<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 11, 1998
----- ---------------------------
Common Stock, No Par Value 3,446,109 Shares
-------------------------- ----------------
AS OF MAY 11, 1998, CORTLAND BANCORP HAD 1,148,703 SHARES OF COMMON STOCK
OUTSTANDING ON A PRE-SPLIT BASIS, 3,446,109 ON A POST-SPLIT BASIS.
<PAGE> 2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - March 31,
1998 and December 31, 1997 2
Consolidated Statements of Income - Three
months ended March 31, 1998 and 1997 3
Consolidated Statement of Shareholders'
Equity - Three months ended March 31, 1998 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements -
March 31, 1998 6 - 15
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 16 - 21
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 22
- ------- -----------------
Item 2. Changes in Securities 22
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 22
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 22
- ------- ---------------------------------------------------
Item 5. Other Information 22
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 22
- ------- --------------------------------
Signatures 23
- ----------
1
<PAGE> 3
<TABLE>
<CAPTION>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,136 $ 9,509
Federal Funds sold 2,700 3,100
--------- ---------
Total cash and cash equivalents 11,836 12,609
--------- ---------
Investment securities available for sale (Note 3) 117,045 115,413
Investment securities held to maturity (approximate market
value of $64,590 in 1998 and $73,684 in 1997) (Note 3) 64,249 73,183
Total loans (Note 4) 190,413 184,491
Less allowance for loan losses (Note 4) (2,873) (2,817)
--------- ---------
Net loans 187,540 181,674
--------- ---------
Premises and equipment 5,642 5,744
Other assets 4,624 4,139
--------- ---------
Total assets $ 390,936 $ 392,762
========= =========
LIABILITIES
Noninterest-bearing deposits $ 45,629 $ 45,652
Interest-bearing deposits 271,475 274,086
--------- ---------
Total deposits 317,104 319,738
--------- ---------
Federal Home Loan Bank advances and other borrowings 29,514 30,814
Other liabilities 2,346 2,001
--------- ---------
Total liabilities 348,964 352,553
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 3,449,289 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 21,632 20,429
Accumulated other comprehensive income 734 779
--------- ---------
Total shareholders' equity 41,972 40,209
--------- ---------
Total liabilities and shareholders' equity $ 390,936 $ 392,762
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
2
<PAGE> 4
<TABLE>
<CAPTION>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
THREE
MONTHS ENDED
MARCH 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,173 $3,755
Interest and dividends on investment securities:
Taxable interest income 1,395 1,600
Nontaxable interest income 245 189
Dividends 59 55
Interest on mortgage-backed securities 1,231 1,232
Other interest income 49 3
------- -------
Total interest income 7,152 6,834
------- -------
INTEREST EXPENSE
Deposits 2,888 2,948
Borrowed funds 419 264
------- -------
Total interest expense 3,307 3,212
------- -------
Net interest income 3,845 3,622
Provision for loan losses 75 0
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,770 3,622
------- -------
OTHER INCOME
Fees for other customer services 335 305
Investment securities gains - net 62 12
Gain (loss) on sale of loans - net 8 (10)
Other non-interest income 61 70
------- -------
Total other income 466 377
------- -------
OTHER EXPENSES
Salaries and employee benefits 1,400 1,383
Net occupancy expense 180 162
Equipment expense 277 270
State and local taxes 141 135
Office supplies 109 114
Marketing expense 73 62
Legal and litigation expense 38 42
Other operating expenses 321 292
------- -------
Total other expenses 2,539 2,460
------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,697 1,539
Federal income taxes 494 472
------- -------
NET INCOME $1,203 $1,067
======= =======
BASIC EARNINGS PER COMMON SHARE (NOTE 6) $0.35 $0.32
======= =======
DILUTED EARNINGS PER COMMON SHARE (NOTE 6) $0.35 $0.32
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
3
<PAGE> 5
<TABLE>
<CAPTION>
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Amounts in thousands)
ACCUMULATED TOTAL
ADDITIONAL OTHER SHARE-
COMMON PAID-IN RETAINED COMPREHENSIVE HOLDERS
STOCK CAPITAL EARNINGS 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 1,203 1,203
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities, net of
reclassification adjustment (45) (45)
Total comprehensive income 1,158
Common stock transactions:
Shares sold 173 432 605
----------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $17,246 $2,360 $21,632 $734 $41,972
======================================================================
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE
FOR SALE SECURITY GAINS AND LOSSES:
Unrealized holding losses on
available-for-sale securities
arising during the period (22)
Less: Reclassification adjustment
for gains realized in net income 23
Net unrealized losses on available- ---------------------
for-sale securities, net of tax ($45)
=====================
</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)
(Amount in thousands)
FOR THE
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $1,697 $2,206
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (2,394) (1,999)
Purchases of securities available for sale (6,597) (10,439)
Proceeds from sales of securities available for sale 949 7,631
Proceeds from call, maturity and principal
payments on securities 15,207 7,328
Net increase in loans made to customers (6,198) (4,371)
Purchase of premises and equipment (108) (171)
--------- --------
Net cash flows from investing activities 859 (2,021)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (2,634) (25)
Net increase (decrease) in borrowings (1,300) (1,319)
Proceeds from sale of common stock 605 558
--------- --------
Net cash flows from financing activities (3,329) (786)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (773) (601)
CASH AND CASH EQUIVALENTS
Beginning of period 12,609 10,083
--------- --------
End of period $11,836 $9,482
========= ========
SUPPLEMENTAL DISCLOSURES
Interest paid $3,363 $3,221
Income taxes paid $0 $53
</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 three months ended March 31, 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. For the quarter ended March 31, 1998, the table below
sets forth the proceeds, gains and losses realized on securities sold or called:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1998
<S> <C>
Proceeds on securities sold $ 949
Gross realized gains on securities sold 31
Gross realized losses on securities sold 0
Proceeds on securities called $ 3,861
Gross realized gains on securities called 31
Gross realized losses on securities called 0
</TABLE>
Securities available for sale, carried at fair value, totalled $117,045
at March 31, 1998 and $115,413 at December 31, 1997 representing 64.6% 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 $32,386 at
March 31, 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
March 31, 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
- -------------------- COST FAIR VALUE
available for sale --------- -------------
- ------------------
<S> <C> <C>
Due in one year or less $ 12,159 $ 12,170
Due after one year
through five years 28,324 28,616
Due after five years
through ten years 15,110 15,278
Due after ten years
815 824
-------- --------
56,408 56,888
Mortgage-backed Securities 55,339 56,109
-------- --------
$111,747 $112,997
======== ========
<CAPTION>
Investment securities
- --------------------- AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ---------------- --------- -----------
<S> <C> <C>
Due in one year or less $ 3,666 $ 3,674
Due after one year
through five years 10,451 10,509
Due after five years
through ten years 23,838 23,992
Due after ten years 7,356 7,319
-------- --------
45,311 45,494
Mortgage-backed Securities 18,938 19,096
-------- --------
$ 64,249 $ 64,590
======== ========
</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 March 31,
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 $ 29,816 $ 275 $ 12 $ 30,079
U.S. Government
agencies and
corporations 19,740 175 17 19,898
Obligations of states
and political
subdivisions 6,852 60 1 6,911
Mortgage-backed and
related securities 55,339 852 82 56,109
-------- -------- -------- --------
Total 111,747 1,362 112 112,997
Marketable equity
securities 2,171 182 208 2,145
Other securities 1,903 0 0 1,903
-------- -------- -------- --------
Total available
for sale $115,821 $ 1,544 $ 320 $117,045
======== ======== ======== ========
<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 $30,378 $ 161 $ 85 $30,454
Obligations of states
and political
subdivisions 14,933 183 76 15,040
Mortgage-backed and
related securities 18,938 178 20 19,096
------- ------- ------- -------
Total held to
maturity $64,249 $ 522 $ 181 $64,590
======= ======= ======= =======
</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 UNREALIZED 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.
The Company's exposure to credit loss in the event of nonperformance by
the other party to these financial instruments is represented by the contract or
notional amount of the instrument. The Company uses the same credit policies in
making commitments and conditional obligations as it does for instruments
recorded on the balance sheet. The amount and nature of collateral obtained, if
any, is based on management's credit evaluation.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
----------------------------
March 31, December 31,
1998 1997
------------- --------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
<S> <C> <C>
Fixed rate $ 5,762 $ 6,241
Variable 36,515 36,774
Standby letters of credit 415 361
</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>
March 31, December 31,
1998 1997
------------- --------
<S> <C> <C>
1-4 family residential mortgages 43.3% 43.1%
Commercial mortgages 28.1% 27.1%
Consumer loans 9.7% 10.3%
Commercial loans 13.9% 14.1%
Home equity loans 5.0% 5.4%
</TABLE>
Included in 1-4 family residential mortgages as of March 31, 1998 are
$1,499 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 March 31, 1998 and March 31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans accounted for on a
nonaccrual basis $2,208 $1,699
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 11 73
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 173 182
</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 March
31, 1998.
<TABLE>
<CAPTION>
<S> <C>
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms $77
Interest income actually included in income on
the loans 28
</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 March 31, 1998, the
recorded investment in impaired loans was $1,798 while the related portion of
the allowance for loan losses was $328.
As of March 31, 1998, there were $2,215 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 $220
of this total.
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
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following is an analysis of the allowance for loan losses at March
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of period $ 2,817 $ 2,966
Loan charge-offs:
1-4 family residential mortgages 4
Commercial mortgages 10
Consumer loans 44 26
Commercial loans
Home equity loans 9
------- -------
44 49
------- -------
Recoveries on previous loan losses:
1 - 4 family residential mortgages 1
Commercial mortgages
Consumer loans 23 28
Commercial loans 2 1
------- -------
Home equity loans
25 30
------- -------
Net loan losses (19) (19)
Provision charged to operations 75
------- -------
Balance at end of period $ 2,873 $ 2,947
------- -------
Ratio of net charge-offs to
average net loans outstanding 1.5% 1.8%
======= =======
</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
MARCH 31,
---------------------------------
1998 1997
---------------------------------
<S> <C> <C>
Net Income $ 1,203 $ 1,067
Average common
shares outstanding * 3,448,374 3,381,201
Basic earnings per share * $ 0.35 $ 0.32
Dilutive earnings per share * $ 0.35 $ 0.32
<FN>
(*) On April 14, 1998, the Company's Board of Directors approved a
three-for-one common stock split, which will be 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 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 March 31, 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 $773 compared to year end 1997.
Operating activities provided cash of $1.7 million and $2.2 million during the
three months ended March 31, 1998 and 1997 respectively. Refer to the
Consolidated Statement of Cash Flows for a summary of the sources and uses of
cash for March 31, 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 11.9% for the three months ended March 31, 1998, as compared to 11.8% for
the like period during 1997. Overall during the first three months of 1998,
capital grew at the annual rate of 17.5%, a figure which reflects earnings,
common stock issued, and the net change in the estimated fair value of available
for sale securities.
During the first three 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 March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Tier 1 Capital $ 40,765 $ 38,933
Tier 2 Capital 2,393 2,326
-------- --------
TOTAL QUALIFYING
CAPITAL $ 43,158 $ 41,259
======== ========
Risk Adjusted
Total Assets (*) $190,987 $185,571
Tier 1 Risk-Based
Capital Ratio 21.34% 20.98%
Total Risk-Based
Capital Ratio 22.60% 22.23%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 10.47% 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 $389,521 for the three
months ended March 31, 1998 and $382,785 for the year ended December 31, 1997.
First Three Months of 1998 as Compared to First Three Months of 1997
- --------------------------------------------------------------------
During the first three months of 1998, net interest income after
provision for loan losses increased by $148 compared to the first three months
of 1997. Total interest income increased by $318 or 4.7% from the level recorded
in 1997. This was accompanied by an increase in interest expense of $95 or 3.0%,
and a provision for loan loss of $75 in 1998 with no provision required in 1997.
The average rate paid on interest sensitive liabilities increased by 5
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $5,574 or 1.9%, primarily reflecting an $11,356
increase in average borrowings from the Federal Home Loan Bank.
Interest and dividend income on securities registered a decrease of
$146 or 4.7% during the first three months of 1998 when compared to 1997. The
average invested balances declined by 3.8%, decreasing by $7,204 over the levels
of a year ago. The decrease in the average balance of investment securities was
accompanied by no change in the portfolio yield.
Interest and fees on loans increased by $418 for the first three months
of 1998 compared to 1997, representing the net effect of a $20,088 increase in
the average balance of the loan portfolio. This 12.0% year-over-year increase
was accompanied by an 8 basis point decline in yield.
Other interest income increased by $46 from the same period a year ago
due to an increase in the average balance of Federal Funds sold, which increased
by $3,300. The yield increased by 28 basis points reflecting the slight
tightening in Fed policy effected a year ago.
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)
Overall average earning assets grew by $16,184, or 4.5%, from the same period
last year, with the tax equivalent yield on earning assets unchanged at 7.8%.
The tax equivalent yield of the investment portfolio measured 6.6%, while the
loan portfolio yielded 9.0%. The tax equivalent net interest margin increased to
4.2% from the 4.1% achieved during last year's first quarter.
Other income from all sources increased by $89 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $18 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 $50 from year ago
levels. Fees for other customer services increased by $30. Other sources of
non-interest income declined by $9 from the same period a year ago.
Loans increased by $5,922 during the quarter. Loans as a percentage of
earning assets stood at 50.9% as of March 31, 1998 as compared to 47.6% on March
31, 1997. The loan to deposit ratio at the end of the first three months of 1998
was 60.0% compared to 53.1% at the end of the same period a year ago. The
investment portfolio represented 57.2% of each deposit dollar, down from 59.5% a
year ago.
Loan charge-offs during the first three months were $44 in 1998 and $49
in 1997, while the recovery of previously charged-off loans amounted to $25 in
1998 compared to $30 in 1997. A provision for loan loss of $75 was charged to
operations in 1998, compared to no provision charged in 1997. The provision was
booked due to increased loan volume and the deterioration in condition of
certain specific credits. At March 31, 1998, the loan loss allowance of $2,873
represented 1.5% of outstanding loans. Non accrual loans at March 31, 1998
represented 1.2% of the loan portfolio compared to 0.9% at December 31, 1997.
Total other expenses in the first three months were $2,539 in 1998
compared to $2,460 in 1997, an increase of $79 or 3.2%. Full time equivalent
employment during the first three months averaged 187 employees in 1998, a 4.1%
decline from the 195 in 1997. Salaries and benefits increased by only $17 over
the similar period a year ago, representing an increase of 1.2%.
For the first three months of 1998, state and local taxes increased by
$6 or 4.4%. Occupancy and equipment expense increased by $25 or 5.8%. All
other expense categories increased by 6.1% or $31 as a group. First quarter
1998 expenses include the newest branch office of the Company's Bank subsidiary
which opened during the third quarter of 1997.
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)
Income before income tax expense amounted to $1,697 for the first three
months of 1998 compared to $1,539 for the similar period of 1997. The effective
tax rate for the first three months was 29.1% in 1998 compared to 30.7% in 1997,
resulting in income tax expense of $494 and $472, respectively. Net income for
the first three months registered $1,203 in 1998 compared to $1,067 in 1997,
representing a 9.4% increase in per share amounts from the $0.32 earned in 1997
to the $0.35 recorded in 1998.
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, and has planned a
program of testing for compliance.
21
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
See Note (5) of the financial statements.
Item 2. Changes in Securities
- ------- ---------------------
Not applicable
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable
Item 5. Other Information
- ------- -----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19. 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
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cortland Bancorp
----------------
(Registrant)
DATED: May 11, 1998 Lawrence A. Fantauzzi
------------ ---------------------
Controller/Treasurer
(Principal Financial Officer)
DATED: May 11, 1998 Dennis E. Linville
------------ ------------------
Executive Vice-President,
Secretary and Director
(Duly Authorized Officer)
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND
CALL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,136
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,045
<INVESTMENTS-CARRYING> 64,249
<INVESTMENTS-MARKET> 64,590
<LOANS> 190,413
<ALLOWANCE> 2,873
<TOTAL-ASSETS> 390,936
<DEPOSITS> 317,104
<SHORT-TERM> 9,493
<LIABILITIES-OTHER> 2,346
<LONG-TERM> 20,021
0
0
<COMMON> 17,246
<OTHER-SE> 24,726
<TOTAL-LIABILITIES-AND-EQUITY> 390,936
<INTEREST-LOAN> 4,173
<INTEREST-INVEST> 2,930
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 7,152
<INTEREST-DEPOSIT> 2,888
<INTEREST-EXPENSE> 3,307
<INTEREST-INCOME-NET> 3,845
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 62
<EXPENSE-OTHER> 2,539
<INCOME-PRETAX> 1,697
<INCOME-PRE-EXTRAORDINARY> 1,203
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 4.2
<LOANS-NON> 2,208
<LOANS-PAST> 11
<LOANS-TROUBLED> 173
<LOANS-PROBLEM> 2,215
<ALLOWANCE-OPEN> 2,817
<CHARGE-OFFS> 44
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 2,873
<ALLOWANCE-DOMESTIC> 2,560
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 313
</TABLE>
