1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSEPTEMBER 30, 1999
-------------------------------
Commission file number 0-13814
-------
Cortland BancorpCORTLAND BANCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OhioOHIO 34-1451118
- ------------------------------------------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
194 West Main Street, Cortland, OhioWEST MAIN STREET, CORTLAND, OHIO 44410
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(330) 637-8040
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 10,CLASS OUTSTANDING AT NOVEMBER 9, 1999
----- ------------------------------
Common Stock, No Par Value 3,612,306 Shares-------------------------------
COMMON STOCK, NO PAR VALUE 3,613,536 SHARES
-------------------------- ----------------------
2
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - June 30,
1999 and December 31, 1998 2
Consolidated Statements of Income -
for the three month and six month
periods ended June 30, 1999 and 1998 3
Consolidated Statement of Shareholders'
Equity - Six months ended June 30, 1999 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements
June 30, 1999 6 - 15
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 16 - 24
---------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about
- ------- ----------------------------------------------
Market Risk 25 - 26
------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
- ------- -----------------
Item 2. Changes in Securities 27
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 27
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 27
- ------- ---------------------------------------------------
Item 5. Other Information 28
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 28 - September 30,
1999 and December 31, 1998 2
Consolidated Statements of Income - for the
Three month and Nine month periods ended
September 30, 1999 and 1998 3
Consolidated Statement of Shareholders'
Equity - Nine months ended September 30, 1999 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements
September 30, 1999 6 - 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 - 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 25 - 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27 - 28
SIGNATURES 29
- ------- --------------------------------
Signatures 30
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1
3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)(Amounts in thousands, except share data)
JUNESEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------------------------------- ----------------------
ASSETS
ASSETS
Cash and due from banks $ 9,848 $ 10,870$10,547 $10,870
Federal Funds sold 1,8007,950 4,150
--------- --------------------------------- ----------------------
Total cash and cash equivalents 11,64818,497 15,020
--------- --------------------------------- ----------------------
Investment securities available for sale (Note 3) 122,293121,499 119,575
Investment securities held to maturity (approximate market
value of $ 66,46981,695 in 1999 and $56,526 in 1998) (Note 3) 68,01783,999 55,935
Total loans (Note 4) 195,131194,755 200,478
Less allowance for loan losses (Note 4) (2,999)(2,965) (3,055)
--------- --------------------------------- ----------------------
Net loans 192,132191,790 197,423
--------- --------------------------------- ----------------------
Premises and equipment 6,0315,886 6,190
Other assets 5,0685,718 3,789
--------- --------------------------------- ----------------------
Total assets $ 405,189 $ 397,932
========= =========$427,389 $397,932
======================== ======================
LIABILITIES
Noninterest-bearing deposits $ 46,289 $ 50,230$49,285 $50,230
Interest-bearing deposits 272,005284,238 270,870
--------- --------------------------------- ----------------------
Total deposits 318,294333,523 321,100
--------- --------------------------------- ----------------------
Federal Home Loan Bank advances and other borrowings 40,94843,089 29,971
Other liabilities 1,5825,229 3,321
--------- --------------------------------- ----------------------
Total liabilities 360,824381,841 354,392
--------- --------------------------------- ----------------------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
20,000,000 shares; issued 3,605,5723,621,901 shares
in 1999 and 3,570,827 in 1998 (Note 6) 18,02818,110 17,854
Additional paid-in capital (Note 6) 5,6855,945 4,920
Retained earnings 21,67322,897 20,015
Accumulated other comprehensive income (799)(1,182) 849
Treasury stock, at cost, 9,5959,596 shares in 1999 and 4,761 shares in 1998 (222) (98)
--------- --------------------------------- ----------------------
Total shareholders' equity 44,36545,548 43,540
--------- --------------------------------- ----------------------
Total liabilities and shareholders' equity $ 405,189 $ 397,932
========= =========$427,389 $397,932
======================== ======================
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)(Amounts in thousands, except per share data)
THREE SIXNINE
MONTHS ENDED MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
---------------------- ----------------------------------------------------- ------------------------------
1999 1998 1999 1998
------- ------- ------- --------------------- ------------- -------------- -----------
INTEREST INCOME
INTEREST INCOME
Interest and fees on loans $ 4,142 $ 4,403 $ 8,314 $ 8,576$4,168 $4,355 $12,482 $12,931
Interest and dividends on investment securities:
Taxable interest income 944 1,229 1,797 2,624966 1,104 2,763 3,728
Nontaxable interest income 421 301 823 546434 356 1,257 902
Dividends 68 67 129 12663 61 192 187
Interest on mortgage-backed securities 1,351 1,224 2,634 2,4551,482 1,234 4,116 3,689
Other interest income 40 63 103 112
------- ------- ------- -------64 60 167 172
-------------- ------------- -------------- -----------
Total interest income 6,966 7,287 13,800 14,439
------- ------- ------- -------7,177 7,170 20,977 21,609
-------------- ------------- -------------- -----------
INTEREST EXPENSE
Deposits 2,542 2,848 5,105 5,7362,613 2,824 7,718 8,560
Borrowed funds 465 419 900 838
------- ------- ------- -------535 427 1,435 1,265
-------------- ------------- -------------- -----------
Total interest expense 3,007 3,267 6,005 6,574
------- ------- ------- -------3,148 3,251 9,153 9,825
-------------- ------------- -------------- -----------
Net interest income 3,959 4,020 7,795 7,8654,029 3,919 11,824 11,784
Provision for loan losses 50 125 100 200
------- ------- ------- -------150 325
-------------- ------------- -------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,909 3,895 7,695 7,665
------- ------- ------- -------3,979 3,794 11,674 11,459
-------------- ------------- -------------- -----------
OTHER INCOME
Fees for other customer services 316 338 614 673330 356 944 1,029
Investment securities gains - net 2 7- 123 9 69192
Gain on sale of loans - net 38 38 95 4631 47 126 93
Other non-interest income 51 60 97 121
------- ------- ------- -------28 39 125 160
-------------- ------------- -------------- -----------
Total other income 407 443 815 909
------- ------- ------- -------389 565 1,204 1,474
-------------- ------------- -------------- -----------
OTHER EXPENSES
Salaries and employee benefits 1,430 1,362 2,807 2,7621,478 1,399 4,285 4,161
Net occupancy expense 203 189 398 369208 190 606 559
Equipment expense 265 280 560 557298 278 858 835
State and local taxes 139 142 277 283149 141 426 424
Office supplies 124 125 231 234111 120 342 354
Marketing expense 76 79 126 15265 63 191 215
Legal and litigation expense 21 58 49 9610 46 59 142
Other operating expenses 403 369 757 690
------- ------- ------- -------409 367 1,166 1,057
-------------- ------------- -------------- -----------
Total other expenses 2,6612,728 2,604 5,205 5,143
------- ------- ------- -------7,933 7,747
-------------- ------------- -------------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 1,655 1,734 3,305 3,4311,640 1,755 4,945 5,186
Federal income taxes 426 497 856 991
------- ------- ------- -------416 480 1,272 1,471
-------------- ------------- -------------- -----------
NET INCOME $ 1,229 $ 1,237 $ 2,449 $ 2,440
======= ======= ======= =======$1,224 $1,275 $3,673 $3,715
============== ============= ============== ===========
BASIC EARNINGS PER COMMON SHARE (NOTE 6) $0.34 # $ 0.340.36 $1.02 $ 0.35 $ 0.68 $ 0.69
======= ======= ======= =======1.04
============== ============= ============== ===========
DILUTED EARNINGS PER COMMON SHARE (NOTE 6) $0.34 $ 0.340.36 $1.02 $ 0.35 $ 0.68 $ 0.69
======= ======= ======= =======1.04
============== ============= ============== ===========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(AMOUNTS IN THOUSANDS)(Amounts in thousands)
ACCUMULATED TOTAL
ADDITIONAL OTHER SHARE-
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY HOLDERS
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
------------------------------------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1999 $17,854 $4,920 $20,015 $849 ($98) $43,540
COMPREHENSIVE INCOME:Comprehensive income:
Net income 2,449 2,4493,673 3,673
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities, net of
reclassification adjustment (1,648) (1,648)
-------------(2,031) (2,031)
------------
Total comprehensive income 801
-------------1,642
------------
Common stock transactions:
Shares sold 174 765 939256 1,025 1,281
Treasury shares purchased (124) (124)
Cash dividends declared (791) (791)
==================================================================================================================================================================
BALANCE AT JUNESEPTEMBER 30, 1999 $18,028 $5,685 $21,673$18,110 $5,945 $22,897 ($799)1,182) ($222) $44,365
============================================================================$45,548
======================================================================================
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE
FOR SALE SECURITY GAINS AND LOSSES:
Net unrealized holding gains or losses(losses) on
available-for -sale securities
arising during the period, net of tax (1,642)(2,025)
Less: Reclassification adjustment
for net gains realized in net income, net of tax 6(6)
Net unrealized gains on available-
==============
for-sale securities, net of tax ========
($1,648)
==============2,031)
========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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6
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
FOR THE
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
------------------------------------------------------------------
1999 1998
----------- ----------1,998
-------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $8,393 $ 3,040 $ 1,4173,100
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (25,344) (7,537)(36,905) (20,030)
Purchases of securities available for sale (20,978) (15,565)(34,385) (24,457)
Proceeds from sales of securities available for sale 949- 3,947
Proceeds from call, maturity and principal
payments on securities 28,672 29,23037,697 50,410
Net decrease (increase) in loans made to customers 3,300 (9,809)3,080 (10,817)
Purchase of premises and equipment (257) (158)
-------- --------(310) (457)
-------------- --------------
Net cash flows from investing activities (14,607) (2,890)
-------- --------(30,823) (1,404)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decreaseincrease in deposit accounts (2,806) (1,351)12,423 35
Net increase in borrowings 10,977 96813,118 (945)
Proceeds from sale of common stock 939 6051,281 975
Dividends paid on common stock (791) (689)
Purchase of treasury stock (124) (61)
-------- --------(73)
-------------- --------------
Net cash flows from financing activities 8,195 (528)
-------- --------25,907 (697)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,372) (2,001)3,477 999
CASH AND CASH EQUIVALENTS
Beginning of period 15,020 12,609
-------- ---------------------- --------------
End of period $ 11,64818,497 $ 10,608
======== ========13,608
============== ==============
SUPPLEMENTAL DISCLOSURES
Interest paid $9,149 $ 6,055 $ 6,6599,906
Income taxes paid $1,180 $ 880 $ 1,0251,544
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Operating results for the sixnine months ended JuneSeptember 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
2.) Reclassifications:
Certain items contained in the 1998 financial statements have been
reclassified to conform with the presentation for 1999. Such reclassifications
had no effect on the net results of operations.
3.) Investment Securities:
Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts, with such amortization or accretion included in interest income.
Securities classified as available for sale are those that could be
sold for liquidity, investment management, or similar reasons even though
management has no present intentions to do so. Securities available for sale are
carried at fair value using the specific identification method. Changes in the
unrealized gains and losses on available for sale securities are recorded net of
tax effect as a component of comprehensive income.
Trading securities are principally held with the intention of selling
in the near term. Trading securities are carried at fair value with changes in
fair value reported in the Consolidated Statements of Income.
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Realized gains or losses on dispositions are based on net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method. The table below sets forth the proceeds, gains and losses realized on
securities sold or called for the period ended:
SIX
NINE MONTHS THREE MONTHS
JuneSeptember 30, 1999 JuneSeptember 30, 1999
------------- ------------------------------- ------------------
Proceeds on securities sold $ 0- $ 0-
Gross realized gains 0 0- -
Gross realized losses 0 0- -
Proceeds on securities called $ 6,0006,015 $ 1,50015
Gross realized gains 9 2-
Gross realized losses 0 0- -
Securities available for sale, carried at fair value, totalled $122,293totaled $121,499 at
JuneSeptember 30, 1999 and $119,575 at December 31, 1998 representing 64.3%59.1% and
68.1%, respectively, of all investment securities. These levels were deemed to
provide an adequate level of liquidity in management's opinion.
Investment securities with a carrying value of approximately $30,010$101,172 at
JuneSeptember 30, 1999 and $29,840 at December 31, 1998 were pledged to secure
deposits and for other purposes. The increase primarily reflects securities
pledged to facilitate a line of credit with the Federal Reserve to accommodate
liquidity needs that may arise as a result of the century date change. The line
is effective from November 1, 1999 through April 7, 2000, with approximately $55
million available to the Company's bank subsidiary.
7
9
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated market value of debt securities at
JuneSeptember 30, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or prepay certain obligations with or without call or prepayment
penalties.
Investment securitiesINVESTMENT SECURITIES AMORTIZED ESTIMATED
available for saleAVAILABLE FOR SALE COST FAIR VALUE
- ------------------ ------------- -----------
Due in one year or less $ 18,33117,837 $ 18,41217,904
Due after one year
through five years 11,628 11,6158,791 8,723
Due after five years
through ten years 9,456 9,29011,571 11,346
Due after ten years 7,067 6,807
-------- --------
46,482 46,1247,182 6,761
------- ------
45,381 44,734
Mortgage-backed Securities 72,758 72,125
-------- --------
$119,240 $118,24973,596 72,722
------- ---------
$118,977 $117,456
======== ========
Investment securities=========
INVESTMENT SECURITIES AMORTIZED ESTIMATED
held to maturityHELD TO MATURITY COST FAIR VALUE
- ---------------- ---------- -------------- -----------
Due in one year or less $ 58888 $ 58887
Due after one year
through five years 10,110 10,11710,063 10,045
Due after five years
through ten years 22,303 21,66427,066 26,257
Due after ten years 17,499 16,72530,134 28,871
-------- --------
50,500 49,09467,351 65,260
Mortgage-backed Securities 17,517 17,37516,648 16,435
-------- --------
$ 68,01783,399 $ 66,46981,695
======== ========
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10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated fair value of investment securities
available for sale and investment securities held to maturity as of JuneSeptember
30, 1999 are as follows:
INVESTMENT GROSS GROSS ESTIMATED
SECURITIES AVAILABLE AMORTIZED UNREALIZED UNREALIZED FAIR
FOR SALE COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ----------------- ---- ----- ------ -----
U.S. Treasury
securitiesSecurities $ 19,76416,706 $ 140101 $ 75 $ 19,89716,802
U.S. Government
agencies and
corporations 15,854 17 326 15,54517,820 6 406 17,420
Obligations of states
and political
subdivisions 10,864 41 223 10,68210,855 26 369 10,512
Mortgage-backed and
related securities 72,758 296 929 72,12573,596 193 1,067 72,722
-------- ----- ------ ------
Total 118,977 326 1,847 117,456
Marketable equity
Securities 2,171 110 347 1,934
Other securities 2,109 - - 2,109
-------- -------- -------- --------
Total 119,240 494 1,485 118,249
Marketable equity
securities 2,171 133 317 1,987
Other securities 2,057 2,057
-------- -------- -------- ----------------- ---------
Total available
for sale $123,468$123,257 $ 627436 $ 1,802 $122,2932,194 $121,499
======== ======== ======== =============== ========= =========
INVESTMENT GROSS GROSS ESTIMATED
SECURITIES HELD AMORTIZED UNREALIZED UNREALIZED FAIR
TO MATURITY COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ------------- ----- ------ -----
U.S. Treasury
Securities $ 3,833 $ 24 $ - $ 3,857
U.S. Government
agencies and
corporations $ 25,330 $ 6 $ 775 $ 24,56137,593 30 993 36,630
Obligations of states
and political
subdivisions 25,170 128 765 24,53325,925 111 1,263 24,773
Mortgage-backed and
related securities 17,517 84 226 17,375
-------- -------- -------- --------16,648 67 280 16,435
------- ------ ------ ------
Total held to
maturity $ 68,01783,999 $ 218232 $ 1,766 $ 66,4692,536 $81,695
======== ======== ======== ============== ======= =======
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11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following provides a summary of the amortized cost and estimated
fair value of investment securities available for sale and investment securities
held to maturity as of December 31, 1998:
INVESTMENT GROSS GROSS ESTIMATED
SECURITIES AVAILABLE AMORTIZED UNREALIZED UNREALIZED FAIR
FOR SALE COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ------------- ----- ------ -----
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 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 GROSS GROSS ESTIMATED
SECURITIES HELD AMORTIZED UNREALIZED UNREALIZED FAIR
TO MATURITY COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ------------- ----- ------ -----
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
maturityMaturity $ 55,935 $ 728 $ 137 $ 56,526
======== ======== ============== ========
10
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. Such instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
on the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
In the event of nonperformance by the other party, the Company's
exposure to credit loss on these financial instruments is represented by the
contract or notional amount of the instrument. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
instruments recorded on the balance sheet. The amount and nature of collateral
obtained, if any, is based on management's credit evaluation.
CONTRACT OR
NOTIONAL AMOUNT
--------------------------
JuneSeptember 30, December 31,
1999 1998
---------- ----------------------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 4,8413,731 $ 2,136
Variable 24,06929,440 18,210
Standby letters of credit 257288 328
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Generally these
financial arrangements have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
11
13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The Company, through its subsidiary bank, grants residential, consumer
and commercial loans, and also offers a variety of saving plans to customers
located primarily in Northeast Ohio and Western Pennsylvania. The following
represents the composition of the loan portfolio:
JuneSeptember 30, December 31,
1999 1998
-------- ---------------- ----
1-4 family residential mortgages 42.0%41.8% 41.7%
Commercial mortgages 33.3%32.9% 30.5%
Consumer loans 8.3%8.4% 8.8%
Commercial loans 12.3%12.7% 14.7%
Home equity loans 4.1%4.2% 4.3%
Included in 1-4 family residential mortgages as of JuneSeptember 30, 1999
are $2,445$1,933 of mortgage loans held for sale in the secondary market. Loans held
for sale at December 31, 1998 totaled $4,336.
The following table sets forth the aggregate balance of underperforming
loans for each of the following categories at JuneSeptember 30, 1999 and December
31, 1998:
June 30, December 31,
1999 1998
---------- -----------
Loans accounted for on a
nonaccrual basis $2,445 $2,741
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 3 41
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 496September 30, December 31,
1999 1998
---- ----
Loans accounted for on a
nonaccrual basis $2,357 $2,741
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 0 41
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 489 162
12
14
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following shows the amounts of contractual interest income and
interest income actually reflected in income on loans accounted for on a
nonaccrual basis and loans considered troubled debt restructuring as of
JuneSeptember 30, 1999.
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms $160$233
Interest income actually included in income on the loans 3675
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 placed on nonaccrual
status, any interest that has been accrued and not collected on the loan is
charged against earnings. Cash payments 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.
Impaired loans are generally included in nonaccrual loans. Management
does not individually evaluate certain smaller balance loans for impairment as
such loans are evaluated on an aggregate basis. These loans include 1 - 4
family, consumer and home equity loans. Impaired loans were evaluated using the
fair value of collateral as the measurement method. At JuneSeptember 30, 1999, the
recorded investment in impaired loans was $533$525 while the related portion of the
allowance for loan losses was $64.
As of JuneSeptember 30, 1999, there were $1,494$1,934 in loans, not included in
the above categories and not considered impaired, but which can be considered
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.
13
15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following is an analysis of the allowance for loan losses for the
sixnine month periods ended JuneSeptember 30, 1999 and 1998:
1999 1998
-------- --------
Balance at beginning of period $ 3,055 $ 2,817
Loan charge-offs:
1-4 family residential mortgages 0 0
Commercial mortgages 17 0
Consumer loans 74 80
Commercial loans 102 20
Home equity loans 2 1
-------- --------
195 101
-------- --------
Recoveries on previous loan losses:
1 - 4 family residential mortgages 0 0
Commercial mortgages 0 0
Consumer loans 34 39
Commercial loans 4 4
Home equity loans 1 0
-------- --------
39 43
-------- --------
Net charge-offs (156) (58)
Provision charged to operations 100 200
-------- -------
Balance at end of period $ 2,999 $ 2,959
-------- -------
Ratio of annualized net charge-offs to
average net loans outstanding 0.16% 0.06%1999 1998
---- ----
Balance at beginning of period $ 3,055 $ 2,817
Loan charge-offs:
1-4 family residential mortgages 3 4
Commercial mortgages 99 -
Consumer loans 107 129
Commercial loans 107 46
Home equity loans 4 1
-------- ---------
320 180
Recoveries on previous loan losses:
1 - 4 family residential mortgages 6 -
Commercial mortgages - -
Consumer loans 42 61
Commercial loans 31 6
Home equity loans 1 -
-------- ---------
80 67
-------- ---------
Net charge-offs (240) (113)
Provision charged to operations 150 325
------- --------
Balance at end of period $ 2,965 $ 3,029
-------- --------
Ratio of annualized net charge-offs to
average net loans outstanding 0.16% 0.08%
======== ======== =======
For each of the periods presented above, the provision for loan losses
charged to operations is based on management's judgment after taking into
consideration all known factors connected with the collectibility of the
existing portfolio. Management evaluates the portfolio in light of economic
conditions, changes in the nature and volume of the portfolio, industry
standards and other relevant factors. Specific factors considered by management
in determining the amounts charged to operations include previous loan loss
experience, the status of past due interest and principal payments, the
anticipated impact of Year 2000 problems on certain commercial customers, the
quality of financial information supplied by customers and the general economic
condition present in the lending area of the Company's bank subsidiary.
14
16
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands except per share data)
5.) Legal Proceedings:
The Company's subsidiary bank was a defendant in a class action lawsuit
FRANK SLENTZ, ET AL. v.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. On March 2, 1999, 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. 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 any material effect on the Company.
6.) Earnings Per Share and Capital Transactions:
The following table sets forth the computation of basic earnings per
common share and diluted earnings per common share.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-----------------------------------------------------------------------------
Net Income $ 1,229 $ 1,237 $ 2,449 $ 2,440
Weighted average common
shares outstanding * 3,596,776 3,549,652 3,598,094 3,550,527
Basic earnings per share * $ 0.34 $ 0.35 $ 0.68 $ 0.69
Diluted earnings per share * $ 0.34 $ 0.35 $ 0.68 $ 0.69
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
1999 1998 1999 1998
------------------------------------------
Net Income $ 1,224 $ 1,275 $ 3,673 $ 3,715
Weighted average common
shares outstanding * 3,612,186 3,567,088 3,602,843 3,556,108
Basic earnings per share * $0.34 $0.36 $1.02 $1.04
Diluted earnings per share * $0.34 $0.36 $1.02 $1.04
*Average shares outstanding and resultant per share amounts have been
restated to give retroactive effect to the 3% stock dividend of
January 1, 1999.
15
17
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Dollars in thousands)
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 included elsewhere in this report.
Note Regarding Forward-looking Statements
- -----------------------------------------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.
Liquidity
- ---------LIQUIDITY
The central role of the Company's liquidity management is to (1) ensure
sufficient liquid funds to meet the normal transaction requirements of its
customers, (2) take advantage of market opportunities requiring flexibility and
speed, and (3) provide a cushion against unforeseen liquidity needs.
Principal sources of liquidity for the Company include assets
considered relatively liquid, such as interest-bearing deposits in other banks,
federal funds sold, cash and due from banks, as well as cash flows from
maturities and repayments of loans, investment securities and mortgage-backed
securities.
Along with its liquid assets, the Company has other sources of
liquidity available to it which help to ensure that adequate funds are available
as needed. These other sources include, but are not limited to, the ability to
obtain deposits through the adjustment of interest rates, the purchasing of
federal funds, borrowings from the Federal Home Loan Bank of Cincinnati and
access to the Federal Reserve Discount Window. The Company has established
special lines of credit with the Federal Reserve and the Federal Home Loan Bank
of Cincinnati to facilitate liquidity needs that may arise in connection with
the century date change. Presently, the Company's bank subsidiary has $55
million available on the line with the Federal Reserve and $10 million
guaranteed with the Federal Home Loan Bank of Cincinnati.
16
18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Cash and cash equivalents decreasedincreased $3,477 compared to year end 1998.
Operating activities provided cash of $3,040$8,393 and $1,417$3,100 during the sixnine months
ended JuneSeptember 30, 1999 and 1998, respectively. Refer to the Consolidated
Statements of Cash Flows for a summary of the sources and uses of cash for
JuneSeptember 30, 1999 and 1998.
Capital Resources
- -----------------CAPITAL RESOURCES
The capital management function is a continuous process which consists
of providing capital for both the current financial position and the anticipated
future growth of the Company. Central to this process is internal equity
generation, particularly through earnings retention. Internal capital generation
is measured as the annualized rate of return on equity, exclusive of any
appreciation or depreciation relating to available for sale securities,
multiplied by the percentage of earnings retained. Internal capital generation
was 7.5%8.6% for the sixnine months ended JuneSeptember 30, 1999, as compared to 8.5%well as 8.6% for the
like period during 1998. Overall during the first sixnine months of 1999, capital
grew at the annual rate of 3.8%6.1%, a figure which reflects earnings, dividends
paid, common stock issued, treasury shares purchased and the net change in the
estimated fair value of available for sale securities.
During the first sixnine months of 1999, the Company repurchased 4,834
shares of common stock from the subsidiary bank's 401-k Plan401k plan and issued 34,74551,075
additional shares of common stock, resulting in net proceeds of $815.$1,157. Of the
34,74551,075 shares issued, 29,35843,338 shares were issued through the Company's dividend
reinvestment plan. The remaining 5,3877,737 shares were issued through the subsidiary
bank's 401-k Plan, which offers employees the opportunity to invest in the
common stock of the Company as one of several participant directed investment
alternatives.
Risk-based standards for measuring capital adequacy require banks and
bank holding companies to maintain capital based on "risk-adjusted" assets.
Categories of assets with potentially higher credit risk require more capital
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as standby letters of credit and interest rate
swaps.
17
19
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
These standards also classify capital into two tiers, referred to as
Tier 1 and Tier 2. The Company's Tier 1 capital consists of common shareholders'
equity (excluding any gain or loss on available for sale debt securities) less
intangible assets and the net unrealized loss on equity securities with readily
determinable fair values. Tier 2 capital is the allowance for loan and lease
losses reduced for certain regulatory limitations. Risk based capital standards
require a minimum ratio of 8% of qualifying total capital to risk-adjusted total
assets with at least 4% constituting Tier 1 capital. Capital qualifying as Tier
2 capital is limited to 100% of Tier 1 capital. All banks and bank holding
companies are also required to maintain a minimum leverage capital ratio (Tier 1
capital to total average assets) in the range of 3% to 4%, subject to regulatory
guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required banking regulatory agencies to revise risk-based capital
standards to ensure that they adequately account for the following additional
risks: interest rate, concentration of credit, and nontraditional activities.
Accordingly, regulators will subjectively consider an institution's exposure to
declines in the economic value of its capital due to changes in interest rates
in evaluating capital adequacy.
The table below illustrates the Company's risk weighted capital ratios
at JuneSeptember 30, 1999 and December 31, 1998.
JuneSeptember 30, 1999 December 31, 1998
-------------------------------- -----------------
Tier 1 Capital $ 44,85546,394 $ 42,211
Tier 2 Capital 2,5192,591 2,473
-------- --------------- ---------
TOTAL QUALIFYING
CAPITAL $ 47,37448,985 $ 44,684
======== =================
Risk Adjusted
Total Assets (*) $201,025$206,876 $197,276
Tier 1 Risk-Based
Capital Ratio 22.31%22.43% 21.40%
Total Risk-Based
Capital Ratio 23.57%23.68% 22.65%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 11.22%11.49% 10.68%
(*) Includes off-balance sheet exposures.
18
20
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Assets, less intangibles and the net unrealized market value adjustment
of investment securities available for sale, averaged $399,647$403,635 for the sixnine
months ended JuneSeptember 30, 1999 and $395,076 for the year ended December 31,
1998.
First Six Months ofFIRST NINE MONTHS OF 1999 as Compared to First Six Months ofAS COMPARED TO FIRST NINE MONTHS OF 1998
- ----------------------------------------------------------------
During the first sixnine months of 1999, net interest income after
provision for loan losses increased by $30$215 compared to the first sixnine months of
1998. Total interest income decreased by $639$632 or 4.4%2.9% from the level recorded in
1998. This was accompanied by a decrease in interest expense of $569$672 or 8.7%6.8% and
a decrease in provision for loan loss of $100$175 or 50%53.8%.
The average rate paid on interest sensitive liabilities declined by 4138
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $2,382$6,435 or 0.8%2.1%. Compared to the first halfnine months of
last year, average borrowings, primarily with the Federal Home Loan Bank,
increased by $5,315$7,276 while the average rate paid on borrowings declined 5148 basis
points, from 5.72%5.70% to 5.21%5.22%. Average interest bearing demand deposits, savings
and money market accounts increased by $2,162, $1,968$2,159, $1,840 and $964,$565 even as the
average rate paid on these products declined by 23, 2022, 24 and 3033 basis points
respectively. Offsetting these increases was an $8,028a $5,405, decrease in time
deposits, where the average rate paid declined 4743 basis points, from 5.73%5.66% to
5.26%5.23%.
Interest and dividend income on securities registered a nominal
decrease of $368$178 or 6.4%2.1% during the first sixnine months of 1999 when compared to
1998, while on a fully taxable equivalent basis income on securities declined by
$234 or 3.9%.$2. The average invested balances increasedrose by 0.8%3.9%, increasing by $1,373$6,983 over the
levels of a year ago. The increase in the average balance of investment
securities was accompanied by a 3125 basis point decline in the taxable equivalent
yield of the portfolio.
Interest and fees on loans decreased by $262$449 for the first sixnine months
of 1999 compared to 1998. A $5,997$2,877 increase in the average balance of the loan
portfolio, or 3.2%1.5%, was accompanied by a 5045 basis point decline in the
portfolio's taxable equivalent yield.
Other interest income decreased by $9$5 from the same period a year ago.
The average balance of Federal Funds sold increased by $283.$412. The yield
decreased by 7663 basis points reflecting the change inmore accomodative Federal Reserve
policy implemented during the latter half of 1998.1998, which has only recently been
reversed. The yield on Federal Funds sold is expected to show an increase duringover
the second halfbalance of 1999 as the Federal Reserve increased the targeted Federal Funds
rate by 25 basis points on June 30, 1999, and again on August 24, 1999.
19
21
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Other income from all sources decreased by $94$270 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $49$33 from the same period a year ago, reflecting generally
favorable market conditions and an increased allocation of resources to this
activity. Gains on securities called and gains on the sale of available for sale
investment securities showed a decrease of $60$183 from year ago levels. Fees for
other customer services decreased by $59,$85, mainly due to the sale of the bank
subsidiary's credit card portfolio in the fourth quarter of 1998 and the
outsourcing of trust services during the third quarter of 1999, while other
sources of non recurringnon-recurring non-interest income decreased by $24$35 from the same
period a year ago.
Loan charge-offs during the first sixnine months were $195$320 in 1999 and
$101$180 in 1998, while the recovery of previously charged-off loans amounted to $39$80
in 1999 compared to $43$67 in 1998. A provision for loan loss of $100$150 was charged
to operations in 1999, compared to $200$325 charged in 1998. At JuneSeptember 30, 1999,
the loan loss allowance of $2,999$2,965 represented approximately 1.5% of outstanding
loans. Non accrual loans at JuneSeptember 30, 1999 represented 1.3%1.2% of the loan
portfolio compared to 1.4% at December 31, 1998 and 0.9%1.2% a year ago.
Total other expenses in the first sixnine months were $5,205$7,933 in 1999
compared to $5,143$7,747 in 1998, an increase of $62$186 or 1.2%2.4%. Full time equivalent
employment during the first sixnine months averaged 180181 employees in 1999, a 3.2%2.7%
decline from the 186 in the same quarter of 1998. Salaries and benefits
increased by $45$124 compared to the similar period a year ago.
For the first sixnine months of 1999, state and local taxes decreased by $6increased $2
or 2.1%0.4%. Occupancy and equipment expense increased by $32,$70, or 3.5%5.0%, reflecting
the increased expense of the newly constructed facility at Mantua Corners which
opened in the fourth quarter of 1998, the cost of continued Y2K readiness
preparation, and the opening of the Company's newest banking office in May of
1999. All other expense categories decreased by 0.8%0.6% or $9$10 as a group.
Income before income tax expense amounted to $3,305$4,945 for the first sixnine
months of 1999 compared to $3,431$5,186 for the similar period of 1998 reflecting an
increased allocation of investment funds to the tax advantaged municipal sector.
The effective tax rate for the first sixnine months was 25.9%25.7% in 1999 compared to
28.9%28.4% in 1998, resulting in income tax expense of $856$1,272 and $991,$1,471
respectively. Net income for the first sixnine months registered $2,449$3,673 in 1999
compared to $2,440$3,715 in 1998, representing basic and diluted per share amounts of
$0.68$1.02 in 1999 and $0.69$1.04 in 1998. Net income before gains on loans and
investment securities measured $3,584 versus $3,527 a year ago, representing
$1.00 per share in 1999 compared to $0.99 in 1998.
20
22
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Second Quarter ofTHIRD QUARTER OF 1999 as compared to Second QuarterAS COMPARED TO THIRD QUARTER 1998
- ---------------------------------------------------------
During the secondthird quarter of 1999 net interest income after provision
for loan losses increased by $14$185 as compared to secondthird quarter 1998. Average
earning assets increased by 2.6%$15,344 or 4.0% while average interest-bearing
liabilities increased by 1.7%$14,408 or 4.8%. Average loans exhibited growth of 0.8%contracted by 1.7%,
while average investments increased by 5.3%10.0%.
The tax equivalent yield on earning assets decreased by 4325 basis points
from the same quarter a year ago. The tax equivalent yield of the investment
portfolio measured 6.3%6.40%, a 2813 basis point decline from the same quarter a year
ago, while the loan portfolio yielded 8.6%8.63%, down 5224 basis points from last
year's rate. Meanwhile, the rate paid on interest-bearing liabilities decreased
4131 basis points compared to a year ago. The net effect of these changes was that
the tax equivalent net interest margin declined to 4.3%4.31%, a decrease of 72 basis
points from that achieved during last year's secondthird quarter.
Loans decreased by $239$376 during the period. Loans as a percentage of
earning assets stood at 50.8%47.7% as of JuneSeptember 30, 1999 as compared to 51.8%51.9% on
JuneSeptember 30, 1998. The loan to deposit ratio at the end of the first sixnine
months of 1999 was 61.3%58.4% compared to 61.5%61.7% at the end of the same period a year
ago. The investment portfolio represented 59.8%61.6% of each deposit dollar, up from
56.9%56.0% a year ago.
Loan charge-offs during the secondthird quarter were $119$125 in 1999 and $57$79 in
1998, while the recovery of previously charged-off loans amounted to $12$41 during
the secondthird quarter of 1999 compared to $18$24 in the same period of 1998.
Other income for the quarter decreased by $36$176 or 8.l%31.2% compared to the
same period a year ago. The continued favorableago, primarily reflecting the sale of the credit card
portfolio in the fourth quarter of 1998 and the outsourcing of trust services
during the third quarter of 1999. Also rising interest rates began to impact
the mortgage rate environment wasas evidenced by a net gain on sales of loans of $38, matching$31,
compared to the $38$47 generated a year ago. NetThere were no gains on investment and
trading securities transactions netted $2,in 1999, while a $7$123 gain was recorded in 1998.
Total other expenses in the secondthird quarter were $2,661$2,728 in 1999 and
$2,604 in 1998, an increase of $57$124 or 2.2%4.8%. Employee salaries and benefits
increased by $68$79 or 5.0%5.6%. Occupancy and equipment expense remained relatively stable, with a
$1 decrease.increased $38, or 8.1%
reflecting the cost of new branch facilities and Y2K preparedness. Other
expenses as a group decreasedincreased by $10$7 or 1.3%0.9% compared to the same period last
year.
Income before tax for the quarter decreased by 4.6%6.6% to $1,655$1,640 in 1999
from the $1,734$1,755 recorded in 1998. Net income for the quarter of $1,229$1,224
represented a 0.6%4.0% decrease from the $1,237$1,275 earned a year ago. Net income
before gains on loans and investment securities rose 3.5%, from $1,163 a year
ago to $1,204 in the third quarter of 1999, representing $0.33 per share in
both years.
21
23
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
YearYEAR 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 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. To date, the Company has spent
approximately $453$505 on it's Year 2000 project. The Company expects to expend an
additional $197$145 by December 31, 1999 to ensure Y2K readiness.readiness, primarily in the
areas of public education, noncritical equipment and other contingencies.
In conjunction with the Federal Financial Institutions Examination
Council Interagency Statement, 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.
22
24
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
RENOVATION (100% COMPLETE): This phase includes hardware and software
upgrades, system replacements, vendor certifications, and other associated
changes deemed necessary to assure Y2K compliance.
VALIDATION (100% 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
critical subsystems.
IMPLEMENTATION (95%(100% 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 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 JuneSeptember 30, 1999, 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.
23
25
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
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 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 www.cbinfo@cortland-banks.com.
New Accounting Standards
- ------------------------NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities". This
standard has been delayed by SFAS No.137. The standard is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.2000. Management does
not anticipate that adoption of this standard will have a material impact on the
Company's financial position or results of operation.
24
26
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
(Dollars in thousands)
Management considers interest rate risk to be the Company's principal
source of market risk. Since December 31, 1998, short term interest rates, as
measured by U. S. Treasury securities with maturities of one year or less, have
increased by 2535 to 5075 basis points, reflecting global economic recovery and an
expectation of monetary tightening on the part of the Federal Reserve. Indeed,
the Federal Reserve did hike short-term rates by 25 basis points on June 30th.30th
and again on August 24th. Meanwhile, intermediate and long term interest rates,
as measured by U. S. Treasury securities with maturities of two or more years,
have increased by approximately 90-120110-150 basis points since yearend, reflecting
above average growth in the U. S. economy, tight labor markets and improved
conditions in global financial markets and foreign economies.
During that same time period, the Company's assets have increased by 7.4%,
financed by nearly equal additions of interest bearing deposits and borrowings.
The subsidiary bank experienced a modest decline of 2.7%2.9% in it's loan portfolio
with funds being shifted to the investment portfolio. Meanwhile, more expensive time deposit liabilities were
replaced with less expensive Federal Home Loan Bank borrowings and growth in
traditional checking and passbook savings products.
The net effect of these changes had minimal effect on the Company's risk
position. When these changes are
incorporated into the Company's risk analysis, simulated results for an
unchanged rate environment indicate a $160$540 increase in net interest income for
the twelve month horizon subsequent to JuneSeptember 30, 1999, compared to the
simulated results for a similar twelve month horizon subsequent to December 31,
1998. The Company's sensitivity to a declining rate environment is basically unchanged.has been
reduced. The Company's sensitivity to an increasing rate environment, however,
has heightened as customers have increasingly moved out of variable rate product
and into fixed rate product. Management has also sought to extend portfolio
duration to guard against the effects of a protracted low rate environment.
Management expects that the decrease in anticipated net interest income under
the rising rate environment willwould be partially offset by similar declines in
operating expense and loan loss provision requirements due to the decline in
loan volume. The table on the next page displays simulated results.
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27
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
(CONTINUED)
(Dollars in thousands)
Simulated Net Interest Income (NII) Scenarios
for the Twelve Months Ending
Net Interest Income $ Change in NII % Change in NII
Changes in JuneSept. 30, Dec. 31, JuneSept. 30, Dec. 31, JuneSept. 30, Dec. 31,
Interest Rates 2000 1999 2000 1999 2000 1999
- -------------- ---------------------------------------------------------------------------------------------------------------------------
Graduated increase of
+300 basis points 15,91516,183 16,027 (738)(851) (467) (4.4)(5.0)% (2.8)%
Short term rates
unchanged 16,65417,034 16,494
Graduated decrease of
-300 basis points 16,38716,927 16,234 (267)(107) (260) (1.6)(0.6)% (1.6)%
The level of interest rate risk indicated remains 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 assurance can be
made that interest rate movements will not impact key assumptions and
relationships in a manner not presently anticipated.
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28
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
ItemITEM 1. Legal Proceedings
- ------- -----------------LEGAL PROCEEDINGS
See Note (5) of the financial statements.
ItemITEM 2. Changes in Securities
- ------- ---------------------CHANGES IN SECURITIES
Not applicable
ItemITEM 3. Defaults upon Senior Securities
- ------- -------------------------------DEFAULTS UPON SENIOR SECURITIES
Not applicable
ItemITEM 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a.) On May 18, 1999, Cortland Bancorp held its annual meeting of
shareholders.
(b.) The following directors were elected for three year terms
ending in 2002.
David C. Cole
Lawrence A. Fantauzzi
Directors whose term of office continued after the annual
meeting:
George E. Gessner
James E. Hoffman III
Timothy K. Woofter
William A. Hagood
K. Ray Mahan
Richard L. Hoover
Rodger W. Platt
27
29
CORTLAND BANCORP AND SUBSIDIARIES
PART II -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
---------------------------
(c.) At the close of business on the record date, 3,600,811
Cortland Bancorp shares were outstanding and entitled to vote.
The results of the election of directors was as follows:
Votes Votes
Cast Cast Votes
For Against Abstained
--------- -------- ---------
David C. Cole 2,416,909 129,992 0
Lawrence A. Fantauzzi 2,419,063 127,837 0
Also voted on was to increase the authorized shares of the
Corporation from 5,000,000 to 20,000,000 shares. 2,227,664
voted for, 200,948 voted against and 118,287 abstained.
Item 5. Other Information
- ------- -----------------
Not applicable
ItemITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
--------EXHIBITS
2. Not applicable
3.1 Articles of Incorporation - as amended May 1999
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
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CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
(b) Reports on FormREPORTS 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, per the 8-K instructions, and described resignations of certain members
of the registrant's Board of Directors and senior management. No financial
statements were filed with this report.
2928
3130
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cortland Bancorp
----------------
(Registrant)
DATED: August 10,November 9, 1999 Lawrence A. Fantauzzi
------------------------------- ---------------------
Secretary/Treasurer
(Chief Financial Officer)
DATED: August 10,November 9, 1999 Rodger W. Platt
------------------------------- ---------------
Chairman and President
(Duly Authorized Officer)
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29