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 June 30, 1996
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Commission file number 0-13814
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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
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(Address of principal executive offices) (Zip Code)
(330) 637-8040
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(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 Aug. 7, 1996
----- -----------------------------
Common Stock, No Par Value 1,049,945 Shares
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2
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------ --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - June 30,
1996 and December 31, 1995 2
Consolidated Statements of Income - Three
and six months ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements -
June 30, 1996 5 - 12
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 13 - 18
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 19
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Item 2. Changes in Securities 19
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Item 3. Defaults Upon Senior Securities 19
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Item 4. Submission of Matters to a Vote of Security Holders 19
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Item 5. Other Information 20
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Item 6. Exhibits and Reports on Form 8-K 20
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Signatures 21
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1
3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1996 1995
------------------------ -----------------------
ASSETS
Cash and due from banks $8,947 $12,439
Investment securities available for sale (Note 3) 114,124 117,689
Investment securities held to maturity (approximate market
value of $74,414 in 1996 and $64,873 in 1995) (Note 3) 76,082 64,021
Total loans (Note 4) 162,595 156,208
Less allowance for loan losses (Note 4) (2,968) (3,011)
------------------------ -----------------------
Net loans 159,627 153,197
------------------------ -----------------------
Premises and equipment 6,248 6,537
Other assets 5,650 4,849
------------------------ -----------------------
Total assets $370,678 $358,732
======================== =======================
LIABILITIES
Noninterest-bearing deposits $37,895 $39,255
Interest-bearing deposits 279,475 276,674
------------------------ -----------------------
Total deposits 317,370 315,929
Short term borrowings under one year 8,922 3,191
Other borrowings over one year 10,026 5,026
Other liabilities 1,081 1,970
------------------------ -----------------------
Total liabilities 337,399 326,116
------------------------ -----------------------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued 1,039,937 shares
in 1996 and 1,026,707 in 1995 5,199 5,134
Additional paid-in capital 9,512 9,171
Retained earnings 19,307 17,693
Net unrealized gain (loss) on available for sale
debt securities and marketable equity securities (736) 643
Treasury stock, at cost, 155 shares in 1996 and 854 in 1995 (3) (25)
------------------------ -----------------------
Total shareholders' equity 33,279 32,616
------------------------ -----------------------
Total liabilities and shareholders' equity $370,678 $358,732
======================== =======================
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
2
4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------------------------- --------------------------
INTEREST INCOME
Interest and fees on loans $3,659 $3,513 $7,293 $6,934
Interest and dividends on investment securities:
Taxable interest income 1,530 1,188 2,888 2,335
Nontaxable interest income 187 167 400 336
Dividends 62 45 114 76
Interest on mortgage-backed securities 1,325 1,106 2,660 2,124
Interest on trading account securities 0 0 3 0
Other interest income 18 30 43 30
------------ ------------ ------------ ------------
Total interest income 6,781 6,049 13,401 11,835
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,970 2,687 5,945 5,123
Borrowed funds 199 52 322 128
------------ ------------ ------------ ------------
Total interest expense 3,169 2,739 6,267 5,251
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,612 3,310 7,134 6,584
PROVISION FOR LOAN LOSSES 0 0 0 0
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,612 3,310 7,134 6,584
------------ ------------ ------------ ------------
OTHER INCOME
Fees for other customer services 322 243 569 472
Investment securities gains (loss) 44 (1) 74 0
Trading securities gains (loss) (4) 0 12 0
Net gain (loss) on sale of loans (20) 24 (19) 79
Net gain (loss) on the sale of other real estate 27 (17) 27 (30)
Other non-interest income 45 39 111 112
------------ ------------ ------------ ------------
Total other income 414 288 774 633
------------ ------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 1,304 1,251 2,617 2,478
Net occupancy expense 144 150 332 292
Equipment expense 268 242 502 477
State and local taxes 120 106 243 212
FDIC assessment 0 161 1 322
Office supplies 114 94 236 212
Marketing expense 78 65 135 121
Collection, repossession and foreclosure expenses 13 31 33 54
Legal and litigation 130 77 208 154
Other operating expenses 297 298 586 606
------------ ------------ ------------ ------------
Total other expenses 2,468 2,475 4,893 4,928
------------ ------------ ------------ ------------
INCOME BEFORE FEDERAL INCOME TAXES 1,558 1,123 3,015 2,289
FEDERAL INCOME TAXES 479 360 933 713
------------ ------------ ------------ ------------
NET INCOME $1,079 $763 $2,082 $1,576
============ ============ ============ ============
EARNINGS PER COMMON SHARE (NOTE 6) $1.03 $0.75 $2.00 $1.55
============ ============ ============ ============
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
3
5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
FOR THE
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
1996 1995
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES $785 $3,745
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (22,411) (7,812)
Purchases of securities available for sale (18,788) (8,971)
Proceeds from sale of securities available for sale 7,089
Proceeds from call, maturity and principal
payments on securities available for sale 16,607 4,602
Proceeds from call, maturity and principal
payments on securities held to maturity 6,661 1,962
Net increase in loans made to customers (6,639) (5,518)
Proceeds from disposition of other real estate 108 16
Proceeds from sale of loans 1,089 177
Purchase of premises and equipment (125) (121)
-------------- --------------
Net cash from investing activities (16,409) (15,665)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 1,441 6,278
Net increase in borrowings 10,731 3,415
Proceeds from sale of common stock 406 303
Dividends paid on common stock (468) (395)
Proceeds from sale of treasury stock 22 0
-------------- --------------
Net cash from financing activities 12,132 9,601
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,492) (2,319)
CASH AND CASH EQUIVALENTS
Beginning of period 12,439 11,567
-------------- --------------
$8,947 $9,248
============== ==============
SUPPLEMENTAL DISCLOSURES
Interest paid $6,328 $5,159
Income taxes paid $835 $235
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 six months ended June 30, 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
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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 June 30, 1996, $1,400 of investment securities
held to maturity were called by the issuer prior to maturity resulting in $1 in
gains. Additionally, $2,000 of investment securities available for sale were
called by the issuer prior to maturity resulting in no net gains or losses.
Further, $6,995 of investment securities available for sale were sold during the
quarter resulting in $43 in net gains. Securities sold primarily comprised
mortgage-backed securities with small remaining balances and U.S. Treasurys
scheduled to mature within the next several months. Finally, $1,000 of trading
securities were sold during the quarter resulting in $4 in losses. The Company
had no trading securities 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 during the first quarter of 1996 resulted in a loss of $18.
Securities available for sale, carried at fair value, totalled $114,124
representing 60.0% 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
June 30, 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 $ 7,415 $ 7,434
Due after one year
through five years 39,431 39,161
Due after five years
through ten years 6,419 6,471
Due after ten years 1,050 1,051
-------- --------
54,315 54,117
Mortgage-Backed Securities 56,825 56,357
-------- --------
$111,140 $110,474
======== ========
Investment securities AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- --------------------- --------- -----------
Due in one year or less $ 1,549 $ 1,554
Due after one year
through five years 7,059 6,895
Due after five years
through ten years 39,864 38,778
Due after ten years 7,746 7,598
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56,218 54,825
Mortgage-Backed Securities 19,864 19,589
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$76,082 $74,414
======= =======
Investment securities with a carrying value of approximately $37,262 at
June 30, 1996 and $38,689 at December 31, 1995 were pledged to secure deposits
and for other purposes.
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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 June 30, 1996, are as
follows:
Investment GROSS GROSS ESTIMATED
securities available AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------------------- ----------- ----------- ----------- -------
U.S. Treasury
securities $ 37,755 $ 93 $ 267 $ 37,581
U.S. Government
agencies and
corporations 9,713 56 29 9,740
Obligations of states
and political
subdivisions 6,847 24 75 6,796
Mortgage-backed and
related securities 56,825 244 712 56,357
-------- -------- -------- --------
Total 111,140 417 1,083 110,474
Marketable equity
securities 2,171 54 283 1,942
Other securities 1,708 0 0 1,708
-------- -------- -------- --------
Total available
for sale $115,019 $ 471 $ 1,366 $114,124
======== ======== ======== ========
Investment GROSS GROSS ESTIMATED
securities held AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- -------------------- ----------- ----------- ----------- -------
U.S. Government
agencies and
corporations $46,282 $ 37 $ 1,288 $45,031
Obligations of states
and political
subdivisions 9,936 53 195 9,794
Mortgage-backed and
related securities 19,864 51 326 19,589
------- ------- ------- -------
Total held to
maturity $76,082 $ 141 $ 1,809 $74,414
======= ======= ======= =======
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 AMORTIZED UNREALIZED UNREALIZED FAIR
to 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
======= ======= ======= =======
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
(Dollars in thousands)
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. Such instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
on the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
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
--------------------
6-30-96 12-31-95
-------- --------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 9,020 $ 6,462
Variable 27,163 29,353
Standby letters of credit 1,302 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 June 30, 1996 and December 31, 1995:
6-30-96 12-31-95
------- --------
1-4 family residential mortgages 43.6% 43.3%
Commercial mortgages 25.8% 24.6%
Consumer loans 13.3% 13.6%
Commercial loans 10.1% 10.6%
Home equity loans 7.2% 7.9%
Included in 1-4 family residential mortgages as of June 30, 1996 are
$1,344 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 June 30, 1996 and June 30, 1995:
6-30-96 6-30-95
------- -------
Balance at beginning of period $ 3,011 $ 3,081
Loan charge-offs (97) (187)
Recoveries 54 210
-------- --------
Net loan recoveries (charge-offs) (43) 23
Provision charged to operations 0 0
-------- --------
Balance at end of period $ 2,968 $ 3,104
======== ========
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 $222 while the related portion of the allowance for loan
losses was $56 at June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1995 1996 1995
------------------- -------------------
Net Income $ 1,079 $ 763 $ 2,082 $ 1,576
Average common
shares outstanding 1,039,588 1,018,338 1,039,104 1,017,916
Earnings per share $ 1.03 $ 0.75 $ 2.00 $ 1.55
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
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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 cash and due from other 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 10.1% for the six months ended June 30, 1996, as compared to 8.1% for the
like period during 1995. Overall during the first six months of 1996, capital
grew at the annual rate of 4.1%, 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 six months of 1996, the Company issued 13,230 shares
of common stock which resulted in proceeds of $406. Of the 13,230 shares issued,
11,796 shares were issued through the Company's dividend reinvestment plan. The
remaining 1,434 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 June 30, 1996 and December 31, 1995.
June 30, 1996 December 31, 1995
------------- -----------------
Tier 1 Capital $ 33,344 $ 31,996
Tier 2 Capital 2,079 2,031
-------- --------
TOTAL QUALIFYING
CAPITAL $ 35,423 $ 34,027
======== ========
Risk Adjusted
Total Assets (*) $165,460 $161,503
Tier 1 Risk-Based
Capital Ratio 20.15% 19.81%
Total Risk-Based
Capital Ratio 21.41% 21.07%
Total Leverage
Capital Ratio 9.01% 9.54%
<FN>
(*) Includes off-balance sheet exposures.
First Six Months of 1996 as Compared to First Six Months of 1995
----------------------------------------------------------------
During the first six months of 1996, net interest income increased by
$550 compared to the first six months of 1995. Total interest income increased
by $1,566 or 13.2% from the level recorded in 1995. This increase was partially
offset by an increase in interest expense of $1,016 or 19.3%.
The average rate paid on interest sensitive liabilities increased by 21
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $34,001 or 13.2%, reflecting two new offices opened in
the second half of 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 $41,316, or 13.5%, from the same period last year,
while the tax equivalent yield on earning assets remained unchanged at 7.85%.
The net effect of these changes was a narrowing in the Company's net interest
margin ratio from 4.4% at June 30th of last year to 4.2% 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
$1,191 or 24.5% during the first six months of 1996 when compared to 1995. The
average invested balances grew by 22.1%, increasing by $33,835 over the levels
of a year ago. The increase in the average balance of investment securities was
accompanied by a 12 basis point increase in portfolio yield.
Interest and fees on loans increased by $359 for the first six months
of 1996 compared to 1995, representing the combined effects of a $6,717 increase
in the average balance of the loan portfolio and an 8 basis point increase in
yield due to the effect of rising interest rates in the mortgage and consumer
sectors.
Interest income from other sources increased by $16 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
quarters end.
Other income from all sources increased by $141 from the same period a
year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market decreased by $98 from the same period a year ago, reflecting less
favorable market conditions as mortgage rates rose during the six month period.
This was partially offset by a $12 increase in net gains on trading securities
and an increase of $74 in net gains on available for sale investment securities
that were either called or sold. Fees for other customer services increased by
$97 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, combined
with a change in the fee structure for all deposit customers implemented during
the first quarter of 1996. The first six months of 1995 also reflected a $30
loss on the sale of other real estate compared to a $27 gain recorded in the
same period of 1996.
Loan charge-offs during the first six months were $97 in 1996 and $187
in 1995, while the recovery of previously charged-off loans amounted to $54 in
1996 compared to $210 in 1995. The loan loss allowance of $2,968 represents 1.8%
of outstanding loans. Non accrual loans at June 30, 1996 represented 0.9% of the
loan portfolio compared to 1.0% at December 31, 1995.
Total other expenses in the first six months were $4,893 in 1996
compared to $4,928 in 1995, a decrease of $35 or 0.7%. Full time equivalent
employment during the first six months averaged 195 employees in 1996 and 194 in
1995. Salaries and benefits increased by $139 over the similar period a year
ago, representing an increase of 5.7%. This was primarily due to the two new
community banking offices opened during the second half of 1995.
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18
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
----------------------------------------------
(Dollars in thousands)
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 $321. State and local taxes increased by $31, or 14.6%.
Occupancy and equipment expense increased by $65, or 8.5%, primarily due to the
newly opened offices. All other expense categories increased by 4.3% or $51 as a
group.
Income before income tax expense amounted to $3,015 for the first six
months of 1996 compared to $2,289 for the similar period of 1995. The effective
tax rate for the first six months was 30.9% in 1996 compared to 31.1% in 1995,
resulting in income tax expense of $933 and $713, respectively. Net income for
the first six months registered $2,082 in 1996 compared to $1,576 in 1995,
representing a 29.0% increase in per share amounts from the $1.55 earned in 1995
to the $2.00 recorded in 1996.
Second Quarter of 1996 as compared to Second Quarter 1995
- ---------------------------------------------------------
During the second quarter of 1996 net interest income increased by $302
as compared to second quarter 1995. Average earning assets increased by 14.0%
while average interest-bearing liabilities increased by a similar 14.2%. Average
loans exhibited growth of 4.8%, while average investments increased by 23.6%.
The tax equivalent yield on earnings assets decreased by 13 basis
points from the same quarter a year ago primarily due to the additional
concentration of earning assets in the investment portfolio. The tax equivalent
yield on the investment portfolio measured 6.6%, essentially unchanged from the
same quarter a year ago, while the loan portfolio yielded 9.2%, down 4 basis
points from last year's rate. Meanwhile, the rate paid on interest-bearing
liabilities increased by 7 basis points compared to a year ago. The net effect
of these changes was that the tax equivalent net interest margin declined to
4.2% from the 4.4% achieved during last year's second quarter.
Loans increased by $4,518 during the quarter. Loans as a percentage of
earning assets stood at 46.1% as of June 30, 1996 as compared to 48.9% on June
30, 1995. The loan to deposit ratio at the end of the first six months of 1996
was 51.2% compared to 53.1% at the end of the same period a year ago. The
investment portfolio now represents 60.0% of each deposit dollar, up from 55.4%
a year ago.
17
19
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
(Dollars in thousands)
Loan charge-offs during the second quarter were $36 in 1996 and $83 in
1995, while the recovery of previously charged-off loans amounted to $34 during
the second quarter of 1996 compared to $62 in the same period of 1995.
Other income for the quarter increased by $126 or 43.8% compared to the
same period a year ago. The $27 gain on sales of other real estate during the
period was in contrast to the $17 loss recognized a year ago. The sharp shift in
the mortgage rate environment was evidenced by a net loss on sale of loans of
$20 compared to the $24 gain generated a year ago. Fees for customer services
were up $79 or 32.5% due to opening of new branches, and a change in fee
structure. Net gains on investment and trading securities transactions netted
$40, while a $1 loss was recorded in 1995.
Total other expenses in the second quarter were $2,468 in 1996 and
$2,475 in 1995, a decrease of $7 or 0.3%. Employee salaries and benefits
increased by $53 or 4.2%. Occupancy and equipment expense increased by $20 or
5.1%. Legal expense increased by $53 or 68.8%. FDIC expense decreased by $161.
Other expenses as a group increased by $28 or 4.7% compared to the same period
last year.
Income before tax for the quarter increased by 38.7% to $1,558 in 1996
from the $1,123 recorded in 1995. Net income for the quarter of $1,079
represented a 41.4% increase from the $763 earned a year ago.
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.
18
20
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
- ------- ---------------------------------------------------
(a). On April 9, 1996, Cortland Bancorp held its annual meeting of
shareholders. At the close of business on the record date, 1,039,011
Cortland Bancorp shares were outstanding and entitled to vote. At the
meeting, 631,145 or 60% of the outstanding shares entitled to vote were
represented by proxy or in person.
(b). The following directors were elected for three year terms
ending in 1999.
P. Bennett Bowers
David C. Cole
Dennis E. Linville
Directors whose term of office continued after the annual meeting:
William A. Hagood
Richard L. Hoover
K. Ray Mahan
Rodger W. Platt
George E. Gessner
James E. Hoffman III
Timothy K. Woofter
(c). Not Applicable
(d). Not Applicable
19
21
CORTLAND BANCORP AND SUBSIDIARIES
---------------------------------
PART II - OTHER INFORMATION (CONTINUED)
--------------------------------------
Item 5. Other Information
- ------- -----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
2. Not applicable
4. Not applicable
10. Not applicable
11. See Note (6) of the Financial Statements
15. Not applicable
18. Not applicable
19. Not applicable
22. Not applicable
23. Not applicable
24. Not applicable
27. Financial Data Schedule
99. Not applicable
(b) Reports on Form 8-K
-------------------
Not applicable
20
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cortland Bancorp
-----------------
(Registrant)
DATED: August 9, 1996 Lawrence A. Fantauzzi
--------------- ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: August 9, 1996 Dennis E. Linville
--------------- ------------------
Executive Vice-President,
Secretary
21