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, 1997
--------------
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 August 8, 1997
----- -----------------------------
Common Stock, No Par Value 1,104,978 Shares
-------------------------- ----------------
2
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - June 30,
1997 and December 31, 1996 2
Consolidated Statements of Income - Six
months ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements -
June 30, 1997 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
- ------- -----------------
Item 2. Changes in Securities 19
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 19
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 19
- ------- ---------------------------------------------------
Item 5. Other Information 19
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 20
- ------- --------------------------------
Signatures 21
- ----------
1
3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
--------- ---------
ASSETS
Cash and due from banks $11,412 $10,083
Federal funds sold 5,900 0
--------- ---------
Total cash and cash equivalents 17,312 10,083
--------- ---------
Investment securities available for sale (Note 3) 118,360 119,088
Investment securities held to maturity (approximate market
value of $68,628 in 1997 and $75,461 in 1996) (Note 3) 68,687 75,286
Total loans (Note 4) 178,020 166,109
Less allowance for loan losses (Note 4) (2,908) (2,966)
--------- ---------
Net loans 175,112 163,143
--------- ---------
Premises and equipment 5,888 6,024
Other assets 4,877 4,886
--------- ---------
Total assets $390,236 $378,510
========= =========
LIABILITIES
Noninterest-bearing deposits $44,227 $42,130
Interest-bearing deposits 279,793 277,900
--------- ---------
Total deposits 324,020 320,030
--------- ---------
Short term borrowings under one year 11,963 7,648
Other borrowings over one year 14,023 13,523
Other liabilities 2,123 1,389
--------- ---------
Total liabilities 352,129 342,590
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized
5,000,000 shares; issued
1,095,940 shares in 1997 and 1,081,817 in 1996 5,480 5,409
Additional paid-in capital 11,447 10,938
Retained earnings 20,983 19,287
Net unrealized gain on available for sale
debt securities and marketable equity securities 197 286
--------- ---------
Total shareholders' equity 38,107 35,920
--------- ---------
Total liabilities and shareholders' equity $390,236 $378,510
========= =========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
2
4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $4,003 $3,659 $7,758 $7,293
Interest and dividends on investment securities:
Taxable interest income 1,556 1,530 3,156 2,888
Nontaxable interest income 188 187 377 400
Dividends 59 62 114 114
Interest on mortgage-backed securities 1,246 1,325 2,478 2,660
Interest on trading account securities 0 0 0 3
Other interest income 75 18 78 43
------ ------- ------- --------
Total interest income 7,127 6,781 13,961 13,401
------ ------- ------- --------
INTEREST EXPENSE
Deposits 3,052 2,970 6,000 5,945
Borrowed funds 280 199 544 322
------ ------- ------- --------
Total interest expense 3,332 3,169 6,544 6,267
------ ------- ------- --------
Net interest income 3,795 3,612 7,417 7,134
Provision for loan losses 0 0 0 0
------ ------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,795 3,612 7,417 7,134
------ ------- ------- --------
OTHER INCOME
Fees for other customer services 322 322 627 569
Trading securities gains (loss) - net 0 (4) 0 12
Investment securities gains - net 19 44 31 74
Gain (loss) on sale of loans - net 20 (20) 10 (19)
Gain on sale of other real estate - net 0 27 0 27
Other non-interest income 40 45 110 111
------ ------- ------- --------
Total other income 401 414 778 774
------ ------- ------- --------
OTHER EXPENSES
Salaries and employee benefits 1,380 1,304 2,763 2,617
Net occupancy expense 166 144 328 332
Equipment expense 273 268 543 502
State and local taxes 130 120 265 243
Office supplies 117 114 231 236
Marketing expense 61 78 123 135
Legal and litigation expense 53 130 95 208
Other operating expenses 303 310 595 620
------ ------- ------- --------
Total other expenses 2,483 2,468 4,943 4,893
------ ------- ------- --------
INCOME BEFORE FEDERAL INCOME TAXES 1,713 1,558 3,252 3,015
Federal income taxes 536 479 1,008 933
------ ------- ------- --------
NET INCOME $1,177 $1,079 $2,244 $2,082
====== ======= ======= ========
EARNINGS PER COMMON SHARE (NOTE 6) $1.07 $1.01 $2.05 $1.95
====== ======= ======= ========
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
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES $4,385 $785
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (3,380) (22,411)
Purchases of securities available for sale (20,606) (18,788)
Proceeds from sales of securities available for sale 15,207 7,089
Proceeds from call, maturity and principal
payments on securities 15,726 23,268
Net increase in loans made to customers (12,613) (6,639)
Proceeds from sale of loans 1,089
Proceeds from disposition of other real estate 108
Purchase of premises and equipment (327) (125)
-------- --------
Net cash flows from investing activities (5,993) (16,409)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 3,990 1,441
Net increase in borrowings 4,815 10,731
Proceeds from sale of common stock 580 406
Dividends paid on common stock (548) (468)
Proceeds from sale of treasury stock 22
-------- --------
Net cash flows from financing activities 8,837 12,132
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,229 (3,492)
CASH AND CASH EQUIVALENTS
Beginning of period 10,083 12,439
-------- --------
End of period $17,312 $8,947
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $6,510 $6,328
Income taxes paid $993 $835
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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996.
2.) Reclassifications:
Certain items contained in the 1996 financial statements have been
reclassified to conform with the presentation for 1997. Such reclassifications
had no effect on the net results of operations.
3.) Investment Securities:
Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts, with such amortization or accretion included in interest income.
Securities classified as available for sale are those that could be
sold for liquidity, investment management, or similar reasons even though
management has no present intentions to do so. Securities available for sale are
carried at fair value using the specific identification method. 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 principally held with the intention of selling
in the near term. Trading securities are carried at fair value with changes in
fair value reported in the Consolidated Statements of Income.
5
7
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Realized gains or losses on dispositions are based on net proceeds and
the adjusted carrying amount of securities sold, using the specific
identification method. During the quarter ended June 30, 1997, $7,558 of
investment securities available for sale were sold resulting in $1 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.
The following table sets forth the proceeds, gains and losses realized
on securities sold or called for the period ended:
THREE MONTHS SIX MONTHS
------------ ----------
June 30, 1997 June 30, 1997
------------- -------------
Proceeds $12,925 $25,116
Gross realized gains 25 43
Gross realized losses 6 12
Securities available for sale, carried at fair value, totalled $118,360
at June 30, 1997 and $119,088 at December 31, 1996 representing 63.3% and 61.3%,
respectively, of all investment securities. These levels were deemed to provide
an adequate level of liquidity in management's opinion.
Investment securities with a carrying value of approximately $38,868 at
June 30, 1997 and $40,645 at December 31, 1996 were pledged to secure deposits
and for other purposes.
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, 1997, 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 $4,170 $4,184
Due after one year
through five years 36,240 36,355
Due after five years
through ten years 13,140 13,231
Due after ten years 2,854 2,857
-------- --------
56,404 56,627
Mortgage-backed Securities 57,529 57,885
-------- --------
$113,933 $114,512
======== ========
Investment securities
- --------------------- AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ---------------- --------- ----------
Due in one year or less $4,237 $4,252
Due after one year
through five years 11,175 11,108
Due after five years
through ten years 30,012 29,916
Due after ten years 5,691 5,688
-------- --------
51,115 50,964
Mortgage-backed Securities 17,572 17,664
-------- --------
$68,687 $68,628
======== ========
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 June 30,
1997, are as follows:
Investment
- ----------
securities available GROSS GROSS ESTIMATED
- -------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
U.S. Treasury
securities $ 30,922 $ 157 $ 68 $ 31,011
U.S. Government
agencies and
corporations 17,981 124 22 18,083
Obligations of states
and political
subdivisions 7,501 39 7 7,533
Mortgage-backed and
related securities 57,529 583 227 57,885
-------- ------ ---- --------
Total 113,933 903 324 114,512
Marketable equity
securities 2,171 125 263 2,033
Other securities 1,815 0 0 1,815
-------- ------ ---- --------
Total available
for sale $117,919 $1,028 $587 $118,360
======== ====== ==== ========
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
U.S. Government
agencies and
corporations $ 41,759 $ 115 $323 $ 41,551
Obligations of states
and political
subdivisions 9,356 101 44 9,413
Mortgage-backed and
related securities 17,572 195 103 17,664
-------- ------ ---- --------
Total held to
maturity $ 68,687 $ 411 $470 $ 68,628
======== ====== ==== ========
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, 1996:
Investment
- ----------
securities available GROSS GROSS ESTIMATED
- -------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
for sale COST GAINS LOSSES VALUE
- -------- --------- ---------- ---------- ---------
U.S. Treasury
securities $ 39,813 $ 265 $ 68 $ 40,010
U.S. Government
agencies and
corporations 11,740 119 5 11,854
Obligations of states
and political
subdivisions 7,471 45 10 7,506
Mortgage-backed and
related securities 55,530 610 161 55,979
-------- ------ ---- --------
Total 114,554 1,039 244 115,349
Marketable equity
securities 2,170 63 255 1,978
Other securities 1,761 1,761
-------- ------ ---- --------
Total available
for sale $118,485 $1,102 $499 $119,088
======== ====== ==== ========
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- --------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
U.S. Government
agencies and
corporations $ 46,674 $ 298 $232 $ 46,740
Obligations of states
and political
subdivisions 9,722 100 52 9,770
Mortgage-backed and
related securities 18,890 171 110 18,951
-------- ------ ---- --------
Total held to
maturity $ 75,286 $ 569 $394 $ 75,461
======== ====== ==== ========
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
------------------
6-30-97 12-31-96
------- --------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 9,978 $ 7,168
Variable 30,092 28,061
Standby letters of credit 359 295
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, 1997 and December 31, 1996:
6-30-97 12-31-96
------- --------
1-4 family residential mortgages 42.6% 43.3%
Commercial mortgages 26.1% 25.5%
Consumer loans 11.6% 12.8%
Commercial loans 13.7% 11.7%
Home equity loans 6.0% 6.7%
Included in 1-4 family residential mortgages as of June 30, 1997 are
$717 of mortgage loans held for sale in the secondary market. Loans held for
sale at December 31, 1996 totaled $1,361. 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, 1997 and June 30, 1996:
6-30-97 6-30-96
------- -------
Balance at beginning of period $ 2,966 $ 3,011
Loan charge-offs (103) (97)
Recoveries 45 54
-------- ---------
Net loan recoveries (charge-offs) (58) (43)
Provision charged to operations 0 0
---- ----
Balance at end of period $ 2,908 $ 2,968
======= ========
Impaired loans are generally included in nonaccrual loans. Management
does not individually evaluate certain smaller balance loans for impairment as
such loans are evaluated on an aggregate basis. Loans deemed impaired were
evaluated using the fair value of collateral as the measurement method. At June
30, 1997, the recorded investment in impaired loans was $959 while the related
portion of the allowance for loan losses was $228.
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,
------------------------ ------------------------
1997 1996 1997 1996
------------------------ ------------------------
Net Income $1,177 $1,079 $2,244 $2,082
Average common
shares outstanding 1,095,895 1,070,331 1,095,273 1,069,833
Earnings per share $1.07 $1.01 $2.05 $1.95
Average shares outstanding and resultant per share amounts have been restated to
give retroactive effect to the 3% stock dividend of January 1, 1997.
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
sufficient liquid funds to meet the normal transaction requirements of its
customers, (2) take advantage of market opportunities requiring flexibility and
speed, and (3) provide a cushion against unforeseen liquidity needs.
Principal sources of liquidity for the Company include assets
considered relatively liquid, such as interest-bearing deposits in other banks,
federal funds sold, cash and due from banks, as well as cash flows from
maturities and repayments of loans, investment securities and mortgage-backed
securities.
Along with its liquid assets, the Company has other sources of
liquidity available to it which help to ensure that adequate funds are available
as needed. These other sources include, but are not limited to, the ability to
obtain deposits through the adjustment of interest rates, the purchasing of
federal funds, and access to the Federal Reserve Discount Window. The Company is
a member of the Federal Home Loan Bank of Cincinnati, which provides yet another
source of liquidity.
Cash and cash equivalents increased $7,229 compared to year end 1996.
Operating activities provided cash of $4.4 million and $0.8 million in the six
months ended June 30, 1997 and 1996 respectively. Refer to the Consolidated
Statement of Cash Flows for a summary of the sources and uses of cash for June
30, 1997 and 1996.
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 9.2% for the six months ended June 30, 1997, as compared to 10.1% for the
like period during 1996. Overall during the first six months of 1997, capital
grew at the annual rate of 12.2%, 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 1997, the Company issued 14,123 shares
of common stock which resulted in proceeds of $580. Of the 14,123 shares issued,
12,333 shares were issued through the Company's dividend reinvestment plan. The
remaining 1,788 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.
Accordingly, regulators will subjectively consider an institution's exposure to
declines in the economic value of its capital due to changes in interest rates
in evaluating capital adequacy.
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, 1997 and December 31, 1996.
June 30, 1997 December 31, 1996
------------- -----------------
Tier 1 Capital $ 37,336 $ 35,006
Tier 2 Capital 2,286 2,112
-------- --------
TOTAL QUALIFYING
CAPITAL $ 39,622 $ 37,118
======== ========
Risk Adjusted
Total Assets (*) $182,243 $168,097
Tier 1 Risk-Based
Capital Ratio 20.49% 20.82%
Total Risk-Based
Capital Ratio 21.74% 22.08%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 9.77% 9.51%
<FN>
(*) Includes off-balance sheet exposures.
Assets less intangibles and the net unrealized market value adjustment
of investment securities available for sale averaged $382,072 for the three
months ended June 30, 1997 and $368,015 for the year ended December 31, 1996.
First Six Months of 1997 as Compared to First Six Months of 1996
----------------------------------------------------------------
During the first six months of 1997, net interest income increased by
$283 compared to the first six months of 1996. Total interest income increased
by $560 or 4.2% from the level recorded in 1996. This was accompanied by an
increase in interest expense of $277 or 4.4%.
The average rate paid on interest sensitive liabilities increased by 10
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $6,835 or 2.3%, primarily reflecting a $6,948 increase
in average borrowings from the Federal Home Loan Bank. Average earning assets
grew by $14,692, or 4.2%, from the same period last year, with the tax
equivalent yield on earning assets unchanged at 7.8%. The Company's net interest
margin ratio was also unchanged at 4.2%.
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
$63 or 1.0% during the first six months of 1997 when compared to 1996. The
average invested balances grew by 0.8%, increasing by $1,528 over the levels of
a year ago. The increase in the average balance of investment securities was
accompanied by a 1 basis point increase in portfolio yield.
Interest and fees on loans increased by $465 for the first six months
of 1997 compared to 1996, representing the net effect of a $11,918 increase in
the average balance of the loan portfolio and an 8 basis point decline in yield.
Other interest income increased by $32 from the same period a year ago
due to an increase in the average balance of Federal Funds sold, which increased
by $1,246. The yield increased by 15 basis points reflecting the slight
tightening in Fed policy.
Other income from all sources increased by only $4 from the same period
a year ago. Gains on 1-4 residential mortgage loans in the secondary mortgage
market increased by $29 from the same period a year ago, reflecting more
favorable market conditions. Trading securities gains showed a decrease of $12
as the Company had no trading activity in the first six months of 1997. Gains on
securities called and gains on the sale of available for sale investment
securities also showed a decrease of $43. Fees for other customer services
increased by $58 due mainly to changes in the fee structure for all deposit
customers implemented late in the first quarter of 1996. The first six months of
1996 also reflected a $27 gain on the sale of other real estate with no activity
in the same period of 1997.
Loan charge-offs during the first six months were $103 in 1997 and $97
in 1996, while the recovery of previously charged-off loans amounted to $45 in
1997 compared to $54 in 1996. At June 30, 1997, the loan loss allowance of
$2,908 represented 1.6% of outstanding loans. Non accrual loans at June 30, 1997
represented 0.8% of the loan portfolio compared to 0.9% at December 31, 1996.
Total other expenses in the first six months were $4,943 in 1997
compared to $4,893 in 1996, an increase of $50 or 1.0%. Full time equivalent
employment during the first six months averaged 196 employees in 1997 and 195 in
1996. Salaries and benefits increased by $146 over the similar period a year
ago, representing an increase of 5.6%.
16
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 six months of 1997, state and local taxes increased by
$22 or 9.1%. Occupancy and equipment expense increased by $37 or 4.4%. These
increases were offset by a $113 or 54.3% decrease in legal expenses. All other
expense categories declined by 4.2% or $42 as a group.
Income before income tax expense amounted to $3,252 for the first six
months of 1997 compared to $3,015 for the similar period of 1996. The effective
tax rate for the first six months was 31.0% in 1997 compared to 30.9% in 1996,
resulting in income tax expense of $1,008 and $933, respectively. Net income for
the first six months registered $2,244 in 1997 compared to $2,082 in 1996,
representing a 5.1% increase in per share amounts from the $1.95 earned in 1996
to the $2.05 recorded in 1997.
Second Quarter of 1997 as compared to Second Quarter 1996
- ---------------------------------------------------------
During the second quarter of 1997 net interest income increased by $183
as compared to second quarter 1996. Average earning assets increased by 3.6%
while average interest-bearing liabilities increased by 1.3%. Average loans
exhibited growth of 8.9%, while average investments declined by 2.9%.
The tax equivalent yield on earnings assets increased by 11 basis
points from the same quarter a year ago. The tax equivalent yield of the
investment portfolio measured 6.7%, a 9 basis point increase from the same
quarter a year ago, while the loan portfolio yielded 9.2%, up 3 basis points
from last year's rate. Meanwhile, the rate paid on interest-bearing liabilities
increased by 15 basis points compared to a year ago. The net effect of these
changes was that the tax equivalent net interest margin increased to 4.3% from
the 4.2% achieved during last year's second quarter.
Loans increased by $7,980 during the period. Loans as a percentage of
earning assets stood at 48.0% as of June 30, 1997 as compared to 46.1% on June
30, 1996. The loan to deposit ratio at the end of the first six months of 1997
was 54.9% compared to 51.2% at the end of the same period a year ago. The
investment portfolio represented 57.7% of each deposit dollar, down from 60.0% 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 $54 in 1997 and $36 in
1996, while the recovery of previously charged-off loans amounted to $15 during
the second quarter of 1997 compared to $34 in the same period of 1996.
Other income for the quarter decreased by $13 or 3.1% compared to the
same period a year ago. The $27 gain on sales of other real estate in 1996 was
in contrast to no activity this year. The sharp shift in the mortgage rate
environment was evidenced by a net gain on sale of loans of $20 compared to the
$20 loss generated a year ago. Net gains on investment and trading securities
transactions netted $19, while a $40 gain was recorded in 1996.
Total other expenses in the second quarter were $2,483 in 1997 and
$2,468 in 1996, an increase of $15 or 0.6%. Employee salaries and benefits
increased by $76 or 5.8%. Occupancy and equipment expense increased by $27 or
6.6%. Legal expense decreased by $77 or 59.2%. Other expenses as a group
decreased by $11 or 1.8% compared to the same period last year.
Income before tax for the quarter increased by 9.9% to $1,713 in 1997
from the $1,558 recorded in 1996. Net income for the quarter of $1,177
represented a 9.1% increase from the $1,079 earned a year ago.
New Accounting Standards
- ------------------------
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standards (SFAS) No.125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to eliminate financial assets when control has been
surrendered in accordance with the criteria provided in the standard. This
standard supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" an
amendment to SFAS No. 65. Application of the new rules did not have a material
impact on the Company's financial position or results of operations.
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 8, 1997, Cortland Bancorp held its annual meeting of
shareholders. At the close of business on the record date,
1,095,455 Cortland Bancorp shares were outstanding and
entitled to vote. At the meeting, 789,311 or 72% 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 2000.
George E. Gessner
James E. Hoffman III
Timothy K. Woofter
Directors whose term of office continued after the annual
meeting:
William A. Hagood
Richard L. Hoover
K. Ray Mahan
Rodger W. Platt
P. Bennett Bowers
David C. Cole
Dennis E. Linville
(c.) Not Applicable
(d.) Not Applicable
Item 5. Other Information
- ------- -----------------
Not applicable
19
21
CORTLAND BANCORP AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
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 8, 1997 Lawrence A. Fantauzzi
-------------- ---------------------
Controller/Treasurer
(Chief Accounting Officer)
DATED: August 8, 1997 Dennis E. Linville
-------------- ------------------
Executive Vice-President,
Secretary
21