1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
------------------
Commission file number 0-13814
-------
Cortland Bancorp
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1451118
- ------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
194 West Main Street, Cortland, Ohio 44410
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(330) 637-8040
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X NO
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1996
----- -----------------------------
Common Stock, No Par Value 1,039,784 Shares
- -------------------------- ----------------
2
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - March 31,
1996 and December 31, 1995 2
Consolidated Statements of Income - Three
months ended March 31, 1996 and 1995 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements -
March 31, 1996 5 - 12
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 13 - 17
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings 18
- ------- -----------------
Item 2. Changes in Securities 18
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 18
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 18
- ------- ---------------------------------------------------
Item 5. Other Information 18
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 18-19
- ------- --------------------------------
Signatures 20
- ----------
1
3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except per share data)
MARCH 31, DECEMBER 31,
1996 1995
---------- ----------
ASSETS
Cash and due from banks $9,678 $12,439
Investment securities available for sale (Note 3) 116,765 117,689
Investment securities held to maturity (approximate market
value of $71,893 in 1996 and $64,873 in 1995) (Note 3) 72,488 64,021
Total loans (Note 4) 158,077 156,208
Less allowance for loan losses (Note 4) (2,970) (3,011)
---------- ----------
Net loans 155,107 153,197
---------- ----------
Premises and equipment 6,385 6,537
Other assets 5,554 4,849
---------- ----------
Total assets $365,977 $358,732
========== ==========
LIABILITIES
Noninterest-bearing deposits $35,913 $39,255
Interest-bearing deposits 280,718 276,674
---------- ----------
Total deposits 316,631 315,929
Short term borrowings under one year 4,338 3,191
Other borrowings over one year 10,026 5,026
Other liabilities 1,494 1,970
---------- ----------
Total liabilities 332,489 326,116
---------- ----------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,039,163 shares
in 1996 and 1,026,707 in 1995 5,196 5,134
Additional paid-in capital 9,491 9,171
Retained earnings 18,696 17,693
Net unrealized gain on available for sale
debt securities and marketable equity securities 108 643
Treasury stock, at cost, 153 shares in 1996 and 854 in 1995 (3) (25)
---------- ----------
Total shareholders' equity 33,488 32,616
---------- ----------
Total liabilities and shareholders' equity $365,977 $358,732
========== ==========
See accompanying notes to consolidated financial statement
of Cortland Bancorp and Subsidiaries
2
4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except for per share data)
THREE
MONTHS ENDED
MARCH 31,
-------------------------------
1996 1995
-------- --------
INTEREST INCOME
Interest and fees on loans $3,634 $3,421
Interest and dividends on investment securities:
Taxable interest income 1,358 1,147
Nontaxable interest income 213 169
Dividends 52 31
Interest on mortgage-backed securities 1,335 1,018
Interest on trading account securities 3 0
Other interest income 25 0
-------- --------
Total interest income 6,620 5,786
-------- --------
INTEREST EXPENSE
Deposits 2,975 2,436
Borrowed funds 123 76
-------- --------
Total interest expense 3,098 2,512
-------- --------
Net interest income 3,522 3,274
PROVISION FOR LOAN LOSSES 0 0
-------- --------
Net interest income after provision
for loan losses 3,522 3,274
-------- --------
OTHER INCOME
Fees for other customer services 247 229
Trading securities gain (loss) 16 0
Investment securities gains 30 1
Gain on sale of loans 1 55
Other non-interest income 66 73
-------- --------
Total other income 360 358
-------- --------
OTHER EXPENSES
Salaries and employee benefits 1,313 1,227
Net occupancy expense 188 142
Equipment expense 234 235
State and local taxes 123 106
FDIC assessment 1 161
Office supplies 122 118
Marketing expense 57 56
Collection, repossession and foreclosure expenses 20 23
Loss on the sale of other real estate 0 13
Legal and litigation expense 78 77
Other operating expenses 289 308
-------- --------
Total other expenses 2,425 2,466
-------- --------
Income before federal income taxes 1,457 1,166
FEDERAL INCOME TAXES 454 353
-------- --------
NET INCOME $1,003 $813
======== ========
EARNINGS PER COMMON SHARE (Note 6) $0.97 $0.80
======== ========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
3
5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
FOR THE
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
-------- -------
NET CASH FROM OPERATING ACTIVITIES $163 $1,702
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (12,728) (222)
Purchases of securities available for sale (9,288) (1,765)
Proceeds from call, maturity and principal
payments on securities available for sale 9,290 1,954
Proceeds from call, maturity and principal
payments on securities held to maturity 4,227 1,102
Net increase in loans made to customers (2,476) (1,169)
Proceeds from disposition of other real estate 0 12
Proceeds from sale of loans 853 36
Purchase of premises and equipment (55) (111)
-------- -------
Net cash from investing activities (10,177) (163)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 702 677
Net increase (decrease) in borrowings 6,147 (5,054)
Proceeds from sale of common stock 382 286
Proceeds from sale of treasury stock 22 0
-------- -------
Net cash from financing activities 7,253 (4,091)
-------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,761) (2,552)
CASH AND CASH EQUIVALENTS
Beginning of period 12,439 11,567
-------- -------
$9,678 $9,015
======== =======
SUPPLEMENTAL DISCLOSURES
Interest paid $3,158 $2,508
Income taxes paid $0 $0
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
4
6
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring items) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
2.) Reclassifications:
The financial statements for 1995 have been reclassified to conform
with the presentation for 1996. Such reclassifications had no effect on the
net results of operations.
3.) Investment Securities:
Securities classified as held to maturity are those that
management has the positive intent and ability to hold to maturity.
Securities classified as available for sale are those that could be sold for
liquidity, investment management, or similar reasons, even though management
has no present intentions to do so. Trading securities are principally held
with the intention of selling in the near term.
5
7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, with such
amortization or accretion included in interest income. Securities
available for sale are carried at fair value using the specific
identification method. Unrealized gains and losses on available for sale
securities are recorded as a separate component of shareholders' equity, net
of tax effects. Trading securities are carried at fair value with changes in
fair value reported in the Consolidated Statements of Income. Realized gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
During the quarter ended March 31, 1996, $3,000 of investment
securities held to maturity were called by the issuer prior to maturity
resulting in $6 in gains. Additionally, $5,000 of investment securities
available for sale were called by the issuer prior to maturity resulting in
$42 in gains. Finally, $3,000 of trading securities were sold during the
quarter resulting in $16 in gains. The Company had no trading positions open at
quarter end.
On February 15, 1994, a pre-refunded escrowed municipal bond with a
par value of $100 and a book value of $124, issued by Northeast Randolph
County, Alabama, was placed on nonaccrual status by the Bank. These bonds were
pre-refunded with U.S. Treasury securities financed by a subsequent bond issue
of Northern Randolph County, Alabama, which later defaulted. Holders of this
refunding issue filed suit, seeking to have the escrow unwound with proceeds
distributed to the claimants. The bond trustee had suspended interest payments
pending a ruling from the court on this matter. On January 11, 1996, the
United States District Court for the Northeastern District of Alabama ordered
that the holders of the pre-refunded issue were to immediately receive the
proceeds of the escrow fund in full satisfaction of the principal and
accrued interest due on the bond, resulting in the bond's early retirement. The
early retirement of the bond resulted in a loss of $18.
Securities available for sale, carried at fair value, totalled
$116,765 representing 61.7% of all investment securities, providing an
adequate level of liquidity in management's opinion.
6
8
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated market value of debt securities at
March 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to
call or prepay certain obligations with or without call or prepayment
penalties.
Investment securities AMORTIZED ESTIMATED
available for sale COST FAIR VALUE
- ------------------- ----------- ---------------
Due in one year or less $ 11,793 $ 11,844
Due after one year
through five years 33,512 33,436
Due after five years
through ten years 7,005 7,125
Due after ten years 1,059 1,060
------- --------
53,369 53,465
Mortgage-Backed Securities 59,208 59,719
-------- --------
$112,577 $113,184
======== ========
Investment securities AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ----------------- ----------- ---------------
Due in one year or less $ 873 $ 879
Due after one year
through five years 5,103 5,045
Due after five years
through ten years 37,971 37,569
Due after ten years 7,769 7,764
-------- --------
51,716 51,257
Mortgage-Backed Securities 20,772 20,636
-------- --------
$72,488 $71,893
======== ========
Investment securities with a carrying value of approximately $35,837
at March 31, 1996 and $38,689 at December 31, 1995 were pledged to secure
deposits and for other purposes.
7
9
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated fair value of investment securities available
for sale and investment securities held to maturity as of March 31, 1996, are
as follows:
Investment GROSS GROSS ESTIMATED
securities available AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
U.S. Treasury
securities $ 35,676 $ 166 $ 156 $ 35,686
U.S. Government
agencies and
corporations 10,815 109 6 10,918
Obligations of states
and political
subdivisions 6,878 34 51 6,861
Mortgage-backed and
related securities 59,208 630 119 59,719
------- ------- -------- --------
Total 112,577 939 332 113,184
Marketable equity
securities 2,171 61 249 1,983
Other securities 1,598 1,598
------- ------- -------- --------
Total available
for sale $116,346 $ 1,000 $ 581 $116,765
======== ======= ========= ========
Investment GROSS GROSS ESTIMATED
securities held AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
U.S. Government
agencies and
corporations $ 41,726 $ 110 $ 564 $ 41,272
Obligations of states
and political
subdivisions 9,990 105 110 9,985
Mortgage-backed and
related securities 20,772 105 241 20,636
------- ------- -------- ---------
Total held to
maturity $ 72,488 $ 320 $ 915 $ 71,893
======== ======== ========= =========
8
10
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following provides a summary of the amortized cost and estimated fair
value of investment securities available for sale and investment securities
held to maturity as of December 31, 1995:
Investment GROSS GROSS ESTIMATED
securities available AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
U.S. Treasury
securities $ 29,727 $ 405 $ 12 $ 30,120
U.S. Government
agencies and
corporations 15,966 229 2 16,193
Obligations of states
and political
subdivisions 7,034 62 44 7,052
Mortgage-backed and
related securities 59,950 846 94 60,702
------- -------- -------- --------
Total 112,677 1,542 152 114,067
Marketable equity
securities 2,171 34 158 2,047
Other securities 1,575 1,575
-------- -------- -------- --------
Total available
for sale $116,423 $ 1,576 $ 310 $117,689
======== ======== ========= ========
Investment GROSS GROSS ESTIMATED
securities held to AMORTIZED UNREALIZED UNREALIZED FAIR
maturity COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
U.S. Government
agencies and
corporations $ 35,407 $ 660 $ 15 $ 36,052
Obligations of states
and political
subdivisions 9,759 170 74 9,855
Mortgage-backed and
related securities 18,855 178 67 18,966
------- ------- ------- ---------
Total held to
maturity $ 64,021 $ 1,008 $ 156 $ 64,873
======== ======== ========= =========
9
11
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
4.) Concentration of Credit Risk and Off-Balance Sheet Risk:
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend
credit, standby letters of credit, and financial guarantees. Such instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized on the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is
represented by the contract or notional amount of the instrument. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for instruments recorded on the balance sheet. The
amount and nature of collateral obtained, if any, is based on management's
credit evaluation.
CONTRACT OR
NOTIONAL AMOUNT
-------------------
3-31-96 12-31-95
--------- --------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit
Fixed rate $10,125 $ 6,462
Variable 27,233 29,353
Standby letters of credit 1,352 1,252
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Generally these financial arrangements have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of these
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
10
12
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
(Dollars in thousands)
The Company, through its subsidiary bank, grants residential,
consumer and commercial loans, and also offers a variety of saving plans to
customers located primarily in its immediate lending area. The following
represents the composition of the loan portfolio at March 31, 1996 and
December 31, 1995:
3-31-96 12-31-95
------- --------
1-4 family residential mortgages 43.2% 43.3%
Commercial mortgages 25.2% 24.6%
Consumer loans 13.1% 13.6%
Commercial loans 10.7% 10.6%
Home equity loans 7.8% 7.9%
Included in 1-4 family residential mortgages as of March 31, 1996
are $752 of mortgage loans held for sale in the secondary market. Loans
held for sale at December 31, 1995 totaled $473. The estimated market value of
these loans approximates their carrying value.
The following is an analysis of changes in the allowance for loan
losses at March 31, 1996 and March 31, 1995:
3-31-96 3-31-95
--------- ---------
Balance at beginning of period $ 3,011 $ 3,081
Loan charge-offs (61) (104)
Recoveries 20 148
-------- ---------
Net loan recoveries (charge-offs) (41) 44
Provision charged to operations 0 0
-------- ---------
Balance at end of period $ 2,970 $ 3,125
======== =========
The recorded investment in loans for which impairment has been
recognized in accordance with Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of Loans," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures", was $228 while the related portion of the allowance for loan
losses was $56 at March 31, 1996.
11
13
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands, except per share data)
5.) Legal Proceedings:
On July 10, 1995, the United States District Court, Northern
District of Ohio, Eastern Division, certified FRANK SLENTZ, ET AL. V.
CORTLAND SAVINGS AND BANKING COMPANY as a class action suit against the
Company's subsidiary bank (Cortland).
Plaintiffs purchased interests in two campgrounds, Ponderosa Park
Resorts ("Ponderosa") and The Landing at Clay's Park ("The Landing").
Plaintiffs signed promissory notes furnished by these campgrounds. Some of
these notes were subsequently sold to Cortland. Plaintiffs allege that the
campgrounds were never developed as promised. Instead, the campgrounds lapsed
into insolvency and were placed in bankruptcy.
Each plaintiff seeks recovery of amounts invested. Cortland
collected aggregate payments approximating $2.0 million and $2.3 million for
principal, interest, late charges, and other settlement charges relating to
plaintiffs' promissory notes purchased from The Landing and Ponderosa,
respectively.
Cortland vigorously objects to plaintiffs' allegations and will
aggressively pursue all defenses available. The probability of an
unfavorable outcome is not known. As the ultimate outcome of this litigation
cannot presently be determined, no provision for any liability that may result
from resolution of this lawsuit has been made in the accompanying consolidated
financial statements.
The Bank is also involved in other legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of these
matters is not expected to have any material effect on the Company.
6.) Earnings Per Share:
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------------------
Net income $ 1,003 $ 813
Average shares outstanding 1,038,621 1,017,490
Net income per share $ 0.97 $ 0.80
Average shares outstanding and resultant per share amounts have been restated
to give retroactive effect to the 3% stock dividend of January 1, 1996.
12
14
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Dollars in thousands)
Liquidity
- ---------
The central role of the Company's liquidity management is to (1)
ensure the possession of and access to sufficient liquid funds to meet the
normal transaction requirements of its customers, (2) to take advantage of
market opportunities requiring flexibility and speed, and (3) to provide a
cushion against unforeseeable liquidity needs.
Principal sources of liquidity for the Company include assets
considered relatively liquid such as interest-bearing deposits in other
banks, federal funds sold, and cash and due from banks; as well as cash flows
from maturities and repayment of loans, investment securities and
mortgage-backed securities.
Along with its liquid assets, the Company has other sources of
liquidity available to it which help to ensure that adequate funds are
available as needed. These other sources include, but are not limited to,
the ability to obtain deposits through the adjustment of interest rates, the
purchasing of federal funds and borrowing on other credit facilities. Access
to the Federal Reserve Discount Window provides an additional source of funds
to the Company. The Company is also a member of the Federal Home Loan Bank of
Cincinnati, providing yet another source of liquidity.
Capital Resources
- -----------------
The capital management function is a continuous process which
consists of providing capital for both the current financial position and the
anticipated future growth of the Company. Central to this process is internal
equity generation, particularly through earnings retention. Internal capital
generation is measured as the annualized rate of return on equity, exclusive
of any appreciation or depreciation relating to available for sale securities,
multiplied by the percentage of earnings retained. Internal capital
generation was 12.6% for the three months ended March 31, 1996, as compared to
11.3% for the like period during 1995. Overall during the first three months
of 1996, capital grew at the annual rate of 10.7%, a figure which reflects
earnings, common stock issued, and the net change in the estimated fair value
of available for sale securities.
13
15
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
During the first three months of 1996, the Company issued 12,456 shares
of common stock which resulted in proceeds of $382. Of the 12,456 shares
issued, 11,796 shares were issued through the Company's dividend reinvestment
plan. The remaining 660 shares were issued through the subsidiary bank's 401-k
Plan which offers employees the choice of investing in the common stock of the
Company as one of several participant directed investment options.
Risk-based standards for measuring capital adequacy require banks and
bank holding companies to maintain capital based on "risk-adjusted" assets.
Categories of assets with potentially higher credit risk require more capital
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as standby letters of credit and interest rate
swaps.
These standards also classify capital into two tiers, referred to as
Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity,
noncumulative and cumulative perpetual preferred stock, and minority interests
less goodwill. Tier 2 capital consists of allowance for loan and lease losses
(subject to certain limitations), perpetual preferred stock (not included in
Tier 1), hybrid capital instruments, term subordinated debt, and
intermediate-term preferred stock. Banks are required to meet a minimum ratio
of 8% of qualifying total capital to risk-adjusted total assets with at least
4% constituting Tier 1 capital. Capital qualifying as Tier 2 capital is
limited to 100% of Tier 1 capital. All banks and bank holding companies are
also required to maintain a minimum leverage capital ratio (Tier 1 capital to
total average assets) in the range of 3% to 4%, subject to regulatory
guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required banking regulatory agencies to revise risk-based capital
standards to ensure that they take adequate account of the following additional
risks: interest rate, concentration of credit, and nontraditional activities. A
new standard regarding interest rate risk (IRR) was issued during the quarter
ended September 30, 1995. While the standard establishes no specific benchmark
for IRR at this time, regulators will subjectively consider an institution's
"exposure to declines in the economic value of its capital due to changes in
interest rates" in evaluating capital adequacy. The new rule was effective
September 1, 1995.
14
16
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
The table below illustrates the Company's risk weighted capital ratios
at March 31, 1996 and December 31, 1995.
March 31, 1996 December 31, 1995
----------------- ------------------
Tier 1 Capital $ 32,727 $ 31,996
Tier 2 Capital 2,076 2,031
-------- --------
TOTAL QUALIFYING
CAPITAL $ 34,803 $ 34,027
-------- --------
Risk Adjusted
Total Assets (*) $165,204 $161,503
Tier 1 Risk-Based
Capital Ratio 19.81% 19.81%
Total Risk-Based
Capital Ratio 21.07% 21.07%
Total Leverage
Capital Ratio 9.14% 9.54%
<FN>
(*) Includes off-balance sheet exposures.
First Quarter of 1996 as Compared to First Quarter of 1995
----------------------------------------------------------
During the first three months of 1996, net interest income
increased by $248 compared to the first three months of 1995. Total
interest income increased by $834 or 14.4% from the level recorded in 1995.
This increase was partially offset by an increase in interest expense of
$586 or 23.3%.
The average rate paid on interest sensitive liabilities increased by 36
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $31,032 or 12.1%, reflecting two new offices opened
in 1995, borrowings from the Federal Home Loan Bank and moderate growth in the
deposits of the Company's existing offices. This enabled average earning
assets to grow by $39,245, or 13.0%, from the same period last year, while the
tax equivalent yield on earning assets increased by 11 basis points. The net
effect of these changes was a narrowing in the Company's net interest margin
ratio from 4.4% in the first quarter of last year to 4.3% this year.
15
17
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Interest and dividend income on securities registered an increase of
$596 or 25.2% during the first three months of 1996 when compared to 1995. The
average invested balances grew by 20.6%, increasing by $31,072 over the levels
of a year ago. The increase in the average balance of investment securities
was accompanied by a 24 basis point increase in portfolio yield.
Interest and fees on loans increased by $213 for the first three
months of 1996 compared to 1995, representing the combined effects of a $6,163
increase in the average balance of the loan portfolio and a 19 basis point
increase in yield due to the effect of rising interest rates in the mortgage
and consumer sectors.
Other interest income increased by $28 from the same period a year ago
due to an increase in the average balances of Federal Funds sold and the
trading account. All trading positions were closed out as of quarter's end.
Other income from all sources increased by $2 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market decreased by $54 from the same period a year ago, reflecting less
favorable market conditions as mortgage rates rose during the quarter. This
was offset by an increase in gains on trading and called investment securities
of $45. Fees for other customer services increased by $18 due mainly to an
increase in deposits and services at the subsidiary bank's two newest branches
brought on-stream during the second half of 1995.
Loans increased by $1,869 during the quarter. Loans as a percentage of
earning assets stood at 45.5% as of March 31, 1996 as compared to 50.3% on
March 31, 1995. The loan to deposit ratio at the end of the first quarter of
1996 was 49.9% compared to 52.9% at the end of the same period a year ago. The
investment portfolio increased by $40,240 or 27.0% from March 31, 1995 to March
31, 1996, and now represents 59.8% of each deposit dollar, up from 52.2% a year
ago.
Loan charge-offs during the first three months were $61 in 1996 and
$104 in 1995, while the recovery of previously charged-off loans amounted to
$20 in 1996 compared to $148 in 1995. The loan loss allowance of $2,970
represents 1.9% of outstanding loans. Non accrual loans at March 31, 1996
represented 0.9% of the loan portfolio compared to 1.0% at December 31, 1995.
16
18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Total other expenses in the first three months were $2,425 in 1996
compared to $2,466 in 1995, a decrease of $41 or 1.7%. Full time equivalent
employment during the first three months averaged 194 employees in 1996 and
192 in 1995. Salaries and benefits increased by $86 over the similar period a
year ago, representing an increase of 7.0%. This was primarily due to the two
new branches opened during the second half of 1995.
The first quarter of 1995 showed a $13 loss on the sale of OREO with no
gain or loss recorded in 1996. For the first half of 1996, the FDIC
dramatically reduced premium rates. As a result, the subsidiary bank
experienced a decrease in FDIC Assessment expense of $160. State and local taxes
increased by $17, or 16.0%. Occupancy and equipment expense increased by $45,
or 11.9%, primarily due to the newly opened offices. All other expense
categories decreased by $16 as a group.
Income before income tax expense amounted to $1,457 for the first three
months of 1996 compared to $1,166 for the first three months of 1995. The
effective tax rate for the first three months was 31.2% in 1996 compared to
30.3% in 1995, resulting in income tax expense of $454 and $353, respectively.
Net income for the first three months registered $1,003 in 1996 compared to
$813 in 1995, representing a 21.2% increase in per share amounts from the $0.80
earned in 1995 to the $0.97 recorded in 1996.
New Accounting Standards
- ------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" effective January 1, 1996. Adoption of this standard
did not have a material impact on the Company's financial position or results
of operations.
The Company also adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights - an amendment of FASB Statement No. 65," effective January 1,
1996. Adoption of this standard did not have a material impact on the Company.
17
19
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
See Note (5) of the financial statements.
Item 2. Changes in Securities
- ------- ---------------------
Not applicable
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not Applicable
Item 5. Other Information
- ------- -----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
18
20
CORTLAND BANCORP AND SUBSIDIARIES
---------------------------------
PART II - OTHER INFORMATION
---------------------------
Note 6. Exhibits and Reports on Form 8-K (continued)
- ------- --------------------------------------------
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
(b) Reports on Form 8-K
-------------------
Not applicable
19
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Cortland Bancorp
----------------
(Registrant)
DATED: May 7, 1996 Lawrence A. Fantauzzi
---------------------
Controller/Treasurer (Chief
Accounting Officer)
DATED: May 7, 1996 Dennis E. Linville
------------------
Executive Vice-President,
Secretary
20