<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 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 No.)
incorporation or organization)
l94 West Main Street
CORTLAND, OHIO 44410
- - --------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 637-8040
-----------------------------
Securities registered pursuant to Section l2(b) of the Act: None
Securities registered pursuant to Section l2(g) of the Act:
COMMON STOCK, NO PAR VALUE
- - --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 months (or for shorter periods that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of the chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment of this Form 10-K [ x ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 18, 1999:
COMMON STOCK, NO PAR VALUE - $95,421,492
- - ----------------------------------------
The number of shares outstanding of the issuer's classes of common stock as
of March 18, 1999:
COMMON STOCK, NO PAR VALUE - 3,600,811 SHARES
- - ---------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Shareholders Report for the year ended December 31,
1998 are incorporated by reference into Part I, Item VI and Part II.
Portions of the Proxy Statement for the annual shareholders meeting to be
held May 18, 1999 are incorporated by reference into Part III.
<PAGE> 2
CORTLAND BANCORP
FORM 10-K
1998
INDEX
<TABLE>
<CAPTION>
PART I PAGE
- - ------ ----
<S> <C> <C>
Item 1. Business:
General I-2
Statistical Disclosure I-4
Item 2. Properties I-11
Item 3. Legal Proceedings I-11
Item 4. Submission of Matters to a Vote of Security Holders I-12
Executive Officers of the Registrant I-12
PART II
- - -------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 7A. Quantitative and Qualitative Disclosure About Market Risk II-1
Item 8. Financial Statements and Supplementary Data II-1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures II-1
PART III
- - --------
Item 10. Directors and Executive Officers of the Registrant III-1
Item 1l. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management III-1
Item 13. Certain Relationships and Related Transactions III-1
PART IV
- - -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
</TABLE>
I-1
<PAGE> 3
PART I
------
ITEM L. BUSINESS
- - ------- --------
GENERAL
- - -------
THE CORPORATION
---------------
The registrant, Cortland Bancorp (also referred to as the "Corporation" or
the "Company"), is a bank holding company which was incorporated under the laws
of the State of Ohio in 1984, and is registered under the Bank Holding Company
Act of l956, as amended. Its subsidiaries are the Cortland Savings and Banking
Company ("Cortland Banks" or the "Bank"), which was acquired at the
Corporation's inception in l985, and New Resources Leasing Company, which was
formed in 1988. The Corporation and its subsidiaries operate in one industry,
domestic banking.
The Corporation conducts no business activities except for investment in
securities as permitted under the Bank Holding Company Act.
The business of the Corporation and its subsidiaries is not seasonal to any
significant extent and is not dependent on any single customer or group of
customers.
CORTLAND BANKS
--------------
Cortland Banks is a full service, state chartered bank engaged in
commercial and retail banking and trust services. Cortland Banks' commercial and
consumer banking services include checking accounts, savings accounts, time
deposit accounts, commercial, mortgage and installment loans, leasing, night
depository, automated teller services, safe deposit boxes, money order services,
travelers checks, utility bill payments and other miscellaneous services
normally offered by commercial banks. In addition, Cortland Banks offers
discount brokerage services, while the Bank's Trust Department offers a broad
range of fiduciary services, including the administration of decedent and trust
estates and other personal and corporate fiduciary services. Business is
conducted at a total of thirteen offices, eight of which are located in Trumbull
County, Ohio. Three offices are located in the communities of Hiram, Windham and
Mantua, Portage County, Ohio, one office is located in the community of
Williamsfield, Ashtabula County, Ohio, and another is located in the community
of Boardman, Mahoning County, Ohio. Chartered by the State of Ohio, Cortland
Banks is also a member of the Federal Reserve System.
NEW RESOURCES LEASING COMPANY
-----------------------------
New Resources Leasing Company was formed in December 1988 as a
separate entity to handle the function of commercial and consumer leasing. The
wholly owned subsidiary has been inactive since incorporation.
SUPERVISION AND REGULATION
--------------------------
The Corporation is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant
to the Bank Holding Company Act of l956, as amended. Generally, this Act limits
the business of bank holding companies to owning or controlling banks and
engaging in such other activities as the Federal Reserve Board may determine to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
I-2
<PAGE> 4
Supervision and Regulation (Continued):
Cortland Banks, as a state banking organization, is subject to periodic
examination and regulation by the Federal Reserve Bank of Cleveland and the
State of Ohio Division of Banks. Cortland Banks is a member of the Federal
Reserve System and its deposits are insured by the Bank Insurance Fund (BIF)
administered by the Federal Deposit Insurance Corporation (FDIC).
Competition:
Cortland Banks actively competes with state and national banks located in
the Ohio counties of Trumbull, Portage, Ashtabula and Mahoning. It also competes
with a large number of other financial institutions, such as savings and loan
associations, insurance companies, consumer finance companies, credit unions and
commercial finance and leasing companies, for deposits, loans and service
business. Money market mutual funds, brokerage houses and similar institutions
provide in a relatively unregulated environment many of the financial services
offered by banks. In the opinion of management, the principal methods of
competition are the rates of interest charged for loans, the rates of interest
paid for funds, the fees charged for services and the availability of services.
Employees:
At March 18, l999, the Corporation and its subsidiaries had 149 full-time
and 49 part-time employees. The Corporation considers its relations with its
employees to be satisfactory.
I-3
<PAGE> 5
STATISTICAL DISCLOSURE
----------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
-------------------------------------------------------------
Information relating to I - Distribution of Assets, Liabilities and
Shareholders' Equity; Interest Rates and Interest Differential is set forth in
the Corporation's 1998 Annual Report to Shareholders under the pages indicated
below and is incorporated herein by reference:
Pages in 1998
Annual Report
to Shareholders
---------------
<TABLE>
<CAPTION>
<S> <C>
A. Average Balance Sheet -
December 31, 1998, 1997 and 1996 27 & 28
B. Analysis of Net Interest Earnings -
Years ending December 31, 1998, 1997 and 1996 27 & 28
C. Rate and Volume Analysis -
1998 change from 1997
and 1997 change from 1996 32
</TABLE>
I-4
<PAGE> 6
II. INVESTMENT PORTFOLIO
A. The following table shows the book value of investment securities by
type of obligation at the dates indicated:
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 53,093 $ 88,660 $ 98,538
U.S. Government mortgage-backed
pass-through certificates 84,536 74,900 74,869
States of the U.S. and political subdivisions 33,794 21,039 17,228
Other securities 4,087 3,997 3,739
-------- -------- --------
$175,510 $188,596 $194,374
======== ======== ========
</TABLE>
B. A summary of securities held at December 3l, l998, classified according
to the earlier of next repricing or the maturity date and the weighted average
yield for each range of maturities, is set forth below. Fixed rate
mortgage-backed securities are classified by their estimated contractual cash
flow, adjusted for current prepayment assumptions. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
(In Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
Book Weighted
TYPE AND MATURITY GROUPING Value Average Yield (1)
-------------------------- -------- ------------------
<S> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations:
Maturing within one year $ 17,156 6.18%
Maturing after one year but within five years 18,217 6.10
Maturing after five years but within ten years 16,182 6.79
Maturing after ten years 1,538 7.22
--------
Total U.S. Treasury and other U.S.
Government agencies and corporations $ 53,093 6.37%
======== =====
U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's:
Maturing within one year $ 48,451 6.24%
Maturing after one year but within five years 24,522 6.55
Maturing after five years but within ten years 10,345 6.89
Maturing after ten years 1,218 6.89
--------
Total U.S. Government mortgage-backed
pass-through certificates, REMICS & CMO's $ 84,536 6.42%
======== ======
</TABLE>
I-5
<PAGE> 7
II. INVESTMENT PORTFOLIO (continued)
- - ------------------------
(In Thousands of Dollars)
DECEMBER 31, 1998
-----------------
Book Weighted
TYPE AND MATURITY GROUPING Value Average Yield (1)
-------------------------- -------- -----------------
States of the U.S. and political subdivisions:
Maturing within one year $ 1,409 6.64%
Maturing after one year but within five years 11,008 6.91
Maturing after five years but within ten years 2,332 7.83
Maturing after ten years 19,045 7.65
--------
Total States of the U.S. and
political subdivisions $ 33,794 7.38%
======== ======
Other securities:
Maturing within one year $ 1,908 6.10%
Maturing after one year but within five years 0
Maturing after five years but within ten years 0
Maturing after ten years 2,179 6.48
--------
Total other securities $ 4,087 6.30%
======== ======
(1) The weighted average yield has been computed by dividing the total interest
income adjusted for amortization of premium or accretion of discount over
the life of the security by the amortized cost of the securities
outstanding. The weighted average yield of tax-exempt obligations of states
of the U.S. and political subdivisions has been calculated on a fully
taxable equivalent basis. The amounts of adjustments to interest which are
based on the statutory tax rate of 34% were $29, $259, $62 and $495 for the
four ranges of maturities.
As of December 31, 1998, there were $13,808 in callable U.S. Government
Agencies, that given current and expected interest rate environments, are likely
to be called within the one year time horizon. These securities are categorized
according to their contractual maturities, with $3,239 maturing after one year
but within five years, $10,066 maturing after five years but within ten years
and $503 maturing after 10 years.
As of December 31, 1998, there were $1,568 in callable U.S. Treasury
securities and $5,583 in callable U.S. Government Agencies that, given current
and expected interest rate environments, are likely to be called within the time
frame defined as after one year but within five years. These securities are
categorized according to their contractual maturities, with $6,116 maturing
after five years but within ten years and $1,035 maturing after 10 years.
I-6
<PAGE> 8
III. LOAN PORTFOLIO (ALL DOMESTIC)
- - ----------------------------------
A. TYPES OF LOANS
- - -----------------
<TABLE>
<CAPTION>
(In Thousands of Dollars)
The following schedule shows the types of loans at the dates indicated:
DECEMBER 31,
-----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 - 4 family residential
mortgages $ 79,125 $ 77,644 $ 70,590 $ 67,099 $ 66,069
Commercial mortgages 61,149 50,015 42,367 38,371 37,554
Consumer loans 17,623 18,990 21,300 21,254 17,247
Commercial loans 29,576 26,022 19,355 16,658 15,101
Home equity loans 8,669 10,064 11,136 12,353 12,854
1 - 4 family residential
mortgages held for sale 4,336 1,756 1,361 473 1,855
-------- -------- -------- -------- --------
$200,478 $184,491 $166,109 $156,208 $150,680
======== ======== ======== ======== ========
</TABLE>
B. MATURITIES AND SENSITIVITIES OF LOANS TO INTEREST RATES
- - ----------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands of Dollars)
The following schedule sets forth maturities based on remaining scheduled
repayments of principal or next repricing opportunity for loans (excluding
mortgage and consumer loans) as of December 31, 1998:
1 Year 1 to Over
TYPES OF LOANS or Less 5 Years 5 Years Total
-------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
Commercial loans $ 18,471 $ 8,003 $ 3,102 $ 29,576
Home Equity 8,669 0 0 8,669
-------- -------- -------- --------
Total loans (excluding
mortgage and consumer loans) $ 27,140 $ 8,003 $ 3,102 $ 38,245
======== ======== ======== ========
</TABLE>
The following schedule sets forth loans as of December 31, 1998 based on
next repricing opportunity for floating and adjustable interest rate products,
and by remaining scheduled principal payments for loan products with fixed rates
of interest. Mortgage and consumer loans have again been excluded.
<TABLE>
<CAPTION>
1 Year Over
TYPES OF LOANS or Less 1 Year Total
-------------- -------- -------- -------
<S> <C> <C> <C>
Floating or adjustable rates of interest $ 26,402 $ 1,057 $ 27,459
Fixed rates of interest 738 10,048 10,786
-------- -------- --------
Total loans $ 27,140 $ 11,105 $ 38,245
======== ======== ========
</TABLE>
I-7
<PAGE> 9
C. RISK ELEMENTS
- - -----------------
(In Thousands of Dollars)
1. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- - ----------------------------------------------
The following table sets forth the aggregate balance of underperforming
loans for each of the following categories for the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $ 2,741 $ 1,653 $ 1,450 $ 1,597 $ 1,909
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 41 10 18 7 14
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 162 173 182 191 205
</TABLE>
The following shows the amounts of contractual interest income and interest
income actually reflected in income on loans accounted for on a nonaccrual basis
and loans considered troubled debt restructuring as of December 31, 1998.
(In Thousands of Dollars)
<TABLE>
<CAPTION>
<S> <C>
Gross interest income that would have been
recorded if the loans had been current in
accordance with their original terms $ 377
Interest income included in income on the loans 153
</TABLE>
A loan is placed on a nonaccrual basis whenever sufficient information is
received to question the collectibility of the loan or any time legal
proceedings are initiated involving a loan. When a loan is charged-off, any
interest that has been accrued and not collected on the loan is charged against
earnings.
Impaired loans are generally included in nonaccrual loans. Management does
not individually evaluate certain smaller balance loans for impairment as such
loans are evaluated on an aggregate basis. These loans generally include 1 - 4
family, consumer and home equity loans. Impaired loans are generally evaluated
using the fair value of collateral as the measurement method. At December 31,
1998, 1997 and 1996 the recorded investment in impaired loans was $719, $1,365
and $1,162 while the allocated portion of the allowance for loan losses for such
loans was $98, $213 and $291 respectively. Interest income recognized on
impaired loans using the cash basis was $9, $116 and $92, respectively.
I-8
<PAGE> 10
C. RISK ELEMENTS (CONTINUED)
- - ----------------------------
(In Thousands of Dollars)
2. POTENTIAL PROBLEM LOANS
--------------------------
As of December 31, 1998, there were $828 in loans, not included in the
above categories and not considered impaired, but which can be considered
potential problem loans. Management does not currently anticipate any loss as a
result of these potential problem loans.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed above do not (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
- - -----------------------------------
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSS
------------------------------------------
Information relating to IV - Summary of Loan Loss Experience - A.
Analysis of the Allowance for Loan Loss is set forth in the
Corporation's 1998 Annual Report to Shareholders, Page 34, Loan Loss
Experience and is incorporated herein by reference.
G. BREAKDOWN OF THE ALLOWANCE FOR LOAN LOSSES
---------------------------------------------
Information relating to IV - Summary of Loan Loss Experience - G.
Breakdown of the Allowance for Loan Losses is set forth in the
Corporation's 1998 Annual Report to Shareholders under the pages
indicated below and is incorporated herein by reference.
<TABLE>
<CAPTION>
Pages in 1998
Annual Report
to Shareholders
---------------
<S> <C>
Breakdown of the Allowance for Loan Losses 35
Percentage of loans in each category 35
Loan Commitments and Lines of Credit 18
</TABLE>
I-9
<PAGE> 11
V. DEPOSITS (ALL DOMESTIC)
- - --------------------------
A. AVERAGE DEPOSITS AND AVERAGE RATES PAID ON DEPOSIT CATEGORIES
----------------------------------------------------------------
Information relating to V - Deposits - A. Average Deposits and
Rates is set forth in the Corporation's 1998 Annual Report to
Shareholders, Pages 27 & 28, Three Year Summary Average Balance
Sheet, Yields and Rates and is incorporated herein by
reference.
B.
Not applicable
C.
Not applicable
D. SUMMARY OF TIME DEPOSITS OF $100,000 OR MORE
------------------------------------------------
Information relating to V - Deposits - D. Summary of Time Deposits
of $100,000 or More by Maturity Range, is set forth in the
Corporation's 1998 Annual Report to Shareholders, Page 17, Note 6,
Deposits and is incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
- - -------------------------------
Information relating to VI - Return on Equity and Assets is set forth in
the Corporation's 1998 Annual Report to Shareholders, page 26, Selected
Financial Data.
I-10
<PAGE> 12
ITEM 2. PROPERTIES
- - ------- ----------
CORTLAND BANCORP'S PROPERTY
---------------------------
Cortland Bancorp owns no property. Operations are conducted at l94 West
Main Street, Cortland, Ohio.
CORTLAND BANKS' PROPERTY
------------------------
Cortland Banks' main office (as described in its charter) is located at l94
West Main Street, Cortland, Ohio. Administrative offices are located at the main
office.
The other offices are:
<TABLE>
<CAPTION>
POPULAR NAME ADDRESS
------------ -------
<S> <C>
Brookfield Office 7325 Warren-Sharon Road, Brookfield, Ohio
Vienna Office 4434 Warren-Sharon Road, Vienna, Ohio
Windham Office 9690 East Center Street, Windham, Ohio
Bristol Office 6090 State Route 45, Bristolville, Ohio
Williamsfield Office State Routes 322 and 7, Williamsfield, Ohio
Hiram Office 682l Wakefield Road, Hiram, Ohio
Warren Office 2935 Elm Road, Warren, Ohio
Hubbard Office 890 West Liberty Street, Hubbard, Ohio
Mantua Office 11661 State Rt. 44, Mantua, Ohio
Niles Office 6050 Youngstown Warren Rd., Niles, Ohio
North Bloomfield Office 8837 State Route 45, North Bloomfield, Ohio
Boardman Office 8580 South Avenue, Youngstown, Ohio
</TABLE>
The Brookfield, Windham, Hubbard, Niles and Boardman offices are leased,
while all of the other above offices are owned by Cortland Banks.
ITEM 3. LEGAL PROCEEDINGS
- - ------- -----------------
The Company's subsidiary bank was a defendant in a class action lawsuit
Frank Slentz, Et Al. V. Cortland Savings and Banking Company, involving
purchased interests in two campgrounds.
On October 20, 1997 the judge presiding over this case filed a judgment
entry dismissing all claims against the Bank without prejudice. The judgment was
appealed by the plaintiffs. Subsequent to year end, the United States Court of
Appeals for the Sixth Circuit affirmed the decision of the district court to
grant summary judgment in favor of the defendant Bank. The plaintiffs have the
right to appeal to the United States Supreme Court. Plaintiffs have also filed
similar suit in the Common Pleas Court of Trumbull County which is currently
scheduled for May 2000. Accordingly, the ultimate outcome of this litigation
presently cannot be determined, and therefore no provision for any liability
relative to such litigation has been made in the accompanying consolidated
financial statements.
The Bank is also involved in other legal actions arising in the ordinary
course of business. In the opinion of management, the outcome of these matters
is not expected to have a material effect on the Company.
I-11
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
The names, ages and positions of the executive officers as of March 18,
l999 are as follows:
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Rodger W. Platt 63 Chairman of the Board,
President and Director
Lawrence A. Fantauzzi 51 Controller/Treasurer, Corporate
Secretary, Director and
Chief Financial Officer
James M. Gasior 39 Vice President and Chief
Operations Officer
</TABLE>
All of the officers listed above will hold office until the next annual
meeting of shareholders and until their successors are duly elected and
qualified.
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
- - ------------------------------------------------------------------
During the past five years the business experience of each of the executive
officers has been as follows:
Rodger W. Platt has been Chairman of the Board of Cortland Bancorp and the
subsidiary bank since November l987. He has been a Director and President of
Cortland Bancorp since its formation in April of l985. He has been a Director of
the subsidiary bank since l974 and has been President since l976.
Lawrence A. Fantauzzi has been the Controller of Cortland Bancorp and the
subsidiary bank since April l987. He became Treasurer and Chief Financial
Officer of Cortland Bancorp and the subsidiary bank in December 1992. He became
a Director of New Resources Leasing Company in November 1995, and Senior Vice
President of the subsidiary bank in April 1996. In February 1999, he was elected
Secretary of the Corporation and appointed to the Board of Directors of Cortland
Bancorp and the subsidiary bank.
James M. Gasior has been the Vice President and Chief Operations Officer of
Cortland Bancorp since April 1995. He has been the Vice President and Chief
Operations Officer of the subsidiary bank since June 1993. He became a Director
of New Resources Leasing Company in November 1995, and Senior Vice President of
the subsidiary bank in April 1996. Prior to June 1993, he was Chief Audit
Officer of the subsidiary bank.
I-12
<PAGE> 14
PART II
-------
Information relating to Items 5, 6, 7, 7A and 8 is set forth in the
Corporation's l998 Annual Report to Shareholders under the pages indicated below
and is incorporated herein by reference:
Pages in l998
Annual Report
to Shareholders
---------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
- - ------- RELATED SHAREHOLDER MATTERS 45
---------------------------
DISCUSSION OF DIVIDEND RESTRICTIONS 25
-----------------------------------
ITEM 6. SELECTED FINANCIAL DATA 26
- - ------- -----------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- - ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29-44
---------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- - -------- MARKET RISK 40-41,
---------------------------------------------- 43-44
ITEM 8. FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION 1-28
- - ------- -------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
---------------------------------------------
None
II-1
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - -------- --------------------------------------------------
Information relating to directors of the Corporation will be set forth in
the Corporation's definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with its annual meeting of shareholders to be
held May 18, 1999. Such information is incorporated herein by reference.
Information relating to executive officers of the Corporation is set forth in
Part I. Pages 2-6 and 8
ITEM 11. EXECUTIVE COMPENSATION
- - -------- ----------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held May
18, 1999. Such information is incorporated herein by reference. Pages 4-6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - -------- --------------------------------------------------------------
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------- ----------------------------------------------
Information relating to this item will be set forth in the Corporation's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with its annual meeting of shareholders to be held May
18, l999. Such information is incorporated herein by reference. Pages 2 and 6
III-l
<PAGE> 16
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- - -------- ---------------------------------------------------------------
(a) l. FINANCIAL STATEMENTS
--------------------
Included in Part II of this report:
Item 8., Financial Statements and Accompanying Information, is set
forth in the Corporation's l998 Annual Report to Shareholders and is
incorporated by reference in Part II of this report.
(a) 2. FINANCIAL STATEMENT SCHEDULES
-----------------------------
Included in Part IV of this report as Exhibit 23:
Independent Accountants' Consent
Schedules:
All schedules are omitted because they are not applicable.
(a) 3. EXHIBITS
--------
The exhibits filed or incorporated by reference as a part of this report
are listed in the Index to Exhibits which appears at page IV-3 hereof and
is incorporated herein by reference.
(b) REPORT ON FORM 8-K
------------------
Form 8-K was filed with the United States Securities and Exchange
Commission, dated December 31, 1998. The 8-K applied to Item 5 - Other
Events and described resignations of certain members of the registrant's
Board of Directors and senior management. No financial statements were
filed with this report.
IV-l
<PAGE> 17
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORTLAND BANCORP
March 18, 1999 By Rodger W. Platt, President
- - ---------------------------- --------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chairman of the Board,
President and Director March 18, 1999
Rodger W. Platt (Principal Executive ---------------
- - --------------------------------- Officer) Date
David C. Cole Director March 18, 1999
- - --------------------------------- --------------
Date
George E. Gessner Director March 18, 1999
- - --------------------------------- --------------
Date
William A. Hagood Director March 18, 1999
- - --------------------------------- --------------
Date
James E. Hoffman, III Director March 18, 1999
- - --------------------------------- --------------
Richard L. Hoover Director March 18, 1999
- - --------------------------------- --------------
Date
K. Ray Mahan Director March 18, 1999
- - --------------------------------- --------------
Date
Timothy K. Woofter Director March 18, 1999
- - --------------------------------- --------------
Date
Lawrence A. Fantauzzi Controller/Treasurer, March 18, 1999
- - --------------------------------- Corporate Secretary and --------------
Director (Principal Date
Financial Officer and
Principal Accounting
Officer)
James M. Gasior Vice President & Chief March 18, 1999
- - ---------------------------------- Operations Officer --------------
Date
IV-2
<PAGE> 18
INDEX TO EXHIBITS
-----------------
The following exhibits are filed or incorporated by reference as part of
this report:
3.l. Articles of Incorporation of the Corporation as currently in effect and
any amendments thereto (incorporated by reference to Exhibit 3 of the
Corporation's Report on Form S-l filed February 5, l988).
3.2. Bylaws of the Corporation as currently in effect (incorporated by
reference to Exhibit 3a of the Corporation's Report on Form S-l filed February
5, l988).
4 The rights of holders of equity securities are defined in portions of the
Articles of Incorporation and Bylaws as referenced in 3.l. and 3.2.
ll Statement regarding computation of earnings per share (filed herewith).
l3 Annual Report to security holders (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consents of experts and counsel - Consent of independent accountants
(filed herewith).
27 Financial Data Schedule (filed herewith).
Copies of any exhibits will be furnished to shareholders upon written
request. Requests should be directed to Lawrence A. Fantauzzi, Secretary,
Cortland Bancorp, l94 West Main Street, Cortland, Ohio 444l0.
IV-3
<PAGE> 1
EXHIBIT 11
----------
CORTLAND BANCORP AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
-----------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 3,558,645 3,500,157 3,421,713
Net Income ($000 Omitted) $ 4,816 $ 4,454 $ 4,110
Basic Earnings per share $ 1.35 $ 1.27 $ 1.20
Diluted Earnings per share $ 1.35 $ 1.27 $ 1.20
</TABLE>
Average shares outstanding and earnings per share have been restated to
give retroactive effect to both the 3% stock dividends paid as of January 1,
1999, 1998 and 1997 and the three-for-one stock split of May 15, 1998.
More information regarding earnings per share is set forth in the
Corporation's 1998 Annual Report to Shareholders, Page 11, Per Share Amounts,
and is incorporated herein by reference.
<PAGE> 1
[CORTLAND BANCORP LOGO]
1998 Annual Report
<PAGE> 2
- - --------------------------------------------------------------------------------
CONTENTS
Chairman's Message
----------------------------------------------
1
Brief Description of the Business
----------------------------------------------
3
Report of Independent Auditors
----------------------------------------------
4
Consolidated Statements of Income
----------------------------------------------
5
Consolidated Balance Sheets
----------------------------------------------
6
Consolidated Statements of
Shareholders' Equity
----------------------------------------------
7
Consolidated Statements of Cash Flows
----------------------------------------------
8
Notes to the Consolidated Financial
Statements
----------------------------------------------
9
Selected Financial Data
----------------------------------------------
26
Three Year Summary
Average Balance Sheets, Yields and
Rates
----------------------------------------------
27
Management's Discussion and Analysis
----------------------------------------------
29
Information as to Stock Prices and
Dividends
----------------------------------------------
45
Cortland Bancorp
Directors and Officers
----------------------------------------------
46
Cortland Savings & Banking
Directors and Officers
----------------------------------------------
47
- - --------------------------------------------------------------------------------
[CORTLAND BANCORP LOGO]
<PAGE> 3
CHAIRMAN'S MESSAGE
- - --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
It may just be my age, but it seems to me that time is flying by ever quicker.
Perhaps it is simply that we live in an age where we are "change challenged." A
wide array of technological advances provide us with a steady stream of
innovative opportunities to increase productivity, flexibility and efficiency,
facilitating more rapid, sustainable economic growth while dampening inflation
by promoting competition on an ever growing scale. With profitability enhanced,
more and more funds are made available for investment, triggering wave after
wave of technological change. So it goes, ever faster.
The result has been a vigorous domestic economy. It is now the longest peacetime
economic expansion in U.S. history. Instead of the economic imbalances and
bottlenecks expected at this point in the expansion, we find the lowest
inflation and unemployment rates in nearly thirty years. Many claim that we have
now crossed the threshold to a golden New Era of opportunity and prosperity. At
its core the seemingly limitless potential of emerging technologies spawn an
ever growing web of information and communication networks that continue to
shrink the globe and "level the playing field." If you listen closely, you may
actually hear the mantra of the New Era: "Evolve or die!"
Today, we find ourselves at the doorstep of the "Mother of All Technological
Challenges," the Year 2000 (Y2K) problem. Prognosticators of doom would have us
believe that economic and technological collapse await us at the dawn of the
third millennium. It seems that we have been deficient in our instructions to
our marvelous computing machines as to the true meaning of time and, as every
banker knows, "time is money." That's all anyone really needs to know in order
to realize that bankers everywhere are earnestly working to resolve the Y2K
problem, and that the problem will be solved. Evolve we will!
At Cortland Banks, we have been very focused on the Y2K issue. We have committed
a significant amount of time, energy and resources to identifying, evaluating
and testing our mission critical systems. As of December 31, 1998, we had spent
$383,000 on the Y2K issue, and estimate that we will spend an additional
$267,000 this year to ensure readiness. The majority of these expenditures
represent normal lifecycle replacements and upgrades to our information and
telecommunication systems. They are simply occurring under the purview of Y2K
project management to ensure compliance.
As we implement the final pieces of our Y2K solution, we will also be testing
key elements of our contingency plans in 1999. Despite all of our planning and
testing, problems may still arise. Perhaps there will be power enough for the
conduct of commerce, but at levels insufficient to power the safe operation of
key electronic systems. We have plans for such an event. Also in 1999, we will
be following up with key customers to ensure that they have done all that they
can to prepare for the millennium date change. We will also continue to educate
the public on the issues. We continue to believe that the safest place for your
money is in the bank. Especially Cortland Banks.
Against the backdrop of all this Y2K activity, I am pleased to report record
earnings for the fifth consecutive year. Net income in 1998 topped $4.8 million,
representing an 8.1% increase over the $4.454 million earned in 1997. Moderate
growth of 3.4% in average earning assets combined with a modest improvement in
the net interest margin ratio to provide more than enough funds to cover a 3.75%
rise in non interest expense and a $450,000 increase in the loan loss provision
necessitated by increased loan volume and concerns related to certain commercial
credits. Meanwhile, strong gains from the sale of mortgage loans and called
investment securities (securities retired prior to maturity by the issuer)
contributed to a 25% increase in non-interest income.
Earnings per share grew from $1.27 in 1997 to $1.35 in 1998. The return on
average assets, a key measure of profitability among financial institutions,
climbed to 1.22% from 1.16% a year ago. Return on average equity measured
11.24%, down from last year's 11.62%, but still ahead of the 10.85% averaged
over the preceding five years.
Strong capital ratios remain one of our defining characteristics. The ratio of
average equity capital to average assets rose to 10.81% in 1998 from 9.99% in
1997. Capital measured as a ratio against assets adjusted for risk remained
above 22%, well above regulatory minimum requirements. A strong capital position
cushions the blow from any sudden unforeseen shocks, and provides considerable
strategic flexibility in an era of rapid competitive, regulatory and
technological change.
The combination of moderate asset growth, solid earnings growth and abundant
capital once again
- - --------------------------------------------------------------------------------
1
<PAGE> 4
- - --------------------------------------------------------------------------------
allowed us to boost the portion of earnings paid out to our shareholders as
dividends. The Board of Directors increased the cash dividend to $0.68 per share
from $0.47 per share last year, hiking the payout ratio from 37% to 50% in the
process. That means 50% of earnings were distributed to shareholders as
dividends.
On April 14, 1998, the Board of Directors voted to split the Company's common
stock. Where shareholders previously held one share of stock, on May 15, 1998
they would now own three shares. Our reasoning was that the additional shares
would increase market liquidity, encourage more shares to trade, and enable the
market place to more efficiently ascertain the true value of Cortland Bancorp's
stock. The market's response was most enthusiastic. The total return (price
appreciation plus dividends) for Cortland Bancorp investors in 1998 was a very
healthy 57%, approximately twice the total return registered by the S&P 500
Index. SNL's Index of banks with assets under $500 million (SNL Index) struggled
to find favor with investors in 1998, falling 8.7%. Over the past five years,
the annual compound rate of return for Cortland Bancorp has measured 38.8%,
while the S&P 500 and the SNL Index both reflect an annual compound rate of
return of 24.1%.
Profitable growth is essential to enhancing shareholder value. Not only must we
seek out new markets to tap, we must also evaluate the effectiveness and
efficiency with which we are servicing existing customers. For sometime now, we
have sought to improve the convenience and efficiency of the services we deliver
to our Portage County customers. In 1998, we were finally able to successfully
resolve certain environmental issues that had long delayed construction of a new
facility, and a new office at Mantua Corners was opened in mid-November. This
office is strategically located to service both the Mantua and Hiram
communities, and the existing Hiram office is scheduled to close during the
second quarter of 1999. At about the same time, we plan to open a new office in
Trumbull County that is well situated to service the communities of Niles,
Girard and Howland.
The residential mortgage growth plan we initiated in 1997 accelerated in 1998.
Our efforts to expand product offerings, establish new investor outlets,
cultivate realtor relations, and expand market coverage were particularly well
received. Approximately $44.5 million in new mortgage loans were originated in
1998, up from $17.9 million last year, with 37% of new originations sold off to
investors as we sought to satisfy customer needs while curtailing interest rate
risk. We look to further build upon this success in 1999 and beyond.
Overall our loan portfolio grew by $16 million, or 8.7%. The commercial sector
continues to strengthen, and now represents 45% of the portfolio, up from 33%
five years ago. Our success, here, is also reflected in a more favorable deposit
mix, with non interest-bearing checking now representing nearly 15% of all
deposits, up from 9% five years ago. Overall, the competition for deposits
remains fierce. Core deposits increased by 1.8% in 1998, a modest improvement
from 1997 when core deposits grew by 1.4%. The public's apprehension over the
Y2K issue is expected to put pressure on deposits throughout 1999.
As we prepare for the new millennium, we reaffirm our commitment to community
banking. We have done it well in the past, but plan to do it even better in the
future. We are presently conducting a thorough review of our approach to
community banking, looking for even better ways to combine and blend our diverse
talent, technology and infrastructure capabilities. Our goal is to forge a
commitment to excellence, up and down the organization, that will not be denied
in its pursuit of community and customer service, enhancing value for the
shareholder every step of the way...
All Stars at every position. Y2K ready as we can be{ in every way.
Sincerely,
/s/ Rodger W. Platt
Rodger W. Platt
Chairman and President
- - --------------------------------------------------------------------------------
2
[CORTLAND BANCORP LOGO]
<PAGE> 5
BRIEF DESCRIPTION OF THE BUSINESS
- - --------------------------------------------------------------------------------
CORTLAND BANCORP
Cortland Bancorp (the "Company") was incorporated under the laws of the State of
Ohio in 1984. The Company is a one bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The principal activity of the
Company is to own, manage and supervise the Cortland Savings and Banking Company
("Cortland Banks" or the "Bank"). The Company presently owns all of the
outstanding shares of the Bank. The Company provides the Bank with direction and
leadership, coordinating and evaluating the activities and efforts of the Bank's
management personnel.
The Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended. Generally, this Act limits the business
of bank holding companies to owning or controlling banks and engaging in such
other activities as the Federal Reserve Board may determine to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Company conducts no other business activities except for investments in
securities as permitted under the Bank Holding Company Act. The business of the
Company and the Bank is not seasonal to any significant extent and is not
dependent on any single customer or group of customers.
THE CORTLAND SAVINGS
AND BANKING COMPANY
The Cortland Savings and Banking Company is a full service state bank engaged in
commercial and retail banking and trust services. The Bank's services include
checking accounts, savings accounts, time deposit accounts, commercial, mortgage
and installment loans, leasing, night depository, automated teller services,
safe deposit boxes, money order services, traveler's checks, utility bill
payments and other miscellaneous services normally offered by commercial banks.
Cortland Banks also offers discount brokerage services, while the Bank's trust
department offers a broad range of fiduciary services, including the
administration of decedent and trust estates and other personal and corporate
fiduciary services.
Business is conducted at a total of thirteen offices, eight of which are located
in Trumbull County, Ohio. Three offices are located in the communities of Hiram,
Windham and Mantua, all in Portage County, Ohio. One office is located in the
community of Williamsfield, Ashtabula County, Ohio, while another is located in
the community of Boardman, Mahoning County, Ohio.
The Bank, as a state chartered banking organization and member of the Federal
Reserve System, is subject to periodic examination and regulation by both the
Federal Reserve Bank of Cleveland and the State of Ohio Division of Banks. These
examinations, which include such areas as capital, liquidity, asset quality,
management practices and other aspects of the Bank's operations, are primarily
for the protection of the Bank's depositors and not for its stockholders. In
addition to these regular examinations, the Bank must furnish periodic reports
to the regulatory authorities containing a full and accurate statement of its
affairs. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) up to the statutory limit of $100,000 per customer.
COMPETITION
Cortland Banks actively competes with state and national banks located in
Northeast Ohio and Western Pennsylvania. It also competes for deposits, loans
and other service business with a large number of other financial institutions,
such as savings and loan associations, credit unions, insurance companies,
consumer finance companies and commercial finance and leasing companies. Also,
money market mutual funds, brokerage houses and similar institutions provide in
a relatively unregulated environment many of the financial services offered by
banks. In the opinion of management, the principal methods of competition are
the rates of interest charged on loans, the rates of interest paid on deposit
funds, the fees charged for services, and the convenience, availability,
timeliness and quality of the customer services offered.
EMPLOYEES
As of December 31, 1998 the Company through its subsidiary bank, employed 153
full-time and 45 part-time employees. The Company provides its employees with a
full range of benefit plans, and considers its relations with its employees to
be satisfactory.
- - --------------------------------------------------------------------------------
3
<PAGE> 6
REPORT OF PACKER, THOMAS & CO.,
INDEPENDENT AUDITORS
- - --------------------------------------------------------------------------------
SHAREHOLDERS AND BOARD OF DIRECTORS
Cortland Bancorp
We have audited the accompanying consolidated balance sheets of Cortland Bancorp
and subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Cortland Bancorp and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Packer, Thomas & Co.
Packer, Thomas & Co.
Youngstown, Ohio
February 15, 1999
- - --------------------------------------------------------------------------------
4
[CORTLAND BANCORP LOGO]
<PAGE> 7
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $ 17,277 $15,981 $14,745
Interest and dividends on investment securities:
Taxable interest....................................... 4,615 6,201 6,118
Nontaxable interest.................................... 1,291 783 772
Dividends.............................................. 255 245 233
Interest on mortgage-backed securities.................... 5,011 4,982 5,160
Interest on trading account securities.................... 7 3
Other interest income..................................... 266 178 45
-------- ------- -------
Total interest income............................. 28,715 28,377 27,076
-------- ------- -------
INTEREST EXPENSE
Deposits.................................................. 11,311 12,081 11,973
Borrowed funds............................................ 1,730 1,266 768
-------- ------- -------
Total interest expense............................ 13,041 13,347 12,741
-------- ------- -------
Net interest income............................ 15,674 15,030 14,335
Provision for loan losses (Note 4)............. 450
-------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 15,224 15,030 14,335
-------- ------- -------
OTHER INCOME
Fees for other customer services.......................... 1,396 1,319 1,219
Trading securities gains - net............................ 13 12
Investment securities gains - net......................... 324 94 102
Gain on sale of loans - net............................... 178 76 15
Gain on sale of other real estate - net................... 27
Other non-interest income................................. 220 191 223
-------- ------- -------
Total other income................................ 2,118 1,693 1,598
-------- ------- -------
OTHER EXPENSES
Salaries and employee benefits............................ 5,842 5,830 5,549
Net occupancy expense..................................... 744 684 666
Equipment expense......................................... 1,161 1,082 1,048
State and local taxes..................................... 566 521 473
Office supplies........................................... 472 480 488
Marketing expense......................................... 282 256 265
Legal and litigation expense.............................. 189 182 277
Other operating expenses.................................. 1,425 1,260 1,231
-------- ------- -------
Total other expenses.............................. 10,681 10,295 9,997
-------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES.......................... 6,661 6,428 5,936
Federal income taxes (Note 10).............................. 1,845 1,974 1,826
-------- ------- -------
NET INCOME.................................................. $ 4,816 $ 4,454 $ 4,110
======== ======= =======
NET INCOME PER SHARE, BOTH BASIC AND DILUTED (Note 1)....... $ 1.35 $ 1.27 $ 1.20
======== ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5
<PAGE> 8
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 10,870 $ 9,509
Federal funds sold.......................................... 4,150 3,100
-------- --------
Total cash and cash equivalents........................... 15,020 12,609
-------- --------
Investment securities available for sale (Note 2)........... 119,575 115,413
Investment securities held to maturity (approximate
market value of $56,526 in 1998 and $73,684 in 1997) (Note
2)........................................................ 55,935 73,183
Total loans (Note 3)........................................ 200,478 184,491
Less allowance for loan losses (Note 4)................... (3,055) (2,817)
-------- --------
Net loans................................................. 197,423 181,674
-------- --------
Premises and equipment (Note 5)............................. 6,190 5,744
Other assets................................................ 3,789 4,139
-------- --------
TOTAL ASSETS...................................... $397,932 $392,762
======== ========
LIABILITIES
Noninterest-bearing deposits................................ $ 50,230 $ 45,652
Interest-bearing deposits (Note 6).......................... 270,870 274,086
-------- --------
Total deposits............................................ 321,100 319,738
-------- --------
Federal Home Loan Bank advances and other borrowings (Note
7)........................................................ 29,971 30,814
Other liabilities........................................... 3,321 2,001
-------- --------
TOTAL LIABILITIES................................. 354,392 352,553
-------- --------
Commitments and contingent liabilities (Notes 8 and 16)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized 5,000,000
shares;
issued 3,570,827 shares in 1998 and 1,138,237 in 1997
(Note 1).................................................. 17,854 5,691
Additional paid-in capital (Note 1)......................... 4,920 13,310
Retained earnings........................................... 20,015 20,429
Accumulated other comprehensive income (Note 1)............. 849 779
Treasury stock, at cost, 4,761 shares....................... (98)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (Note 15)................. 43,540 40,209
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $397,932 $392,762
======== ========
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
6
[CORTLAND BANCORP LOGO]
<PAGE> 9
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Share-
Common Paid-In Retained Comprehensive Treasury holders
Stock Capital Earnings Income Stock Equity
------ ---------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996................... $5,134 $ 9,171 $17,693 $ 643 $ (25) $32,616
COMPREHENSIVE INCOME:
Net income................................. 4,110 4,110
Other comprehensive income, net of tax:
Unrealized losses on available for sale
securities, net of reclassification
adjustment............................. (357) (357)
-------
Total comprehensive income................... 3,753
-------
COMMON STOCK TRANSACTIONS:
Shares sold................................ 120 680 800
Treasury shares sold....................... 25 25
Cash dividends declared ($.27 per share)... (941) (941)
Special cash dividend ($.09 per share)..... (315) (315)
3% stock dividend.......................... 155 1,087 (1,242)
Cash paid in lieu of fractional shares..... (18) (18)
------- -------- ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1996................. 5,409 10,938 19,287 286 0 35,920
------- -------- ------- ------ ------ -------
COMPREHENSIVE INCOME:
Net income................................. 4,454 4,454
Other comprehensive income, net of tax:
Unrealized gains on available for sale
securities, net of reclassification
adjustment............................. 493 493
-------
Total comprehensive income................... 4,947
-------
COMMON STOCK TRANSACTIONS
Shares sold................................ 118 899 1,017
Cash dividends declared ($.31 per share)... (1,101) (1,101)
Special cash dividend ($.16 per share)..... (553) (553)
3% stock dividend.......................... 164 1,473 (1,637)
Cash paid in lieu of fractional shares..... (21) (21)
------- -------- ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1997................. 5,691 13,310 20,429 779 0 40,209
------- -------- ------- ------ ------ -------
COMPREHENSIVE INCOME:
Net income................................. 4,816 4,816
Other comprehensive income, net of tax:
Unrealized gains on available for sale
securities, net of reclassification
adjustment............................. 70 70
-------
Total comprehensive income................... 4,886
-------
COMMON STOCK TRANSACTIONS
Shares sold................................ 263 713 976
Treasury shares purchased.................. (98) (98)
Cash dividends declared ($.39 per share)... (1,382) (1,382)
Special cash dividend ($.29 per share)..... (1,039) (1,039)
3% stock dividend.......................... 518 2,279 (2,797)
Cash paid in lieu of fractional shares..... (12) (12)
Adjustment for the effect of 3 for 1 common
stock split (Note 1)..................... 11,382 (11,382)
------- -------- ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1998................. $17,854 $ 4,920 $20,015 $ 849 $ (98) $43,540
======= ======== ======= ====== ====== =======
</TABLE>
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE
FOR SALE SECURITY GAINS AND LOSSES:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains (losses) on available for sale
securities
arising during the period, net of tax..................... $284 $555 $(290)
Less: Reclassification adjustment for gains realized in net
income, net of tax........................................ 214 62 67
---- ---- -----
Net unrealized gains (losses) on available for sale
securities, net of tax.................................... $ 70 $493 $(357)
==== ==== =====
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
7
<PAGE> 10
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 4,816 $ 4,454 $ 4,110
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation, amortization and accretion.......... 1,402 1,382 1,463
Provision for loan loss........................... 450
Deferred tax expense (benefit).................... (220) 64 69
Investment securities gains....................... (324) (94) (102)
Other real estate gains........................... (27)
Gains on sales of loans........................... (178) (76) (15)
Loans originated for sale......................... (19,222) (3,930) (1,421)
Proceeds from sale of loans originated for sale... 16,820 3,611 539
Gain on sale of fixed assets...................... (28)
Changes in:
Interest and fees receivable................ 359 102 (123)
Interest payable............................ (112) 61 (62)
Other assets and liabilities................ 1,607 850 (505)
-------- -------- --------
Net cash flows from operating
activities............................. 5,370 6,424 3,926
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale............. (40,767) (31,408) (37,738)
Purchases of securities held to maturity............... (22,930) (20,498) (20,696)
Proceeds from sales of securities available for sale... 4,947 19,630 12,997
Proceeds from call, maturity and principal payments on
securities.......................................... 71,718 38,364 31,703
Net increase in loans made to customers................ (14,257) (18,136) (10,149)
Proceeds from disposition of other real estate......... 28 225
Proceeds from sale of loans............................ 638 1,089
Proceeds from sale of fixed assets..................... 35
Purchases of premises and equipment.................... (1,307) (571) (319)
-------- -------- --------
Net cash flows from investing
activities............................. (1,923) (12,591) (22,888)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts............ 1,362 (292) 4,101
Net (decrease) increase in borrowings.................. (843) 9,643 12,954
Dividends paid......................................... (2,433) (1,675) (1,274)
Purchases of treasury stock............................ (98)
Proceeds from sale of treasury stock................... 25
Proceeds from sale of common stock..................... 976 1,017 800
-------- -------- --------
Net cash flows from financing
activities............................. (1,036) 8,693 16,606
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................ 2,411 2,526 (2,356)
-------- -------- --------
CASH AND CASH EQUIVALENTS
Beginning of year...................................... 12,609 10,083 12,439
-------- -------- --------
End of year............................................ $ 15,020 $ 12,609 $ 10,083
======== ======== ========
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
8
[CORTLAND BANCORP LOGO]
<PAGE> 11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Cortland Bancorp (the Company) and its wholly-owned subsidiaries,
Cortland Savings and Banking Company (the Bank) and New Resources Leasing Co.
All significant intercompany balances and transactions have been eliminated.
Industry Segment Information: The Company and its subsidiaries operate in the
domestic banking industry which accounts for substantially all of the Company's
assets, revenues and operating income. The Company, through its subsidiary bank,
grants residential, consumer, and commercial loans and offers a variety of
saving plans to customers located primarily in the Northeastern Ohio area.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Flow: Cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Generally, federal funds are purchased and sold
for one-day periods. The Company reports net cash flows for customer loan
transactions, deposit transactions and deposits made with other financial
institutions.
The Company paid interest of $13,153,000, $13,286,000 and $12,803,000 in 1998,
1997 and 1996, respectively. Cash paid for income taxes was $2,043,500 in 1998,
$1,824,000 in 1997 and $1,571,000 in 1996. Transfers of loans to other real
estate were $0, $0 and $11,000 in 1998, 1997 and 1996, respectively.
Investment Securities: Investments in debt and equity securities are classified
as held to maturity, trading or available for sale. Securities classified as
held to maturity are those that management has the positive intent and ability
to hold to maturity. Securities classified as available for sale are those that
could be sold for liquidity, investment management, or similar reasons, even
though management has no present intentions to do so. Trading securities are
principally held with the intention of selling in the near term.
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts, with such amortization or accretion
included in interest income. Securities available for sale are carried at fair
value with unrealized gains and losses recorded as a separate component of
shareholders' equity, net of tax effects. Changes in fair values of trading
securities are reported in the consolidated statements of income. Realized gains
or losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method. Interest on
securities is accrued and credited to operations based on the principal balance
outstanding, adjusted for amortization of premiums and accretion of discounts.
Loans: Loans are stated at the principal amount outstanding net of the
unamortized balance of deferred loan origination fees and costs. Deferred loan
origination fees and costs are amortized as an adjustment to the related loan
yield over the contractual life using the level yield method. Interest income on
loans is accrued over the term of the loans based on the amount of principal
outstanding. The accrual of interest is discontinued on a loan when management
believes that the collection of interest is doubtful. Generally a loan is placed
on nonaccrual status once the borrower is 90 days past due on payments. Interest
income accrued up to the date a loan is placed on nonaccrual is reversed through
interest income. Cash payments
- - --------------------------------------------------------------------------------
(Continued)
9
<PAGE> 12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
received while a loan is classified as nonaccrual are recorded as a reduction to
principal or reported as interest income according to management's judgement as
to collectibility of principal.
Loans Held for Sale: The Company originates certain residential mortgage loans
for sale in the secondary mortgage loan market. For the majority of loan sales,
the Company concurrently sells the rights to service the related loans. In
addition, the Company may periodically identify other loans which may be sold.
These loans are classified as loans held for sale, and carried, in the
aggregate, at the lower of cost or estimated market value based on secondary
market prices. To mitigate interest rate risk, the Company may obtain fixed
commitments at the time loans are originated or identified as being held for
sale. No such commitments existed as of December 31, 1998.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance consist of
provisions for loan losses charged to expense and recoveries of previously
charged-off loans. Reductions to the allowance result from the charge-off of
loans deemed uncollectible by management. After a loan is charged-off,
collection efforts continue and future recoveries may occur.
A loan is considered impaired when it appears probable that all principal and
interest amounts will not be collected according to the loan contract.
Allowances for loan losses on impaired loans are determined using the estimated
future cash flows of the loan, discounted to their present value using the
loan's effective interest rate. Allowances for loan losses for impaired loans
that are collateral dependent are generally determined based on the estimated
fair value of the underlying collateral. Smaller balance homogeneous loans are
evaluated for impairment in the aggregate. Such loans include one-to-four family
residential, home equity and consumer loans. Commercial loans and commercial
mortgage loans are evaluated individually for impairment. Impaired loans are
generally classified as nonaccrual loans.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations, including their financial position and collateral
values, and other factors and estimates which are subject to change over time.
While management may periodically allocate portions of the allowance for
specific problem situations, the entire allowance is available for any
charge-offs that occur.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed generally on the
straight-line method over the estimated useful lives of the various assets.
Maintenance and repairs are expensed and major improvements are capitalized.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the
lower of cost or fair value less estimated costs to sell. Any reduction from the
carrying value of the related loan to fair value at the time of acquisition is
accounted for as a loan loss. Any subsequent reduction in fair market value is
reflected as a valuation allowance through a charge to income.
Intangible Asset: An intangible asset resulting from a branch acquisition is
being amortized over a 15 year period. The intangible asset, net of accumulated
amortization, was $428,000 and $465,000 at December 31, 1998 and 1997,
respectively, and is included in other assets.
- - --------------------------------------------------------------------------------
(Continued)
10
[CORTLAND BANCORP LOGO]
<PAGE> 13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising: The Company expenses advertising costs as incurred.
Income Taxes: A deferred tax liability or asset is determined at each balance
sheet date. It is measured by applying currently enacted tax laws to future
amounts that result from differences in the financial statement and tax bases of
assets and liabilities.
Comprehensive Income: Accumulated other comprehensive income for the Company is
comprised solely of unrealized holding gains (losses) on available for sale
securities, net of tax.
Per Share Amounts: The Board of Directors declared 3% common stock dividends
payable as of January 1, 1999, 1998 and 1997. The 3% common stock dividend
issued on January 1, 1999 resulted in the issuance of 103,600 shares of common
stock, which have been included in the 3,570,827 shares reported as issued at
December 31, 1998.
On April 14, 1998, the Company's Board of Directors approved a three-for-one
common stock split, which was paid May 15, 1998 to shareholders of record as of
April 25, 1998. To reflect the split, common stock was increased and additional
paid-in capital was decreased by $11,382,000, maintaining the stated value at
$5.00 per share.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." This statement requires the presentation of basic and
diluted earnings per share. The Company adopted SFAS No. 128 effective December
31, 1997. In addition, the Company adopted SFAS No. 129, "Disclosure of
Information about Capital Structure", which was also effective December 31,
1997.
Basic and diluted earnings per share are based on weighted average shares
outstanding. Average shares outstanding and per share amounts have been restated
to give retroactive effect to both the 3% common stock dividend of January 1,
1999 and the three-for-one stock split of May 15, 1998.
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income ($000 omitted)............................... $ 4,816 $ 4,454 $ 4,110
Weighted average common shares outstanding.............. 3,558,645 3,500,157 3,421,713
Basic earnings per share................................ $ 1.35 $ 1.27 $ 1.20
Diluted earnings per share.............................. $ 1.35 $ 1.27 $ 1.20
</TABLE>
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
- - --------------------------------------------------------------------------------
(Continued)
11
<PAGE> 14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
material impact on the Company's financial position or results of operations. As
required, prior period financial statements have been reclassified to reflect
the adoption of this statement.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement requires that a public enterprise report financial and
descriptive information about its operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain specific
revenue and expense items, segment assets and certain other information.
Management has determined that adoption of SFAS No. 131 will not result in
increased reporting and disclosure requirements.
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This standard is
effective for all fiscal years beginning after June 15, 1999. Management does
not anticipate that adoption of this standard will have a material impact on the
Company's financial position or results of operation.
Reclassifications: Certain items in the financial statements for 1997 and 1996
have been reclassified to conform to the 1998 presentation.
- - --------------------------------------------------------------------------------
(Continued)
12
[CORTLAND BANCORP LOGO]
<PAGE> 15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The following is a summary of investment securities:
(Amounts in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities................... $ 22,828 $ 375 $ $ 23,203
U.S. Government agencies and
corporations............................. 14,855 118 17 14,956
Obligations of states and political
subdivisions............................. 11,353 134 72 11,415
Mortgage-backed and related securities..... 65,043 919 48 65,914
-------- ------ ------ --------
Total debt securities............ 114,079 1,546 137 115,488
Marketable equity securities............... 2,171 127 206 2,092
Other securities........................... 1,995 1,995
-------- ------ ------ --------
Total available for sale......... $118,245 $1,673 $ 343 $119,575
======== ====== ====== ========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government agencies and
corporations............................. $ 14,934 $ 108 $ 10 $ 15,032
Obligations of states and political
subdivisions............................. 22,379 462 99 22,742
Mortgage-backed and related securities..... 18,622 158 28 18,752
-------- ------ ------ --------
Total held to maturity........... $ 55,935 $ 728 $ 137 $ 56,526
======== ====== ====== ========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities.................... $ 29,855 $ 299 $ 20 $ 30,134
U.S. Government agencies and corporations... 18,867 212 1 19,078
Obligations of states and political
subdivisions.............................. 7,103 70 1 7,172
Mortgage-backed and related securities...... 54,241 873 82 55,032
-------- ------ ------ --------
Total debt securities............. 110,066 1,454 104 111,416
Marketable equity securities................ 2,171 166 214 2,123
Other securities............................ 1,874 1,874
-------- ------ ------ --------
Total available for sale.......... $114,111 $1,620 $ 318 $115,413
======== ====== ====== ========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government agencies and corporations... $ 39,448 $ 246 $ 83 $ 39,611
Obligations of states and political
subdivisions.............................. 13,867 193 34 14,026
Mortgage-backed and related securities...... 19,868 200 21 20,047
-------- ------ ------ --------
Total held to maturity............ $ 73,183 $ 639 $ 138 $ 73,684
======== ====== ====== ========
</TABLE>
At December 31, 1998 and 1997, other securities consisted of $1,769,000 and
$1,648,000 in Federal Home Loan Bank (FHLB) stock, respectively, and $226,000 in
Federal Reserve Board (FED) stock. Each investment is carried at cost, and the
Company is required to hold such investments as a condition of membership in
order to transact business with the FHLB and the FED.
- - --------------------------------------------------------------------------------
(Continued)
13
<PAGE> 16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less.................................... $ 15,346 $ 15,462
Due after one year through five years...................... 20,178 20,514
Due after five years through ten years..................... 6,347 6,458
Due after ten years........................................ 7,165 7,140
-------- --------
Subtotal......................................... 49,036 49,574
Mortgage-backed securities................................. 65,043 65,914
-------- --------
Total............................................ $114,079 $115,488
======== ========
INVESTMENT SECURITIES HELD TO MATURITY
Due in one year or less.................................... $ 1,084 $ 1,090
Due after one year through five years...................... 9,114 9,289
Due after five years through ten years..................... 13,010 13,222
Due after ten years........................................ 14,105 14,173
-------- --------
Subtotal......................................... 37,313 37,774
Mortgage-backed securities................................. 18,622 18,752
-------- --------
Total............................................ $ 55,935 $ 56,526
======== ========
</TABLE>
The following table sets forth the proceeds, gains and losses realized on
securities sold or called for each of the years ended December 31:
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Proceeds................................................... $28,063 $30,180 $16,479
Gross realized gains....................................... 325 107 131
Gross realized losses...................................... 1 13 29
</TABLE>
Investment securities with a carrying value of approximately $29,840,000 at
December 31, 1998 and $33,191,000 at December 31, 1997 were pledged to secure
deposits and for other purposes.
- - --------------------------------------------------------------------------------
(Continued)
14
[CORTLAND BANCORP LOGO]
<PAGE> 17
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
The following is a summary of loans:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
1-4 family residential mortgage loans...................... $ 79,125 $ 77,644
Commercial mortgage loans.................................. 61,149 50,015
Consumer loans............................................. 17,623 18,990
Commercial loans........................................... 29,576 26,022
Home equity loans.......................................... 8,669 10,064
1-4 family residential mortgage loans held for sale........ 4,336 1,756
-------- --------
Total loans...................................... $200,478 $184,491
======== ========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year......................... $2,817 $2,966 $3,011
Loan charge-offs..................................... (294) (252) (176)
Recoveries........................................... 82 103 131
------ ------ ------
Net loan charge-offs............................... (212) (149) (45)
Provision charged to operations...................... 450
------ ------ ------
Balance at end of year............................... $3,055 $2,817 $2,966
====== ====== ======
</TABLE>
Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $2,741,000,
$1,653,000 and $1,450,000 at December 31, 1998, 1997 and 1996, respectively.
Interest income on these loans, if accrued, would have increased pretax income
by approximately $219,000, $35,000 and $29,000 for 1998, 1997 and 1996,
respectively.
Impaired loans were evaluated using the fair value of collateral as the
measurement method. At December 31, 1998, 1997 and 1996, the recorded investment
in impaired loans was $719,000, $1,365,000 and $1,162,000 while the allocated
portion of the allowance for loan losses for such loans was $98,000, $213,000
and $291,000, respectively. Interest income recognized on impaired loans using
the cash basis was $9,000, $116,000 and $92,000, respectively.
The remaining principal balance of renegotiated loans for which interest has
been reduced and that are still accruing interest totaled $162,000, $173,000 and
$182,000 at December 31, 1998, 1997 and 1996, respectively. Interest income
recognized on these loans was $20,000, $20,000 and $21,000 for 1998, 1997 and
1996, respectively. Interest income that would have been recognized under the
original terms was $25,000 for 1998, 1997 and 1996.
- - --------------------------------------------------------------------------------
(Continued)
15
<PAGE> 18
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
As of December 31, 1998, 1997 and 1996, there were $828,000, $676,000 and
$97,000 in loans that were neither classified as nonaccrual nor considered
impaired, but which can be considered potential problem loans. Management does
not currently anticipate any loss as a result of these potential problem loans.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Land.................................................... $ 733 $ 638
Premises................................................ 5,500 5,021
Equipment............................................... 7,035 6,482
Leasehold improvements.................................. 206 208
------- -------
13,474 12,349
Less accumulated depreciation........................... 7,284 6,605
------- -------
Net book value................................ $ 6,190 $ 5,744
======= =======
</TABLE>
Depreciation expense was $854,000 for 1998, $851,000 for 1997 and $832,000 for
1996.
NOTE 6 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Demand.................................................. $ 50,349 $ 45,958
Savings................................................. 83,435 82,236
Time:
In denominations under $100,000....................... 111,125 116,255
In denominations of $100,000 or more.................. 25,961 29,637
-------- --------
Total......................................... $270,870 $274,086
======== ========
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
16
[CORTLAND BANCORP LOGO]
<PAGE> 19
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
The following is a summary of time deposits of $100,000 or more by remaining
maturities:
(Amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
Certificates Other Time Certificates Other Time
of Deposit Deposits Total of Deposit Deposits Total
------------ ----------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Three months or less...... $ 7,099 $ 495 $ 7,594 $ 8,464 $ 405 $ 8,869
Three to six months....... 4,273 268 4,541 4,793 4,793
Six to twelve months...... 5,604 5,604 5,668 325 5,993
One through five years.... 4,420 3,000 7,420 6,251 2,658 8,909
Over five years........... 203 599 802 303 770 1,073
------- ------ ------- ------- ------ -------
Total........... $21,599 $4,362 $25,961 $25,479 $4,158 $29,637
======= ====== ======= ======= ====== =======
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following is a summary of total Federal Home Loan Bank advances and other
borrowings:
(Amounts in thousands)
<TABLE>
<CAPTION>
CURRENT December 31,
INTEREST ------------------
RATE 1998 1997
-------- ------- -------
<S> <C> <C> <C>
FEDERAL HOME LOAN BANK ADVANCES
Variable rate LIBOR based Federal Home Loan Bank
advances, with monthly interest payments:
Due in 1998........................................ $ $ 5,000
Due in 2000........................................ 5,000
Due in 2004........................................ 5.1194% 3,000 3,000
Fixed rate and convertible fixed rate Federal Home Loan
Bank advances, with monthly interest payments:
Due in 1998........................................ 5,000
Due in 1999........................................ 6.1533% 3,000 3,000
Due in 2000........................................ 6.5000% 1,000 1,000
Due in 2002........................................ 6.4900% 2,000 2,000
Due in 2003........................................ 5.1664% 5,500
Due in 2007........................................ 6.3700% 1,000 1,000
Due in 2008........................................ 5.3811% 9,500
------- -------
Total Federal Home Loan Bank advances............ 25,000 25,000
OTHER BORROWINGS
Securities sold under repurchase agreements............. 3.9524% 4,376 3,472
U.S. Treasury interest-bearing demand note.............. 4.1080% 577 2,321
Other................................................... 3.0000% 18 21
------- -------
Total other borrowings........................... 4,971 5,814
------- -------
Total Federal Home Loan Bank advances and
other borrowings........................... $29,971 $30,814
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
17
<PAGE> 20
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (Continued)
Federal Home Loan Bank (FHLB) advances are collateralized by the FHLB stock
owned by the Bank, which had a carrying value of $1,769,500 at December 31,
1998, and a blanket lien against the Bank's qualified mortgage loan portfolio.
Maximum borrowing capacity from the FHLB totaled $35,390,000 at December 31,
1998.
As of December 31, 1998, $11 million of the FHLB fixed rate advances are
convertible to quarterly LIBOR floating rate advances on or after certain
specified dates at the option of the FHLB. Should the FHLB elect to convert, the
Company acquires the right to prepay any or all of the borrowing at the time of
conversion and on any interest payment due date thereafter. The Company had no
convertible fixed rate advances as of December 31, 1997.
NOTE 8 - COMMITMENTS
The Bank occupies office facilities under operating leases extending to 2007.
Most of these leases contain an option to renew at the then fair rental value
for periods of five and ten years. These options enable the Bank to retain use
of these facilities in desirable operating areas. In most cases, management
expects that in the normal course of business, leases will be renewed or
replaced by other leases. Rental expense was $229,000 for 1998, $209,000 for
1997 and $199,000 for 1996. The following is a summary of remaining future
minimum lease payments under current noncancelable operating leases for office
facilities:
(Amounts in thousands)
<TABLE>
<S> <C>
Years ending -
December 31, 1999............................. $142
December 31, 2000............................. 124
December 31, 2001............................. 117
December 31, 2002............................. 105
December 31, 2003............................. 81
Later years..................................... 272
----
Total...................................... $841
====
</TABLE>
At December 31, 1998, the Bank was required to maintain aggregate cash reserves
amounting to $3,451,000 in order to satisfy federal regulatory requirements.
These amounts do not earn interest.
The Bank grants commercial and industrial loans, commercial and residential
mortgages, and consumer loans to customers in Northeast Ohio and Western
Pennsylvania. Although the Bank has a diversified portfolio, exposure to credit
loss can be adversely impacted by downturns in local economic and employment
conditions. Approximately 3.99% of total loans are unsecured at December 31,
1998, compared to 4.27% at December 31, 1997.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The Bank's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is
represented by the contractual amount of the instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
instruments recorded on the Balance Sheet.
- - --------------------------------------------------------------------------------
(Continued)
18
[CORTLAND BANCORP LOGO]
<PAGE> 21
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS (Continued)
The following is a summary of such contract commitments:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate....................................... $ 2,136 $ 6,241
Variable rate.................................... 18,210 36,774
Standby letters of credit.......................... 328 361
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
NOTE 9 - EMPLOYEE BENEFIT PLAN
The Bank has a contributory defined contribution retirement plan (a 401(k) plan)
which covers substantially all employees. Total expense under the plan was
$170,000 for 1998, $164,000 for 1997 and $156,000 for 1996. The Bank is
obligated to contribute 2% of the gross pay of each eligible participant. In
addition, the Bank matches participants' voluntary contributions up to 2% of
gross pay. Participants may make voluntary contributions to the plan up to a
maximum of 10% of gross wages or $10,000, whichever is less. The Bank makes
monthly contributions to this plan equal to amounts accrued for plan expense.
NOTE 10 - FEDERAL INCOME TAXES
The composition of income tax expense is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current................................................. $1,625 $1,910 $1,757
Deferred................................................ 220 64 69
------ ------ ------
Total.............................................. $1,845 $1,974 $1,826
====== ====== ======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
19
<PAGE> 22
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES (Continued)
The following is a summary of net deferred taxes included in other liabilities
in 1998 and 1997, and included in other assets in 1996:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Gross deferred tax assets:
Provision for loan and other real estate losses....... $ 787 $ 634 $ 634
Loan origination fees................................. 22 37 94
Other items........................................... 163 89 62
Gross deferred tax liabilities:
Unrealized gain on available for sale securities...... (437) (401) (147)
Depreciation.......................................... (387) (388) (404)
Other items........................................... (153) (159) (109)
----- ----- -----
Net deferred tax asset (liability)............ $ (5) $(188) $ 130
===== ===== =====
</TABLE>
The following is a reconciliation between tax expense using the statutory tax
rate of 34% and actual taxes:
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory tax........................................... $2,265 $2,186 $2,018
Effect of non-taxable interest and dividends............ (420) (212) (192)
------ ------ ------
Total income taxes............................ $1,845 $1,974 $1,826
====== ====== ======
</TABLE>
The related income tax expense on investment and trading securities gains and
losses amounted to $110,000 for 1998, $36,000 for 1997 and $39,000 for 1996, and
is included in the total federal income tax provision.
- - --------------------------------------------------------------------------------
(Continued)
20
[CORTLAND BANCORP LOGO]
<PAGE> 23
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ 15,020 $ 15,020 $ 12,609 $ 12,609
Investment securities..................... 175,510 176,101 188,596 189,097
Loans, net of allowance for loan losses... 197,423 197,292 181,674 181,986
LIABILITIES:
Demand and savings deposits............... $ 184,014 $ 184,014 $173,846 $173,846
Time deposits............................. 137,086 139,340 145,892 146,867
FHLB advances............................. 25,000 25,211 25,000 25,026
Other borrowings.......................... 4,971 4,971 5,814 5,814
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1998 and 1997. The estimated fair value
for cash and cash equivalents is considered to approximate cost. The estimated
fair value for securities is based on quoted market values for individual
securities or for equivalent securities when specific quoted prices are not
available. Carrying value is considered to approximate fair value for loans,
FHLB advances and other borrowings that reprice frequently and for deposit
liabilities subject to immediate withdrawal. The fair values of loans, FHLB
advances and other borrowings and time deposits that reprice less frequently are
approximated by a discount rate valuation technique utilizing estimated market
interest rates as of December 31, 1998 and 1997. The fair value of unrecorded
commitments at December 31, 1998 and 1997, is not material.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earning power
of core deposit accounts, the earnings potential of the Bank's trust department,
the trained work force, customer goodwill, and similar items. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
NOTE 12 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
- - --------------------------------------------------------------------------------
(Continued)
21
<PAGE> 24
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain a minimum ratio of 4% both for total Tier I
risk-based capital to risk-weighted assets and for Tier I risk-based capital to
average assets and a minimum ratio of 8% for total risk-based capital to
risk-weighted assets.
Under the regulatory framework for prompt corrective action, the Company is
categorized as well capitalized, requiring minimum capital ratios of 10% for
total risk-based capital to risk-weighted assets, 6% for Tier I risk-based
capital to risk-weighted assets, and 5% for Tier I risk-based capital to average
assets (the leverage ratio). There are no conditions or events since the most
recent communication from regulators that management believes would change the
Company's category.
<TABLE>
<CAPTION>
(Amounts in thousands)
December 31, December 31,
1998 1997
---------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Risk-Based Capital.............. $44,684 $41,259
Ratio to Risk-Weighted Assets....... 22.65% 22.23%
Tier I Risk-Based Capital............. $42,211 $38,933
Ratio to Risk-Weighted Assets....... 21.40% 20.98%
Ratio to Average Assets............. 10.68% 10.17%
</TABLE>
Tier I capital is shareholders' equity less intangibles and the unrealized
market value adjustment of investment securities available for sale. Total
risk-based capital is Tier I capital plus the qualifying portion of the
allowance for loan losses. Assets and certain off balance sheet items adjusted
in accordance with risk classification comprise risk-weighted assets of
$197,276,000 and $185,571,000 as of December 31, 1998 and 1997, respectively.
Assets less intangibles and the net unrealized market value adjustment of
investment securities available for sale averaged $395,076,000 and $382,785,000
for the years ended December 31, 1998 and 1997, respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1998. The following is an analysis of such
loans:
(Amounts in thousands)
<TABLE>
<S> <C>
Total loans at December 31, 1997............................ $4,137
New loans................................................... 626
Repayments.................................................. 843
------
Total loans at December 31, 1998.................. $3,920
======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
22
[CORTLAND BANCORP LOGO]
<PAGE> 25
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 14 - CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Cortland Bancorp (parent company
only). In this information, the parent's investment in subsidiaries is stated at
cost, including equity in the undistributed earnings of the subsidiaries since
inception, adjusted for any unrealized gains or losses on available for sale
securities.
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Cash.................................................. $ 198 $ 200
Investment securities available for sale.............. 4,063 3,086
Investment securities held to maturity................ 488
Investment in bank subsidiary......................... 38,780 36,967
Investment in non-bank subsidiary..................... 15 15
Other assets.......................................... 61 30
-------- --------
$ 43,605 $ 40,298
======== ========
LIABILITIES:
Other liabilities..................................... $ 65 $ 89
SHAREHOLDERS' EQUITY:
Common stock (Note 1)................................. 17,854 5,691
Additional paid-in capital (Note 1)................... 4,920 13,310
Retained earnings..................................... 20,015 20,429
Accumulated other comprehensive income................ 849 779
Treasury stock........................................ (98)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................... 43,540 40,209
-------- --------
$ 43,605 $ 40,298
======== ========
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
23
<PAGE> 26
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 14 - CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Dividends from bank subsidiary.............................. $3,000 $2,200 $1,275
Interest and dividend income................................ 236 147 17
Investment securities gains................................. 21 1
Other expenses.............................................. (87) (46) (40)
------ ------ ------
Income before income tax and equity in
undistributed net income of subsidiaries............... 3,170 2,302 1,252
Income tax (expense) benefit........................... (57) (34) 8
Equity in undistributed net income of subsidiaries..... 1,703 2,186 2,850
------ ------ ------
NET INCOME........................................ $4,816 $4,454 $4,110
====== ====== ======
</TABLE>
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 4,816 $ 4,454 $ 4,110
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in undistributed net income of subsidiaries.... (1,703) (2,186) (2,850)
Investment securities gains........................... (21) (1)
Change in other assets and liabilities................ (34) 51 (9)
------- ------- -------
Net cash flows from operating activities......... 3,058 2,318 1,251
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities....................... (4,540) (2,820) (1,252)
Proceeds from sales of securities available for sale..... 1,000 1,003
Proceeds from call, maturity and principal payments
on securities available for sale...................... 2,035 250
------- ------- -------
Net cash flows from investing activities......... (1,505) (1,567) (1,252)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid........................................... (2,433) (1,675) (1,274)
Proceeds from sale of common stock....................... 976 1,017 800
Proceeds from sale of treasury stock..................... 25
Purchases of treasury stock.............................. (98)
------- ------- -------
Net cash flows from financing activities......... (1,555) (658) (449)
------- ------- -------
Net change in cash....................................... (2) 93 (450)
CASH
Beginning of year........................................ 200 107 557
------- ------- -------
End of year.............................................. $ 198 $ 200 $ 107
======= ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
24
[CORTLAND BANCORP LOGO]
<PAGE> 27
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
- - --------------------------------------------------------------------------------
NOTE 15 - DIVIDEND RESTRICTIONS
The Company is generally dependent on the receipt of cash dividends from the
Bank in order to pay cash dividends to shareholders. The Bank is subject to
regulations of the Ohio Division of Banks which restrict dividends to retained
earnings (as defined) of the current and prior two years. Under this
restriction, at December 31, 1998 approximately $6,739,000 is available for the
payment of dividends by the Bank. In addition, dividend payments may not reduce
capital levels below minimum regulatory guidelines.
NOTE 16 - LITIGATION
The Company's subsidiary bank was a defendant in a class action lawsuit Frank
Slentz, Et Al. V. Cortland Savings and Banking Company, involving purchased
interests in two campgrounds.
On October 20, 1997 the judge presiding over this case filed a judgment entry
dismissing all claims against the Bank without prejudice. The judgment was
appealed by the plaintiffs. Subsequent to year end, the United States Court of
Appeals for the Sixth Circuit affirmed the decision of the district court to
grant summary judgment in favor of the defendant Bank. The plaintiffs have the
right to appeal to the United States Supreme Court. Plaintiffs have also filed a
similar suit in the Common Pleas Court of Trumbull County which is currently
scheduled for May 2000. Accordingly, the ultimate outcome of this litigation
presently cannot be determined, and therefore no provision for any liability
relative to such litigation has been made in the accompanying consolidated
financial statements.
The Bank is also involved in other legal actions arising in the ordinary course
of business. In the opinion of management, the outcome of these matters is not
expected to have a material effect on the Company.
- - --------------------------------------------------------------------------------
25
<PAGE> 28
CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
- - --------------------------------------------------------------------------------
(In thousands of dollars, except for ratios and per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Interest Income........................... $ 28,715 $ 28,377 $ 27,076 $ 24,805 $ 22,564
Total Interest Expense.......................... 13,041 13,347 12,741 11,421 9,498
-------- -------- -------- -------- --------
NET INTEREST INCOME............................. 15,674 15,030 14,335 13,384 13,066
Provision for Loan Losses....................... 450
Total Other Income.............................. 2,118 1,693 1,598 1,311 1,150
Total Other Expenses............................ 10,681 10,295 9,997 10,061 9,812
-------- -------- -------- -------- --------
INCOME BEFORE TAX............................... 6,661 6,428 5,936 4,634 4,404
Federal Income Tax.............................. 1,845 1,974 1,826 1,345 1,321
-------- -------- -------- -------- --------
NET INCOME...................................... $ 4,816 $ 4,454 $ 4,110 $ 3,289 $ 3,083
======== ======== ======== ======== ========
BALANCE SHEET DATA
Assets.......................................... $397,932 $392,762 $378,510 $358,732 $320,361
Investments..................................... 175,510 188,596 194,374 181,710 148,976
Net Loans....................................... 197,423 181,674 163,143 153,197 147,599
Deposits........................................ 321,100 319,738 320,030 315,929 284,675
Borrowings...................................... 29,971 30,814 21,171 8,217 7,055
Shareholders' Equity............................ 43,540 40,209 35,920 32,616 27,521
AVERAGE BALANCES
Assets.......................................... $396,364 $383,585 $368,645 $335,602 $323,335
Investments..................................... 179,954 188,182 190,173 163,319 155,413
Net Loans....................................... 194,621 175,515 160,657 153,702 148,288
Deposits........................................ 319,740 320,297 318,040 295,972 289,372
Borrowings...................................... 30,832 22,535 14,503 7,079 3,417
Shareholders' Equity............................ 42,842 38,317 34,242 30,412 28,044
PER COMMON SHARE DATA (1)
Net Income, both Basic and Diluted.............. $ 1.35 $ 1.27 $ 1.20 $ 0.98 $ 0.93
Cash Dividends Declared......................... 0.68 0.47 0.36 0.30 0.25
Book Value...................................... 12.21 11.43 10.44 9.71 8.35
ASSET QUALITY RATIOS
Underperforming Assets as a
Percentage of:
Total Assets................................ 0.74% 0.47% 0.44% 0.59% 0.82%
Equity plus Allowance for Loan Losses....... 6.32 4.27 4.32 5.94 8.61
Tier I Capital.............................. 7.00 4.72 4.79 6.61 9.08
FINANCIAL RATIOS
Return on Average Equity........................ 11.24% 11.62% 12.00% 10.80% 11.00%
Return on Average Assets........................ 1.22 1.16 1.11 0.98 0.95
Average Equity to Average Assets................ 10.81 9.99 9.29 9.06 8.67
Equity to Asset Ratio........................... 10.94 10.24 9.50 9.09 8.59
Tangible Equity to Tangible Asset Ratio......... 10.83 10.13 9.37 8.96 8.59
Cash Dividend Payout Ratio...................... 50.40 37.00 30.00 30.60 26.90
Net Interest Margin Ratio....................... 4.30 4.21 4.19 4.30 4.37
</TABLE>
(1) Basic and diluted earnings per common share are based on weighted average
shares outstanding adjusted retroactively for stock dividends and the
three-for-one stock split of May 15, 1998. Cash dividends per common share are
based on actual cash dividends declared, adjusted retroactively for the stock
dividends and the three-for-one stock split. Book value per common share is
based on shares outstanding at each period, adjusted retroactively for the stock
dividends and the three-for-one stock split.
- - --------------------------------------------------------------------------------
26
[CORTLAND BANCORP LOGO]
<PAGE> 29
THREE YEAR SUMMARY
AVERAGE BALANCE SHEET, YIELDS AND RATES
- - --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
The following schedules show average balances of interest-earning and non
interest-earning assets and liabilities, and Shareholders' equity for the years
indicated. Also shown are the related amounts of interest earned or paid and the
related average yields or interest rates paid for the years indicated. The
averages are based on daily balances.
<TABLE>
<CAPTION>
1998
----------------------------------
Average Interest
Balance Earned Yield or
Outstanding or Paid Rate
----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold........................................ $ 4,952 $ 266 5.4%
Trading account securities................................
Investment securities:
U.S. Treasury and other U.S.
Government agencies and corporations.................. 71,164 4,606 6.5%
U.S. Government mortgage-backed
pass through certificates............................. 77,205 5,011 6.5%
States of the U.S. and political
subdivisions (Note 1, 2, 3)........................... 27,539 1,858 6.7%
Other securities........................................ 4,046 255 6.3%
-------- -------
TOTAL INVESTMENT SECURITIES................................. 179,954 11,730 6.5%
LOANS (Note 2, 3, 4)........................................ 194,621 17,376 8.9%
-------- -------
TOTAL INTEREST-EARNING ASSETS............................... 379,527 $29,372 7.7%
=======
Non interest-earning assets:
Cash and dues from banks.................................. 8,999
Premises and equipment.................................... 5,688
Other..................................................... 2,150
--------
TOTAL ASSETS................................................ $396,364
========
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits........................ $ 48,531 $ 1,258 2.6%
Savings................................................. 82,537 2,098 2.5%
Time.................................................... 141,613 7,955 5.6%
-------- -------
TOTAL INTEREST-BEARING DEPOSITS............................. 272,681 11,311 4.1%
-------- -------
Borrowings:
U.S. Treasury interest-bearing demand note................ 751 40 5.3%
Federal funds purchased................................... 20 1 5.0%
Securities sold under agreement to repurchase............. 3,237 147 4.5%
Other borrowings under one year........................... 4,501 268 6.0%
Other borrowings over one year............................ 22,323 1,274 5.7%
-------- -------
TOTAL BORROWINGS............................................ 30,832 1,730 5.6%
-------- -------
TOTAL INTEREST-BEARING LIABILITIES.......................... 303,513 $13,041 4.3%
=======
Non interest-bearing liabilities:
Demand deposits........................................... 47,059
Other liabilities......................................... 2,950
Shareholders equity....................................... 42,842
--------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY................... $396,364
========
Net interest income......................................... $16,331
=======
Net interest rate spread (Note 5)........................... 3.4%
====
Net interest margin (Note 6)................................ 4.3%
====
</TABLE>
Note 1 - Includes both taxable and tax exempt securities.
Note 2 - The amounts are presented on a fully taxable equivalent basis using the
statutory tax rate of 34% in 1998, 1997 and 1996, and have been
adjusted to reflect the effect of disallowed interest expense related
to carrying tax exempt assets. Tax-free income from states of the U.S.
and political subdivisions, other securities and loans amounted to
$1,263, $1 and $276 respectively, for 1998; $755, $1 and $239
respectively, for 1997; and $743, $1 and $211 respectively, for 1996.
Note 3 - Average balance outstanding includes the average amount outstanding of
all nonaccrual investment securities and loans. States and political
subdivisions consist of average total principal adjusted for
amortization of premium and accretion of discount less average
allowance for estimated losses, and include both taxable and tax exempt
securities. Loans consist of average total loans less average unearned
income.
- - --------------------------------------------------------------------------------
27
<PAGE> 30
- - --------------------------------------------------------------------------------
(Fully taxable equivalent basis in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Average Interest Average Interest
Balance Earned Yield or Balance Earned Yield or
Outstanding or Paid Rate Outstanding or Paid Rate
----------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 3,196 $ 178 5.6% $ 843 $ 45 5.4%
116 7 6.4% 57 3 5.9%
92,366 6,162 6.7% 92,281 6,075 6.6%
74,491 4,982 6.7% 77,246 5,160 6.7%
17,503 1,152 6.6% 16,995 1,145 6.7%
3,822 245 6.4% 3,651 234 6.4%
-------- ------- -------- -------
188,182 12,541 6.7% 190,173 12,614 6.6%
175,515 16,057 9.1% 160,657 14,809 9.2%
-------- ------- -------- -------
367,009 $28,783 7.8% 351,730 $27,471 7.8%
======= =======
8,671 8,679
5,919 6,287
1,986 1,949
-------- --------
$383,585 $368,645
======== ========
$ 47,544 $ 1,386 2.9% $ 46,945 $ 1,259 2.7%
84,291 2,255 2.7% 86,468 2,319 2.7%
146,263 8,440 5.8% 146,628 8,395 5.7%
-------- ------- -------- -------
278,098 12,081 4.3% 280,041 11,973 4.3%
-------- ------- -------- -------
819 42 5.1% 681 35 5.1%
618 35 5.7% 1,918 108 5.6%
3,726 177 4.8% 2,747 120 4.4%
4,800 277 5.8%
12,572 735 5.8% 9,157 505 5.5%
-------- ------- -------- -------
22,535 1,266 5.6% 14,503 768 5.3%
-------- ------- -------- -------
300,633 $13,347 4.4% 294,544 $12,741 4.3%
======= =======
42,199 37,999
2,436 1,860
38,317 34,242
-------- --------
$383,585 $368,645
======== ========
$15,436 $14,730
======= =======
3.4% 3.5%
==== ====
4.2% 4.2%
==== ====
</TABLE>
Note 4 - Interest earned on loans includes net loan fees of $144 in 1998, $44 in
1997 and $89 in 1996.
Note 5 - Net interest rate spread represents the difference between the yield on
earning assets and the cost of funds.
Note 6 - Net interest margin is calculated by dividing the difference between
total interest earned and total interest expensed by total
interest-earning assets.
- - --------------------------------------------------------------------------------
28
[CORTLAND BANCORP LOGO]
<PAGE> 31
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
The following is management's discussion and analysis of the financial condition
and results of operations of Cortland Bancorp (the "Company"). The discussion
should be read in conjunction with the Consolidated Financial Statements and
related notes and summary financial information included elsewhere in this
annual report.
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 either nationally or in the Company's market
area; increased competitive pressures or changes in either the nature or
composition of competitors; changes in the legal and regulatory environment;
changes in factors influencing liquidity such as expectations regarding the rate
of inflation or deflation, currency exchange rates and other factors influencing
market volatility; unforeseen risks associated with the Year 2000 issue and
other global economic and financial factors.
OVERVIEW AND OUTLOOK
Net income for 1998 was up 8.13% to $4,816, best in the Company's history, and
constituted an increase of $362 from the $4,454 earned in 1997. Earnings per
share of $1.35 represented an improvement of $0.08 from the $1.27 per share
realized in 1997.
Capital ratios remained strong, facilitating a 45% increase in dividends per
share. As of December 31, 1998, the ratio of equity capital to total assets was
10.94%, up from 10.24% a year ago. Risk-based capital measured 22.65% compared
to 22.23% at December 31, 1997. All capital ratios continue to register well in
excess of required regulatory minimums.
Return on average equity in 1998 declined to 11.24% while the return on average
assets climbed to 1.22%. Book value per share increased 6.8% to $12.21. The
price of the Company's common stock increased during the year, trading in a
range between a first quarter low of $16 7/8 and a third quarter high of
$31 1/8. The percentage of earnings per share paid out as dividends was
increased to 50% from the 37% paid last year.
Management expects the economy in 1999 to slow moderately from the robust rate
of growth achieved both in 1997 and 1998, with inflation and unemployment rates
remaining low. Interest rates are expected to remain relatively stable over the
first half of 1999 as the economy slows due to fiscal restraint and continued
economic problems in Asia and South America. Interest rates could rise during
the latter half of 1999 due to liquidity pressures associated with the Year 2000
(Y2K) problem. However, these pressures are likely to be mitigated by a slowing
economy and an accommodative Federal Reserve.
The Company remains firmly committed to new ideas, new products, and emerging
technologies that can enhance internal operating efficiencies and increase
customer satisfaction, strengthening franchise value. To further facilitate
customer service and innovation while enhancing productivity, the Company will
continue to focus on refining its retail lending and branch operations during
1999.
During the fourth quarter of 1998, the Company relocated its Mantua office to a
newly constructed facility to better serve Portage County customers, especially
those from both the Mantua and Hiram communities. In the second quarter of 1999,
the Company expects to close the existing Hiram branch office and to open an
additional banking office in Trumbull County to better service the communities
of Girard, Niles and Howland.
YEAR 2000
In 1997, Cortland Bancorp established a "Year 2000 (Y2K) project management
team" to provide a structured format for thoroughly addressing the Year 2000
problem. The project team's mission is to ensure that the Company's operation is
not adversely impacted by systemic errors arising from calculations using the
year 2000 date. At this time the Company expects to expend $650 on its Year 2000
program. It is anticipated that approximately 65% of these costs comprise
capital expenditures for normal lifecycle replacement/upgrades for the Company's
information systems, 20% represent capital expenditures directly associated with
Year 2000, and the remaining 15% embrace consulting, testing and other
miscellaneous Year 2000 expenses. The company does not separately track the
internal costs incurred for the Y2K project, such as payroll costs for its
project management team, as these costs are considered immaterial. The Y2K
project team has
- - --------------------------------------------------------------------------------
29
<PAGE> 32
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
been entirely staffed with existing personnel. It is anticipated that costs
associated with the Year 2000 project will not have a material adverse impact on
net income. As of December 31, 1998, the Company had spent approximately $383 on
it's Year 2000 project. The Company expects to expend an additional $267 by
December 31, 1999 to ensure Y2K readiness.
In conjunction with the Federal Financial Institutions Examination Council
Interagency Statements, the Company has outlined key phases, and important
aspects, essential for effective Year 2000 project management. An overview of
these phases and their completion status are as follows:
AWARENESS (100% COMPLETE): Outline the Year 2000 problem, gaining executive
level support for the resources to perform compliance work. Establish a Year
2000 project team and develop an overall plan to perform Y2K compliance work
that encompasses vendors, customers, suppliers, correspondent banks, service
bureaus, The Federal Reserve, insurance providers, manufacturers and
distributors of information systems and related equipment.
ASSESSMENT (100% COMPLETE): Assess the size and complexity of the problem and
detail the magnitude of the effort necessary to address Year 2000 issues.
Identify all hardware, software, networks, ATM's, and other various platforms,
as well as customer and vendor interdependencies affected by the Year 2000 date
change. The assessment includes environmental systems that are dependent on
embedded microchips, such as security equipment, elevators, voice/data
telecommunications and vaults.
RENOVATION (80% COMPLETE): This phase includes hardware and software upgrades,
system replacements, vendor certification, and other associated changes deemed
necessary to assure Y2K compliance. The renovation stage is expected to be
completed by March 31, 1999.
VALIDATION (80% COMPLETE): This stage includes the testing of incremental
changes to hardware and software components. In addition to testing upgraded
components, connections with other systems are verified and system performance
evaluated utilizing a variety of key sensitive dates. The Company has completed
the development of test and validation methodologies, and tested some
subsystems. The validation stage is expected to be essentially complete by March
31, 1999.
IMPLEMENTATION (80% COMPLETE): Mission critical systems must be certified as
Year 2000 compliant and accepted by the Company. Any noncompliant mission
critical system will be brought to the attention of executive management
immediately for resolution. The Company has formulated contingency plans in the
event that critical applications are determined to be inoperable on or near the
year 2000. These contingency plans are labor intensive and would result in
additional payroll expense until the functionality of the mission critical
applications are restored. For any system failing certification, the business
effect will be assessed and the organization's Year 2000 contingency plans
activated. The implementation stage is expected to be essentially complete by
March 31, 1999.
The Company's personnel are also actively educating and alerting customers to
potential Y2K issues and problems. Loan review personnel have conducted surveys
and made inquiries of key loan customers as to their Y2K readiness to determine
whether any additional provisions to the allowance for loan loss are required.
As of December 31, 1998, no additional provisions were required.
Due to the scope and magnitude of the Year 2000 project, the Company has
designed an extensive monitoring process to oversee the completion of the Year
2000 project with results presented to the Board of Directors on a quarterly
basis. The Company and its bank subsidiary are also regulated by the Federal
Reserve and the State of Ohio, who periodically review the Company's Y2K
readiness, and who have the power and authority to issue sanctions to enforce
Y2K compliance.
Ultimate success is dependent upon the cooperation and ability of vendors,
customers and all levels of government and governmental agencies to meet the Y2K
challenge. The problem is truly global in nature, and its successful resolution
depends upon everyone, everywhere, doing their part. It is recognized that the
failure of any of these parties to achieve Year 2000 compliance could result in
- - --------------------------------------------------------------------------------
30
[CORTLAND BANCORP LOGO]
<PAGE> 33
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
material additional expense to the Company, including possible litigation. The
Company currently believes that the reasonably "worst case" Y2K scenario
involves the failure of utilities and governments to achieve Y2K compliance,
causing a general disruption of commerce resulting in a material increase in
nonperforming loans and credit losses, accompanied by a lack of liquidity due to
financial market dysfunctions. The Company's net income would be adversely
impacted by increased operating costs, additional collection and foreclosure
expense, and the effects of a compressed net interest margin. The Company
maintains capital levels significantly in excess of regulatory minimum
guidelines as additional protection in the event of such "worst case" scenarios.
(If you would like more information on Cortland Banks Year 2000 efforts, please
e-mail Timothy Carney at [email protected].)
ASSET QUALITY
Management closely monitors and evaluates trends and developments in asset
quality. Internal loan review systems require detailed monthly analysis of
delinquencies, nonperforming assets and other sensitive credits. Generally, all
mortgage, commercial and consumer loans are moved to nonaccrual status once they
reach 90 days past due or when analysis of a borrower's creditworthiness
indicates the collection of interest and principal is in doubt.
In addition to nonperforming loans, total nonperforming assets include
nonperforming investment securities and real estate acquired in satisfaction of
debts previously contracted. Total underperforming assets add to this amount
loans which have been restructured to provide for a reduction of interest or
principal because of a deterioration in the financial condition of the borrower.
Also included as underperforming assets are loans which are more than 89 days
past due that continue to accrue interest income. The following table depicts
the trend in these potentially problematic asset categories.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Nonaccrual loans:
1-4 residential mortgages $ 330 $ 565 $ 622
Commercial mortgages 2,089 986 754
Commercial loans 262 27 0
Consumer loans 60 57 17
Home equity loans 0 18 57
-----------------------------------------------------------
TOTAL NONACCRUAL LOANS 2,741 1,653 1,450
Other real estate owned 0 0 28
-----------------------------------------------------------
TOTAL NONPERFORMING ASSETS 2,741 1,653 1,478
Loans ninety days past due
and still accruing interest 41 10 18
Restructured loans 162 173 182
-----------------------------------------------------------
TOTAL UNDERPERFORMING ASSETS $2,944 $1,836 $1,678
</TABLE>
The table below provides a number of asset quality ratios based on the data
presented above. Overall, asset quality remained at acceptable levels during
1998. Asset quality ratios were, however, adversely impacted by several
commercial credits which were placed on non-accrual status during 1998.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Nonperforming loans as a
percentage of total loans 1.37% 0.90% 0.87%
Nonperforming assets as a
percentage of total assets 0.69% 0.42% 0.39%
Underperforming assets as a
percentage of total assets 0.74% 0.47% 0.44%
Underperforming assets as a
percentage of equity
capital plus allowance for
loan losses 6.32% 4.27% 4.32%
</TABLE>
RESULTS OF OPERATIONS
Common comparative ratios for results of operations are the return on average
equity and the return on average assets. The return on average equity amounted
to 11.2%, 11.6% and 12.0% for 1998, 1997 and 1996, respectively, while the
return on average assets amounted to 1.2% in 1998, 1.2% in 1997 and 1.1% in
1996.
Net interest income, the principal source of the Company's earnings, is the
amount by which interest and fees generated by interest-earning assets,
primarily loans and investment securities, exceed the interest cost of deposits
and borrowed funds. The net interest margin ratio, which registered 4.2% both in
1997 and 1996, measured 4.3% in 1998.
- - --------------------------------------------------------------------------------
31
<PAGE> 34
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
The following table provides a detailed analysis of changes in net interest
income, identifying that portion of the change that is due to a change in the
volume of average assets and liabilities outstanding versus that portion which
is due to a change in the average yields on earning assets and average rates on
interest-bearing liabilities. Changes in interest due to both rate and volume
which cannot be segregated have been allocated to rate and volume changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
--------------------------------
Volume Rate Total Volume Rate Total
- - ------------------------------------------
Increase (Decrease) in Interest Income
Federal funds sold................... $ 95 $ (7) $ 88 $ 131 $ 2 $ 133
Trading account securities........... (7) 0 (7) 3 1 4
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations.................... (1,377) (179) (1,556) 6 81 87
U.S. Government mortgage-backed
pass-through certificates....... 178 (149) 29 (184) 6 (178)
States of the U.S. and political
subdivisions.................... 676 30 706 34 (27) 7
Other securities................... 14 (4) 10 11 0 11
Loans................................ 1,713 (394) 1,319 1,360 (112) 1,248
- - ------------------------------------------
Total Interest Income Change............ 1,292 (703) 589 1,361 (49) 1,312
- - ------------------------------------------
Increase (Decrease) in Interest Expense
Interest-bearing demand deposits..... 28 (156) (128) 16 111 127
Savings deposits..................... (46) (111) (157) (58) (6) (64)
Time deposits........................ (264) (221) (485) (21) 66 45
U.S. Treasury interest-bearing
demand note........................ (3) 1 (2) 7 0 7
Federal funds purchased.............. (29) (5) (34) (74) 1 (73)
Securities sold under agreements to
repurchase......................... (22) (8) (30) 46 11 57
Other borrowings under one year...... (17) 8 (9) 277 0 277
Other borrowings over one year....... 557 (18) 539 198 32 230
- - ------------------------------------------
Total Interest Expense Change........... 204 (510) (306) 391 215 606
- - ------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME
ON A TAXABLE EQUIVALENT BASIS........ $1,088 $ (193) $ 895 $ 970 $ (264) $ 706
- - ------------------------------------------
</TABLE>
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32
[CORTLAND BANCORP LOGO]
<PAGE> 35
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
Total other income for 1998 increased $425, or 25.1% compared to an increase of
$95, or 5.9% in 1997. Fees for customer services increased by $77 or 5.8%. The
increase reflects changes in the fee structure for debit card and ATM
transactions implemented during 1997. The Company experienced no net gain or
loss on the disposition of other real estate in 1998 and 1997 compared to a net
gain of $27 in 1996. Loans held for sale in the secondary market showed gains of
$178, $76 and $15 in 1998, 1997 and 1996, respectively. Activity in trading
securities, the early call of held to maturity securities, and transactions
involving available for sale securities combined to produce net gains of $324 in
1998, $107 in 1997 and $114 in 1996, respectively.
Other operating income increased by $29 during 1998, following a $32 decrease in
1997. This income category is subject to fluctuation due to nonrecurring items.
<TABLE>
<S> <C> <C> <C>
OTHER INCOME
1998 1997 1996
Fees for other customer
services $1,396 $1,319 $1,219
Gain on sale of loans 178 76 15
Gain on sale of other real
estate 0 0 27
Other operating income 220 191 223
---------------------------------
1,794 1,586 1,484
Trading securities net
gains 0 13 12
Investment securities net
gains 324 94 102
---------------------------------
Total other income $2,118 $1,693 $1,598
</TABLE>
Total other non-interest expenses increased by 3.7%, or $386 in 1998. This
compares to an increase of $298, or 3.0% in 1997. Expenditures for salaries and
employee benefits increased by only 0.2%, due partly to the outsourcing of the
internal audit function, in the second quarter of 1998.
Occupancy and equipment expense increased by a combined 7.9%, or $139,
reflecting a partial year of operation for the Company's newest office, the
first full year of operation for an office opened in 1997, and nonrecurring Y2K
expense. All other categories of non-interest expense increased by $235, or 8.7%
in the aggregate. This increase primarily reflects the first full year operating
expenses for the branch office opened late in the third quarter of 1997; costs
related to the outsourcing of the internal audit function; nonrecurring costs
associated with the three-for-one common stock split; and nonrecurring marketing
costs related to the development and introduction of a new deposit product.
<TABLE>
<S> <C> <C> <C>
NON-INTEREST EXPENSE
1998 1997 1996
Salaries and benefits $ 5,842 $ 5,830 $ 5,549
Net occupancy expense 744 684 666
Equipment expense 1,161 1,082 1,048
State and local taxes 566 521 473
Office supplies 472 480 488
Marketing expense 282 256 265
Legal and litigation expense 189 182 277
Other operating expense 1,425 1,260 1,231
------- ------- -------
Total other expenses $10,681 $10,295 $ 9,997
</TABLE>
Salaries and employee benefits represented 54.7% of all non-interest expenses in
1998. Exclusive of legal and litigation expenses, salaries and employee benefits
share of non-interest expense was 55.7%, 57.6% and 57.1% in 1998, 1997 and 1996,
respectively. Salaries and employee benefits increased by only $12 in 1998
following an increase of $281 in 1997. The following details components of these
increases:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ANALYSIS OF CHANGES IN SALARIES & BENEFITS
Amounts Percent
----------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------
Salaries $ 33 $248 $295 0.7% 5.7% 7.3%
Benefits (1) 20 16 (0.1) 1.6 1.3
Profit Sharing 42 25 42 16.9 11.2 21.4
------------------
74 293 353 1.2 5.0 6.4
Def'd Loan
Origination (62) (12) (66) 25.0 4.2 30.0
------------------
$ 12 $281 $287 0.2% 5.1% 5.5%
</TABLE>
Full-time equivalent employment averaged 184 employees in 1998, 196 in 1997 and
195 in 1996. Wage and salary expense per employee averaged $25,163 in 1998,
$23,455 in 1997 and $22,306 in 1996, exclusive of profit sharing, which averaged
$1,576 per employee in 1998, $1,263 in 1997 and $1,144 in 1996. Productivity
ratios which measure employee efficiency continued to improve. Average earning
assets per employee measured $2,063 in 1998, $1,872 in 1997 and $1,804 in 1996.
- - --------------------------------------------------------------------------------
33
<PAGE> 36
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
LOAN LOSS EXPERIENCE
For each year presented below, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
known factors connected with the collectibility of the existing portfolio.
Management evaluates the portfolio in light of economic conditions, changes in
the nature and volume of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include previous loan loss experience, the status of past
due interest and principal payments, the anticipated impact of Year 2000
problems on certain commercial customers, the quality of financial information
supplied by customers and the general economic condition of the communities in
which credit has been extended.
The following provides an analysis of the allowance for loan losses for the
periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 2,817 $ 2,966 $ 3,011 $ 3,081 $ 3,139
Loan losses:
1-4 family residential mortgages...... (4) (21) (5) (69) (72)
Commercial mortgages.................. 0 (16) 0 0 (27)
Consumer loans........................ (190) (202) (167) (220) (141)
Commercial loans...................... (98) 0 (4) (78) (48)
Home equity loans..................... (2) (13) 0 0 0
------- ------- ------- ------- -------
(294) (252) (176) (367) (288)
------- ------- ------- ------- -------
Recoveries on previous loan losses:
1-4 family residential mortgages...... 0 2 3 4 4
Commercial mortgages.................. 0 0 0 78 6
Consumer loans........................ 72 85 72 152 156
Commercial loans...................... 9 11 56 63 64
Home equity loans..................... 1 5 0 0 0
------- ------- ------- ------- -------
82 103 131 297 230
------- ------- ------- ------- -------
Net loan losses............................ (212) (149) (45) (70) (58)
------- ------- ------- ------- -------
Provision charged to operations............ 450 0 0 0 0
------- ------- ------- ------- -------
Balance at end of year..................... $ 3,055 $ 2,817 $ 2,966 $ 3,011 $ 3,081
======= ======= ======= ======= =======
Ratio of net loan losses to
average net loans outstanding............ 0.11% 0.09% 0.03% 0.05% 0.04%
======= ======= ======= ======= =======
Ratio of loan loss allowance to total
loans.................................... 1.52% 1.53% 1.78% 1.93% 2.04%
======= ======= ======= ======= =======
</TABLE>
A provision for loan losses of $450 was charged to operations in 1998 compared
to no provision in 1994 through 1997. The provision was booked due to increased
loan volume and concerns related to certain specific commercial credits.
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34
[CORTLAND BANCORP LOGO]
<PAGE> 37
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
With the allowance for loan loss at 111% of nonperforming loans and 104% of all
underperforming loans, management has determined the allowance to be adequate.
The following is an allocation of the allowance for loan losses. The allowance
has been allocated according to the amount deemed to be reasonably necessary to
provide for the possibility of losses being incurred within the following
categories of loans as of December 31, for the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
1-4 family residential mortgages................... $ 498 $ 427 $ 387 $ 351 $ 385
Commercial mortgages............................... 1,441 1,378 1,179 1,118 1,223
Consumer loans..................................... 222 278 410 416 407
Commercial loans................................... 505 283 325 239 207
Home equity loans.................................. 21 25 55 61 63
Unallocated portion................................ 368 426 610 826 796
------ ------ ------ ------ ------
$3,055 $2,817 $2,966 $3,011 $3,081
====== ====== ====== ====== ======
</TABLE>
The allocations of the allowance as shown in the table above should not be
interpreted as an indication that future loan losses will occur in the same
proportions or that the allocations indicate future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is applicable to the entire portfolio.
The following table represents the composition of the loan portfolio as of
December 31, for the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
% OF TOTAL LOANS
--------------------------------
1-4 family residential mortgages................... 39.5% 42.1% 42.5% 43.0% 43.9%
Commercial mortgages............................... 30.5 27.1 25.5 24.6 24.9
Consumer loans..................................... 8.8 10.3 12.8 13.6 11.5
Commercial loans................................... 14.7 14.1 11.7 10.6 10.0
Home equity loans.................................. 4.3 5.4 6.7 7.9 8.5
1-4 family residential mortgage loans held for
sale............................................. 2.2 1.0 0.8 0.3 1.2
</TABLE>
- - --------------------------------------------------------------------------------
LOAN PORTFOLIO
The level of general economic activity remained brisk during 1998. The Company
realized an increase of $15,987 in the loan portfolio from the level of $184,491
recorded at December 31, 1997.
Residential lending's share of the portfolio decreased slightly during 1998 with
1-4 family residential mortgages representing 41.7% of total loans compared to
43.1% in 1997. The portion of the
- - --------------------------------------------------------------------------------
35
<PAGE> 38
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
loan portfolio represented by commercial loans (including commercial real
estate) increased from 41.2% to 45.2%. Consumer loans (including home equity
loans) decreased from 15.7% to 13.1%. This was due partly to the sale of our
credit card portfolio which occurred in the fourth quarter of 1998.
The following chart indicates changes that have occurred in the composition of
the loan portfolio over the past five years. Residential lending, excluding home
equity loans, now comprises 41.7% of the portfolio, a decrease from its 48.0%
share in 1993. Home equity loans have also decreased from a 9.2% portfolio share
in 1993 to 4.3% in 1998. During that same time frame, traditional consumer
installment lending saw its share of the portfolio decline from 10.0% to 8.8%.
Meanwhile, the portfolio share claimed by commercial loans (including commercial
real estate) climbed to 45.2%, up from 32.8% five years ago, as the Company
aggressively pursued medium-to-small business relationships.
LOAN PORTFOLIO COMPOSITION
(In Percentages)
1998 1993
------ ------
1-4 Family Mortgages 41.7 48.0
Commercial 45.2 32.8
Home Equity 4.3 9.2
Consumer 8.8 10.0
During 1998, approximately $44.5 million in new mortgage loans were originated
by the Company, an increase of $26.6 million over 1997, and $34.9 million over
1996. This increase was primarily attributable to improvements in product
offerings, including a service release sales program, which permitted the
Company to offer significantly lower interest rates.
With the yield and quality of mortgage loans remaining favorable during the
year, management elected to hold a large percentage of the year's production.
The following shows the approximate disposition of mortgage loans originated
during 1998 (in millions):
<TABLE>
<S> <C>
Retained in Portfolio:................ $28.1
Loans Sold to Freddie Mac,
Servicing Rights Retained:............ $ 2.0
Loans Sold to Other Investors with
Servicing Rights Released:............ $14.4
</TABLE>
Management intends to continue to sell loans on both a Service Retained basis to
the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), and on a
Service Released basis to FHLMC and other investors. Management does not
anticipate that the composition of loans sold and loans retained in 1999 will
deviate significantly from the levels shown above.
Management plans to further penetrate the local residential mortgage market in
1999. Management anticipates hiring additional experienced mortgage originators
in 1999, as well as continuing development of aggressive realtor call programs.
Management also remains committed to finding new avenues to offer our mortgage
clientele the most diversified choices possible. Management is actively
evaluating additional hardware and software products to improve customer
service. Management anticipates a 10% - 15% increase in mortgage originations
during 1999.
Management's expansion of business product offerings made available through
competitive interest rates has enabled commercial lending personnel to establish
new business relationships while enhancing existing customer relationships.
Commercial loan personnel have aggressively pursued business opportunities with
a wide array of medium to small businesses. Enterprises serviced through the
Bank's commercial lending function include automobile dealerships, trucking
companies, physicians and medical groups, general contractors, service
contractors, restaurants, hotels/motels, retailers, wholesalers, as well as
county and political subdivisions.
Consumer lending, as in prior years, is anticipated to remain on a declining
trend. Consumers are increasingly moving toward lease financing as an
- - --------------------------------------------------------------------------------
36
<PAGE> 39
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
alternative to traditional purchase financing, as is the current trend in
automobile financing. The Company has been reasonably successful in marketing
fixed rate amortizing mortgage products that consumers utilize for home
improvements; the purchase of consumer goods of all types; education, travel and
other personal expenditures; and the consolidation of credit card and other
existing debt into term payout. However, since this consumer activity is
collateralized by residential real estate, it is included with 1-4 residential
mortgage lending.
Additional information regarding the loan portfolio can be found in the Notes to
the Consolidated Financial Statements (NOTES 1, 3, 8, 11 and 13).
INVESTMENT SECURITIES
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," requires that investment
securities be segregated into three separate portfolios: held to maturity,
available for sale and trading, each with its own method of accounting.
Held to maturity securities are recorded at historical cost, adjusted for
amortization of premiums and accretion of discounts. Trading securities are
marked-to-market, with any gain or loss reflected in the determination of
income. Securities designated as available for sale are similarly carried at
their fair market value. However, any gain or loss (net of tax) is recorded as
an adjustment to shareholders' equity as a component of Comprehensive Income.
One effect of SFAS 115 is to expose shareholders' equity to fluctuations
resulting from market volatility. The potential adverse impact of this
volatility is somewhat mitigated as bank regulatory agencies measure capital
adequacy for regulatory purposes without regard to the effects of SFAS 115.
Securities designated by the Company as held to maturity tend to be higher
yielding but less liquid either due to maturity, size or other characteristics
of the issue. The Company must have both the intent and the ability to hold such
securities to maturity.
Securities the Company has designated as available for sale may be sold prior to
maturity in order to fund loan demand, to adjust for interest rate sensitivity,
to reallocate bank resources, or to reposition the portfolio to reflect changing
economic conditions and shifts in the relative values of market sectors.
Available for sale securities tend to be more liquid investments and generally
exhibit less price volatility as interest rates fluctuate.
As of December 31, 1998, the carrying value of all investment securities, both
available for sale and held to maturity, tallied $175,510, a decrease of $13,086
or 6.9% from the prior year. The allocation between single maturity investment
securities and mortgage-backed securities shifted to a 51/49 split versus the
59/41 division of the previous year. Mortgage-backed securities rose $9,636 or
12.9%.
Holdings of obligations of states and political subdivisions showed a net
increase of $12,755 as the Company sought to extend call dates as protection
against a protracted low interest rate environment. The primary focus here was
on high grade callable municipals issued by Ohio communities.
The Company decreased its holdings of U.S. Treasury securities by approximately
$6.9 million, or 23.0% reflecting reduced pledging requirements. During the
latter half of 1998, the low yields available on U.S. Treasury securities made
reinvestment unattractive as well.
Investments in U.S. government agencies and sponsored corporations decreased by
approximately $28.6 million or 48.9% as sharply falling interest rates caused
securities to be called during the year. These securities were not fully
replaced due to the low yields available and the flat shape of the yield curve.
Marketable equity securities depreciated by $31 during 1998, while holdings of
other securities increased by $121 reflecting stock dividends received from the
Federal Home Loan Bank of Cincinnati.
- - --------------------------------------------------------------------------------
37
<PAGE> 40
[CORTLAND BANCORP LOGO]
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
The mix of mortgage-backed securities remained weighted in favor of fixed rate
securities in 1998. Floating rate and adjustable rate mortgage-backed securities
provide some degree of protection against rising interest rates, while fixed
rate securities perform better in periods of stable to slightly declining
interest rates. The portion of the mortgage-backed portfolio allocated to fixed
rate securities remained steady at 55% both in 1998 and 1997.
Included in the mortgage-backed securities portfolio are investments in
collateralized mortgage obligations which totalled $12,798 and $13,869 at
December 31, 1998 and 1997, respectively. These investments are monitored and
subjected to periodic stress tests. At both December 31, 1998 and 1997, none of
these investments were considered "high risk". The Company has no investments in
structured notes, inverse floaters or other high risk derivative products.
At December 31, 1998, a net unrealized gain of $849, net of tax, was included in
shareholders' equity as a component of Comprehensive Income, as compared to a
net unrealized gain of $779, net of tax, as of December 31, 1997. This $70
increase primarily reflects the enhanced market value of debt securities in
general as interest rates declined throughout much of the second half of the
year, reversing the apprehension of higher rates carried over from last year.
Higher interest rates generally translate into lower market prices for debt
securities; conversely falling interest rates generally result in an
appreciation in the market value of debt securities.
Additional information regarding investments can be found in the Notes to the
Consolidated Financial Statements (NOTES 1 and 2).
DEPOSITS
The Company's deposits are derived from the individuals and businesses located
in its primary market area. Total deposits at year-end exhibited a slight
increase of 0.43% to $321,100 at December 31, 1998 as compared to $319,738 at
December 31, 1997.
The Company's deposit base consists of demand deposits, savings, money market
and time deposit accounts. Average noninterest-bearing deposits increased 11.5%
during 1998, while average interest-bearing deposits decreased by 1.9%.
During 1998, noninterest-bearing deposits averaged $47,059 or 14.7% of total
average deposits as compared to $42,199 or 13.2% in 1997. Core deposits averaged
$292,897 for the year ended December 31, 1998, an increase of $5,236 or 1.8%
from the average level of 1997. During 1997, core deposits had averaged
$287,661, an increase of 1.4% from the preceding year.
Historically, the deposit base of the Company has been characterized by a
significant aggregate amount of core deposits. Core deposits represented 91.6%
of average total deposits in 1998 compared to 89.8% in 1997 and 89.2% in 1996.
Over the past five years, the Company has successfully increased the share of
deposits represented by noninterest-bearing and NOW checking accounts. These
products now comprise 22.4% of total deposits compared to only 15.8% five years
ago. The following depicts how the deposit mix has shifted during this time
frame.
AVERAGE DEPOSIT MIX
(In Percentages)
1998 1993
------ ------
Other CD's 35.9 33.7
Jumbo CD's 8.4 6.9
Savings 25.8 31.7
Money Market 7.5 11.9
NOW 7.7 6.7
Checking 14.7 9.1
Additional information regarding interest-bearing deposits is presented in the
Notes to the Consolidated Financial Statements (NOTE 6).
- - --------------------------------------------------------------------------------
38
<PAGE> 41
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
FOURTH QUARTER 1998 AS
COMPARED TO FOURTH QUARTER 1997
The Federal Open Market Committee (FOMC) of the Federal Reserve lowered both the
targeted federal funds rate and the discount rate by 25 basis points each on
October 15, 1998 and November 17, 1998. The interest rate moves followed a
similar reduction in the federal funds rate on September 29, 1998. The FOMC
noted that the rate cuts would cushion the effects on prospective U.S. economic
growth of increasing weakness in foreign economies and of less accommodative
conditions in domestic financial markets. The federal funds rate establishes the
cost of overnight interbank borrowings and influences the determination of other
interest rates, such as banks' prime lending rate.
Tax equivalent net interest income for the Company during the fourth quarter of
1998, increased by $160, a 4.1% increase over fourth quarter 1997. The yield on
earning assets declined by 32 basis points while fourth quarter average earning
assets increased by 3.6%, or $13.5 million, when compared to a year ago. The
result was a decrease in tax equivalent interest income of $27. The rate paid on
interest-bearing liabilities decreased by 31 basis points while fourth quarter
average interest-bearing liabilities increased by $5 million when compared to a
year ago, resulting in a decrease in total interest expense of $187. The net
interest margin for the quarter registered 4.2%, the same as that attained a
year ago.
Loan charge-offs during the quarter were $114 in 1998 and $101 in 1997, while
the recovery of previously charged-off loans amounted to $15 during the fourth
quarter of 1998 compared to $30 in the same period of 1997.
Total other income increased by $149 from a year ago. The increase was primarily
due to the following: an $85 gain on sale of loans in 1998 compared to a $36
gain in the same period of 1997, a $3 increase in fees for customer services,
and a $132 gain on investment securities in 1998 compared to $48 in 1997.
Total other non-interest expenses in the fourth quarter were $2,934 in 1998
compared to $2,807 in 1997, an increase of $127 or 4.5%. Salaries and benefits
constituted a $35 increase, or 2.1%. Occupancy and equipment, office supplies
and marketing expenses increased by $24, or 3.6%. State and local tax
assessments increased by $14, or 10.9%, while legal and other expenses increased
by $54 due primarily to consulting and maintenance expenses associated with the
Year 2000.
Income before income tax during the fourth quarter amounted to $1,475 in 1998
compared to $1,504 in 1997. Income tax expense for the fourth quarter of 1998
was $374 as compared to $450 in 1997, reflecting a 75% increase in the tax
advantaged municipal bond portfolio. Fourth quarter net income was $1,101 in
1998 compared to $1,054 in 1997, representing an increase of $47, or 4.5%.
Earnings per share for the fourth quarter, adjusted for the 3% stock dividend
paid January 1, 1999, and the May 15, 1998 three-for-one stock split amounted to
$0.31 in 1998 and $0.30 in 1997. After tax gains on investment securities in the
fourth quarter of 1998 contributed $0.02 per share compared to $0.01 per share
in 1997.
Realized gains or losses on securities are based on net proceeds and the
adjusted carrying amount of the securities, 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 TWELVE
MONTHS MONTHS
DECEMBER 31, DECEMBER 31,
1998 1998
------------ ------------
<S> <C> <C>
Proceeds on securities
sold................. $1,000 $ 4,947
Gross realized gains... 0 32
Gross realized
losses............... 0 0
Proceeds on securities
called............... $9,275 $23,116
Gross realized gains... 132 293
Gross realized
losses............... 1 1
</TABLE>
During the fourth quarter, the Company sold its portfolio of credit card
receivables at their book value, realizing no gain or loss on the transaction.
The Company has no plans to re-enter this highly competitive, volume driven
business. Also in the fourth quarter the Company opened its newly constructed
facility at Mantua Corners in Portage County. Plans to consolidate the existing
Mantua and Hiram offices into the new facility should be completed by May 1999.
- - --------------------------------------------------------------------------------
39
<PAGE> 42
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
ASSET-LIABILITY MANAGEMENT
The Company's senior management and Board of Directors routinely review the
Company's balance sheet structure for stability, liquidity, and capital
adequacy. The Company has defined a set of key control parameters which provide
various measures of the Company's exposure to changes in interest rates. The
Company's asset-liability management goal is to produce a net interest margin
that is relatively stable despite interest rate volatility while maintaining an
acceptable level of earnings. Net Interest Margin is the difference between
total interest earned on a fully taxable equivalent basis and total interest
expensed. The Net Interest Margin Ratio expresses this difference as a
percentage of average earning assets. In each of the past five years, the
Company has reported record earnings, while the net interest margin ratio has
averaged 4.27%, ranging between 4.19% and 4.37%.
Included among the various measurement techniques used by the Company to
identify and manage exposure to changing interest rates is the use of computer
based simulation models. Computerized simulation techniques enable the Company
to explore and measure net interest income volatility under alternative asset
deployment strategies, different interest rate environments, various product
offerings and changing growth patterns.
GAP TABLE
December 31, 1998
<TABLE>
<CAPTION>
Maturity or Repricing Interval
-----------------------------------------------------
Non Rate
Sensitive
3 Months 3 to 12 1 to 5 or greater than 5
or Less Months Years Years Total
-------- ------- ------ --------------- -----
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Federal Funds Sold......................... $ 4,150 $ 0 $ 0 $ 0 $ 4,150
Investments................................ 39,006 43,726 57,659 35,119 175,510
Loans & Leases............................. 57,241 36,320 84,316 22,601 200,478
-------- -------- -------- -------- --------
Total Earning Assets......................... 100,397 80,046 141,975 57,720 380,138
Other Assets................................. 0 0 0 17,794 17,794
-------- -------- -------- -------- --------
Total Assets................................. $100,397 $ 80,046 $141,975 $ 75,514 $397,932
======== ======== ======== ======== ========
Interest-Bearing Liabilities
NOW & Supernow Accounts.................... $26,950 $ 0 $ 0 $ 0 $ 26,950
Money Market Accounts...................... 23,399 0 0 0 23,399
Passbook Savings........................... 83,435 0 0 0 83,435
Time Deposits less than 100,000............ 27,032 43,846 32,925 7,322 111,125
Time Deposits greater than or equal to
100,000.................................. 8,358 10,145 6,656 802 25,961
Repurchase Agreements...................... 4,376 0 0 0 4,376
U.S. Treasury Demand....................... 577 0 0 0 577
Other Borrowings........................... 4,000 2,000 8,500 10,518 25,018
-------- -------- -------- -------- --------
Total Interest-Bearing Liabilities........... 178,127 55,991 48,081 18,642 300,841
Demand Deposits.............................. 0 0 0 50,230 50,230
Other Liabilities............................ 0 0 0 3,321 3,321
Shareholders' Equity......................... 0 0 0 43,540 43,540
-------- -------- -------- -------- --------
Total Liabilities & Equity................... $178,127 $ 55,991 $ 48,081 $115,733 $397,932
======== ======== ======== ======== ========
Rate Sensitivity Gap......................... $(77,730) $ 24,055 $ 93,894 $ 39,078
Cumulative Gap............................... $(77,730) $(53,675) $ 40,219 $ 79,297
Cumulative Gap to Total Assets............... (19.5)% (13.5)% 10.1% 19.9%
</TABLE>
- - --------------------------------------------------------------------------------
40
[CORTLAND BANCORP LOGO]
<PAGE> 43
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
The preceding Gap Table presents an analysis of the Company's earliest repricing
opportunity for each of its interest-earning assets and interest-bearing
liabilities. Assets are distributed according to the earlier of interest rate
repricing opportunity or expected cash flows. Time deposits and liabilities with
defined maturities are distributed according to the earlier of the repricing
interval or contractual maturity. Other core deposit accounts (NOW, Supernow,
Money Market and Savings accounts) are shown as being available for repricing in
the earliest time frame, although management can exert considerable influence
over the timing and manner of repricing these core deposits. Therefore, these
accounts may reprice in later time intervals and reflect smaller incremental
changes than other interest-earning assets and interest-bearing liabilities.
Since management may reprice these accounts at its discretion, the impact of
changing rates on net interest income is likely to be considerably less severe
than inferred by this table.
During 1998, the effective maturities of earning assets shortened as interest
rates declined, primarily during the second half of the year, as the Federal
Reserve reduced short-term interest rates by 75 basis points to combat financial
market turmoil resulting from the Russian debt default and deflationary
pressures emerging from Asia. As interest rates fell and the yield curve
flattened, the number of investments eligible to be called expanded
significantly, while prepayments on loans and mortgage-backed securities
accelerated, causing the effective maturities of earning assets to shorten.
While the preceding Gap Table provides a general indication of the potential
effect that changing interest rates may have on net interest income, it does not
by itself present a complete picture of interest rate sensitivity. Because the
repricing of the various categories of assets and liabilities is subject to
competitive pressures, customer preferences and other factors, such assets and
liabilities may in fact reprice in different time periods and in different
increments than assumed.
The computerized simulation techniques utilized by management provide a more
sophisticated measure of the degree to which the Company's interest sensitive
assets and liabilities may be impacted by changes in the general level of
interest rates. These analyses show the Company's net interest income remaining
relatively neutral within the economic and interest rate scenarios anticipated
by management. In fact, as previously noted, the Company's net interest margin
has remained relatively stable in the range of 4.19% to 4.37% over the past five
years, despite significant shifts in the mix of earning assets and the direction
and level of interest rates.
NET INTEREST MARGIN RATIO
(In Percentages)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
4.37 4.30 4.19 4.21 4.30
</TABLE>
LIQUIDITY
The central role of the Company's liquidity management is to (1) ensure
sufficient liquid funds to meet the normal transaction requirements of its
customers, (2) take advantage of market opportunities requiring flexibility and
speed, and (3) provide a cushion against unforeseen liquidity needs.
Principal sources of liquidity for the Company include assets considered
relatively liquid, such as interest-bearing deposits in other banks, federal
funds sold, cash and due from banks, as well as cash flows from maturities and
repayments of loans, investment securities and mortgage-backed securities.
Cash and cash equivalents, which includes federal funds sold, increased by
$2,411 compared to year-end 1997. Anticipated principal repayments on
mortgage-backed securities along with investment securities maturing, repricing,
or expected to be called in one year or less amounted to $82,732 at December 31,
1998, representing 47.1% of the total
- - --------------------------------------------------------------------------------
41
<PAGE> 44
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
combined portfolio, as compared to $84,573 or 44.8% of the portfolio a year ago.
Along with its liquid assets, the Company has other sources of liquidity
available to it which help to ensure that adequate funds are available as
needed. These other sources include, but are not limited to, the ability to
obtain deposits through the adjustment of interest rates, the purchasing of
federal funds, and access to the Federal Reserve Discount Window. The Company is
also a member of the Federal Home Loan Bank of Cincinnati, which provides yet
another source of liquidity.
Operating activities provided cash of $5.4 million, $6.4 million and $3.9
million in 1998, 1997 and 1996, respectively. Refer to the Consolidated
Statements of Cash Flows for a summary of the sources and uses of cash in 1998,
1997 and 1996.
CAPITAL RESOURCES
Regulatory standards for measuring capital adequacy require banks and bank
holding companies to maintain capital based on "risk-adjusted" assets so that
categories of assets of potentially higher credit risk require more capital
backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance sheet activities such as standby letters of credit and
interest rate swaps.
The risk-based standards classify capital into two tiers. Tier 1 capital
consists of common shareholders' equity, noncumulative and cumulative perpetual
preferred stock, and minority interests less goodwill. Tier 2 capital consists
of a limited amount of the allowance for loan and lease losses, perpetual
preferred stock (not included in Tier 1), hybrid capital instruments, term
subordinated debt, and intermediate-term preferred stock.
The following graph, which is not "risk-adjusted," indicates that Tier 1 capital
as a percentage of total average assets has strengthened significantly over the
past several years. This measure of capital adequacy is known as the "leverage
ratios."
LEVERAGE RATIO
(In Percentages)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
8.97 9.53 9.51 10.17 10.68
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required banking regulatory agencies to revise risk-based capital standards to
ensure that they take adequate account of interest rate risk. Accordingly,
regulators will subjectively consider an institution's exposure to declines in
the economic value of its capital due to changes in interest rates in evaluating
capital adequacy.
The following table illustrates the Company's risk-weighted capital ratios at
December 31, 1998 and 1997. Banks are required to maintain a minimum ratio of 8%
of qualifying total capital to risk-adjusted total assets. The Tier 1 capital
ratio must be at least 4%. Capital qualifying as Tier 2 capital is limited to
100% of Tier 1 capital. As the table indicates, the Company maintains both Tier
1 and total risk-based capital well in excess of the required regulatory minimum
ratios.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Tier 1 Capital $ 42,211 $ 38,933
Tier 2 Capital 2,473 2,326
-------- --------
QUALIFYING CAPITAL $ 44,684 $ 41,259
======== ========
Risk-Adjusted Total Assets(*) $197,276 $185,571
======== ========
Tier 1 Risk-Based Capital Ratio 21.40% 20.98%
Total Risk-Based Capital Ratio 22.65% 22.23%
Total Leverage Capital Ratio 10.68% 10.17%
</TABLE>
(*) Includes off-balance sheet exposures
- - --------------------------------------------------------------------------------
42
[CORTLAND BANCORP LOGO]
<PAGE> 45
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
requires that investments designated as available for sale be marked-to-market
with corresponding entries to the deferred tax account and shareholders' equity.
Regulatory agencies, however, have decided to exclude these adjustments in
computing risk-based capital, as their inclusion would tend to potentially
increase the volatility of this important measure of capital adequacy.
Additional information regarding regulatory matters can be found in the Notes to
the Consolidated Financial Statements (NOTE 12.)
MARKET RISK
Management considers interest rate risk to be the Company's principal source of
market risk. Interest rate risk is measured as the impact of interest rate
changes on the Company's net interest income. Components of interest rate risk
comprise repricing risk, basis risk and yield curve risk. Repricing risk arises
due to timing differences in the repricing of assets and liabilities as interest
rate changes occur. Basis risk occurs when repricing assets and liabilities
reference different key rates. Yield curve risk arises when a shift occurs in
the relationship among key rates across the maturity spectrum.
The effective management of interest rate risk seeks to limit the adverse impact
of interest rate changes on the Company's net interest margin, providing the
Company with the best opportunity for maintaining consistent earnings growth.
Toward this end, management uses computer simulation to model the Company's
financial performance under varying interest rate scenarios. These scenarios may
reflect changes in the level of interest rates, changes in the shape of the
yield curve, and changes in interest rate relationships.
The simulation model allows management to test and evaluate alternative
responses to a changing interest rate environment. Typically when confronted
with a heightened risk of rising interest rates, the Company will evaluate
strategies that shorten investment and loan repricing intervals and maturities,
emphasize the acquisition of floating rate over fixed rate assets, and lengthen
the maturities of liability funding sources. When the risk of falling rates is
perceived, management will consider strategies that shorten the maturities of
funding sources, lengthen the repricing intervals and maturities of investments
and loans, and emphasize the acquisition of fixed rate assets over floating rate
assets.
The most significant assumptions used in the simulation relate to the cash flows
and repricing characteristics of the Company's balance sheet. Repricing and
runoff rate assumptions are based upon specific product parameters modified by
historical trends and internal projections. These assumptions are periodically
reviewed and benchmarked against historical results. Actual results may differ
from simulated results not only due to the timing, magnitude and frequency of
interest rate changes, but also due to changes in general economic conditions,
changes in customer preferences and behavior, and changes in strategies by both
existing and potential competitors.
The table on the following page shows the Company's current estimate of interest
rate sensitivity based on the composition of its balance sheet at December 31,
1998. For purposes of this analysis, short term interest rates as measured by
the federal funds rate and the prime lending rate are assumed to increase
(decrease) gradually over the next twelve months reaching a level 300 basis
points higher (lower) than the rates in effect at December 31, 1998. Under both
the rising rate scenario and the falling rate scenario, the yield curve is
assumed to exhibit a parallel shift.
One measure of the yield curve's shape is the difference between the yield on
the ten year Treasury and the three month Treasury. At December 31, 1998 this
difference was approximately 15 basis points, indicating a flat yield curve.
Under both the rising and falling rate scenario, this difference remains at a
positive 15 basis points.
The base case against which interest rate sensitivity is measured assumes no
change in short term rates. The base case also assumes no growth in assets and
liabilities and no change in asset or liability mix. Under these simulated
conditions, the
- - --------------------------------------------------------------------------------
43
<PAGE> 46
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
- - --------------------------------------------------------------------------------
base case projects net interest income of $16,494 for the year ending December
31, 1999.
SIMULATED NET INTEREST INCOME SENSITIVITY
FOR THE TWELVE MONTHS ENDING DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET INTEREST
CHANGE IN INTEREST RATES INCOME $ CHANGE % CHANGE
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Graduated increase of
+300 basis points $16,027 $(467) (2.8)%
Short term rates
unchanged (base case) 16,494
Graduated decrease of
-300 basis points 16,234 (260) (1.6)%
</TABLE>
The level of interest rate risk indicated is within limits that management
considers acceptable. However, given that interest rate movements can be sudden
and unanticipated, and are increasingly influenced by global events and
circumstances beyond the purview of the Federal Reserve, no assurances can be
made that interest rate movements
will not impact key assumptions and parameters in a manner not presently
embodied by the model.
It is management's opinion that hedging instruments currently available are not
a cost effective means of controlling interest rate risk for the Company.
Accordingly, the Company does not currently use financial derivatives, such as
interest rate options, swaps, caps, floors or other similar instruments.
IMPACT OF INFLATION
Consolidated financial information included herein has been prepared in
accordance with generally accepted accounting principles, which require the
Company to measure financial position and operating results in terms of
historical dollars. Changes in the relative value of money due to inflation are
generally not considered. Neither the price, timing nor the magnitude of changes
directly coincide with changes in interest rates.
- - --------------------------------------------------------------------------------
44
[CORTLAND BANCORP LOGO]
<PAGE> 47
INFORMATION AS TO STOCK PRICES AND DIVIDENDS OF CORTLAND BANCORP
- - --------------------------------------------------------------------------------
OTHER INFORMATION
The Company files quarterly reports (Forms 10-Q) as well as an annual report
(Form 10-K) with the Securities and Exchange Commission. The quarterly reports
are filed within 45 days of the end of each quarter, while the annual report is
filed within 90 days of the end of each year. Any individual requesting copies
of such reports may obtain these by writing to:
Deborah L. Eazor
Cortland Bancorp
194 West Main Street, Cortland, Ohio 44410
The Company's stock trades on the NASDAQ OTC market. The following brokerage
firms are known to be relatively active in trading the Company's stock:
Community Banc Investments, Inc.
Columbus, Ohio
Contact: Greig A. McDonald
Telephone: 1-800-224-1013
Everen Securities, Inc.
201 E. Commerce Street
Youngstown, Ohio
Contact: Joseph E. Campana
Telephone: 1-800-541-5348
McDonald & Company Securities, Inc.
International Towers Building
25 Market Street
Youngstown, Ohio 44503
Telephone: 1-330-746-2993
Smith Barney, Inc.
Youngstown, Ohio
Telephone: 1-800-535-0017
The following table shows the prices at which the common stock of the Company
has actually been purchased and sold in market transactions during the periods
indicated. The range of market price is compiled from data provided by brokers
based on limited trading. Also shown in the table are the dividends per share on
the outstanding common stock. All figures shown have been adjusted to give
retroactive effect to the 3% stock dividend paid as of January 1, 1999, 1998 and
1997 and the three-for-one stock split of May 15, 1998. The Company currently
has approximately 1,749 shareholders.
<TABLE>
<CAPTION>
Price Per Share Cash
------------------------- Dividends
High Low Per Share
----------- --- ---------
<S> <C> <C> <C>
1998
FOURTH QUARTER...................................... 28 3/8 26 3/8 $0.48
THIRD QUARTER....................................... 31 1/8 24 3/8 0.00
SECOND QUARTER...................................... 25 18 3/8 0.20
FIRST QUARTER....................................... 18 3/8 16 7/8 0.00
1997
Fourth Quarter...................................... 19 1/8 15 1/2 $0.31
Third Quarter....................................... 16 1/8 14 5/8 0.00
Second Quarter...................................... 15 1/4 13 5/8 0.16
First Quarter....................................... 14 5/8 13 0.00
1996
Fourth Quarter...................................... 13 3/8 12 1/8 $0.23
Third Quarter....................................... 12 3/8 11 1/2 0.00
Second Quarter...................................... 12 11 1/4 0.13
First Quarter....................................... 12 9 5/8 0.00
</TABLE>
For the convenience of shareholders, the Company has established a plan whereby
shareholders may have their dividends automatically reinvested in the common
stock of Cortland Bancorp. In addition, shareholders may elect to supplement
their dividends with cash contributions to fund additional
purchases. Participation in the plan is completely
voluntary and shareholders may withdraw at any time.
For current stock prices you may access our home page at www.cortland-banks.com.
For more information on the dividend reinvestment plan, you may contact Deborah
L. Eazor at the following telephone number: (330) 637-8040.
- - --------------------------------------------------------------------------------
45
<PAGE> 48
CORTLAND BANCORP
BOARD OF DIRECTORS
RODGER W. PLATT
CHAIRMAN
DAVID C. COLE
LAWRENCE A. FANTAUZZI
GEORGE E. GESSNER
WILLIAM A. HAGOOD
JAMES E. HOFFMAN III
RICHARD L. HOOVER
K. RAY MAHAN
TIMOTHY K. WOOFTER
OFFICERS
RODGER W. PLATT
CHAIRMAN AND PRESIDENT
LAWRENCE A. FANTAUZZI
CHIEF FINANCIAL OFFICER
AND SECRETARY-TREASURER
JAMES M. GASIOR
VICE PRESIDENT AND CHIEF
OPERATIONS OFFICER
CORTLAND BANKS OFFICES AND LOCATIONS
Thirteen Offices Serving These Fine Communities
BOARDMAN
8580 South Avenue
Youngstown, Ohio 44514
330-758-5884
BRISTOL
6090 State Route 45
Bristolville, Ohio 44402
330-889-3062
BROOKFIELD
7325 Warren-Sharon Road
Brookfield, Ohio 44403
330-448-6814
CORTLAND
194 West Main Street
Cortland, Ohio 44410
330-637-8040
HIRAM
6821 Wakefield Road
Hiram, Ohio 44234
330-569-3237
HUBBARD
890 West Liberty Street
Hubbard, Ohio 44425
330-534-2265
MANTUA
11661 State Route 44
Mantua, Ohio 44255
330-274-3111
NILES
6050 Youngstown-Warren Road
Niles, Ohio 44446
330-544-3333
NORTH BLOOMFIELD
8837 State Route 45
North Bloomfield, Ohio 44450
440-685-4731
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
330-394-1438
WARREN
2935 Elm Road
Warren, Ohio 44483
330-372-1520
WILLIAMSFIELD
5917 U.S. Route 322
Williamsfield, Ohio 44093
440-293-7502
WINDHAM
9690 East Center Street
Windham, Ohio 44288
330-326-2340
Member
Federal Reserve System
and
Federal Deposit Insurance Corporation
Visit us at our home page on the world wide web at
www.cortland-banks.com
or e-mail us at [email protected]
46
[CORTLAND BANCORP LOGO]
<PAGE> 49
THE CORTLAND SAVINGS AND BANKING COMPANY
BOARD OF DIRECTORS
DAVID C. COLE
General Manager
Cole Valley Motor Company
LAWRENCE A. FANTAUZZI
Senior Vice President
GEORGE E. GESSNER
Attorney
WILLIAM A. HAGOOD
President, Tri-City Mobile Homes, Inc.
JAMES E. HOFFMAN III
Attorney
RICHARD L. HOOVER
Consultant
K. RAY MAHAN
President, Mahan Packing Co.
RODGER W. PLATT
President and Chairman
TIMOTHY K. WOOFTER
President, Stan-Wade Metal Products
PAUL C. BOWERS
Director Emeritus
R. B. KNIGHT
Director Emeritus
JOHN F. GESSNER
Director Emeritus
STANLEY L. WOOFTER
Director Emeritus
* * * * *
OFFICERS
RODGER W. PLATT
President and Chairman
LAWRENCE A. FANTAUZZI
Senior Vice President, Controller, Secretary-Treasurer
and Chief Financial Officer
JAMES M. GASIOR
Senior Vice President and Chief Operations Officer
STEPHEN A. TELEGO, SR.
Senior Vice President and Director of Human Resources and Corporate
Administration
CHARLES J. COMMONS
Vice President
GERALD L. THOMPSON
Vice President
MARLENE LENIO
Vice President
EMMA JEAN WOLLAM
Vice President
ROBERT J. HORVATH
Vice President
T. WILLIAM ELLIOTT
Vice President
DANNY L. WHITE
Vice President
JUDY RUSSELL
Vice President
JAMES DUFF
Vice President
FRANK R. SEDALL
Vice President
MARK J. MEDIATE
Vice President
TIMOTHY CARNEY
Vice President
DOUGLAS BLAY
Vice President
GERARD F. KANE
Assistant Vice President
MARK GOVERNOR
Assistant Vice President
MARCEL P. ARNAL
Assistant Vice President
JAMES A. REA
Assistant Vice President
GRACE J. BACOT
Assistant Vice President
BEVERLY KOSTOFF
Assistant Vice President
PIETRO PASCALE
Assistant Vice President
KEITH MROZEK
Assistant Vice President
SHIRLEY F. ROOT
Assistant Vice President
JOYCE P. RATCLIFF
Assistant Vice President and Trust Officer
CRAIG PHYTHYON
Assistant Vice President
JANET K. HOUSER
Assistant Secretary-Treasurer
DEBORAH L. EAZOR
Assistant Secretary-Treasurer
RUSSELL E. TAYLOR
Assistant Treasurer
STEVE J. MACK
Assistant Secretary
DARLENE MACK
Assistant Secretary
KAREN RUDGE
Assistant Secretary
BARBARA R. SANDROCK
Assistant Secretary
KIMBERLY S. VOGT
Assistant Secretary
47
<PAGE> 1
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
- - ------------------------------
The following lists the subsidiaries of the registrant and the state of
incorporation of each:
NAME INCORPORATED
---- ------------
1) The Cortland Savings and Banking Company Ohio
2) New Resources Leasing Company Ohio
<PAGE> 1
Exhibit 23
----------
CONSENT OF INDEPENDENT AUDITORS
WE CONSENT TO THE INCORPORATION BY REFERENCE IN THE PROSPECTUSES CONSTITUTING
PART OF THE REGISTRATION STATEMENTS ON FORM S-8 FOR THE CORTLAND SAVINGS AND
BANKING 401(k) PLAN AND FORM S-3 FOR THE CORTLAND BANCORP DIVIDEND REINVESTMENT
PLAN OF OUR REPORT DATED FEBRUARY 15, 1999 ON THE 1998 CONSOLIDATED FINANCIAL
STATEMENTS OF CORTLAND BANCORP AND SUBSIDIARIES, WHICH REPORT IS INCORPORATED BY
REFERENCE IN THIS FORM 10-K.
YOUNGSTOWN, OHIO PACKER, THOMAS & CO.
MARCH 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,870
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,575
<INVESTMENTS-CARRYING> 55,935
<INVESTMENTS-MARKET> 56,526
<LOANS> 200,478
<ALLOWANCE> 3,055
<TOTAL-ASSETS> 397,932
<DEPOSITS> 321,100
<SHORT-TERM> 7,953
<LIABILITIES-OTHER> 3,321
<LONG-TERM> 22,018
0
0
<COMMON> 17,854
<OTHER-SE> 25,686
<TOTAL-LIABILITIES-AND-EQUITY> 397,932
<INTEREST-LOAN> 17,277
<INTEREST-INVEST> 11,172
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 28,715
<INTEREST-DEPOSIT> 11,311
<INTEREST-EXPENSE> 13,041
<INTEREST-INCOME-NET> 15,674
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 324
<EXPENSE-OTHER> 10,681
<INCOME-PRETAX> 6,661
<INCOME-PRE-EXTRAORDINARY> 6,661
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,816
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.3
<LOANS-NON> 2,741
<LOANS-PAST> 41
<LOANS-TROUBLED> 162
<LOANS-PROBLEM> 828
<ALLOWANCE-OPEN> 2,817
<CHARGE-OFFS> 294
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 3,055
<ALLOWANCE-DOMESTIC> 2,687
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 368
</TABLE>
