanding or Paid Rate
- ---------------------------- ----------- ------- ----
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 843 $ 45 5.4%
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 (1) (2) 16,995 1,145 6.7%
Other securities (1) 3,651 234 6.4%
-------- --------
Total investment securities (1) 190,173 12,614 6.6%
Loans (1) (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 under one year 0 0
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-7
<PAGE> 9
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST EARNINGS (CONTINUED)
---------------------------------------------
(In Thousands of Dollars)
Interest Average
Average Earned Yield or
Year ended December 31, 1995 Outstanding or Paid Rate
- ---------------------------- ----------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 2,485 $ 146 5.9%
Trading account securities 0 0
Investment securities:
U.S. Treasury and other U.S.
Government agencies and
corporations 74,447 5,051 6.8%
U.S. Government mortgage-backed
pass-through certificates 70,471 4,571 6.5%
States of the U.S. and political
subdivisions (1) (2) 15,436 1,024 6.6%
Other securities (1) 2,965 187 6.3%
-------- --------
Total investment securities (1) 163,319 10,833 6.6%
Loans (1) (2) (4) 153,702 14,175 9.2%
-------- --------
Total interest-earning assets $319,506 $ 25,154 7.9%
======== ========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 45,864 $ 1,177 2.6%
Savings 87,072 2,406 2.8%
Time 129,320 7,452 5.8%
--------- --------
Total deposits 262,256 11,035 4.2%
--------- --------
Borrowings:
U.S. Treasury interest-bearing
demand note 756 41 5.4%
Federal funds purchased 1,276 78 6.1%
Securities sold under agreements
to repurchase 2,390 110 4.6%
Other borrowings under one year 0 0
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%
======== =====
<FN>
(1) The amounts are reflected on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1997, 1996 and 1995. Tax-free income from states of
the U.S. and political subdivisions, other securities and loans amounted to
$755, $1 and $239 respectively, for 1997; $743, $1 and $211 respectively, for
1996; and $656, $1 and $197 respectively, for 1995.
(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 $44 in 1997, $89 in 1996 and
$72 in 1995.
</FN>
</TABLE>
I-8
<PAGE> 10
<TABLE>
<CAPTION>
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:
1997 Change from 1996
----------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
-------- -------- ---------
<S> <C> <C> <C>
Interest Income
- ---------------
Federal funds sold $ 133 $ 131 $ 2
Trading account securities 4 3 1
Investment securities:
U.S. Treasury and other U.S. Government
agencies and corporations 87 6 81
U.S. Government mortgage-backed
pass-through certificates (178) (184) 6
States of the U.S. and political
subdivisions 7 34 (27)
Other securities 11 11 0
--------- --------- --------
Total investment securities (73) (133) 60
Loans 1,248 1,360 (112)
--------- --------- --------
Total interest income $ 1,312 $ 1,361 $ (49)
========= ========= ========
Interest Expense
- ----------------
Deposits:
Interest-bearing demand deposits $ 127 $ 16 $ 111
Savings (64) (58) (6)
Time 45 (21) 66
--------- --------- -------
Total deposits 108 (63) 171
--------- --------- -------
Borrowings:
U.S. Treasury interest-bearing
demand note 7 7 0
Federal funds purchased (73) (74) 1
Securities sold under agreements to repurchase 57 46 11
Other borrowings under one year 277 277 0
Other borrowings over one year 230 198 32
--------- --------- -------
Total borrowings 498 454 44
--------- --------- -------
Total interest expense $ 606 $ 391 $ 215
========= ========= =======
</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
<TABLE>
<CAPTION>
RATE AND VOLUME ANALYSIS (Continued)
------------------------------------
(In Thousands of Dollars)
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)
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 under one year 0 0 0
Other borrowings over one year 348 359 (11)
--------- -------- --------
Total borrowings 382 407 (25)
--------- -------- --------
Total interest expense $ 1,320 $ 1,409 $ (89)
========= ======== ========
</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:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
December 31,
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 88,660 $ 98,538 $ 81,720
U.S. Government mortgage-backed
pass-through certificates 74,900 74,869 79,557
States of the U.S. and political subdivisions 21,039 17,228 16,811
Other securities 3,997 3,739 3,622
-------- -------- --------
$188,596 $194,374 $181,710
======== ======== ========
</TABLE>
A summary of securities held at December 31, 1997, 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.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
December 31, 1997
-----------------
Book Weighted
Type and Maturity Grouping Value Average Yield (1)
-------------------------- -------- ------------------
<S> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations:
Maturing within one year $ 17,912 6.36%
Maturing after one year but within five years 27,162 6.25
Maturing after five years but within ten years 40,960 7.07
Maturing after ten years 2,626 8.04
--------
Total U.S. Treasury and other U.S.
Government agencies and corporations $ 88,660 6.70%
======== =====
U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's
Maturing within one year $ 40,208 6.42%
Maturing after one year but within five years 20,615 6.75
Maturing after five years but within ten years 10,688 6.98
Maturing after ten years 3,389 6.98
--------
Total U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's $ 74,900 6.62%
======== =====
</TABLE>
I-11
<PAGE> 13
II. INVESTMENT PORTFOLIO (continued)
- -------------------------------------
<TABLE>
<CAPTION>
(In Thousands of Dollars)
December 31, 1997
---------------------------------
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 $ 1,745 6.79%
Maturing after one year but within five years 11,672 6.40
Maturing after five years but within ten years 2,614 7.56
Maturing after ten years 5,008 7.39
--------
Total States of the U.S. and
political subdivisions $ 21,039 6.81%
======== ======
Other securities:
Maturing within one year $ 1,878 6.04%
Maturing after one year but within five years 0 0
Maturing after five years but within ten years 0 0
Maturing after ten years 2,119 6.46
--------
Total other securities $ 3,997 6.26%
======== ======
<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, $223, $60 and
$114 for the four ranges of maturities.
</FN>
</TABLE>
As of December 31, 1997, there were $22,830 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 $1,351 maturing after one year
but within five years, $19,360 maturing after five years but within ten years
and $2,119 maturing after 10 years.
As of December 31, 1997, there were $1,579 in callable U.S. Treasury
securities and $17,586 in callable U.S. Government Agencies 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 $18,658 maturing
after five years but within ten years and $507 maturing after 10 years.
I-12
<PAGE> 14
III. LOAN PORTFOLIO (ALL DOMESTIC)
TYPES OF LOANS
--------------
(In Thousands of Dollars)
<TABLE>
<CAPTION>
The following schedule shows the types of loans at the dates indicated:
December 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 77,644 $ 70,590 $ 67,099 $ 66,069 $ 68,096
Commercial mortgage 50,015 42,367 38,371 37,554 35,014
Consumer loans 18,990 21,300 21,254 17,247 14,539
Commercial loans 26,022 19,355 16,658 15,101 12,898
Home equity loans 10,064 11,136 12,353 12,854 13,403
1 - 4 family residential
mortgages held for sale 1,756 1,361 473 1,855 1,877
-------- -------- -------- -------- --------
$184,491 $166,109 $156,208 $150,680 $145,827
======== ======== ======== ======== ========
</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, 1997:
<TABLE>
<CAPTION>
1 Year 1 to Over
Types of Loans or Less 5 Years 5 Years Total
-------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
Commercial loans $ 16,895 $ 7,582 $ 1,545 $ 26,022
Home Equity 10,064 0 0 10,064
-------- -------- -------- --------
Total loans (excluding
mortgage and consumer loans) $ 26,959 $ 7,582 $ 1,545 $ 36,086
======== ======== ======== ========
</TABLE>
The following schedule sets forth loans as of December 31, 1997 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 $ 25,677 $ 1,067 $ 26,744
Fixed rates of interest 1,282 8,060 9,342
-------- -------- --------
Total loans $ 26,959 $ 9,127 $ 36,086
======== ======== ========
</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,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $ 1,653 $ 1,450 $ 1,597 $ 1,909 $ 1,652
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 10 18 7 14 353
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 173 182 191 205 573
</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, 1997.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
<S> <C>
Gross interest income that would have been recorded if the
loans had been current in accordance with their original terms $188
Interest income included in income on the loans 148
</TABLE>
A loan is placed on a nonaccrual basis whenever sufficient information is
received to question the collectibility of the loan or any time legal
proceedings are initiated involving a loan. When a loan is charged-off, any
interest that has been accrued and not collected on the loan is charged against
earnings.
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. These loans generally include 1 - 4
family, consumer and home equity loans. Impaired loans were evaluated using the
fair value of collateral as the measurement method. At December 31, 1997, 1996
and 1995 the recorded investment in impaired loans was $1,365, $1,162 and $231
while the allocated portion of the allowance for loan losses for such loans was
$213, $291 and $57 respectively. Interest income recognized on impaired loans
using the cash basis was $116, $92 and $18 respectively.
As of December 31, 1997, there were $676 in loans, not included in the
above categories and not considered impaired, but which can be considered
potential problem loans. Management does not currently anticipate any loss as a
result of these potential problem loans.
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:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
December 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,966 $ 3,011 $ 3,081 $ 3,139 $ 3,415
Loan losses:
1 - 4 family residential
mortgages (21) (5) (69) (72) (172)
Commercial mortgages (16) 0 0 (27) (42)
Consumer loans (202) (167) (220) (141) (271)
Commercial loans 0 (4) (78) (48) (123)
Home equity loans (13) 0 0 0 (7)
-------- ------ ------- ------- -------
(252) (176) (367) (288) (615)
-------- ------ ------- ------- -------
Recoveries on previous
loan losses:
1 - 4 family residential
mortgages 2 3 4 4 26
Commercial mortgages 0 0 78 6 28
Consumer loans 85 72 152 156 202
Commercial loans 11 56 63 64 83
Home equity loans 5 0 0 0 0
-------- ------- ------- -------- ------
103 131 297 230 339
-------- ------- ------- -------- ------
Net loan losses (149) (45) (70) (58) (276)
-------- ------- ------- -------- -------
Provision charged to
operations 0 0 0 0 0
-------- ------- ------- ------- -------
Balance at end of year $ 2,817 $ 2,966 $ 3,011 $ 3,081 $ 3,139
======== ======= ======= ======= =======
Ratio of net loan losses to
average net loans
outstanding .09% .03% .05% .04% .19%
===== ===== ===== ===== =====
</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 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage $ 427 $ 387 $ 351 $ 385 $ 405
Commercial mortgage 1,378 1,179 1,118 1,223 1,029
Consumer loans 278 410 416 407 424
Commercial loans 283 325 239 207 192
Home equity loans 25 55 61 63 67
Unallocated portion 426 610 826 796 1,022
------- -------- -------- -------- --------
$ 2,817 $ 2,966 $ 3,011 $ 3,081 $ 3,139
======= ======== ======== ======== ========
</TABLE>
The allocation of the allowance as shown in the table above should not be
interpreted as an indication that loan losses in 1998 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 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgage 43.1% 43.3% 43.3% 45.1% 48.0%
Commercial mortgages 27.1 25.5 24.6 24.9 24.0
Consumer loans 10.3 12.8 13.6 11.5 10.0
Commercial loans 14.1 11.7 10.6 10.0 8.8
Home equity loans 5.4 6.7 7.9 8.5 9.2
-------- ------- -------- -------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ======== ======== ========
</TABLE>
LOAN COMMITMENTS AND LINES OF CREDIT
------------------------------------
In the normal course of business, the bank subsidiary has extended various
commitments for credit. Commitments for mortgages, revolving lines of credit and
letters of credit generally are extended for a period of one month up to one
year. Normally, no fees are charged on any unused portion. Fees are typically
charged for the issuance of a letter of credit.
I-16
<PAGE> 18
V. DEPOSITS (ALL DOMESTIC)
- --------------------------
The following table shows the classification of average deposits for the
periods indicated:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Average Balance 1997 1996 1995
--------------- -------- -------- ------
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 42,199 $ 37,999 $ 33,716
Interest-bearing demand deposits 47,544 46,945 45,864
Savings 84,291 86,468 87,072
Time deposits 146,263 146,628 129,320
-------- -------- --------
Total average deposits $320,297 $318,040 $295,972
======== ======== ========
</TABLE>
The following shows the average rate paid on the following deposit
categories for the periods indicated:
<TABLE>
<CAPTION>
Type 1997 1996 1995
---- -------- -------- ------
<S> <C> <C> <C>
Interest-bearing demand deposits 2.9% 2.7% 2.6%
Savings 2.7 2.7 2.8
Time deposits 5.8 5.7 5.8
</TABLE>
A summary of time deposits of $100,000 or more as of December 31, 1997 by
maturity range is shown below:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Other
Certificates Time
of Deposit Deposits Total
---------- -------- -----
<S> <C> <C> <C>
3 months or less remaining until maturity $ 8,464 $ 405 $ 8,869
3 to 6 months remaining until maturity 4,793 0 4,793
6 to 12 months remaining until maturity 5,668 325 5,993
Over 12 months remaining until maturity 6,554 3,428 9,982
--------- --------- --------
Total outstanding $ 25,479 $ 4,158 $ 29,637
========= ========= ========
</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 1997 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 194 West
Main Street, Cortland, Ohio.
CORTLAND BANKS' PROPERTY
------------------------
Cortland Banks' main office (as described in its charter) is located at 194
West Main Street, Cortland, Ohio. Administrative offices are located at the main
office.
The other offices are:
Popular Name Address
------------ -------
Brookfield Office 7325 Warren-Sharon Road, Brookfield, Ohio
Vienna Office 4434 Warren-Sharon Road, Vienna, Ohio
Windham Office 9690 East Center Street, Windham, Ohio
Bristol Office 6090 State Route 45, Bristolville, Ohio
Williamsfield Office State Routes 322 and 7, Williamsfield, Ohio
Hiram Office 6821 Wakefield Road, Hiram, Ohio
Warren Office 2935 Elm Road, Warren, Ohio
Hubbard Office 890 West Liberty Street, Hubbard, Ohio
Mantua Office 10521 Main Street, Mantua, Ohio
Niles Office 6050 Youngstown Warren Rd., Niles, Ohio
North Bloomfield Office 8837 State Route 45, North Bloomfield, Ohio
Boardman Office 8580 South Avenue, Youngstown, Ohio
The Brookfield, Windham, Hubbard, Mantua, Niles and Boardman offices are
leased, while all of the other above offices are owned by Cortland Banks.
Item 3. Legal Proceedings
- ------- -----------------
The Company's subsidiary bank was a defendant in a class action lawsuit
Frank Slentz, Et Al. V. Cortland Savings and Banking Company, involving
purchased interests in two campgrounds.
On October 20, 1997 the judge presiding over this case filed a judgment
entry dismissing all claims against the Bank without prejudice. The judgment was
appealed by the plaintiffs. The ultimate outcome of this litigation presently
cannot be determined, and therefore no provision for any liability relative to
such litigation has been made in the accompanying consolidated financial
statements.
The Bank is also involved in other legal actions arising in the ordinary
course of business. In the opinion of management, the outcome of these matters
is not expected to have a material effect on the Company.
I-19
<PAGE> 21
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
- ------------------------------------
The names, ages and positions of the executive officers as of March 10,
1998 are as follows:
Name Age Position Held
---- --- -------------
Rodger W. Platt 62 Chairman of the Board,
President and Director
Dennis E. Linville 47 Executive Vice President,
Secretary and Director
Lawrence A. Fantauzzi 50 Controller/Treasurer and
Chief Financial Officer
James M. Gasior 38 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 Chairman of the Board of Cortland Bancorp and
the subsidiary bank since November 1987. He has been a Director and President of
Cortland Bancorp since its formation in April of 1985. He has been a Director of
the subsidiary bank since l974 and has been President since 1976.
Dennis E. Linville has been Executive Vice President of Cortland Bancorp
and the subsidiary bank since November 1987. He became a Director of the
subsidiary bank in June of 1989. He has been a Director of Cortland Bancorp and
New Resources Leasing Company since December 1988. He has been the Secretary of
Cortland Bancorp since 1985 and Secretary of the subsidiary bank since l984.
Lawrence A. Fantauzzi has been the Controller of Cortland Bancorp and the
subsidiary bank since April 1987. 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. Prior to June 1993, he was Chief Audit
Officer of the subsidiary bank.
I-20
<PAGE> 22
PART II
-------
Information relating to Items 5, 6, 7, 7A and 8 is set forth in the
Corporation's 1997 Annual Report to Shareholders under the pages indicated below
and is incorporated herein by reference:
Pages in 1997
Annual Report
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20-21,
37-38
Management considers interest rate risk to be the Company's principal
source of market risk. Interest rate risk is measured as the impact of interest
rate changes on the Company's net interest income. Components of interest rate
risk comprise repricing risk, basis risk and yield curve risk. Repricing risk
arises due to timing differences in the repricing of assets and liabilities as
interest rate changes occur. Basis risk occurs when repricing assets and
liabilities reference different key rates. Yield curve risk arises when a shift
occurs in the relationship among key rates across the maturity spectrum.
The effective management of interest rate risk seeks to limit the
adverse impact of interest rate changes on the Company's net interest margin,
providing the Company with the best opportunity for maintaining consistent
earnings growth. Toward this end, management uses computer simulation to model
the Company's financial performance under varying interest rate scenarios. These
scenarios may reflect changes in the level of interest rates, changes in the
shape of the yield curve, and changes in interest rate relationships.
The simulation model allows management to test and evaluate
alternative responses to a changing interest rate environment. Typically when
confronted with a heightened risk of rising interest rates, the Company will
evaluate strategies that shorten investment and loan repricing intervals and
maturities, emphasize the acquisition of floating rate over fixed rate assets,
and lengthen the maturities of liability funding sources. When the risk of
falling rates is paramount, management will consider strategies that shorten the
maturities of funding sources, lengthen the repricing intervals and maturities
of investments and loans, and emphasize the acquisition of fixed rate assets
over floating rate assets.
The most significant assumptions used in the simulation relate to the
cash flows and repricing characteristics of the Company's balance sheet.
Repricing and runoff rate assumptions are based upon specific product
parameters modified by historical trends and internal projections. These
assumptions are periodically reviewed and benchmarked against historical
results. Actual results may differ from simulated results not only due to the
timing, magnitude and frequency of interest rate changes, but also due to
changes in general economic conditions, changes in customer preferences and
behavior, and changes in strategies by both existing and potential competitors.
II-1
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
The following table shows the Company's current estimate of interest
rate sensitivity based on the composition of its balance sheet at December 31,
1997. For purposes of this analysis, short term interest rates as measured by
the federal funds rate and the prime lending rate are assumed to increase
(decrease) gradually over the next twelve months reaching a level 300 basis
points higher (lower) than the rates in effect at December 31, 1997. Under the
rising rate scenario, the shape of the yield curve is assumed to flatten and
then invert, with short term rates exceeding long term rates. Under the falling
rate scenario, the yield curve is assumed to steepen.
One measure of the yield curve's shape is the difference between the
yield on the ten year Treasury and the three month Treasury. At December 31,
1997 this difference was approximately 39 basis points, indicating a
relatively flat yield curve. Under the falling rate scenario, this difference
widens to a positive 193 basis points. Under the rising rate scenario, this
difference is a negative 30 basis points, indicating an inverted yield curve
where short term rates exceed long term rates.
The base case against which interest rate sensitivity is measured
assumes no change in short term rates. The base case also assumes no growth in
assets and liabilities and no change in asset or liability mix. Under these
simulated conditions, the base case projects net interest income of $15,311 for
the year ending in 1998.
Simulated Net Interest Income Sensitivity
For The Twelve Months Ending December 31, 1998
(Amounts in thousands)
CHANGE IN NET INTEREST
INCOME FROM BASE CASE
----------------------
NET INTEREST
CHANGE IN INTEREST RATES INCOME $ CHANGE % CHANGE
- ------------------------ ------------ -------- --------
Graduated increase of +300 basis points $15,064 $(247) (1.6)%
Short term rates unchanged (base case) 15,311
Graduated decrease of -300 basis points 15,238 (73) (0.5)%
The level of interest rate risk indicated is within limits that
management considers acceptable. However, given that interest rate movements
can be sudden and unanticipated, and are increasingly influenced by global
events and circumstances beyond the purview of the Federal Reserve, no
assurances can be made that interest rate movements will not impact key
assumptions and parameters in a manner not presently embodied by the model.
It is management's opinion that hedging instruments currently
available are not a cost effective means of controlling interest rate risk for
the Company. Accordingly, the Company does not currently use financial
derivatives, such as interest rate options, swaps, caps, floors or other similar
instruments.
ITEM 8. FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION 1-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
II-2
<PAGE> 24
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information relating to directors of the Corporation will be set forth in
the Corporation's definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with its annual meeting of shareholders to be
held April 14, 1998. Such information is incorporated herein by reference.
Information relating to executive officers of the Corporation is set forth in
Part I. Pages 2-6 and 9
Item 11. Executive Compensation
- -------- ----------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held
April 14, 1998. Such information is incorporated herein by reference. Pages 7-9
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
None
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held
April 14, 1998. Such information is incorporated herein by reference. Pages 2
and 6
III-1
<PAGE> 25
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) 1. Financial Statements
--------------------
Included in Part II of this report:
Item 8., Financial Statements and Accompanying Information, is set
forth in the Corporation's 1997 Annual Report to Shareholders and is
incorporated by reference in Part II of this report.
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report as Exhibit 23:
Independent Accountants' Consent
Schedules:
All schedules are omitted because they are not applicable.
(a) 3. Exhibits
--------
The exhibits filed or incorporated by reference as a part of this report
are listed in the Index to Exhibits which appears at page IV-3 hereof and
is incorporated herein by reference.
(b) Report on Form 8-K
------------------
No reports on Form 8-K were filed for the three months ended December 31,
1997.
IV-1
<PAGE> 26
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 10, 1998 By Rodger W. Platt, President
- -------------------------- --------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chairman of the Board,
Rodger W. Platt President and Director March 10, 1998
- -------------------------------- ----------------
(Principal Executive Date
Officer)
Executive Vice
President, Secretary
Dennis E. Linville and Director March 10, 1998
- -------------------------------- ----------------
Date
P. Bennett Bowers Director March 10, 1998
- -------------------------------- ----------------
Date
David C. Cole Director March 10, 1998
- -------------------------------- ----------------
Date
George E. Gessner Director March 10, 1998
- -------------------------------- ----------------
Date
William A. Hagood Director March 10, 1998
- -------------------------------- ----------------
Date
James E. Hoffman, III Director March 10, 1998
- -------------------------------- ----------------
Date
Richard L. Hoover Director March 10, 1998
- -------------------------------- ----------------
Date
K. Ray Mahan Director March 10, 1998
- -------------------------------- ----------------
Date
Timothy K. Woofter Director March 10, 1998
- -------------------------------- ----------------
Date
Lawrence A. Fantauzzi Controller/Treasurer March 10, 1998
- -------------------------------- ----------------
(Principal Financial Date
and Principal Accounting
Officer)
James M. Gasior Vice President & Chief March 10, 1998
- -------------------------------- ----------------
Operations Officer Date
IV-2
<PAGE> 27
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-1 filed February 5, 1988).
3.2. Bylaws of the Corporation as currently in effect (incorporated by
reference to Exhibit 3a of the Corporation's Report on Form S-l filed February
5, 1988).
4 The rights of holders of equity securities are defined in portions of the
Articles of Incorporation and Bylaws as referenced in 3.l. and 3.2.
11 Statement regarding computation of earnings per share (filed herewith).
13 Annual Report to security holders (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consents of experts and counsel - Consent of independent accountants
(filed herewith).
27 Financial Data Schedule (filed herewith).
Copies of any exhibits will be furnished to shareholders upon written
request. Requests should be directed to Dennis E. Linville, Secretary, Cortland
Bancorp, 194 West Main Street, Cortland, Ohio 44410.
IV-3
<PAGE> 1
Exhibit 11
CORTLAND BANCORP AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
-----------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Average shares outstanding 1,132,869 1,107,480 1,083,535
Net Income ($000 Omitted) $ 4,454 $ 4,110 $ 3,289
Earnings per share $ 3.93 $ 3.71 $ 3.04
</TABLE>
Average shares outstanding and earnings per share have been restated to
give retroactive effect to the 3% stock dividends paid as of January 1, 1998,
1997 and 1996.
<PAGE> 1
Exhibit 13
[CORTLAND BANCORP LOGO]
1997 Annual Report
<PAGE> 2
- --------------------------------------------------------------------------------
CONTENTS
Chairman's Message
----------------------------------------------
1
Brief Description of the Business
----------------------------------------------
3
Report of Independent Auditors
----------------------------------------------
4
Consolidated Statements of Income
----------------------------------------------
5
Consolidated Balance Sheets
----------------------------------------------
6
Consolidated Statements of
Shareholders' Equity
----------------------------------------------
7
Consolidated Statements of Cash Flows
----------------------------------------------
8
Notes to the Consolidated Financial
Statements
----------------------------------------------
9
Three Year Summary
Average Balances, Yields and Rates
----------------------------------------------
25
Selected Financial Data
----------------------------------------------
27
Management's Discussion and Analysis
----------------------------------------------
28
Information as to Stock Prices and
Dividends
----------------------------------------------
41
Cortland Bancorp
Directors and Officers
----------------------------------------------
42
Cortland Savings & Banking
Directors and Officers
----------------------------------------------
43
- --------------------------------------------------------------------------------
[CORTLAND BANCORP LOGO]
<PAGE> 3
CHAIRMAN'S MESSAGE
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
As we approach the end of the second millennium all seems right with the world.
We find ourselves in the seventh year of the current economic expansion, making
it one of the longest on record. Typically, at this stage of the economic cycle,
activity begins to wane as imbalances develop that eventually precipitate
recession.
Instead, 1997 was another year of plentiful surprises. Economic growth
accelerated to a rate well above trend. Unemployment fell to rates well below
trend. Productivity registered gains much more typical of the earlier rather
than latter stages of the business cycle. Already low inflation rates continued
to decline even further, despite dire warnings to the contrary (some statistical
nonsense about too many people working causing inflation).
As 1997 began to wind down, the federal government rang up the current month's
receipts and expenditures only to find the budget in balance years ahead of
schedule. Stock markets soared, interest rates sagged, and the Tribe took a one
run lead into the ninth inning of game seven of the 1997 World Series. Folks,
can it get much better than this?
But then the Tribe dropped game seven in eleven. The Dow lopped off a record
554.26 points the very next day. (A most severe response, even for Tribe fans.
Who would have thought that there were that many Tribe fans? Who would have
thought that they owned so much stock?) Economic storm clouds gathered on the
Pacific rim pounding Asian economies to the depths of depression. (El Nino?)
Scandal surfaced along the Potomac. (La Nina?) Saddam balked. The Air Force
scrambled. Perhaps we're not quite ready for nirvana?
It may not have been nirvana, but 1997 was pretty darn good. Net income for 1997
of $4.454 million topped last year's $4.11 million by 8.4%, and marked the
fourth consecutive year that the Company established record earnings. Moderate
growth of 4.3% in average earning assets (loans, investments and federal funds)
coupled with a modest 2.4% increase in net non-interest expenses (total other
expenses less total other income) were the keys to the improvement.
Earnings per share climbed to $3.93 from the $3.71 recorded in 1996. The return
on average assets rose to 1.16% from last year's 1.11%. Return on equity of
11.6% slipped a notch from the 12.0% reached last year, but still stood above
the 10.9% average of the preceding five years.
Capital ratios remained strong, as the leverage capital ratio climbed above 10%
while the risk-based capital ratio remained above 22%. Our exceptional strength,
here, is a source of considerable strategic flexibility at a time of rapid
regulatory, competitive and technological change.
This combination of moderate asset growth, solid earnings growth and abundant
capital allowed us to boost the percentage of earnings paid out as dividends to
our shareholders to 37% from the previous 30%. Cash dividends in 1997 totaled
$1.46 per share compared to $1.12 in 1996 (both figures have been adjusted for
the 3% stock dividend). Despite the more generous payout, book value per share
climbed to $35.33 from last year's $32.25, an increase of 9.6%.
All of these factors helped push the price for Cortland Bancorp stock to $59 per
share by yearend. The total return (price appreciation plus dividends) for
Cortland Bancorp investors in 1997 was a very healthy 50%. That easily
outdistanced the 33% return registered by the S&P 500 Index, but fell short of
the 70% return for SNL's Index of banks with assets under $500 million (SNL
Index). With the banking industry continuing to consolidate, bank stocks in 1997
remained "hot-hot-hot." Over the past five years, the annual compound rate of
return for both the stock of Cortland Bancorp and the SNL Index has been 33%,
overshadowing a very respectable showing of 20% on the part of the S&P 500
Index.
Profitable growth is the keystone to realizing that kind of performance.
Frequently, that means tapping new markets, and that's just what we did in 1997.
During the third quarter we celebrated the opening of our thirteenth office,
located along the Boardman-Poland border in southern Mahoning County, a
particularly vibrant economic market. Open less than six months, this office has
quickly established a presence in the community, with more than $5 million in
loans already under management by yearend.
Overall, loans in 1997 increased by $18.4 million, representing an annual growth
rate of 11%. Residential mortgage originations nearly doubled, with the bulk of
the increased activity occurring in the
- --------------------------------------------------------------------------------
1
<PAGE> 4
- --------------------------------------------------------------------------------
latter half of 1997. This acceleration in activity reflects the addition of an
experienced mortgage banker, expanded product offerings, new investor outlets,
improved realtor relations and more favorable economic, tax and interest rate
environments.
Our emphasis on developing strategic relationships in the medium-to-small
business sector continues to find strong support in the communities we serve.
Despite considerable competitive pressure from the super-regional banks, we are
finding that lots of folks prefer our personal, hometown style of banking.
Commercial lending's share of the loan portfolio, which was just 31.9% five
years ago, climbed to 41.2%, up from 37.2% last year. Despite strong growth,
adherence to strict underwriting standards has enabled us to maintain a high
level of asset quality with credit losses held to a minimum.
As we head into 1998, we simply want more. We want more and we will have more.
Tapping new markets such as the Boardman-Poland corridor is only part of the
answer. We must also improve our penetration and coverage of existing markets to
better leverage our resources. To accomplish this, we will realign our branch
lending and operations structure in 1998. This realignment will not only enhance
our business development opportunities, but also extend access of our particular
brand of community banking to a greater number of potential customers. We not
only expect to significantly increase loan volume, but to also create a more
highly focused and productive customer service environment. One that stimulates
innovation, leverages our investment in technology, and thrives on customer
satisfaction. One that seeks not only new customers, but new opportunities to
leverage existing customer relationships.
Over the past several years, deposits in the banking industry have been
particularly hard to come by. Market share has been eroded by fierce competition
from brokerage firms, insurance companies and mutual funds. The long bull run in
equities begun in 1982 means that an entire generation has yet to experience the
downside risk of a protracted contraction in stock market values. Unless the
threat of such downside risk is perceived as real, the intrinsic value of
federal deposit insurance is diminished.
Cortland Banks has been fortunate over the years as we have not experienced this
erosion to our deposit base. The year-over-year decrease in our deposits this
year reflects a $10 million reduction in the amount of volatile public funds.
When this component is excluded, deposits exhibit a year-over-year increase of
3.2%. We are particularly pleased that average non-interest bearing checking
balances increased by 11.1% last year. These important core accounts represented
only 8.1% of the deposit mix five years ago. Today, they represent 13.2% of
average total deposits, providing us with much better balance in the mix of our
funds.
During 1997 we upgraded and expanded our ATM network. We also introduced
customers to our new debit card. Both products provide customers with increased
convenience. Both products will contribute significantly to increased fee income
in the future. During 1998, we will be conducting a thorough review of our
deposit products to ensure that the products we offer are competitive and
meeting customers' needs. Look for us to roll out some new offerings as a
result.
We remain as committed as ever to community banking, but recognize that the
nature of community is shifting. The boundaries are beginning to blur.
Technology is shrinking the world. Our sense of community is rapidly evolving to
a virtual one. Yet we remain the same. Dedicated to helping others make their
particular dream a reality by providing the finest, friendliest banking services
anywhere on the globe.
We couldn't do any of it without you, our shareholders. Thanks for all of your
support.
Sincerely,
/s/ Rodger W. Platt
Rodger W. Platt
Chairman and President
- --------------------------------------------------------------------------------
2
[CORTLAND BANCORP LOGO]
<PAGE> 5
BRIEF DESCRIPTION OF THE BUSINESS
- --------------------------------------------------------------------------------
CORTLAND BANCORP
Cortland Bancorp (the "Company") was incorporated under the laws of the State of
Ohio in 1984. The Company is a one bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The principal activity of the
Company is to own, manage and supervise the Cortland Savings and Banking Company
("Cortland Banks" or the "Bank"). The Company presently owns all of the
outstanding shares of the Bank. The Company provides managerial resources to,
and coordinates and evaluates the activities of, the Bank.
The Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended. Generally, this Act limits the business
of bank holding companies to owning or controlling banks and engaging in such
other activities as the Federal Reserve Board may determine to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Company conducts no other business activities except for investments in
securities as permitted under the Bank Holding Company Act. The business of the
Company and the Bank is not seasonal to any significant extent and is not
dependent on any single customer or group of customers.
THE CORTLAND SAVINGS
AND BANKING COMPANY
The Cortland Savings and Banking Company is a full service state bank engaged in
commercial and retail banking and trust services. The Bank's services include
checking accounts, savings accounts, time deposit accounts, commercial, mortgage
and installment loans, leasing, credit card services, night depository,
automated teller services, safe deposit boxes, money order services, traveler's
checks, utility bill payments and other miscellaneous services normally offered
by commercial banks. Cortland Banks also offers discount brokerage services,
while the Bank's trust department offers a broad range of fiduciary services,
including the administration of decedent and trust estates and other personal
and corporate fiduciary services.
Business is conducted at a total of thirteen offices, eight of which are located
in Trumbull County, Ohio. Three offices are located in the communities of Hiram,
Windham and Mantua, all in Portage County, Ohio while one office is located in
the community of Williamsfield, Ashtabula County, Ohio. The newest office is
located in the community of Boardman, Mahoning County, Ohio.
The Bank, as a state chartered banking organization and member of the Federal
Reserve System, is subject to periodic examination and regulation by both the
Federal Reserve Bank of Cleveland and the State of Ohio Division of Banks. These
examinations, which include such areas as capital, liquidity, asset quality,
management practices and other aspects of the Bank's operations, are primarily
for the protection of the Bank's depositors and not for its stockholders. In
addition to these regular examinations, the Bank must furnish periodic reports
to the regulatory authorities containing a full and accurate statement of its
affairs. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) up to the statutory limit of $100,000 per customer.
COMPETITION
Cortland Banks actively competes with state and national banks located in
Northeast Ohio and Western Pennsylvania. It also competes for deposits, loans
and other service business with a large number of other financial institutions,
such as savings and loan associations, credit unions, insurance companies,
consumer finance companies and commercial finance and leasing companies. Also,
money market mutual funds, brokerage houses and similar institutions provide in
a relatively unregulated environment many of the financial services offered by
banks. In the opinion of management, the principal methods of competition are
the rates of interest charged on loans, the rates of interest paid on deposit
funds, the fees charged for services, and the convenience, availability,
timeliness and quality of the customer services offered.
EMPLOYEES
As of December 31, 1997 the Company through its subsidiary, the Bank, employed
159 full-time and 51 part-time employees. The Company provides its employees
with a full range of benefit plans, and considers its relations with its
employees to be satisfactory.
- --------------------------------------------------------------------------------
3
<PAGE> 6
REPORT OF PACKER, THOMAS & CO.,
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
SHAREHOLDERS AND BOARD OF DIRECTORS
Cortland Bancorp
We have audited the accompanying consolidated balance sheets of Cortland Bancorp
and subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Packer, Thomas & Co.
Packer, Thomas & Co.
Youngstown, Ohio
February 13, 1998
- --------------------------------------------------------------------------------
4
[CORTLAND BANCORP LOGO]
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.............................. $ 15,981 $ 14,745 $ 14,117
Interest and dividends on investment securities:
Taxable interest..................................... 6,201 6,118 5,112
Nontaxable interest.................................. 783 772 684
Dividends............................................ 245 233 175
Interest on mortgage-backed securities.................. 4,982 5,160 4,571
Interest on trading account securities.................. 7 3
Other interest income................................... 178 45 146
-------- -------- --------
Total interest income........................... 28,377 27,076 24,805
-------- -------- --------
INTEREST EXPENSE
Deposits................................................ 12,081 11,973 11,035
Borrowed funds.......................................... 1,266 768 386
-------- -------- --------
Total interest expense.......................... 13,347 12,741 11,421
-------- -------- --------
Net interest income.......................... 15,030 14,335 13,384
Provision for loan losses (Note 4)...........
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 15,030 14,335 13,384
-------- -------- --------
OTHER INCOME
Fees for other customer services........................ 1,319 1,219 973
Trading securities gains - net.......................... 13 12
Investment securities gains - net....................... 94 102 5
Gain on sale of loans - net............................. 76 15 93
Gain (loss) on sale of other real estate - net.......... 27 (32)
Other non-interest income............................... 191 223 272
-------- -------- --------
Total other income.............................. 1,693 1,598 1,311
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits.......................... 5,830 5,549 5,262
Net occupancy expense................................... 684 666 611
Equipment expense....................................... 1,082 1,048 1,004
State and local taxes................................... 521 473 414
FDIC assessment......................................... 39 2 334
Office supplies......................................... 480 488 473
Marketing expense....................................... 256 265 255
Legal and litigation expense............................ 182 277 263
Other operating expenses................................ 1,221 1,229 1,445
-------- -------- --------
Total other expenses............................ 10,295 9,997 10,061
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES........................ 6,428 5,936 4,634
Federal income taxes (Note 11)............................ 1,974 1,826 1,345
-------- -------- --------
NET INCOME................................................ $ 4,454 $ 4,110 $ 3,289
======== ======== ========
EARNINGS PER COMMON SHARE (Note 1)........................ $ 3.93 $ 3.71 $ 3.04
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 9,509 $ 10,083
Federal Funds sold.......................................... 3,100
---------- ----------
Total cash and cash equivalents........................... 12,609 10,083
---------- ----------
Investment securities available for sale (Note 2)........... 115,413 119,088
Investment securities held to maturity (approximate market
value of $73,684 in 1997 and $75,461 in 1996) (Note 2).... 73,183 75,286
Total loans (Note 3)........................................ 184,491 166,109
Less allowance for loan losses (Note 4)................... (2,817) (2,966)
---------- ----------
Net loans................................................. 181,674 163,143
---------- ----------
Premises and equipment (Note 5)............................. 5,744 6,024
Other assets................................................ 4,139 4,886
---------- ----------
TOTAL ASSETS...................................... $ 392,762 $ 378,510
========== ==========
LIABILITIES
Noninterest-bearing deposits................................ $ 45,652 $ 42,130
Interest-bearing deposits (Note 7).......................... 274,086 277,900
---------- ----------
Total deposits............................................ 319,738 320,030
---------- ----------
Federal Home Loan Bank advances and other borrowings
(Note 8).................................................. 30,814 21,171
Other liabilities........................................... 2,001 1,389
---------- ----------
TOTAL LIABILITIES................................. 352,553 342,590
---------- ----------
Commitments and contingent liabilities (Notes 9 and 17)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued and outstanding 1,138,237 shares
in 1997 and 1,081,817 in 1996............................. 5,691 5,409
Additional paid-in capital.................................. 13,310 10,938
Retained earnings........................................... 20,429 19,287
Net unrealized gain on available for sale debt and
marketable equity securities (Note 2)..................... 779 286
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (Note 16)................. 40,209 35,920
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 392,762 $ 378,510
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
6
[CORTLAND BANCORP LOGO]
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Net Un-
realized
Gain Total
Additional (Loss) Share-
Common Paid-In Retained Treasury on holders'
Stock Capital Earnings Stock Securities Equity
------ ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995................... $ 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 ($.74 per share)... (794) (794)
Special cash dividend ($.19 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 ($.84 per share)... (941) (941)
Special cash dividend ($.28 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
-------- -------- -------- -------- -------- --------
Net income................................. 4,454 4,454
Shares sold................................ 118 899 1,017
Cash dividends declared ($.97 per share)... (1,101) (1,101)
Special cash dividend ($.49 per share)..... (553) (553)
3% stock dividend.......................... 164 1,473 (1,637)
Cash paid in lieu of fractional shares..... (21) (21)
Net change in unrealized gain on available
for sale debt and marketable equity
securities.............................. 493 493
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997................. $ 5,691 $ 13,310 $ 20,429 $ 0 $ 779 $ 40,209
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
7
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 4,454 $ 4,110 $ 3,289
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation, amortization and accretion........... 1,382 1,463 1,552
Deferred tax expense (benefit)..................... 64 69 (22)
Investment securities gains........................ (94) (102) (5)
Other real estate (gains) losses................... (27) 32
Gains on sales of loans............................ (76) (15) (93)
Loans originated for sale.......................... (3,930) (1,421) 1,473
Proceeds from sale of loans originated for sale.... 3,611 539
Changes in:
Interest and fees receivable................. 102 (123) (396)
Interest payable............................. 61 (62) 330
Other assets and liabilities................. 850 (505) 509
-------- -------- --------
Net cash flows from operating activities... 6,424 3,926 6,669
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale.............. (31,408) (37,738) (32,352)
Purchases of securities held to maturity................ (20,498) (20,696) (30,225)
Proceeds from sales of securities available for sale.... 19,630 12,997
Proceeds from call, maturity and principal payments on
securities........................................... 38,364 31,703 32,629
Net increase in loans made to customers................. (18,136) (10,149) (7,366)
Net proceeds from the acquisition of deposits........... 10,605
Proceeds from disposition of other real estate.......... 28 225 194
Proceeds from sale of loans............................. 1,089 330
Purchases of premises and equipment..................... (571) (319) (861)
-------- -------- --------
Net cash flows from investing activities... (12,591) (22,888) (27,046)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts............. (292) 4,101 20,649
Net increase in borrowings.............................. 9,643 12,954 1,126
Dividends paid.......................................... (1,675) (1,274) (1,026)
Purchases of treasury stock............................. (25)
Proceeds from sale of treasury stock.................... 25
Proceeds from sale of common stock...................... 1,017 800 525
-------- -------- --------
Net cash flows from financing activities... 8,693 16,606 21,249
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................. 2,526 (2,356) 872
-------- -------- --------
CASH AND CASH EQUIVALENTS
Beginning of year....................................... 10,083 12,439 11,567
-------- -------- --------
End of year............................................. $ 12,609 $ 10,083 $ 12,439
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
8
[CORTLAND BANCORP LOGO]
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
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 $13,286,000, $12,803,000 and $11,091,000 in 1997,
1996 and 1995, respectively. Cash paid for income taxes was $1,824,000 in 1997,
$1,571,000 in 1996 and $936,000 in 1995. Transfers of loans to other real estate
were $0, $11,000 and $58,000 in 1997, 1996 and 1995, 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, 1997 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred and to eliminate financial assets
when control has been surrendered in accordance with the criteria provided in
the standard. This standard supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights" an amendment to SFAS No. 65. Application of the new rules did
not have a material impact on the Company's financial position or results of
operations.
- --------------------------------------------------------------------------------
(Continued)
9
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In addition, effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital
Structure." Adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
LOANS: Loans are stated at the principal amount outstanding net of the
unamortized balance of deferred loan origination fees and costs. The Company
amortizes deferred loan fees and costs over the lives of the related loans as an
adjustment to interest income using the level yield method.
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, in the aggregate, at the lower
of cost or estimated market value based on secondary market prices. 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, 1997.
CONCENTRATIONS OF CREDIT RISK: The following table represents the composition of
the loan portfolio as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
% of Total Loans
-----------------
1997 1996
------- -------
<S> <C> <C>
1-4 family residential mortgage................. 42.1% 42.5%
Commercial mortgage loans....................... 27.1 25.5
Consumer loans.................................. 10.3 12.8
Commercial loans................................ 14.1 11.7
Home equity loans............................... 5.4 6.7
1-4 family residential mortgage
loans held for sale........................... 1.0 0.8
</TABLE>
Approximately 4.27% of total loans are unsecured at December 31, 1997, compared
to 3.16% at December 31, 1996.
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.
- --------------------------------------------------------------------------------
(Continued)
10
[CORTLAND BANCORP LOGO]
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, are recorded as a reduction of principal, and interest
income is recorded once principal recovery is reasonably assured.
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: An intangible asset resulting from a branch acquisition is
being amortized over a 15 year period. The intangible asset, net of accumulated
amortization, was $465,000 and $501,000 at December 31, 1997 and 1996,
respectively, and is included in other assets.
ADVERTISING: The Company expenses advertising costs as incurred.
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, 1998, 1997 and 1996. The 3% common stock dividend
issued on January 1, 1998 resulted in the issuance of 32,743 shares of common
stock, which have been included in the 1,138,237 shares reported as issued at
December 31, 1997.
Basic earnings per share are based on weighted average shares outstanding.
Weighted average shares outstanding were 1,132,869 for 1997, 1,107,480 for 1996
and 1,083,535 for 1995. 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.
- --------------------------------------------------------------------------------
(Continued)
11
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
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, 1997
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities................... $ 29,855 $ 299 $ 20 $ 30,134
U.S. Government agencies and
corporations............................. 18,867 212 1 19,078
Obligations of states and political
subdivisions............................. 7,103 70 1 7,172
Mortgage-backed and related securities..... 54,241 873 82 55,032
-------- ------ ------ --------
Total............................ 110,066 1,454 104 111,416
Marketable equity securities............... 2,171 166 214 2,123
Other securities........................... 1,874 1,874
-------- ------ ------ --------
Total available for sale......... $114,111 $1,620 $ 318 $115,413
======== ====== ====== ========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government agencies and
corporations............................. $ 39,448 $ 246 $ 83 $ 39,611
Obligations of states and political
subdivisions............................. 13,867 193 34 14,026
Mortgage-backed and related securities..... 19,868 200 21 20,047
-------- ------ ------ --------
Total held to maturity........... $ 73,183 $ 639 $ 138 $ 73,684
======== ====== ====== ========
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
======== ====== ====== ========
</TABLE>
At December 31, 1997 and 1996, other securities consisted of $1,648,000 and
$1,535,000 in Federal Home Loan Bank (FHLB) stock, respectively, and $226,000 in
Federal Reserve Board (FED) stock. Each 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.
- --------------------------------------------------------------------------------
(Continued)
12
[CORTLAND BANCORP LOGO]
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December 31,
1997, 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, 1997
----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less.................................... $ 9,130 $ 9,144
Due after one year through five years...................... 30,869 31,196
Due after five years through ten years..................... 14,999 15,209
Due after ten years........................................ 827 835
-------- --------
Subtotal......................................... 55,825 56,384
Mortgage-backed securities................................. 54,241 55,032
-------- --------
Total............................................ $110,066 $111,416
======== ========
INVESTMENT SECURITIES HELD TO MATURITY
Due in one year or less.................................... $ 5,645 $ 5,659
Due after one year through five years...................... 10,241 10,295
Due after five years through ten years..................... 29,596 29,827
Due after ten years........................................ 7,833 7,856
-------- --------
Subtotal......................................... 53,315 53,637
Mortgage-backed securities................................. 19,868 20,047
-------- --------
Total............................................ $ 73,183 $ 73,684
======== ========
</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>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Proceeds................................................... $30,180 $16,479 $2,146
Gross realized gains....................................... 107 131 12
Gross realized losses...................................... 13 29 7
</TABLE>
Investment securities with a carrying value of approximately $33,191,000 at
December 31, 1997 and $40,645,000 at December 31, 1996 were pledged to secure
deposits and for other purposes.
- --------------------------------------------------------------------------------
(Continued)
13
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
The following is a summary of loans:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
1-4 family residential mortgage loans...................... $ 77,644 $ 70,590
Commercial mortgage loans.................................. 50,015 42,367
Consumer loans............................................. 18,990 21,300
Commercial loans........................................... 26,022 19,355
Home equity loans.......................................... 10,064 11,136
1-4 family residential mortgage loans held for sale........ 1,756 1,361
-------- --------
Total loans...................................... $184,491 $166,109
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $1,653,000,
$1,450,000, and $1,597,000 at December 31, 1997, 1996 and 1995, respectively.
Interest income on these loans, if accrued, would have been approximately
$35,000, $29,000 and $63,000 for 1997, 1996 and 1995, respectively.
Renegotiated loans for which interest has been reduced and that are still
accruing interest totaled approximately $173,000, $182,000 and $191,000 at
December 31, 1997, 1996 and 1995, respectively. Interest income recognized on
these loans was $20,000, $21,000 and $20,000 for 1997, 1996 and 1995,
respectively. Interest income that would have been recognized under the original
terms was $25,000 for 1997, 1996 and 1995.
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,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year......................... $2,966 $3,011 $3,081
Loan charge-offs..................................... (252) (176) (367)
Recoveries........................................... 103 131 297
------ ------ ------
Net loan charge-offs............................... (149) (45) (70)
Provision charged to operations...................... 0 0 0
------ ------ ------
Balance at end of year............................... $2,817 $2,966 $3,011
====== ====== ======
</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. These loans generally include 1 - 4 family,
consumer and home equity loans. Impaired loans were evaluated using the fair
value of collateral as the measurement method. At December 31, 1997, 1996, and
1995, the recorded investment in impaired loans was $1,365,000, $1,162,000 and
$231,000 while the allocated portion of the allowance for loan losses for such
loans was $213,000, $291,000 and $57,000, respectively. Interest Income
recognized on impaired loans using the cash basis was $116,000, $92,000 and
$18,000, respectively.
- --------------------------------------------------------------------------------
(Continued)
14
[CORTLAND BANCORP LOGO]
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Land.................................................... $ 638 $ 638
Premises................................................ 5,021 5,010
Equipment............................................... 6,482 6,125
Leasehold improvements.................................. 208 191
-------- --------
12,349 11,964
Less accumulated depreciation........................... 6,605 5,940
-------- --------
Net book value................................ $ 5,744 $ 6,024
======== ========
</TABLE>
Depreciation expense was $851,000 for 1997, $832,000 for 1996 and $799,000 for
1995.
NOTE 6 - OTHER REAL ESTATE
The following is a summary of other real estate:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Other real estate....................................... $ 0 $ 28
Less allowance for losses...............................
-------- --------
Net other real estate................................... $ 0 $ 28
======== ========
</TABLE>
Activity in the allowance for losses on other real estate is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning of year............................ $ 0 $ 4
Charge-offs............................................. (4)
-------- --------
Balance at end of year.................................. $ 0 $ 0
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Demand.................................................. $ 45,958 $ 45,943
Savings................................................. 82,236 85,289
Time:
In denominations under $100,000....................... 116,255 111,635
In denominations of $100,000 or more.................. 29,637 35,033
-------- --------
Total interest-bearing deposits............... $274,086 $277,900
======== ========
</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,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Three months or less.................................... $ 8,869 $ 13,275
Three to twelve months.................................. 10,786 15,122
One through five years.................................. 8,909 5,675
Over five years......................................... 1,073 961
-------- --------
Total......................................... $ 29,637 $ 35,033
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16
[CORTLAND BANCORP LOGO]
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following is a summary of total Federal Home Loan Bank advances and other
borrowings:
(Amounts in thousands)
<TABLE>
<CAPTION>
CURRENT December 31,
INTEREST ------------------
RATE 1997 1996
-------- ------- -------
<S> <C> <C> <C>
FEDERAL HOME LOAN BANK ADVANCES
Variable rate LIBOR based Federal Home Loan Bank
advances, with monthly interest payments:
Due in 1998........................................ 5.97% $ 5,000 $ 5,000
Due in 2000........................................ 5.97 5,000 5,000
Due in 2004........................................ 5.65 3,000
Fixed rate Federal Home Loan Bank advances, with monthly
interest payments:
Due in 1998........................................ 5.86 5,000 2,000
Due in 1999........................................ 6.15 3,000 1,500
Due in 2000........................................ 6.50 1,000
Due in 2002........................................ 6.49 2,000
Due in 2007........................................ 6.37 1,000
------- -------
Total Federal Home Loan Bank advances............ 25,000 13,500
OTHER BORROWINGS
Securities sold under repurchase agreements............. 4.72 3,472 2,394
U.S. Treasury interest-bearing demand note.............. 5.25 2,321 1,204
Federal funds purchased................................. 4,050
Other................................................... 3.00 21 23
------- -------
Total other borrowings........................... 5,814 7,671
------- -------
Total Federal Home Loan Bank advances and
other borrowings........................... $30,814 $21,171
======= =======
</TABLE>
Federal Home Loan Bank (FHLB) advances are collateralized by the FHLB stock
owned by the Bank, with a carrying amount of $1,648,000 at December 31, 1997 and
a blanket lien against the Bank's qualified mortgage loan portfolio. Maximum
borrowing capacity from the FHLB totaled $32,960,000 at December 31, 1997.
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
- --------------------------------------------------------------------------------
(Continued)
17
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS (Continued)
$209,000 for 1997, $199,000 for 1996 and $181,000 for 1995. The following is a
summary of remaining future minimum lease payments under current noncancelable
operating leases for office facilities:
(Amounts in thousands)
<TABLE>
<S> <C>
Year ending -
December 31, 1998............................. $142
December 31, 1999............................. 142
December 31, 2000............................. 124
December 31, 2001............................. 117
December 31, 2002............................. 105
Later years..................................... 353
----
Total...................................... $983
====
</TABLE>
The Bank is required to maintain aggregate cash reserves amounting to $2,882,000
at December 31, 1997 to satisfy federal regulatory requirements. These amounts
do not earn interest.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The Bank's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is
represented by the contractual amount of the instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
instruments recorded on the Balance Sheet.
The following is a summary of such contract commitments:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate....................................... $ 6,241 $ 7,168
Variable rate.................................... 36,774 28,061
Standby letters of credit.......................... 361 295
</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.
- --------------------------------------------------------------------------------
(Continued)
18
[CORTLAND BANCORP LOGO]
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
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
$164,000 for 1997, $156,000 for 1996 and $141,000 for 1995. 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>
Year Ended
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current................................................. $ 1,910 $ 1,757 $ 1,367
Deferred................................................ 64 69 (22)
-------- -------- --------
Total.............................................. $ 1,974 $ 1,826 $ 1,345
======== ======== ========
</TABLE>
The following is a summary of net deferred taxes included in other liabilities
in 1997 and in other assets in 1996 and 1995:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Gross deferred tax assets:
Provision for loan and other real estate losses....... $ 634 $ 634 $ 636
Loan origination fees................................. 37 94 118
Other items........................................... 89 62 44
Gross deferred tax liabilities:
Unrealized gain on available for sale securities...... (401) (147) (331)
Depreciation.......................................... (388) (404) (385)
Other items........................................... (159) (109) (67)
-------- -------- --------
Net deferred tax asset (liability)............ $ (188) $ 130 $ 15
======== ======== ========
</TABLE>
The Company has adequate recoverable taxes paid in prior years to warrant
recording the full amount of deferred tax assets without a valuation allowance.
- --------------------------------------------------------------------------------
(Continued)
19
<PAGE> 22
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES (Continued)
The following is a reconciliation between tax expense using the statutory tax
rate of 34% and actual taxes:
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory tax........................................... $ 2,186 $ 2,018 $ 1,576
Effect of non-taxable interest and dividends............ (212) (192) (231)
-------- -------- --------
Total income taxes............................ $ 1,974 $ 1,826 $ 1,345
======== ======== ========
</TABLE>
The related income tax expense on investment and trading securities gains and
losses amounted to $36,000 for 1997, $39,000 for 1996 and $2,000 for 1995, and
is included in the total federal income tax provision.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ 12,609 $ 12,609 $ 10,083 $ 10,083
Investment securities..................... 188,596 189,097 194,374 194,549
Loans, net of allowance for loan losses... 181,674 181,986 163,143 163,088
LIABILITIES:
Demand and savings deposits............... $ 173,846 $ 173,846 $ 173,362 $ 173,362
Time deposits............................. 145,892 146,867 146,668 147,747
FHLB advances............................. 25,000 25,026 13,500 13,480
Other borrowings.......................... 5,814 5,814 7,671 7,671
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1997 and 1996. 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,
FHLB advances and other borrowings that reprice frequently and for deposit
liabilities subject to immediate withdrawal. The fair values of loans, FHLB
advances and other borrowings and time deposits that reprice less frequently are
approximated by a discount rate valuation technique utilizing estimated market
interest rates as of December 31, 1997 and 1996. The fair value of unrecorded
commitments at December 31, 1997 and 1996, 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
- --------------------------------------------------------------------------------
(Continued)
20
[CORTLAND BANCORP LOGO]
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 judgments by the
regulators about components, risk weightings, and other factors.
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). There
are no conditions or events since the most recent communication from regulators
that management believes has changed the Company's category.
<TABLE>
<CAPTION>
(Amounts in thousands)
December 31, December 31,
1997 1996
---------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Risk-Based Capital.............. $41,259 $37,118
Ratio to Risk Weighted Assets....... 22.23% 22.08%
Tier I Risk-Based Capital............. $38,933 $35,006
Ratio to Risk Weighted Assets....... 20.98% 20.82%
Ratio to Average Assets............. 10.17% 9.51%
</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
$185,571,000 and $168,097,000 as of December 31, 1997 and 1996, respectively.
Assets less intangibles and the net unrealized market value adjustment of
investment
- --------------------------------------------------------------------------------
(Continued)
21
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
securities available for sale averaged $382,785,000 and $368,015,000 for the
years ended December 31, 1997 and 1996, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1997. The following is an analysis of such
loans:
(Amounts in thousands)
<TABLE>
<S> <C>
Total loans at December 31, 1996............................ $ 1,508
New loans................................................... 3,043
Repayments.................................................. (414)
--------
Total loans at December 31, 1997.................. $ 4,137
========
</TABLE>
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,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
Cash.................................................. $ 200 $ 107
Investment securities available for sale.............. 3,086 1,399
Investment in bank subsidiary......................... 36,967 34,366
Investment in non-bank subsidiary..................... 15 15
Other assets.......................................... 30 34
-------- --------
$ 40,298 $ 35,921
======== ========
LIABILITIES:
Other liabilities..................................... $ 89 $ 1
SHAREHOLDERS' EQUITY:
Common stock.......................................... 5,691 5,409
Additional paid-in capital............................ 13,310 10,938
Retained earnings..................................... 20,429 19,287
Net unrealized gain on available for sale
debt and marketable equity securities.............. 779 286
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................... 40,209 35,920
-------- --------
$ 40,298 $ 35,921
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22
[CORTLAND BANCORP LOGO]
<PAGE> 25
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 15 - CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividends from bank subsidiary........................... $ 2,200 $ 1,275 $ 1,100
Interest and dividend income............................. 147 17 1
Investment securities gains.............................. 1
Other expenses........................................... (46) (40) (39)
-------- -------- --------
Income before income tax and equity in undistributed
earnings of subsidiaries............................ 2,302 1,252 1,062
Income tax (expense) benefit........................ (34) 8 13
Equity in undistributed net income of
subsidiaries...................................... 2,186 2,850 2,214
-------- -------- --------
NET INCOME..................................... $ 4,454 $ 4,110 $ 3,289
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 4,454 $ 4,110 $ 3,289
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in undistributed net income of
subsidiaries...................................... (2,186) (2,850) (2,214)
Investment securities gains......................... (1)
Change in other assets and liabilities.............. 51 (9) (14)
-------- -------- --------
Net cash flows from operating activities....... 2,318 1,251 1,061
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities..................... (2,820) (1,252) (1)
Proceeds from sales of securities available for sale... 1,003
Proceeds from call, maturity and principal payments on
securities available for sale....................... 250
-------- -------- --------
Net cash flows from investing activities....... (1,567) (1,252) (1)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid......................................... (1,675) (1,274) (1,026)
Proceeds from sale of common stock..................... 1,017 800 525
Proceeds from sale of treasury stock................... 25
Purchases of treasury stock............................ (25)
-------- -------- --------
Net cash flows from financing activities....... (658) (449) (526)
-------- -------- --------
Net change in cash..................................... 93 (450) 534
CASH
Beginning of year...................................... 107 557 23
-------- -------- --------
End of year............................................ $ 200 $ 107 $ 557
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE> 26
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
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, 1997 approximately $7,250,000 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
The Company's subsidiary bank was a defendant in a class action lawsuit Frank
Slentz, Et Al. V. Cortland Savings and Banking Company, involving purchased
interests in two campgrounds.
On October 20, 1997 the judge presiding over this case filed a judgment entry
dismissing all claims against the Bank without prejudice. The judgment was
appealed by the plaintiffs. The ultimate outcome of this litigation presently
cannot be determined, and therefore no provision for any liability relative to
such litigation 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
[CORTLAND BANCORP LOGO]
<PAGE> 27
THREE YEAR SUMMARY
AVERAGE BALANCES, YIELDS AND RATES
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1997
----------------------------------
Average Interest
Balance Earned Yield or
Outstanding Or Paid Rate
----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold.................................... $ 3,196 $ 178 5.6%
Trading account securities............................ 116 7 6.4%
Investment securities:
U.S. Treasury and other U.S.
Government agencies and corporations............. 92,366 6,162 6.7%
U.S. Government mortgage-backed
pass through certificates........................ 74,491 4,982 6.7%
States of the U.S. and political
subdivisions (Note 1, 2, 3)...................... 17,503 1,152 6.6%
Other securities................................... 3,822 245 6.4%
-------- -------
TOTAL INVESTMENT SECURITIES............................. 188,182 12,541 6.7%
LOANS (Note 2, 3, 4).................................... 175,515 16,057 9.1%
-------- -------
TOTAL INTEREST-EARNING ASSETS........................... $367,009 $28,783 7.8%
======== =======
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits................... $ 47,544 $ 1,386 2.9%
Savings............................................ 84,291 2,255 2.7%
Time............................................... 146,263 8,440 5.8%
-------- -------
TOTAL INTEREST-BEARING DEPOSITS......................... 278,098 12,081 4.3%
-------- -------
Borrowings:
U.S. Treasury interest-bearing demand note............ 819 42 5.1%
Federal funds purchased............................... 618 35 5.7%
Securities sold under agreement to repurchase......... 3,726 177 4.8%
Other borrowings under one year....................... 4,800 277 5.8%
Other borrowings over one year........................ 12,572 735 5.8%
-------- -------
TOTAL BORROWINGS........................................ 22,535 1,266 5.6%
-------- -------
TOTAL INTEREST-BEARING LIABILITIES...................... $300,633 $13,347 4.4%
======== =======
Net interest margin..................................... $15,436 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 1997, 1996 and 1995, and have been
adjusted to reflect the effect of disallowed interest expense related
to carrying tax exempt assets.
- --------------------------------------------------------------------------------
25
<PAGE> 28
- --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
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>
$ 843 $ 45 5.4% $ 2,485 $ 146 5.9%
57 3 5.9%
92,281 6,075 6.6% 74,447 5,051 6.8%
77,246 5,160 6.7% 70,471 4,571 6.5%
16,995 1,145 6.7% 15,436 1,024 6.6%
3,651 234 6.4% 2,965 187 6.3%
-------- ------- -------- -------
190,173 12,614 6.6% 163,319 10,833 6.6%
160,657 14,809 9.2% 153,702 14,175 9.2%
-------- ------- -------- -------
$351,730 $27,471 7.8% $319,506 $25,154 7.9%
======== ======= ======== =======
$ 46,945 $ 1,259 2.7% $ 45,864 $ 1,177 2.6%
86,468 2,319 2.7% 87,072 2,406 2.8%
146,628 8,395 5.7% 129,320 7,452 5.8%
-------- ------- -------- -------
280,041 11,973 4.3% 262,256 11,035 4.2%
-------- ------- -------- -------
681 35 5.1% 756 41 5.4%
1,918 108 5.6% 1,276 78 6.1%
2,747 120 4.4% 2,390 110 4.6%
9,157 505 5.5% 2,657 157 5.9%
-------- ------- -------- -------
14,503 768 5.3% 7,079 386 5.5%
-------- ------- -------- -------
$294,544 $12,741 4.3% $269,335 $11,421 4.2%
======== ======= ======== =======
$14,730 4.2% $13,733 4.3%
======= ==== ======= =====
</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 $44 in 1997, $89 in
1996 and $72 in 1995.
- --------------------------------------------------------------------------------
26
[CORTLAND BANCORP LOGO]
<PAGE> 29
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 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Interest Income........................... $ 28,377 $ 27,076 $ 24,805 $ 22,564 $ 23,067
Total Interest Expense.......................... 13,347 12,741 11,421 9,498 10,127
-------- -------- -------- -------- --------
NET INTEREST INCOME............................. 15,030 14,335 13,384 13,066 12,940
Provision for Loan Losses.......................
Total Other Income.............................. 1,693 1,598 1,311 1,150 885
Total Other Expenses............................ 10,295 9,997 10,061 9,812 10,688
-------- -------- -------- -------- --------
INCOME BEFORE TAX............................... 6,428 5,936 4,634 4,404 3,137
Federal Income Tax.............................. 1,974 1,826 1,345 1,321 887
-------- -------- -------- -------- --------
NET INCOME...................................... $ 4,454 $ 4,110 $ 3,289 $ 3,083 $ 2,250
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total Assets.................................... $392,762 $378,510 $358,732 $320,361 $321,269
Investments..................................... 188,596 194,374 181,710 148,976 153,787
Net Loans....................................... 181,674 163,143 153,197 147,599 142,688
Deposits........................................ 319,738 320,030 315,929 284,675 287,492
Borrowings...................................... 30,814 21,171 8,217 7,055 4,230
Shareholders' Equity............................ 40,209 35,920 32,616 27,521 26,531
PER COMMON SHARE DATA (1)
Net Income...................................... $ 3.93 $ 3.71 $ 3.04 $ 2.89 $ 2.14
Cash Dividends Declared......................... 1.46 1.12 0.93 0.77 0.47
Book Value...................................... 35.33 32.25 29.99 25.79 25.21
ASSET QUALITY RATIOS
Underperforming Assets as a
Percentage of:
Total Assets............................... 0.47% 0.44% 0.59% 0.82% 1.05%
Equity plus Allowance for Loan Losses...... 4.27 4.32 5.94 8.61 11.37
Tier I Capital............................. 4.72 4.79 6.61 9.08 12.72
FINANCIAL RATIOS
Return on Average Equity........................ 11.62% 12.00% 10.80% 11.00% 8.83%
Return on Average Assets........................ 1.16 1.11 0.98 0.95 0.71
Average Equity to Average Total Assets.......... 9.99 9.29 9.06 8.67 8.01
Equity to Asset Ratio........................... 10.24 9.50 9.09 8.59 8.26
Tangible Equity to Tangible Asset Ratio......... 10.13 9.37 8.96 8.59 8.26
Cash Dividend Payout Ratio...................... 37.2 30.2 30.6 26.6 22.0
Net Interest Margin Ratio....................... 4.21 4.19 4.30 4.37 4.35
</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> 30
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
OVERVIEW AND OUTLOOK
Net income for 1997 increased by 8.4% to $4,454, best in the Company's history,
and constituted an increase of $344 from the $4,110 earned in 1996. Earnings per
share of $3.93 represented an improvement of $0.22 from the $3.71 per share
realized in 1996.
Capital ratios continued to strengthen, facilitating a 30% increase in dividends
per share. As of December 31, 1997, the ratio of equity capital to total assets
was 10.24%, up from 9.50% a year ago; while risk-based capital measured 22.23%
compared to 22.08% at December 31, 1996. All capital ratios were well in excess
of required regulatory minimums.
During the year, the Company added 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. During the fourth quarter of 1997, the Company began
assessing surcharges for ATM transactions. These charges are expected to
contribute an additional $50-$75 of service fee income in 1998.
The Company opened its newest banking office in southern Mahoning County during
August of 1997, while the relocation of the Mantua branch to a new facility at
Mantua Corners has been indefinitely delayed pending resolution of EPA issues.
Management expects the economy in 1998 to exhibit a slower rate of growth than
in 1997 with continued low inflation. Interest rates are expected to remain
relatively stable over the first half of 1998 before declining in the second
half as the economy slows due to fiscal and monetary restraint and economic
problems in Asia.
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. To further facilitate
customer service and innovation while enhancing productivity, the Company will
realign its retail lending and branch operations during 1998.
Return on average equity in 1997 declined slightly to 11.62% while the return on
average assets climbed to 1.16%. Book value per share increased 9.6% to $35.33.
The price of the Company's common stock increased during the year, trading in a
range between a first quarter low of $40 and a fourth quarter high of $59. The
percentage of earnings per share paid out in dividends was increased to 37% from
the 30% previously paid out.
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>
1997 1996 1995
<S> <C> <C> <C>
Nonaccrual loans:
1-4 residential mortgage $ 565 $ 622 $ 553
Commercial mortgage 986 754 777
Commercial loans 27 0 0
Secured by farmland 0 0 261
Consumer loans 57 17 6
Home equity loans 18 57 0
-----------------------------------------------------------
TOTAL NONACCRUAL LOANS 1,653 1,450 1,597
Investment securities 0 0 106
Other real estate owned 0 28 215
-----------------------------------------------------------
TOTAL NONPERFORMING ASSETS 1,653 1,478 1,918
Loans ninety days past due
and still accruing interest 10 18 7
Restructured loans 173 182 191
-----------------------------------------------------------
TOTAL UNDERPERFORMING ASSETS $1,836 $1,678 $2,116
</TABLE>
The table below provides a number of asset quality ratios based on the data
presented above. Overall, asset quality remained reasonably stable during 1997.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Nonperforming loans as a
percentage of total loans 0.90% 0.87% 1.02%
Nonperforming assets as a
percentage of total assets 0.42% 0.39% 0.53%
Underperforming assets as a
percentage of total assets 0.47% 0.44% 0.59%
Underperforming assets as a
percentage of equity
capital plus allowance for
loan losses 4.27% 4.32% 5.94%
</TABLE>
- --------------------------------------------------------------------------------
28
[CORTLAND BANCORP LOGO]
<PAGE> 31
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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 2,966 $ 3,011 $ 3,081 $ 3,139 $ 3,415
Loan losses:
1-4 family residential mortgages...... (21) (5) (69) (72) (172)
Commercial mortgages.................. (16) 0 0 (27) (42)
Consumer loans........................ (202) (167) (220) (141) (271)
Commercial loans...................... 0 (4) (78) (48) (123)
Home equity loans..................... (13) 0 0 0 (7)
------- ------- ------- ------- -------
(252) (176) (367) (288) (615)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1-4 family residential mortgages...... 2 3 4 4 26
Commercial mortgages.................. 0 0 78 6 28
Consumer loans........................ 85 72 152 156 202
Commercial loans...................... 11 56 63 64 83
Home equity loans..................... 5 0 0 0 0
------- ------- ------- ------- -------
103 131 297 230 339
------- ------- ------- ------- -------
Net loan losses............................ (149) (45) (70) (58) (276)
------- ------- ------- ------- -------
Provision charged to operations............ 0 0 0 0 0
------- ------- ------- ------- -------
Balance at end of year..................... $ 2,817 $ 2,966 $ 3,011 $ 3,081 $ 3,139
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans outstanding............ 0.09% 0.03% 0.05% 0.04% 0.19%
======= ======= ======= ======= =======
Ratio of loan loss allowance to total
loans.................................... 1.53% 1.78% 1.93% 2.04% 2.15%
======= ======= ======= ======= =======
</TABLE>
The improvement in asset quality achieved over the past several years has
resulted in a low ratio of net loan losses to average net loans. The allowance
for loan loss at 170% of nonperforming loans and 153% 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> 32
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>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
1-4 family residential mortgages................... $ 427 $ 387 $ 351 $ 385 $ 405
Commercial mortgages............................... 1,378 1,179 1,118 1,223 1,029
Consumer loans..................................... 278 410 416 407 424
Commercial loans................................... 283 325 239 207 192
Home equity loans.................................. 25 55 61 63 67
Unallocated portion................................ 426 610 826 796 1,022
------ ------ ------ ------ ------
$2,817 $2,966 $3,011 $3,081 $3,139
====== ====== ====== ====== ======
</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 quickened during 1997. The Company
realized an increase of $18,382 in the loan portfolio from the level of $166,109
recorded at December 31, 1996.
Residential lending's share of the portfolio remained steady during 1997 with
1-4 family residential mortgages representing 43.1% of total loans compared to
43.3% in 1996. The portion of the loan portfolio represented by commercial loans
(including commercial real estate) increased from 37.2% to 41.2%. Consumer loans
(including home equity loans) decreased from 19.5% to 15.7%.
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 43.1% of the portfolio, a decrease from its 47.4%
share in 1992. Home equity loans have also decreased from an 8.2% portfolio
share in 1992 to 5.4% in 1997. During that same time frame, traditional consumer
installment lending saw its share of the portfolio decline from 12.5% to 10.3%.
Meanwhile, the portfolio share claimed by commercial loans (including commercial
real estate) climbed to 41.2%, up from 31.9% five years ago, as the Company
aggressively pursued medium-to-small business relationships.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(In Percentages)
<S> <C> <C> <C>
1-4 Family Mortgages 43.1 1-4 Family Mortgages 47.4
Home Equity 5.4 Home Equity 8.2
Consumer 10.3 Consumer 12.5
Commercial 41.2 Commercial 31.9
1997 1992
</TABLE>
During 1997, approximately $17.9 million in new mortgage loans were originated
by the Company, an increase of $8.3 million from the prior year. The
- --------------------------------------------------------------------------------
30
[CORTLAND BANCORP LOGO]
<PAGE> 33
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Company added an experienced mortgage banker in the second quarter of 1997.
Approximately 75% of all residential mortgage production occurred in the last
half of 1997.
With the yield and quality of mortgage loans favorable and production levels
still relatively moderate, management elected to hold approximately 80% of
mortgages originated in 1997. 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 $25. A portion of mortgage loans are also sold to other investors
with servicing rights released.
Management seeks to further stimulate production of residential mortgage loans
in 1998. The new mortgage banker hired in 1997 will help further develop and
expand our market coverage. Emphasis continues to be placed on realtor call
programs. Management continues to pursue additional outlets for jumbo mortgage
products (in the range of $226,000 and up) and other non-standard mortgage
offerings. Management anticipates that mortgage production will increase by
40-50% in 1998, with a significant number of mortgage originations sold to FHLMC
and other investors.
Management remains committed to continuing its expansion into the
medium-to-small business sector. Management's expansion of business product
offerings, delivered by experienced commercial lenders, has paid off by
significantly increasing net commercial loans outstanding while building
medium-to-small business market share. Despite competitive pressures from
super-regional banks, the Company's focused marketing efforts towards this
sector is proving a successful competitive strategy. In addition to increasing
penetration within existing markets, management seeks to identify and enter new
markets as well. During 1997, the Company entered the southern Mahoning County
market and has experienced strong acceptance by area businesses.
Consumer lending is anticipated to remain flat. Increasingly consumers are
opting to lease rather than purchase personal vehicles. The Company 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 fluctuations
resulting from market volatility. The potential adverse impact of this
volatility, however, was mitigated when bank regulatory agencies decided to
measure capital adequacy for regulatory purposes without regard to the effects
of SFAS 115.
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
- --------------------------------------------------------------------------------
31
<PAGE> 34
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
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, 1997, the carrying value of all investment securities, both
available for sale and held to maturity, tallied $188,596, a decrease of $5,778
or 3.0% from the prior year. The allocation between single maturity investment
securities and mortgage-backed securities shifted slightly to a 59/41 split
versus the 61/39 division of the previous year. Mortgage-backed securities were
virtually unchanged, increasing by just $31.
Holdings of obligations of states and political subdivisions showed a net
increase of $3,811 as the Company sought to extend call dates as protection
against falling interest rates. The primary focus here was pre-refunded
municipals that are fully escrowed in U.S. Government obligations and high grade
callable municipals issued by Ohio communities.
The Company decreased its holdings of U.S. Treasury securities by approximately
$9.9 million, or 24.7% as securities were sold during the year to accommodate
liquidity needs and to reflect declining pledging requirements.
Investments in U.S. government agencies and sponsored corporations remained
virtually unchanged as purchases in high yielding callable issues were offset by
securities that were called during the year.
Marketable equity securities appreciated by $145 during 1997, while holdings of
other securities increased by $113 on stock dividends received from the Federal
Home Loan Bank of Cincinnati.
The mix of mortgage-backed securities reversed from a 54/46 weighting in favor
of floating rate and adjustable rate products in 1996 to a 55/45 weighting in
favor of fixed rate securities in 1997. 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 1997 and 1996 is graphically depicted below.
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES
PORTFOLIO MIX
(In Percentage)
<S> <C> <C> <C>
Fixed Rate 55 Fixed Rate 46
Variable & Adjustable 45 Variable & Adjustable 54
1997 1996
</TABLE>
Included in the mortgage-backed securities portfolio are investments in
collateralized mortgage obligations which totalled $13,869 and $12,632 at
December 31, 1997 and 1996, respectively. These investments are monitored and
subjected to regulatory prescribed stress tests. At both December 31, 1997 and
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, 1997, a net unrealized gain of $779, net of tax, was included in
shareholders' equity, as compared to a net unrealized gain of $286, net of tax,
as of December 31, 1996. This $493 increase primarily reflects the enhanced
market value of debt securities in general as interest rates declined throughout
much of the fourth quarter, reversing the trend toward higher rates established
earlier in the year. Higher interest rates generally translate into lower market
prices for
- --------------------------------------------------------------------------------
32
[CORTLAND BANCORP LOGO]
<PAGE> 35
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
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
decrease of 0.09% to $319,738 at December 31, 1997 as compared to $320,030 at
December 31, 1996.
The Company's deposit base consists of demand deposits, savings, money market
and time deposit accounts. Average noninterest-bearing deposits increased 11.1%
during 1997, while average interest-bearing deposits decreased by 0.7%.
During 1997, noninterest-bearing deposits averaged $42,199 or 13.2% of total
average deposits as compared to $37,999 or 11.9% in 1996. Core deposits averaged
$287,661 for the year ended December 31, 1997, an increase of $4,039 or 1.4%
from the average level of 1996. During 1996, core deposits had averaged
$283,622, an increase of 5.9% 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 89.8%
of average total deposits in 1997 compared to 89.2% in 1996 and 90.5% in 1995.
Over the past five years, the Company has successfully increased the share of
deposits represented by noninterest-bearing and NOW checking accounts. These
products now comprise 20.4% of total deposits compared to only 14.4% five years
ago. The following depicts how the deposit mix has shifted during this time
frame.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT MIX
(In Percentages)
<S> <C> <C> <C>
Jumbo CD's 10.2 Jumbo CD's 6.6
Other CD's 35.5 Other CD's 39.0
Checking 13.2 Checking 8.1
NOW 7.2 NOW 6.3
Money Market 7.6 Money Market 11.5
Savings 26.3 Savings 28.5
1997 1992
</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 11.6%, 12.0% and 10.8% for 1997, 1996 and 1995, respectively, while the
return on average assets amounted to 1.2% in 1997, 1.1% in 1996 and 1.0% in
1995.
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. The net interest margin ratio registered 4.2%, both in 1997
and 1996 and 4.3% in 1995.
- --------------------------------------------------------------------------------
33
<PAGE> 36
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>
- --------------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
-----------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Income
Federal funds sold.................... $ 131 $ 2 $ 133 $ (88) $ (13) $(101)
Trading account securities............ 3 1 4 3 0 3
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations..................... 6 81 87 1,178 (154) 1,024
U.S. Government mortgage-backed
pass-through certificates........ (184) 6 (178) 449 140 589
States of the U.S. and political
subdivisions..................... 34 (27) 7 105 16 121
Other securities.................... 11 0 11 44 3 47
Loans................................. 1,360 (112) 1,248 641 (7) 634
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income Change............. 1,361 (49) 1,312 2,332 (15) 2,317
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense
Interest-bearing demand deposits...... 16 111 127 28 54 82
Savings deposits...................... (58) (6) (64) (17) (70) (87)
Time deposits......................... (21) 66 45 991 (48) 943
U.S. Treasury interest-bearing
demand note......................... 7 0 7 (4) (2) (6)
Federal funds purchased............... (74) 1 (73) 36 (6) 30
Securities sold under agreements to
repurchase.......................... 46 11 57 16 (6) 10
Other borrowings under one year....... 277 0 277 0 0 0
Other borrowings over one year........ 198 32 230 359 (11) 348
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense Change............ 391 215 606 1,409 (89) 1,320
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME ON A TAXABLE EQUIVALENT BASIS.. $ 970 $ (264) $ 706 $ 923 $ 74 $ 997
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
34
[CORTLAND BANCORP LOGO]
<PAGE> 37
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Total other income for 1997 increased $95, or 5.9% compared to an increase of
$287, or 21.9% in 1996. Fees for customer services increased by $100 or 8.2%.
The increase reflects changes in the fee structure for debit card and ATM
transactions during 1997 and the effect of changes in the fees charged checking
account customers implemented during 1996. The Company experienced no net gain
or loss on the disposition of other real estate in 1997 compared to a net gain
of $27 in 1996 and a net loss of $32 recorded in 1995. Loans held for sale in
the secondary market showed gains of $76, $15 and $93 in 1997, 1996 and 1995,
respectively. Activity in trading securities, the early call of held to maturity
securities, and transactions involving available for sale securities combined to
produce net gains of $107 and $114 in 1997 and 1996, respectively, as compared
to more modest gains of $5 in 1995.
Other operating income decreased by $32 during 1997, following a $49 decrease in
1996. This income category is subject to fluctuation due to nonrecurring items,
with other operating income for 1995 having benefited from a $69 refund on the
Alpine class action settlement.
<TABLE>
<S> <C> <C> <C>
OTHER INCOME
1997 1996 1995
Fees for other customer
services $1,319 $1,219 $ 973
Gain on sale of loans 76 15 93
Gain (loss) on sale of other
real estate 0 27 (32)
Other operating income 191 223 272
---------------------------------
1,586 1,484 1,306
Trading securities net
gains 13 12 0
Investment securities net
gains 94 102 5
---------------------------------
Total other income $1,693 $1,598 $1,311
</TABLE>
Total other non-interest expenses increased by 3.0%, or $298 in 1997. This
compares to a decrease of $64, or 0.6% in 1996. Expenditures for salaries and
employee benefits increased by 5.1%, reflecting, in part, the staffing
requirements of the Company's newest branch office opened in the second half of
1997.
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 in 1996 and an increase of $37 in 1997.
Occupancy and equipment expense increased by a combined 3.0%, or $52, reflecting
a partial year of operation for the Company's newest office. All other
categories of non-interest expense decreased by $72, or 2.6% in the aggregate,
as the Company continued to emphasize expense control while realizing the
benefits of maintaining high standards of asset quality.
<TABLE>
<S> <C> <C> <C>
NON-INTEREST EXPENSE
1997 1996 1995
Salaries and benefits $ 5,830 $ 5,549 $ 5,262
Net occupancy expense 684 666 611
Equipment expense 1,082 1,048 1,004
State and local taxes 521 473 414
FDIC assessment 39 2 334
Office supplies 480 488 473
Marketing expense 256 265 255
Legal and litigation expense 182 277 263
Other operating expense 1,221 1,229 1,445
------- ------- -------
Total other expenses $10,295 $ 9,997 $10,061
</TABLE>
Salaries and employee benefits represented 56.6% of all non-interest expenses in
1997. Exclusive of FDIC, legal and litigation expenses, salaries and employee
benefits share of non-interest expense was 57.9%, 57.1% and 55.6% in 1997, 1996
and 1995, respectively. Salaries and employee benefits increased by $281 in 1997
following an increase of
- --------------------------------------------------------------------------------
35
<PAGE> 38
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
$287 in 1996. The following details components of these increases:
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN SALARIES & BENEFITS
Amounts Percent
----------------------------------------
1997 1996 1995 1997 1996 1995
----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $248 $295 $197 5.7% 7.3% 5.1%
Benefits 20 16 61 1.6 1.3 5.2
Profit Sharing 25 42 15 11.2 21.4 8.3
------------------
293 353 273 5.0 6.4 5.3
Def'd Loan
Origination (12) (66) 33 4.2 30.0 13.1
------------------
$281 $287 $306 5.1% 5.5% 6.2%
</TABLE>
During 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 196 employees in 1997, 195 in 1996 and
194 in 1995. Wage and salary expense per employee averaged $23,455 in 1997,
$22,306 in 1996 and $20,897 in 1995, exclusive of profit sharing, which averaged
$1,263 per employee in 1997, $1,144 in 1996 and $1,014 in 1995. Productivity
ratios which measure employee efficiency continued to improve. Average earning
assets per employee measured $1,872 in 1997, $1,804 in 1996 and $1,647 in 1995.
FOURTH QUARTER 1997 AS
COMPARED TO FOURTH QUARTER 1996
During the fourth quarter of 1997, tax equivalent net interest income increased
by $195, a 5.2% increase over fourth quarter 1996. The yield on earning assets
increased by 6 basis points while fourth quarter average earning assets
increased by $14 million when compared to a year ago, resulting in an increase
in tax equivalent interest income of $341. The rate paid on interest-bearing
liabilities increased by 13 basis points while fourth quarter average
interest-bearing liabilities increased by $4 million when compared to a year
ago, resulting in an increase in total interest expense of $146. 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 $101 in 1997 and $38 in 1996, while the
recovery of previously charged-off loans amounted to $30 during the fourth
quarter of 1997 compared to $36 in the same period of 1996.
Despite a $26 decline in other operating income from a year ago, total other
income increased by $80. The increase was primarily due to the following: a $36
gain on sale of loans in 1997 compared to a $24 gain in the same period of 1996;
a $49 increase in fees for customer services, 40% of which came from ATM fees
enacted this quarter; and a $48 gain on investment securities.
Total other non-interest expenses in the fourth quarter were $2,807 in 1997
compared to $2,684 in 1996, an increase of $123 or 4.6%. Salaries and benefits
constituted a $53 increase, or 3.3%. Occupancy and equipment, office supplies
and marketing expenses increased by $43, or 6.8%, primarily due to the opening
of a new branch office in mid third quarter. State and local taxes and FDIC
assessments increased by $28, or 25.5%.
Income before income tax during the fourth quarter amounted to $1,504 in 1997
compared to $1,362 in 1996. Income tax expense for the fourth quarter of 1997
was $450 as compared to $415 in 1996. Fourth quarter net income was $1,054 in
1997 compared to $947 in 1996, representing an increase of $107, or 11%.
Earnings per share for the fourth quarter, adjusted for the 3% stock dividend
paid January 1, 1998, amounted to $0.93 in 1997 and $0.85 in 1996. There were no
gains or losses on investment securities in the fourth quarter of 1996, while
1997 fourth quarter earnings per share include after tax gains on investment
securities of $0.03 per share.
- --------------------------------------------------------------------------------
36
[CORTLAND BANCORP LOGO]
<PAGE> 39
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
ASSET-LIABILITY MANAGEMENT
The Company's Asset/Liability Committee, comprised of members of both senior
management and the Board of Directors, meets periodically to review the
Company's balance sheet structure and liquidity needs. The Company has defined a
set of key control parameters which provide various measures of the balance
sheet's exposure to changes in interest rates. The Company's goal is to produce
a net interest margin that is relatively stable despite interest rate volatility
while maintaining 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, 1997
<TABLE>
<CAPTION>
Maturity or Repricing Interval
-----------------------------------------------------
Non Rate
Sensitive
or greater
3 Months 3 to 12 1 to 5 than 5
or Less Months Years Years Total
-------- ------- ------ --------- -----
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Federal Funds Sold......................... $ 3,100 $ 0 $ 0 $ 0 $ 3,100
Investments................................ 43,062 41,511 77,263 26,760 188,596
Loans & Leases............................. 58,646 40,361 67,571 17,913 184,491
-------- -------- -------- ------- --------
Total Earning Assets......................... 104,808 81,872 144,834 44,673 376,187
Other Assets................................. 0 0 0 16,575 16,575
-------- -------- -------- ------- --------
Total Assets................................. $104,808 $ 81,872 $144,834 $61,248 $392,762
======== ======== ======== ======= ========
Interest-Bearing Liabilities
NOW & Supernow Accounts.................... $23,365 $ 0 $ 0 $ 0 $ 23,365
Money Market Accounts...................... 22,593 0 0 0 22,593
Passbook Savings........................... 82,236 0 0 0 82,236
Time Deposits less than 100,000............ 32,014 45,372 29,557 9,312 116,255
Time Deposits greater than or
equal to 100,000......................... 9,136 10,786 8,642 1,073 29,637
Repurchase Agreements...................... 3,472 0 0 0 3,472
U.S. Treasury Demand....................... 2,321 0 0 0 2,321
Other Borrowings........................... 13,500 4,500 6,000 1,021 25,021
-------- -------- -------- ------- --------
Total Interest-Bearing Liabilities........... 188,637 60,658 44,199 11,406 304,900
Demand Deposits.............................. 0 0 0 45,652 45,652
Other Liabilities............................ 0 0 0 2,001 2,001
Shareholders' Equity......................... 0 0 0 40,209 40,209
-------- -------- -------- ------- --------
Total Liabilities & Equity................... $188,637 $ 60,658 $ 44,199 $99,268 $392,762
======== ======== ======== ======= ========
Rate Sensitivity Gap......................... $(83,829) $ 21,214 $100,635 $33,267
Cumulative Gap............................... $(83,829) $(62,615) $ 38,020 $71,287
Cumulative Gap to Total Assets............... (21.3)% (15.9)% 9.7% 18.2%
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE> 40
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 much of 1997, the effective maturities of earning assets lengthened as
management sought to take advantage of the increase in interest rates that
occurred between March and September, as the Federal Reserve and certain
investors in the capital markets grew concerned that the economy would overheat,
reigniting inflation. These fears failed to materialize and by year-end focus
had shifted to the crises in the Asian economies and their potential
deflationary impact on the U.S. economy. As the yield curve flattened rapidly in
response, the likelihood that certain callable investments would indeed be
called heightened and the prospects for accelerating prepayments on loans and
mortgage backed securities increased similarly. The impact of these market
developments will most likely be to shorten the effective maturities of the
Company's earning assets.
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 five 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 cash equivalents, which includes federal funds sold, increased $2,526
compared to year-end 1996. Investment securities maturing, repricing or expected
to be called in one year or less amounted to $78,170 at December 31, 1997,
representing 41.4% of the total combined portfolio, as compared to $72,370 and
37.2% 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
- --------------------------------------------------------------------------------
38
[CORTLAND BANCORP LOGO]
<PAGE> 41
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- --------------------------------------------------------------------------------
Discount Window. The Company is a member of the Federal Home Loan Bank of
Cincinnati, which provides yet another source of liquidity.
Operating activities provided cash of $6.4 million, $3.9 million and $6.7
million in 1997, 1996 and 1995, respectively. Refer to the Consolidated
Statements of Cash Flows for a summary of the sources and uses of cash in 1997,
1996 and 1995.
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."
<TABLE>
<CAPTION>
LEVERAGE RATIO
(In Percentage)
<S> <C>
1993 8.33
1994 8.97
1995 9.53
1996 9.51
1997 10.17
</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, 1997 and 1996. 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,
1997 1996
------------ ------------
<S> <C> <C>
Tier 1 Capital $ 38,933 $ 35,006
Tier 2 Capital 2,326 2,112
-------- --------
QUALIFYING CAPITAL $ 41,259 $ 37,118
======== ========
Risk-Adjusted Total Assets(*) $185,571 $168,097
======== ========
Tier 1 Risk-Based Capital Ratio 20.98% 20.82%
Total Risk-Based Capital Ratio 22.23% 22.08%
Total Leverage Capital Ratio 10.17% 9.51%
</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> 42
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 $367,009 during 1997, representing a 4.3%
increase over 1996. 1996 earning assets had averaged $351,730 for a 10.1%
increase over 1995. The yield on interest-earning assets was 7.8%, 7.8% and 7.9%
in 1997, 1996 and 1995, respectively. The average rate incurred on
interest-bearing liabilities was 4.4%, 4.3% and 4.2% for those same years.
Interest-bearing liabilities averaged $300,633 for 1997, increasing by 2.1% from
1996 levels which averaged $294,544.
<TABLE>
<CAPTION>
NET INTEREST MARGIN RATIO
(In Percentages)
<S> <C>
1993 4.4
1994 4.4
1995 4.3
1996 4.2
1997 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 1997 comprised 51.3% of
average earning assets, up from 42.5% five years ago, but down from 54.1% in
1996.
Growth objectives have required management to increase its utilization of more
expensive funding sources. Borrowed funds represented 6.1% of average earning
assets in 1997 compared to 4.1% in 1996 and 2.2% in 1995, 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 which require 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. Neither the price, timing nor the magnitude of changes
directly coincide with changes in interest rates.
YEAR 2000
The Company has established a "Year 2000 (Y2K) project management team" to
provide a structured format for thoroughly addressing the Y2K problem. The
project team seeks to ensure that operational and financial systems are not
adversely affected by Y2K software or hardware failures due to calculations
using the year 2000 date. The Company expects to incur Y2K program costs over
the next three years of approximately $100,000 to $500,000 to replace, or
repair, computer applications and equipment to make them "Year 2000 compliant."
These cost estimates are not expected to represent significant amounts of
incremental costs, but rather a reallocation and resequencing of existing and
planned technology resources.
Management is requiring vendors and providers of computer equipment to represent
that all products provided are, or will be, Year 2000 compliant. The Y2K project
team has also planned a program of testing for compliance. Subsidiary bank
personnel are also actively educating and alerting customers to the potential
Y2K issues, including inquiries as to the readiness and preparedness of key loan
customers.
Ultimate success is dependent upon the cooperation and ability of vendors,
customers and all levels of government and governmental agencies (including the
Federal Reserve) to meet the Y2K challenge. The problem is truly global in
nature, and its successful resolution depends upon everyone, everywhere, doing
their part. It is recognized that the failure of any of these parties to achieve
Year 2000 compliance could result in additional expense to the Company.
- --------------------------------------------------------------------------------
40
[CORTLAND BANCORP LOGO]
<PAGE> 43
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
McDonald & Company Securities, Inc.
International Towers Building
25 Market Street
Youngstown, Ohio 44503
Telephone: 1-330-746-2993
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, 1998, 1997 and
1996. The Company currently has approximately 1,437 shareholders.
<TABLE>
<CAPTION>
Price Per Share Cash
------------------------- Dividends
High Low Per Share
----------- --- ---------
<S> <C> <C> <C>
1997
FOURTH QUARTER...................................... 59 48 $0.97
THIRD QUARTER....................................... 50 45 1/4 0.00
SECOND QUARTER...................................... 47 42 0.49
FIRST QUARTER....................................... 45 1/8 40 0.00
1996
Fourth Quarter...................................... 41 1/2 37 1/2 $0.71
Third Quarter....................................... 38 3/8 35 1/2 0.00
Second Quarter...................................... 37 1/4 34 3/4 0.41
First Quarter....................................... 37 29 3/4 0.00
1995
Fourth Quarter...................................... 32 25 1/2 $0.56
Third Quarter....................................... 27 1/4 25 1/4 0.00
Second Quarter...................................... 27 1/2 25 0.37
First Quarter....................................... 27 23 1/2 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 current stock prices you may access our home page at www.cortland-banks.com.
For more information on the dividend reinvestment plan, you may contact Deborah
L. Eazor at the following telephone number: (330) 637-8040.
- --------------------------------------------------------------------------------
41
<PAGE> 44
CORTLAND BANCORP
BOARD OF DIRECTORS
RODGER W. PLATT
CHAIRMAN
P. BENNETT BOWERS
DAVID C. COLE
GEORGE E. GESSNER
WILLIAM A. HAGOOD
JAMES E. HOFFMAN III
RICHARD L. HOOVER
DENNIS E. LINVILLE
K. RAY MAHAN
TIMOTHY K. WOOFTER
OFFICERS
RODGER W. PLATT
CHAIRMAN AND PRESIDENT
DENNIS E. LINVILLE
EXECUTIVE VICE PRESIDENT
AND CORPORATE SECRETARY
LAWRENCE A. FANTAUZZI
TREASURER AND CONTROLLER
JAMES M. GASIOR
VICE PRESIDENT AND CHIEF
OPERATIONS OFFICER
CORTLAND BANKS OFFICES AND LOCATIONS
Thirteen Offices Serving These Fine Communities
BOARDMAN
8580 South Avenue
Youngstown, Ohio 44514
330-758-5884
BRISTOL
6090 State Route 45
Bristolville, Ohio 44402
330-889-3062
BROOKFIELD
7325 Warren-Sharon Road
Brookfield, Ohio 44403
330-448-6814
CORTLAND
194 West Main Street
Cortland, Ohio 44410
330-637-8040
HIRAM
6821 Wakefield Road
Hiram, Ohio 44234
330-569-3237
HUBBARD
890 West Liberty Street
Hubbard, Ohio 44425
330-534-2265
MANTUA
10521 Main Street
Mantua, Ohio 44255
330-274-3111
NILES
6050 Youngstown-Warren Road
Niles, Ohio 44446
330-544-3333
NORTH BLOOMFIELD
8837 State Route 45
North Bloomfield, Ohio 44450
440-685-4731
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
330-394-1438
WARREN
2935 Elm Road
Warren, Ohio 44483
330-372-1520
WILLIAMSFIELD
5917 U.S. Route 322
Williamsfield, Ohio 44093
440-293-7502
WINDHAM
9690 East Center Street
Windham, Ohio 44288
330-326-2340
Member
Federal Reserve System
and
Federal Deposit Insurance Corporation
Visit us at our home page on the world wide web at
www.cortland-banks.com
or Email us at [email protected]
42
[CORTLAND BANCORP LOGO]
<PAGE> 45
THE CORTLAND SAVINGS AND BANKING COMPANY
BOARD OF DIRECTORS
P. BENNETT BOWERS
Bowers Insurance Agency
DAVID C. COLE
General Manager
Cole Valley Motor Company
GEORGE E. GESSNER
Attorney
WILLIAM A. HAGOOD
President, Tri-City Mobile Homes, Inc.
JAMES E. HOFFMAN III
Attorney
RICHARD L. HOOVER
Consultant
DENNIS E. LINVILLE
Executive Vice President
K. RAY MAHAN
President, Mahan Packing Co.
RODGER W. PLATT
President and Chairman
TIMOTHY K. WOOFTER
President, Stan-Wade Metal Products
PAUL C. BOWERS
Director Emeritus
R. B. KNIGHT
Director Emeritus
JOHN F. GESSNER
Director Emeritus
STANLEY L. WOOFTER
Director Emeritus
* * * * *
OFFICERS
RODGER W. PLATT
President and Chairman
DENNIS E. LINVILLE
Executive Vice President and Corporate Secretary
LAWRENCE A. FANTAUZZI
Senior Vice President, Controller, Treasurer
and Chief Financial Officer
JAMES M. GASIOR
Senior Vice President and Chief Operations Officer
CHARLES J. COMMONS
Vice President
GERALD L. THOMPSON
Vice President
MARLENE LENIO
Vice President
EMMA JEAN WOLLAM
Vice President
TED BANGERT
Vice President
ROBERT J. HORVATH
Vice President
T. WILLIAM ELLIOTT
Vice President
STEPHEN A. TELEGO, SR.
Vice President and Director of Human Resources
CARLO A. CICCONE
Vice President and Chief Audit Officer
DANNY L. WHITE
Assistant Vice President
GERARD F. KANE
Assistant Vice President
MARK GOVERNOR
Assistant Vice President
MARCEL P. ARNAL
Assistant Vice President
JAMES A. REA
Assistant Vice President
JUDY RUSSELL
Assistant Vice President
GRACE J. BACOT
Assistant Vice President
JAMES DUFF
Assistant Vice President
BEVERLY KOSTOFF
Assistant Vice President
PIETRO PASCALE
Assistant Vice President
KEITH MROZEK
Assistant Vice President
FRANK R. SEDALL
Assistant Vice President
MARK J. MEDIATE
Assistant Vice President
SHIRLEY F. ROOT
Assistant Vice President
JOYCE P. RATCLIFF
Assistant Vice President and Trust Officer
CRAIG PHYTHYON
Assistant Vice President
TIMOTHY CARNEY
Assistant Vice President
DOUGLAS BLAY
Assistant Vice President
ROSE A. STROUD
Assistant Secretary-Treasurer
JANET K. HOUSER
Assistant Secretary-Treasurer
DEBORAH L. EAZOR
Assistant Secretary-Treasurer
RUSSELL E. TAYLOR
Assistant Treasurer
STEVE J. MACK
Assistant Secretary
SUE FABIAN
Assistant Secretary
DAVID IKLODI
Assistant Secretary
DARLENE MACK
Assistant Secretary
43
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following lists the subsidiaries of the registrant and the state of
incorporation of each:
NAME INCORPORATED
---- ------------
1) The Cortland Savings and Banking Company Ohio
2) New Resources Leasing Company Ohio
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We 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 13, 1998 on the 1997 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 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 ANNUAL
REPORT AND 1997 10K 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,509
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,413
<INVESTMENTS-CARRYING> 73,183
<INVESTMENTS-MARKET> 73,684
<LOANS> 184,491
<ALLOWANCE> 2,817
<TOTAL-ASSETS> 392,762
<DEPOSITS> 319,738
<SHORT-TERM> 15,793
<LIABILITIES-OTHER> 2,001
<LONG-TERM> 15,021
0
0
<COMMON> 5,691
<OTHER-SE> 34,518
<TOTAL-LIABILITIES-AND-EQUITY> 392,762
<INTEREST-LOAN> 15,981
<INTEREST-INVEST> 12,211
<INTEREST-OTHER> 185
<INTEREST-TOTAL> 28,377
<INTEREST-DEPOSIT> 12,081
<INTEREST-EXPENSE> 13,347
<INTEREST-INCOME-NET> 15,030
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 94
<EXPENSE-OTHER> 10,295
<INCOME-PRETAX> 6,428
<INCOME-PRE-EXTRAORDINARY> 4,454
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,454
<EPS-PRIMARY> 3.93
<EPS-DILUTED> 3.93
<YIELD-ACTUAL> 4.2
<LOANS-NON> 1,653
<LOANS-PAST> 10
<LOANS-TROUBLED> 173
<LOANS-PROBLEM> 676
<ALLOWANCE-OPEN> 2,966
<CHARGE-OFFS> 252
<RECOVERIES> 103
<ALLOWANCE-CLOSE> 2,817
<ALLOWANCE-DOMESTIC> 2,391
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 426
</TABLE>
