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 September 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 November 10, 1997
----- --------------------------------
Common Stock, No Par Value 1,105,493 Shares
-------------------------- ----------------
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
- ------- --------------------------------
Cortland Bancorp and Subsidiaries:
Consolidated Balance Sheets - September 30,
1997 and December 31, 1996 2
Consolidated Statements of Income - Nine
months ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements -
September 30, 1997 5 - 14
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations 15 - 20
---------------------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 21
- ------- -----------------
Item 2. Changes in Securities 21
- ------- ---------------------
Item 3. Defaults Upon Senior Securities 21
- ------- -------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 21
- ------- ---------------------------------------------------
Item 5. Other Information 21
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 21
- ------- --------------------------------
Signatures 22
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3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------- ---------
ASSETS
Cash and due from banks $ 9,299 $ 10,083
Investment securities available for sale (Note 3) 122,205 119,088
Investment securities held to maturity (approximate market
value of $66,059 in 1997 and $75,461 in 1996) (Note 3) 65,666 75,286
Total loans (Note 4) 180,422 166,109
Less allowance for loan losses (Note 4) (2,888) (2,966)
--------- ---------
Net loans 177,534 163,143
--------- ---------
Premises and equipment 5,851 6,024
Other assets 4,939 4,886
--------- ---------
Total assets $ 385,494 $ 378,510
========= =========
LIABILITIES
Noninterest-bearing deposits $ 42,336 $ 42,130
Interest-bearing deposits 274,032 277,900
--------- ---------
Total deposits 316,368 320,030
--------- ---------
Short term borrowings under one year 13,785 7,648
Other borrowings over one year 13,521 13,523
Other liabilities 1,740 1,389
--------- ---------
Total liabilities 345,414 342,590
--------- ---------
Commitments and contingent liabilities (Notes 4 & 5)
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized 5,000,000 shares; issued
1,104,979 shares in 1997 and 1,081,817 in 1996 5,525 5,409
Additional paid-in capital 11,813 10,938
Retained earnings 22,139 19,287
Net unrealized gain on available for sale
debt securities and marketable equity securities 603 286
--------- ---------
Total shareholders' equity 40,080 35,920
--------- ---------
Total liabilities and shareholders' equity $ 385,494 $ 378,510
========= =========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1997 1996 1997 1996
------ ------- ------- --------
INTEREST INCOME
Interest and fees on loans $4,076 $ 3,721 $11,834 $ 11,014
Interest and dividends on investment securities:
Taxable interest income 1,540 1,583 4,696 4,471
Nontaxable interest income 194 179 571 579
Dividends 67 56 181 170
Interest on mortgage-backed securities 1,267 1,247 3,745 3,907
Interest on trading account securities 7 0 7 3
Other interest income 45 0 123 43
------ ------- ------- --------
Total interest income 7,196 6,786 21,157 20,187
------ ------- ------- --------
INTEREST EXPENSE
Deposits 3,037 3,002 9,037 8,947
Borrowed funds 362 214 906 536
------ ------- ------- --------
Total interest expense 3,399 3,216 9,943 9,483
------ ------- ------- --------
Net interest income 3,797 3,570 11,214 10,704
Provision for loan losses 0 0 0 0
------ ------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,797 3,570 11,214 10,704
------ ------- ------- --------
OTHER INCOME
Fees for other customer services 328 335 955 904
Trading securities gains - net 13 0 13 12
Investment securities gains - net 15 28 46 102
Gain (loss) on sale of loans - net 30 10 40 (9)
Gain (loss) on sale of other real estate - net 0 (3) 0 24
Other non-interest income 34 39 144 150
------ ------- ------- --------
Total other income 420 409 1,198 1,183
------ ------- ------- --------
OTHER EXPENSES
Salaries and employee benefits 1,421 1,339 4,184 3,956
Net occupancy expense 180 171 508 503
Equipment expense 249 267 792 769
State and local taxes 128 120 393 363
Office supplies 110 124 341 360
Marketing expense 66 71 189 206
Legal and litigation expense 45 33 140 241
Other operating expenses 346 295 941 915
------ ------- ------- --------
Total other expenses 2,545 2,420 7,488 7,313
------ ------- ------- --------
INCOME BEFORE FEDERAL INCOME TAXES 1,672 1,559 4,924 4,574
Federal income taxes 516 478 1,524 1,411
------ ------- ------- --------
NET INCOME $1,156 $ 1,081 $ 3,400 $ 3,163
====== ======= ======= ========
EARNINGS PER COMMON SHARE (NOTE 6) $ 1.05 $ 1.00 $ 3.10 $ 2.95
====== ======= ======= ========
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 5,404 $ 1,932
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (9,141) (20,356)
Purchases of securities available for sale (29,043) (32,478)
Proceeds from sales of securities available for sale 16,194 11,918
Proceeds from call, maturity and principal
payments on securities 28,616 27,687
Net increase in loans made to customers (15,239) (6,031)
Proceeds from sale of loans 1,089
Proceeds from disposition of other real estate 12 185
Purchase of premises and equipment (503) (237)
-------- --------
Net cash flows from investing activities (9,104) (18,223)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (3,662) 3,668
Net increase in borrowings 6,135 10,833
Proceeds from sale of common stock 991 771
Dividends paid on common stock (548) (468)
Proceeds from sale of treasury stock 22
-------- --------
Net cash flows from financing activities 2,916 14,826
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (784) (1,465)
CASH AND CASH EQUIVALENTS
Beginning of period 10,083 12,439
-------- --------
End of period $ 9,299 $ 10,974
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 9,909 $ 9,562
Income taxes paid $ 1,419 $ 1,160
See accompanying notes to consolidated financial statements
of Cortland Bancorp and Subsidiaries
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
1.) Management Representation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 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.
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
Realized gains or losses on dispositions are based on net proceeds and
the adjusted carrying amount of securities sold, using the specific
identification method. During the quarter ended September 30, 1997, $2,974 of
trading account securities were sold resulting in $13 in net gains.
The table below sets forth the proceeds, gains and losses realized
on securities sold or called for the following reporting periods:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 1997 September 30, 1997
------------------ ------------------
Proceeds $10,179 $35,294
Gross realized gains 16 60
Gross realized losses 1 14
Securities available for sale, carried at fair value, totalled $122,205
at September 30, 1997 and $119,088 at December 31, 1996 representing 65.0% 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 $32,852 at
September 30, 1997 and $40,645 at December 31, 1996 were pledged to secure
deposits and for other purposes.
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The amortized cost and estimated market value of debt securities at
September 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 $ 8,291 $ 8,316
Due after one year
through five years 36,096 36,382
Due after five years
through ten years 17,036 17,228
Due after ten years 849 853
-------- --------
62,272 62,779
Mortgage-backed Securities 54,872 55,524
-------- --------
$117,144 $118,303
======== ========
Investment securities
- --------------------- AMORTIZED ESTIMATED
held to maturity COST FAIR VALUE
- ------------------ --------- -----------
Due in one year or less $ 1,336 $ 1,338
Due after one year
through five years 11,601 11,637
Due after five years
through ten years 29,522 29,688
Due after ten years 3,904 3,925
------- -------
46,363 46,588
Mortgage-backed Securities 19,303 19,471
------- -------
$65,666 $66,059
======= =======
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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 September
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 $ 31,885 $ 264 $ 31 $ 32,118
U.S. Government
agencies and
corporations 22,936 217 17 23,136
Obligations of states
and political
subdivisions 7,451 75 1 7,525
Mortgage-backed and
related securities 54,872 807 155 55,524
-------- ------ ---- --------
Total 117,144 1,363 204 118,303
Marketable equity
securities 2,171 119 232 2,058
Other securities 1,844 0 0 1,844
-------- ------ ---- --------
Total available
for sale $121,159 $1,482 $436 $122,205
======== ====== ==== ========
Investment
- ----------
securities held GROSS GROSS ESTIMATED
- -------------------- AMORTIZED UNREALIZED UNREALIZED FAIR
to maturity COST GAINS LOSSES VALUE
- ----------- --------- ---------- ---------- ---------
U.S. Government
agencies and
corporations $35,849 $218 $123 $35,944
Obligations of states
and political
subdivisions 10,514 158 28 10,644
Mortgage-backed and
related securities 19,303 214 46 19,471
------- ---- ---- -------
Total held to
maturity $65,666 $590 $197 $66,059
======= ==== ==== =======
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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 0 0 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
======= ==== ==== =======
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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 offbalance 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
---------------------------
September 30, December 31,
1997 1996
------------- ------------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit:
Fixed rate $ 6,902 $ 7,168
Variable 32,697 28,061
Standby letters of credit 358 295
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.
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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:
September 30, December 31,
1997 1996
------------- ------------
1-4 family residential mortgages 42.6% 43.3%
Commercial mortgages 26.8% 25.5%
Consumer loans 11.1% 12.8%
Commercial loans 13.7% 11.7%
Home equity loans 5.8% 6.7%
Included in 1-4 family residential mortgages as of September 30, 1997
are $513 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 table sets forth the aggregate balance of underperforming
loans for each of the following categories at September 30, 1997 and September
30, 1996:
1997 1996
------------- ----------
Loans accounted for on a
nonaccrual basis $1,414 $1,503
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
nonaccrual loans above) 54 2
Loans considered troubled debt
restructurings (not included
in nonaccrual loans or loans
contractually past due above) 178 196
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following shows the amounts of contractual interest income and
interest income actually reflected in income on loans accounted for on a
nonaccrual basis and loans considered troubled debt restructuring as of
September 30, 1997.
Gross interest income that would have been recorded if the loans had been
current in accordance with their original terms $106
Interest income actually included in income on
the loans 82
A loan is placed on a nonaccrual basis whenever sufficient information
is received to question the collectibility of the loan or any time legal
proceedings are initiated involving a loan. When a loan is charged-off, any
interest that has been accrued and not collected on the loan is charged against
earnings.
Impaired loans are generally included in nonaccrual loans. Management
does not individually evaluate certain smaller balance loans for impairment as
such loans are evaluated on an aggregate basis. These loans include 1 - 4
family, consumer and home equity loans. Impaired loans were evaluated using
the fair value of collateral as the measurement method. At September 30, 1997,
the recorded investment in impaired loans was $983 while the related portion of
the allowance for loan losses was $150.
As of September 30, 1997, there were $695 in loans, not included in the
above categories and not considered impaired, but which can be considered
potential problem loans. Management has established specific allocations
of the allowance for loan loss of $63, which it considers adequate based on
current information, to cover potential loss related to these credits.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed above do not (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
The following is an analysis of the allowance for loan losses at
September 30, 1997 and 1996:
1997 1996
------- -------
Balance at beginning of period $ 2,966 $ 3,011
Loan charge-offs:
1-4 family residential mortgages (9) (4)
Commercial mortgages (10) 0
Consumer loans (120) (131)
Commercial loans 0 (3)
Home equity loans (12) 0
------- -------
(151) (138)
------- -------
Recoveries on previous loan losses:
1 - 4 family residential mortgages 1 1
Commercial mortgages 0 0
Consumer loans 60 60
Commercial loans 7 34
Home equity loans 5 0
------- -------
73 95
------- -------
Net loan losses (78) (43)
Provision charged to operations 0 0
------- -------
Balance at end of period $ 2,888 $ 2,968
------- -------
Ratio of net charge-offs to
average net loans outstanding .05% .03%
======= =======
For each of the periods presented above, the provision for loan losses
charged to operations is based on management's judgment after taking into
consideration all known factors connected with the collectibility of the
existing portfolio. Management evaluates the portfolio in light of economic
conditions, changes in the nature and volume of the portfolio, industry
standards and other relevant factors. Specific factors considered by management
in determining the amounts charged to operations include previous loan loss
experience, the status of past due interest and principal payments, the quality
of financial information supplied by the customers and the general economic
condition present in the lending area of the Corporations's bank subsidiary.
13
15
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(Dollars in thousands)
5.) Legal Proceedings:
The Company's subsidiary bank (Cortland) was a defendant in a
class action lawsuit FRANK SLENTZ, ET AL. V. CORTLAND SAVINGS AND
BANKING COMPANY.
On October 20, 1997 the judge presiding over this case filed a judgment
entry dismissing all claims against Cortland without prejudice. The judgment may
be appealed by the plaintiffs. If appealed the ultimate outcome of this
litigation presently cannot be determined, and therefore no provision for any
liability relative to this litigation has been made in the accompanying
consolidated financial statements.
The Bank is also involved in other legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of these
matters is not expected to have any material effect on the Company.
6.) Earnings Per Share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net Income $ 1,156 $ 1,081 $ 3,400 $ 3,163
Average common
shares outstanding 1,104,977 1,080,966 1,098,543 1,073,571
Earnings per share $ 1.05 $ 1.00 $ 3.10 $ 2.95
Average shares outstanding and resultant per share amounts have been restated to
give retroactive effect to the 3% stock dividend of January 1, 1997.
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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
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 decreased $784 compared to year end 1996.
Operating activities provided cash of $5.4 million and $1.9 million in the nine
months ended September 30, 1997 and 1996 respectively. Refer to the Consolidated
Statement of Cash Flows for a summary of the sources and uses of cash for
September 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 10.7% for the nine months ended September 30, 1997, as compared to 11.2% for
the like period during 1996. Overall during the first nine months of 1997,
capital grew at the annual rate of 15.4%, a figure which reflects earnings,
common stock issued, and the net change in the estimated fair value of available
for sale securities.
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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 nine months of 1997, the Company issued 23,162 shares
of common stock which resulted in proceeds of $991. Of the 23,162 shares issued,
20,388 shares were issued through the Company's dividend reinvestment plan. The
remaining 2,774 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.
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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 September 30, 1997 and December 31, 1996.
September 30, 1997 December 31, 1996
------------------ -----------------
Tier 1 Capital $ 38,928 $ 35,006
Tier 2 Capital 2,283 2,112
-------- --------
TOTAL QUALIFYING
CAPITAL $ 41,211 $ 37,118
======== ========
Risk Adjusted
Total Assets (*) $182,001 $168,097
Tier 1 Risk-Based
Capital Ratio 21.39% 20.82%
Total Risk-Based
Capital Ratio 22.64% 22.08%
Tier 1 Risk-Based
Capital to Average Assets
(Leverage Capital Ratio) 10.08% 9.51%
(*) Includes off-balance sheet exposures.
Assets, less intangibles and the net unrealized market value adjustment
of investment securities available for sale, averaged $386,133 for the three
months ended September 30, 1997 and $368,015 for the year ended December 31,
1996.
First Nine Months of 1997 as Compared to First Nine Months of 1996
- ------------------------------------------------------------------
During the first nine months of 1997, net interest income increased by
$510 compared to the first nine months of 1996. Total interest income increased
by $970 or 4.8% from the level recorded in 1996. This was accompanied by an
increase in interest expense of $460 or 4.9%.
The average rate paid on interest sensitive liabilities increased by 11
basis points year-over-year. The average balance of interest sensitive
liabilities increased by $6,774 or 2.3%, primarily reflecting a $7,980 increase
in average borrowings from the Federal Home Loan Bank. Average earning assets
grew by $15,486 , or 4.4%, 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%.
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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
$70 or 0.7% during the first nine months of 1997 when compared to 1996. The
average invested balances grew by 0.1%, increasing by $135 over the levels of a
year ago. The increase in the average balance of investment securities was
accompanied by a 4 basis point increase in portfolio yield.
Interest and fees on loans increased by $820 for the first nine months
of 1997 compared to 1996, representing the net effect of a $13,400 increase in
the average balance of the loan portfolio and a 7 basis point decline in yield.
Other interest income increased by $80 from the same period a year ago
due to an increase in the average balance of Federal Funds sold, which increased
by $1,872. The yield increased by 16 basis points reflecting the slight
tightening in Fed policy.
Other income from all sources increased by only $15 from the same
period a year ago. Gains on 1-4 residential mortgage loans in the secondary
mortgage market increased by $49 from the same period a year ago, reflecting
more favorable market conditions. Trading securities gains showed an increase of
$1. Gains on securities called and gains on the sale of available for sale
investment securities showed a decrease of $56 from year ago levels. Fees for
other customer services increased by $51 due mainly to changes in the fee
structure for all deposit customers implemented during 1996. The first nine
months of 1996 also reflected a $24 gain on the sale of other real estate with
no gain or loss recorded for the same period of 1997. Other sources of
non-interest income declined by $6 from the same period a year ago.
Loan charge-offs during the first nine months were $151 in 1997 and
$138 in 1996, while the recovery of previously charged-off loans amounted to $73
in 1997 compared to $95 in 1996. At September 30, 1997, the loan loss allowance
of $2,888 represented 1.6% of outstanding loans. Non accrual loans at September
30, 1997 represented 0.8% of the loan portfolio compared to 0.9% at December 31,
1996.
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20
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 nine months were $7,488 in 1997
compared to $7,313 in 1996, an increase of $175 or 2.4%. Full time equivalent
employment during the first nine months averaged 197 employees in 1997 and 196
in 1996. Salaries and benefits increased by $228 over the similar period a year
ago, representing an increase of 5.8%.
For the first nine months of 1997, state and local taxes increased by
$30 or 8.3%. Occupancy and equipment expense increased by $28 or 2.2%. These
increases were offset by a $101 or 41.9% decrease in legal expenses. All other
expense categories declined by 0.7% or $10 as a group.
Income before income tax expense amounted to $4,924 for the first nine
months of 1997 compared to $4,574 for the similar period of 1996. The effective
tax rate for the first nine months was 31.0% in 1997 compared to 30.8% in 1996,
resulting in income tax expense of $1,524 and $1,411, respectively. Net income
for the first nine months registered $3,400 in 1997 compared to $3,163 in 1996,
representing a 5.1% increase in per share amounts from the $2.95 earned in 1996
to the $3.10 recorded in 1997.
Third Quarter of 1997 as compared to Third Quarter 1996
- -------------------------------------------------------
During the third quarter of 1997 net interest income increased by $227
as compared to third quarter 1996. Average earning assets increased by 4.8%
while average interest-bearing liabilities increased by 2.2%. Average loans
exhibited growth of 10.1%, while average investments declined by 1.5%.
The tax equivalent yield on earnings assets increased by 9 basis points
from the same quarter a year ago. The tax equivalent yield of the investment
portfolio measured 6.7%, an 11 basis point increase from the same quarter a year
ago, while the loan portfolio yielded 9.2%, unchanged from last year's rate.
Meanwhile, the rate paid on interest-bearing liabilities increased by 14 basis
points compared to a year ago. The net effect of these changes was that the tax
equivalent net interest margin increased to 4.2% from the 4.1% achieved during
last year's third quarter.
Loans increased by $2,402 during the period. Loans as a percentage of
earning assets stood at 47.8% as of September 30, 1997 as compared to 45.6% on
September 30, 1996. The loan to deposit ratio at the end of the first nine
months of 1997 was 57.0% compared to 50.8% at the end of the same period a year
ago. The investment portfolio represented 59.4% of each deposit dollar, down
from 60.4% a year ago.
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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 third quarter were $48 in 1997 and $41 in
1996, while the recovery of previously charged-off loans amounted to $28 during
the third quarter of 1997 compared to $41 in the same period of 1996.
Other income for the quarter increased by $11 or 2.7% compared to the
same period a year ago. The $3 loss 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 $30 compared to the
$10 gain generated a year ago. Net gains on investment and trading securities
transactions netted $28, while an equal amount was recorded in 1996.
Total other expenses in the third quarter were $2,545 in 1997 and
$2,420 in 1996, an increase of $125 or 5.2%, influenced in part by the Company's
opening its thirteenth banking office during the latter half of August. Employee
salaries and benefits increased by $82 or 6.1%. Other expenses as a group
increased by $43 or 4.0% compared to the same period last year.
Income before tax for the quarter increased by 7.2% to $1,672 in 1997
from the $1,559 recorded in 1996. Net income for the quarter of $1,156
represented a 6.9% increase from the $1,081 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 supersedes 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.
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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
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
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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: November 10, 1997 Lawrence A. Fantauzzi
----------------- ---------------------
Controller/Treasurer
(Principal Financial Officer)
DATED: November 10, 1997 Dennis E. Linville
----------------- ------------------
Executive Vice-President,
Secretary and Director
(Duly Authorized Officer)
22