<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------
Commission file number 0-13814
-------
Cortland Bancorp
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1451118
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
194 West Main Street, Cortland, Ohio 44410
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(330) 637-8040
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 10, 1998
----- ------------------------------
Common Stock, No Par Value 3,463,529 Shares
-------------------------- ----------------
<PAGE> 2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - June 30,
1998 and December 31, 1997 2
Consolidated Statements of Income - Six
months ended June 30, 1998 and 1997 3
Consolidated Statement of Shareholders'
Equity - Six months ended June 30, 1998 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements -
June 30, 1998 6 - 15
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 16 - 22
---------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
- ------- -----------------
Item 2. Changes in Securities 23
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 23
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 23
- ------- ---------------------------------------------------
Item 5. Other Information 24
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 24
- ------- --------------------------------
Signatures 25
- ----------
<PAGE> 3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 9,308 $ 9,509
Federal Funds sold 1,300 3,100
--------- ---------
Total cash and cash equivalents 10,608 12,609
--------- ---------
Investment securities available for sale (Note 3) 120,244 115,413
Investment securities held to maturity (approximate market
value of $61,460 in 1998 and $73,684 in 1997) (Note 3) 61,000 73,183
Total loans (Note 4) 195,843 184,491
Less allowance for loan losses (Note 4) (2,959) (2,817)
--------- ---------
Net loans 192,884 181,674
--------- ---------
Premises and equipment 5,480 5,744
Other assets 4,317 4,139
--------- ---------
Total assets $ 394,533 $ 392,762
========= =========
LIABILITIES
Noninterest-bearing deposits $ 47,889 $ 45,652
Interest-bearing deposits 270,498 274,086
--------- ---------
Total deposits 318,387 319,738
--------- ---------
Federal Home Loan Bank advances and other borrowings 31,782 30,814
Other liabilities 1,916 2,001
--------- ---------
Total liabilities 352,085 352,553
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized 5,000,000 shares; issued
3,449,291 shares in 1998 and 3,414,711 in 1997 (Note 6) 17,246 17,073
Additional paid-in capital (Note 6) 2,360 1,928
Retained earnings 22,180 20,429
Accumulated other comprehensive income 723 779
Treasury stock, at cost, 3,181 shares (61)
--------- ---------
Total shareholders' equity 42,448 40,209
--------- ---------
Total liabilities and shareholders' equity $ 394,533 $ 392,762
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
2
<PAGE> 4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,403 $ 4,003 $ 8,576 $ 7,758
Interest and dividends on investment securities:
Taxable interest income 1,229 1,556 2,624 3,156
Nontaxable interest income 301 188 546 377
Dividends 67 59 126 114
Interest on mortgage-backed securities 1,224 1,246 2,455 2,478
Other interest income 63 75 112 78
------- ------- ------- -------
Total interest income 7,287 7,127 14,439 13,961
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,848 3,052 5,736 6,000
Borrowed funds 419 280 838 544
------- ------- ------- -------
Total interest expense 3,267 3,332 6,574 6,544
------- ------- ------- -------
Net interest income 4,020 3,795 7,865 7,417
Provision for loan losses 125 0 200 0
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,895 3,795 7,665 7,417
------- ------- ------- -------
OTHER INCOME
Fees for other customer services 338 322 673 627
Investment securities gains - net 7 19 69 31
Gain on sale of loans - net 38 20 46 10
Other non-interest income 60 40 121 110
------- ------- ------- -------
Total other income 443 401 909 778
------- ------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 1,362 1,380 2,762 2,763
Net occupancy expense 189 166 369 328
Equipment expense 280 273 557 543
State and local taxes 142 130 283 265
Office supplies 125 117 234 231
Marketing expense 79 61 152 123
Legal and litigation expense 58 53 96 95
Other operating expenses 369 303 690 595
------- ------- ------- -------
Total other expenses 2,604 2,483 5,143 4,943
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,734 1,713 3,431 3,252
Federal income taxes 497 536 991 1,008
------- ------- ------- -------
NET INCOME $ 1,237 $ 1,177 $ 2,440 $ 2,244
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE (NOTE 6) $ 0.36 $ 0.35 $ 0.71 $ 0.66
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE (NOTE 6) $ 0.36 $ 0.35 $ 0.71 $ 0.66
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
3
<PAGE> 5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
ADDITIONAL OTHER SHARE-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HOLDERS
STOCK CAPITAL EARNINGS STOCK INCOME EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 $ 5,691 $ 13,310 $ 20,429 $779 $ 40,209
Adjustment for the effect of
3-for-1 common stock split 11,382 (11,382)
BALANCE AT JANUARY 1, 1998
RESTATED --------------------------------------------------------------------------------
17,073 1,928 20,429 779 40,209
--------------------------------------------------------------------------------
Comprehensive income:
Net income 2,440 2,440
Other comprehensive income, net of tax:
Unrealized losses on available-
for-sale securities, net of
reclassification adjustment (56) (56)
--------
Total comprehensive income 2,384
Common stock transactions:
Shares sold 173 432 605
Treasury shares purchased (61) (61)
Cash dividends declared
($0.20 per share) (689) (689)
--------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ 17,246 $ 2,360 $ 22,180 ($61) $723 $ 42,448
================================================================================
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE
FOR SALE SECURITY GAINS AND LOSSES:
Unrealized holding losses on
available-for -sale securities
arising during the period (32)
Less: Reclassification adjustment
for gains realized in net income 24
Net unrealized losses on available- --------
for-sale securities, net of tax ($56)
========
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
4
<PAGE> 6
<TABLE>
<CAPTION>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
FOR THE
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
----------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 1,417 $ 4,385
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (7,537) (3,380)
Purchases of securities available for sale (15,565) (20,606)
Proceeds from sales of securities available for sale 949 15,207
Proceeds from call, maturity and principal
payments on securities 29,230 15,726
Net increase in loans made to customers (9,809) (12,613)
Purchase of premises and equipment (158) (327)
-------- --------
Net cash flows from investing activities (2,890) (5,993)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (1,351) 3,990
Net increase in borrowings 968 4,815
Proceeds from sale of common stock 605 580
Dividends paid on common stock (689) (548)
Purchase of treasury stock (61)
-------- --------
Net cash flows from financing activities (528) 8,837
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,001) 7,229
CASH AND CASH EQUIVALENTS
Beginning of period 12,609 10,083
-------- --------
End of period $ 10,608 $ 17,312
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 6,659 $ 6,510
Income taxes paid $ 1,025 $ 993
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
5
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a
fair presentation have been included. Operating results for the six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
2.) Reclassifications:
Certain items contained in the 1997 financial statements have been
reclassified to conform with the presentation for 1998. Such reclassifications
had no effect on the net results of operations.
3.) Investment Securities:
Securities classified as held to maturity are those that management
has the positive intent and ability to hold to maturity. Securities held to
maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts, with such amortization or accretion included in
interest income.
Securities classified as available for sale are those that could be
sold for liquidity, investment management, or similar reasons even though
management has no present intentions to do so. Securities available for sale
are carried at fair value using the specific identification method. Changes in
the unrealized gains and losses on available for sale securities are recorded
net of tax effect as a component of comprehensive income.
Trading securities are principally held with the intention of selling
in the near term. Trading securities are carried at fair value with changes in
fair value reported in the Consolidated Statements of Income.
6
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Realized gains or losses on dispositions are based on net proceeds
and the adjusted carrying amount of securities sold, using the specific
identification method. The table below sets forth the proceeds, gains and
losses realized on securities sold or called for the period ended:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Proceeds on securities sold $ 0 $ 949
Gross realized gains 0 31
Gross realized losses 0 0
Proceeds on securities called $ 3,250 $7,111
Gross realized gains 7 38
Gross realized losses 0 0
</TABLE>
Securities available for sale, carried at fair value, totalled
$120,244 at June 30, 1998 and $115,413 at December 31, 1997 representing 66.3%
and 61.2%, respectively, of all investment securities. These levels were
deemed to provide an adequate level of liquidity in management's opinion.
Investment securities with a carrying value of approximately $29,391
at June 30, 1998 and $33,191 at December 31, 1997 were pledged to secure
deposits and for other purposes.
7
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated market value of debt securities at
June 30, 1998, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to
call or prepay certain obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Investment securities AMORTIZED ESTIMATED
available for sale COST FAIR VALUE
- ------------------ --------- ----------
<S> <C> <C>
Due in one year or less $ 19,634 $ 19,745
Due after one year
through five years 23,121 23,407
Due after five years
through ten years 11,251 11,398
Due after ten years 4,661 4,608
-------- --------
58,667 59,158
Mortgage-backed Securities 56,276 57,041
-------- --------
$114,943 $116,199
======== ========
<CAPTION>
Investment securities AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ---------------- --------- -----------
<S> <C> <C>
Due in one year or less $ 2,604 $ 2,607
Due after one year
through five years 9,860 9,945
Due after five years
through ten years 20,250 20,477
Due after ten years 9,846 9,806
-------- --------
42,560 42,835
Mortgage-backed Securities 18,440 18,625
-------- --------
$ 61,000 $ 61,460
======== ========
</TABLE>
8
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated fair value of investment securities
available for sale and investment securities held to maturity as of June 30,
1998, are as follows:
<TABLE>
<CAPTION>
Investment GROSS GROSS ESTIMATED
securities available AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 29,777 $ 281 $ 5 $ 30,053
U.S. Government
agencies and
corporations 18,213 214 5 18,422
Obligations of states
and political
subdivisions 10,677 67 61 10,683
Mortgage-backed and
related securities 56,276 841 76 57,041
-------- -------- -------- --------
Total 114,943 1,403 147 116,199
Marketable equity
securities 2,171 147 206 2,112
Other securities 1,933 0 0 1,933
-------- -------- -------- --------
Total available
for sale $119,047 $ 1,550 $ 353 $120,244
======== ======== ======== ========
<CAPTION>
Investment GROSS GROSS ESTIMATED
securities held AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies and
corporations $ 25,069 $ 175 $ 43 $ 25,201
Obligations of states
and political
subdivisions 17,491 226 83 17,634
Mortgage-backed and
related securities 18,440 192 7 18,625
-------- -------- -------- --------
Total held to
maturity $ 61,000 $ 593 $ 133 $ 61,460
======== ======== ======== ========
</TABLE>
9
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following provides a summary of the amortized cost and estimated
fair value of investment securities available for sale and investment
securities held to maturity as of December 31, 1997:
<TABLE>
<CAPTION>
Investment GROSS GROSS ESTIMATED
securities available AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
<CAPTION>
Investment GROSS GROSS ESTIMATED
securities held AMORTIZED UREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
10
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. Such instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
on the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
In the event of nonperformance by the other party, the Company's
exposure to credit loss on these financial instruments is represented by the
contract or notional amount of the instrument. The Company uses the same
credit policies in making commitments and conditional obligations as it does
for instruments recorded on the balance sheet. The amount and nature of
collateral obtained, if any, is based on management's credit evaluation.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
--------------------------
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 6,620 $ 6,241
Variable 24,524 36,774
Standby letters of credit 385 361
</TABLE>
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Generally
these financial arrangements have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of these commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
11
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The Company, through its subsidiary bank, grants residential,
consumer and commercial loans, and also offers a variety of saving plans to
customers located primarily in its immediate lending area. The following
represents the composition of the loan portfolio:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
1-4 family residential mortgages 43.8% 43.1%
Commercial mortgages 28.8% 27.1%
Consumer loans 10.3% 10.3%
Commercial loans 12.3% 14.1%
Home equity loans 4.8% 5.4%
</TABLE>
Included in 1-4 family residential mortgages as of June 30, 1998 are
$3,357 of mortgage loans held for sale in the secondary market. Loans held for
sale at December 31, 1997 totaled $1,756.
The following table sets forth the aggregate balance of
underperforming loans for each of the following categories at June 30, 1998
and June 30, 1997:
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Loans accounted for on a
nonaccrual basis $1,014 $1,487
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 5 78
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 169 181
</TABLE>
12
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
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 June
30, 1998.
<TABLE>
<S> <C>
Gross interest income that would have been recorded if the loans had been
current in accordance with their original terms $94
Interest income actually included in income on the loans 23
</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 include 1 - 4
family , consumer and home equity loans. Impaired loans were evaluated using
the fair value of collateral as the measurement method. At June 30, 1998, the
recorded investment in impaired loans was $816 while the related portion of
the allowance for loan losses was $158.
As of June 30, 1998, there were $2,149 in loans, not included in the
above categories and not considered impaired, but which can be considered
potential problem loans. The Small Business Administration has guaranteed $217
of this total. The portion of the allowance for loan losses related to these
potential problem loans was $200.
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.
13
<PAGE> 15
<TABLE>
<CAPTION>
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following is an analysis of the allowance for loan losses for the
six month periods ended June 30, 1998 and 1997:
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of period $2,817 $2,966
Loan charge-offs:
1-4 family residential mortgages 0 9
Commercial mortgages 0 10
Consumer loans 80 72
Commercial loans 20 0
Home equity loans 1 12
------ ------
101 103
Recoveries on previous loan losses:
1 - 4 family residential mortgages 0 0
Commercial mortgages 0 1
Consumer loans 39 38
Commercial loans 4 6
Home equity loans 0 0
------ ------
43 45
Net loan losses 58 58
Provision charged to operations 200 0
------ ------
Balance at end of period $2,959 $2,908
------ ------
Ratio of net charge-offs to
average net loans outstanding 0.06% 0.07%
====== ======
</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 Company's bank
subsidiary.
14
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands except per share data)
5.) 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 any material effect on the Company.
6.) Earnings Per Share and Capital Transactions:
The following table sets forth the computation of basic earnings per
common share and diluted earnings per common share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $1,237 $1,177 $2,440 $2,244
Average common
shares outstanding * 3,446,667 3,385,061 3,447,516 3,383,141
Basic earnings per share * $0.36 $0.35 $0.71 $0.66
Diluted earnings per share * $0.36 $0.35 $0.71 $0.66
<FN>
(*) On April 14, 1998, the Company's Board of Directors approved a
three-for-one common stock split which was paid May 15 to shareholders of
record as of April 25, 1998. Average shares outstanding and resultant per
share amounts have been restated to give retroactive effect to both the 3%
stock dividend of January 1, 1998, and the three-for-one stock split of May
15, 1998.
</TABLE>
Common stock issued and additional paid-in capital have been restated for
the aforementioned stock split for both June 30, 1998 and December 31, 1997.
15
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Dollars in thousands)
Note Regarding Forward-looking Statements
- -----------------------------------------
In addition to historical information contained herein, the following
discussion may contain forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in any forward-looking
statements. Some of the factors that could cause or contribute to such
differences are changes in the economy and interest rates in the Company's
market area.
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.
Along with its liquid assets, the Company has other sources of
liquidity available to it which help to ensure that adequate funds are
available as needed. These other sources include, but are not limited to, the
ability to obtain deposits through the adjustment of interest rates, the
purchasing of federal funds, and access to the Federal Reserve Discount Window
and the Federal Home Loan Bank of Cincinnati.
Cash and cash equivalents decreased $2,001 compared to year end 1997.
Operating activities provided cash of $1.4 million and $4.4 million during the
six months ended June 30, 1998 and 1997, respectively. Refer to the
Consolidated Statements of Cash Flows for a summary of the sources and uses of
cash for June 30, 1998 and 1997.
16
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Capital Resources
- -----------------
The capital management function is a continuous process which
consists of providing capital for both the current financial position and the
anticipated future growth of the Company. Central to this process is internal
equity generation, particularly through earnings retention. Internal capital
generation is measured as the annualized rate of return on equity, exclusive
of any appreciation or depreciation relating to available for sale securities,
multiplied by the percentage of earnings retained. Internal capital generation
was 8.5% for the six months ended June 30, 1998, as compared to 9.2% for the
like period during 1997. Overall during the first six months of 1998, capital
grew at the annual rate of 11.1%, a figure which reflects earnings, dividends
paid, common stock issued, treasury shares purchased and the net change in the
estimated fair value of available for sale securities.
During the first six months of 1998, the Company issued 34,578 shares of
common stock (restated for the 3-for-1 common stock split effective May 15,
1998) which resulted in proceeds of $605. Of the 34,578 shares issued, 31,296
shares were issued through the Company's dividend reinvestment plan. The
remaining 3,282 shares were issued through the subsidiary bank's 401-k Plan
which offers employees the choice of investing in the common stock of the
Company as one of several participant directed investment options.
Risk-based standards for measuring capital adequacy require banks and
bank holding companies to maintain capital based on "risk-adjusted" assets.
Categories of assets with potentially higher credit risk require more capital
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as standby letters of credit and interest
rate swaps.
17
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
These standards also classify capital into two tiers, referred to as
Tier 1 and Tier 2. The Company's Tier 1 capital consists of common
shareholders' equity (excluding any gain or loss on available for sale debt
securities) less net unrealized loss on equity securities with readily
determinable fair values and intangible assets. Tier 2 capital is the
allowance for loan and lease losses reduced for certain regulatory
limitations. Risk based capital standards require a minimum ratio of 8% of
qualifying total capital to risk-adjusted total assets with at least 4%
constituting Tier 1 capital. Capital qualifying as Tier 2 capital is limited
to 100% of Tier 1 capital. All banks and bank holding companies are also
required to maintain a minimum leverage capital ratio (Tier 1 capital to total
average assets) in the range of 3% to 4%, subject to regulatory guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required banking regulatory agencies to revise risk-based capital
standards to ensure that they take adequate account of the following
additional risks: interest rate, concentration of credit, and nontraditional
activities. Accordingly, regulators will subjectively consider an
institution's exposure to declines in the economic value of its capital due to
changes in interest rates in evaluating capital adequacy.
The table below illustrates the Company's risk weighted capital
ratios at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Tier 1 Capital $ 41,240 $ 38,933
Tier 2 Capital 2,456 2,326
-------- --------
TOTAL QUALIFYING
CAPITAL $ 43,696 $ 41,259
======== ========
Risk Adjusted
Total Assets (*) $196,002 $185,571
Tier 1 Risk-Based
Capital Ratio 21.04% 20.98%
Total Risk-Based
Capital Ratio 22.29% 22.23%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 10.53% 10.17%
<FN>
(*) Includes off-balance sheet exposures.
</TABLE>
18
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Assets, less intangibles and the net unrealized market value
adjustment of investment securities available for sale, averaged $391,517 for
the six months ended June 30, 1998 and $382,785 for the year ended December
31, 1997.
First Six Months of 1998 as Compared to First Six Months of 1997
- ----------------------------------------------------------------
During the first six months of 1998, net interest income after
provision for loan losses increased by $248 compared to the first six months
of 1997. Total interest income increased by $478 or 3.4% from the level
recorded in 1997. This was accompanied by an increase in interest expense of
$30 or 0.5%, and a provision for loan loss of $200 in 1998 compared to no
provision requirement in 1997.
The average rate paid on interest sensitive liabilities declined by 3
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $3,232 or 1.1%, primarily reflecting a $10,961
increase in average borrowings from the Federal Home Loan Bank and a $7,798
decrease in large certificates of deposit (amounts of $100,000 of more).
Interest and dividend income on securities registered a decrease of
$374 or 6.1% during the first six months of 1998 when compared to 1997. The
average invested balances declined by 3.7%, decreasing by $7,011 over the
levels of a year ago. The decrease in the average balance of investment
securities was accompanied by a 9 basis point decrease in the portfolio yield.
Interest and fees on loans increased by $818 for the first six months
of 1998 compared to 1997, representing the net effect of a $19,659 increase in
the average balance of the loan portfolio. This 11.5% year-over-year increase
was accompanied by a 13 basis point decline in yield.
Other interest income increased by $34 from the same period a year
ago due to an increase in the average balance of Federal Funds sold, which
increased by $1,198. The yield increased by 2 basis points reflecting the
steady Fed policy of the past year.
19
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Other income from all sources increased by $131 from the same period
a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $36 from the same period a year ago, reflecting more
favorable market conditions. Gains on securities called and gains on the sale
of available for sale investment securities showed an increase of $38 from
year ago levels. Fees for other customer services increased by $46. Other
sources of non-interest income increased by $11 from the same period a year
ago.
Loan charge-offs during the first six months were $101 in 1998 and
$103 in 1997, while the recovery of previously charged-off loans amounted to
$43 in 1998 compared to $45 in 1997. A provision for loan loss of $200 was
charged to operations in 1998, compared to no provision charged in 1997. The
provision was booked due to increased loan volume and concerns related to
certain specific credits. At June 30, 1998, the loan loss allowance of $2,959
represented 1.5% of outstanding loans. Non accrual loans at June 30, 1998
represented 0.5% of the loan portfolio compared to 0.9% at December 31, 1997.
Total other expenses in the first six months were $5,143 in 1998
compared to $4,943 in 1997, an increase of $200 or 4.0%. Full time equivalent
employment during the first six months averaged 186 employees in 1998, a 5.1%
decline from the 196 in 1997. Salaries and benefits decreased by $1 over the
similar period a year ago.
For the first six months of 1998, state and local taxes increased by
$18 or 6.8%. Occupancy and equipment expense increased by $55 or 6.3%. All
other expense categories increased by 12.2% or $128 as a group. First half
1998 expenses include the newest branch office of the Company's Bank
subsidiary which opened during the third quarter of 1997. Also included are
non recurring costs in the amount of $35 associated with the three-for-one
common stock split, and $22 related to development and introduction costs for
a new deposit product.
Income before income tax expense amounted to $3,431 for the first six
months of 1998 compared to $3,252 for the similar period of 1997. The
effective tax rate for the first six months was 28.9% in 1998 compared to
30.9% in 1997, resulting in income tax expense of $991 and $1,008,
respectively. Net income for the first six months registered $2,440 in 1998
compared to $2,244 in 1997, representing a 7.6% increase in per share amounts
from the $0.66 earned in 1997 to the $0.71 recorded in 1998.
20
<PAGE> 22
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Second Quarter of 1998 as compared to Second Quarter 1997
- ---------------------------------------------------------
During the second quarter of 1998 net interest income increased by
$100 as compared to second quarter 1997. Average earning assets increased by
3.2% while average interest-bearing liabilities increased by 0.3%. Average
loans exhibited growth of 11.0%, while average investments declined by 3.6%.
The tax equivalent yield on earning assets decreased by 6 basis
points from the same quarter a year ago. The tax equivalent yield of the
investment portfolio measured 6.6%, a 15 basis point decline from the same
quarter a year ago, while the loan portfolio yielded 9.1%, down 16 basis
points from last year's rate. Meanwhile, the rate paid on interest-bearing
liabilities decreased 10 basis points compared to a year ago. The net effect
of these changes was that the tax equivalent net interest margin increased to
4.4%, an increase of 12 basis points from that achieved during last year's
second quarter.
Loans increased by $5,344 during the period. Loans as a percentage of
earning assets stood at 51.8% as of June 30, 1998 as compared to 48.0% on June
30, 1997. The loan to deposit ratio at the end of the first six months of 1998
was 61.5% compared to 54.9% at the end of the same period a year ago. The
investment portfolio represented 56.9% of each deposit dollar, down from 57.7%
a year ago.
Loan charge-offs during the second quarter were $57 in 1998 and $54
in 1997, while the recovery of previously charged-off loans amounted to $18
during the second quarter of 1998 compared to $15 in the same period of 1997.
Other income for the quarter increased by $42 or 10.5% compared to
the same period a year ago. The favorable mortgage rate environment was
evidenced by a net gain on sales of loans of $38 compared to the $20 generated
a year ago. Net gains on investment and trading securities transactions netted
$7, while a $19 gain was recorded in 1997.
Total other expenses in the second quarter were $2,604 in 1998 and
$2,483 in 1997, an increase of $121 or 4.9%. Employee salaries and benefits
decreased by $18 or 1.3%. Occupancy and equipment expense increased by $30 or
6.8%, primarily reflecting the Company's newest branch office opened in the
third quarter of 1997. Other expenses as a group increased by $109 or 4.4%
compared to the same period last year.
21
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Income before tax for the quarter increased by 1.2% to $1,734 in 1998
from the $1,713 recorded in 1997. Net income for the quarter of $1,237
represented a 5.1% increase from the $1,177 earned a year ago.
New Accounting Standards
- ------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting the components of comprehensive
income and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be included in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
shareholders' equity and bypass net income. Adoption of this standard did not
have a material impact on the Company's financial position or results of
operation.
Year 2000
- ---------
Cortland Bancorp has established a "Year 2000 project management team" to
provide a structured format for thoroughly addressing the Year 2000 problem.
The project team seeks to ensure that the Bank's operational and financial
systems will not be adversely affected by Year 2000 software or hardware
failures, due to processing errors arising from calculations using the Year
2000 date. The Bank is requiring its computer systems and software vendors to
represent that the products provided are, or will be, Year 2000 compliant. The
Bank has planned a program of testing for compliance, and has formulated
contingency plans in the event that critical applications are inoperable on or
near the Year 2000. The Company expects to complete it's Year 2000 testing by
December 31, 1998.
22
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
See Note (5) of the financial statements.
Item 2. Changes in Securities
- ------- ---------------------
Not applicable
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a.) On April 14, 1998, Cortland Bancorp held its annual meeting
of shareholders. At the close of business on the record
date, 3,449,277* Cortland Bancorp shares were outstanding
and entitled to vote. At the meeting, 2,413,134* or 70% of
the outstanding shares entitled to vote were represented by
proxy or in person.
(b.) The following directors were elected for three year terms
ending in 2001.
William A. Hagood
K. Ray Mahan
Richard L. Hoover
Rodger W. Platt
Directors whose term of office continued after the annual
meeting:
P. Bennett Bowers
David C. Cole
Dennis E. Linville
George E. Gessner
James E. Hoffman III
Timothy K. Woofter
(c.) Not Applicable
(d.) Not Applicable
*Restated to give retroactive effect to the three-for-one stock split
of May 15, 1998.
23
<PAGE> 25
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
---------------------------------------
Item 5. Other Information
- ------- -----------------
As discussed in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders, any qualified shareholder of the Company
who intends to submit a proposal to the Company at the 1999 Annual
Meeting of Shareholders must submit such proposal to the Company not
later than November 17, 1998 to be considered for inclusion in the
Company's Proxy Statement and form of Proxy (the "Proxy Materials")
relating to that meeting. If a shareholder intends to present a
proposal at the 1999 Annual Meeting of Shareholders, but has not
sought the inclusion of such proposal in the Company's Proxy
Materials, such proposal must be received by the Company prior to
February 1, 1999, or the Company's management proxies for the 1999
Annual Meeting will be entitled to use their discretionary voting
authority should such proposal then be raised, without any
discussion of the matter in the Company's Proxy Material.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
(b) Reports on Form 8-K
-------------------
Not applicable
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cortland Bancorp
(Registrant)
DATED: August 10, 1998 Lawrence A. Fantauzzi
--------------- ---------------------
Controller/Treasurer
(Principal Financial Officer)
DATED: August 10, 1998 Dennis E. Linville
--------------- ------------------
Executive Vice-President,
Secretary and Director
(Duly Authorized Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,308
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,244
<INVESTMENTS-CARRYING> 61,000
<INVESTMENTS-MARKET> 61,460
<LOANS> 195,843
<ALLOWANCE> 2,959
<TOTAL-ASSETS> 394,533
<DEPOSITS> 318,387
<SHORT-TERM> 7,261
<LIABILITIES-OTHER> 1,916
<LONG-TERM> 24,521
0
0
<COMMON> 17,246
<OTHER-SE> 25,202
<TOTAL-LIABILITIES-AND-EQUITY> 394,533
<INTEREST-LOAN> 8,576
<INTEREST-INVEST> 5,751
<INTEREST-OTHER> 112
<INTEREST-TOTAL> 14,439
<INTEREST-DEPOSIT> 5,736
<INTEREST-EXPENSE> 6,574
<INTEREST-INCOME-NET> 7,865
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 5,143
<INCOME-PRETAX> 3,431
<INCOME-PRE-EXTRAORDINARY> 3,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,440
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 4.3
<LOANS-NON> 1,014
<LOANS-PAST> 5
<LOANS-TROUBLED> 169
<LOANS-PROBLEM> 2,149
<ALLOWANCE-OPEN> 2,817
<CHARGE-OFFS> 101
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 2,959
<ALLOWANCE-DOMESTIC> 2,636
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 323
</TABLE>
