Cortland Bancorp 10Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition from to

Commission file number: 001-38827

Cortland Bancorp Inc

(Exact name of registrant as specified in its charter)

Ohio		34-1451118
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

194 West Main Street, Cortland, Ohio		44410
(Address of principal executive offices)		(Zip code)

330- 637-8040

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, No Par Value	CLDB	NASDAQ Capital Market

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ 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.

TITLE OF CLASS		SHARES OUTSTANDING
Common Stock, No Par Value		4,262,277 Shares May 6, 2021

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Cortland Bancorp and Subsidiaries:

	Consolidated Balance Sheets (unaudited) – March 31, 2021 and December 31, 2020	2

	Consolidated Statements of Income (unaudited) – Three months ended March 31, 2021 and 2020	3

	Consolidated Statements of Comprehensive Income (unaudited) – Three months ended March 31, 2021 and 2020	4

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) – Three months ended March 31, 2021 and 2020	5

	Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2021 and 2020	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

	Consolidated Average Balance Sheets, Yields and Rates – Quarter-to-Date March 31, 2021, December 31, 2020 and March 31, 2020	28

	Selected Financial Data	29

	Financial Review	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II – OTHER INFORMATION		45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

SIGNATURES		50

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

	March 31,			December 31,
	2021			2020
ASSETS
Cash and due from banks	$	8,403		$	9,728
Interest-earning deposits		38,874			26,380
Total cash and cash equivalents		47,277			36,108
Investment securities available-for-sale (Note 3)		167,143			167,875
Regulatory stock (Note 3)		3,031			3,031
Loans held for sale		6,577			6,876
Total loans (Note 4)		518,618			556,760
Less allowance for loan losses (Note 4)		(6,020	)		(6,019	)
Net loans		512,598			550,741
Premises and equipment		11,485			11,693
Bank-owned life insurance		21,279			21,166
Other assets		22,315			23,815
Total assets	$	791,705		$	821,305

LIABILITIES
Noninterest-bearing deposits	$	214,801		$	198,499
Interest-bearing deposits		465,510			502,011
Total deposits		680,311			700,510
Securities sold under agreements to repurchase (Note 13)		1,793			1,488
Federal Home Loan Bank advances - short term		0			2,000
Federal Home Loan Bank advances - long term		10,000			16,000
Subordinated debt (Note 7)		5,155			5,155
Other liabilities		13,350			15,147
Total liabilities		710,609			740,300

SHAREHOLDERS’ EQUITY
Common stock - $5.00 stated value - authorized 20,000,000 shares; issued 4,728,267 shares in 2021 and 2020; outstanding shares, 4,213,429 in 2021 and 4,223,153 in 2020		23,641			23,641
Additional paid-in capital		21,018			21,238
Retained earnings		43,826			41,863
Accumulated other comprehensive income (Note 10)		3,117			4,867
Treasury stock, at cost, 514,838 shares in 2021 and 505,114 in 2020		(10,506	)		(10,604	)
Total shareholders’ equity		81,096			81,005
Total liabilities and shareholders’ equity	$	791,705		$	821,305

See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except per share data)

	THREE MONTHS ENDED
	MARCH 31,
	2021		2020
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	6,145	$	6,054
Interest and dividends on investment securities:
Taxable interest		199		337
Nontaxable interest		564		467
Dividends		14		16
Other interest income		10		56
Total interest and dividend income		6,932		6,930
INTEREST EXPENSE
Deposits		474		1,096
Securities sold under agreements to repurchase		1		1
Federal Home Loan Bank advances - short term		4		0
Federal Home Loan Bank advances - long term		33		87
Subordinated debt		22		41
Total interest expense		534		1,225
Net interest income		6,398		5,705
PROVISION FOR LOAN LOSSES		0		600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,398		5,105
NON-INTEREST INCOME
Fees for customer services		507		542
Investment securities available-for-sale gains, net		71		0
Mortgage banking gains, net		800		596
Earnings on bank-owned life insurance		113		93
Other non-interest income		293		221
Total non-interest income		1,784		1,452
NON-INTEREST EXPENSES
Salaries and employee benefits		2,844		2,766
Occupancy and equipment		606		646
State and local taxes		160		146
FDIC insurance		40		6
Professional fees		218		302
Advertising and marketing		71		57
Data processing fees		66		72
Other operating expenses		930		985
Total non-interest expenses		4,935		4,980
INCOME BEFORE FEDERAL INCOME TAX EXPENSE		3,247		1,577
Federal income tax expense		481		206
NET INCOME	$	2,766	$	1,371
EARNINGS PER SHARE BASIC AND DILUTED	$	0.66	$	0.32
CASH DIVIDENDS DECLARED PER SHARE	$	0.19	$	0.19

See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)

	THREE MONTHS ENDED
	MARCH 31,
	2021			2020
Net income	$	2,766		$	1,371
Other comprehensive (loss) income:
Securities available for sale:
Unrealized holding (losses) gains on available-for-sale securities		(2,145	)		1,566
Tax effect		450			(329	)
Reclassification adjustment for net gains in net income		(71	)		0
Tax effect		15			0
Total securities available-for-sale		(1,751	)		1,237
Change in post-retirement obligations		1			(4	)
Total other comprehensive (loss) income		(1,750	)		1,233
Total comprehensive income	$	1,016		$	2,604

See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands, except per share data)

	THREE MONTHS ENDED
	MARCH 31,
	2021			2020
COMMON STOCK
Balance	$	23,641		$	23,641

ADDITIONAL PAID IN CAPITAL
Beginning balance		21,238			21,266
Equity compensation		(220	)		48
Ending Balance		21,018			21,314

RETAINED EARNINGS
Beginning balance		41,863			36,187
Net income		2,766			1,371
Cash dividend declared, $0.19 per share for both three months ended March 31, 2021 and 2020		(803	)		(813	)
Ending balance		43,826			36,745

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning balance		4,867			1,168
Other comprehensive (loss) income		(1,750	)		1,233
Ending balance		3,117			2,401

TREASURY STOCK
Beginning balance		(10,604	)		(7,924	)
Treasury shares purchased (9,724 and 150,920 shares purchased in first quarter 2021 and 2020, respectively)		(204	)		(3,092	)
Equity compensation		302			124
Ending balance		(10,506	)		(10,892	)
TOTAL SHAREHOLDERS' EQUITY	$	81,096		$	73,209

See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries

CORTLAND BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

	FOR THE THREE MONTHS
	ENDED MARCH 31,
	2021			2020
Net cash flow from operating activities	$	3,946		$	2,156
Cash flow from investing activities
Purchases of available-for-sale securities		(20,100	)		0
Proceeds from sale of available-for-sale securities		12,200			0
Proceeds from call, maturity and principal payments on available-for-sale securities		5,902			6,699
Purchases of regulatory stock		0			(160	)
Net (increase) decrease in loans made to customers		38,143			36,499
Contributions to partnership funds		0			(152	)
Purchases of premises and equipment		(21	)		(463	)
Net cash flow from investing activities		36,124			42,423
Cash deficit from financing activities
Net increase (decrease) in deposit accounts		(20,199	)		(25,125	)
Net change in securities sold under agreements to repurchase		305			(247	)
Net change in Federal Home Loan Bank advances - short term		(2,000	)		2,000
Repayments of Federal Home Loan Bank advances - long term		(6,000	)		(6,000	)
Proceeds from Federal Home Loan Bank advances - long term		0			4,000
Dividends paid		(803	)		(813	)
Treasury shares purchased		(204	)		(3,092	)
Net cash deficit from financing activities		(28,901	)		(29,277	)
Net change in cash and cash equivalents		11,169			15,302
Cash and cash equivalents
Beginning of period		36,108			27,815
End of period	$	47,277		$	43,117
Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	0		$	0
Interest	$	606		$	1,281
Increase in ROU asset	$	0		$	205
Increase in lease liability	$	0		$	205

See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.) Basis of Presentation and Reclassifications:

The accompanying unaudited consolidated financial statements of Cortland Bancorp (the Company) and the Cortland Savings and Banking Company (the Bank) have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) 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 U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2020, included in our Form 10-K for the year ended December 31, 2020, filed with the United States Securities and Exchange Commission. The accompanying Consolidated Balance Sheet at December 31, 2020 has been derived from the audited Consolidated Balance Sheet but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Certain items contained in the 2020 financial statements have been reclassified to conform to the presentation for 2021. Such reclassifications had no effect on the net results of operations or shareholders’ equity.

2.) Authoritative Accounting Guidance:

In June 2016, the FASB issued ASU (Accounting Standard Update) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15,2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a onetime election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This Update is not expected to have a significant impact on the Company’s financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.) Investment Securities:

Investments in debt securities are classified as held-to-maturity, available-for-sale or trading. 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. Securities classified as trading are those that management has bought principally for the purpose of selling in the near term. The Company currently has no securities classified as held-to-maturity or trading.

Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity, net of tax. 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 income includes amortization of purchase premium or discount and is amortized on the level-yield method without anticipating payments, except for U.S. Government mortgage-backed and related securities where twelve months of historical prepayments are taken into consideration.

The regulatory stock is carried at cost (its redeemable value) and the Company is required to hold such investments as a condition of membership in order to transact business with the Federal Home Loan Bank (FHLB) of Cincinnati and the Federal Reserve Bank (FRB). The stock is bought from and sold to the correspondent institutions based upon its par value. The stock cannot be traded or sold in any market and as such is classified as restricted stock, carried at cost (its redeemable value) and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB and FRB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB and FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and FRB and (d) the liquidity position of the FHLB and FRB. The Company does not consider these investments to be other-than-temporarily impaired at March 31, 2021.

Securities are evaluated periodically to determine whether a decline in value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline in value is permanent but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Unrealized losses on available-for-sale investments have not been recognized into income. However, once a decline in value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table is a summary of investment securities available-for-sale and regulatory stock:

(Amounts in thousands)

Gross

Unrealized

March 31, 2021

Amortized Cost

Gains

Losses

Fair Value

Obligations of states and political subdivisions

89,661

3,841

269

93,233

U.S. Government-sponsored mortgage-backed securities

64,607

742

476

64,873

U.S. Government-sponsored collateralized mortgage obligations

3,993

4,070

U.S. Government-guaranteed small business administration pools

4,884

4,967

Total investment securities available-for-sale

163,145

4,747

749

167,143

Federal Home Loan Bank (FHLB) stock

2,805

—

2,805

Federal Reserve Bank (FRB) stock

226

—

226

Total regulatory stock

3,031

—

3,031

	(Amounts in thousands)
			Gross		Gross
			Unrealized		Unrealized
December 31, 2020	Amortized Cost		Gains		Losses		Fair Value
Obligations of states and political subdivisions	$	83,007	$	5,074	$	0	$	88,081
U.S. Government-sponsored mortgage-backed securities		68,677		1,015		96		69,596
U.S. Government-sponsored collateralized mortgage obligations		4,680		91		3		4,768
U.S. Government-guaranteed small business administration pools		5,298		132		0		5,430
Total investment securities available-for-sale	$	161,662	$	6,312	$	99	$	167,875
Federal Home Loan Bank (FHLB) stock	$	2,805	$	—	$	—	$	2,805
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock	$	3,031	$	—	$	—	$	3,031

The amortized cost and fair value of debt securities at March 31, 2021, 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)
	Amortized Cost		Fair Value
Due in one year or less	$	0	$	0
Due after one year through five years		3,565		3,624
Due after five years through ten years		1,706		1,755
Due after ten years		89,274		92,821
Total		94,545		98,200
U.S. Government-sponsored mortgage-backed and related securities		68,600		68,943
Total investment securities available-for-sale	$	163,145	$	167,143

The table below sets forth the proceeds, gains and losses realized on available for sale securities sold or called for the periods ended March 31, 2021 and March 31, 2020.

	(Amounts in thousands)
	Three Months Ended March 31,
	2021		2020
Proceeds on securities sold	$	12,200	$	0
Gross realized gain		94		0
Gross realized losses		23		0

Investment securities with a carrying value of approximately $68.1 million at March 31, 2021 and $74.3 million at December 31, 2020 were pledged to secure deposits and for other purposes. The remaining securities provide an adequate level of liquidity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following is a summary of the fair value of available-for-sale securities with unrealized losses and an aging of those unrealized losses at March 31, 2021:

	(Amounts in thousands)
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of states and political subdivisions	$	8,489	$	269	$	0	$	0	$	8,489	$	269
U.S. Government-sponsored mortgage-backed securities		28,259		476		0		0		28,259		476
U.S. Government-sponsored collateralized mortgage obligations		711		3		0		0		711		3
U.S. Government-guaranteed small business administration pools		688		1		0		0		688		1
Total	$	38,147	$	749	$	0	$	0	$	38,147	$	749

The above table comprises 20 investment securities where the fair value is less than the related amortized cost.

The following is a summary of the fair value of available-for-sale securities with unrealized losses and an aging of those unrealized losses at December 31, 2020:

	(Amounts in thousands)
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of states and political subdivisions	$	0	$	0	$	0	$	0	$	0	$	0
U.S. Government-sponsored mortgage-backed securities		21,028		96		0		0		21,028		96
U.S. Government-sponsored collateralized mortgage obligations		794		3		0		0		794		3
U.S. Government-guaranteed small business administration pools		0		0		0		0		0		0
Total	$	21,822	$	99	$	0	$	0	$	21,822	$	99

The above table comprises 7 investment securities where the fair value is less than the related amortized cost.

The unrealized losses at March 31, 2021 on the Company’s investments were caused by changes in market rates and related spreads. It is expected that the securities would not be settled at less than the amortized cost of the Company’s investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not consider these investments to be other-than-temporarily impaired at March 31, 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.) Loans and Allowance for Loan Losses:

The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern Ohio and Western Pennsylvania.

The following represents the composition of the loan portfolio for the period ending:

	(Amounts in thousands)
	March 31, 2021				December 31, 2020
	Balance		%		Balance		%
Commercial	$	100,614		19.4	$	132,419		23.8
Commercial real estate		311,211		60.0		317,537		57.0
Residential real estate		79,663		15.4		79,169		14.2
Consumer - home equity		23,677		4.5		24,062		4.3
Consumer - other		3,453		0.7		3,573		0.7
Total loans	$	518,618		100.0	$	556,760		100.0

During 2020, the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. Small Business Administration ("SBA"). The PPP provides loans to small businesses who were affected by economic conditions as a result of the Coronavirus Disease 2019 ("COVID-19") pandemic to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. During 2020, the Company originated $56.3 million in PPP loans. During the first three months of 2021, the Company originated another $22 million of second round PPP loans. As of December 31, 2020 and March 31, 2021, the Company had outstanding principal balances of $45.3 million and $47.2 million, respectively. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.2 million in fees associated with the processing of the 2020 loans and $948,000 for the 2021 loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. Upon forgiveness of the loans, unrecognized fee income is recorded immediately. Fee income related to forgiveness was $460,000 for the three months ended March 31, 2021, and none for the comparable period in 2020.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans and consumer loans. The pools of commercial real estate loans and commercial loans are also broken down further by industry sectors when analyzing the related pools. Using the largest concentrations as the qualifier, these industry sectors include non-residential buildings; skilled nursing and nursing care; residential real estate lessors, agents and managers; hotel and motels, and trucking. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.

These factors include, but are not limited to, the following:

Factor Considered:		Risk Trend:
Levels of and trends in (a) charge-offs, (b) classifications and (c) non-accruals		(a) Stable, (b) Increasing, (c) Stable
Trends in volume and terms		Stable
Changes in lending policies and procedures		Stable
Experience, depth and ability of management, including loan review function		Stable
Economic trends, including valuation of underlying collateral		Increasing
Concentrations of credit		Increasing
Effect of COVID-19 pandemic		Increasing

The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:

Factor Considered:		Risk Trend:
Levels and trends in classification		Increasing
Declining trends in financial performance		Increasing
Structure and lack of performance measures		Increasing
Migration between risk categories		Increasing

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The provision charged to operations can be allocated to a loan classification either as a positive or negative value as a result of any material changes to: net charge-offs or recovery which influence the historical allocation percentage, qualitative risk factors or loan balances.

The following is an analysis of changes in the allowance for loan losses for the periods ended:

Three Months Ended

	(Amounts in thousands)
				Commercial		Residential			Consumer -			Consumer -
March 31, 2021	Commercial			real estate		real estate			home equity			other			Total
Balance at beginning of period	$	1,897		$	3,526	$	375		$	101		$	120		$	6,019
Loan charge-offs		0			0		0			0			(38	)		(38	)
Recoveries		0			0		0			1			38			39
Net loan recoveries (charge-offs)		0			0		0			1			0			1
Provision charged to operations		(322	)		343		(1	)		(2	)		(18	)		0
Balance at end of period	$	1,575		$	3,869	$	374		$	100		$	102		$	6,020

	(Amounts in thousands)
				Commercial		Residential		Consumer -			Consumer -
March 31, 2020	Commercial			real estate		real estate		home equity			other			Total
Balance at beginning of period	$	1,756		$	2,130	$	334	$	104		$	141		$	4,465
Loan charge-offs		(1	)		0		0		0			(36	)		(37	)
Recoveries		19			0		25		0			15			59
Net loan recoveries (charge-offs)		18			0		25		0			(21	)		22
Provision charged to operations		77			464		42		(1	)		18			600
Balance at end of period	$	1,851		$	2,594	$	401	$	103		$	138		$	5,087

In response to poor economic conditions relative to the Coronavirus pandemic throughout 2020, the Company granted numerous requests for modifications and deferrals from commercial borrowers. During that time, the Company increased the economic qualitative factors within the allowance for loan loss evaluation, and additional COVID-19 factors were applied to these loans after segmenting into industry classifications. As nearly all of the modifications are now in full payment status, the level of the allowance for loan losses is considered adequate without additional provision. The qualitative factors in the current period have resulted in migrating existing allowance excesses to the segments reflecting the higher risk levels, which is primarily the hotel industry included in Commercial Real Estate. The amount of net recoveries (charge-offs) also impacts the provision charged to operations for any category of loans. Charge-offs affect the historical rate applied to each category, and the amount needed to replenish the amount charged off. The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date.

The following tables present a full breakdown by portfolio classification of the allowance for loan losses and the recorded investment in loans at March 31, 2021 and December 31, 2020:

(Amounts in thousands)

Commercial

Residential

Consumer -

March 31, 2021

Commercial

real estate

home equity

other

Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

579

Collectively evaluated for impairment

996

3,869

374

100

102

5,441

Total ending allowance balance

1,575

3,869

374

100

102

6,020

Loan Portfolio:

Individually evaluated for impairment

4,524

2,794

7,318

Collectively evaluated for impairment

96,090

308,417

79,663

23,677

3,453

511,300

Total ending loans balance

100,614

311,211

79,663

23,677

3,453

518,618

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	(Amounts in thousands)
			Commercial		Residential		Consumer -		Consumer -
December 31, 2020	Commercial		real estate		real estate		home equity		other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	579	$	0	$	0	$	0	$	0	$	579
Collectively evaluated for impairment		1,318		3,526		375		101		120		5,440
Total ending allowance balance	$	1,897	$	3,526	$	375	$	101	$	120	$	6,019
Loan Portfolio:
Individually evaluated for impairment	$	4,584	$	2,428	$	0	$	0	$	0	$	7,012
Collectively evaluated for impairment		127,835		315,109		79,169		24,062		3,573		549,748
Total ending loans balance	$	132,419	$	317,537	$	79,169	$	24,062	$	3,573	$	556,760

The decrease in commercial loan balances from year-end was due in part to 60-day or less term commercial loans for a total of $24.1 million that closed in 2020 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2021. Also contributing to the decrease in commercial loan balances is the forgiveness of loans granted under the PPP during the first quarter of 2021.

The following tables represent credit exposures by internally assigned grades for March 31, 2021 and December 31, 2020. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor.

•

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which makes collection in full highly questionable and improbable, based on existing circumstances.

•

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table is a summary of credit quality indicators by internally assigned grades as of March 31, 2021 and December 31, 2020:

	(Amounts in thousands)
	Commercial		Commercial real estate
March 31, 2021
Pass	$	87,242	$	279,182
Special Mention		2,451		14,847
Substandard		10,921		17,182
Ending Balance	$	100,614	$	311,211

	(Amounts in thousands)
	Commercial		Commercial real estate
December 31, 2020
Pass	$	119,689	$	285,086
Special Mention		2,506		15,453
Substandard		10,224		16,998
Ending Balance	$	132,419	$	317,537

The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard. Nonaccrual loans in these categories are evaluated for charge off or charge down, and the remaining balance has the same allowance factor as pooled loans.

The following table is a summary of consumer credit exposure as of March 31, 2021 and December 31, 2020:

(Amounts in thousands)

Residential real estate

Consumer - home equity

Consumer - other

March 31, 2021

Performing

79,231

23,552

3,453

Nonperforming

432

125

Total

79,663

23,677

3,453

	(Amounts in thousands)
	Residential real estate		Consumer - home equity		Consumer - other
December 31, 2020
Performing	$	78,684	$	23,932	$	3,573
Nonperforming		485		130		0
Total	$	79,169	$	24,062	$	3,573

Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table is a summary of classes of loans on non-accrual status as of March 31, 2021 and December 31, 2020:

	(Amounts in thousands)
	March 31,		December 31,
	2021		2020
Commercial	$	889	$	889
Commercial real estate		802		404
Residential real estate		432		485
Consumer:
Consumer - home equity		125		130
Consumer - other		0		0
Total	$	2,248	$	1,908

Troubled Debt Restructuring

Nonperforming loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were 0 loans modified as TDR’s during the three month periods ended March 31, 2021 and 2020.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments as of December 31, 2019. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

As of March 31, 2021, we had 6 commercial loans aggregating $15.6 million, deferring principal and/or interest for periods ranging from 90 to 180 days. All of these loans were performing in accordance with their terms prior to modification, are currently performing, and are in conformance with the guidelines of the CARES Act. Since April 2020, 121 prior modifications aggregating $107 million have returned to full payment status. For further discussion, see Significant Developments Impact of COVID-19 section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following table is an aging analysis of the recorded investment of past due loans as of March 31, 2021 and December 31, 2020:

	(Amounts in thousands)
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days Or								90 Days and
	Past Due		Past Due		Greater		Total Past Due		Current		Total Loans		Accruing
March 31, 2021
Commercial	$	0	$	0	$	889	$	889	$	99,725	$	100,614	$	0
Commercial real estate		0		0		521		521		310,690		311,211		0
Residential real estate		45		0		393		438		79,225		79,663		0
Consumer:
Consumer - home equity		0		0		55		55		23,622		23,677		0
Consumer - other		6		0		0		6		3,447		3,453		0
Total	$	51	$	0	$	1,858	$	1,909	$	516,709	$	518,618	$	0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	(Amounts in thousands)
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days Or								90 Days and
	Past Due		Past Due		Greater		Total Past Due		Current		Total Loans		Accruing
December 31, 2020
Commercial	$	0	$	0	$	889	$	889	$	131,530	$	132,419	$	0
Commercial real estate		0		0		115		115		317,422		317,537		0
Residential real estate		0		33		398		431		78,738		79,169		0
Consumer:
Consumer - home equity		29		0		55		84		23,978		24,062		0
Consumer - other		9		0		0		9		3,564		3,573		0
Total	$	38	$	33	$	1,457	$	1,528	$	555,232	$	556,760	$	0

An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.

When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.

•

All borrowers whose loans are classified doubtful by examiners and internal loan review

•

All loans on non-accrual status

•

Any loan in foreclosure

•

Any loan with a specific allowance

•

Any loan determined to be collateral dependent for repayment

•

Loans classified as troubled debt restructuring

Commercial loans and commercial real estate loans evaluated for impairment are excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at March 31, 2021 and December 31, 2020. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three months ended March 31, 2021 and 2020.

(Amounts in thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

March 31, 2021

With no related allowance recorded:

Commercial

3,714

4,579

—

Commercial real estate

2,794

—

With an allowance recorded:

Commercial

810

579

Commercial real estate

Total:

Commercial

4,524

5,389

579

Commercial real estate

2,794

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2020
With no related allowance recorded:
Commercial	$	3,774	$	4,700	$	—
Commercial real estate		2,428		2,428		—
With an allowance recorded:
Commercial		810		810		579
Commercial real estate		0		0		0
Total:
Commercial	$	4,584	$	5,510	$	579
Commercial real estate	$	2,428	$	2,428	$	0

	(Amounts in thousands)
	Three Months Ended
	Average Recorded		Interest Income
	Investment		Recognized
March 31, 2021
With no related allowance recorded:
Commercial	$	3,734	$	36
Commercial real estate		2,536		35
With an allowance recorded:
Commercial		810		0
Commercial real estate		0		0
Total:
Commercial	$	4,544	$	36
Commercial real estate	$	2,536	$	35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	(Amounts in thousands)
	Three Months Ended
	Average Recorded		Interest Income
	Investment		Recognized
March 31, 2020
With no related allowance recorded:
Commercial	$	3,888	$	38
Commercial real estate		2,911		42
With an allowance recorded:
Commercial		927		0
Commercial real estate		0		0
Total:
Commercial	$	4,815	$	38
Commercial real estate	$	2,911	$	42

5.) Legal Proceedings:

The Company is involved in legal actions arising in the ordinary course of business. In the opinion of management, the outcomes from these matters, either individually or in the aggregate, are not expected to have any material effect on the Company.

6.) Earnings Per Share and Capital Transactions:

Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common outstanding stock, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price for the period. The common stock equivalents are comprised of unvested restricted share awards.

	Three Months Ended
	March 31,
	2021		2020
Net income (amounts in thousands)	$	2,766	$	1,371

Weighted average common shares outstanding		4,172,086		4,231,589
Net effect of dilutive common share equivalents		19,524		14,530
Adjusted average shares outstanding-dilutive		4,191,610		4,246,119

Basic earnings per share	$	0.66	$	0.32
Diluted earnings per share	$	0.66	$	0.32

7.) Subordinated Debt:

In July 2007, a trust formed by the Company issued $5.0 million of floating rate trust preferred securities as part of a pooled offering of such securities due December 2037. The Company owns all $155,000 of the common securities issued by the trust. The securities bear interest at the 3-month LIBOR rate plus 1.45%. The rates at March 31, 2021 and December 31, 2020 were 1.63% and 1.67%, respectively. The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The debentures represent the sole assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at par.

The trust is not consolidated with the Company’s financial statements. Accordingly, the Company does not report the securities issued by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. The subordinated debentures qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.) Commitments:

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. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance Sheets. The contract or notional amounts on 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.

The following table is a summary of such contractual commitments:

	(Amounts in thousands)
	March 31,		December 31,
	2021		2020
Commitments to extend credit:
Fixed rate	$	43,975	$	25,201
Variable rate		78,817		78,706
Standby letters of credit		1,570		3,870

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. Standby letters of credit are conditional commitments issued by the Company 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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. The increase in commitments is in line with the Company’s increased focus on commercial and industrial lending, and specifically construction loans requiring future draws.

The Company also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice.

The following table is a summary of overdraft protection for the periods indicated:

	(Amounts in thousands)
	March 31,			December 31,
	2021			2020
Overdraft protection available on depositors' accounts	$	7,891		$	8,010
Balance of overdrafts included in loans		37			137
Average daily balance of overdrafts		291			365
Average daily balance of overdrafts as a percentage of available		3.69	%		4.56	%

Customer Derivatives - Interest Rate Swaps/Floors – The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third party are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At March 31, 2021, based on the contract values, the Company had three U.S. Government-sponsored mortgage-backed securities pledged for collateral on its interest rate swaps with the third party financial institution at a fair value of $3.6 million. At December 31, 2020 based upon the swap contract values, the Company had four U.S. Government-sponsored mortgage-backed securities pledged for collateral on its interest rate swaps with a third-party financial institution with a fair value of $4.7 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Summary information regarding these derivatives is presented below:

	(Amounts in thousands)
	Notional Amount						Fair Value
	March 31,		December 31,				March 31,			December 31,
	2021		2020		Interest Rate Paid	Interest Rate Received	2021			2020
Customer interest rate swap
Maturing in 2025	$	4,067	$	4,167	1 Mo. Libor + Margin	Fixed	$	228		$	292
Maturing in 2026		1,660		1,694	1 Mo. Libor + Margin	Fixed		67			105
Maturing in 2027		12,801		12,918	1 Mo. Libor + Margin	Fixed		928			1,408
Maturing in 2028		4,946		5,953	1 Mo. Libor + Margin	Fixed		607			958
Maturing in 2029		3,590		3,627	1 Mo. Libor + Margin	Fixed		94			282
Maturing in 2030		0		17,602	1 Mo. Libor + Margin	Fixed		0			646
Maturing in 2032		2,467		2,509	1 Mo. Libor + Margin	Fixed		59			170
Maturing in 2033		1,089		1,095	1 Mo. Libor + Margin	Fixed		66			156
Third party interest rate swap
Maturing in 2030		19,597		0	Fixed	1 Mo. Libor + Margin		331			0
Total	$	50,217	$	49,565			$	2,380		$	4,017

Third party interest rate swap
Maturing in 2025	$	4,067	$	4,167	Fixed	1 Mo. Libor + Margin	$	(228	)	$	(292	)
Maturing in 2026		1,660		1,694	Fixed	1 Mo. Libor + Margin		(67	)		(105	)
Maturing in 2027		12,801		12,918	Fixed	1 Mo. Libor + Margin		(928	)		(1,408	)
Maturing in 2028		4,946		5,953	Fixed	1 Mo. Libor + Margin		(607	)		(958	)
Maturing in 2029		3,590		3,627	Fixed	1 Mo. Libor + Margin		(94	)		(282	)
Maturing in 2030		0		17,602	Fixed	1 Mo. Libor + Margin		0			(646	)
Maturing in 2032		2,467		2,509	Fixed	1 Mo. Libor + Margin		(59	)		(170	)
Maturing in 2033		1,089		1,095	Fixed	1 Mo. Libor + Margin		(66	)		(156	)
Customer interest rate swap
Maturing in 2030		19,597		0	1 Mo. Libor + Margin	Fixed		(331	)		0
Total	$	50,217	$	49,565			$	(2,380	)	$	(4,017	)

The following table presents the fair values of derivative instruments in the balance sheet:

	(Amounts in thousands)
	Assets			Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
March 31, 2021
Interest rate derivatives	Other assets	$	2,380	Other liabilities	$	2,380

December 31, 2020
Interest rate derivatives	Other assets	$	4,017	Other liabilities	$	4,017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9.) Fair Value of Assets and Liabilities:

Measurements

The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:

Level 1:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2:

Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation.

Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:

Investment securities available-for-sale– Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Loans held for sale – Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at fair value based on what the secondary markets have offered on best efforts commitments.

Interest rate derivatives – The fair value is based on settlement values adjusted for credit risks associated with the counter parties and the Company and observable market interest rate curves.

The following table presents the assets reported on the Consolidated Balance Sheets, on a recurring basis, at their fair value as of March 31, 2021 and December 31, 2020 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			(Amounts in thousands)
			Fair Value Measurements at March 31, 2021 Using
	March 31,
Description	2021		Level 1		Level 2		Level 3
ASSETS
Obligations of states and political subdivisions	$	93,233	$	0	$	93,233	$	0
U.S. Government-sponsored mortgage-backed securities		64,873		0		64,873		0
U.S. Government-sponsored collateralized mortgage obligations		4,070		0		4,070		0
U.S. Government-guaranteed small business administration pools		4,967		0		4,967		0
Loans held for sale		6,577		6,577		0		0
Interest rate derivatives		2,380		0		2,380		0

LIABILITIES
Interest rate derivatives	$	2,380	$	0	$	2,380	$	0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

			(Amounts in thousands)
			Fair Value Measurements at December 31, 2020 Using
	December 31,
Description	2020		Level 1		Level 2		Level 3
ASSETS
Obligations of states and political subdivisions	$	88,081	$	0	$	88,081	$	0
U.S. Government-sponsored mortgage-backed securities		69,596		0		69,596		0
U.S. Government-sponsored collateralized mortgage obligations		4,768		0		4,768		0
U.S. Government-guaranteed small business administration pools		5,430		0		5,430		0
Loans held for sale		6,876		6,876		0		0
Interest rate derivatives		4,017		0		4,017		0

LIABILITIES
Interest rate derivatives	$	4,017	$	0	$	4,017	$	0

The following table presents quantitative information about the Level 3 significant inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2021 and December 31, 2020.

	(Amounts in thousands)
	Fair value at March 31,		Valuation	Significant Unobservable
	2021		Technique	Input	Range of Inputs
Impaired loans	$	231	Appraisal of Collateral	Appraisal Adjustments		(76	)%
				Liquidation Expenses		(10	)%

	(Amounts in thousands)
	Fair value at December 31,		Valuation	Significant Unobservable
	2020		Technique	Input	Range of Inputs
Impaired loans	$	231	Appraisal of Collateral	Appraisal Adjustments		(76	)%
				Liquidation Expenses		(10	)%

Financial Instruments

The Company discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the 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 trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The carrying amounts and fair values of the Company’s financial instruments carried at amortized cost are as follows:

(Amounts in thousands)

March 31, 2021

Carrying

Amount

Level 1

Level 2

Level 3

Fair Value

ASSETS:

Cash and cash equivalents

47,277

Net loans

512,598

515,259

Bank-owned life insurance

21,279

Accrued interest receivable

2,370

LIABILITIES:

Demand, savings and money market deposits

596,031

Time deposits

84,280

85,188

Securities sold under agreements to repurchase

1,793

Federal Home Loan Bank advances - long term

10,000

10,208

Subordinated debt

5,155

5,149

Accrued interest payable

211

	(Amounts in thousands)
	December 31, 2020
	Carrying
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS:
Cash and cash equivalents	$	36,108	$	36,108	$	0	$	0	$	36,108
Net loans		550,741		0		0		553,949		553,949
Bank-owned life insurance		21,166		21,166		0		0		21,166
Accrued interest receivable		2,436		2,436		0		0		2,436

LIABILITIES:
Demand, savings and money market deposits	$	603,446	$	603,446	$	0	$	0	$	603,446
Time deposits		97,064		0		0		98,227		98,227
Securities sold under agreements to repurchase		1,488		1,488		0		0		1,488
Federal Home Loan Bank advances - short term		2,000		0		0		2,002		2,002
Federal Home Loan Bank advances - long term		16,000		0		0		16,326		16,326
Subordinated debt		5,155		0		0		4,938		4,938
Accrued interest payable		283		283		0		0		283

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.) Accumulated Other Comprehensive Income (Loss):

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three months ended March 31, 2021 and 2020:

	(Amounts in thousands)
	Three Months Ended
	March 31,
	2021						2020
	Unrealized						Unrealized
	gains						gains
	(losses) on			Change in			(losses) on		Change in
	available-			pension and			available-		pension and
	for-sale			postretirement			for-sale		postretirement
	securities (a)			obligations (a)			securities (a)		obligations (a)
Beginning balance	$	4,909		$	(42	)	$	1,107	$	61
Other comprehensive income (loss) before reclassification		(1,695	)		1			1,237		(4	)
Amount reclassified from accumulated other comprehensive income or loss		(56	)		0			0		0
Total other comprehensive income (loss)		(1,751	)		1			1,237		(4	)
Ending balance	$	3,158		$	(41	)	$	2,344	$	57

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

There following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.

	(Amounts in thousands)
	Three Months Ended
	March 31,
	2021			2020
	Amount			Amount
	reclassified			reclassified
	from			from		Affected line
	accumulated			accumulated		item in the
	other			other		Consolidated
	comprehensive			comprehensive		Statements
	income or loss (a)			income or loss (a)		of Income
Details about other comprehensive income or loss:
Unrealized gains (losses) on available-for-sale securities	$	71		$	—	Investment securities available-for-sale gains (losses), net
Tax effect		(15	)		0	Federal income tax expense
	$	56		$	0

11.) Post-Retirement Obligations:

The Company accrues for the monthly benefit expense of post-retirement cost of insurance for split dollar life insurance coverage. The following table presents the changes in the accumulated liability:

	(Amounts in thousands)
	Three Months Ended
	March 31,
	2021			2020
Beginning balance	$	911		$	745
Expense recorded		8			9
Other comprehensive (income) loss recorded		(1	)		4
Ending balance	$	918		$	758

12.) Stock Repurchase Program:

On December 17, 2019, the Company’s Board of Directors approved a new program which allows the Company to purchase up to 200,000 shares, or approximately 4.6% of the 4,323,822 outstanding shares of common stock at December 17, 2019. On March 17, 2020 the Company’s Board of Directors approved an increase in the number of shares authorized for repurchase under the December 17, 2019 plan by 100,000 shares bringing the total to 300,000 shares authorized. This program expired on December 31, 2020. The Company purchased 146,318 shares under this program in calendar 2020, all of which occurred in the three months ended March 31, 2020. On January 19, 2021, The Company's Board of Directors approved a new program which allows for the Company to repurchase up to 200,000 shares, or approximately 4.7% of the 4,223,153 outstanding shares of common stock at January 19, 2021. This program will expire on December 31, 2021. The Company purchased 9,724 shares in the three months ended March 31, 2021. Repurchased shares are designated as treasury shares, available for general corporate purposes, including possible use in connection with the Company’s dividend reinvestment program, employee benefit plans, acquisitions or other distributions. Based on the value of the Company’s stock on March 31, 2021, the remaining authorization to repurchase the stock for the program is approximately $4.2 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13.) Securities Sold Under Agreements to Repurchase:

The following table provides additional detail regarding repurchase agreements:

	(Amounts in thousands)
	Repurchase Agreements (Sweep)
	Accounted for as Secured Borrowings
	At March 31,		At December 31,
	2021		2020
	Remaining Contractual Maturity
	of the Agreements
	Overnight and		Overnight and
	Continuous		Continuous
Repurchase agreements:
U.S. Government-sponsored mortgage-backed securities	$	3,807	$	4,065
Total collateral carrying value	$	3,807	$	4,065
Total repurchase agreements	$	1,793	$	1,488

14.) Equity Compensation:

The Omnibus Equity Plan permits the award of up to 340,000 shares to the Company’s employees to promote the long-term financial success of the Company, increasing shareholder value by providing employees the opportunity to acquire an ownership interest in the Company and enabling the Company and its related entities to attract and retain the services of those upon whom the successful conduct of business depends. In the first three months of 2021, there were not any grants of stock awarded to employees under the plan, compared to 47,567 shares being granted under the plan in the first three months of 2020. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a prorated straight-line basis. In the first three months of 2021 and 2020, compensation expense of $82,000 and $129,000, respectively, was recorded in the Consolidated Statements of Income. As of March 31, 2021, there was $498,000 of total unrecognized compensation expense related to the non-vested shares granted under the Plan. Shares awarded under this plan can vest immediately and/or on the anniversary of the award date from one to three years out if the employee remains employed with Cortland Bancorp. The remaining cost is expected to be recognized over a weighted average period of 21.0 months.

Granted shares are awarded upon a combination of service and achievement of performance objectives derived from one or more of the performance criteria. The main performance metrics used for the periods presented were three-year earnings per share growth and three-year return on equity ranked versus a peer group.

The following is the activity under the Omnibus Equity Plan during the three months ended March 31, 2021:

				Weighted Average
				Grant Date Fair
	Shares			Value
Nonvested at January 1, 2021		51,456		$	16.29
Granted		0			0
Vested		(15,853	)		15.85
Forfeited		0			0
Nonvested at March 31, 2021		35,603		$	16.50

The Director Equity Plan permits the award of up to 113,000 shares to nonemployee directors to promote the long-term financial success of the Company, increasing shareholder value by enabling the Company and its related entities to attract and retain the services of those directors upon whom the successful conduct of business depends. There were not any awards of stock granted to the directors in the first three months of 2021, compared to 2,684 Board approved shares granted under the plan in the first three months of 2020. In the first three months of 2021, there was not any expense recorded in the Consolidated Statements of Income, compared to $43,000 of expense recorded in the first three months of 2020.

Note 15.) Risks and Uncertainties:

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Company's customers. The pandemic and its associated impacts on trade, travel, employee productivity, unemployment and consumer spending has resulted in less economic activity and volatility and disruption in the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on the Company's business, financial condition, and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory, and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees, and vendors. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees, and communities during this difficult time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)

	(Fully taxable equivalent basis in thousands of dollars)
	QUARTER-TO-DATE AS OF
	March 31, 2021							December 31, 2020							March 31, 2020
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest earning deposits	$	31,937	$	10		0.13	%	$	23,889	$	10		0.17	%	$	16,158	$	56		1.39	%
Investment securities (1) (2) (3)		161,695		916		2.27	%		167,133		972		2.33	%		134,969		927		2.81	%
Loans (1) (2) (3)		541,996		6,148		4.57	%		547,252		6,030		4.39	%		505,861		6,056		4.79	%
Total interest-earning assets		735,628	$	7,074		3.87	%		738,274	$	7,012		3.78	%		656,988	$	7,039		4.30	%
Cash and due from banks		7,853							7,458							7,551
Bank premises and equipment		11,623							11,820							11,612
Other assets		44,863							44,371							37,657
Total non-interest-earning assets		64,339							63,649							56,820
Total assets	$	799,967						$	801,923						$	713,808
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits	$	248,010	$	158		0.26	%	$	255,350	$	217		0.34	%	$	215,356	$	430		0.80	%
Savings		134,465		28		0.08	%		126,642		30		0.09	%		111,983		27		0.10	%
Time		91,244		288		1.28	%		98,618		400		1.61	%		133,912		639		1.91	%
Total interest-bearing deposits		473,719		474		0.41	%		480,610		647		0.53	%		461,251		1,096		0.95	%
Other borrowings		18,112		38		0.85	%		22,682		42		0.75	%		22,021		88		1.60	%
Subordinated debt		5,155		22		1.73	%		5,155		23		1.77	%		5,155		41		3.12	%
Total interest-bearing liabilities		496,986	$	534		0.44	%		508,447	$	712		0.56	%		488,427	$	1,225		1.01	%
Demand deposits		206,168							198,171							131,912
Other liabilities		15,217							16,572							13,876
Shareholders' equity		81,596							78,733							79,593
Total liabilities and shareholders' equity	$	799,967						$	801,923						$	713,808
Net interest income			$	6,540						$	6,300						$	5,814
Net interest rate spread (4)						3.43	%						3.22	%						3.29	%
Net interest margin (5)						3.58	%						3.40	%						3.56	%
Ratio of interest-earning assets to interest-bearing liabilities						1.48							1.45							1.35

(1)	Includes both taxable and tax-exempt loans and investment securities.

(2)

The amounts are presented on a fully taxable equivalent basis using the statutory rate of 21% in 2021 and 2020 and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax-exempt assets. The tax equivalent income adjustment for loans and investment securities was $3,000 and $139,000, respectively, for March 31, 2021, $3,000 and $136,000, respectively, for December 31, 2021; and $2,000 and $107,000, respectively, for March 31, 2020.

(3)

Average balance outstanding includes the average amount outstanding of all non-accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and includes both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average unearned income.

(4)	Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities.

(5)	Net interest margin is calculated by dividing net interest income by total interest-earning assets.

SELECTED FINANCIAL DATA FOR THE QUARTER ENDED

(In thousands of dollars, except for ratios and per share amounts)

	March 31,			December 31,			September 30,			June 30,			March 31,
Unaudited	2021			2020			2020			2020			2020
SUMMARY OF OPERATIONS
Total interest income	$	6,932		$	6,873		$	6,671		$	6,618		$	6,930
Total interest expense		(534	)		(712	)		(868	)		(1,004	)		(1,225	)
NET INTEREST INCOME (NII)		6,398			6,161			5,803			5,614			5,705
Provision for loan losses		—			—			(525	)		(450	)		(600	)
NII after loss provision		6,398			6,161			5,278			5,164			5,105
Investment securities gains		71			122			—			18			—
Mortgage banking gains		800			1,119			1,281			900			596
Other income		913			1,127			684			797			856
Total non-interest expense		(4,935	)		(5,195	)		(4,721	)		(4,578	)		(4,980	)
Income before tax expense		3,247			3,334			2,522			2,301			1,577
Federal income tax expense		481			536			360			369			206
Net income	$	2,766		$	2,798		$	2,162		$	1,932		$	1,371

PER COMMON SHARE DATA (1)
Earnings per share, basic and diluted	$	0.66		$	0.67		$	0.51		$	0.47		$	0.32
Book value		19.25			19.18			18.51			17.94			17.32
Cash dividends declared per share		0.19			0.14			0.14			0.14			0.19

BALANCE SHEET DATA
Assets	$	791,705		$	821,305		$	811,625		$	780,017		$	712,650
Investments		170,174			170,906			170,608			165,957			133,638
Loans		518,618			556,760			534,146			528,097			482,239
Allowance for loan losses		6,020			6,019			6,045			5,520			5,087
Deposits		680,311			700,510			680,640			648,417			593,256
Borrowings		16,948			24,643			37,243			39,483			30,830
Shareholders' equity		81,096			81,005			78,148			75,772			73,209

AVERAGE BALANCES
Assets	$	799,967		$	801,923		$	809,834		$	774,804		$	713,808
Investments		161,695			167,133			161,975			144,125			134,969
Loans		535,597			541,319			530,704			521,447			502,398
Deposits		679,887			678,781			677,948			648,287			593,163
Borrowings		23,267			27,837			37,842			34,878			27,176
Shareholders' equity		81,596			78,733			77,048			73,960			79,593

ASSET QUALITY RATIOS
Net (charge-offs) recoveries	$	1		$	(26	)	$	—		$	(17	)	$	22
Net (charge-offs) recoveries as a percentage of average total loans		—	%		(0.02	)%		—	%		(0.01	)%		0.02	%
Loans 30 days or more beyond their contractual due date as a percent of total loans		0.37	%		0.27	%		0.36	%		0.38	%		0.59	%
Nonperforming loans	$	7,876		$	7,628		$	7,746		$	7,918		$	8,230
Total nonperforming assets	$	7,876		$	7,628		$	7,746		$	7,918		$	8,230
Nonperforming assets as a percentage of:
Total assets		0.99	%		0.93	%		0.95	%		1.02	%		1.15	%
Equity plus allowance for loan losses		9.04			8.77			9.20			9.74			10.51
Tier I capital		9.49			9.40			9.82			10.26			10.86

FINANCIAL RATIOS
Return on average equity		13.56	%		14.22	%		11.22	%		10.45	%		6.89	%
Return on average assets		1.38			1.40			1.07			1.00			0.77
Efficiency ratio		59.80			60.79			59.72			61.62			68.54
Effective tax rate		14.81			16.08			14.27			16.04			13.06
Net interest margin		3.58			3.40			3.17			3.21			3.56

(1)

Basic earnings per common share are based on weighted average shares outstanding. Diluted earnings per share is after consideration of common stock equivalents. Cash dividends per common share are based on actual dividends declared. Book value per common share is based on shares outstanding at each period end.

Financial Review

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 quarterly report.

Note Regarding Forward-looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In addition to historical information, certain information included in this discussion and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may contain forward-looking statements that involve risks and uncertainties. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or similar terminology identify forward-looking statements. These statements reflect management’s beliefs and assumptions, and are based on information currently available to management.

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, including the impact of the impairment of securities; political actions, including failure of the United States Congress to raise the federal debt ceiling or the imposition of changes in the federal budget; changes in customer preferences and consumer behavior; 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; changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchase of mortgage loans sold and other estimates; and risks associated with other global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations, earnings and asset quality along with global political and financial factors.

While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

Significant Developments

Each item listed below materially affects the comparability of our results of operations for the three months ended March 31, 2021 and 2020, and our financial condition as of March 31, 2021 and December 31, 2020, and may affect the comparability of financial information we report in future fiscal periods.

Impact of COVID-19

The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2021, and can be expected to have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in Ohio, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In Ohio, the Governor ordered schools to close through the remainder of the school year and ordered many retail establishments to close and imposed limitations on gathering sizes through May 31, 2020. The Bank remained open during these orders because banks have been identified as essential services, but serving its customers through its drive-ups and Video Teller Machines and in all of its branch offices by appointment only. Beginning in June, the Governor began opening up business in various phases in order to improve economic conditions. At that time, the Bank opened six of its thirteen branches but continued to operate only drive-up services at the others. All branches closed their lobbies again in November 2020 as the virus peaked again. Reopening occurred on February 5, 2021.

Each state has experienced an increase in unemployment levels as a result of the curtailment of business activities, rising from an average of 4.1 percent in Ohio in January 2020 to an average of 17.6 percent in April 2020, according to the Bureau of Labor Statistics. The Ohio unemployment rate in March 2021 was down to 4.7%.

To date, many of the public health and economic effects of COVID-19 have been concentrated in large cities, such as New York City and Miami, but, as suspected, similar effects have occurred on a more delayed basis in smaller cities and communities, where our banking operations are primarily focused.

Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

•

The Federal Reserve decreased the range for the federal funds target rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a range of 0.0 – 0.25%.

•

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the paycheck protection program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning on April 27, 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.

•

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

	•	On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (MSNLF), and (2) the Main Street Expanded Loan Facility (MSELF). MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion.
	•	On January 11, 2021, the window opened for a second round of PPP loans, allotting $285 billion to small businesses. The Bank participated as a lender and had until March 31, 2021 to submit loans on behalf of its customers.

Effects on Our Business. We currently expect that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel industry will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to this industry and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.

Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:

•

We are actively working with loan customers to monitor loan modification terms. (See below)

•

We continue to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.

•

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities, which we are carrying out in a prudent and responsible manner. The Company approved 419 round one PPP loans totaling $56.3 million for small businesses. The Small Business Administration has forgiven $34.3 million of these loans as of March 31, 2021, with the remaining expected to be forgiven in the second quarter of 2021. During this first quarter of 2021, the Company approved $25 million to 227 small businesses in round two of the PPP loan program. Forgiveness of round two loans is not expected until late 2021 or early 2022.

•

No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely worked from home, but have now begun to phase in on-site. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols. We are also utilizing staggered shifts and/or work days to create more workspace in those operational areas conducive to that type of scheduling.

Loan Modifications. As of March 31, 2021, we had 6 commercial loans aggregating $15.6 million predominantly in the hotel industry, deferring principal and/or interest for periods ranging from 90 to 180 days. All of these loans were performing in accordance with their terms prior to modification, are currently performing, and are in conformance with the guidelines of the CARES Act. Since April 2020, 121 prior modifications aggregating $107 million have returned to full payment status.

The effect of these modifications was captured in the evaluation of the Allowance for Loan Losses. All of these loans are performing as of quarter end and through this reporting; however, the future performance, specifically beyond the term of the deferral, is uncertain. To recognize a credit allowance commensurate with the existing risk, the Company assigned qualitative factors onto each of the affected segmented balances for allowance purposes. Among the data used to assign qualitative factors were the stress tests performed on each of the five largest concentrations, the nature and length of the modifications, and observations of the overall COVID impact to the specific industry including:

•

Whether the business experienced closure or just a curtailment

•

Any impact of existing or potential government aid to the business/industry

•

The adaptability to alternative revenue production

•

Support of underlying collateral

These qualitative factors were based on current observations and could be materially different in future quarters. The longer the economy is operating in its current reduced capacity, the more severe the ultimate outcome is expected.

Liquidity and Capital Resources. As the stay-at-home orders played out in March 2020, the company began a liquidity preservation mode. With the growing pandemic and all of the uncertainty of its affect on the economy, availability of future liquidity came into question. In late March 2020 and early April 2020, the Company accessed several of its wholesale funding sources in the aggregate of $8 million to begin building liquidity for cautionary purposes. Also during this time period, the Federal Reserve announced the relaxation of the discount window standards, encouraging member banks to utilize this borrowing resource at any time. Additionally, the Federal Reserve created the Payroll Protection Program Liquidity Facility (“PPPLF”) designed to directly fund the PPP loans made available to small businesses, essentially availing funding to the Company. In addition to these federally sponsored programs, the State of Ohio also made funds available through various programs. The Company did not find it necessary to utilize these programs to any material degree due to the significant deposit growth experienced in 2020. There are no balances outstanding in any of the programs. As of quarter-end March 2021, the Company has availability to its unused wholesale capacity by policy of $168 million.

Analysis of Assets, Liabilities and Shareholders’ Equity

Due to the seasonality of the loan and deposit balances in the year-end balance sheet, a comparison of March 31, 2020 is included in the analysis of assets and liabilities, in addition to the usual comparison to December 31, 2020. The following table contains the loan and deposit balances referenced in the discussions:

	(Amounts in thousands)
	March 31,		December 31,		March 31,
	2021		2020		2020
Loans:
Commercial	$	100,614	$	132,419	$	71,969
Commercial real estate		311,211		317,537		299,098
Residential real estate		79,663		79,169		82,870
Consumer - home equity		23,677		24,062		24,779
Consumer - other		3,453		3,573		3,523
Total loans	$	518,618	$	556,760	$	482,239
Total earning assets	$	734,243	$	760,922	$	655,759
Total assets	$	791,705	$	821,305	$	712,650
Deposits:
Noninterest-bearing deposits	$	214,801	$	198,499	$	132,888
Interest-bearing demand deposits		381,230		404,947		324,273
Time deposits		84,280		97,064		136,095
Total deposits	$	680,311	$	700,510	$	593,256
Total interest bearing liabilities	$	482,458	$	526,654	$	491,198

Earning assets are comprised of deposits at financial institutions, including the Federal Reserve Bank, investment securities and loans. Earning assets were $734.2 million at March 31, 2021, a decrease of 3.5% from the December 31, 2020 balance of $760.9 million. The decrease from December 31, 2020 was mainly due to a decrease in loans of $38.1 million, a decrease of $732,000 in investment securities available-for-sale and an increase in interest-earning deposits of $12.5 million. Earning assets increased 12.0% from the March 31, 2020 balance of $655.8 million, which was due mainly to an increase in interest-earning deposits of $3.7 million, an increase in investment securities available-for-sale of $36.5 million, and an increase in loans of $36.4 million. Total assets of $791.7 million at March 31, 2021 decreased by $29.6 million, or 3.6%, from the asset total of $821.3 million at December 31, 2020, and increased $79.1 million, or 11.1%, from the asset total of $712.7 million at March 31, 2020. See below for further analysis of changes in loans.

At March 31, 2021, the investment securities available-for-sale portfolio was $167.1 million compared to $167.9 million at December 31, 2020, a decrease of $732,000, or less than 0.5%. Investment securities available-for-sale represented 22.8% of earning assets at March 31, 2021, compared to 22.1% at December 31, 2020. As the Company manages its balance sheet for loan growth, asset mix, liquidity and current interest rates and interest rate forecasts, the investment portfolio is a primary source of liquidity and therefore can reflect variation in balances accordingly. The investment securities available-for-sale portfolio represented 24.6% and 24.0% of each deposit dollar at March 31, 2021 and December 31, 2020, respectively.

The investment securities available-for-sale portfolio had net unrealized gains, net of tax, of $3.2 million at March 31, 2021 and net unrealized gains, net of tax of $4.9 million at December 31, 2020. The decrease in unrealized gains is reflective of the increase in certain interest rates during 2021 and its effect on securities valuation.

Loans held for sale decreased by $299,000 to $6.6 million at March 31, 2021 from $6.9 million at December 31, 2020, reflecting variation of the mortgage loan processing and origination activity.

Total loans at March 31, 2021 were $518.6 million compared to $556.8 million at December 31, 2020, a 6.9% decrease, and $482.2 million at March 31, 2020, a 7.5% increase. Year-end loan balances included 60-day or less term commercial loans totaling $24.1 million that closed in 2020 and were fully secured by segregated deposit accounts with the Bank, and matured in the first quarter of 2021. Excluding these seasonal loans at December 31, 2020, total loans actually decreased $14.0 million, or 2.6% through March 31, 2021. PPP loan originations offset the effect of PPP forgiveness. With falling interest rates, numerous commercial customers paid off loan balances to take advantage of capital markets. In the current and previous quarter, commercial loan payoffs totaled $12 million and $9.5 million, respectively. Additionally, efforts from the lending staff have shifted focus on servicing existing borrowers impacted by COVID-19 versus prospecting for new loans. Total gross loans as a percentage of earning assets stood at 70.6% as of March 31, 2021, 73.2% as of December 31, 2020, and 73.5% as of March 31, 2020. The total loan-to-deposit ratio was 76.2% at March 31, 2021, 79.5% at December 31, 2020 and 81.3% March 31, 2020.

The allowance for loan losses of $6.0 million at March 31, 2021 and December 31, 2020, and $5.1 million at March 31, 2020 represented approximately 1.16% of outstanding loans at March 31, 2021, 1.08% at December 31, 2020 and 1.05% at March 31, 2020. Excluding the fully guaranteed PPP loans, the allowance was 1.28% of loans at March 31, 2021. The elevated level of the allowance is a reflection of the effect of the COVID-19 pandemic on the borrowers of the Company. See Analysis of Provision for Loan Losses.

During the first three months, loan charge-offs were $38,000 in 2021 compared to $37,000 for the same period in 2020, while the recovery of previously charged-off loans amounted to $39,000 in 2021 and $59,000 in 2020. This resulted in net recoveries of $1,000 in 2021 and $22,000 in 2020, which represented 2 basis points. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-offs associated with account balances vary from period to period as loans are deemed uncollectible by management. Nonaccrual loans were $2.2 million at March 31, 2021 and March 31, 2020, $1.9 million at December 31, 2020, and $2.1 million at March 31, 2020 or 0.4%, 0.3% and 0.4%, respectively, of total loans.

Bank-owned life insurance had a cash surrender value of $21.3 million at March 31, 2021 and $21.2 million at December 31, 2020 Comprising approximately 23.9% and 24.3% of Tier 1 capital plus the allowance for loan losses for March 31, 2021 and December 31, 2020, respectively, management may consider additional insurance purchases not to exceed a 25% guideline.

Other assets decreased to $22.3 million at March 31, 2021 from $23.8 million at December 31, 2020. As of March 31, 2021, a $4.9 million investment in partnership funds is included in other assets compared to $5.1 million at December 31, 2020, with an offsetting $2.3 million at March 31, 2021 and December 31, 2020 in other liabilities, which is the commitment to fund these affordable housing investments. A partnership investment of $8.5 million and $8.3 million into a privately managed pooled fund of small business administration loans is included in other assets at March 31, 2021 and at December 31, 2020, respectively. Both of these investments are intended to satisfy Community Reinvestment Act requirements. Also included in other assets is $1.7 million in fair value of commercial loan swaps at March 31, 2021 and $4.0 million at December 31, 2020 with a equal amount in other liabilities.

Noninterest-bearing deposits measured $214.8 million at March 31, 2021 compared to $198.5 million at December 31, 2020 and $132.9 million at March 31, 2020. Much of the $16.3 million, or 8.2%, increase from year-end relates to government aid to our customers in the form of PPP loans to commercial customers and stimulus checks to consumers. Interest-bearing deposits decreased $36.5 million to $465.5 million at March 31, 2021 from $502.0 million at December 31, 2020 and increased $5.1 million from $460.4 million at March 31, 2020. The decrease in interest-bearing deposits from year end reflects segregated money market deposit accounts with the Bank which fully collateralized $24.1 million in 60-day or less term commercial loans that closed in 2020. The loans matured and the deposits withdrew in the first quarter of 2021. Absent the collateral deposits, interest-bearing deposits decreased $12.4 million, or 2.3%, during the first three months of 2021, most of which was wholesale deposits no longer needed.

Federal Home Loan Bank advances and short-term borrowings decreased by $7.7 million to $11.8 million at March 31, 2021 from $19.5 million at December 31, 2020, reflecting the Company's early payoff of $6 million. Management continues to use short-term borrowings to bridge its current cash flow needs resulting in variations from period to period. Wholesale deposits, when cheaper than FHLB funds, are sometimes used in lieu of borrowings. Other liabilities measured $13.4 million at March 31, 2021 and $15.1 million at December 31, 2020. Included is the operating lease liability, the commitment to fund the affordable housing investments and fair value of swaps described above.

The Company’s total shareholders’ equity measured $81.1 million at March 31, 2021 and $81.0 million on December 31, 2020. The Company’s capital continues to meet the requirements to be deemed well-capitalized under all regulatory measures.

Cash dividends of $0.19 per share were paid to shareholders in the first three months of 2021 and 2020 (including a special dividend of $.05 in both periods).

Capital Resources

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

The Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and were subject to a phase-in period through January 1, 2019, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve Board, along with the other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gives community banks, including the Company, the option to calculate a simple leverage ratio to measure capital adequacy, if the community banks meet certain requirements. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio (CBLR) framework if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopts tier 1 capital and the existing leverage ratio into the CBLR framework. The tier 1 numerator takes into account the modifications made in relation to the capital simplifications and current expected credit loss (CECL) methodology transitions rules as of the compliance dates of those rules. Qualifying institutions that elect to use the CBLR framework (each, a CBLR Bank) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well capitalized ratio requirements. Each CBLR Bank will not be required to calculate or report risk based capital. A CBLR Bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk based capital rule. The Company did not elect the option of using the CBLR framework to measure capital adequacy as of March 31, 2021.

At March 31, 2021 and December 31, 2020, actual capital levels and minimum required levels were:

(Dollars in thousands)

Minimum required

To be well-capitalized under

for capital adequacy

prompt corrective action

Actual

purposes

regulations

March 31, 2021

Amount

Ratio

Amount

Ratio

Amount

Ratio

CET1 capital (to risk-weighted assets)

Company

77,980

13.88

25,288

4.5

N/A

Bank

74,385

13.31

25,146

4.5

36,322

6.5

Tier 1 capital (to risk-weighted assets)

Company

82,980

14.77

33,717

6.0

N/A

Bank

74,385

13.31

33,528

6.0

44,704

8.0

Total capital (to risk-weighted assets)

Company

89,084

15.85

44,956

8.0

N/A

Bank

86,489

15.48

44,704

8.0

55,880

10.0

Tier 1 capital (to average assets)

Company

82,980

10.45

31,759

4.0

N/A

Bank

74,385

9.41

31,618

4.0

39,523

5.0

	(Dollars in thousands)
						Minimum required					To be well-capitalized under
						for capital adequacy					prompt corrective action
	Actual					purposes					regulations
December 31, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
CET1 capital (to risk-weighted assets)
Company	$	76,138		13.15	%	$	26,054		4.5	%		N/A		N/A
Bank		72,671		12.62	%		25,912		4.5	%	$	37,428		6.5	%
Tier 1 capital (to risk-weighted assets)
Company		81,138		14.01	%		34,739		6.0	%		N/A		N/A
Bank		72,671		12.62	%		34,549		6.0	%		46,065		8.0	%
Total capital (to risk-weighted assets)
Company		87,241		15.07	%		46,319		8.0	%		N/A		N/A
Bank		84,774		14.72	%		46,065		8.0	%		57,581		10.0	%
Tier 1 capital (to average assets)
Company		81,138		10.20	%		31,816		4.0	%		N/A		N/A
Bank		72,671		9.18	%		31,679		4.0	%		39,599		5.0	%

The Company had $5.0 million of trust preferred securities at both March 31, 2021 and December 31, 2020 that qualified as Tier 1 capital. Refer to Note 7, “Subordinated Debt.”

The Bank was categorized as "well capitalized" at March 31, 2021 and December 31, 2020.

Certain Non-GAAP Measures

Certain financial information can be determined by methods other than Generally Accepted Accounting Principles (GAAP). Specifically, certain financial measures are based on core earnings rather than net income. Core earnings exclude income, expense, gains and losses that either are not reflective of ongoing operations or that are not expected to reoccur with any regularity or reoccur with a high degree of uncertainty and volatility. Included in the volatile category is the loan loss provision and Federal income tax expense, while gains on Bank-owned life insurance are considered nonrecurring when such gains are present. Such information may be useful to both investors and management and can aid them in understanding the Company’s current performance trends and financial condition. Core earnings are a supplemental tool for analysis and not a substitute for GAAP net income. Reconciliation from GAAP net income to the non-GAAP measure of core earnings can be referenced as part of management’s discussion and analysis of financial condition and results of operations.

Core earnings of $3.2 million for the three months ended March 31, 2021 was 49.2% higher than the same period in 2020, and 2.6% lower on a linked quarter basis. Driving the results are the continuous improvement in net interest income, supplemented by the growing, but seasonal gains on mortgage loans sold. Full discussion of results follows.

	(Amounts in thousands)
	Three Months Ended
	March 31, 2021		March 31, 2020		December 31, 2020
GAAP net income	$	2,766	$	1,371	$	2,798
Provision for loan losses		—		600		—
Federal income tax expense		481		206		536
Pre-tax, pre-provision income	$	3,247	$	2,177	$	3,334

Analysis of Net Interest Income

	(Amounts in thousands)
	Three months ended
	March 31,
	2021		2020
Net interest income	$	6,398	$	5,705
Tax equivalent income adjustment for investment securities		139		107
Tax equivalent income adjustment for loans		3		2
Net interest income on a fully taxable equivalent basis	$	6,540	$	5,814
Interest and dividends on investment securities	$	777	$	820
Tax equivalent income adjustment for investment securities		139		107
Investment securities income on a fully taxable equivalent basis	$	916	$	927
Interest and fees on loans	$	6,145	$	6,054
Tax equivalent income adjustment for loans		3		2
Loan income on a fully taxable equivalent basis	$	6,148	$	6,056

Three Months Ended March 31, 2021 and 2020

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. On a fully taxable equivalent basis, net interest income measured $6.5 million for the quarter ended March 31, 2021 and $5.8 million for the quarter ended March 31, 2020. The resulting net interest margin was 3.58% for March 31, 2021 and 3.56% for March 31, 2020.

The increase in interest income, on a fully taxable equivalent basis, of $35,000 is the product of a 12.0% year-over-year increase in average earning assets and a 43 basis point decrease in yield. The decrease in interest expense of $691,000 was a product of a 57 basis point decrease in rates paid and a 1.8% increase in average interest-bearing liabilities. The net result was a 12.5% increase in net interest income on a fully taxable equivalent basis, and a 2 basis point increase in the Company’s net interest margin on an asset base that grew 12.0%.

On a fully taxable equivalent basis, income on investment securities decreased by $11,000, or 1.2%. The average invested balances in these securities increased by $26.7 million, or 19.8%, from the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 54 basis point decrease in the tax equivalent yield of the portfolio. The increase in balances is a result of investing excess liquidity relating to growing deposit balances from pandemic-related aid. These investment purchases were made in a lower interest rate environment, driving down the composite yield, but providing income on otherwise sterile funds. The Company will continue attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when beneficial.

On a fully taxable equivalent basis, income on loans increased by $92,000, or 1.5%, for the March 31, 2021 period compared to the same period in 2020. A $36.1 million increase in the average balance of the loan portfolio, or 7.1%, was accompanied by a 22 basis point decrease in the portfolio’s tax equivalent yield. The three rate decreases in the latter half of 2019 by the Federal Open Market Committee (FOMC) aggregating to 75 basis points, in addition to the two rate reductions in the first quarter of 2020 for another 150 basis points has steadily pulled the offering rates of new loan production downward. Strong competition for good credits has also applied downward pressure on offering rates. The commercial loan portfolio housed the majority of the net increase in balances mainly consisting of PPP loans.

Other interest income decreased by $46,000, or 82.1%, from the same period a year ago. The average balance of interest-earning deposits increased by $15.8 million, or 97.7%. The yield decreased by 126 basis points from 2020 to 2021, reflecting the aggregate net decreases in the federal funds rate. Management intends to remain fully invested, minimizing on-balance sheet liquidity, but mindful of the possible reversal of recent deposit growth.

Average interest-bearing demand deposits and money market accounts increased by $32.7 million, or 15.2%, for the quarter ended March 31, 2021 compared to the same period of 2020, while average savings balances increased by $22.5 million, or 20.1%. The average rate paid on interest-bearing demand deposits and money market accounts decreased 54 basis points from 2020 to 2021 to 0.26%, reflecting the expiration of promotional specials offered during 2019 and 2020. The average rate paid on savings accounts was 0.08% and 0.10% for the quarters ended March 31, 2021 and 2020. The average balance of time deposit products decreased by $42.7 million, or 31.9%, as the average rate paid decreased by 63 basis points, from 1.91% to 1.28%. The current low-rate environment offers little opportunity for time deposit customers, resulting in a shift into demand accounts. Time deposits also include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts. Brokered deposits are one of several borrowing sources, primarily used when rates therein are beneficial versus other sources. Due to higher customer deposits, brokered and other wholesale sources have been paid down.

Average borrowings and subordinated debt decreased by $3.9 million or 14.4% while the average rate paid decreased by 85 basis points. As higher cost borrowings matured, the borrowings that remained were at lower rates, and the new borrowings were obtained at lower rates as well . Management continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives. In the current low rate environment, wholesale and borrowing rates can reprice lower, while deposit rates may show modest decline. In October 2020, the Company utilized a portion of its excess liquidity to pay off $8 million of advances from the FHLB and in March 2021 the Company again paid off $6 million in advances to utilize a portion of its excess liquidity. The average rate on the advances paid off in October 2020 was 2.62%, and 0.78% in March 2021, both of which resulted in a reduction in the average cost of borrowings prospectively.

Analysis of Provision for Loan Losses, Non-Interest Income, Non-Interest Expense and Federal Income Tax - Three Months Ended March 31, 2021 and March 31, 2020

During the first three months of both 2021 and 2020, the amount charged to operations as a provision for loan losses was adjusted to account for charge-offs against the allowance, as well as changes in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company had allocated a portion of the allowance for a select few specific problem loans in 2021 and 2020, and has not experienced significant deterioration in any loan type other than the hotel industry, including the residential real estate portfolios or the commercial loan portfolio, and accordingly has not added any special provision for these loan types. All other past due loans, potential problem loans, as well as loans on non-accrual have all been stable. Over one-third of the hotel portfolio is currently deferring principle and/or interest payments under COVID-19 modifications. During 2020, the Company classified two of these credits totaling $9.4 million as substandard. With loan to values averaging 44%, the loans are not considered impaired, but have been allocated qualitative factors commensurate with the associated risk. There was no provision for loan losses for the three months ended March 31, 2021, compared to a $600,000 provision for loan losses for the three months ended March 31, 2020. The decreased provision for the three months ended March 31, 2021, compared to the same time period in 2020, was due to the majority of COVID-related loan modifications returning to full payment status. Allocated reserves to these loans were essentially freed up for reallocation to segments still subject to risk uncertainty, specifically the hotel industry. We believe the provision for loan losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline and loan defaults could increase as a result of the unknown ongoing impact of the COVID-19 pandemic.

Total non-interest income increased by $332,000, or 22.9%, for the three months ended March 31, 2021 compared to March 31, 2020.

For the first three months of 2021, fees for customer services decreased by $35,000, or 6.5%, from the same period a year ago, driven by fewer customer fee-driven transactions on deposit accounts. Mortgage banking gains increased by $204,000 in 2021 compared to 2020, reflective of the increase in refinances of existing loans resulting from the decline in interest rates. Earnings on bank-owned life insurance increased by $20,000. Other sources of non-interest income increased by $143,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items.

Total non-interest expenses in the first three months were $4.9 million in 2021 compared to $5.0 million in 2020, a decrease of $45,000 or 0.9%. During the first three months of 2021, expenditures for salaries and employee benefits increased by $78,000, or 2.8%, from the similar period a year ago, reflecting annual merit increases.

Occupancy and equipment decreased by $40,000, reflecting the partial closure of branches due to the pandemic. Professional fees decreased by $84,000. All other expense categories varied by $1,000 or less than 0.1%, in the aggregate.

The effective tax rate for the first three months was 14.8% in 2021 and 13.1% in 2020, resulting in income tax expense of $481,000 in 2021 and $206,000 in 2020. The effective rate is affected by the current rate of profitability and tax-free components of the revenue stream.

The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate (21%) to pre-tax income as a result of the following differences:

	(Amounts in thousands)
	March 31,
	2021						2020
	Balance			%			Balance			%
Provision at statutory rate	$	682			21.0		$	331			21.0
Add (Deduct) tax effects of:
Earnings on bank-owned life insurance-net		(42	)		(1.3	)		(16	)		(1.0	)
Non-taxable interest income		(119	)		(3.7	)		(98	)		(6.2	)
Low income housing tax credits		(52	)		(1.6	)		(35	)		(2.2	)
Non-deductible expenses		12			0.4			24			1.5
Federal income tax expense	$	481			14.8		$	206			13.1

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.

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The objective of liquidity management is to ensure the Company has the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. The Company maintains strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, proper management of capital markets funding sources and addressing unexpected liquidity requirements.

Principal sources of liquidity available to the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold and, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities.

Principal repayments on mortgage-backed securities, collateralized mortgage obligations and small business administration pools, along with investment securities maturing or called amounted to $5.9 million in the first three months of 2021, which annualized represents 13.9% of the total combined portfolio, compared to $6.7 million, or 19.6%, of the portfolio a year ago. The current low interest rate environment generally increases prepayment speeds on mortgage-backed securities. A large portion of the investment portfolio is allocated to amortizing debt in order to provide cash flows to supplement loan growth.

In order to address the concern of FDIC insurance of larger depositors, the Bank is a member of the IntraFi Network, formerly known as Promontory Interfinancial Network which offered Certificate of Deposit Account Registry Service (CDARS ^®) program and the Insured Cash Sweep (ICS) program. The CDARS ^®product is now rebranded as IntraFi Funding and the ICS program is now renamed IntraFi Network Deposits. Through IntraFi Funding the Bank’s customers can increase their FDIC insurance by up to $50 million through reciprocal certificate of deposit accounts and likewise through IntraFi Network Deposits, they can accomplish the same through money market savings accounts. This is accomplished by the Bank entering into reciprocal depository relationships with other member banks. The individual customer’s large deposit is broken into amounts below $250,000 and placed with other banks that are members of the network. The reciprocal member bank issues certificates of deposit or money market savings accounts in amounts that ensure that the entire deposit is eligible for FDIC insurance. The Bank can also execute “one-way buy” transactions wherein deposits are taken in on a non-reciprocal basis through a weekly bidding process. At March 31, 2021, the Bank had $6.5 million of deposits in the IntraFi Funding program, of which none was executed as one-way buy transactions and the Bank had $14.9 million of deposits in the IntraFi Network Deposit money market program, of which none was executed as one-way buy transactions. Prospectively, for regulatory purposes, reciprocal IntraFi products are no longer considered a brokered deposit.

Along with its liquid assets, the Bank 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, correspondent bank lines of credit and access to the Federal Reserve Discount Window. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides its largest source of liquidity. At March 31, 2021, the Bank had approximately $27.3 million available of collateral-based borrowing capacity at FHLB of Cincinnati, supplementing the $3.7 million of availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a $38.8 million cash management line, of which nothing has been disbursed, subject to posting additional collateral. The Bank, by policy, has access to approximately 25% of total deposits in various forms of wholesale deposits that could be used as an additional source of liquidity. At March 31, 2021, there was $3.0 million in outstanding balances in wholesale deposits including internet-based deposits, with access to an additional $167.0 million. The Company was also granted a total of $13.5 million in unsecured, discretionary Federal Funds lines of credit with correspondent banks with no funds drawn upon as of March 31, 2021. Unpledged securities of $99.0 million are also available for borrowing under repurchase agreements or as additional collateral for FHLB lines of credit or to sell to generate liquidity.

At the outset of the Pandemic, in response to the uncertainty surrounding the stay-at-home orders, business closures, and the potential negative effects to the economy, the Bank opted to begin increasing on-balance sheet liquidity in the event funds may be unavailable in the future. Simultaneously, in response to the COVID-19 pandemic, governmental agencies took several measures to avail liquidity to the banking industry. Among the key provisions are the following:

Federal Reserve Bank Actions

•

Lowered the primary borrowing rate through the discount window by 150 basis points to 0.25% to enhance the role of the discount window for banks facing potential funding pressures.

•

Encouraged banks to utilize intraday credit extended by Reserve Banks on both a collateralized and uncollateralized basis.

•

Supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions.

•

Reduced the reserve requirement ratios to 0.0% effective March 26, 2020.

•

Established the Paycheck Protection Program Liquidity Facility (PPPLF) to extend credit to eligible financial institutions that originate Small Business PPP loans, taking the loans as collateral at face value; established the rate at 0.35%.

In addition to the Federal Reserve Bank’s actions, the FHLB offered interest free six-month advances for COVID-19 related liquidity needs, with normal collateral posted up to $5 million per institution. The Treasurer of the State of Ohio offered to open interest-bearing deposit accounts in Ohio banks at a rate of .02% (currently), fully collateralized up to a six-month term. The Company qualified for $17 million and entered into the six month program in July 2020 with the the six month term expiring in January 2021. The Company experienced significant deposit growth during the pandemic, which minimized usage of these government-sponsored programs.

Based upon the accommodations described above, the Bank has substantial liquidity available, over and above normal channels, to address any future needs emanating from the current pandemic.

The Company has other more limited sources of liquidity. In addition to its existing liquid assets, it can raise funds in the securities market through debt or equity offerings or it can receive dividends from its bank subsidiary. Generally, the Bank may pay dividends without prior approval as long as the dividend is not more than the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, as long as the Bank remains well-capitalized after the dividend payment. The amount available for dividends at March 31, 2021 is $9.5 million. Future dividend payments by the Bank to the Company are based upon future earnings. The Holding Company had cash of $316,000 at March 31, 2021 available to meet cash needs. It also held a $6.0 million note receivable, the cash flow from which approximates the debt service on the Junior Subordinated Debentures. Cash is generally used by the Holding Company to pay quarterly interest payments on the debentures, pay dividends to common shareholders, repurchase shares, and to fund operating expenses.

Cash and cash equivalents totaled $47.3 million at March 31, 2021 compared to $43.1 million at March 31, 2020 and $36.1 million at December 31, 2020 The Company strives to be fully invested, minimizing on balance sheet liquidity, however, higher liquidity levels have been maintained during the Pandemic as a precautionary measure.

The following table details the cash flow from operating activities for the three months ended:

	(Amounts in thousands)
	March 31,
	2021			2020
Net income	$	2,766		$	1,371
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation, amortization and accretion		814			595
Provision for loan losses		—			600
Investment securities available-for-sale (gains) losses, net		(71	)		—
Originations of mortgage banking loans held for sale		(28,221	)		(15,721	)
Proceeds from the sale of mortgage banking loans		29,320			16,496
Mortgage banking gains, net		(800	)		(596	)
Earnings on bank-owned life insurance		(113	)		(93	)
Equity compensation		82			172
Changes in:
Deferred taxes		(174	)		(115	)
Other assets and liabilities		343			(553	)
Net cash flow from operating activities	$	3,946		$	2,156

Key variations stem from: 1) In the three months ended March 31, 2021 net income was $1.4 million higher than the same period in 2020 driven by lower provision for loan losses and higher mortgage banking gains. 2) Mortgage banking activity increased substantially due to historic low interest rates. 3) Equity compensation decreased primarily due to variation in vesting periods. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for 2021 and 2020.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operation are based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Certain accounting policies involve significant judgments and assumptions by management which has a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Management has discussed the development and selection of these accounting estimates with the Audit Committee.

Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

Accounting for the Allowance for Loan Losses

The determination of the allowance for loan losses and the resulting amount of the provision for loan losses charged to operations reflects management’s current judgment about the credit quality of the loan portfolio and takes into consideration changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio and, in the terms of loans, changes in the experience, ability and depth of lending management, changes in the volume and severity of past due, non-accrual and adversely classified or graded loans, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of competition, legal and regulatory requirements and other external factors. The nature of the process by which we determine the appropriate allowance for loan losses requires the exercise of considerable judgment. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance is increased by the provision for loan losses and decreased by charge-offs when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies or defaults and a higher level of non-performing assets, net charge offs, and provision for loan losses in future periods.

The Company’s allowance for loan losses methodology consists of three elements: specific valuation allowances based on probable losses on specific loans; valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends; and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company. These elements support the basis for determining allocations between the various loan categories and the overall adequacy of our allowance to provide for probable losses inherent in the loan portfolio.

With these methodologies, a general allowance is established for each loan type based on historical losses for each loan type in the portfolio. Additionally, management allocates a specific allowance for “Impaired Credits,” which is based on current information and events; it is probable the Company will not collect all amounts due according to the original contractual terms of the loan agreement. The level of the general allowance is established to provide coverage for management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the specific allowance. Additional information regarding allowance for credit losses can be found in the Notes to the Consolidated Financial Statements (Note 4) and elsewhere in this Management’s Discussion and Analysis.

Investment Securities and Impairment

The classification and accounting for investment securities is discussed in detail in Note 3 of the Consolidated Financial Statements. Investment securities must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s intentions, if any, with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities, if any, flow directly through earnings during the periods in which they arise, whereas available-for-sale securities are recorded as a separate component of shareholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources. At each reporting date, the Company assesses whether there is an “other-than-temporary” impairment to the Company’s investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income (loss).

The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities are recognized in accordance with FASB ASC topic 320, Investments – Debt and Equity Securities. The purpose of this ASC is to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to communicate more effectively when an OTTI event has occurred. This ASC amends the OTTI guidance in GAAP for debt securities, improves the presentation and disclosure of OTTI on investment securities and changes the calculation of the OTTI recognized in earnings in the financial statements. This ASC does not amend existing recognition and measurement guidance related to OTTI of equity securities.

For debt securities, ASC topic 320 requires an entity to assess whether it has the intent to sell the debt security or it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.

In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation and amount of the OTTI recognized in the income statement.

In these instances, the impairment is separated into the amount of the total impairment related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income (loss). The total OTTI is presented in the income statement with an offset for the amount of the total OTTI that is recognized in other comprehensive income (loss). In determining the amount of impairment related to credit loss, the Company uses a third party discounted cash flow model, several inputs for which require estimation and judgment. Among these inputs are projected deferral and default rates and estimated recovery rates. Realization of events different than that projected could result in a large variance in the values of the securities.

Income Taxes

The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position.

The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The Company conducts periodic assessments of deferred tax assets, including net operating loss carryforwards, to determine if it is more-likely-than-not that they will be realized. In making these assessments, the Company considers taxable income in prior periods, projected future taxable income, potential tax planning strategies and projected future reversals of deferred tax items. These assessments involve a certain degree of subjectivity which may change significantly depending on the related circumstances.

Available Information

The Company files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 Amended (the Exchange Act). The Company’s website is www.cortlandbank.com. The Company makes available through its website, free of charge, the reports filed with the SEC, as soon as reasonably practicable after such material is electronically filed, or furnished to, the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The public may read and copy any materials filed with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Company’s Form 10-K for the year ended December 31, 2020.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. With the supervision and participation by management, including the Company’s principal executive officer and principal financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) has been evaluated as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures were effective.

Changes in Internal Control Over Financial Reporting. Our Chief Executive Officer and Chief Financial Officer have concluded that there have been no significant changes during the period covered by this report in the Company’s internal control over financial reporting (as defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

See Note (5) of the financial statements.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—Not applicable

Company’s Common Stock.

The following table shows information relating to the repurchase of shares of the Company’s common stock during the quarter ended March 31, 2021.

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs*

January

—

200,000

February

1,128

19.81

1,128

198,872

March

8,596

21.21

8,596

190,276

Total

9,724

21.05

9,724

190,276

*	On January 19, 2021, the Company’s Board of Directors approved a new program which allows the Company to purchase up to 200,000 shares, or approximately 4.7% of the 4,223,153 outstanding shares of common stock at January 19, 2021. This program will expire on December 31, 2021.

Item 3. Defaults upon Senior Securities—Not applicable

Item 4. Mine Safety Disclosures—Not applicable

Item 5. Other Information—Not applicable

CORTLAND BANCORP AND SUBSIDIARIES

INDEX TO EXHIBITS

Item 6. Exhibits—The following exhibits are filed or incorporated by reference as part of this report:

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form**	Exhibit	Filing Date	Filed Herewith

3.1	Restated Amended Articles of Cortland Bancorp reflecting amendment dated June 25, 1999. Note: filed for purposes of SEC reporting compliance only. This restated document has not been filed with the State of Ohio.	10-K(1)	3.1	03/16/06

3.2	Code of Regulations, as amended.	8-K	3.2	05/30/17

4.1	The rights of holders of equity securities are defined in portions of the Articles of Incorporation as referenced in Exhibit 3.1	10-K(1)	4.1	03/16/06

	and the Code of Regulations as referenced in Exhibit 3.2	8-K	4.1	05/30/17

4.2	Agreement to furnish instruments and agreements defining rights of holders of long-term debt				✓

*10.1	Group Term Carve Out Plan dated February 23, 2001, by The Cortland Savings and Banking Company with each executive officer other than Rodger W. Platt and with selected other officers, as amended by the August 2002 letter amendment	10-K(1)	10.1	03/16/06

*10.1.1	Amendment of Group Term Carve Out Plan, dated October 28, 2014	8-K	10.1.1	11/03/14

10.2	[Reserved]

10.3	[Reserved]

*10.4	Amended Director Retirement Agreement between Cortland Bancorp and David C. Cole, dated as of December 18, 2007	10-K	10.4	03/17/08

10.5	[Reserved]

10.6	[Reserved]

*10.7	Amended Director Retirement Agreement between Cortland Bancorp and James E. Hoffman III, dated as of December 18, 2007	10-K	10.7	03/17/08

*10.8	Amended Director Retirement Agreement between Cortland Bancorp and Neil J. Kaback, dated as of December 18, 2007	10-K	10.8	03/17/08

10.9	[Reserved]

*10.10	Amended Director Retirement Agreement between Cortland Bancorp and Richard B. Thompson, dated as of December 18, 2007	10-K	10.10	03/17/08

*10.11	Amended Director Retirement Agreement between Cortland Bancorp and Timothy K. Woofter, dated as of December 18, 2007	10-K	10.11	03/17/08

*10.12	Form of Split Dollar Agreement entered into by Cortland Bancorp and each of Directors David C. Cole, James E. Hoffman III, and Timothy K. Woofter as of February 23, 2001, as of March 1, 2004, with Director Neil J. Kaback, and as of October 1, 2001, with Director Richard B. Thompson;	10-K(1)	10.12	03/16/06

	as amended on December 26, 2006, for Directors Cole, Hoffman, Thompson, and Woofter;	10-K	10.12	03/15/07

*10.13	Director’s Retirement Agreement between Cortland Bancorp and Director Joseph E. Koch, dated as of April 19, 2011	8-K	10.13	04/22/11

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form**	Exhibit	Filing Date	Filed Herewith

*10.14	Split Dollar Agreement and Endorsement between Cortland Bancorp and Director Joseph E. Koch, dated as of April 19, 2011	8-K	10.14	04/22/11

*10.15	Form of Indemnification Agreement entered into by Cortland Bancorp with each of its directors	10-K(1)	10.15	03/16/06

*10.16	Endorsement Split Dollar Agreement between The Cortland Savings and Banking Company and David J. Lucido, dated as of March 27, 2012	10-K	10.16	03/29/12

*10.17	Eighth Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Timothy Carney, dated as of December 28, 2018	8-K	10.17	12/28/18

*10.18	Third Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of December 3, 2008	8-K	10.18	12/12/08

*10.19	Eighth Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and James M. Gasior, dated as of December 28, 2018	8-K	10.19	12/28/18

10.20	[Reserved]

10.21	[Reserved]

10.22	[Reserved]

*10.23	Second Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and David J. Lucido, dated as of December 28, 2018	8-K	10.23	12/28/18

*10.24	Fifth Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Timothy Carney, dated as of December 28, 2018	8-K	10.24	12/28/18

*10.25	Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Stanley P. Feret, dated as of December 28, 2018	8-K	10.25	12/28/18

*10.26	Fifth Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and James M. Gasior, dated as of December 28, 2018	8-K	10.26	12/28/18

10.27	[Reserved]

10.28	[Reserved]

10.29	[Reserved]

*10.30	Endorsement Split Dollar Agreement between The Cortland Savings and Banking Company and Stanley P. Feret, dated as of July 23, 2013	10-Q	10.30	08/13/13

*10.31.1	Severance Agreement between Cortland Bancorp and Tim Carney, dated as of September 28, 2012, as amended November 24, 2015	10-K	10.31.1	12/01/15

*10.31.2	Severance Agreement between Cortland Bancorp and James Gasior, dated as of September 28, 2012, as amended November 24, 2015	8-K	10.31.2	12/01/15

*10.31.3	Amended Severance Agreement between Cortland Bancorp and David J. Lucido, dated as of December 28, 2018	8-K	10.31.3	12/28/18

10.32	[Reserved]

10.33	[Reserved]

Incorporated by Reference

Exhibit No.

Exhibit Description

Form**

Exhibit

Filing Date

Filed
Herewith

*10.34

Amended Severance Agreement between Cortland Bancorp and Stanley P. Feret, dated as of December 28, 2018

8-K

10.34

12/28/18

*10.35

Annual Incentive Plan for Executive Officers

8-K

10.35

09/18/20

*10.36

2015 Omnibus Equity Plan

10-Q

10.36

08/11/15

*10.36.1

Form of incentive stock option award under the 2015 Omnibus Equity Plan

10-Q

10.36.1

08/11/15

*10.36.2

Form of nonqualified stock option award under the 2015 Omnibus Equity Plan

10-Q

10.36.2

08/11/15

*10.36.3

Form of restricted stock award under the 2015 Omnibus Equity Plan

8-K

10.36.3

03/19/20

*10.36.4

Form of restricted stock award under the 2015 Omnibus Equity Plan

8-K

10.36.4

03/23/20

*10.37

2015 Director Equity Plan

10-Q

10.37

08/11/15

*10.37.1

Form of nonqualified stock option award under the 2015 Director Equity Plan

10-Q

10.37.1

08/11/15

*10.37.2

2015 Director Equity Plan Restricted Stock Award Agreement

10-Q

10.37.2

08/11/15

Statement of re-computation of per share earnings

See Note 6

of Financial

Statements

31.1

Certification of the Chief Executive Officer under Rule 13a-14(a)

✓

31.2

Certification of Chief Financial Officer under Rule 13a-14(a)

✓

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer required under section 906 of the Sarbanes-Oxley Act of 2002

✓

101

The following materials from Cortland Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail (included with this filing)

✓

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

✓

(1)

Film number 06691632

*	Management contract or compensatory plan or arrangement

**	SEC File No. 000-13814 through March 2019, SEC File No. 001-38827 thereafter.

CORTLAND BANCORP AND SUBSIDIARIES

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)

/s/ James M. Gasior

Date: May 13, 2021

James M. Gasior

President and

Chief Executive Officer

(Principal Executive Officer)

/s/ David J. Lucido

Date: May 13, 2021

David J. Lucido

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

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Cortland Bancorp (CLDB) 10-Q2021 Q1 Quarterly report

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