Attached files
file | filename |
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EX-32 - EXHIBIT 32 - CORTLAND BANCORP INC | c92212exv32.htm |
EX-31.1 - EXHIBIT 31.1 - CORTLAND BANCORP INC | c92212exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition from to
Commission file number: 0-13814
Cortland Bancorp
(Exact name of registrant as specified in its charter)
Ohio | 34-1451118 | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) | |
194 West Main Street, Cortland, Ohio | 44410 | |
(Address of principal executive offices) | (Zip code) |
(330) 637-8040
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated
filer and large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Small reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
TITLE OF CLASS | SHARES OUTSTANDING | |
Common Stock, No Par Value at November 6, 2009 | 4,525,552 Shares |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 25 | ||||||||
26 | ||||||||
27 | ||||||||
28 | ||||||||
29 47 | ||||||||
48 49 | ||||||||
50 | ||||||||
PART II OTHER INFORMATION |
||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
51 | ||||||||
52 | ||||||||
59 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 32 |
1
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited) | ||||||||
SEPTEMBER 30, | DECEMBER 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 6,797 | $ | 8,394 | ||||
Interest bearing deposits |
51,649 | 18,449 | ||||||
Total cash and cash equivalents |
58,446 | 26,843 | ||||||
Investment securities available for sale (Note 3) |
140,099 | 121,348 | ||||||
Investment securities held to maturity (estimated fair value of
$34,843 at September 30, 2009 and $71,210 at December 31, 2008) (Note 3) |
33,859 | 70,406 | ||||||
Total loans (Note 4) |
236,539 | 246,017 | ||||||
Less allowance for loan losses (Note 4) |
(2,389 | ) | (2,470 | ) | ||||
Net loans |
234,150 | 243,547 | ||||||
Premises and equipment |
7,238 | 7,571 | ||||||
Bank owned life insurance |
13,092 | 12,748 | ||||||
Other assets |
11,491 | 10,902 | ||||||
Total assets |
$ | 498,375 | $ | 493,365 | ||||
LIABILITIES |
||||||||
Noninterest-bearing deposits |
$ | 55,670 | $ | 58,635 | ||||
Interest-bearing deposits |
324,276 | 321,318 | ||||||
Total deposits |
379,946 | 379,953 | ||||||
Federal Home Loan Bank advances |
62,500 | 62,500 | ||||||
Other short term borrowings |
9,301 | 5,648 | ||||||
Subordinated debt |
5,155 | 5,155 | ||||||
Other liabilities |
4,449 | 4,081 | ||||||
Total liabilities |
461,351 | 457,337 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock $5.00 stated value authorized
20,000,000 shares; issued 4,728,267 in 2009 and 2008 |
23,641 | 23,641 | ||||||
Additional paid-in capital |
20,850 | 21,078 | ||||||
Retained earnings |
(501 | ) | 6,480 | |||||
Accumulated other comprehensive loss |
(3,372 | ) | (11,078 | ) | ||||
Treasury stock at cost, 202,716 September 30, 2009 and 230,800 at December 31, 2008 |
(3,594 | ) | (4,093 | ) | ||||
Total shareholders equity |
37,024 | 36,028 | ||||||
Total liabilities and shareholders equity |
$ | 498,375 | $ | 493,365 | ||||
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
2
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
SEPTEMBER 30, | SEPTEMBER 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 3,805 | $ | 3,847 | $ | 11,416 | $ | 11,601 | ||||||||
Interest and dividends on investment securities: |
||||||||||||||||
Taxable interest income |
520 | 1,279 | 2,155 | 4,071 | ||||||||||||
Nontaxable interest income |
323 | 381 | 1,010 | 1,155 | ||||||||||||
Dividends |
43 | 47 | 129 | 144 | ||||||||||||
Interest on mortgage-backed securities |
1,016 | 1,260 | 3,291 | 3,609 | ||||||||||||
Other interest income |
55 | 35 | 123 | 179 | ||||||||||||
Total interest income |
5,762 | 6,849 | 18,124 | 20,759 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
1,501 | 2,090 | 5,023 | 6,791 | ||||||||||||
Borrowed funds |
720 | 776 | 2,134 | 2,380 | ||||||||||||
Subordinated debt |
27 | 55 | 104 | 190 | ||||||||||||
Total interest expense |
2,248 | 2,921 | 7,261 | 9,361 | ||||||||||||
Net interest income |
3,514 | 3,928 | 10,863 | 11,398 | ||||||||||||
Provision for loan losses |
121 | 105 | 337 | 495 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
3,393 | 3,823 | 10,526 | 10,903 | ||||||||||||
OTHER INCOME |
||||||||||||||||
Fees for other customer services |
597 | 596 | 1,684 | 1,730 | ||||||||||||
Investment securities gains net |
8 | 34 | 177 | 116 | ||||||||||||
Impairment losses on investment securities: |
||||||||||||||||
Impairment losses on investment securities |
(2,330 | ) | (17,449 | ) | ||||||||||||
Non credit-related losses on securities and not expected to be sold
recognized in other comprehensive income before tax |
(202 | ) | 3,277 | |||||||||||||
Net impairment losses on investment securities |
(2,532 | ) | (14,172 | ) | ||||||||||||
Gain on sale of loans net |
43 | 4 | 233 | 25 | ||||||||||||
Other real estate gains (losses) net |
(2 | ) | 15 | 49 | ||||||||||||
Earnings on bank owned life insurance |
136 | 137 | 410 | 402 | ||||||||||||
Other non-interest income |
19 | 29 | 121 | 95 | ||||||||||||
Total other income |
(1,729 | ) | 798 | (11,532 | ) | 2,417 | ||||||||||
OTHER EXPENSES |
||||||||||||||||
Salaries and employee benefits |
1,837 | 1,788 | 5,502 | 5,371 | ||||||||||||
Net occupancy and equipment expense |
455 | 500 | 1,400 | 1,471 | ||||||||||||
State and local taxes |
103 | 138 | 316 | 416 | ||||||||||||
FDIC expense |
233 | 15 | 750 | 36 | ||||||||||||
Bank exam and audit expense |
135 | 129 | 353 | 337 | ||||||||||||
Office supplies |
82 | 90 | 267 | 282 | ||||||||||||
Other operating expenses |
538 | 598 | 1,632 | 1,759 | ||||||||||||
Total other expenses |
3,383 | 3,258 | 10,220 | 9,672 | ||||||||||||
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES |
(1,719 | ) | 1,363 | (11,226 | ) | 3,648 | ||||||||||
Federal income tax expense (benefit) |
(736 | ) | 285 | (4,248 | ) | 731 | ||||||||||
NET INCOME (LOSS) |
$ | (983 | ) | $ | 1,078 | $ | (6,978 | ) | $ | 2,917 | ||||||
BASIC EARNINGS PER COMMON SHARE (NOTE 6) |
$ | (0.22 | ) | $ | 0.24 | $ | (1.54 | ) | $ | 0.65 | ||||||
DILUTED EARNINGS PER COMMON SHARE (NOTE 6) |
$ | (0.22 | ) | $ | 0.24 | $ | (1.54 | ) | $ | 0.65 | ||||||
CASH DIVIDENDS DECLARED PER SHARE |
$ | 0.22 | $ | 0.65 | ||||||||||||
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
3
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
(Amounts in thousands)
ACCUMULATED | TOTAL | |||||||||||||||||||||||
ADDITIONAL | OTHER | SHARE- | ||||||||||||||||||||||
COMMON | PAID-IN | RETAINED | COMPREHENSIVE | TREASURY | HOLDERS | |||||||||||||||||||
STOCK | CAPITAL | EARNINGS | LOSS | STOCK | EQUITY | |||||||||||||||||||
NINE MONTHS ENDED SEPTEMBER 30, 2008 |
||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2008 |
$ | 23,200 | $ | 20,976 | $ | 9,386 | $ | (94 | ) | $ | (4,644 | ) | $ | 48,824 | ||||||||||
Cumulative effect of adjustment from adoption of
of Emerging Issues Task Force issue 06-04 |
(539 | ) | (539 | ) | ||||||||||||||||||||
Balance after cumulative effect of adjustment |
23,200 | 20,976 | 8,847 | (94 | ) | (4,644 | ) | 48,285 | ||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net income |
2,917 | 2,917 | ||||||||||||||||||||||
Other comprehensive loss,
net of tax benefit: |
||||||||||||||||||||||||
Unrealized losses on available-
for-sale securities, net of
reclassification adjustment |
(3,944 | ) | (3,944 | ) | ||||||||||||||||||||
Total comprehensive loss |
(1,027 | ) | ||||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||
Treasury shares reissued |
(206 | ) | 942 | 736 | ||||||||||||||||||||
Treasury shares purchased |
(746 | ) | (746 | ) | ||||||||||||||||||||
Cash dividends declared |
(2,904 | ) | (2,904 | ) | ||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2008 |
$ | 23,200 | $ | 20,770 | $ | 8,860 | $ | (4,038 | ) | $ | (4,448 | ) | $ | 44,344 | ||||||||||
NINE MONTHS ENDED SEPTEMBER 30, 2009 |
||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2009 |
$ | 23,641 | $ | 21,078 | $ | 6,480 | $ | (11,078 | ) | $ | (4,093 | ) | $ | 36,028 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net loss |
(6,978 | ) | (6,978 | ) | ||||||||||||||||||||
Other comprehensive income,
net of tax : |
||||||||||||||||||||||||
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment |
9,869 | 9,869 | ||||||||||||||||||||||
Other comprehensive loss related to
securities for which other than temporary impairment
has been recognized in earnings, net of tax benefit |
(2,163 | ) | (2,163 | ) | ||||||||||||||||||||
Total comprehensive income |
728 | |||||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||
Treasury shares reissued |
(228 | ) | 500 | 272 | ||||||||||||||||||||
Treasury shares purchased |
(1 | ) | (1 | ) | ||||||||||||||||||||
Cash paid in lieu of fractional shares |
(3 | ) | (3 | ) | ||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2009 |
$ | 23,641 | $ | 20,850 | $ | (501 | ) | $ | (3,372 | ) | $ | (3,594 | ) | $ | 37,024 | |||||||||
COMPONENTS OF OTHER COMPREHENSIVE LOSS (INCOME)
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
SEPTEMBER 30, | SEPTEMBER 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net unrealized holding gains (losses) on
available-for-sale securities
arising during the period, net of tax |
$ | 1,184 | $ | 2,169 | $ | (1,531 | ) | $ | (3,867 | ) | ||||||
Reclassification adjustment
for net gains realized in net income, net of tax |
(5 | ) | (23 | ) | (117 | ) | (77 | ) | ||||||||
Reclassification adjustment for other than temporary
impairment losses on debt securities, net of tax |
1,672 | 9,354 | ||||||||||||||
Net unrealized gains (losses) on available-
for-sale securities, net of tax |
$ | 2,851 | $ | 2,146 | $ | 7,706 | $ | (3,944 | ) | |||||||
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
4
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
FOR THE | ||||||||
NINE MONTHS ENDED | ||||||||
SEPTEMBER 30, | ||||||||
2009 | 2008 | |||||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
$ | 3,379 | $ | 3,506 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of securities available for sale |
(37,043 | ) | (30,518 | ) | ||||
Purchases of securities held to maturity |
(2,040 | ) | (11,908 | ) | ||||
Proceeds from call, maturity and principal
payments on securities |
54,544 | 61,695 | ||||||
Net decrease ( increase) in loans made to customers |
8,532 | (9,005 | ) | |||||
Proceeds from disposition of other real estate |
485 | 405 | ||||||
Purchases of premises and equipment |
(168 | ) | (1,654 | ) | ||||
Net cash flows from investing activities |
24,310 | 9,015 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net decrease in deposit accounts |
(7 | ) | (4,034 | ) | ||||
Proceeds from Federal Home Loan Bank advances |
10,000 | |||||||
Pay down of Federal Home Loan Bank borrowings |
(6,000 | ) | ||||||
Net increase (decrease) in short term borrowings |
3,653 | (97 | ) | |||||
Dividends paid |
(3 | ) | (2,904 | ) | ||||
Purchases of treasury stock |
(1 | ) | (746 | ) | ||||
Treasury shares reissued |
272 | 736 | ||||||
Net cash flows from financing activities |
3,914 | (3,045 | ) | |||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
31,603 | 9,476 | ||||||
CASH AND CASH EQUIVALENTS |
||||||||
Beginning of period |
26,843 | 9,441 | ||||||
End of period |
$ | 58,446 | $ | 18,917 | ||||
SUPPLEMENTAL DISCLOSURES |
||||||||
Interest paid |
$ | 7,382 | $ | 9,526 | ||||
Income taxes paid |
$ | 585 | $ | 635 | ||||
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
5
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
1.) Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (U.S.GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring items) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended September 30, 2009 are
not necessarily indicative of the results that may be expected for the year ending December 31,
2009. These interim unaudited consolidated financial statements should be read in conjunction with
our annual audited financial statements as of December 31, 2008, included in our Form 10-K for the
year ended December 31, 2008, filed with the United States Securities and Exchange Commission. The
accompanying consolidated balance sheet at December 31, 2008, has been derived from the audited
consolidated balance sheet but does not include all of the information and footnotes required by
U.S. GAAP for complete financial statements.
The Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC)
topic 105 Generally Accepted Accounting Principles became effective on July 1, 2009. At that
date, the ASC became FASBs officially recognized source of authoritative U.S. generally accepted
accounting principles (GAAP) applicable to all public and non-public non-governmental entities,
superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging
Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under
the authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. All other accounting literature is considered non-authoritative. The switch to the
ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.
Citing particular content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure.
2.) Reclassifications:
Certain items contained in the 2008 financial statements have been reclassified to conform to
the presentation for 2009. 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. Changes in the unrealized gains and losses on available for sale securities are recorded
net of tax effect as a component of comprehensive income.
Securities are evaluated periodically to determine whether a decline in their value is
other-than-temporary. Management utilizes criteria such as the magnitude and duration of the
decline, in addition to the reasons underlying the decline, to determine whether the loss in value
is other-than-temporary. The term other-than-temporary is not intended to indicate that the
decline is permanent, but indicates that the prospect for a near-term recovery of value is not
necessarily favorable, or that there is a lack of evidence to support a realizable value equal to
or greater than the carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the credit related OTTI is recognized in earnings while the non-credit
related OTTI on securities not expected to be sold is recognized in other comprehensive income
(loss).
6
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, or called using the specific identification method. The table below
sets forth the proceeds and gains or losses realized on securities sold or called for the period
ended:
THREE MONTHS | NINE MONTHS | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Proceeds on securities sold |
None | None | None | None | ||||||||||||
Gross realized gains |
None | None | None | None | ||||||||||||
Gross realized losses |
None | None | None | None | ||||||||||||
Proceeds on securities called |
$ | 1,000 | $ | 4,970 | $ | 25,220 | $ | 36,523 | ||||||||
Gross realized gains |
8 | 34 | 177 | 116 | ||||||||||||
Gross realized losses |
None | None | None | None |
Securities available for sale, carried at fair value, totaled $140,099 at September 30, 2009
and $121,348 at December 31, 2008 representing 80.54% and 63.28%, respectively, of all investment
securities. These levels provide an adequate level of liquidity in managements opinion.
Investment securities with a carrying value of approximately $90,808 at September 30, 2009 and
$104,162 at December 31, 2008 were pledged to secure deposits and for other purposes.
The amortized cost and estimated fair value of debt securities at September 30, 2009, 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.
AMORTIZED | ESTIMATED | |||||||
Investment securities available for sale | COST | FAIR VALUE | ||||||
Due in one year or less |
$ | 3,277 | $ | 3,358 | ||||
Due after one year
through five years |
396 | 409 | ||||||
Due after five years
through ten years |
10,196 | 10,344 | ||||||
Due after ten years |
37,766 | 29,289 | ||||||
51,635 | 43,400 | |||||||
Mortgage-backed securities |
89,824 | 92,950 | ||||||
Total |
$ | 141,459 | $ | 136,350 | ||||
AMORTIZED | ESTIMATED | |||||||
Investment securities held to maturity | COST | FAIR VALUE | ||||||
Due in one year or less |
$ | 3,904 | $ | 3,994 | ||||
Due after one year
through five years |
628 | 633 | ||||||
Due after five years
through ten years |
5,679 | 5,794 | ||||||
Due after ten years |
14,725 | 15,495 | ||||||
24,936 | 25,916 | |||||||
Mortgage-backed securities |
8,923 | 8,927 | ||||||
Total |
$ | 33,859 | $ | 34,843 | ||||
7
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The amortized cost and estimated fair value of investment securities available for sale and
investment securities held to maturity as of September 30, 2009, are as follows:
GROSS | GROSS | ESTIMATED | ||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
Investment securities available for sale | COST | GAINS | LOSSES | VALUE | ||||||||||||
U.S. Government
agencies and
corporations |
$ | 19,064 | $ | 502 | $ | 20 | $ | 19,546 | ||||||||
Obligations of states
and political
subdivisions |
10,704 | 344 | 11,048 | |||||||||||||
Mortgage-backed and
related securities |
89,824 | 3,245 | 119 | 92,950 | ||||||||||||
Trust preferred pools/
Collateralized debt
obligations |
21,580 | 9,061 | 12,519 | |||||||||||||
Corporate securities |
287 | 287 | ||||||||||||||
Total debt securities |
141,459 | 4,091 | 9,200 | 136,350 | ||||||||||||
Regulatory stock |
3,749 | 3,749 | ||||||||||||||
Total available
for sale |
$ | 145,208 | $ | 4,091 | $ | 9,200 | $ | 140,099 | ||||||||
GROSS | GROSS | ESTIMATED | ||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
Investment securities held to maturity | COST | GAINS | LOSSES | VALUE | ||||||||||||
U.S. Treasury
Securities |
$ | 131 | $ | 13 | $ | $ | 144 | |||||||||
U.S. Government
agencies and
corporations |
5,990 | 245 | 6,235 | |||||||||||||
Obligations of states
and political
subdivisions |
18,815 | 722 | 19,537 | |||||||||||||
Mortgage-backed and
related securities |
8,923 | 368 | 364 | 8,927 | ||||||||||||
Total held to
maturity |
$ | 33,859 | $ | 1,348 | $ | 364 | $ | 34,843 | ||||||||
8
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
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, 2008:
GROSS | GROSS | ESTIMATED | ||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
Investment securities available for sale | COST | GAINS | LOSSES | VALUE | ||||||||||||
U.S. Government
agencies and
corporations |
$ | 11,314 | $ | 561 | $ | $ | 11,875 | |||||||||
Obligations of states
and political
subdivisions |
7,293 | 289 | 84 | 7,498 | ||||||||||||
Mortgage-backed and
related securities |
80,073 | 2,067 | 162 | 81,978 | ||||||||||||
Trust preferred Pools/
collateralized debt obligations |
34,600 | 6 | 19,460 | 15,146 | ||||||||||||
Corporate securities |
1,102 | 1,102 | ||||||||||||||
Total debt securities |
134,382 | 2,923 | 19,706 | 117,599 | ||||||||||||
Regulatory stock |
3,749 | 3,749 | ||||||||||||||
Total available
for sale |
$ | 138,131 | $ | 2,923 | $ | 19,706 | $ | 121,348 | ||||||||
GROSS | GROSS | ESTIMATED | ||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
Investment securities held to maturity | COST | GAINS | LOSSES | VALUE | ||||||||||||
U.S. Treasury
Securities |
$ | 134 | $ | 18 | $ | $ | 152 | |||||||||
U.S. Government
agencies and
corporations |
32,894 | 407 | 50 | 33,251 | ||||||||||||
Obligations of states
and political
subdivisions |
22,626 | 726 | 49 | 23,303 | ||||||||||||
Mortgage-backed and
related securities |
14,752 | 265 | 513 | 14,504 | ||||||||||||
Total held to
maturity |
$ | 70,406 | $ | 1,416 | $ | 612 | $ | 71,210 | ||||||||
9
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following is a summary of the fair value of securities with unrealized losses and an aging
of those unrealized losses at September 30, 2009:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government agencies
and corporations |
$ | 1,969 | $ | 20 | $ | $ | $ | 1,969 | $ | 20 | ||||||||||||||
Mortgage-backed and
related securities |
22,231 | 96 | 1,024 | 387 | 23,255 | 483 | ||||||||||||||||||
Trust preferred pools/
collateralized debt
obligations |
12,519 | 9,061 | 12,519 | 9,061 | ||||||||||||||||||||
Total |
$ | 24,200 | $ | 116 | $ | 13,543 | $ | 9,448 | $ | 37,743 | $ | 9,564 | ||||||||||||
The above table represents 47 investment securities where the current value is less than the
related amortized cost.
The following is a summary of the fair value of securities with unrealized losses and an aging
of those unrealized losses at December 31, 2008:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government agencies
and corporations |
$ | 3,947 | $ | 50 | $ | $ | $ | 3,947 | $ | 50 | ||||||||||||||
Obligations of states and
political subdivisions |
2,906 | 105 | 370 | 28 | 3,276 | 133 | ||||||||||||||||||
Mortgage-backed and
related securities |
7,046 | 526 | 12,098 | 149 | 19,144 | 675 | ||||||||||||||||||
Trust preferred pools/
collateralized debt
obligations |
2,737 | 1,944 | 12,199 | 17,516 | 14,936 | 19,460 | ||||||||||||||||||
Total |
$ | 16,636 | $ | 2,625 | $ | 24,667 | $ | 17,693 | $ | 41,303 | $ | 20,318 | ||||||||||||
The above table represents 135 investment securities where the current value is less than the
related amortized cost.
The unrealized loss on Collateralized Debt Obligations (CDOS) represents pools of trust
preferred debt primarily issued by bank holding companies and insurance companies. The net
unrealized loss on these securities at September 30, 2009 was $9,061 as compared to a $19,454 loss
at December 31, 2008.
The unrealized losses on the Companys investment in U.S. Government agencies and
corporations, obligations of states and political subdivisions, and mortgage-backed and related
securities were caused by changes in market rates and related spreads, as well as reflecting
current distressed conditions in the credit markets and the markets on-going reassessment of
appropriate liquidity and risk premiums. It is expected that the securities would not be settled at
a price less than the amortized cost of the Companys investment because the decline in market
value is attributable to changes in interest rates and relative spreads and not credit quality, and
because the Company does not intend to sell those investments and it is not more likely than not
that the Company will be required to sell the investments before recovery of its amortized cost
basis less any current period credit loss. The Company does not consider those investments to be
other-than-temporarily impaired at September 30, 2009.
During September 2008, the U.S. government placed mortgage finance companies Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), under
conservatorship, giving management control to their regulator, the Federal Housing Finance Agency,
or FHFA, and providing both companies with access to credit from the U.S. Treasury. Debt
obligations now provide an explicit guarantee of the full faith and credit of the United States
government to existing and future debt holders of Fannie Mae and Freddie Mac limited to the period under which
they are under conservatorship.
10
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
In response to the takeover, the Federal Deposit Insurance Corporation tentatively approved a
rule, proposed by all four federal bank regulators, that eases capital requirements for federally
insured depository institutions that hold FNMA and FHLMC corporate debt, subordinated debt,
mortgage guarantees and derivatives.
Adversely affected by these actions were the value of the common stock and preferred stock of
both FNMA and FHLMC. Neither the Company nor its bank subsidiary owned any common or preferred
shares of either FNMA or FHLMC.
Securities Deemed to be Other-Than-Temporarily Impaired
The Company reviews investment debt securities on an ongoing basis for the presence of other
than temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on
individual investment securities were recognized during the first three quarters of 2009 in
accordance with FASB ASC topic 320, Investments Debt and Equity Securities. The purpose of this
ASC was to provide greater clarity to investors about the credit and noncredit component of an
other-than-temporary impairment event and to communicate more effectively when an
other-than-temporary impairment event has occurred. This ASC amends the other-than-temporary
impairment guidance in GAAP for debt securities and improves the presentation and disclosure of
other-than-temporary impairment on investment securities and changes the calculation of the
other-than-temporary impairment recognized in earnings in the financial statements. This ASC does
not amend existing recognition and measurement guidance related to other-than-temporary impairment
of equity securities.
For debt securities, ASC topic 320 requires an entity to assess whether (a) it has the intent
to sell the debt security, or (b) it is more likely than not that it will be required to sell the
debt security before its anticipated recovery. If either of these conditions is met, an
other-than-temporary impairment on the security must be recognized.
In instances in which a determination is made that a credit loss (defined as the difference
between the present value of the cash flows expected to be collected and the amortized cost basis)
exists but the entity does not intend to sell the debt security and it is not more likely than not
that the entity will be required to sell
the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the
amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation
and amount of the other-than-temporary impairment recognized in the income statement.
In these instances, the impairment is separated into (a) the amount of the total impairment
related to the credit loss, and (b) the amount of the total impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the credit loss is
recognized in earnings. The amount of the total impairment related to all other factors is
recognized in other comprehensive income (loss). The total other-than-temporary impairment is
presented in the income statement with an offset for the amount of the total other-than-temporary
impairment that is recognized in other comprehensive income (loss). Previously, in all cases, if an
impairment was determined to be other-than-temporary, an impairment loss was recognized in earnings
in an amount equal to the entire difference between the securitys amortized cost basis and its
fair value at the balance sheet date of the reporting period for which the assessment was made. The
new presentation provides additional information about the amounts that the Company does not expect
to collect related to a debt security.
11
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Through the impairment assessment process, the Company determined that the investments
discussed below were other-than-temporarily impaired at September 30, 2009. The Company recorded
impairment credit losses in earnings on available-for-sale securities of $2.5 million and $14.2
million for the three and nine month periods ended September 30, 2009. The $3.3 million non-credit
portion of impairment recognized during the nine month period ended September 30, 2009 was recorded
in Other Comprehensive Income. No impairment was recorded in the nine months ended September 30,
2008.
THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||||||||
Impairment Losses Recognized in Income | September 30, | September 30, | |||||||||||||||||
On Other-Than-Temporarily Impaired Securities | 2009 | 2008 | 2009 | 2008 | |||||||||||||||
Collateralized debt obligations |
$ | 2,532 | $ | | $ | 13,357 | $ | | |||||||||||
General Motors Corporate Securities |
| | 815 | | |||||||||||||||
Total |
$ | 2,532 | $ | | $ | 14,172 | $ | | |||||||||||
At September 30, 2009, the Company recognized $815 of other-than-temporary losses attributable
to its General Motors Corporation Corporate Securities with a cost basis of $2,354. The impairment
charges were recognized due to the fact that General Motors filed for government-assisted Chapter
11 bankruptcy protection on June 1, 2009. On July 10, 2009, a new entity, NGMCO, Inc purchased the
ongoing operations and trademarks from GM. The purchasing company in turn changed its name from
NGMCO, Inc to General Motors Company, marking the emergence of a new operation from the
pre-packaged Chapter 11 reorganization. Under the reorganization process, termed a 363 sale, the
purchaser of the assets of a company in bankruptcy proceedings is able to obtain approval for the
purchase from the court prior to the submission of a re-organization plan, free of liens and other
claims.
For the nine month period ended September 30, 2009, the Company recognized OTTI of $13,357 of
which $10,825 was recognized in the first two quarters as other-than-temporary losses attributable
to sixteen CDOs with a cost basis of $19,122. The impairment charges were recognized after
determining the likely future cash flows of these securities had been adversely impacted from the
previous quarter.
4.) Concentration of Credit Risk and Off Balance Sheet Risk:
The Company currently does not enter into derivative financial instruments including futures,
forwards, interest rate risk swaps, option contracts, or other financial instruments with similar
characteristics. The Company also does not participate in any partnerships that might give rise to
off-balance sheet liabilities.
The Company, through its subsidiary bank, is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of credit, and
financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized on the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular classes of financial
instruments.
12
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
In the event of nonperformance by the other party, the Companys exposure to credit loss on
these financial instruments is represented by the contract or notional amount of the instrument.
The Company uses the same credit policies in making commitments and conditional obligations as it
does for instruments recorded on the balance sheet. The amount and nature of collateral obtained,
if any, is based on managements credit evaluation.
CONTRACT OR | ||||||||
NOTIONAL AMOUNT | ||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Financial instruments whose contract
amount represents credit risk: |
||||||||
Commitments to extend credit: |
||||||||
Fixed rate |
$ | 1,476 | $ | 1,301 | ||||
Variable |
33,115 | 35,699 | ||||||
Standby letters of credit |
933 | 850 |
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Generally these financial arrangements
have fixed expiration dates or other termination clauses and may require payment of a fee. Standby
letters of credit are conditional commitments issued by the Companys subsidiary bank to guarantee
the performance of a customer to a third party. Since many of these commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is
based on managements credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment and income producing
commercial properties.
The Companys subsidiary bank also offers limited overdraft protection as a non-contractual
courtesy which is available to demand deposit accounts in good standing for business, personal or
household use. The Company reserves the right to discontinue this service without prior notice.
The available amount of overdraft protection on depositors accounts not included in the table
above at September 30, 2009 totaled $10,651 and $11,536 at December 31, 2008. The total average
daily balance of overdrafts used in 2009 was $136 and $161 in 2008, or approximately 1.3% of the
total aggregate overdraft protection available to depositors at September 30, 2009 and 1.4% at
December 31, 2008.
13
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
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 Northeast Ohio and
Western Pennsylvania. The following represents the composition of the loan portfolio:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
1-4 family residential mortgages |
26.1 | % | 28.1 | % | ||||
Commercial mortgages |
54.6 | % | 52.3 | % | ||||
Consumer loans |
3.5 | % | 3.3 | % | ||||
Commercial loans |
9.8 | % | 11.3 | % | ||||
Home equity loans |
6.0 | % | 5.0 | % |
There are $58 in mortgage loans held for sale included in 1-4 family residential mortgages as
of September 30, 2009, and $236 at December 31, 2008. These loans are carried, in the aggregate, at
the lower of cost or estimated market value based on secondary market prices.
The following table sets forth the aggregate balance of underperforming loans for each of the
following categories at September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Loans accounted for on a
non-accrual basis |
$ | 785 | $ | 858 | ||||
Loans contractually past due
90 days or more as to
interest or principal
payments (not included in
non-accrual loans above) |
NONE | NONE | ||||||
Loans considered troubled debt
restructurings (not included
in non-accrual loans or loans
contractually past due above) |
591 | 432 |
14
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following shows the amounts of contractual interest income and interest income actually
reflected in income on loans accounted for on a non-accrual basis and loans considered troubled
debt restructuring for the nine months ended September 30, 2009 and 2008.
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Gross interest income that would have been recorded
if the loans had been current in accordance with
their original terms (contractual interest income) |
$ | 100 | $ | 148 | ||||
Interest income actually included in income on the loans |
49 | 29 |
A loan is placed on a non-accrual 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 placed on non-accrual status, any interest that has been accrued and not
collected on the loan is charged against earnings. Cash payments received while a loan is
classified as non-accrual are recorded as a reduction to principal or reported as interest income
according to managements judgment as to collectibility of principal.
A loan is returned to accrual status when either all of the principal and interest amounts
contractually due are brought current and future payments are, in managements opinion,
collectible, or when it otherwise becomes well secured and in the process of collection. When a
loan is charged-off, any interest accrued but not collected on the loan is charged against
earnings.
Loans are considered impaired when, based on current information and events, it is probable
the Company will be unable to collect all amounts due in accordance with the original contractual
terms of the loan agreement, including scheduled principal and interest payments. If a loan is
impaired, a specific valuation allowance is allocated, if necessary. Impaired loans are generally
included in non-accrual 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. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.
Impaired loans were as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Balance of impaired loans with no allocated allowance |
$ | 270 | $ | 483 | ||||
Balance of impaired loans with an allocated allowance |
617 | 441 | ||||||
Total recorded investment in impaired loans |
$ | 887 | $ | 924 | ||||
Amount of the allowance allocated to impaired loans |
$ | 114 | $ | 262 | ||||
Average balance of impaired loans |
$ | 1,073 | $ | 1,489 | ||||
The impaired loans included in the table above were primarily comprised of collateral
dependent commercial loans. Interest income recognized on these loans subsequent to their
classification as impaired was $11 for the nine months ended September 30, 2009 and $37 for the
twelve months ended December 31, 2008.
Loans
in the amount of $31,647 as of September 30, 2009, and $27,499 as of December 31, 2008
were not included in any of the above categories and were not currently considered impaired, but
which can be considered to be potential problem loans.
Any loans classified for regulatory purposes as loss, doubtful, substandard, or special
mention that have not been disclosed above either 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.
15
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following is an analysis of the allowance for loan losses for the periods ended September
30, 2009 and September 30, 2008:
THREE MONTHS | NINE MONTHS | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Balance at beginning of period |
$ | 2,556 | $ | 1,554 | $ | 2,470 | $ | 1,621 | ||||||||
Loan charge-offs: |
||||||||||||||||
14 family residential mortgages |
56 | 22 | 86 | 174 | ||||||||||||
Commercial mortgages |
166 | 45 | 233 | 258 | ||||||||||||
Consumer loans and other loans |
40 | 69 | 146 | 186 | ||||||||||||
Commercial loans |
1 | 1 | 5 | 20 | ||||||||||||
Home equity loans |
56 | | 56 | 17 | ||||||||||||
319 | 137 | 526 | 655 | |||||||||||||
Recoveries on previous loan losses |
||||||||||||||||
1 4 family residential mortgages |
| | 1 | | ||||||||||||
Commercial mortgages |
4 | 1 | 28 | 2 | ||||||||||||
Consumer loans and other loans |
27 | 37 | 79 | 97 | ||||||||||||
Commercial loans |
| 35 | | 35 | ||||||||||||
Home equity loans |
| | | | ||||||||||||
31 | 73 | 108 | 134 | |||||||||||||
Net charge-offs |
(288 | ) | (64 | ) | (418 | ) | (521 | ) | ||||||||
Provision charged to operations |
121 | 105 | 337 | 495 | ||||||||||||
Balance at end of period |
$ | 2,389 | $ | 1,595 | $ | 2,389 | $ | 1,595 | ||||||||
Ratio of annualized net charge-offs
to average loans outstanding |
0.49 | % | 0.11 | % | 0.23 | % | 0.31 | % | ||||||||
For each of the periods presented above, the provision for loan losses charged to operations
is based on managements 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 customers; the cash flow
coverage and trends evidenced by financial information supplied by customers; the nature and
estimated value of any collateral supporting specific loan credits; risk classifications determined
by the Companys loan review systems or as the result of the regulatory examination process; and
general economic conditions in the lending area of the Companys bank subsidiary. Key risk factors
and assumptions are systematically updated to reflect actual experience and changing circumstances.
The Company maintains an allowance for losses on unfunded commercial lending commitments to
provide for the risk of loss inherent in these arrangements. The allowance is computed using a
methodology similar to that used to determine the allowance for loan losses. This allowance is
reported as a liability on the balance sheet within accrued expenses and other liabilities, while
the corresponding provision for these losses is recorded as a component of other expense.
Certain asset-specific loans are evaluated individually for impairment, based on managements
best estimate of discounted cash repayments and the anticipated proceeds from liquidating
collateral. The actual timing and amount of repayments and the ultimate realizable value of the
collateral may differ from managements estimates.
16
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The expected loss for certain other commercial credits utilizes internal risk ratings. These
loss estimates are sensitive to changes in the customers risk profile, the realizable value of
collateral, other risk factors and the related loss
experience of other credits of similar risk. Consumer credits generally employ statistical loss
factors, adjusted for other risk indicators, applied to pools of similar loans stratified by asset
type. These loss estimates are sensitive to changes in delinquency status and shifts in the
aggregate risk profile.
5.) Legal Proceedings:
The Bank is involved in legal actions arising in the ordinary course of business. In the
opinion of management, the outcomes from these matters, either individually or in the aggregate,
are not expected to have any material effect on the Company.
6.) Earnings Per Share and Capital Transactions:
The following table sets forth the computation of basic earnings per common share and diluted
earnings per common share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares outstanding during the applicable period.
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Income (Loss) |
$ | (983 | ) | $ | 1,078 | $ | (6,978 | ) | $ | 2,917 | ||||||
Weighted average common
shares outstanding* |
4,525,551 | 4,486,031 | 4,525,505 | 4,490,547 | ||||||||||||
Basic earnings per share* |
$ | (0.22 | ) | $ | 0.24 | $ | (1.54 | ) | $ | 0.65 | ||||||
Diluted earnings per share* |
$ | (0.22 | ) | $ | 0.24 | $ | (1.54 | ) | $ | 0.65 | ||||||
Dividends declared per share* |
$ | 0.00 | $ | 0.22 | $ | 0.00 | $ | 0.65 |
* | Average shares outstanding and the resulting per share amounts have been restated to give
retroactive effect to the two 1% stock dividends in 2009. |
7.) Stock Repurchase Program
On February 27, 2007, the Companys Board of Directors approved a Stock Repurchase Program
which permitted the Company to repurchase up to 100,000 shares of its outstanding common shares in
the over-the-counter market or in privately negotiated transactions in accordance with applicable
regulations of the Securities and Exchange Commission. Based on the value of the Companys stock on
February 27, 2007, the commitment to repurchase the stock over the program was approximately
$1,715.
On August 14, 2007, the Companys Board of Directors authorized the repurchase of up to an
additional 100,000 shares of its outstanding common shares in over-the-counter market or in
privately negotiated transactions. Based on the value of the Companys stock on August 14, 2007,
the commitment to repurchase these additional shares over the program was approximately $1,635.
On November 27, 2007, the Companys Board of Directors increased to 300,000 shares the size of
its current stock buyback program by authorizing the repurchase of up to an additional 100,000
shares of its outstanding common shares in the over-the-counter market or in privately negotiated
transactions. Based on the value of the Companys stock on November 27, 2007, the commitment to
repurchase these additional shares over the program was approximately $1,375.
The repurchase program terminated on February 28, 2009. Repurchased shares are designated as
treasury shares, available for general corporate purposes, including possible use in connection
with the Companys dividend reinvestment program, employee benefit plans, acquisitions or other
distributions. Under the program the Company repurchased 205,986 shares in 2007, 51,817 shares in
2008 and none in 2009. The Company reissued 28,084 shares to existing shareholders through its
dividend reinvestment program during 2009, net of repurchased fractional shares.
17
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
8.) Subordinated Debt
In July 2007 a trust formed by the Company issued $5,000 of floating rate trust preferred
securities as part of a pooled offering of such securities due December 2037. The Bancorp owns all
$155 of the common securities related to this trust. The Company issued subordinated debentures to
the trust at an interest rate that floats quarterly at the 3-month Libor rate plus 1.45% in
exchange for the proceeds of the trust preferred offering. The debentures constitute the assets of
this trust. The Company may redeem the subordinated debentures, in whole or in part, at a premium
declining ratably to par in September 2012.
In accordance with FASB ASC Topic 942 Financial Services Depository and Lending the trust
is not consolidated with the Companys financial statements. Accordingly, the Company does not
report the securities issued by the trust as liabilities, but instead reports as liabilities the
subordinated debentures issued by the Company and held by the trust. The subordinated debentures
qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Companys
capital adequacy.
9.) Fair Value
Measurements
Accounting guidance under ASC Topic 820, Fair Value Measurements and Disclosures, affirms
that the objective of fair value when the market for an asset is not active is the price that would
be received to sell the asset in an orderly transaction, and clarifies and includes additional
factors for determining whether there has been a significant decrease in market activity for an
asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the evidence.
ASC Topic 820 provides guidance for measuring the fair value of an asset or liability in
circumstances in which a quoted price in an active market for the identical asset or liability is
not available. In such instances, a reporting entity is required to measure fair value utilizing a
valuation technique that uses:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of
the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly
or indirectly observable as of the reported date. The nature of these assets and liabilities
include items for which quoted prices are available but which trade less frequently, and items that
are fair valued using other financial instruments, the parameters of which can be directly
observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported
date. These items do not have two-way markets and are measured using managements best estimate of
fair value, where inputs into the determination of fair value require significant management
judgment or estimation.
18
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following table presents the assets reported on the consolidated balance sheets at their
fair value as of September 30, 2009 and December 31, 2008 by level within the fair value hierarchy.
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
Fair Value Measurements at 9/30/09 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | ||||||||||||||
Description | 09/30/09 | (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
U.S. Government agencies
and corporations |
$ | 19,546 | $ | $ | 19,546 | $ | ||||||||||
Obligations of states and
political subdivisions |
11,048 | 11,048 | ||||||||||||||
Mortgage-backed and
related securities |
92,950 | 92,950 | ||||||||||||||
Trust preferred pools/
collateralized debt obligations |
12,519 | 12,519 | ||||||||||||||
Corporate securities |
287 | 287 | ||||||||||||||
Total |
$ | 136,350 | $ | $ | 123,831 | $ | 12,519 | |||||||||
Fair Value Measurements at 12/31/08 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | ||||||||||||||
Description | 12/31/08 | (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
U.S. Government agencies
and corporations |
$ | 11,875 | $ | $ | 11,875 | $ | ||||||||||
Obligations of states and
political subdivisions |
7,498 | 7,498 | ||||||||||||||
Mortgage-backed and
related securities |
81,978 | 81,978 | ||||||||||||||
Trust preferred pools/
collateralized debt obligations |
15,146 | 15,146 | ||||||||||||||
Corporate securities |
1,102 | 1,102 | ||||||||||||||
Total |
$ | 117,599 | $ | $ | 101,351 | $ | 16,248 | |||||||||
The following tables present the changes in the Level 3 fair value category for the nine
months (Table 1) and three months (Table 2) ended September 30, 2009. The Company classifies
financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one
significant unobservable input to the valuation model. In addition to these unobservable inputs,
the valuation models for Level 3 financial instruments typically also rely on a number of inputs
that are readily observable either directly or indirectly.
Net unrealized | ||||||||||||||||||||||||||||
Losses included | ||||||||||||||||||||||||||||
Net realized/ | in net income | |||||||||||||||||||||||||||
Unrealized gains/ | for the period | |||||||||||||||||||||||||||
(losses) included in | Transfers | Purchases | relating to | |||||||||||||||||||||||||
Other | in and/or | issuances | assets held at | |||||||||||||||||||||||||
January 1, | Noninterest | Comprehensive | out of | and | September 30, | September 30, | ||||||||||||||||||||||
Table 1 | 2009 | Income | Income | Level 3 | settlements | 2009 | 2009 | |||||||||||||||||||||
Trust preferred
pools/CDOs |
$ | 15,146 | $ | (13,357 | ) | $ | 10,393 | $ | $ | 337 | $ | 12,519 | $ | (13,357 | ) | |||||||||||||
Corporate securities |
1,102 | (815 | ) | (287 | ) | (815 | ) |
Losses included | ||||||||||||||||||||||||||||
Net realized/ | in net income | |||||||||||||||||||||||||||
Unrealized gains/ | for the period | |||||||||||||||||||||||||||
(losses) included in | Transfers | Purchases | relating to | |||||||||||||||||||||||||
Other | in and/or | issuances | assets held at | |||||||||||||||||||||||||
June 30, | Noninterest | Comprehensive | out of | and | September 30, | September 30, | ||||||||||||||||||||||
Table 2 | 2009 | Income | Income | Level 3 | settlements | 2009 | 2009 | |||||||||||||||||||||
Trust preferred
pools/CDOs |
$ | 11,387 | $ | (2,532 | ) | $ | 3,507 | $ | $ | 157 | $ | 12,519 | $ | (2,532 | ) | |||||||||||||
Corporate securities |
287 | (287 | ) |
19
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
On September 30, 2008, the Company changed its valuation technique for pooled trust preferred
holdings available-for-sale. Previously, the Company relied on prices compiled by third party
vendors using observable market data (Level 2) to determine the values of these securities. Based
on financial market conditions at September 30, 2008, the Company concluded that the fair values
obtained from third party vendors reflected forced liquidation or distressed sales for these trust
preferred securities. Therefore, the Company estimated fair value based on a discounted cash flow
methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity
risks. The change in the valuation technique for these trust preferred securities resulted in a
transfer of these securities into Level 3 financial assets.
The Company conducts other-than-temporary impairment analysis on a quarterly basis.
The initial indication of other-than-temporary impairment for both debt and equity securities is a
decline in the market value below the amount recorded for an investment. A decline in value that is
considered to be other-than-temporary is recorded as a loss within non-interest income in the
consolidated statements of income. In determining whether an impairment is other than temporary,
the Company considers a number of factors, including, but not limited to, the length of time and
extent to which the market value has been less than cost, recent events specific to the issuer,
including investment downgrades by rating agencies and economic conditions of its industry, and a
determination that the Company does not intend to sell those investments and it is not more likely
than not that the Company will be required to sell the investments before recovery of its amortized
cost basis less any current period credit loss. Among the factors that are considered in
determining the Companys intent and ability is a review of its capital adequacy, interest rate
risk position and liquidity.
The Company also considers the issuers financial condition, capital strength and near-term
prospects. In addition, for debt securities the Company considers the cause of the price decline
(general level of interest rates and industry- and issuer-specific factors), current ability to
make future payments in a timely manner and the issuers ability to service debt. The assessment of
a securitys ability to recover any decline in market value, the ability of the issuer to meet
contractual obligations and the Companys intent and ability to retain the security require
considerable judgment.
Collateralized debt obligations are accounted for under FASB ASC Topic 325 Investments
Other For these investments at acquisition, the Company evaluates current available information
in estimating the future cash flows of these securities and determines whether there have been
favorable or adverse changes in estimated cash flows from the cash flows previously projected. The
Company considers the structure and term of the pool and the financial condition of the underlying
issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate
risk premiums, the timing and amount of interest and principal payments and the allocation of
payments to the various note classes. Current estimates of cash flows are based on the most recent
trustee reports, announcements of deferrals or defaults, expected future default rates and other
relevant market information.
The Company owns 32 collateralized debt obligation securities (CDO) totaling
$35,324 (par value) that are backed by trust preferred securities issued by banks, thrifts,
insurance companies and real estate investment trusts. These securities were all rated investment
grade at inception. During the second half of 2008 and through the third quarter of 2009, factors
outside the Companys control impacted the fair value of these securities and will likely continue
to do so for the foreseeable future. These factors include but are not limited to: guidance on
fair value accounting, issuer credit deterioration, issuer deferral and default rates, potential
failure or government seizure of underlying financial institutions or insurance companies, ratings
agency actions, or regulatory actions. As a result of changes in these and various other factors
during the first three quarters of 2009, Moodys Investors Service, Fitch Ratings and Standards and
Poors downgraded multiple CDO securities, including securities held by the Company. Thirty-one of
the CDO securities held by the Company are now considered to be below investment grade, with one
20
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
security
still rated investment grade. The deteriorating economic, credit and financial conditions experienced in 2008 and 2009 have resulted in illiquid and inactive financial
markets and severely depressed prices for these securities. The Company analyzed the cash flow
characteristics of these securities. The Company determined that for 16 of these securities, it
does not intend to sell the securities and it is not more likely than not that the Company will be
required to sell the securities before recovery of its amortized cost basis. It was determined
that there was no adverse change in the cash flows for these 16 securities. The Company does not
consider the investment in these assets to be other-than-temporarily impaired at September 30,
2009. However, there is a risk that subsequent evaluations could result in recognition of
other-than-temporary impairment charges in the future. Upon completion of the September 30, 2009
analysis, our model indicated other-than-temporary impairment on the remaining sixteen securities,
all of which experienced additional defaults or deferrals during the period. These sixteen
securities had impairment losses of $16.6 million, of which $13.4 million was recorded as expense
and $3.2 million was recorded in other comprehensive income. These sixteen securities remained
classified as available for sale at September 30, 2009, and together, the 32 securities subjected
to FASB ASC Topic 320 accounted for the entire $9.1 million of gross unrealized losses in the trust
preferred pools/collateralized debt obligations category at September 30, 2009.
The following table details the sixteen debt securities with other-than-temporary impairment,
their credit ratings at September 30, 2009 and the related losses recognized in earnings:
Amount of other-than | Amount of other than | |||||||||||
Temporary impairment | Temporary impairment | |||||||||||
Related to credit loss | Related to credit loss | |||||||||||
At January 1, 2009 | Addition | At Sept. 30, 2009 | ||||||||||
PreTSL II Mezzanine Moodys Rated Ca |
$ | | $ | 907 | $ | 907 | ||||||
PreTSL VIII B-3 Moodys Rated Ca |
| 1,419 | 1,419 | |||||||||
PreTSL XVI D Fitch Rated C |
| 518 | 518 | |||||||||
PreTSL XVI D Fitch Rated C |
| 1,026 | 1,026 | |||||||||
Alesco Preferred Funding VIII
Class E Notes 1 Moodys Rated Ca |
| 1,493 | 1,493 | |||||||||
Tropic CDO V Class B-1L Moodys Rated Ca |
| 4,425 | 4,425 | |||||||||
MM Community Funding III Class B
Moodys Rated Baa3 |
| 6 | 6 | |||||||||
PreTSL IX Class B-2 Moodys Rated Ca |
| 160 | 160 | |||||||||
PreTSL XVII Class D Fitch Rated C |
| 954 | 954 | |||||||||
PreTSL XXV Class D Fitch Rated C |
| 1,025 | 1,025 | |||||||||
PreTSL XXVI Class D Fitch Rated C |
| 343 | 343 | |||||||||
PreTSL XVIII Class D Fitch Rated C |
| 527 | 527 | |||||||||
Trapeza CDO II Class C-1 Moodys Rated Caa2 |
| 318 | 318 | |||||||||
PreTSL XVII Class C Moodys Rated CC |
| 72 | 72 | |||||||||
PreTSL XV Class B-3 Moodys Rated Ca |
| 82 | 82 | |||||||||
PreTSL XV Class B-2 Moodys Rated Ca |
| 82 | 82 | |||||||||
Total |
$ | | $ | 13,357 | $ | 13,357 | ||||||
The market for these securities at September 30, 2009 is not active and markets for
similar securities are also not active. The inactivity was evidenced first by a significant
widening of the bid-ask spread in the brokered markets in which CDOs trade and then by a
significant decrease in the volume of trades relative to historical levels. The new issue market
is also inactive as no new trust preferred CDOs have been issued since 2007. There are currently
very few market participants who are willing and or able to transact for these securities. The
pooled market value for these securities remains very depressed relative to historical levels. For
example, the yield spreads for the broad market of investment grade and high yield corporate bonds
reached all time wide levels versus Treasuries at the end of November. Although there has been
marked improvement in the credit spread premium in the corporate bond space, no such improvement
has been noted in the market for trust preferred CDOs.
21
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Given conditions in the debt markets today and the absence of observable
transactions in the secondary and the new issue markets, we determined:
| The few observable transactions and market quotations that are available are not
reliable for purposes of determining fair value at September 30, 2009; |
| An income valuation approach technique (present value technique) that maximizes the use
of relevant observable inputs and minimizes the use of unobservable inputs will be equally
or more representative of fair value than the market approach valuation technique used at
prior measurement dates; and |
| The CDOs will be classified within Level 3 of the fair value hierarchy because the
Company determined that significant adjustments are required to determine fair value at the
measurement date. |
The CDO valuations were derived by an independent third party valuation service.
Our approach to determining fair value involved these steps:
1. | The credit quality of the collateral is estimated using average probability of default
values for each issuer (adjusted for rating levels). |
|
2. | The default probabilities also considered the potential for correlation among issuers
within the same industry (e.g. banks with other banks). |
|
3. | The cash flows were forecast for the underlying collateral and applied to each CDO tranche to
determine the resulting distribution among the securities. |
|
4. | The expected cash flows were discounted to calculate the present value of the security. |
|
5. | The effective discount rates on an overall basis generally range from 9.07% to 47.36% and are
highly dependent upon the credit quality of the collateral, the relative position of the
tranche in the capital structure of the CDO and the prepayment assumptions. |
The following table presents the assets measured on a nonrecurring basis on the consolidated
balance sheets at their fair value as of September 30, 2009 and December 31, 2008, by level within
the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair
value through the establishment of specific reserves. Techniques used to value the collateral that
secure the impaired loan include: quoted market prices for identical assets classified as Level 1
inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level
2 inputs. In cases where valuation techniques include inputs that are unobservable and are based on
estimates and assumptions developed by management based on the best information available under
each circumstance, the asset valuation is classified as Level 3 inputs.
September 30, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets Measured on a Nonrecurring Basis: |
||||||||||||||||
Impaired Loans |
$ | $ | 773 | $ | $ | 773 | ||||||||||
Other Real Estate Owned |
689 | 689 |
December 31, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets Measured on a Nonrecurring Basis: |
||||||||||||||||
Impaired Loans |
$ | $ | 662 | $ | $ | 662 | ||||||||||
Other Real Estate Owned |
809 | 809 |
Impaired Loans: A loan is considered to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts due (both interest
and principal) according to the contractual terms of the loan agreement. Impaired loans are
measured, as a practical expedient, at the loans observable market price or the fair market value
of the collateral if the loan is collateral dependent. At September 30, 2009, the recorded
investment in impaired loans was $887 with a related reserve of $114 resulting in a net balance of
$773. At December 31, 2008, the recorded investment in impaired loans was $924 with a related
reserve of $262 resulting in a net balance of $662.
22
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Other Real Estate Owned (OREO): Real Estate acquired through foreclosure or deed-in-lieu of
foreclosure is included in other assets. Such real estate is carried at the lower of cost or fair
value less estimated costs to sell. Any reduction from the carrying value of the related loan to
fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in
fair market value is reflected as a valuation allowance through a charge to income. Costs of
significant property improvements are capitalized, whereas costs, relating to holding and
maintaining the property, are charged to expense. At September 30, 2009 the recorded investment in
OREO was $699 with a valuation allowance of $10 resulting in a net balance of $689. At December
31, 2008, the recorded investment in OREO was $819 with a valuation allowance of $10 resulting in a
net balance of $809.
Financial Instruments
The FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate the value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other estimation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate and estimates of
future cash flows.
Such techniques and assumptions, as they apply to individual categories of the financial
instruments, are as follows:
Cash and cash equivalents The carrying amounts for cash and cash equivalents are a reasonable
estimate of those assets fair value.
Investment securities Fair values of securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on quoted market
prices of comparable securities. Prices on trust preferred securities were calculated using a
discounted cash-flow technique. Cash flows were estimated based on credit and prepayment
assumptions. The present value of the projected cash flows was calculated using a discount rate
equal to the current yield used to accrete the beneficial interest.
Loans, net of allowance for loan loss Market quotations are generally not available for loan
portfolios. The fair value is estimated by discounting future cash
flows using current market inputs at which loans with similar terms
and qualities would be made to borrowers of similar credit quality.
Accrued interest receivable The carrying amount is a reasonable estimate of these assets fair
value.
Demand and savings deposits Demand, savings, and money market deposit accounts are valued at the
amount payable on demand.
Time deposits The fair value of certificates of deposit based on the discounted value of
contractual cash flows. The discount rates are estimated using market rates currently offered for
similar instruments with similar remaining maturities.
23
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
FHLB advances The fair value for fixed rate advances is estimated by discounting the future cash
flows using rates at which advances would be made to borrowers with similar credit ratings and for
the same remaining maturities. The fair value for
FHLB advances The fair value for fixed rate advances is estimated by discounting the future cash
flows using rates at which advances would be made to borrowers with similar credit ratings and for
the same remaining maturities. The fair value for
the fixed rate advances that are convertible to quarterly LIBOR floating rate advances on or after
certain specified dates at the option of the FHLB and the FHLB fixed rate advances that are putable
on or after certain specified dates at the option of the FHLB are priced using the FHLB of
Cincinnatis model.
Other short term borrowings Other borrowings generally have an original term to maturity of one
week or less. Consequently, their carrying value is a reasonable estimate of fair value.
Subordinated debt The carrying amount for the subordinated debt is a reasonable estimate of the
debts fair value due to the fact the debt floats based on LIBOR and resets quarterly.
Accrued interest payable The carrying amount is a reasonable estimate of these liabilities fair
value.
The fair value of unrecorded commitments at September 30, 2009 and December 31, 2008 is not
material.
In addition, other assets and liabilities of the Company that are not defined as financial
instruments are not included in the disclosures, such as property and equipment. Also,
non-financial instruments typically not recognized in financial statements nevertheless may have
value but are not included in the above disclosures. These include, among other items, the
estimated earning power of core deposit accounts, the trained work force, customer goodwill and
similar items. Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts and estimated fair values of the Companys financial instruments are as
follows:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 58,446 | $ | 58,446 | $ | 26,843 | $ | 26,843 | ||||||||
Investment securities available for sale |
140,099 | 140,099 | 121,348 | 121,348 | ||||||||||||
Investment securities held to maturity |
33,859 | 34,843 | 70,406 | 71,210 | ||||||||||||
Loans, net of allowance for loan losses |
234,150 | 240,594 | 243,547 | 248,267 | ||||||||||||
Accrued interest receivable |
2,340 | 2,340 | 2,637 | 2,637 | ||||||||||||
LIABILITIES |
||||||||||||||||
Demand and savings deposits |
209,280 | 209,280 | 203,682 | 203,682 | ||||||||||||
Time deposits |
170,666 | 175,696 | 176,271 | 180,431 | ||||||||||||
FHLB advances |
62,500 | 66,487 | 62,500 | 67,889 | ||||||||||||
Other short term borrowings |
9,301 | 9,301 | 5,648 | 5,648 | ||||||||||||
Subordinated debt |
5,155 | 5,155 | 5,155 | 5,155 | ||||||||||||
Accrued interest payable |
845 | 845 | 967 | 967 |
24
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
10.) Memorandum of Understanding
As disclosed under Item 5 of the Form 10Q filing for the quarter ended March 31, 2009,
Cortland Bancorp and the Cortland Savings and Banking Company, in May 2009, were presented with an
informal memorandum of understanding.
On May 26, 2009, the Board of Directors of Cortland Bancorp (CLDB) and The Cortland Savings
and Banking Company (Cortland Banks), a wholly-owned subsidiary of CLDB, adopted resolutions
authorizing its President and Chief Executive Officer to enter into the Memorandum of Understanding
(MOU) with the Federal Reserve Bank of Cleveland (Federal Reserve). The MOU, which was executed
June 1, 2009, requires CLDB and Cortland Banks to obtain the Federal Reserves approval prior to:
(i) incurring any debt; (ii) repurchasing any of its stock; or (iii) paying any dividends.
The MOU also requires Cortland Banks, within specified timeframes, to submit the following
plans to the Federal Reserve for its approval: (i) a plan to strengthen and improve management of
the overall risk exposure of the investment portfolio; and (ii) a plan to maintain an adequate
capital position.
The provisions of the MOU shall remain effective and enforceable until stayed, modified,
terminated or suspended by the Federal Reserve.
11.) Subsequent Events
The Company assessed events occurring subsequent to September 30, 2009 through November 9,
2009 for potential recognition and disclosure in the consolidated financial statements in
accordance with FASB ASC Topic 855 Subsequent Events. No events have occurred that would require
adjustment to or disclosure in the consolidated financial statements which were issued on November 9, 2009.
25
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS,
YIELDS AND RATES (UNAUDITED)
YIELDS AND RATES (UNAUDITED)
(Fully taxable equivalent basis in thousands of dollars)
YEAR TO DATE AS OF | ||||||||||||||||||||||||||||||||||||
SEPTEMBER 30, 2009 | DECEMBER 31, 2008 | SEPTEMBER 30, 2008 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | ||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Federal funds sold and other earning assets |
$ | 63,523 | $ | 123 | 0.4 | % | $ | 11,462 | $ | 200 | 1.8 | % | $ | 10,209 | $ | 179 | 2.4 | % | ||||||||||||||||||
Investment securities (1) (2) |
175,598 | 7,062 | 5.4 | % | 223,077 | 12,583 | 5.6 | % | 225,265 | 9,509 | 5.6 | % | ||||||||||||||||||||||||
Loans (2) (3) |
238,594 | 11,478 | 6.4 | % | 228,440 | 15,557 | 6.8 | % | 226,407 | 11,659 | 6.9 | % | ||||||||||||||||||||||||
Total interest-earning assets |
477,715 | $ | 18,663 | 5.2 | % | 462,979 | $ | 28,340 | 6.1 | % | 461,881 | $ | 21,347 | 6.2 | % | |||||||||||||||||||||
Cash and due from banks |
6,655 | 6,791 | 7,784 | |||||||||||||||||||||||||||||||||
Bank premises and equipment |
7,450 | 7,055 | 6,893 | |||||||||||||||||||||||||||||||||
Other assets |
7,174 | 11,546 | 11,700 | |||||||||||||||||||||||||||||||||
Total non-interest-earning
assets |
21,279 | 25,392 | 26,377 | |||||||||||||||||||||||||||||||||
Total Assets |
$ | 498,994 | $ | 488,371 | $ | 488,258 | ||||||||||||||||||||||||||||||
LIABILITIES AND
SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 64,041 | $ | 359 | 0.8 | % | $ | 49,653 | $ | 706 | 1.4 | % | $ | 48,299 | $ | 511 | 1.4 | % | ||||||||||||||||||
Savings |
84,521 | 436 | 0.7 | % | 77,401 | 851 | 1.1 | % | 76,830 | 620 | 1.1 | % | ||||||||||||||||||||||||
Time |
178,112 | 4,228 | 3.2 | % | 178,372 | 7,259 | 4.1 | % | 179,377 | 5,660 | 4.2 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
326,674 | 5,023 | 2.1 | % | 305,426 | 8,816 | 2.9 | % | 304,506 | 6,791 | 3.0 | % | ||||||||||||||||||||||||
Federal funds purchased |
154 | 7 | 4.5 | % | 206 | 7 | 4.4 | % | ||||||||||||||||||||||||||||
Other borrowings |
68,752 | 2,134 | 4.2 | % | 70,807 | 3,110 | 4.4 | % | 71,539 | 2,373 | 4.4 | % | ||||||||||||||||||||||||
Subordinated Debt |
5,155 | 104 | 2.7 | % | 5,155 | 244 | 4.7 | % | 5,155 | 190 | 4.9 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
400,581 | $ | 7,261 | 2.4 | % | 381,542 | $ | 12,177 | 3.2 | % | 381,406 | $ | 9,361 | 3.3 | % | |||||||||||||||||||||
Demand deposits |
57,993 | 56,496 | 55,963 | |||||||||||||||||||||||||||||||||
Other liabilities |
4,791 | 5,214 | 5,681 | |||||||||||||||||||||||||||||||||
Shareholders equity |
35,629 | 45,119 | 45,208 | |||||||||||||||||||||||||||||||||
Total liabilities and
Shareholders equity |
$ | 498,994 | $ | 488,371 | $ | 488,258 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 11,402 | $ | 16,163 | $ | 11,986 | ||||||||||||||||||||||||||||||
Net interest rate spread (4) |
2.8 | % | 2.9 | % | 2.9 | % | ||||||||||||||||||||||||||||||
Net interest margin (5) |
3.2 | % | 3.5 | % | 3.5 | % | ||||||||||||||||||||||||||||||
Ratio of interest-earning assets
to interest-bearing liabilities |
1.19 | 1.21 | 1.21 | |||||||||||||||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities |
|
(2) | Tax exempt interest is shown on a tax equivalent basis
for proper comparison using a statutory federal income
tax rate of 34%. The tax equivalent income adjustment for loans and
investment is $62 and $477 for September 30, 2009, $76 and $705 for December 31, 2008,
and $58 and $530 for September 30, 2008 |
|
(3) | Includes applicable loan origination and commitment fees,
net of deferred origination cost amortization. |
|
(4) | Interest rate spread represents the difference between the yield
on earning assets and the rate paid on interest bearing liabilities. |
|
(5) | Interest margin is calculated by dividing the difference between total
interest earned and total interest expensed by total interest-earning
assets. |
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
26
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS,
YIELDS AND RATES (UNAUDITED)
YIELDS AND RATES (UNAUDITED)
(Fully taxable equivalent basis in thousands of dollars)
QUARTER TO DATE AS OF | ||||||||||||||||||||||||||||||||||||
SEPTEMBER 30, 2009 | JUNE 30, 2009 | SEPTEMBER 30, 2008 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | ||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Federal funds sold and other
earning assets |
$ | 84,366 | $ | 55 | 0.3 | % | $ | 75,331 | $ | 48 | 0.3 | % | $ | 7,410 | $ | 35 | 1.9 | % | ||||||||||||||||||
Investment securities (1) (2) |
154,037 | 2,057 | 5.4 | % | 169,883 | 2,233 | 5.3 | % | 226,087 | 3,866 | 5.6 | % | ||||||||||||||||||||||||
Loans (2) (3) |
236,625 | 3,825 | 6.4 | % | 236,553 | 3,777 | 6.4 | % | 228,248 | 3,143 | 6.8 | % | ||||||||||||||||||||||||
Total interest-earning assets |
475,028 | $ | 5,937 | 5.0 | % | 481,767 | $ | 6,058 | 5.1 | % | 461,745 | $ | 7,044 | 6.1 | % | |||||||||||||||||||||
Cash and due from banks |
6,704 | 6,637 | 7,758 | |||||||||||||||||||||||||||||||||
Bank premises and equipment |
7,331 | 7,457 | 7,293 | |||||||||||||||||||||||||||||||||
Other assets |
13,582 | 4,503 | 7,336 | |||||||||||||||||||||||||||||||||
Total non-interest-earning
assets |
27,617 | 18,597 | 22,387 | |||||||||||||||||||||||||||||||||
Total Assets |
$ | 502,645 | $ | 500,364 | $ | 484,132 | ||||||||||||||||||||||||||||||
LIABILITIES AND
SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 65,883 | $ | 78 | 0.5 | % | $ | 63,972 | $ | 118 | 0.7 | % | $ | 50,459 | $ | 167 | 1.3 | % | ||||||||||||||||||
Savings |
85,868 | 104 | 0.5 | % | 85,613 | 148 | 0.7 | % | 78,435 | 219 | 1.1 | % | ||||||||||||||||||||||||
Time |
175,601 | 1,319 | 3.0 | % | 180,219 | 1,421 | 3.2 | % | 175,638 | 1,704 | 3.9 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
327,352 | 1,501 | 1.8 | % | 329,804 | 1,687 | 2.1 | % | 304,532 | 2,090 | 2.7 | % | ||||||||||||||||||||||||
Federal funds purchased |
||||||||||||||||||||||||||||||||||||
Other borrowings |
69,166 | 720 | 4.1 | % | 68,795 | 711 | 4.2 | % | 72,018 | 776 | 4.3 | % | ||||||||||||||||||||||||
Subordinated Debt |
5,155 | 27 | 2.0 | % | 5,155 | 34 | 2.7 | % | 5,155 | 55 | 4.2 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
401,673 | $ | 2,248 | 2.2 | % | 403,754 | $ | 2,432 | 2.4 | % | 381,705 | $ | 2,921 | 3.0 | % | |||||||||||||||||||||
Demand deposits |
58,172 | 58,087 | 56,365 | |||||||||||||||||||||||||||||||||
Other liabilities |
6,420 | 4,068 | 5,578 | |||||||||||||||||||||||||||||||||
Shareholders equity |
36,380 | 34,455 | 40,484 | |||||||||||||||||||||||||||||||||
Total liabilities and
Shareholders equity |
$ | 502,645 | $ | 500,364 | $ | 484,132 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 3,689 | $ | 3,626 | $ | 4,123 | ||||||||||||||||||||||||||||||
Net interest rate spread (4) |
2.8 | % | 2.7 | % | 3.1 | % | ||||||||||||||||||||||||||||||
Net interest margin (5) |
3.1 | % | 3.0 | % | 3.6 | % | ||||||||||||||||||||||||||||||
Ratio of interest-earning assets
to interest-bearing liabilities |
1.18 | 1.19 | 1.21 | |||||||||||||||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities |
|
(2) | Tax exempt interest is shown on a tax equivalent basis
for proper comparison using a statutory federal income
tax rate of 34%. The tax equivalent income adjustment for loans and
investment is $20 and $155 for September 30, 2009, $17 and $160 for June 30, 2009
and $19 and $176 for September 30, 2008. |
|
(3) | Includes applicable loan origination and commitment fees,
net of deferred origination cost amortization. |
|
(4) | Interest rate spread represents the difference between the yield
on earning assets and the rate paid on interest bearing liabilities. |
|
(5) | Interest margin is calculated by dividing the difference between total
interest earned and total interest expensed by total interest-earning assets. |
See accompanying notes to the unaudited consolidated financial statements
of Cortland Bancorp and Subsidiaries
of Cortland Bancorp and Subsidiaries
27
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA FOR QUARTER ENDED
(In thousands of dollars, except for ratios and per share amounts)
(In thousands of dollars, except for ratios and per share amounts)
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
Unaudited | 2009 | 2009 | 2009 | 2008 | 2008 | |||||||||||||||
SUMMARY OF OPERATIONS |
||||||||||||||||||||
Total interest income |
$ | 5,762 | $ | 5,881 | $ | 6,481 | $ | 6,800 | $ | 6,849 | ||||||||||
Total interest expense |
(2,248 | ) | (2,432 | ) | (2,581 | ) | (2,816 | ) | (2,921 | ) | ||||||||||
NET INTEREST INCOME (NII) |
3,514 | 3,449 | 3,900 | 3,984 | 3,928 | |||||||||||||||
Provision for loan losses |
(121 | ) | (65 | ) | (151 | ) | (1,290 | ) | (105 | ) | ||||||||||
NII after loss provision |
3,393 | 3,384 | 3,749 | 2,694 | 3,823 | |||||||||||||||
Security gains (losses) including impairment losses |
(2,524 | ) | (7,830 | ) | (3,641 | ) | (1,228 | ) | 34 | |||||||||||
Gain on sale of loans |
43 | 119 | 71 | 5 | 4 | |||||||||||||||
Total other income (excluding security and loan gains) |
752 | 736 | 742 | 665 | 760 | |||||||||||||||
Total other noninterest expense |
(3,383 | ) | (3,557 | ) | (3,280 | ) | (3,143 | ) | (3,258 | ) | ||||||||||
Income before tax |
(1,719 | ) | (7,148 | ) | (2,359 | ) | (1,007 | ) | 1,363 | |||||||||||
Net (loss) income |
$ | (983 | ) | $ | (4,598 | ) | $ | (1,397 | ) | $ | (564 | ) | $ | 1,078 | ||||||
Net (loss) income (Rolling 4 Quarters) (1) |
$ | (7,542 | ) | $ | (5,481 | ) | $ | (78 | ) | $ | 2,353 | $ | 4,033 | |||||||
PER COMMON SHARE DATA (2) |
||||||||||||||||||||
Net (loss) income, both basic and diluted |
$ | (0.22 | ) | $ | (1.01 | ) | $ | (0.31 | ) | $ | (0.13 | ) | $ | 0.24 | ||||||
Net (loss) income, both basic and diluted (Rolling 4 Quarters) |
(1.67 | ) | (1.21 | ) | (0.02 | ) | 0.53 | 0.92 | ||||||||||||
Cash dividends declared |
| | | 0.22 | 0.21 | |||||||||||||||
Cash dividends declared (Rolling 4 Quarters) |
0.22 | 0.43 | 0.65 | 0.86 | 0.88 | |||||||||||||||
Book value |
8.18 | 7.77 | 7.37 | 8.01 | 9.90 | |||||||||||||||
BALANCE SHEET DATA |
||||||||||||||||||||
Assets |
$ | 498,375 | $ | 500,049 | $ | 493,400 | $ | 493,365 | $ | 488,608 | ||||||||||
Investments |
173,958 | 141,773 | 172,875 | 191,754 | 213,430 | |||||||||||||||
Net loans |
234,150 | 233,096 | 233,826 | 243,547 | 229,059 | |||||||||||||||
Deposits |
379,946 | 386,169 | 382,071 | 379,953 | 360,754 | |||||||||||||||
Borrowings |
71,801 | 68,903 | 68,612 | 68,148 | 74,316 | |||||||||||||||
Subordinated Debt (See Note 8 Subordinated Debt) |
5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
Shareholders equity |
37,024 | 35,156 | 33,335 | 36,028 | 44,344 | |||||||||||||||
AVERAGE BALANCES |
||||||||||||||||||||
Assets |
$ | 502,645 | $ | 500,364 | $ | 493,796 | $ | 488,707 | $ | 484,132 | ||||||||||
Investments |
154,037 | 169,883 | 203,413 | 216,557 | 226,087 | |||||||||||||||
Net loans |
234,140 | 234,016 | 240,136 | 232,925 | 226,667 | |||||||||||||||
Deposits |
385,524 | 387,891 | 380,530 | 366,247 | 360,897 | |||||||||||||||
Borrowings |
69,166 | 68,795 | 68,286 | 68,625 | 72,018 | |||||||||||||||
Subordinated Debt |
5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
Shareholders equity |
36,380 | 34,455 | 36,043 | 44,858 | 40,484 | |||||||||||||||
ASSET QUALITY RATIOS |
||||||||||||||||||||
Loans 30 days or more beyond their contractual due
date as a percent of total loans |
0.59 | % | 0.85 | % | 0.86 | % | 0.57 | % | 1.03 | % | ||||||||||
Underperforming assets (3) as a percentage of: |
||||||||||||||||||||
Total assets |
0.41 | 0.37 | 0.46 | 0.43 | 0.61 | |||||||||||||||
Equity plus allowance for loan losses |
5.24 | 4.93 | 6.26 | 5.45 | 6.51 | |||||||||||||||
Tier I capital |
4.55 | 4.01 | 4.42 | 4.03 | 5.61 | |||||||||||||||
FINANCIAL RATIOS |
||||||||||||||||||||
Return on average equity |
(10.81 | )% | (53.38 | )% | (15.50 | )% | (5.03 | )% | 10.68 | % | ||||||||||
Return on average equity (Rolling 4 Quarters) |
(19.87 | ) | (14.07 | ) | (0.19 | ) | 5.22 | 8.74 | ||||||||||||
Return on average assets |
(0.78 | ) | (3.68 | ) | (1.13 | ) | (0.46 | ) | 0.89 | |||||||||||
Return on average assets (Rolling 4 Quarters) |
(1.52 | ) | (1.11 | ) | (0.02 | ) | 0.48 | 0.82 | ||||||||||||
Effective tax rate |
(42.82 | ) | (35.70 | ) | (40.80 | ) | (44.00 | ) | 20.90 | |||||||||||
Net interest margin ratio |
3.11 | 3.03 | 3.43 | 3.60 | 3.58 |
(1) | Rolling 4 quarters is calculated by using the current quarter plus the preceding 3 quarters. |
|
(2) | Basic and diluted earnings per share are based on weighted average shares outstanding adjusted retroactively for stock dividends.
Cash dividends per common share are based on actual cash dividends declared, adjusted retroactively for the stock dividends.
Book value per common share is based on shares outstanding at each period, adjusted retroactively for the stock dividends. |
|
(3) | Underperforming assets include non accrual loans, OREO and restructured loans. |
28
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Financial Review
The following is managements discussion and analysis of the financial condition and results
of operations of Cortland Bancorp (the Company). The discussion should be read in conjunction
with the Consolidated Financial Statements and related notes included elsewhere in this report.
Note Regarding Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In addition to historical information, certain information included in
this Quarterly Report on Form 10-Q and other material filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) may contain herein, the forward-looking
statements that involve risks and uncertainties. The words believes, expects, may, will,
should, projects, contemplates, anticipates, forecasts, intends, or similar terminology
identify forward-looking statements. These statements reflect managements beliefs and
assumptions, and are based on information currently available to management.
Economic circumstances, the Companys operations and actual results could differ significantly
from those discussed in any forward-looking statements. Some of the factors that could cause or
contribute to such differences are changes in the economy and interest rates either nationally or
in the Companys market area; changes in customer preferences and consumer behavior; increased
competitive pressures or changes in either the nature or composition of competitors; changes in the
legal and regulatory environment; changes in factors influencing liquidity such as expectations
regarding the rate of inflation or deflation, currency exchange rates, and other factors
influencing market volatility; unforeseen risks associated with other global economic, political
and financial factors.
While actual results may differ significantly from the results discussed in the
forward-looking statements, the Company undertakes no obligation to update publicly any
forward-looking statement for any reason, even if new information becomes available.
Certain Non GAAP Measures
Certain financial information has been determined by methods other than Generally Accepted
Accounting Principles (GAAP). Specifically, certain financial measures are based on core earnings
rather than net income. Core earnings exclude income, expense, gains and losses that either is not
reflective of ongoing operations or that are not expected to reoccur with any regularity or reoccur
with a high degree of uncertainty and volatility. Such information may be useful to both investors
and management, and can aid them in understanding the Companys current performance trends and
financial condition. Core earnings are a supplemental tool for analysis and not a substitute for
GAAP net income. Reconciliation from GAAP net income to the non GAAP measure of core earnings is
shown as part of managements discussion and analysis of quarterly and year-to-date financial
results of operations.
29
Table of Contents
ORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and follow general practices within the
industries in which it operates in accordance with FASB ASC 105 Generally Accepted Accounting
Principles. The most significant accounting policies followed by the Company are presented in
Notes to Consolidated Financial Statements Summary of Significant Accounting Policies in the 2008
annual report on Form 10-K. Application of these principles requires management to make estimates,
assumptions and judgments that affect the amounts reported in the financial statements and
accompanying notes. Some of these policies and related methodologies are more critical than others.
There has been no material change in critical accounting estimates since those presented in the
2008 annual report on Form 10-K.
The Company has identified its policy on the allowance for loan losses as being critical
because it requires management to make particularly difficult, subjective and/or complex judgments
about matters that are inherently uncertain, and because of the likelihood that materially
different amounts would be reported under different conditions or by using different assumptions.
In determining the appropriate amount to reserve for potential credit losses, the Companys banking
subsidiary also considers unfunded commitments, such as loan commitments, letter of credit and
unused lines of credit.
The classification and accounting for investment securities are discussed in detail in Note 3
of the consolidated Financial Statements presented elsewhere herein. Under FASB ASC Topic 320
Investment Debt and Equity Securities, investment securities must be classified as
held-to-maturity, available-for-sale, or trading. The appropriate classification is based
partially on our ability to hold the securities to maturity and largely on managements intentions,
if any, with respect to either holding or selling the securities. The classification of investment
securities is significant since it directly impacts the accounting for unrealized gains and losses
on securities. Unrealized gains and losses on trading securities, if any, flow directly through
earnings during the periods in which they arise, whereas available-for-sale securities are recorded
as a separate component of shareholders equity (accumulated other comprehensive income or losses)
and do not affect earnings until realized.
The fair values of our investment securities are generally determined by reference to quoted
market prices and reliable independent sources. In the absence of observable market inputs related
to items such as cash flow assumptions or adjustments to market rates, management judgment is used.
Different judgments and assumptions used in pricing could result in different estimates of value.
When the fair value of a security is less than its amortized cost for an extended period, we
consider whether there is an other than temporary impairment in the value of the security. If, in
managements judgment, an other-than-temporary-impairment exists, the portion of the loss in value
attributable to credit quality is transferred from accumulated other comprehensive loss as an
immediate reduction of current earnings and the cost basis of the security is written down by this
amount.
We consider the following factors when determining an other-than-temporary-impairment for a
security or investment:
| The length of time and the extent to which the market value has been less than amortized
cost; |
||
| The financial condition and near-term prospects of the issuer; |
||
| The underlying fundamentals of the relevant market and the outlook for such market for
the near future; |
||
| Our intent to sell the debt security or whether it is more likely than not that we will
be required to sell the debt security before its anticipated recovery; and |
||
| When applicable for purchased beneficial interests, the estimated cash flows of the
securities are assessed for adverse changes.
|
30
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Quarterly, securities are evaluated for other-than-temporary-impairment in accordance with
FASB ASC Topic 320 Investment Debt and Equity Securities
An impairment that is an other-than-temporary-impairment is a decline in the fair value of an investment below its amortized
cost attributable to factors that indicate the decline will not be recovered over the anticipated
holding period of the investment. Other-than-temporary-impairments result in reducing the
securitys carrying value by the amount of credit loss. The credit component of the
other-than-temporary-impairment loss is realized through the statement of income and the remainder
of the loss remains in other comprehensive income.
Investment securities are discussed in more detail in Note 3 and Note 9 to the Consolidated
Financial Statements and in Managements Discussion and Analysis on Analysis of Assets and
Liabilities presented elsewhere.
Executive Summary
Cortland Bancorp (the Company) is a bank holding company headquartered in Cortland, Ohio,
whose principle activity is to own, manage and supervise the Cortland Savings and Banking Company
(Cortland Banks or the Bank).
Cortland Banks with total assets of $498.4 million at September 30, 2009, is a state charter
bank engaged in commercial and retail banking services. The Bank offers a full range of financial
services to our local communities with an ongoing strategic focus on commercial banking
relationships.
The Banks results of operations depend primarily on net interest income, which in part, is a
direct result of the market interest rate environment. Net interest income is the difference
between the interest income earned on interest bearing assets, and the interest paid on interest
bearing liabilities. Net interest income is affected by the shape of the market yield curve, the
re-pricing of interest earning assets and interest bearing liabilities and the pre-payment rate of
mortgage related assets. Our results of operation may be affected significantly by general and
local economic conditions, particularly those with respect to changes in market interest rates,
credit quality, governmental policies and actions of regulatory authority.
Net loss for the first nine months of 2009 is ($6,978) compared to net income of $2,917 for
the first nine months of 2008. Results for the first nine months of 2009 were impacted by an
other-than-temporary-impairment loss of $14,172. The impairment charges were recognized after
determining that the likely future cash flows of these securities had been adversely affected from
the previous quarter.
Net interest margin for the first nine months of 2009 was 3.2% compared to 3.5%
year-over-year. The margin decreased in 2009 compared to the same period a year ago as the yields
on earning assets decreased. Trends in the mix of earning assets have resulted in a shift to a
more asset sensitive balance sheet, or a balance sheet in which assets re-price more quickly than
funding costs.
Loan loss reserves were bolstered at year end to account for charge-offs against the allowance
and to give recognition to the economys steep slide into a serious and likely long lasting
recession, with expectations for deterioration on credit quality arising from faltering economic
and financial conditions. During the nine month period ended September 30, 2009, we recorded an
additional provision expense of $337. Loans considered as potential problem loans increased from
$19,550 at September 30, 2008 to $31,647 at September 30, 2009. Non accrual loans however,
decreased from $1,944 at September 30, 2008 to $785 at September 30, 2009. As a percent of total
loans, the allowance was 1.0% at September 30, 2009, and December 31, 2008 and 0.69% at September
30, 2008. Annualized net charge-offs were 0.23% of average loans in the nine months of 2009
compared to 0.31% year-over-year.
31
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
The Company adopted FASB ASC Topic 320 Investment -Debt and Equity Securities. This new
guidance requires that credit-related OTTI be recognized in earnings while noncredit-related OTTI
on securities not expected to be sold is recognized in other comprehensive income (loss) (OCI).
Refer to Note 3, Investment Securities, for a further discussion of securities impairment, and the
following discussion of trust preferred CDO securities.
Trust Preferred CDO Securities. Between April 08, 2003 and March 17, 2008, the Company
invested in multiple investment grade tranches of trust preferred CDO securities. The underlying
collateral for the security is pooled trust preferred securities issued by banks, insurance
companies and real estate investment trusts geographically dispersed across the United States. The
Company holds 32 such separate securities. These securities generally have a floating rate which
adjusts to three-month Libor plus a specified margin every quarter. These securities can be called
in whole by the issuer after five years or ten years, and had an expected initial life of 10 years
and maximum life of 30 years.
At September 30, 2008, all of the trust preferred CDO securities were still investment grade
rated, were paying as agreed with no shortfall in principal or interest payments, and were
determined not to involve other-than-temporary impairment (OTTI). During the second half of 2008
and through the nine months of 2009, factors outside the Companys control impacted the fair value
of these securities and will likely continue to do so for the foreseeable future. These factors
include but are not limited to: guidance on fair value accounting, issuer credit deterioration,
issuer deferral and default rates, potential failure or government seizure of underlying financial
institutions or insurance companies, ratings agency actions, regulatory actions. As a result of
changes in these and various other factors during the nine months ended September 30, 2009, Moodys
Investors Service, Fitch Ratings and Standards and Poors downgraded multiple CDO securities,
including securities held by the Company. Thirty-one of the securities held by the Company are now
considered to be below investment grade, with one security still rated investment grade. The
deteriorating economic, credit, and financial conditions experienced in 2008 and 2009 have resulted
in illiquid and inactive financial markets and severely depressed prices for these securities.
The Company reviews investment securities on an ongoing basis for the presence of other than
temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual
investment securities were recognized during the first quarter 2009 in accordance with FASB ASC
Topic 320 Investment Debt and Equity Securities. This new guidance requires that
credit-related OTTI be recognized in earnings while noncredit-related OTTI on securities not
expected to be sold is recognized in other comprehensive income (loss) (OCI). The credit-related
OTTI recognized during 2009 was $14.2 million and was solely related to available-for-sale
securities newly deemed other than temporarily having a book value of $21.5 million.
Noncredit-related impairment on these securities, which are not expected to be sold, was $3.2
million and was recognized in OCI the nine months ended September 30, 2009.
To determine the extent of impairment at September 30, 2009, we considered various factors and
used a discounted cash flow analysis. Among the factors considered were: how much fair value has
declined below cost; length of time the decline in fair value has existed; financial condition of
the underlying issuers; reasons attributable for the decline in value; changes in credit ratings;
projected payments on the securities; and changes in laws/regulations affecting the securities.
Cash flow modeling was performed to determine if the present value of the cash flows expected on
each security were still equivalent to the original cash flows projected on the security when
purchased. The cash flows on 16 of the 32 trust preferred CDO securities were equivalent to the
original cash flows projected when the security was purchased as there have been no principal or
interest shortfalls on the 16 securities. In general, the cash flows were modeled under a base
model scenario, which included assumptions for annual defaults, prepayments percentages and
recovery percentages on the issuers on the underlying trust preferred securities. The cash flow
analysis supports our assertion that there was no change in the present value of cash flows for 16
of the 32 securities. We also used a stress analysis on the securities to determine how much in
additional deferrals/defaults must occur before
the security will experience a change in cash flows. We determined that the decline in fair value
below amortized cost is temporary for 16 of the 32 securities based on managements assessment of
the factors, projected full recoverability of the cash flows, results of stress analysis, and that
the Company does not intend to sell these securities and it is not more likely than not that the
Company will be required to sell the securities before recovery of its amortized cost basis. We
will continue to evaluate our trust preferred CDO securities portfolio for OTTI on a quarterly
basis.
32
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
The valuation of our trust preferred CDO securities portfolio has decreased substantially as a
result of the current credit crisis and lack of liquidity in the financial markets. Our review
indicated that current market prices for these trust preferred CDO securities have been adversely
affected by a significant reduction in liquidity, deterioration in the credit quality of underlying
issuers of collateral, and the forecast that defaults on various securities will increase in the
declining economy. There are limited trades in these securities and we believe the majority of
investors in such instruments have decided not to participate in the market unless they are
required to sell as a result of liquidation, bankruptcy, or other forced or distressed
conditions. Sales occur so infrequently that there are no regular bid and ask prices. We were
informed that recent trades are essentially from distressed sales where the seller must liquidate
their position and accept what is offered. As a result of these factors, the current fair value of
our trust preferred CDO securities is substantially less than what we believe is indicated by the
performance of the collateral underlying the securities and calculations of expected cash flows.
At September 30, 2009, the Company reviewed a variety of alternative pricing information
including pricing provided by independent investment banking/brokerage and financial consulting
sources. At September 30, 2009, the Company valued the trust preferred CDO securities using values
provided by an independent investment banking/brokerage firm. The estimates of fair value are
predominately based on a review of the securities and any recent sales activity of the same or
similar securities, and are considered to be representative of the price at which the security
could be sold in the current inactive and illiquid market. The general methodology includes the
following:
The CDO valuations were derived by an independent third party valuation service. Their
approach to determining fair value involved these steps:
1. | The credit quality of the collateral is estimated using average probability of
default values for each issuer (adjusted for rating levels). |
||
2. | The default probabilities also considered the potential for correlation among
issuers within the same industry (e.g. banks with other banks). |
||
3. | The cash flows were forecast for the underlying collateral and applied to each CDO
tranche to determine the resulting distribution among the securities. |
||
4. | The expected cash flows were discounted to calculate the present value of the
security. |
||
5. | The effective discount rates on all overall basis generally range from 9.07% to 47.36%
and are highly dependent upon the credit quality of the collateral, the relative position of
the tranche in the capital structure of the CDO and the prepayment assumptions. |
Based on its analysis, the Company currently believes that a weighted average value of
approximately $0.35 per $1.00 of par value is representative of the fair value of the entire trust
preferred CDO securities portfolio, as of September 30, 2009. In comparison, as of June 30, 2009
and December 31, 2008, management reported a weighted average value of approximately $0.34 per
$1.00 and $0.43 per $1.00, respectively, of par value as representative of the fair value of the
entire trust preferred securities portfolio.
33
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Based upon the results of our impairment testing and determination of fair value, as of
September 30, 2009, our trust preferred CDO securities, had a fair value of $12.5 million and a par
value of $35.3 million at September 30, 2009. At September 30, 2009, the Company had sixteen
securities on which the analysis indicated other-than-temporary impairment. These sixteen
securities had impairment losses of $16.6 million, of which $13.4 million was recorded as expense
and $3.2 million was recorded in other comprehensive loss.
As discussed above, the fair value of the remaining 16 trust preferred CDO securities also
reflect a significant discount to cost. However, based on managements analysis, these securities
were not considered to have OTTI at September 30, 2009. In the event that any of these 16 trust
preferred CDO securities are determined to be OTTI in the future, OTTI charges will need to be
recorded against earnings. These 16 trust preferred CDO securities had a weighted average fair
value estimated by us to be $10.0 million, or approximately $0.62 for every $1.00 of par value, as
of September 30, 2009. In comparison, at June 30, 2009 there were 19 trust preferred CDO securities
not considered to have OTTI with a weighted average fair value estimated to be $9.02 million, or
approximately $0.51 for every $1.00 of par value.
At September 30, 2009, the Company recognized $815 of other-than-temporary losses attributable
to its General Motors Corporation Corporate Securities with a cost basis of $1,102. The impairment
charges were recognized due to the fact that General Motors filed for government-assisted Chapter
11 bankruptcy protection on June 1, 2009. On July 10, 2009, a new entity, NGMCO, Inc purchased the
ongoing operations and trademarks from GM. The purchasing company in turn changed its name from
NGMCO, Inc to General Motors Company, marking the emergence of a new operation from the
pre-packaged Chapter 11 reorganization. Under the reorganization process, termed a 363 sale, the
purchaser of the assets of a company in bankruptcy proceedings is able to obtain approval for the
purchase from the court prior to the submission of a re-organization plan, free of liens and other
claims.
During the remainder of 2009, maintaining the Companys well-capitalized position is a primary
focus. On March 2, 2009, the company announced the boards decision to curtail the regular
quarterly cash dividend and to declare a quarterly stock dividend of 1% payable on April 1, 2009.
Until the economy and the financial industry emerge from this challenging environment, the
Companys board of directors deems it only prudent to conserve capital.
Liquidity
The central role of the Companys liquidity management is to (1) ensure sufficient liquid
funds to meet the normal transaction requirements of its customers, (2) take advantage of market
opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen
liquidity needs.
Liquidity risk arises from the possibility that we may not be able to satisfy current or
future financial commitments, or may become unduly reliant on alternative funding sources. The
objective of liquidity management is to ensure we have the ability to fund balance sheet growth and
meet deposit and debt obligations in a timely and cost-effective manner. Management monitors
liquidity through a regular review of asset and liability maturities, funding sources, and loan and
deposit forecasts. We maintain strategic and contingency liquidity plans to ensure sufficient
available funding to satisfy requirements for balance sheet growth, properly manage capital
markets funding sources and to address unexpected liquidity requirements.
Principal sources of liquidity for the Company include assets considered relatively liquid,
such as interest-bearing deposits in other banks, such as the Federal Reserve Bank, 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.
34
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
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, borrowings from the Federal Home Loan Bank of Cincinnati and access to
the Federal Reserve Discount Window.
Cash and cash equivalents increased by $39,529 from September 30, 2008 and increased by
$31,603 from levels measured at year-end. The changes are mainly attributable to the deposit
balance at the Federal Reserve Bank which increased by $50,542 from September 30, 2008 and $33,132
from year-end, as the Company has elected to maintain increased cash reserves. Operating
activities provided cash of $3,379 and $3,506 during the nine months ended September 30, 2009 and
2008, respectively. Key differences stem mainly from: 1) a decrease in net income of $9,895
compared to September 30, 2008; 2) loans held for sale decreased by $178 at September 30, 2009 as
compared to an increase of $68 at September 30, 2008; 3) gains on the call of investments were $177
at September 30, 2009 compared to $116 at September 30, 2008; 4) amortization, accretion and
depreciation on securities were $517 in 2009 compared to $495 in 2008; 5) provisions for loan loss
were $337 at September 30, 2009 compared to $495 at September 30, 2008; 6) other real estate gains
of $15 were recorded at September 30, 2009 compared to a $49 gain at September 30, 2008, and 7)
deferred tax benefit at September 30, 2009 increased by $4,810 compared to a $96 decrease at
September 30, 2008. The deferred tax benefit at September 30, 2009 was due mainly to the tax
benefit of the other-than-temporary-impairment charge of $14,172. Refer to the Consolidated
Statements of Cash Flows for a summary of the sources and uses of cash for investing and financing
activities for September 30, 2009 and 2008.
The following table details the cash flows from operating activities:
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net Income (loss) |
$ | (6,978 | ) | $ | 2,917 | |||
Adjustments to reconcile net income (loss) to
net cash flows from operating activities: |
||||||||
Depreciation, amortization and accretion |
517 | 567 | ||||||
Provision for loan loss |
337 | 495 | ||||||
Investment securities gains, net |
(177 | ) | (116 | ) | ||||
Impairment losses |
14,172 | |||||||
Other real estate (gains) losses, net |
(15 | ) | (49 | ) | ||||
Impact of loans held for sale |
178 | (68 | ) | |||||
Deferred tax |
(4,810 | ) | 96 | |||||
Changes in other assets and liabilities |
155 | (336 | ) | |||||
Net cash flows from operating activities |
$ | 3,379 | $ | 3,506 | ||||
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. Internally generated capital retained by the Company measured
(20.5%) for the nine months ended September 30, 2009 and (1.4%) for the nine months ended September
30, 2008. Overall capital (a figure which reflects the cumulative adjustment to retained earnings,
earnings, dividends paid, common stock issued, treasury shares purchased, treasury shares reissued
and the net change in the estimated fair value of available for sale securities) increased at an
annual rate of 3.7%, primarily due to a decrease in unrealized losses on available for sale
investment securities. Capital remains within regulatory requirements for well capitalized
financial institutions.
35
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
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.
Risk-based standards also classify capital into two tiers, referred to as Tier 1 and Tier 2.
The Companys Tier 1 capital consists of common shareholders equity (excluding any gain or loss on
available for sale debt securities) plus subordinated notes payable to the unconsolidated trust
that issued trust preferred securities net of the bank holding Companys investment in the trust
less intangible assets and the net unrealized loss on equity securities with readily determinable
fair values. Tier 2 capital includes the allowance for loan and lease losses and the allowance for
credit losses on off balance sheet credit exposures reduced for certain regulatory limitations.
In April 2009, the FFIEC issued additional instructions for reporting of direct credit
substitutions that have been downgraded below investment grade. Included in the definition of a
direct credit substitute are mezzanine and subordinated tranches of collateralized debt obligations
and non agency Collateralized Mortgage Obligations. Adopting these instructions for the 2009 period
results in an increase in total risk weighted assets with an attendant decrease in the risk-based
capital and Tier 1 risk based capital ratios.
As a result of the decline in value of our trust preferred CDO securities the regulatory
capital levels of the Bank have come under significant pressure. As a result of investment
downgrades by the rating agencies during the first three quarters, 31 of the 32 trust preferred CDO
and the General Motors corporate securities were rated as highly speculative grade debt
securities. As a consequence, the Bank is required to maintain higher levels of regulatory
risk-based capital for these securities due to the greater perceived risk of default by the
underlying bank and insurance company issuers. Specifically, regulatory guidance requires the Bank
to apply a higher risk weighting formula for these securities to calculate its regulatory capital
ratios. The result of that calculation increased the Banks risk-weighted assets for these
securities to $99.2 million, well above the $37.3 million in amortized cost of these securities as
of September 30, 2009, thereby significantly diluting the regulatory capital ratios. Upon applying
the higher level of risk weighted assets to the Banks regulatory capital ratios, the calculated
ratios are as follows at September 30, 2009: a Tier 1 leverage ratio of 8.92% (compared to a well
capitalized threshold of 5.0%); a Tier 1 risk-based capital ratio of 12.46% (compared to a well
capitalized threshold of 6.00%); and a total risk based capital ratio of 13.14% (compared to a
well capitalized threshold of 10.00% and an adequately capitalized threshold of 8.00%)
Risk based capital standards require 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. Capital ratios remained within regulatory
minimums for well capitalized financial institutions.
36
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required
banking regulatory agencies to revise risk-based capital standards to ensure that they adequately
account for the following additional risks: interest rate, concentration of credit, and non
traditional activities. Accordingly, regulators will subjectively consider an institutions
exposure to declines in the economic value of its capital due to changes in interest rates in
evaluating capital adequacy. The table below illustrates the Companys risk weighted capital ratios
at September 30, 2009 and December 31, 2008.
September 30, 2009 | December 31, 2008 | |||||||
Tier 1 Capital |
$ | 45,362 | $ | 52,045 | ||||
Tier 2 Capital |
2,478 | 2,476 | ||||||
TOTAL QUALIFYING CAPITAL |
$ | 47,840 | $ | 54,521 | ||||
Risk Adjusted Total Assets (*) |
$ | 364,036 | $ | 317,861 | ||||
Tier 1 Risk-Based Capital Ratio |
12.46 | % | 16.37 | % | ||||
Total Risk-Based Capital Ratio |
13.14 | % | 17.15 | % | ||||
Tier 1 Risk-Based Capital to Average Assets (Leverage Capital Ratio) |
8.92 | % | 10.58 | % |
(*) | Includes off-balance sheet exposures. |
Assets, less intangibles and the net unrealized market value adjustment of investment
securities available for sale, averaged $508,638 for the nine months ended September 30, 2009 and
$492,033 for the year ended December 31, 2008.
In managements opinion, as supported by the data in the table below, the
Company met all capital adequacy requirements to which it was subject as of September 30, 2009 and
December 31, 2008. As of those dates, Cortland Bancorp was well capitalized under regulatory
prompt corrective action provisions.
Actual Regulatory | Regulatory Capital Ratio | |||||||||||||||
Capital Ratios as of: | requirements to be: | |||||||||||||||
September 30, | December 31, | Well | Adequately | |||||||||||||
2009 | 2008 | Capitalized | Capitalized | |||||||||||||
Total risk-based capital
to risk-weighted assets |
13.14 | % | 17.15 | % | 10.00 | % | 8.00 | % | ||||||||
Tier 1 capital to
risk-weighted assets |
12.46 | % | 16.37 | % | 6.00 | % | 4.00 | % | ||||||||
Tier 1 capital to
average assets |
8.92 | % | 10.58 | % | 5.00 | % | 4.00 | % |
On March 2, 2009, the Company announced that, at the February 24, 2009 meeting, the Companys
Board of Directors declared a quarterly stock dividend of 1% payable on April 1, 2009 to
shareholders of record as of March 9, 2009. The regular quarterly cash dividend, which most
recently had been paid at the rate of $0.22 per share had been curtailed.
On May 26, 2009, the Board of Directors of Cortland Bancorp (CLDB) and The Cortland Savings
and Banking Company (Cortland Banks), a wholly-owned subsidiary of CLDB, adopted a resolution
authorizing its President and Chief Executive Officer to enter into the Memorandum of Understanding
(MOU) with the Federal Reserve Bank of Cleveland (Federal Reserve). The MOU, which was executed
June 1, 2009, requires CLDB and Cortland Banks to obtain the Federal Reserves approval prior to
paying any dividends.
37
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
First Nine Months of 2009 as Compared to First Nine Months of 2008
INTEREST MARGIN YTD | ||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | |||||||||||||||||||
INTEREST-EARNING ASSETS |
||||||||||||||||||||||||
Federal funds sold and other earning assets |
$ | 63,523 | $ | 123 | 0.4 | % | $ | 10,209 | $ | 179 | 2.4 | % | ||||||||||||
Investment securities (1) (2) |
175,598 | 7,062 | 5.4 | % | 225,265 | 9,509 | 5.6 | % | ||||||||||||||||
Loans (2) (3) |
238,594 | 11,478 | 6.4 | % | 226,407 | 11,659 | 6.9 | % | ||||||||||||||||
Total interest-earning assets |
$ | 477,715 | $ | 18,663 | 5.2 | % | $ | 461,881 | $ | 21,347 | 6.2 | % | ||||||||||||
INTEREST-BEARING LIABILITIES |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 64,041 | $ | 359 | 0.8 | % | $ | 48,299 | $ | 511 | 1.4 | % | ||||||||||||
Savings |
84,521 | 436 | 0.7 | % | 76,830 | 620 | 1.1 | % | ||||||||||||||||
Time |
178,112 | 4,228 | 3.2 | % | 179,377 | 5,660 | 4.2 | % | ||||||||||||||||
Total interest-bearing deposits |
326,674 | 5,023 | 2.1 | % | 304,506 | 6,791 | 3.0 | % | ||||||||||||||||
Federal funds purchased |
206 | 7 | 4.4 | % | ||||||||||||||||||||
Other borrowings |
68,752 | 2,134 | 4.2 | % | 71,539 | 2,373 | 4.4 | % | ||||||||||||||||
Subordinated debt |
5,155 | 104 | 2.7 | % | 5,155 | 190 | 4.9 | % | ||||||||||||||||
Total interest-bearing liabilities |
$ | 400,581 | $ | 7,261 | 2.4 | % | $ | 381,406 | $ | 9,361 | 3.3 | % | ||||||||||||
Net interest income |
$ | 11,402 | $ | 11,986 | ||||||||||||||||||||
Net interest rate spread (4) |
2.8 | % | 2.9 | % | ||||||||||||||||||||
Net interest margin (5) |
3.2 | % | 3.5 | % | ||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities |
|
(2) | Tax exempt interest is shown on a tax equivalent basis for proper comparison using a
statutory federal income tax rate of 34%. |
|
The tax equivalent income adjustment for loans and investments is $62 and $477 for September
2009 and $58 and $530 for September 2008. |
||
(3) | Includes applicable loan origination and commitment fees,
net of deferred origination cost amortization. |
|
(4) | Interest rate spread represents the difference between the yield on earning assets and
the rate paid on interest bearing deposits. |
|
(5) | Interest margin is calculated by dividing the difference between total
interest earned and total interest expensed by total interest-earning assets. |
Analysis of Net Interest Income for the First Nine Months
Net interest income, the principal source of the Companys earnings, is the amount by which
interest and fees generated by interest-earning assets, primarily loans and investment securities,
exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent, net
interest income measured $11,402 at September 30, 2009 and $11,986 at September 30, 2008. During
the recent reporting period the net interest margin ratio registered 3.20% at September 30, 2009
and 3.46% at September 30, 2008.
The decrease in interest income, on a fully taxable equivalent basis, of $2,684 is the product
of a 93 basis point decrease in interest rates earned offset by a 3.4% year-over-year increase in
average earning assets. The decrease in interest expense of $2,100 was a product of an 85 basis
point decrease in rates paid offset slightly by a 5.0% increase in interest-bearing liabilities.
The net result was a 4.9% decrease in net interest income on a fully taxable equivalent basis and a
26 basis point decrease in the Companys net interest margin ratio.
38
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Interest and dividend income on securities registered a decrease of $2,394 or 26.7%, during
the nine months ended September 30, 2009 when compared to 2008. On a fully taxable equivalent
basis, income on investment securities decreased by $2,447 or 25.7%. The average invested balances
in securities decreased by $49,667 or 22.0% from the levels of a year ago. The decrease in the
average balance of investment securities resulted from a management decision to not reinvest all of
the proceeds from called securities that were realized in 2008 and 2009. During the first nine
months ended September 30, 2009, $39,083 in investment securities were purchased while $54,544 of
investment securities were called by the issuer or matured, and in the first nine months of 2008
$42,426 in investment securities were purchased while $61,695 were called by the issuer or matured. There were no sales of investment securities in 2008
or 2009. The decrease in the average balance of investment securities was accompanied by a 26 basis
point decrease in the tax equivalent yield of the portfolio.
Interest and fees on loans decreased by $185 or 1.6%, while on a fully taxable equivalent
basis, income on loans decreased by $181 or 1.6%, for the nine months of 2009 compared to 2008. A
$12,187 increase in the average balance of the loan portfolio, or 5.4%, was accompanied by a 44
basis point decrease in the portfolios tax equivalent yield. This increase in the average loan
portfolio balance is a direct result of efforts to increase market share. The Company has
benefited from new loan referrals from existing customers as well as from a customer testimonial
advertising and marketing campaign which has generated interest in the Companys line of products
and services.
Other interest income decreased by $56 from the same period a year ago. The average balance
of federal funds sold and other money market funds increased by $53,314, or 522.2%. The yield
decreased by 196 basis points during the first nine months of 2009 compared to 2008, as a result of
Federal Reserve monetary policy.
Average interest-bearing demand deposits and money market accounts increased by $15,742 while
savings increased by $7,691. Total interest paid on these products was $795 a $336 decrease from
last year. The average rate paid on these products decreased by 49 basis points in the aggregate.
The average balance of time deposit products decreased by $1,265 as the average rate paid decreased
by 104 basis points, from 4.2%
to 3.2%. Interest expense decreased on time deposits by $1,432 from the prior year.
Compared to last year, average borrowings, subordinated debt and federal funds purchased
decreased by $2,993, while the average rate paid on borrowings decreased by 41 basis points.
Net interest income after provision for loan losses was reduced by $337 of provisions for loan
losses recognized in 2009 compared to $495 recognized at September 30, 2008. The amount charged to
operations as a provision to loan loss in the first nine months of 2009, was made to account for
charge-offs against the allowance, and to also account for managements assessment of the increased
credit risk in the commercial real estate and commercial loan portfolios and the current economic
environment.
Analysis of Other Income, Other Expense and Federal Income Tax for the First Nine Months
Other income from all sources decreased by $13,949 from the same period a year ago.
Gains on 1-4 residential mortgage loans sold in the secondary mortgage market increased by $208
from the same period a year ago due to an increase in loan sales activity. This increase in loan
sales activity for the first nine months of 2009 as compared to 2008 is attributable to the
significant decline in mortgage interest rates during the fourth quarter of 2008 and the first nine
months of 2009. Gains on securities called and net gains on the sale of available for sale
investment securities increased by $61 from year ago levels. With rates falling during the
quarter, U.S. Government agencies and corporations elected to call an increasing number of issues.
The Bank held several of these issues at a discount and thus recognized a gain when they were
called. 2009 gains were offset by a $14,172 impairment loss attributable to Collateralized Debt
Obligations (CDOs), representing pools of trust preferred debt primarily issued by bank holding
companies, and insurance companies and General Motors bonds. (See Note 3 Investment Securities).
Fees for other customer services decreased by $46. Gain on the sale of Other Real Estate Owned
(OREO) was $15 at September 30, 2009, a decrease of $34 from the gain of $49 recorded at September
30, 2008. This gain in 2008 was on the sale of one property that was held in OREO since 2007.
Other sources of non-recurring non-interest income increased by $34 from the same period a year
ago. This latter income category is subject to fluctuation due to the non-recurring nature of the
items.
39
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Total other expenses in the first nine months were $10,220 in 2009 compared to $9,672 in 2008,
an increase of $548 or 5.7%. Full time equivalent employment averaged 161 during the first nine
months of 2009 and 2008. Salaries and benefits increased by $131, or 2.4%, from the similar period
a year ago. This increase is due to increases in employee benefits, primarily hospitalization.
For the first nine months of 2009, state and local taxes decreased by $100 due to a decrease
in franchise tax. Occupancy and equipment expense decreased by $71 or 4.8%.
Insurance premiums paid to the FDIC increased by $714. The increase is primarily due to the
increase in the rates banks pay for deposit insurance. Deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) up to a maximum amount, which is generally $250,000 (in effect until
December 31, 2013) per depositor subject to aggregation rules. As an FDIC-insured institution, the
Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC adopted a
Restoration Plan to restore the reserve ratio of the Deposit Insurance Fund (DIF) to 1.15%.
Effective April 1, 2009, the Restoration Plan provides base assessment rate adjustments. In
addition, under an interim rule, the FDIC imposed a five basis point emergency special assessment
on insured depository institutions on June 30, 2009. The special assessment was payable on
September 30, 2009. The Company anticipates its FDIC insurance expense will continue to adversely
impact operating expenses for the year ended December 31, 2009.
All other expense categories decreased by 5.3%, or $126 as a group. This expense
category is subject to fluctuation due to non-recurring items.
Loss before income tax benefit amounted to $(11,226) for the first nine months of 2009
compared to income before income tax of $3,648 for the similar period of 2008. The effective tax
rate for the first nine months was (37.8)% in 2009 and 20.0% in 2008, resulting in income tax
benefit of $4,248 and expense of $731 respectively. The provision for income taxes differs from
the amount of income tax determined applying the applicable U.S. statutory federal income tax rate
to pre-tax income as a result of the following differences:
NINE MONTHS ENDED | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Provision at statutory rate |
$ | (3,817 | ) | $ | 1,240 | |||
Add (Deduct): |
||||||||
Tax effect of non-taxable income |
(485 | ) | (571 | ) | ||||
Tax effect of non-deductible expense |
54 | 62 | ||||||
Federal income tax (benefit) expense |
$ | (4,248 | ) | $ | 731 | |||
Net loss for the first nine months registered $(6,978) in 2009 compared to net income $2,917
in 2008, representing per share amounts of $(1.54) in 2009 and $0.65 in 2008. There were no cash
dividends declared in 2009 compared to $0.65 in 2008.
40
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Core earnings (earnings before other-than-temporary impairment charge, gains on loans sold,
investment securities sold or called, other real estate losses and certain other non-recurring
items such as the FDIC special assessment) decreased by $554 or 19.8%, in the first nine months of
2009 compared to 2008 primarily due to increased FDIC assessment rates. Core earnings for the
first nine months of 2009 were $2,243 compared to $2,797 for the same nine month period in 2008.
Core earnings per share were $0.50 at September 30, 2009 and $0.62 at September 30, 2008. The
following is reconciliation between core earnings and earnings as reported under generally accepted
accounting principles in the United States (GAAP earnings):
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
GAAP Earnings or loss |
$ | (6,978 | ) | $ | 2,917 | |||
Investment security losses (gains)-net |
(177 | ) | (116 | ) | ||||
Impairment losses on investment securities |
14,172 | |||||||
Gain on sale of loans |
(233 | ) | (25 | ) | ||||
(Gain) Loss on sale of other real estate |
(15 | ) | (49 | ) | ||||
Loss on disposition of fixed assets |
8 | |||||||
FDIC special assessment |
224 | |||||||
Tax effect of adjustments |
(4,750 | ) | 62 | |||||
Core Earnings |
$ | 2,243 | $ | 2,797 | ||||
Core earnings per share |
$ | 0.50 | $ | 0.62 |
41
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Analysis of Assets and Liabilities
Our earning assets are comprised of investment securities, loans and loans held for
sale, deposits at financial institutions, mainly the Federal Reserve Bank and Federal Funds.
Earning assets were $462,088 at September 30, 2009, an increase of 1.7% from September 30, 2008,
which was $454,284, and an increase of 1.3% since December 31, 2008, which stood at $456,220.
Total cash and cash equivalents increased by $31,603 from year-end, and by
$39,529 from the twelve month period ending September 30, 2008. This is due mainly to deposits
held at the Federal Reserve Bank, which increased by $33,132 from year-end and increased by $50,542
from September 30, 2008. Bank management has elected to employ a higher level of deposits at the
Federal Reserve Bank which are now interest bearing to achieve a higher level of short-term
liquidity needed to support loan demand, and compensate for poorly functioning credit markets.
We classify investment securities as available-for-sale to give management the flexibility to
sell the securities prior to maturity, if needed, based on fluctuating interest rates or changes in
our funding requirements. However, we also have some securities in our held-to-maturity investment
portfolio.
At September 30, 2009, the investment securities portfolio was $173,958 compared to $213,430
at September 30, 2008, a decrease of $39,472 or 18.5%. Investment securities decreased $17,796
compared to December 31, 2008, a decrease of 9.3%. This decrease is primarily attributable to
security calls and principle paydowns. Investment securities represented 37.6% of earning assets
at September 30, 2009, compared to 47.0% at September 30, 2008, and 42.0% at December 31, 2008.
The Banks management elected not to reinvest all of the proceeds from called securities that were
realized during the nine months ended September 30, 2009 and the end of 2008. The investment
portfolio represented 45.8% of each deposit dollar, down from 59.2% a year ago and 50.5% at year
end levels.
The investment securities available-for-sale portfolio had unrealized losses net of unrealized
gains of $5,109 at September 30, 2009 and $6,118 at September 30, 2008, a decrease of $5.1 million
compared to net unrealized losses of $16.8 million at December 31, 2008. Contributing to the
volatility in net unrealized losses over the past twelve months are changes in interest rates and
an inactive market for certain securities as discussed in Note 9 to the financial statements. A
$14.2 million other-than-temporary-impairment was recorded during the nine months of 2009 related
to sixteen pooled trust preferred securities and investments in General Motors Corporation bonds.
The annualized yields on investments securities, on a taxable equivalent basis, were 5.4% for
the nine months ended September 30, 2009, compared to 5.6% for the nine months ended September 30,
2008, and 5.6% for the twelve months ended December 31, 2008. Quarter to date annualized yields on
investment securities on a taxable equivalent basis were 5.4% for September 30, 2009, 5.6% for
September 30, 2008 and 5.7% for December 31, 2008.
Loans net of the allowance for losses increased by $5,091 during the twelve month period from
September 30, 2008 to September 30, 2009, and decreased by $9,397 from year-end. Gross loans as a
percentage of earning assets stood at 51.2% as of September 30, 2009, 50.8% at September 30, 2008
and 53.9% as of December 31, 2008. The loan to deposit ratio at the end of the first nine months
of 2009 was 62.3% as compared to 63.9% for the same period a year ago. The increase in loans from
September 30, 2008 primarily resulted from efforts to increase market share. The Company benefited
from new loan referrals from existing customers as well as from a customer testimonial advertising
and marketing campaign which has generated interest in the Companys line of products and services.
The decrease from year end was due in part to a single 90 day term commercial loan for $7,755 that
closed in December 2008 and was fully secured by a segregated deposit account with the Bank. The
loan matured in the first quarter of 2009. At September 30, 2009 the loan loss allowance of $2,389
represented approximately 1.0% of outstanding loans, and at September 30, 2008 the
loan loss allowance of $1,595 represented approximately 0.69% of outstanding loans. The loan loss
allowance at December 31, 2008 of $2,470 represented approximately 1.0% of outstanding loans.
42
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
During the first nine months, loan charge-offs were $526 in 2009 compared to $655 in 2008,
while the recovery of previously charged-off loans amounted to $108 in 2009 compared to $134 in
2008. Non-accrual loans at September 30, 2009 and December 31, 2008 represented 0.3% of the loan
portfolio compared to 0.8% at September 30, 2008.
Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are
recorded periodically during the year. The number of loan accounts and the amount of charge-off
associated with account balances vary from period to period as loans are deemed uncollectible by
management.
Premises and equipment decreased by $333 from year-end and decreased by $112 from September
30, 2008.
Other assets increased by $589 or 5.4% from year-end and $4,270 or 59.1% from September 30,
2008. Other real estate owned stood at $689 in September 2009 as compared to $809 at December 31,
2008 and $933 at September 30, 2008. Net deferred tax assets measured $7,296 at September 30,
2009, $6,456 at December 31, 2008 and $2,225 at September 30, 2008, primarily reflecting an
increase in deferred tax benefits arising from unrealized losses on available for sale investment
securities, the increase in provision for loan loss from September 2008, and an
other-than-temporary impairment loss recognized in the fourth quarter of 2008 and the first half of
2009. Interest receivable on investments and loans stood at $2,340 at September 30, 2009, $2,637
at December 31, 2008 and $2,952 at September 30, 2008. Bank owned life insurance had a cash
surrender value of $13,092 at September 30, 2009, $12,748 at December 31, 2008 and $12,631 at
September 30, 2008.
Non interest-bearing deposits decreased by $2,965 from year-end and decreased by $287 from
twelve months ago. Interest-bearing deposits increased by $2,958 from year-end and increased by
$19,479 from September 30, 2008. The increase from September 30, 2008 is made up mainly of an
increase in super passbook savings accounts of $5,910 and a $14,973 increase in money market
accounts.
Federal Home Loan Bank advances and other short term borrowings increased by $3,653 from
year-end and decreased by $2,515 from September 30, 2008.
Other liabilities measured $4,449 at September 30, 2009, $4,081 at December 31, 2008 and
$4,039 at September 30, 2008. The two major components in other liabilities are accrued interest
on deposits and borrowings which measured $845 at September 30, 2009, $966 at December 31, 2008 and
$1,114 at September 30, 2008. The other large component is accrued expense which measured $2,806
at September 30, 2009, $3,020 at December 31, 2008 and $2,299 at September 30, 2008. The largest
item in this category is accrued expense for post-retirement benefits.
43
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
Third Quarter of 2009 as Compared to Third Quarter of 2008
INTEREST MARGIN QTD | ||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | |||||||||||||||||||
INTEREST-EARNING ASSETS |
||||||||||||||||||||||||
Federal funds sold and other money market funds |
$ | 84,366 | $ | 55 | 0.3 | % | $ | 7,410 | $ | 35 | 1.9 | % | ||||||||||||
Investment securities (1) (2) |
154,037 | 2,057 | 5.4 | % | 226,087 | 3,866 | 5.6 | % | ||||||||||||||||
Loans (2) (3) |
236,625 | 3,825 | 6.4 | % | 228,248 | 3,143 | 6.8 | % | ||||||||||||||||
Total interest-earning assets |
$ | 475,028 | $ | 5,937 | 5.0 | % | $ | 461,745 | $ | 7,044 | 6.1 | % | ||||||||||||
INTEREST-BEARING LIABILITIES |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 65,883 | $ | 78 | 0.5 | % | $ | 50,459 | $ | 167 | 1.3 | % | ||||||||||||
Savings |
85,868 | 104 | 0.5 | % | 78,435 | 219 | 1.1 | % | ||||||||||||||||
Time |
175,601 | 1,319 | 3.0 | % | 175,638 | 1,704 | 3.9 | % | ||||||||||||||||
Total interest-bearing deposits |
327,352 | 1,501 | 1.8 | % | 304,532 | 2,090 | 2.7 | % | ||||||||||||||||
Federal funds purchased |
||||||||||||||||||||||||
Subordinated Debt |
5,155 | 27 | 2.0 | % | 5,155 | 55 | 4.3 | % | ||||||||||||||||
Other borrowings |
69,166 | 720 | 4.1 | % | 72,018 | 776 | 4.2 | % | ||||||||||||||||
Total interest-bearing liabilities |
$ | 401,673 | $ | 2,248 | 2.2 | % | $ | 381,705 | $ | 2,921 | 3.0 | % | ||||||||||||
Net interest income |
$ | 3,689 | $ | 4,123 | ||||||||||||||||||||
Net interest rate spread (4) |
2.8 | % | 3.1 | % | ||||||||||||||||||||
Net interest margin (5) |
3.1 | % | 3.6 | % | ||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities |
|
(2) | Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory
federal income tax rate of 34%. The tax equivalent income adjustment for loans and investments is $20 and $155 for September 2009
and $19 and $276 for September 2008. |
|
(3) | Includes loan origination and commitment fees. |
|
(4) | Interest rate spread represents the difference between the yield on earning assets and the
rate paid on interest bearing deposits. |
|
(5) | Interest margin is calculated by dividing the difference between total
interest earned and total interest expensed by total interest-earning assets. |
Analysis of Net Interest Income for the Third Quarter
Tax equivalent net interest income for the Company during the third quarter of 2009 decreased
by $434 a 10.5% decrease from the third quarter of 2008. The yield on earning assets decreased by
111 basis points while third quarter average earning assets increased by 2.9%, or $13,283, when
compared to a year ago. The result was a decrease in tax equivalent interest income of $1,107 The
rate paid on interest-bearing liabilities decreased by 82 basis points from the same quarter a year
ago, while third quarter average interest-bearing liabilities increased by $19,968 when compared to
a year ago, resulting in a decrease in total interest expense of $673. The net interest margin
ratio for the quarter registered 3.1 %, down 47 basis points from last years third quarter.
44
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, except for per share amounts)
Analysis of Other Income, Other Expense and Federal Income Tax for the Third Quarter
Loan charge-offs during the quarter were $319 in 2009 compared to $137 in 2008, while the
recovery of previously charged-off loans amounted to $73 during the third quarter of 2009 compared
to $31 in the same period of 2008. The Companys provision for loan losses during the quarter
ended September 30, 2009 was $121 and $105 in the third quarter of 2008. Charge-offs of specific
problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during
the year. The number of loan accounts and the amount of charge-off associated with account
balances vary from period to period as loans are deemed uncollectible by management. The balance
of the allowance for loan loss and provisions to the loan loss allowance are based on an assessment
of both the risk of loss and the amount of loss on loans within the loan portfolio. During the
first three quarters of 2009, the amount charged to operations as a provision for loan loss was
increased to account for the increase in charge-offs against the allowance, as well as an increase
in loan balances recorded in the portfolio, expected losses on specific problem loans and several
qualitative factors including factors specific to the local economy and to industries operating in
the local market. The Company has allocated a portion of the allowance for a number of specific
problem loans through the first nine months of 2008, but has not experienced significant
deterioration in any loan type including the residential real estate portfolios or the commercial
loan portfolio as some peer banking companys have experienced, and accordingly has not added any
special provision for these loan types.
Other income decreased by $2,527 from a year ago. The largest reason for this decrease is an
other-than-temporary impairment loss in the amount of $2,532 recorded in the third quarter of 2009
attributable to CDOs. Gains on investment securities decreased by $26. The net gain on loans
sold during the quarter amounted to $43, compared to $4 a year ago, an increase of $39 due to an
increase in loan sales activity. This increase in loan sales activity for the third quarter of
2009 as compared to 2008 is attributable to the significant decline in mortgage interest rates
during the fourth quarter of 2008 and through the first half of 2009.
Total other non-interest expenses in the third quarter were $3,383 in 2009 compared to $3,258
in 2008, an increase of $125 or 3.8%. Salaries and benefits constituted a $49 increase, or 2.7%.
State and local taxes decreased by $35 compared to the third quarter of 2008. FDIC expense
increased by $218 due to assessment rate increases. Net occupancy expense decreased by $45. Other
expenses decreased by $62 or 7.6%. This expense category is subject to fluctuation due to
non-recurring items.
Loss before income tax benefit during the third quarter amounted to $(1,719) in 2009 compared
to income before income tax expense of $1,363 in 2008. Income tax benefit for the third quarter of
2009 was $(736) compared to expense of $285 in 2008. Third quarter net loss was $(983) in 2009
compared to income of $1,078 in 2008, representing a decrease of $2,061. Loss per share for the
third quarter, adjusted for the 1% stock dividends paid in 2009, was $(0.22) in September 2009
compared to earnings per share of $0.24 in September 2008.
Core earnings (earnings before other than temporary impairment charge, gains on loans sold,
investment securities sold or called and certain other non-recurring items) decreased by 38.2% in
the third quarter of 2009 compared to 2008. Core earnings for the third quarter of 2009 were $654
compared to last years $1,058. The decrease was due in part to increased FDIC assessment rates
and hospitalization costs. Core earnings per share were $0.14 in 2009 and $0.24 in 2008.
45
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, except for per share amounts)
The following is reconciliation between core earnings and earnings under generally accepted
accounting principles in the United States (GAPP earnings):
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
GAAP Earnings |
$ | (983 | ) | $ | 1,078 | |||
Investment security gains |
(8 | ) | (34 | ) | ||||
Impairment losses on investment securities |
2,532 | |||||||
Gain on sale of loans |
(43 | ) | (4 | ) | ||||
Gain on sale of other real estate |
2 | |||||||
Loss on disposition of fixed assets |
6 | |||||||
Tax effect of adjustments |
(844 | ) | 10 | |||||
Core Earnings |
$ | 654 | $ | 1,058 | ||||
Core earnings per share |
$ | 0.14 | $ | 0.24 |
Authoritative Accounting Guidance
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-01, Topic 105 Generally Accepted Accounting Principles FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The
Codification is the single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification does not change current GAAP, but is intended to
simplify user access to all authoritative GAAP by providing all the authoritative literature
related to a particular topic in one place. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company
adopted this standard for the interim reporting period ending September 30, 2009. The adoption of
this standard did not have a material impact on the Companys results of operations or financial
position.
In September 2006, the FASB issued an accounting standard related to fair value measurements,
which was effective for the Company on January 1, 2008. This standard defined fair value,
established a framework for measuring fair value, and expanded disclosure requirements about fair
value measurements. On January 1, 2008, the Company adopted this accounting standard related to
fair value measurements for the Companys financial assets and financial liabilities. The Company
deferred adoption of this accounting standard related to fair value measurements for the Companys
nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at
fair value on an annual or more frequently recurring basis, until January 1, 2009. The adoption of
this accounting standard related to fair value measurements for the Companys nonfinancial assets
and nonfinancial liabilities did not have a material impact on the Companys statements of income
and condition. This accounting standard was subsequently codified into ASC Topic 820, Fair Value
Measurements and Disclosures.
In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements
and Disclosures. This ASC provides additional guidance in determining fair values when there is no
active market or where the price inputs being used represent distressed sales. It reaffirms the
need to use judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. The adoption of this new guidance did
not have a material effect on the Companys results of operations or financial position.
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except for per share amounts)
In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments Debt and
Equity Securities, which provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on securities. This guidance is
effective for interim and annual periods ending after June 15, 2009. The Company has presented the
necessary disclosures in Note (3) herein.
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures
(Topic 820) Measuring Liabilities at Fair Value. This ASU provides amendments for fair value
measurements of liabilities. It provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a reporting entity is
required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when
estimating a fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents the
transfer of the liability. ASU 2009-05 is effective for the first reporting period (including
interim periods) beginning after issuance or fourth quarter 2009. The Company is currently
evaluating the impact of this standard on the Companys financial condition, results of operations,
and disclosures.
In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments,
which relates to fair value disclosures for any financial instruments that are not currently
reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to
require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This guidance is effective
for interim and annual periods ending after June 15, 2009. The Company has presented the necessary
disclosures in Note (9) herein.
The Company has been, until recently, entitled to engage in the expanded range of activities
in which a financial holding company, as defined in Federal Reserve Board rules, may engage.
However, the Company had not taken advantage of that expanded authority and has elected to rescind
its financial holding company status. The Company is now entitled to engage in these activities
deemed permissible to a bank holding company, as defined by Federal Reserve Board rules and the
applicable laws of the United States.
Available Information
The Company files an annual report on Form 10K, quarterly reports on Form 10Q, current reports
on Form 8K and amendments to those reports with the Securities and Exchange Commission (SEC)
pursuant to Section 13 (a) or (15) d of the Exchange Act. The Companys Internet address is
www.cortland-banks.com. The Company makes available through this address, free of charge, the
reports filed, as soon as reasonably practicable after such material is electronically filed, or
otherwise furnished to the SEC. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically
with the SEC at www.sec.gov.
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands, except for per share amounts)
Management considers interest rate risk to be the Companys principal source of market risk.
Interest rate risk is measured as the impact of interest rate changes on the Companys net interest
income. Components of interest rate risk comprise re-pricing risk, basis risk and yield curve
risk. Re-pricing risk arises due to timing differences in the re-pricing of assets and liabilities
as interest rate changes occur. Basis risk occurs when re-pricing assets and liabilities reference
different key rates. Yield curve risk arises when a shift occurs in the relationship among key
rates across the maturity spectrum.
The effective management of interest rate risk seeks to limit the adverse impact of interest
rate changes on the Companys net interest margin, providing the Company with the best opportunity
for maintaining consistent earnings growth. Toward this end, Management uses computer simulation
to model the Companys financial performance under varying interest rate scenarios. These
scenarios may reflect changes in the level of interest rates, changes in the shape of the yield
curve, and changes in interest rate relationships.
The simulation model allows Management to test and evaluate alternative responses to a
changing interest rate environment. Typically when confronted with a heightened risk of rising
interest rates, the Company will evaluate strategies that shorten investment and loan re-pricing
intervals and maturities, emphasize the acquisition of floating rate over fixed rate assets, and
lengthen the maturities of liability funding sources. When the risk of falling rates is perceived,
Management will typically consider strategies that shorten the maturities of funding sources,
lengthen the re-pricing intervals and maturities of investments and loans, and emphasize the
acquisition of fixed rate assets over floating rate assets.
The most significant assumptions used in the simulation relate to the cash flows and
re-pricing characteristics of the Companys balance sheet. Re-pricing and runoff rate assumptions
are based on a detailed interface with actual customer information and investment data stored on
the subsidiary banks information systems. Consensus prepayment speeds derived from an independent
third party source are used to adjust the runoff cash flows for the impact of the specific interest
rate environments under consideration. Simulated results are benchmarked against historical
results. Actual results may differ from simulated results not only due to the timing, magnitude
and frequency of interest rate changes, but also due to changes in general economic conditions,
changes in customer preferences and behavior, and changes in strategies by both existing and
potential competitors.
The table on the following page shows the Companys current estimate of interest rate
sensitivity based on the composition of the balance sheet at September 30, 2009 and December 31,
2008. For purposes of this analysis, short term interest rates as measured by the federal funds
rate and the prime lending rate are assumed to increase (decrease) gradually over the subsequent
twelve months reaching a level basis points higher (lower) than the rates in effect at
September 30, 2009 and December 31, 2008 for the respective simulations. Under both the rising rate
scenario and the falling rate scenario, the yield curve is assumed to exhibit a parallel shift.
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
(Dollars in thousands, except for per share amounts)
Over the past twelve months, the Federal Reserve has lowered the rate on overnight federal
funds by 200 basis points. At September 30, 2009, the difference between the yield on the ten-year
Treasury and the three-month Treasury was a positive 317 basis points compared to a positive 214
basis points at December 31, 2008. With longer-term rates exceeding short-term rates the yield
curve has a positive slope.
The base case against which interest rate sensitivity is measured assumes no change in
short-term rates. The base case also assumes no growth in assets and liabilities and no change in
asset or liability mix. Under these simulated conditions the base case projects net interest
income of $16,094 for the twelve month period ending September 30, 2010.
Simulated Net Interest Income (NII) Scenarios | ||||||||||||||||||||||||
Fully Taxable Equivalent Basis | ||||||||||||||||||||||||
For the Twelve Months Ending | ||||||||||||||||||||||||
Net Interest Income | $ Change in NII | % Change in NII | ||||||||||||||||||||||
Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | |||||||||||||||||||
Changes in Interest Rates | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
Graduated increase of
+300 basis points |
$ | 17,214 | $ | 15,380 | $ | 1,120 | $ | (84 | ) | 7.0 | % | (0.5 | )% | |||||||||||
Short term rates
unchanged |
16,094 | 15,464 | ||||||||||||||||||||||
Graduated decrease of
-300 basis points |
14,883 | 15,333 | (1,211 | ) | (131 | ) | (7.5 | )% | (0.8 | )% |
The level of interest rate risk indicated is within limits that Management considers
acceptable. However, given that interest rate movements can be sudden and unanticipated, and are
increasingly influenced by global events and circumstances beyond the purview of the Federal
Reserve, no assurance can be made that interest rate movements will not impact key assumptions and
parameters in a manner not presently embodied by the model.
It is Managements opinion that hedging instruments currently available are not a cost
effective means of controlling interest rate risk for the Company. Accordingly, the Company does
not currently use financial derivatives, such as interest rate options, floors or other similar
instruments.
49
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. With the supervision and
participation of management, including the Companys principal
executive officer who is also Acting Chief Financial Officer, the effectiveness of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) has been
evaluated as of the end of the period covered by this report. Based upon that evaluation, the
Companys principal executive officer who is also acting chief
financial officer has concluded that such
disclosure controls and procedures are, to the best of his knowledge, effective as of the end of
the period covered by this report to ensure that material information relating to the Company and
its consolidated subsidiaries is made known to them, particularly during the period for which our
periodic reports, including this report, are being prepared.
Changes
in Internal Control Over Financial Reporting. Our Chief Executive
Officer who is also acting Chief Financial Officer has concluded that there have been no significant changes during the
period covered by this report in the Companys internal control over financial reporting (as
defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, internal control over financial reporting.
50
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note (5) of the financial statements.
Item 1A Risk Factors
There have been no material changes from the risk factors previously disclosed in response to
Item 1A of Part 1 of Form 10-K filed March 16, 2009
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Companys Common Stock. There were no repurchases of shares of the Companys common
stock during the three months ended September 30, 2009.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Not applicable
51
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
PART II OTHER INFORMATION (CONTINUED)
Item 6. Exhibits
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
2 | Plan of
acquisition,
reorganization,
arrangement,
liquidation or
succession
|
N/A | ||||||||||||
3.1 | Restated Amended
Articles of
Cortland Bancorp
reflecting
amendment dated May
18, 1999. Note:
filed for purposes
of SEC reporting
compliance only.
This restated
document has not
been filed with the
State of Ohio
|
10-K | 3.1 | 03/16/06 | ||||||||||
3.2 | Code of
Regulations, as
amended |
|||||||||||||
For the Bancorp
|
10-K | 3.2 | 03/16/06 | |||||||||||
For Cortland
Savings and Banking
|
10-K | 3.2 | 03/15/07 | |||||||||||
4 | The rights of
holders of equity
securities are
defined in portions
of the Articles of
Incorporation and
Code of Regulations
as referenced in
Exhibits 3.1 and
3.2
|
10-K | 4 | 03/16/06 | ||||||||||
*10.1 | Group Term Carve
Out Plan dated
February 23, 2001,
by The Cortland
Savings and Banking
Company with each
executive officer
other than Rodger
W. Platt and with
selected other
officers, as
amended by the
August 2002 letter
amendment
|
10-K | 10.1 | 03/16/06 | ||||||||||
*10.2 | Group Term Carve
Out Plan Amended
Split Dollar Policy
Endorsement entered
into by The
Cortland Savings
and Banking Company
on December 15,
2003 with Stephen
A. Telego, Sr.
|
10-K | 10.2 | 03/16/06 |
52
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*10.3 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and Jerry A.
Carleton, dated as
of December 18,
2007
|
10-K | 10.3 | 03/17/08 | ||||||||||
*10.4 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and David C. Cole,
dated as of
December 18, 2007
|
10-K | 10.4 | 03/17/08 | ||||||||||
*10.5 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and George E.
Gessner, dated as
of December 18,
2007
|
10-K | 10.5 | 03/17/08 | ||||||||||
*10.6 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and William A.
Hagood, dated as of
October 12, 2003
|
10-K | 10.6 | 03/16/06 | ||||||||||
*10.7 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and James E.
Hoffman III, dated
as of December 18,
2007
|
10-K | 10.7 | 03/17/08 | ||||||||||
*10.8 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and Neil J. Kaback,
dated as of
December 18, 2007
|
10-K | 10.8 | 03/17/08 | ||||||||||
*10.9 | Director Retirement
Agreement between
Cortland Bancorp
and K. Ray Mahan,
dated as of March
1, 2001
|
10-K | 10.9 | 03/16/06 | ||||||||||
*10.10 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and Richard B.
Thompson, dated as
of December 18,
2007
|
10-K | 10.10 | 03/17/08 | ||||||||||
*10.11 | Amended Director
Retirement
Agreement between
Cortland Bancorp
and Timothy K.
Woofter, dated as
of December 18,
2007
|
10-K | 10.11 | 03/17/08 |
53
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*10.12 | Form of Split
Dollar Agreement
entered into by
Cortland Bancorp
and each of
Directors David C.
Cole, George E.
Gessner, William A.
Hagood, James E.
Hoffman III, K. Ray
Mahan, and Timothy
K. Woofter as of
February 23, 2001,
as of March 1,
2004, with Director
Neil J. Kaback, and
as of October 1,
2001, with Director
Richard B.
Thompson;
|
10-K | 10.12 | 03/16/06 | ||||||||||
as amended on
December 26, 2006,
for Directors Cole,
Gessner, Hoffman,
Mahan, Thompson,
and Woofter;
|
10-K | 10.12 | 3/15/07 | |||||||||||
Amended Split
Dollar Agreement
and Endorsement
entered into by
Cortland Bancorp as
of December 18,
2007, with Director
Jerry A. Carleton
|
10-K | 10.12 | 03/17/08 | |||||||||||
*10.13 | Split Dollar
Agreement between
The Cortland
Savings and Banking
Company and Rodger
W. Platt dated of
as February 23,
2001, as amended on
August 15, 2002,
and September 29,
2005
|
10-K | 10.13 | 03/16/06 | ||||||||||
*10.14 | Endorsement Split
Dollar Agreement
between The
Cortland Savings
and Banking Company
and Rodger W. Platt
dated as of
September 29, 2005
|
10-K | 10.14 | 03/16/06 | ||||||||||
*10.15 | Form of
Indemnification
Agreement entered
into by Cortland
Bancorp with each
of its directors as
of May 24, 2005
|
10-K | 10.15 | 03/16/06 | ||||||||||
*10.16 | Amended Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and Rodger
W. Platt, dated as
of August 15, 2002
|
10-K | 10.16 | 03/16/06 |
54
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*10.17 | Third Amended and
Restated Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and Timothy
Carney, dated as of
December 3, 2008
|
8-K | 10.17 | 12/12/08 | ||||||||||
*10.18 | Third Amended and
Restated Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and
Lawrence A.
Fantauzzi, dated as
of December 3, 2008
|
8-K | 10.18 | 12/12/08 | ||||||||||
*10.19 | Third Amended and
Restated Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and James
M. Gasior, dated as
of December 3, 2008
|
8-K | 10.19 | 12/12/08 | ||||||||||
*10.20 | Second Amended
Salary Continuation
Agreement between
The Cortland
Savings and Banking
Company and Marlene
Lenio, dated as of
December 3, 2008
|
8-K | 10.20 | 12/12/08 | ||||||||||
*10.21 | Amended Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and Craig
Phythyon, dated as
of December 3, 2008
|
8-K | 10.21 | 12/12/08 | ||||||||||
*10.22 | Third Amended and
Restated Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and Stephen
A. Telego, Sr.,
dated as of
December 3, 2008
|
8-K | 10.22 | 12/12/08 | ||||||||||
*10.23 | Third Amended and
Restated Salary
Continuation
Agreement between
The Cortland
Savings and Banking
Company and Danny
L. White, dated as
of December 3, 2008
|
8-K | 10.23 | 12/12/08 |
55
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*10.24 | Third Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and Timothy Carney,
dated as of
December 3, 2008
|
8-K | 10.24 | 12/12/08 | ||||||||||
*10.25 | Third Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and Lawrence A.
Fantauzzi, dated as
of December 3, 2008
|
8-K | 10.25 | 12/12/08 | ||||||||||
*10.26 | Third Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and James M.
Gasior, dated as of
December 3, 2008
|
8-K | 10.26 | 12/12/08 | ||||||||||
*10.27 | Second Amended
Split Dollar
Agreement between
The Cortland
Savings and Banking
Company and Marlene
Lenio, dated as of
December 3, 2008
|
8-K | 10.27 | 12/12/08 | ||||||||||
*10.28 | Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and Craig Phythyon,
dated as of
December 3, 2008
|
8-K | 10.28 | 12/12/08 | ||||||||||
*10.29 | Third Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and Stephen A.
Telego, Sr., dated
as of December 3,
2008
|
8-K | 10.29 | 12/12/08 | ||||||||||
*10.30 | Third Amended Split
Dollar Agreement
and Endorsement
between The
Cortland Savings
and Banking Company
and Danny L. White,
dated as of
December 3, 2008
|
8-K | 10.30 | 12/12/08 |
56
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*10.31 | Severance Agreement
entered into by
Cortland Bancorp
and The Cortland
Savings and Banking
Company in December
3, 2008, with each
of Timothy Carney,
Lawrence A.
Fantauzzi, James M.
Gasior, and Stephen
A. Telego, Sr.
|
8-K | 10.31 | 12/12/08 | ||||||||||
*10.32 | Severance Agreement
entered into by
Cortland Bancorp
and The Cortland
Savings and Banking
Company in December
3, 2008, with each
of Marlene Lenio,
Craig M. Phythyon,
Barbara Sandrock,
and Danny L. White
|
8-K | 10.32 | 12/12/08 | ||||||||||
11 | Statement re
computation of per
share earnings
|
See Note 6 of
financial statements |
||||||||||||
15 | Letter re unaudited interim financial statements |
N/A | ||||||||||||
18 | Letter re change in
accounting principles |
N/A | ||||||||||||
19 | Report furnished to
security holders
|
N/A | ||||||||||||
22 | Published report
regarding matters
submitted to vote
of security holders
|
N/A | ||||||||||||
23 | Consents of experts
and counsel
Consent of
independent
registered public
Accounting firms
|
N/A | ||||||||||||
24 | Power of Attorney
|
N/A |
57
Table of Contents
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
31.1 | Certification of
the Chief Executive
Officer and Acting Chief Financial Officer under Rule
13a-14(a)
|
ü | ||||||||||||
32 | Section 1350
Certification of
Chief Executive
Officer and Acting Chief
Financial Officer
required under
section 906 of the
Sarbanes-Oxley Act
of 2002
|
ü |
* | Management contract or compensatory plan or arrangement |
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be
directed to James Gasior, Secretary, Cortland Bancorp, 194 West Main Street, Cortland, Ohio 44410.
58
Table of Contents
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 9, 2009 | /s/ James M. Gasior | |||
James M. Gasior | ||||
(Chief Executive Officer and Acting Chief Financial Officer) |
59