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EX-32 - EXHIBIT 32 - CORTLAND BANCORP INC | c17337exv32.htm |
EX-31.2 - EXHIBIT 31.2 - CORTLAND BANCORP INC | c17337exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - CORTLAND BANCORP INC | c17337exv31w1.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: March 31, 2011
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)
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 o | Non-accelerated filer o | Small reporting company þ | |||
(Do not check if a smaller reporting company) |
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 | 4,525,538 Shares at May 9, 2011 |
Cortland Bancorp and Subsidiaries: |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6-26 | ||||||||
27 | ||||||||
28 | ||||||||
29-42 | ||||||||
43-44 | ||||||||
45 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
47 | ||||||||
50 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited) MARCH 31, |
DECEMBER 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 7,669 | $ | 6,894 | ||||
Interest-bearing deposits |
14,918 | 8,910 | ||||||
Total cash and cash equivalents |
22,587 | 15,804 | ||||||
Investment securities available for sale (Note 3) |
179,916 | 168,158 | ||||||
Investment securities held-to-maturity (estimated fair value of
$20,941 at December 31, 2010 ) (Note 3) |
20,300 | |||||||
Total loans (Note 4) |
257,731 | 265,441 | ||||||
Less allowance for loan losses (Note 5) |
(2,641 | ) | (2,501 | ) | ||||
Net loans |
255,090 | 262,940 | ||||||
Premises and equipment |
6,666 | 6,720 | ||||||
Bank-owned life insurance |
12,588 | 12,491 | ||||||
Other assets |
12,721 | 13,860 | ||||||
Total assets |
$ | 489,568 | $ | 500,273 | ||||
LIABILITIES |
||||||||
Noninterest-bearing deposits |
$ | 61,799 | $ | 61,362 | ||||
Interest-bearing deposits |
322,407 | 330,147 | ||||||
Total deposits |
384,206 | 391,509 | ||||||
Federal Home Loan Bank advances |
46,000 | 53,000 | ||||||
Other short-term borrowings |
6,565 | 4,901 | ||||||
Subordinated debt |
5,155 | 5,155 | ||||||
Other liabilities |
3,760 | 3,856 | ||||||
Total liabilities |
445,686 | 458,421 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock $5.00 stated value authorized
20,000,000 shares; issued 4,728,267 in 2011 and 2010; outstanding shares
4,525,539 in 2011 and 4,525,541 in 2010 |
23,641 | 23,641 | ||||||
Additional paid-in capital |
20,850 | 20,850 | ||||||
Retained earnings |
4,282 | 3,413 | ||||||
Accumulated other comprehensive loss |
(1,297 | ) | (2,458 | ) | ||||
Treasury stock at cost, 202,728 at March 31, 2011 and 202,726 December
31, 2010 |
(3,594 | ) | (3,594 | ) | ||||
Total shareholders equity |
43,882 | 41,852 | ||||||
Total liabilities and shareholders equity |
$ | 489,568 | $ | 500,273 | ||||
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 | ||||||||
MARCH 31, | ||||||||
2011 | 2010 | |||||||
INTEREST INCOME |
||||||||
Interest and fees on loans |
$ | 3,763 | $ | 3,679 | ||||
Interest and dividends on investment securities: |
||||||||
Taxable interest |
1,113 | 1,486 | ||||||
Nontaxable interest |
395 | 321 | ||||||
Dividends |
32 | 40 | ||||||
Other interest income |
17 | 23 | ||||||
Total interest income |
5,320 | 5,549 | ||||||
INTEREST EXPENSE |
||||||||
Deposits |
864 | 1,116 | ||||||
Other short-term borrowings |
2 | |||||||
Federal Home Loan Bank advances |
364 | 622 | ||||||
Subordinated debt |
23 | 22 | ||||||
Total interest expense |
1,253 | 1,760 | ||||||
Net interest income |
4,067 | 3,789 | ||||||
PROVISION FOR LOAN LOSSES |
174 | 175 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
3,893 | 3,614 | ||||||
OTHER INCOME |
||||||||
Fees for customer services |
513 | 545 | ||||||
Investment securities gains net |
83 | |||||||
Impairment losses on investment securities: |
||||||||
Total other-than -temporary impairment losses |
(141 | ) | (275 | ) | ||||
Portion of (gains) losses recognized in other comprehensive income
(before tax) |
(61 | ) | (269 | ) | ||||
Net impairment losses recognized in earnings |
(202 | ) | (544 | ) | ||||
Gain on sale of loans net |
16 | 4 | ||||||
Other real estate losses net |
(28 | ) | (4 | ) | ||||
Earnings on bank owned life insurance |
124 | 136 | ||||||
Other non-interest income |
27 | 27 | ||||||
Total other income |
533 | 164 | ||||||
OTHER EXPENSES |
||||||||
Salaries and employee benefits |
1,795 | 1,261 | ||||||
Net occupancy and equipment expense |
455 | 472 | ||||||
State and local taxes |
116 | 108 | ||||||
FDIC insurance expense |
211 | 225 | ||||||
Bank exam and audit fees |
102 | 109 | ||||||
Office supplies |
86 | 86 | ||||||
Other operating expenses |
590 | 478 | ||||||
Total other expenses |
3,355 | 2,739 | ||||||
INCOME BEFORE FEDERAL INCOME TAXES |
1,071 | 1,039 | ||||||
Federal income tax expense |
202 | 145 | ||||||
NET INCOME |
$ | 869 | $ | 894 | ||||
BASIC EARNINGS PER COMMON SHARE (NOTE 6) |
$ | 0.19 | $ | 0.20 | ||||
DILUTED EARNINGS PER COMMON SHARE (NOTE 6) |
$ | 0.19 | $ | 0.20 | ||||
CASH DIVIDENDS DECLARED PER SHARE |
$ | | $ | | ||||
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 STATEMENTS 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 | |||||||||||||||||||
THREE MONTHS ENDED MARCH 31, 2010 |
||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2010 |
$ | 23,641 | $ | 20,850 | $ | 142 | $ | (4,131 | ) | $ | (3,594 | ) | $ | 36,908 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
894 | 894 | ||||||||||||||||||||||
Other comprehensive income,
net of tax : |
||||||||||||||||||||||||
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment, net of tax of $387 |
753 | 753 | ||||||||||||||||||||||
Other comprehensive gain related to
securities for which other than temporary impairment
has been recognized in earnings, net of tax of $92 |
177 | 177 | ||||||||||||||||||||||
Total comprehensive income |
1,824 | |||||||||||||||||||||||
BALANCE AT MARCH 31, 2010 |
$ | 23,641 | $ | 20,850 | $ | 1,036 | $ | (3,201 | ) | $ | (3,594 | ) | $ | 38,732 | ||||||||||
THREE MONTHS ENDED MARCH 31, 2011 |
||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2011 |
$ | 23,641 | $ | 20,850 | $ | 3,413 | $ | (2,458 | ) | $ | (3,594 | ) | $ | 41,852 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
869 | 869 | ||||||||||||||||||||||
Other comprehensive income,
net of tax : |
||||||||||||||||||||||||
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment, net of tax of $577 |
1,121 | 1,121 | ||||||||||||||||||||||
Other comprehensive gain related to
securities for which other than temporary impairment
has been recognized in earnings, net of tax of $21 |
40 | 40 | ||||||||||||||||||||||
Total comprehensive income |
2,030 | |||||||||||||||||||||||
BALANCE AT MARCH 31, 2011 |
$ | 23,641 | $ | 20,850 | $ | 4,282 | $ | (1,297 | ) | $ | (3,594 | ) | $ | 43,882 | ||||||||||
COMPONENTS OF OTHER COMPREHENSIVE
INCOME
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2011 | 2010 | |||||||
Net unrealized holding gains on available-for-sale securities arising during the period,
net of taxes of $558 and $294, respectively |
$ | 1,083 | $ | 571 | ||||
Reclassification adjustment for net gains realized in net income,
net of taxes of $28 |
(55 | ) | | |||||
Reclassification adjustment for other-than-temporary impairment losses
on debt securities, net of taxes of $69 and $185 , respectively |
133 | 359 | ||||||
Net unrealized gains on available-for-sale securities, net of tax |
1,161 | 930 | ||||||
Net income |
869 | 894 | ||||||
Total comprehensive income |
$ | 2,030 | $ | 1,824 | ||||
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 | ||||||||
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2011 | 2010 | |||||||
NET CASH FLOWS FROM OPERATING ACTIVITIES |
$ | 1,931 | $ | 472 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of available-for-sale securities |
(1,612 | ) | (17,787 | ) | ||||
Proceeds from sales of securities |
3,227 | |||||||
Proceeds
from call, maturity and principal payments on securities |
8,142 | 7,521 | ||||||
Net decrease in loans made to customers |
7,560 | 11,249 | ||||||
Proceeds from disposition of other real estate |
260 | 11 | ||||||
Purchases of premises and equipment |
(86 | ) | (6 | ) | ||||
Net cash flows from investing activities |
17,491 | 988 | ||||||
CASH DEFICIT FROM FINANCING ACTIVITIES |
||||||||
Net decrease in deposit accounts |
(7,303 | ) | (12,208 | ) | ||||
Proceeds from Federal Home Loan Bank advances |
10,000 | |||||||
Repayments of Federal Home Loan Bank advances |
(17,000 | ) | (5,000 | ) | ||||
Net increase in short term borrowings |
1,664 | 253 | ||||||
Net cash deficit from financing activities |
(12,639 | ) | (16,955 | ) | ||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
6,783 | (15,495 | ) | |||||
CASH AND CASH EQUIVALENTS |
||||||||
Beginning of period |
15,804 | 44,823 | ||||||
End of period |
$ | 22,587 | $ | 29,328 | ||||
SUPPLEMENTAL DISCLOSURES |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,303 | $ | 1,825 | ||||
Income taxes |
$ | | $ | 400 |
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 U.S.GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2011 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2011. These interim unaudited consolidated
financial statements should be read in conjunction with our annual audited financial statements as
of December 31, 2010, included in our Form 10-K for the year ended December 31, 2010, filed with
the United States Securities and Exchange Commission. The accompanying consolidated balance sheet
at December 31, 2010, 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.
2.) Reclassifications:
Certain items contained in the 2010 financial statements have been reclassified to conform to the
presentation for 2011. Such reclassifications had no effect on the net results of operations.
3.) Investment Securities:
Investments in debt and equity securities are classified as held-to-maturity, available-for-sale or
trading. Securities classified as held-to-maturity are those that management has the positive
intent and ability to hold to maturity. Securities classified as available-for-sale are those that
could be sold for liquidity, investment management, or similar reasons, even though management has
no present intentions to do so. The Company currently has no securities classified as trading.
As of March 31, 2011, in order to maintain maximum flexibility in managing the investment portfolio
and to improve liquidity options, management opted to reclassify all investments in the
held-to-maturity classification into the available-for-sale portfolio. The reclassification resulted
in the recording of an unrealized gain of $522, an increase of $344 net of tax to other
comprehensive income. Prior to the reclassification, held-to-maturity securities were stated at
cost, adjusted for amortization of premiums and accretion of discounts, with such amortization or
accretion included in interest income. Available-for-sale securities are carried at fair value with
unrealized gains and losses recorded as a separate component of shareholders equity, net of tax
effects. Realized gains or losses on dispositions are based on net proceeds and the adjusted
carrying amount of securities sold, using the specific identification method. Interest income
includes amortization of purchase premium or discount premiums. Discounts on securities are
amortized on the level-yield method without anticipating payments, except for both U.S. Government
and private-label mortgage-backed and related securities where prepayments are anticipated.
Securities are evaluated periodically to determine whether a decline in value is
other-than-temporary. Management utilizes criteria such as the magnitude and duration of the
decline, along with 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 either the
decline or the amount of the present value cash flow expected to be collected is less than the
securitys amortized cost basis is permanent, but indicates that the prospect for a near-term
recovery of value is not necessarily favorable and that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment. Unrealized losses
on investments have not been recognized into income. However, once a decline in value is determined
to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized
in earnings while the non-credit related OTTI on securities not
expected to be sold is recognized in other comprehensive loss.
6
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following is a summary of investment securities:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
March 31, 2011 |
||||||||||||||||
Investment securities available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 123 | $ | 13 | $ | | $ | 136 | ||||||||
U.S. Government agencies and corporations |
30,821 | 497 | 1 | 31,317 | ||||||||||||
Obligations of states and political subdivisions |
37,036 | 339 | 835 | 36,540 | ||||||||||||
U.S. Government-sponsored mortgage-backed and related securities |
91,887 | 3,040 | 90 | 94,837 | ||||||||||||
Private-label mortgage-backed and related securities |
744 | 6 | 188 | 562 | ||||||||||||
Trust preferred securities |
17,935 | 118 | 4,865 | 13,188 | ||||||||||||
Corporate securities |
287 | | | 287 | ||||||||||||
Total debt securities |
178,833 | 4,013 | 5,979 | 176,867 | ||||||||||||
Regulatory stock |
3,049 | | | 3,049 | ||||||||||||
Total available-for-sale |
$ | 181,882 | $ | 4,013 | $ | 5,979 | $ | 179,916 | ||||||||
December 31, 2010 |
||||||||||||||||
Investment securities available-for-sale |
||||||||||||||||
U.S. Government agencies and corporations |
$ | 28,913 | $ | 541 | $ | | $ | 29,454 | ||||||||
Obligations of states and political subdivisions |
27,332 | 42 | 1,485 | 25,889 | ||||||||||||
U.S. Government-sponsored mortgage-backed and related securities |
93,956 | 2,752 | 222 | 96,486 | ||||||||||||
Private-label mortgage-backed and related securities |
208 | 6 | | 214 | ||||||||||||
Trust preferred securities |
18,137 | 101 | 5,459 | 12,779 | ||||||||||||
Corporate securities |
287 | | | 287 | ||||||||||||
Total debt securities |
168,833 | 3,442 | 7,166 | 165,109 | ||||||||||||
Regulatory stock |
3,049 | | | 3,049 | ||||||||||||
Total available-for-sale |
$ | 171,882 | $ | 3,442 | $ | 7,166 | $ | 168,158 | ||||||||
Investment securities held-to-maturity |
||||||||||||||||
U.S. Treasury securities |
$ | 124 | $ | 15 | $ | | $ | 139 | ||||||||
U.S. Government agencies and corporations |
1,993 | 107 | | 2,100 | ||||||||||||
Obligations of states and political subdivisions |
12,607 | 385 | 10 | 12.982 | ||||||||||||
U.S. Government-sponsored mortgage-backed and related securities |
5,010 | 338 | 1 | 5,347 | ||||||||||||
Private-label mortgage-backed and related securities |
566 | | 193 | 373 | ||||||||||||
Total held-to-maturity |
$ | 20,300 | $ | 845 | $ | 204 | $ | 20,941 | ||||||||
At March 31, 2011 and December 31, 2010, regulatory stock consisted of $2,823 in Federal Home Loan
Bank (FHLB) stock and $226 in Federal Reserve Bank (FED) stock. Each investment is carried at cost,
and the Company is required to hold such investments as a condition of membership in order to
transact business with the FHLB and the FED.
While the Federal Home Loan Banks have been negatively impacted by the current economic conditions,
the Federal Home Loan Bank of Cincinnati has reported profits for 2010, remains in compliance with
regulatory capital and liquidity requirements, continues to pay dividends on stock and makes
redemptions at par value. With consideration given to these factors, management concluded that the
stock was not impaired at March 31, 2011 or December 31, 2010.
The amortized cost and fair value of debt securities at March 31, 2011, by contractual maturity,
are shown below. Actual maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment penalties.
7
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
March 31, 2011 | ||||||||
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Investment securities available-for-sale |
||||||||
Due in one year or less |
$ | 1,959 | $ | 1,973 | ||||
Due after one year through five years |
5,069 | 5,150 | ||||||
Due after five years through ten years |
31,257 | 31,720 | ||||||
Due after ten years |
47,917 | 42,625 | ||||||
Subtotal |
86,202 | 81,468 | ||||||
U.S. Government-sponsored mortgage-backed and related securities |
91,887 | 94,837 | ||||||
Private-label mortgage-backed and related securities |
744 | 562 | ||||||
Total |
$ | 178,833 | $ | 176,867 | ||||
The table below sets forth the proceeds and gains or losses realized on securities sold or called
for the three months ended:
March 31, | ||||||||
2011 | 2010 | |||||||
Proceeds on securities sold |
$ | 3,227 | $ | | ||||
Gross realized gains |
81 | | ||||||
Gross realized losses |
| | ||||||
Proceeds on securities called |
$ | 330 | $ | | ||||
Gross realized gains |
2 | | ||||||
Gross realized losses |
| |
Available-for-sale securities, carried at fair value, totaled $179,916 at March 31, 2011 and
$168,158 at December 31, 2010. These securities represent 100.00% and 89.23% of all investment
securities at March 31, 2011 and December 31, 2010, respectively. In managements opinion, these
levels provide an adequate level of liquidity.
Investment securities with a carrying value of approximately $108,544 at March 31, 2011 and
$108,473 at December 31, 2010 were pledged to secure deposits and for other purposes.
The following is a summary of the fair value of securities with unrealized losses and an aging of
those unrealized losses at March 31, 2011:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government agencies and corporations |
$ | 2,523 | $ | 1 | $ | | $ | | $ | 2,523 | $ | 1 | ||||||||||||
U.S. Government-sponsored mortgage-backed and related securities |
19,336 | 89 | 7 | 1 | 19,343 | 90 | ||||||||||||||||||
Private-label mortgage-backed and related securities |
| | 368 | 188 | 368 | 188 | ||||||||||||||||||
Obligations of states and political subdivisions |
18,142 | 691 | 5,250 | 144 | 23,392 | 835 | ||||||||||||||||||
Trust preferred securities |
| | 8,973 | 4,865 | 8,973 | 4,865 | ||||||||||||||||||
Total |
$ | 40,001 | $ | 781 | $ | 14,598 | $ | 5,198 | $ | 54,599 | $ | 5,979 | ||||||||||||
The above table comprises 77 investment securities where the fair value is less than the related
amortized cost.
8
Table of Contents
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 December 31, 2010:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government-sponsored mortgage-backed and
related securities |
$ | 26,538 | $ | 222 | $ | 33 | $ | 1 | $ | 26,571 | $ | 223 | ||||||||||||
Private-label mortgage-backed and related securities |
| | 373 | 193 | 373 | 193 | ||||||||||||||||||
Obligations of states and political subdivisions |
20,075 | 1,351 | 4,290 | 144 | 24,365 | 1,495 | ||||||||||||||||||
Trust preferred securities |
| | 11,997 | 5,459 | 11,997 | 5,459 | ||||||||||||||||||
Total |
$ | 46,613 | $ | 1,573 | $ | 16,693 | $ | 5,797 | $ | 63,306 | $ | 7,370 | ||||||||||||
The above table comprises 89 investment securities where the fair value is less than the related
amortized cost.
The unrealized loss on trust preferred securities represents pools of trust preferred debt
primarily issued by bank holding companies and insurance companies. The unrealized loss on these
securities at March 31, 2011 was $4,865 compared to a $5,459 loss at December 31, 2010.
The unrealized losses on the Companys investment in U.S. Government agencies and corporations,
obligations of states and political subdivisions, U.S. Government-sponsored mortgage-backed and
related securities and private-label mortgage-backed and related securities were caused by changes
in market rates and related spreads and are reflective of current distressed conditions in the
credit markets and the 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. Also, 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 March 31,
2011.
Among the Companys numerous mortgage-backed securities is one privately-issued variable rate
collateralized mortgage obligation (CMO). The security was valued on March 31, 2011 at $0.66 on a
dollar and is scheduled to reprice in February of 2012. The Company had the security tested by a
third party for subprime mortgage containment and none was found. As government intervention takes
hold and the market in general somewhat settles, the CMO market has begun a slow recovery. At March
31, 2009, this security priced at $0.39 on a dollar and at December 31, 2010 at $0.66 on a dollar.
The sizable increase in the value since March 2009 provides evidence that the impairment is
temporary. General market liquidity has been improving, even with the government phasing out of its
many assertive programs. The security carries a credit rating of A indicating little probability
of default. Also, as a variable rate security, interest resets have been bringing the rate down,
thus reducing the value. As interest rates rise in the next nine to twelve months (as some
economists predict), and the rate resets higher, the price of the security should also recover
relative to book value. The securitys underlying delinquency rate is 7.25%. A current analysis of
this security indicates at the current delinquency and default rates, no loss is projected on this
security through its maturity. The Company does not intend to sell this security and it is not
more-likely-than-not that the Company will be required to sell the debt security before its
anticipated recovery. As a result of all the facts presented, the Company does not consider this
investment to be other-than-temporarily impaired.
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
(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. The Companys investment in FNMA and FHLMC is $7,574 and $1,993,
respectively.
9
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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 (FDIC) 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.
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 quarter of 2011 in accordance
with FASB ASC topic 320, Investments Debt and 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 OTTI 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 defines the presentation and amount of the OTTI 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 OTTI 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).
The Company assessed the impairment of certain securities currently in an illiquid market. Through
the impairment assessment process, the Company determined that the investments discussed in the
following table were other-than-temporarily impaired at March 31, 2011 and 2010. The Company
recorded impairment credit losses in earnings on available-for-sale securities of $202 and $544 for
the quarters ended March 31, 2011 and 2010, respectively. The $61 and $269 non-credit portion of
impairment recognized during the quarters ended March 31, 2011 and 2010, respectively, was recorded
in other comprehensive loss.
March 31, | ||||||||
2011 | 2010 | |||||||
Trust preferred securities |
$ | 202 | $ | 544 | ||||
Total |
$ | 202 | $ | 544 | ||||
For the quarter ended March 31, 2011, the Company recognized OTTI of $202 attributable to 5 trust
preferred securities with a cost basis of $8,540. For the quarter ended March 31, 2010, the
Company recognized OTTI of $544 attributable to 12 trust preferred securities with a cost basis of
$14,675. The impairment charges were recognized after determining the likely future cash flows of
these securities had been adversely impacted.
At March 31, 2011, there was $3,861 of investment securities considered to be in non-accrual
status. This included the remaining book value of the Companys investment in General Motors
corporate securities of $287 and $3,574 of the Companys holding in trust preferred securities. As
of March 31, 2011, the quarterly interest payments for 21 of its 32 investments in trust preferred
securities have been placed in payment in kind status, which results in a temporary delay in the
payment of interest. As a result of the delay in the collection of interest payments, management
placed these securities in non-accrual status. Current estimates indicate that the interest
payment delays may exceed ten years. All other trust preferred securities remain in accrual status.
4.) Loans:
The Company, through its subsidiary bank, grants residential, consumer and commercial loans to
customers located primarily in Northeast Ohio and Western Pennsylvania.
10
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following represents the composition of the loan portfolio for the period ending:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Balance | % | Balance | % | |||||||||||||
Commercial real estate |
$ | 151,221 | 58.6 | $ | 146,389 | 55.1 | ||||||||||
Commercial |
31,355 | 12.2 | 42,349 | 16.0 | ||||||||||||
Residential real estate |
51,260 | 19.9 | 52,262 | 19.7 | ||||||||||||
Residential real estate held for sale |
146 | 0.1 | 262 | 0.1 | ||||||||||||
Consumer |
6,717 | 2.6 | 7,216 | 2.7 | ||||||||||||
Home equity |
17,032 | 6.6 | 16,963 | 6.4 | ||||||||||||
Total loans |
$ | 257,731 | $ | 265,441 | ||||||||||||
Residental real estate held for sale is carried, in the aggregate, at the lower of cost or
estimated market value based on secondary market prices.
5.) Allowance for Loan Loss:
Management has an established methodology to determine the adequacy of the allowance for loan
losses that assesses the risks and losses inherent in the loan portfolio. For purposes of
determining the allowance for loan losses, the Company has segmented loans in the portfolio by
product type. Loans are segmented into the following pools: commercial loans, commercial real
estate loans, residential real estate loans, and consumer loans. The Company also sub-segments the
consumer loan portfolio into the following two classes: home equity loans and other consumer loans.
Historical loss percentages for each risk category are calculated and used as the basis for
calculating allowance allocations. These historical loss percentages are calculated over multiple
periods for all portfolio segments. Management evaluates these results and utilizes the most
reflective period in the calculation. Certain qualitative factors are then added to the historical
allocation percentage to get the adjusted factor. These factors include, but are not limited to,
the following:
Factor Considered: | Risk Trend: | |
Levels of and trends in charge-offs, classifications and non-accruals
|
Increasing | |
Trends in volume and terms
|
Increasing | |
Changes in lending policies and procedures
|
Increasing | |
Experience, depth and ability of management
|
Increasing | |
Economic trends
|
Increasing | |
Concentrations of credit
|
Stable |
The following factors are analyzed and applied to loans internally graded with higher risk credit
in addition to the above factors for non-classified loans:
Factor Considered: | Risk Trend: | |
Levels and trends in classification
|
Decreasing | |
Declining trends in financial performance
|
Stable | |
Structure and lack of performance measures
|
Stable | |
Migration between risk categories
|
Stable |
11
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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 an analysis of changes in the allowance for loan losses for the periods ended:
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Balance at beginning of year |
$ | 2,501 | $ | 2,437 | ||||
Loan charge-offs |
(57 | ) | (195 | ) | ||||
Recoveries |
23 | 30 | ||||||
Net loan charge-offs |
(34 | ) | (165 | ) | ||||
Provision charged to operations |
174 | 175 | ||||||
Balance at end of year |
$ | 2,641 | $ | 2,447 | ||||
The total allowance of $2,641 reflects managements estimate of loan losses inherent in the loan
portfolio at the consolidated balance sheet date. The following tables presents a full breakdown by
portfolio segment, the changes in the allowance for loan losses and the recorded investment in
loans for the periods ended March 31, 2011 and December 31, 2010.
Commercial | ||||||||||||||||||||
March 31, 2011 | Commercial | Real Estate | Consumer | Residential | Total | |||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Beginning balance |
$ | 249 | $ | 1,611 | $ | 223 | $ | 418 | $ | 2,501 | ||||||||||
Charge-offs |
| | (32 | ) | (25 | ) | (57 | ) | ||||||||||||
Recoveries |
| | 20 | 3 | 23 | |||||||||||||||
Provision and Reallocation |
110 | 61 | 15 | (12 | ) | 174 | ||||||||||||||
Ending Balance |
$ | 359 | $ | 1,672 | $ | 226 | $ | 384 | $ | 2,641 | ||||||||||
Individually evaluated for impairment |
$ | 96 | $ | 23 | $ | | $ | | $ | 119 | ||||||||||
Collectively evaluated for impairment |
263 | 1,649 | 226 | 384 | 2,522 | |||||||||||||||
Loan Portfolio: |
||||||||||||||||||||
Ending Balance |
$ | 31,355 | $ | 151,221 | $ | 23,749 | $ | 51,406 | $ | 257,731 | ||||||||||
Individually evaluated for impairment |
$ | 102 | $ | 1,564 | $ | | $ | | $ | 1,666 | ||||||||||
Collectively evaluated for impairment |
31,253 | 149,657 | 23,749 | 51,406 | 256,065 |
Commercial | ||||||||||||||||||||
December 31, 2010 | Commercial | Real Estate | Consumer | Residential | Total | |||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Beginning balance |
$ | 209 | $ | 1,666 | $ | 247 | $ | 315 | $ | 2,437 | ||||||||||
Charge-offs |
(1 | ) | (204 | ) | (182 | ) | (229 | ) | (616 | ) | ||||||||||
Recoveries |
| 58 | 99 | 18 | 175 | |||||||||||||||
Provision and Reallocation |
41 | 91 | 59 | 314 | 505 | |||||||||||||||
Ending Balance |
$ | 249 | $ | 1,611 | $ | 223 | $ | 418 | $ | 2,501 | ||||||||||
Individually evaluated for impairment |
$ | 103 | $ | 94 | $ | | $ | | $ | 197 | ||||||||||
Collectively evaluated for impairment |
146 | 1,517 | 223 | 418 | 2,304 | |||||||||||||||
Loan Portfolio: |
||||||||||||||||||||
Ending Balance |
$ | 42,349 | $ | 146,389 | $ | 24,179 | $ | 52,524 | $ | 265,441 | ||||||||||
Individually evaluated for impairment |
$ | 155 | $ | 1,738 | $ | | $ | | $ | 1,893 | ||||||||||
Collectively evaluated for impairment |
42,194 | 144,651 | 24,179 | 52,524 | 263,548 |
12
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following tables represent credit exposures by internally assigned grades for March 31, 2011
and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the
contractual obligations of the loan agreements as scheduled or at all. The Companys internal
credit risk grading system is based on experiences with similarly graded loans.
The Companys internally assigned grades are as follows:
| Pass loans which are protected by the current net worth and paying capacity of the
obligor or by the value of the underlying collateral. Within this category, there are
grades of exceptional, quality, acceptable and pass monitor. |
| Special Mention loans where a potential weakness or risk exists, which could cause a
more serious problem if not corrected. |
| Substandard loans that have a well-defined weakness based on objective evidence and
are characterized by the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. |
| Doubtful loans classified as doubtful have all the weaknesses inherent in a
substandard asset but with the severity which make collection in full highly questionable
and improbable, based on existing circumstances. |
| Loss loans classified as a loss are considered uncollectible, or of such value that
continuance as an asset is not warranted. This rating does not mean that the assets have no
recovery or salvage value but rather that the assets should be charged off now, even though
partial or full recovery may be possible in the future. |
The following is a summary of credit quality indicators by internally assigned grade as of March
31, 2011 and December 31, 2010:
Commercial | ||||||||||||
March 31, 2011 | Commercial | Real Estate | Total | |||||||||
Pass |
$ | 29,599 | $ | 129,264 | $ | 158,863 | ||||||
Special Mention |
1,238 | 14,433 | 15,671 | |||||||||
Substandard |
518 | 7,524 | 8,042 | |||||||||
Doubtful/Loss |
| | | |||||||||
Ending Balance |
$ | 31,355 | $ | 151,221 | $ | 182,576 | ||||||
Commercial | ||||||||||||
December 31, 2010 | Commercial | Real Estate | Total | |||||||||
Pass |
$ | 41,159 | $ | 125,904 | $ | 167,063 | ||||||
Special Mention |
873 | 12,257 | 13,130 | |||||||||
Substandard |
317 | 8,228 | 8,545 | |||||||||
Doubtful/Loss |
| | | |||||||||
Ending Balance |
$ | 42,349 | $ | 146,389 | $ | 188,738 | ||||||
The Bank evaluates the classification of consumer, home equity and residential loans primarily on a
pooled basis. If the Bank becomes aware that adverse or distressed conditions exist that may affect
a particular loan, the loan is downgraded following the above definitions of special mention and
substandard. If the above conditions exist, the loan is considered nonperforming. If not, the
pooled loan is not graded.
13
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Loans are considered to be nonperforming when they become 90 days past due, though the Company may
be receiving partial payments of interest and partial repayments of principal on such loans. When a
loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from
interest income. Loans that were previously 90 days past due and are now current are also
considered nonperforming until they show a six month history of being current. Loans in foreclosure
are considered
nonperforming.
Nonperforming loans also include certain loans that have been modified in trouble debt
restructurings where economic concessions have been granted to borrowers who have experienced or
are expected to experience financial difficulties. These concessions typically result from the
Companys loss mitigation activities and could include reductions in the interest rate, payment
extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as
nonperforming at the time of restructure and may only be returned to performing status after
considering the borrowers sustained repayment performance for a reasonable period, generally six
months.
There were $1,345 in restructured loans at March 31, 2011 and $1,334 at December 31, 2010. The
total interest recognized on these loans was $20 and $90 at March 31, 2011 and December 31, 2010,
respectively. Had the loans at March 31, 2011 not been restructured, interest would have increased
pretax income by $7 compared to $12 at December 31, 2010.
The following is a summary of consumer credit exposure as of March 31, 2011 and December 31, 2010.
Consumer | ||||||||||||
Home | Other | |||||||||||
Equity | Consumer | Residential | ||||||||||
March 31, 2011 |
||||||||||||
Performing |
$ | 16,727 | $ | 5,635 | $ | 50,171 | ||||||
Nonperforming |
305 | 1,082 | 1,235 | |||||||||
Total |
$ | 17,032 | $ | 6,717 | $ | 51,406 | ||||||
December 31, 2010 |
||||||||||||
Performing |
$ | 16,762 | $ | 6,130 | $ | 51,395 | ||||||
Nonperforming |
201 | 1,086 | 1,129 | |||||||||
Total |
$ | 16,963 | $ | 7,216 | $ | 52,524 | ||||||
The following is an aging analysis of the recorded investment of past due loans as of March 31,
2011 and December 31, 2010.
Recorded | ||||||||||||||||||||||||||||
31-59 | 60-89 | Investment | ||||||||||||||||||||||||||
Days | Days | 90 Days | Total | > 90 Days | ||||||||||||||||||||||||
Past | Past | Or | Past | Total | and | |||||||||||||||||||||||
March 31, 2011 | Due | Due | Greater | Due | Current | Loans | Accruing | |||||||||||||||||||||
Commercial real estate |
$ | 945 | $ | 183 | $ | 102 | $ | 1,230 | $ | 149,991 | $ | 151,221 | $ | | ||||||||||||||
Commercial |
13 | | 85 | 98 | 31,257 | 31,355 | | |||||||||||||||||||||
Residential |
228 | 56 | 869 | 1,153 | 50,253 | 51,406 | | |||||||||||||||||||||
Consumer |
||||||||||||||||||||||||||||
Consumer home equity |
| | 51 | 51 | 16,981 | 17,032 | | |||||||||||||||||||||
Consumer other |
59 | 23 | 1,033 | 1,115 | 5,602 | 6,717 | | |||||||||||||||||||||
Total |
$ | 1,245 | $ | 262 | $ | 2,140 | $ | 3,647 | $ | 254,084 | $ | 257,731 | $ | | ||||||||||||||
14
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
Recorded | ||||||||||||||||||||||||||||
31-59 | 60-89 | Investment | ||||||||||||||||||||||||||
Days | Days | 90 Days | Total | > 90 Days | ||||||||||||||||||||||||
Past | Past | Or | Past | Total | and | |||||||||||||||||||||||
December 31, 2010 | Due | Due | Greater | Due | Current | Loans | Accruing | |||||||||||||||||||||
Commercial real estate |
$ | 418 | $ | 55 | $ | 102 | $ | 575 | $ | 145,814 | $ | 146,389 | $ | | ||||||||||||||
Commercial |
| | 132 | 132 | 42,217 | 42,349 | | |||||||||||||||||||||
Residential |
41 | 282 | 902 | 1,225 | 51,299 | 52,524 | | |||||||||||||||||||||
Consumer |
||||||||||||||||||||||||||||
Consumer home equity |
169 | | 47 | 216 | 16,747 | 16,963 | | |||||||||||||||||||||
Consumer other |
69 | 4 | 1,047 | 1,120 | 6,096 | 7,216 | | |||||||||||||||||||||
Total |
$ | 697 | $ | 341 | $ | 2,230 | $ | 3,268 | $ | 262,173 | $ | 265,441 | $ | | ||||||||||||||
An impaired loan is a loan on which, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due (including both interest and principal)
according to the contractual terms of the loan agreement. However, an insignificant delay or
insignificant shortfall in amount of payments on a loan does not mean that the loan is impaired.
When a loan is determined to be impaired, impairment should be measured based on the present value
of expected future cash flows discounted at the loans effective interest rate. However, as a
practical expedient, the bank will measure impairment based on a loans observable market price, or
the fair value of the collateral if the loan is collateral dependent.
The following are the criteria for selecting individual loans / relationships for impairment
analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.
| All borrowers whose loans are classified doubtful by examiners and internal loan review. |
| All loans on non-accrual status |
| Any loan in foreclosure |
| Any loan with a specific reserve |
| Any loan determined to be collateral dependent for repayment |
| Loans classified as troubled debt restructuring |
Any loan evaluated for impairment is excluded from the general pool of loans in the ALLL
calculation regardless if a specific reserve was determined. If management determines that the
value of the impaired loan is less than the recorded investment in the loan (net of previous
charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is
recognized through an allowance estimate or a charge-off to the allowance.
15
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 recorded investment and unpaid principal balances for impaired
loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with
the associated allowance amount, if applicable, at March 31, 2011 and December 31, 2010. Also
presented are the average recorded investments in the impaired balances and interest income
recognized after impairment.
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
March 31, 2011 |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 395 | $ | 395 | $ | | $ | 1,251 | $ | 2 | ||||||||||
Commercial |
| | | | | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 1,169 | $ | 1,169 | $ | 23 | $ | 1,295 | $ | 18 | ||||||||||
Commercial |
102 | 102 | 96 | 107 | 1 | |||||||||||||||
Total: |
||||||||||||||||||||
Commercial real estate |
$ | 1,564 | $ | 1,564 | $ | 23 | $ | 2,546 | $ | 20 | ||||||||||
Commercial |
102 | 102 | 96 | 107 | 1 | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 501 | $ | 501 | $ | | $ | 233 | $ | 2 | ||||||||||
Commercial |
45 | 45 | | 18 | | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 1,237 | $ | 1,237 | $ | 94 | $ | 364 | $ | 2 | ||||||||||
Commercial |
110 | 110 | 103 | 128 | 3 | |||||||||||||||
Total: |
||||||||||||||||||||
Commercial real estate |
$ | 1,738 | $ | 1,738 | $ | 94 | $ | 597 | $ | 4 | ||||||||||
Commercial |
155 | 155 | 103 | 146 | 3 |
The following is a summary of classes of loans on non-accrual status as of March 31, 2011 and
December 31, 2010:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial real estate |
$ | 304 | $ | 307 | ||||
Commercial |
85 | 132 | ||||||
Residential |
1,012 | 1,040 | ||||||
Consumer |
||||||||
Consumer home equity |
51 | 47 | ||||||
Consumer other |
1,070 | 1,085 | ||||||
Total |
$ | 2,522 | $ | 2,611 | ||||
16
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
As of March 31, 2011 and December 31, 2010, there were $6,600 and $6,845, respectively, in loans
that were neither classified as non-accrual nor considered impaired, but which can be considered
potential problem loans.
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.
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 869 | $ | 894 | ||||
Weighted average common shares outstanding |
4,525,542 | 4,525,550 | ||||||
Basic earnings per share |
$ | 0.19 | $ | 0.20 | ||||
Diluted earnings per share |
$ | 0.19 | $ | 0.20 |
7.) 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 issued by the trust. The securities bear interest at the 3-month
LIBOR rate plus 1.45%. The rates at March 31, 2011 and December 31, 2010 were 1.76% and 1.75%,
respectively. The Company issued subordinated debentures to the trust in exchange for the proceeds
of the trust preferred offering. The debentures represent the sole 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.
8.) Commitments:
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 or other special purpose
entities 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 consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular classes of financial
instruments.
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.
17
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following is a summary of such contractual commitments:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Commitments to extend credit |
||||||||
Fixed rate |
$ | 5,949 | $ | 7,395 | ||||
Variable rate |
40,552 | 36,717 | ||||||
Standby letters of credit |
241 | 444 |
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 Bank to
guarantee the performance of a customer to a third party. Since many of the 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 businesses as well as individually/jointly owned accounts in good
standing for 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 at March
31, 2011 totaled $10,269 and $10,333 at December 31, 2010. The total average daily balance of
overdrafts used at March 31, 2011 was $118 and $126 at December 31, 2010, or less than 2% of the
total aggregate overdraft protection available to depositors. The balance at March 31, 2011 of all
deposit overdrafts included in total loans was $106 and $147 at December 31, 2010.
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.
The Company groups assets and liabilities recorded at fair value into three levels based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. A financial instruments level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement (with level 1
considered highest and level 3 considered lowest). A brief description of each level follows:
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 March 31, 2011 and December 31, 2010 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 3/31/11 Using | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets | Observable | Unobservable | ||||||||||||||
for Identical | Inputs | Inputs | ||||||||||||||
Description | 3/31/11 | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. Treasury securities |
$ | 136 | $ | | $ | 136 | $ | | ||||||||
U.S. Government agencies and corporations |
31,317 | | 31,317 | | ||||||||||||
Obligations of states and political subdivisions |
36,540 | | 36,540 | | ||||||||||||
U.S. Government-sponsored mortgage-backed and
related securities |
94,837 | | 94,837 | | ||||||||||||
Private-label mortgage-backed and related securities |
562 | | 562 | | ||||||||||||
Trust preferred securities |
13,188 | | | 13,188 | ||||||||||||
Corporate securities |
287 | | 287 | | ||||||||||||
Total |
$ | 176,867 | $ | | $ | 163,679 | $ | 13,188 | ||||||||
Fair Value Measurements at 12/31/10 Using | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets | Observable | Unobservable | ||||||||||||||
for Identical | Inputs | Inputs | ||||||||||||||
Description | 12/31/10 | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. Government agencies and corporations |
$ | 29,454 | $ | | $ | 29,454 | $ | | ||||||||
Obligations of states and political subdivisions |
25,889 | | 25,889 | | ||||||||||||
U.S. Government-sponsored mortgage-backed and
related securities |
96,486 | | 96,486 | | ||||||||||||
Private-label mortgage-backed and related securities |
214 | | 214 | | ||||||||||||
Trust preferred securities |
12,779 | | | 12,779 | ||||||||||||
Corporate securities |
287 | | 287 | | ||||||||||||
Total |
$ | 165,109 | $ | | $ | 152,330 | $ | 12,779 | ||||||||
19
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following tables present the changes in the Level 3 fair value category for the three months
ended March 31, 2011. 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.
Losses | ||||||||||||||||||||||||||||
included in net | ||||||||||||||||||||||||||||
Net realized/unrealized | income for the | |||||||||||||||||||||||||||
gains/(losses) included in | Transfers | Purchases, | period relating | |||||||||||||||||||||||||
Other | in and/or | issuances | to assets held | |||||||||||||||||||||||||
January 1, | Noninterest | comprehensive | out of | and | March 31, | at March 31, | ||||||||||||||||||||||
Net Unrealized | 2011 | income | income | Level 3 | settlements | 2011 | 2011 | |||||||||||||||||||||
Trust preferred
securities |
$ | 12,779 | $ | (202 | ) | $ | 611 | $ | | $ | | $ | 13,188 | $ | (202 | ) |
The Company conducts OTTI analyses 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. All of the
foregoing require considerable judgment.
Trust Preferred Securities:
Trust preferred securities are accounted for under FASB ASC Topic 325 Investments Other. The
Company evaluates current available information in estimating the future cash flows of 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 trust preferred securities totaling $34,926 (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. Beginning during the second
half of 2008 and through 2010, 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, the following: 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 2009 and 2010, Moodys
Investors Service, Fitch Ratings and Standards and Poors downgraded multiple trust preferred
securities, including securities held by the Company. All 32 of the trust preferred securities held
by the Company are now considered to be below investment grade. The deteriorating economic, credit
and financial conditions experienced in 2008 and through 2010 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 and determined that for 12 of these securities,
it does not consider the investment in these assets to be other-than-temporarily impaired at March
31, 2011. The Company does not intend to sell the securities and it is more-likely-than-not that
the Company will be required to sell the securities before recovery of its amortized cost basis.
There was no adverse change in the cash flows. Although the Company does not consider the
investment in these assets to be other-than-temporarily impaired at March 31, 2011, there is a risk
that subsequent evaluations could result in recognition of OTTI charges in the future. Upon
completion of the March 31, 2011 analysis, the model indicated OTTI on the remaining 20 securities,
5 of which experienced additional defaults or deferrals during the period. These 20 securities had
life-to-date impairment losses of $18.7 million, of which $16.6 million was recorded as expense and
$2.1 million was recorded in other comprehensive loss. These 20 securities remained classified as
available-for-sale at March 31, 2011, and together, the 32 securities subjected to FASB ASC Topic
320 accounted for the entire $4.7 million of unrealized losses in the trust preferred securities
category at March 31, 2011.
20
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following table details the 20 debt securities with other-than-temporary impairment, their
credit ratings at March 31, 2011 and the related losses recognized in earnings:
Amount of | ||||||||||||||
Amount of OTTI | OTTI related | |||||||||||||
Moodys/ | related to credit | Addition | to credit loss at | |||||||||||
Fitch | loss at January 1, | March 31, | March 31, | |||||||||||
Rating | 2011 | 2011 | 2011 | |||||||||||
Alesco Preferred Funding VIII Class E Notes 1 |
C/C | $ | 1,500 | $ | | $ | 1,500 | |||||||
MM Community Funding II Class B |
Ba1/CC | 11 | | 11 | ||||||||||
PreTSL I Mezzanine |
Ca/C | 430 | | 430 | ||||||||||
PreTSL II Mezzanine |
Ca/C | 1,274 | 141 | 1,415 | ||||||||||
PreTSL V Mezzanine |
Ba3/D | 97 | | 97 | ||||||||||
PreTSL VIII B-3 |
C/C | 1,635 | | 1,635 | ||||||||||
PreTSL IX Class B-2 |
Ca/C | 274 | | 274 | ||||||||||
PreTSL XV Class B-2 |
C/C | 267 | 10 | 277 | ||||||||||
PreTSL XV Class B-3 |
C/C | 269 | 10 | 279 | ||||||||||
PreTSL XVI D |
NR/C | 518 | | 518 | ||||||||||
PreTSL XVI D |
NR/C | 991 | | 991 | ||||||||||
PreTSL XVII Class C |
Ca/C | 978 | | 978 | ||||||||||
PreTSL XVII Class D |
NR/C | 930 | | 930 | ||||||||||
PreTSL XVIII Class D |
NR/C | 513 | | 513 | ||||||||||
PreTSL XXIII Class C-FP |
C/C | 211 | | 211 | ||||||||||
PreTSL XXV Class D |
NR/C | 1,001 | | 1,001 | ||||||||||
PreTSL XXVI Class D |
NR/C | 465 | | 465 | ||||||||||
Trapeza CDO II Class C-1 |
Ca/C | 598 | | 598 | ||||||||||
Tropic CDO V Class B-1L |
C/C | 4,427 | 1 | 4,428 | ||||||||||
Trapeza IX B-1 |
Ca/CC | 10 | 40 | 50 | ||||||||||
Total |
$ | 16,399 | $ | 202 | $ | 16,601 | ||||||||
21
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The following table provides additional information related to the Companys trust preferred
securities as of March 31, 2011 used to evaluate other-than-temporary impairments.
Excess | ||||||||||||||||||||||||||||
Subordination | ||||||||||||||||||||||||||||
Number of | Deferrals and | as a % of | ||||||||||||||||||||||||||
Unrealized | Moodys | Issuers | Defaults as % of | Current | ||||||||||||||||||||||||
Book | Fair | Gain | Fitch | Currently | Current | Performing | ||||||||||||||||||||||
Deal | Class | Value | Value | (Loss) | Rating | Performing | Collateral | Collateral | ||||||||||||||||||||
PreTSL I |
Mezzanine | $ | 516 | $ | 613 | $ | 97 | Ca/C | 16 | 42.76 | % | | % | |||||||||||||||
PreTSL II |
Mezzanine | 692 | 513 | (179 | ) | Ca/C | 23 | 39.89 | | |||||||||||||||||||
PreTSL IV |
Mezzanine | 182 | 167 | (15 | ) | Ca/CCC | 4 | 27.07 | 19.35 | |||||||||||||||||||
PreTSL V |
Mezzanine | 22 | 14 | (8 | ) | Ba3/D | | 100.00 | | |||||||||||||||||||
PreTSL VIII |
B-3 | 365 | 165 | (200 | ) | C/C | 22 | 44.82 | | |||||||||||||||||||
PreTSL IX |
B-2 | 722 | 436 | (286 | ) | Ca/C | 33 | 31.02 | | |||||||||||||||||||
PreTSL XV |
B-2 | 224 | 51 | (173 | ) | C/C | 51 | 35.38 | | |||||||||||||||||||
PreTSL XV |
B-3 | 224 | 51 | (173 | ) | C/C | 51 | 35.38 | | |||||||||||||||||||
PreTSL XVI |
D | | | | NR/C | 34 | 46.94 | | ||||||||||||||||||||
PreTSL XVI |
D | | | | NR/C | 34 | 49.64 | | ||||||||||||||||||||
PreTSL XVII |
C | | | | Ca/C | 36 | 36.31 | | ||||||||||||||||||||
PreTSL XVII |
D | | | | NR/C | 36 | 36.31 | | ||||||||||||||||||||
PreTSL XVIII |
D | | | | NR/C | 53 | 24.88 | | ||||||||||||||||||||
PreTSL XXIII |
C-2 | 1,011 | 215 | (796 | ) | C/C | 92 | 27.70 | | |||||||||||||||||||
PreTSL XXIII |
C-FP | 1,547 | 861 | (686 | ) | C/C | 92 | 27.70 | | |||||||||||||||||||
PreTSL XXV |
D | | | | NR/C | 48 | 37.22 | | ||||||||||||||||||||
PreTSL XXVI |
D | | | | NR/C | 50 | 29.56 | | ||||||||||||||||||||
I-PreTSL I |
B-1 | 985 | 871 | (114 | ) | NR/CCC | 16 | 9.04 | 9.55 | |||||||||||||||||||
I-PreTSL I |
B-2 | 1,000 | 871 | (129 | ) | NR/CCC | 16 | 9.04 | 9.55 | |||||||||||||||||||
I-PreTSL I |
B-3 | 1,000 | 871 | (129 | ) | NR/CCC | 16 | 9.04 | 9.55 | |||||||||||||||||||
I-PreTSL II |
B-3 | 2,990 | 3,000 | 10 | NR/B | 29 | | 14.33 | ||||||||||||||||||||
I-PreTSL III |
B-2 | 1,000 | 853 | (147 | ) | B2/CCC | 24 | 5.81 | 11.32 | |||||||||||||||||||
I-PreTSL III |
C | 1,000 | 650 | (350 | ) | NR/CCC | 24 | 5.81 | 3.75 | |||||||||||||||||||
I-PreTSL IV |
B-1 | 1,000 | 647 | (353 | ) | Ba2/CCC | 29 | 11.60 | 3.36 | |||||||||||||||||||
I-PreTSL IV |
B-2 | 1,000 | 647 | (353 | ) | Ba2/CCC | 29 | 11.60 | 3.36 | |||||||||||||||||||
I-PreTSL IV |
C | 500 | 226 | (274 | ) | Caa1/CC | 29 | 11.60 | | |||||||||||||||||||
Alesco VIII |
E | | | | C/C | 56 | 35.62 | | ||||||||||||||||||||
MM Community Funding
III |
B | 426 | 437 | 11 | Ba1/CC | 7 | 32.17 | 0.77 | ||||||||||||||||||||
MM Community Funding II |
B | 165 | 165 | | Baa2/BB | 5 | 29.31 | 17.32 | ||||||||||||||||||||
Tropic V |
B-1L | | | | C/C | 53 | 39.68 | | ||||||||||||||||||||
Trapeza II |
C-1 | 414 | 391 | (23 | ) | Ca/C | 23 | 37.04 | | |||||||||||||||||||
Trapeza IX |
B-1 | 950 | 473 | (477 | ) | Ca/CC | 41 | 10.96 | 21.82 | |||||||||||||||||||
Total |
$ | 17,935 | $ | 13,188 | $ | (4,747 | ) | |||||||||||||||||||||
22
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CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
The market for these securities at March 31, 2011 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 trust preferred securities 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 securities 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.
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 securities.
Given conditions in the debt markets today and the absence of observable transactions in the
secondary and the new issue markets, the Company determined the following:
| The few observable transactions and market quotations that are available are not
reliable for purposes of determining fair value at March 31, 2011; |
| 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
measurement dates prior to 2008; and |
| The trust preferred securities will be classified within Level 3 of the fair value
hierarchy because the Company determined that significant judgments are required to
determine fair value at the measurement date. |
The Company enlisted the aid of an independent third party to perform the trust preferred security
valuations. The approach to determining fair value involved the following process:
1. | Estimate the credit quality of the collateral using average probability of default
values for each issuer (adjusted for rating levels). |
2. | Consider the potential for correlation among issuers within the same industry for
default probabilities (e.g. banks with other banks). |
3. | Forecast the cash flows for the underlying collateral and apply to each trust preferred
security tranche to determine the resulting distribution among the securities, including
prepayment and cures. |
4. | Discount the expected cash flows to calculate the present value of the security. |
The effective discount rates on an overall basis generally range from 18.13% to 42.74% and are
highly dependent upon the credit quality of the collateral, the relative position of the tranche in
the capital structure of the trust preferred security and the prepayment assumptions.
The Company also monitored default and deferral activity since March 31, 2011 for valuation
consideration. There were no material unexpected results to consider.
23
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 measured on a nonrecurring basis on the consolidated
balance sheets at their fair value as of March 31, 2011 and December 31, 2010, 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 loans 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.
March 31, 2011 | ||||||||||||||||
Level | Level | Level | ||||||||||||||
1 | 2 | 3 | Total | |||||||||||||
Assets Measured on a nonrecurring basis: |
||||||||||||||||
Impaired loans |
$ | | $ | | $ | 1,547 | $ | 1,547 | ||||||||
Other real estate owned |
| | 560 | 560 |
December 31, 2010 | ||||||||||||||||
Level | Level | Level | ||||||||||||||
1 | 2 | 3 | Total | |||||||||||||
Assets Measured on a nonrecurring basis: |
||||||||||||||||
Impaired loans |
$ | | $ | | $ | 3,903 | $ | 3,903 | ||||||||
Other real estate owned |
| | 848 | 848 |
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 March 31, 2011, the recorded investment in
impaired loans was $1,666 with a
related reserve of $119 resulting in a net balance of $1,547. At December 31, 2010, the recorded
investment in impaired loans was $4,100 with a related reserve of $197 resulting in a net balance
of $3,903.
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 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 March 31, 2011, the recorded investment in OREO was $583 with a valuation
allowance of $23 resulting in a net balance of $560. At December 31 2010, the recorded investment
in OREO was $883 with a valuation allowance of $35 resulting in a net balance of $848.
Financial Instruments:
The FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized in the Consolidated Balance Sheets, 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.
24
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except for per share amounts)
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. Loans held for sale are carried, in aggregate, at the lower of cost or fair value.
Accrued interest receivable The carrying amount is a reasonable estimate of these assets fair
value.
Demand, savings and money market 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 is 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.
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 short-term borrowings generally have an original term to
maturity of one year or less. Consequently, their carrying value is a reasonable estimate of fair
value.
Subordinated debt The floating issuances curves to maturity are averaged to obtain an index. The
spread between BBB-rated bank debt and 25-year swap rates is determined to calculate the spread on
outstanding trust preferred securities. The discount
margin is then added to the index to arrive at a discount rate, which determines the present value
of projected cash flows.
Accrued interest payable The carrying amount is a reasonable estimate of these liabilities fair
value.
The fair value of unrecorded commitments at March 31, 2011 and December 31, 2010 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:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 22,587 | $ | 22,587 | $ | 15,804 | $ | 15,804 | ||||||||
Investment securities available-for-sale |
179,916 | 179,916 | 168,158 | 168,158 | ||||||||||||
Investment securities held-to-maturity |
| | 20,300 | 20,941 | ||||||||||||
Loans, net of allowance for loan losses |
255,090 | 254,944 | 262,940 | 268,557 | ||||||||||||
Accrued interest receivable |
2,212 | 2,212 | 2,124 | 2,124 | ||||||||||||
LIABILITIES |
||||||||||||||||
Demand, savings and money market deposits |
$ | 223,313 | $ | 223,313 | $ | 234,876 | $ | 234,876 | ||||||||
Time deposits |
160,893 | 160,893 | 156,633 | 160,750 | ||||||||||||
FHLB advances |
46,000 | 48,794 | 53,000 | 56,216 | ||||||||||||
Other short-term borrowings |
6,565 | 6,565 | 4,901 | 4,901 | ||||||||||||
Subordinated debt |
5,155 | 4,065 | 5,155 | 3,962 | ||||||||||||
Accrued interest payable |
485 | 485 | 535 | 535 |
25
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
On May 26, 2009, the Board of Directors of Cortland Bancorp and Cortland Banks adopted resolutions
authorizing its President and Chief Executive Officer to enter into the Memorandum of Understanding
(MOU) with the Federal Reserve. The MOU was executed June 1, 2009. The Division of Financial
Institutions, State of Ohio, became a party to the MOU in December 2009, when the agreement was
revised. The revised MOU was executed December 31, 2009. The MOU requires the Company 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 required, within specified timeframes, submission of the following
plans to the Federal Reserve for its approval: (i) Cortland Banks a plan to strengthen and
improve management of the overall risk exposure of the investment portfolio; (ii) the Company and
Cortland Banks a plan to maintain an adequate capital position, (iii) the Company and Cortland
Banks a plan to strengthen board oversight of the management and operations of the Bank and (iv)
Cortland Banks a plan for 2010 to improve the Banks earnings and overall condition.
The provisions of the MOU shall remain effective and enforceable until stayed, modified, terminated
or suspended by the Federal Reserve. The Company is substantially in compliance with the
provisions of the MOU as of March 31, 2011.
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)
YEAR TO DATE AS OF | ||||||||||||||||||||||||||||||||||||
MARCH 31, 2011 | DECEMBER 31, 2010 | MARCH 31, 2010 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | ||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Interest earning deposits and other assets |
$ | 12,614 | $ | 17 | 0.52 | % | $ | 24,898 | $ | 92 | 0.36 | % | $ | 34,320 | $ | 23 | 0.26 | % | ||||||||||||||||||
Investment securities (1) (2) |
187,949 | 1,734 | 3.70 | % | 191,546 | 7,807 | 4.07 | % | 179,916 | 1,999 | 4.45 | % | ||||||||||||||||||||||||
Loans (1) (2) (3) |
257,266 | 3,775 | 5.91 | % | 237,624 | 14,765 | 6.21 | % | 242,043 | 3,696 | 6.15 | % | ||||||||||||||||||||||||
Total interest-earning assets |
457,829 | $ | 5,526 | 4.85 | % | 454,068 | $ | 22,664 | 4.99 | % | 456,279 | $ | 5,718 | 5.04 | % | |||||||||||||||||||||
Cash and due from banks |
6,649 | 6,570 | 6,547 | |||||||||||||||||||||||||||||||||
Bank premises and equipment |
6,704 | 6,918 | 7,077 | |||||||||||||||||||||||||||||||||
Other assets |
19,808 | 19,032 | 18,938 | |||||||||||||||||||||||||||||||||
Total non-interest-earning
assets |
33,161 | 32,520 | 32,562 | |||||||||||||||||||||||||||||||||
Total Assets |
$ | 490,990 | $ | 486,588 | $ | 488,841 | ||||||||||||||||||||||||||||||
LIABILITIES AND
SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 74,471 | $ | 48 | 0.26 | % | $ | 69,295 | $ | 256 | 0.37 | % | $ | 69,378 | $ | 73 | 0.43 | % | ||||||||||||||||||
Savings |
91,303 | 39 | 0.17 | % | 89,049 | 212 | 0.24 | % | 87,534 | 74 | 0.34 | % | ||||||||||||||||||||||||
Time |
160,600 | 777 | 1.96 | % | 158,578 | 3,611 | 2.28 | % | 161,740 | 969 | 2.43 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
326,374 | 864 | 1.07 | % | 316,922 | 4,079 | 1.29 | % | 318,652 | 1,116 | 1.42 | % | ||||||||||||||||||||||||
Other borrowings |
51,342 | 366 | 2.89 | % | 58,317 | 2,195 | 3.76 | % | 62,920 | 622 | 4.01 | % | ||||||||||||||||||||||||
Subordinated Debt |
5,155 | 23 | 1.78 | % | 5,155 | 93 | 1.81 | % | 5,155 | 22 | 1.70 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
382,871 | $ | 1,253 | 1.33 | % | 380,394 | $ | 6,367 | 1.68 | % | 386,727 | $ | 1,760 | 1.85 | % | |||||||||||||||||||||
Demand deposits |
61,721 | 61,320 | 59,572 | |||||||||||||||||||||||||||||||||
Other liabilities |
3,675 | 5,394 | 4,764 | |||||||||||||||||||||||||||||||||
Shareholders equity |
42,723 | 39,480 | 37,778 | |||||||||||||||||||||||||||||||||
Total liabilities and
Shareholders equity |
$ | 490,990 | $ | 486,588 | $ | 488,841 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 4,273 | $ | 16,297 | $ | 3,958 | ||||||||||||||||||||||||||||||
Net interest rate spread (4) |
3.52 | % | 3.31 | % | 3.19 | % | ||||||||||||||||||||||||||||||
Net interest margin (5) |
3.74 | % | 3.59 | % | 3.47 | % | ||||||||||||||||||||||||||||||
Ratio of interest-earning assets
to interest-bearing liabilities |
1.20 | 1.19 | 1.18 | |||||||||||||||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities and loans. |
|
(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 $12 and $194 for March 31, 2011, $59 and $733 for December 31, 2010 and $17 and
$152 for March 31, 2010. |
|
(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 net interest income 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
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)
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Unaudited | 2011 | 2010 | 2010 | 2010 | 2010 | |||||||||||||||
SUMMARY OF OPERATIONS |
||||||||||||||||||||
Total interest income |
$ | 5,320 | $ | 5,334 | $ | 5,370 | $ | 5,619 | $ | 5,549 | ||||||||||
Total interest expense |
(1,253 | ) | (1,416 | ) | (1,567 | ) | (1,624 | ) | (1,760 | ) | ||||||||||
NET INTEREST INCOME (NII) |
4,067 | 3,918 | 3,803 | 3,995 | 3,789 | |||||||||||||||
Provision for loan losses |
(174 | ) | (180 | ) | (30 | ) | (120 | ) | (175 | ) | ||||||||||
NII after loss provision |
3,893 | 3,738 | 3,773 | 3,875 | 3,614 | |||||||||||||||
Security gains ( losses) including impairment losses |
(119 | ) | (81 | ) | (1,419 | ) | 350 | (544 | ) | |||||||||||
Gain on sale of loans |
16 | 131 | 63 | 38 | 4 | |||||||||||||||
Total other income (excluding security and loan gains) |
636 | 716 | 645 | 726 | 704 | |||||||||||||||
Total other noninterest expense |
(3,355 | ) | (3,205 | ) | (3,287 | ) | (3,210 | ) | (2,739 | ) | ||||||||||
Income (loss) before tax |
1,071 | 1,299 | (225 | ) | 1,779 | 1,039 | ||||||||||||||
Net income (loss) |
$ | 869 | $ | 1,036 | $ | 17 | $ | 1,324 | $ | 894 | ||||||||||
PER COMMON SHARE DATA (1) |
||||||||||||||||||||
Net (loss) income, both basic and diluted |
$ | 0.19 | $ | 0.23 | $ | | $ | 0.29 | $ | 0.20 | ||||||||||
Book value |
9.62 | 9.25 | 8.99 | 8.89 | 8.59 | |||||||||||||||
BALANCE SHEET DATA |
||||||||||||||||||||
Assets |
$ | 489,568 | $ | 500,273 | $ | 482,886 | $ | 478,872 | $ | 485,916 | ||||||||||
Investments |
179,916 | 188,458 | 201,366 | 178,970 | 187,172 | |||||||||||||||
Net loans |
255,090 | 262,940 | 230,811 | 234,697 | 234,690 | |||||||||||||||
Deposits |
384,206 | 391,509 | 376,638 | 370,489 | 375,287 | |||||||||||||||
Borrowings |
52,565 | 57,901 | 55,865 | 58,515 | 58,619 | |||||||||||||||
Subordinated Debt |
5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
Shareholders equity |
43,882 | 41,852 | 40,706 | 40,220 | 38,732 | |||||||||||||||
AVERAGE BALANCES |
||||||||||||||||||||
Assets |
$ | 490,990 | $ | 482,896 | $ | 486,962 | $ | 487,673 | $ | 488,841 | ||||||||||
Investments |
187,949 | 200,372 | 194,983 | 190,654 | 179,916 | |||||||||||||||
Net loans |
254,721 | 234,251 | 231,282 | 235,546 | 239,615 | |||||||||||||||
Deposits |
388,095 | 381,971 | 373,920 | 378,861 | 378,224 | |||||||||||||||
Borrowings |
51,342 | 52,424 | 58,813 | 59,222 | 62,920 | |||||||||||||||
Subordinated Debt |
5,155 | 5,155 | 5,155 | 5,155 | 5,155 | |||||||||||||||
Shareholders equity |
42,723 | 39,655 | 40,488 | 39,969 | 37,778 | |||||||||||||||
ASSET QUALITY RATIOS |
||||||||||||||||||||
Loans 30 days or more beyond their contractual due
date as a percent of total loans |
1.47 | % | 1.37 | % | 1.31 | % | 0.78 | % | 0.69 | % | ||||||||||
Nonperforming loans |
$ | 3,782 | $ | 3,858 | $ | 2,275 | $ | 1,961 | $ | 1,600 | ||||||||||
Nonperforming securities |
3,861 | 3,767 | 2,079 | 2,354 | 2,994 | |||||||||||||||
Other real estate owned |
560 | 848 | 976 | 760 | 677 | |||||||||||||||
Total nonperforming assets |
$ | 8,203 | $ | 8,473 | $ | 5,330 | $ | 5,075 | $ | 5,271 | ||||||||||
Nonperforming assets as a percentage of: |
||||||||||||||||||||
Total assets |
1.68 | % | 1.69 | % | 1.10 | % | 1.06 | % | 1.08 | % | ||||||||||
Equity plus allowance for loan losses |
17.60 | 19.07 | 12.31 | 11.85 | 12.76 | |||||||||||||||
Tier I capital |
17.26 | 18.11 | 11.71 | 10.52 | 11.23 | |||||||||||||||
FINANCIAL RATIOS |
||||||||||||||||||||
Return on average equity |
8.14 | % | 10.45 | % | 0.17 | % | 13.25 | % | 9.83 | % | ||||||||||
Return on average assets |
0.71 | 0.86 | 0.01 | 1.08 | 0.73 | |||||||||||||||
Efficiency ratio |
71.10 | 67.26 | 72.87 | 67.45 | 60.91 | |||||||||||||||
Effective tax rate |
18.86 | 20.25 | (107.56 | ) | 25.58 | 13.96 | ||||||||||||||
Net interest margin |
3.74 | 3.67 | 3.52 | 3.68 | 3.47 |
(1) | Basic and diluted earnings per share are based on weighted average shares outstanding. Book
value per common share is based on shares outstanding at each period. |
28
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(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 and summary financial information included
elsewhere in this annual 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 discussion
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 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, including the impact of the impairment of securities; 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; and 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.
Analysis of Assets and Liabilities
Earning assets are comprised of investment securities, loans and deposits at financial
institutions, including the Federal Reserve Bank. Earning assets were $452,565 at March 31, 2011,
an increase of 1.3% from the March 31, 2010 balance of $446,736, and a decrease of 2.2% from the
December 31, 2010 balance of $462,809.
Total cash and cash equivalents increased by $6,783 from year-end and decreased by $6,741 from the
balance at March 31, 2010. This occurred mainly in deposits held at the Federal Reserve Bank, which
increased by $6,020 from year-end and decreased by $8,669 from March 31, 2010. Throughout 2010,
excess liquidity was employed into the investment portfolio, while in 2011, liquidity has been
increased to fund the increase in lending activity.
Investment securities are classified 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. As of March 31, 2011, management opted to reclassify all investments in
the held-to-maturity classification into the available-for-sale portfolio. The reclassification
resulted in the recording of an unrealized gain of $522, an increase of $344 net of tax to other
comprehensive income
At March 31, 2011, the investment securities portfolio was $179,916 compared to $187,172 at March
31, 2010, a decrease of $7,256, or 3.9%. Investment securities decreased $8,542 compared to
December 31, 2010, a decrease of 4.5%. This decrease was primarily the result of managements
decision not to reinvest the principal and interest proceeds received during the quarter back into
the investment portfolio. Investment securities represented 39.8% of earning assets at March 31,
2011, compared to 41.9% at March 31, 2010 and 40.7% at December 31, 2010. As the Company manages
its balance sheet for loan growth, asset mix, liquidity and for current interest rates and interest
rate forecasts, the investment portfolio is a primary source of liquidity. Management has also used
funds to decrease borrowings as they mature. The investment portfolio represented 46.8% of each
deposit dollar, down from 49.9% a year ago and 48.1% of year-end levels.
29
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
The investment securities available-for-sale portfolio had net unrealized losses of $1,966 at March
31, 2011, a decrease of $2,884 compared to net unrealized losses of $4,850 at March 31, 2010, and a
decrease of $1,758 compared to net unrealized losses of $3,724 at December 31, 2010. 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.
The Companys investment portfolio contains trust preferred securities, which have resulted in
valuation charges against income of $13.7 million in 2009 and $2.7 million in 2010. The Company
continues to value these securities consistent with valuation techniques prescribed under
accounting standards. The market for these securities and similar securities, which had been
relatively active since 2003, became illiquid during the financial crisis of 2008 and is still
currently not active. Since 2008, the Company has modeled and analyzed the cash flow
characteristics and has concluded that a major portion of these devalued securities were not
recoverable. The charge for this other than temporary impairment for the first quarter of 2011
was $202 versus $544 in the first quarter of 2010.
Totals loans at March 31, 2011 were $257.7 million as compared to $237.1 million a year ago. Total
assets of $489.6 million at March 31, 2011 reflect a slight increase of 0.8% from year ago asset
totals of $485.9 million as management orchestrates balance sheet strategies designed to reinvest
cash flows from its investment portfolio and increase loan balances with no material change in
composite asset totals. This balance sheet strategy is designed to improve net interest income
margins and overall profitability while maintaining assets which support the Companys current
capital position.
Loans net of the allowance for losses increased by $20,400 during the twelve month period from
March 31, 2010 to March 31, 2011, and decreased by $7,850 from December 31, 2010. Gross loans as a
percentage of earning assets stood at 56.9% as of March 31, 2011, 53.1% at March 31, 2010 and 57.4%
as of December 31, 2010. The loan to deposit ratio was 67.1% at March 31, 2011 and 63.2% at March
31, 2010. The increase in loans has primarily resulted from efforts designed to increase market
share. The Company substantially restructured and expanded its commercial lending staff in the
second half of 2010 with the specific objective of growing loans while maintaining credit quality.
The decrease in loans from year-end was due in part to 60-day term commercial loans for a total of
$16,915 that closed in December 2010 and were fully secured by segregated deposit accounts with the
Bank. The loans matured in the first quarter of 2011. At March 31, 2011, the loan loss allowance of
$2,641 represented approximately 1.02% of outstanding loans, and at March 31, 2010 the loan loss
allowance of $2,447 represented approximately 1.03% of outstanding loans. The loan loss allowance
at December 31, 2010 of $2,501 represented approximately 0.94% of outstanding loans.
During the first three months, loan charge-offs were $57 in 2011 compared to $195 in 2010, while
the recovery of previously charged-off loans amounted to $23 in 2011 and $30 in 2010. 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.
Loans accounted for on a non-accrual basis decreased from $2,611 at December 31, 2010 to $2,522 at
the recent quarter ended March 31, 2011 and increased from $988 at March 31, 2010. Non-accrual
loans at March 31, 2011 represented 1.0% of the loan portfolio compared to 0.98% at December 31,
2010 and 0.4% at March 31, 2010. The increase from March 31, 2010 is a single loan for $1,100,
fully secured by collateral, for which no loss is expected to be incurred.
Bank-owned life insurance had a cash surrender value of $12,588 at March 31, 2011, $12,491 at
December 31, 2010 and $13,322 at March 31, 2010. The decrease is due to death benefit proceeds of
$1,138 received in the second quarter of 2010. Other assets decreased to $12,721 at March 31, 2011
from $13,860 at December 31, 2010 and $14,418 at March 31, 2010. Included in other assets is a
prepaid assessment paid to the FDIC in December of 2009. This prepayment is the estimate, based on
projected assessment rates and assessment base, made by the FDIC of premiums due until December 31,
2012. On a quarterly basis, this prepayment is reduced through a charge to expense until the
prepayment is depleted. The balance is $1,903 at March 31, 2011, $2,106 at December 31, 2010 and
$2,767 at March 31, 2010. Other real estate decreased to $560 at March 31, 2011 compared to $848 at
December 31, 2010 and $677 at March 31, 2010.
30
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Noninterest-bearing deposits measured $61,799 at March 31, 2011 from $61,362 at December 31, 2010
and $57,302 at March 31,
2010. Interest-bearing deposits decreased $7,740 to $322,407 at March 31, 2011 from $330,147 at
December 31, 2010. The decrease in non-interest bearing deposits from year end is due in part to
segregated deposit accounts with the Bank which fully collateralized $16,915 in 60-day term
commercial loans that closed in December 2010. The loans matured in the first quarter of 2011.
Federal Home Loan Bank advances and other short term borrowings decreased to $52,565 at March 31,
2011 compared to $57,901 at December 31, 2010 and $58,619 at March 31, 2010. The decrease is due
to managements decision to pay down individual borrowings at their respective maturities rather
than refinancing. Future maturities are also expected to be paid off.
Other liabilities remain fairly consistent measuring $3,760 at March 31, 2011 compared to $3,856 at
December 31, 2010, but decreased by $4,363 from $8,123 at March 31, 2010. The large liability in
March 2010 reflects the liability for security purchases not settled of $4,282. Accrued expenses
measure $2,448 at March 31, 2011, $2,469 at December 31, 2010 and $2,411 at March 31, 2010.
The Companys total shareholders equity increased from $41,852 on December 31, 2010 to $43,882 at
March 31, 2011, an increase of $2,030. The Company continues to remain well capitalized under all
regulatory measures. The Companys total risk-based capital is $12.7 million in excess of the 10%
well capitalized threshold.
Capital Resources
Regulatory standards for measuring capital adequacy require banks and bank holding companies to
maintain capital based on risk-adjusted assets so that categories of assets of potentially higher
credit risk require more capital backing 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.
The risk-based standards classify capital into two tiers. Tier 1 capital consists of common
shareholders equity, noncumulative and cumulative perpetual preferred stock, qualifying trust
preferred securities and minority interests less intangibles, disallowed deferred tax assets and
the unrealized market value adjustment of investment securities available-for-sale. Tier 2 capital
consists of a limited amount of the allowance for loan and lease losses, perpetual preferred stock
(not included in Tier 1), hybrid capital instruments, term subordinated debt, and intermediate-term
preferred stock.
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 trust preferred securities and
non-agency collateralized mortgage obligations. Adopting these instructions 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 the value of the Banks trust preferred securities, the regulatory
capital levels of the Bank have declined. As a result of investment downgrades by the rating
agencies during 2010, all of the 32 trust preferred securities 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
increases the Banks risk-weighted assets for these securities to $83.8 million, well above the
$36.9 million in amortized cost of these securities as of March 31, 2011, thereby significantly
diluting the regulatory capital ratios.
31
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Regardless of the trust preferred securities risk weighting, the Company met all capital adequacy
requirements to which it was subject as of March 31, 2011 and December 31, 2010, as supported by
the data in the following table. As of those dates, the Company was well capitalized under
regulatory prompt corrective action provisions.
Actual Regulatory | Regulatory Capital Ratio | |||||||||||||||
Capital Ratios as of: | requirements to be: | |||||||||||||||
March 31, | December 31, | Well | Adequately | |||||||||||||
2011 | 2010 | Capitalized | Capitalized | |||||||||||||
Total risk-based capital to risk-weighted assets |
13.38 | % | 13.42 | % | 10.00 | % | 8.00 | % | ||||||||
Tier I capital to risk-weighted assets |
12.66 | % | 12.72 | % | 6.00 | % | 4.00 | % | ||||||||
Tier I capital to average assets |
9.69 | % | 9.59 | % | 5.00 | % | 4.00 | % |
Risk based capital standards require a minimum ratio of 8.00% of qualifying total capital to
risk-adjusted total assets with at least 4.00% constituting Tier 1 capital. Capital qualifying as
Tier 2 capital is limited to 100.00% 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 3.00% to 4.00%, subject to regulatory guidelines. Capital ratios remain above
regulatory minimums for well capitalized financial institutions.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) require 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 following table illustrates the Companys components of risk weighted capital
ratios and the excess over amounts considered well-capitalized at March 31, 2011 and December 31,
2010.
March 31, 2011 |
December 31, 2010 |
|||||||
Tier 1 Capital |
$ | 47,521 | $ | 46,787 | ||||
Tier 2 Capital |
2,725 | 2,585 | ||||||
QUALIFYING CAPITAL |
$ | 50,246 | $ | 49,372 | ||||
Risk-Adjusted Total Assets (*) |
$ | 375,465 | $ | 367,798 | ||||
Tier 1 Risk- Based Capital Excess |
$ | 24,993 | $ | 24,719 | ||||
Total Risk- Based Capital Excess |
12,700 | 12,592 | ||||||
Total Leverage Capital Excess |
22,993 | 22,406 |
(*) | Includes off-balance sheet exposures |
Average total assets for leverage capital purposes is calculated as average assets, less disallowed
deferred tax assets, less intangibles and the net unrealized market value adjustment of quarter end
March 31, 2011 investment securities available for sale, which averaged $490,567 for the three
months ended March 31, 2011 and $487,620 for the year ended December 31, 2010.
Regulations require that Investments designated as available for sale are marked-to-market with
corresponding entries to the deferred tax account and shareholders equity. Regulatory agencies,
however, exclude these adjustments in computing risk-based capital, as their inclusion would tend
to increase the volatility of this important measure of capital adequacy.
32
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Analysis of Earnings
Executive Summary
Net income for the three months ended March 31, 2011 was $869, or $0.19 per share, compared to
$894, or $0.20 per share, a year ago.
Core earnings for the three months which exclude non-recurring items such as impairment loss and
reductions in retirement expense were $1,002 at March 31, 2011 compared to $951 for the same period
in 2010.
Net interest margin of 3.74% for the quarter is an improvement on both a linked quarter basis from
3.67% and year-over-year from 3.47% as the Company continues to optimally manage its balance sheet
in this historically low interest rate environment.
Net interest income provides the core earnings base for the Company and increased 7.9% to $4.1
million in 2011 versus $3.8 million in 2010. The Company has benefited from increasing balances in
the loan portfolio yielding 5.91% during the quarter while reducing balances in the investment
portfolio earning 3.70%. Also, as liabilities continue to mature and reprice at lower rates, the
net interest margin has, and is expected to continue to improve.
The Company continues to excel in managing risks in the loan portfolio as asset quality measures
are among the best for banks with similar asset totals. Net loan charge-offs were .05% of average
loans in 2011 versus .27% in the first quarter of 2010. The allowance for loan loss (ALLL) to
total loans ratio was 1.02% and 1.03% at the 2011 and 2010 quarter ends, respectively. The
Companys allowance for loan losses covers 70% of nonperforming loans at March 31, 2011.
Despite the elevated unemployment level and slow economic recovery, the Company, to date, has not
experienced notable deterioration in credit quality. Nonperforming loans were $3.8 million at
March 31, 2011 or 1.47% of loans, relatively unchanged from $3.9 million at December 31, 2010.
Included in these totals is a single loan for $1.1 million fully secured by collateral for which no
loss is expected to be incurred. For the quarters ending March 31, 2011 and 2010 provisions for
loan loss were $174 and $175 respectively, more than covering the net charge-offs for the
respective periods. The allowance is considered adequate giving recognition to the risk inherent
in the loan portfolio and the expectation of a slow economic recovery.
The Companys recognition of non-cash, pre-tax other-than-temporary impairment losses on investment
securities fell dramatically for the quarter to $202 versus $544 in the first quarter of 2010.
Non-interest income for the quarter, excluding OTTI charges and securities gains, decreased by
$56 from a year ago. This is mainly due to a decline in Fees for Customer Services of $32 and
losses on Other Real Estate of $28 in 2011 versus 2010 losses of $4. Fees for Customer Services
was negatively affected by new banking regulations effective in August of 2010 limiting the ability
of financial institutions to charge overdraft fees in certain situations.
Non-interest expenses for the first quarter of 2011 were $3.4 million as compared to $2.7 million
for the same period in 2010. A one-time credit of $457 in the first quarter 2010 relating to
reductions in supplemental retirement benefits, net of severance, was the major cause for the
expense differential.
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 are
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 financial results of
operations.
Core earnings (earnings before other than temporary impairment charge, and certain other
non-recurring items) increased for the quarter ended March 31, 2011 as compared to the comparable
2010 period. Core earnings for the first quarter of 2011 was $1,002, or $0.22 per share, compared
to $951, or $0.21 per share.
33
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
The following is a reconciliation between core earnings and earnings under GAAP.
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
GAAP earnings (loss) |
$ | 869 | $ | 894 | ||||
Impairment losses on investment securities |
202 | 544 | ||||||
Credits relating to reorganization net |
| (457 | ) | |||||
Tax effect of adjustments |
(69 | ) | (30 | ) | ||||
Core earnings |
$ | 1,002 | $ | 951 | ||||
Core earnings per share |
$ | 0.22 | $ | 0.21 | ||||
Analysis of Net Interest Income Three months ended March 31, 2011 and 2010
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance(1) | Interest | Rate | Balance(1) | Interest | Rate | |||||||||||||||||||
INTEREST-EARNING ASSETS |
||||||||||||||||||||||||
Interest-earning deposits and other earning assets |
$ | 12,614 | $ | 17 | 0.52 | % | $ | 34,320 | $ | 23 | 0.26 | % | ||||||||||||
Investment securities(1)(2) |
187,949 | 1,734 | 3.70 | % | 179,916 | 1,999 | 4.45 | % | ||||||||||||||||
Loans(1)(2)(3) |
257,266 | 3,775 | 5.91 | % | 242,043 | 3,696 | 6.15 | % | ||||||||||||||||
Total interest-earning assets |
$ | 457,829 | $ | 5,526 | 4.85 | % | $ | 456,279 | $ | 5,718 | 5.04 | % | ||||||||||||
INTEREST-BEARING LIABILITIES |
||||||||||||||||||||||||
Interest-bearing demand and money market deposits |
$ | 74,471 | $ | 48 | 0.26 | % | $ | 69,378 | $ | 73 | 0.43 | % | ||||||||||||
Savings |
91,303 | 39 | 0.17 | % | 87,534 | 74 | 0.34 | % | ||||||||||||||||
Time |
160,600 | 777 | 1.96 | % | 161,740 | 969 | 2.43 | % | ||||||||||||||||
Total interest-bearing deposits |
326,374 | 864 | 1.07 | % | 318,652 | 1,116 | 1.42 | % | ||||||||||||||||
Other borrowings |
51,342 | 366 | 2.89 | % | 62,920 | 622 | 4.01 | % | ||||||||||||||||
Subordinated debt |
5,155 | 23 | 1.78 | % | 5,155 | 22 | 1.70 | % | ||||||||||||||||
Total interest-bearing liabilities |
$ | 382,871 | $ | 1,253 | 1.33 | % | $ | 386,727 | $ | 1,760 | 1.85 | % | ||||||||||||
Net interest income |
$ | 4,273 | $ | 3,958 | ||||||||||||||||||||
Net interest rate spread(4) |
3.52 | % | 3.19 | % | ||||||||||||||||||||
Net interest margin(5) |
3.74 | % | 3.47 | % | ||||||||||||||||||||
(1) | Includes both taxable and tax exempt securities. |
|
(2) | The amounts are presented on a fully taxable equivalent basis using the statutory tax rate of
34%, and have been adjusted to reflect the effect of disallowed interest expense related to
carrying tax-exempt assets. Tax-free income from loans and states of the U.S. and political
subdivisions amounted to $12 and $194 for 2011 and $17 and $152 for 2010, respectively. |
|
(3) | Includes applicable loan origination and commitment fees, net of deferred origination cost
amortization. |
|
(4) | Net interest rate spread represents the difference between the yield on earning assets and
the rate paid on interest-bearing liabilities. |
|
(5) | Net interest margin is calculated by dividing the net interest income by total interest-earning
assets. |
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Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
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 basis, net
interest income measured $4,273 at March 31, 2011 and $3,958 at March 31, 2010. During the recent
reporting period the net interest margin registered 3.74% at March 31, 2011 and 3.47% at March 31,
2010.
The decrease in interest income, on a fully taxable equivalent basis, of $192 is the product of a
19 basis point decrease in interest rates earned and a 0.3% year-over-year increase in average
earning assets. The decrease in interest expense of $507 was a product
of a 52 basis point decrease in rates paid and a 1.0% decrease in interest-bearing liabilities. The
net result was an 8.0% increase in net interest income on a fully taxable equivalent basis, and a
27 basis point increase in the Companys net interest margin on an asset base of similar size, but
different mix.
On a fully taxable equivalent basis, income on investment securities decreased by $265, or 13.3%.
The average invested balances in securities increased by $8,033, or 4.5% from the levels of a year
ago. The increase in the average balance of investment securities was accompanied by a 75 basis
point decrease in the tax equivalent yield of the portfolio. The Company expects to continue
redeployment of liquidity into loans.
On a fully taxable equivalent basis, income on loans increased by $79, or 2.1%, for the three
months of 2011 compared to the same period in 2010. A $15,223 increase in the average balance of
the loan portfolio, or 6.2%, was accompanied by a 24 basis point decrease in the portfolios tax
equivalent yield.
Other interest income decreased by $6 from the same period a year ago. The average balance of
interest earning deposits decreased by $21,706, or 63.2%. The yield increased by 26 basis points
during the first three months of 2011 compared to 2010.
Average interest-bearing demand deposits and money market accounts increased by $5,093 while
savings balances increased by $3,769. Total interest paid on these products was $87, a $60 decrease
from last year. The average rate paid on both these products decreased by 17 basis points. The
average balance of time deposit products decreased by $1,140 as the average rate paid decreased by
47 basis points, from 2.43% to 1.96%. Interest expense decreased on time deposits by $192 from the
prior year. As time deposits mature, the balances are reinvested at the lower current rates. As
the Federal Reserve has no immediate intent to raise short-term interest rates, the Company expects
the cost of deposits to continue declining.
Average borrowings and subordinated debt decreased by $11,578 while the average rate paid on
borrowings decreased by 105 basis points. FHLB borrowings of $17,000 were paid off at their due
dates in 2011. Management plans to pay down individual borrowings at their respective due dates in
the future using current liquidity.
Impairment Analysis of Investment Securities
The Company owns 32 trust preferred securities totaling $34,926 (par value) issued by banks,
thrifts, insurance companies and real estate investment trusts. The market for these securities at
March 31, 2011 is not active and markets for similar securities are also not active. Given
conditions in the debt markets today and the absence of observable transactions in the secondary
and new issue markets, the Company determined the few observable transactions and market quotations
that are available are not reliable for purposes of determining fair value at March 31, 2011. It
was decided that an income valuation approach technique (present value technique) that maximizes
the use of relevant observable inputs and minimizes the use of unobservable inputs would be more
representative of fair value than the market approach valuation technique used at measurement dates
prior to 2008.
35
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
The Company enlisted the aid of an independent third party to perform the trust preferred
securities valuations. The approach to determining fair value involved the following process:
1. | Estimate the credit quality of the collateral using average probability of default
values for each issuer (adjusted for rating levels). |
2. | Consider the potential for correlation among issuers within the same industry for
default probabilities (e.g. banks with other banks). |
3. | Forecast the cash flows for the underlying collateral and apply to each trust preferred
security tranche to determine the resulting distribution among the securities. |
4. | Discount the expected cash flows to calculate the present value of the security. |
The effective discount rates on an overall basis generally range from 18.13% to 42.74% and are
highly dependent upon the credit quality of the collateral, the relative position of the tranche in
the capital structure of the trust preferred securities and the prepayment assumptions.
Based upon the results of the analysis, the Company currently believes that a weighted average
price of approximately $0.38 per $1.00 of par value is representative of the fair value of the 32
trust preferred securities, with individual securities therein ranging from zero to $1.00.
The Company considered all information available as of March 31, 2011 to estimate the impairment
and resulting fair value of the trust preferred securities. These securities are supported by a
number of banks and insurance companies located throughout the country. The FDIC has recently
indicated that there are many financial institutions still considered troubled banks even after the
numerous failures in 2010. If the conditions of the underlying banks in the trust preferred
securities worsen, there may be additional impairment to recognize in 2011 or later.
Analysis of Other Income, Other Expense and Federal Income Tax for the First Three Months
Total other income, excluding investment gains and impairment losses, decreased by $56. After
impairment losses and gains on investment securities, other income increased by $369 from the same
period a year ago.
Gains on 1-4 residential mortgage loans sold in the secondary mortgage market increased by $12 from
the same period a year ago. Fees for other customer services decreased by $32. In November 2009,
the Federal Reserve Board issued a final rule that was effective July 1, 2010, which prohibited
financial institutions from charging consumers fees for paying overdrafts on automated teller
machine and one-time debit card transactions, unless a consumer consents, or opts in, to the
overdraft service for those types of transactions. Consumers were provided a notice that explained
the financial institutions overdraft services, including the fees associated with the service, and
the consumers choices. Because the Banks customers had to provide advance consent to the
overdraft service for automated teller machine and one-time debit card transactions, the Company
cannot provide any assurance as to the ultimate impact of this rule on the amount of
overdraft/insufficient funds charges reported in future periods. Loss on the sale of Other Real
Estate Owned (OREO) was $28 at March 31, 2011, a decrease to income of $24 from the loss of $4
recorded at March 31, 2010. Other sources of non-recurring non-interest income decreased by $12
from the same period a year ago. This latter income category is subject to fluctuation due to the
non-recurring nature of the items.
Gains on securities called and net gains on the sale of available for sale investment securities
increased by $83 from year ago levels. Gains were offset by impairment losses attributable to trust
preferred securities primarily issued by bank holding companies and insurance companies. Losses of
$202 were recognized in 2011 as compared to $544 in 2010.
Total other expenses in the first three months were $3,355 in 2011 compared to $2,739 in 2010, an
increase of $616, or 22.5%. Full time equivalent employment averaged 147 during both the first
three months of 2011 and 2010. Salaries and benefits increased by $534, or 42.3%, from the similar
period a year ago. The Company completed its management reorganization during 2010 and recorded
credits of $457 related to various compensation plans, net of severance costs. Absent this credit,
other expenses increased 5% between the comparable periods.
36
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Charges for insurance premiums paid to the FDIC decreased by $14. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC) up to a maximum amount, which is generally $250 per
depositor subject to aggregation rules. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. Pursuant to a final rule adopted by the
FDIC in November 2009, the Bank was required to prepay its estimated quarterly risk-based
assessments to the FDIC for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The
Bank prepaid the amount of $2,974 in December 2009 and had a remaining balance of $1,903 at March
31, 2011. These prepaid assessment amounts are included in other assets of the Company. The Bank
will be assessed quarterly premiums by the FDIC and such assessments will be charged against the
prepaid asset until such time as the prepaid asset has been fully expensed, at which point the Bank
will resume paying premiums to the FDIC. The Company anticipates its FDIC insurance expense will
continue to adversely impact operating expenses for the year
ended December 31, 2011.
All other expense categories increased by 7.7%, or $96 in the aggregate. These expense categories
are subject to fluctuation due to non-recurring items. The increase in 2011 is mainly due to third
party fees for system upgrades.
Income before tax amounted to $1,071 for the first three months of 2011 compared to $1,039 for the
similar period of 2010. The effective tax rate for the first three months was 18.9% in 2011 and
14.0% in 2010, resulting in income tax expense of $202 and $145, respectively. The provision for
income taxes differs from the amount of income tax determined applying the applicable U.S.
statutory federal income tax rate (34%) to pre-tax income as a result of the following differences:
March 31, 2011 | March 31, 2010 | |||||||||||||||
Balance | % | Balance | % | |||||||||||||
Provision at statutory rate |
$ | 364 | 34.0 | % | $ | 353 | 34.0 | % | ||||||||
Add (Deduct): |
||||||||||||||||
Tax effect of earnings on bank-owned life insurance-net |
(33 | ) | (3.1 | )% | (38 | ) | (3.7 | )% | ||||||||
Tax effect of other non-taxable income |
(143 | ) | (13.3 | )% | (184 | ) | (17.7 | )% | ||||||||
Tax effect of non-deductible expense |
14 | 1.3 | % | 14 | 1.4 | % | ||||||||||
Federal income taxes |
$ | 202 | 18.9 | % | $ | 145 | 14.0 | % | ||||||||
The majority of non-taxable income consists of interest on obligations of states and political
subdivisions.
Net income registered $869 for the three months ended March 31, 2011 and $894 for the similar
period of 2010, representing per share amounts of $0.19 in 2011 and $0.20 in 2010.
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 the Company 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. The Company maintains strategic and contingency liquidity plans to ensure
sufficient available funding to satisfy requirements for balance sheet growth, proper management of
capital markets funding sources and addressing unexpected liquidity requirements.
Principal sources of liquidity for the Company include assets considered relatively liquid, such as
interest-bearing deposits in other banks, federal funds sold, cash and due from banks, as well as
cash flows from maturities and repayments of loans, investment securities and mortgage-backed
securities.
37
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Concerns over deposit fluctuations with respect to the overall banking industry were addressed by
the FDIC in September and October 2008. The FDIC temporarily increased the individual account
deposit insurance from $100 per account to $250 per account through December 31, 2009, which has
subsequently been made permanent. The FDIC also implemented the Transaction Account Guarantee
Program (TAGP), which provides for full FDIC coverage for transaction accounts, regardless of
dollar amounts. The Company elected to opt-in to this program, thus, customers received full
coverage for transaction accounts under the program. The TAGP expired December 31, 2010. It was
replaced by a final rule to implement the section of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) that provides temporary unlimited coverage for non-interest bearing
transaction accounts at all FDIC-insured depository institutions. The separate coverage for
non-interest bearing transaction accounts became effective on December 31, 2010 and terminates on
December 31, 2012. This provision is similar to the TAGP, except it does not include low-interest
Negotiable Order of Withdrawal (NOW) accounts. The
Dodd-Frank provision also differs significantly from the TAGP in that it applies to all
FDIC-insured depository institutions with qualifying deposits. Concerns regarding the overall
banking industry or the Company could have an adverse effect on future deposit levels.
In order to address the concern of FDIC insurance of larger depositors, the Bank became a member of
the Certificate of Deposit Account Registry Service (CDARS®) program late in 2009. Through CDARS®,
the Banks customers can increase their FDIC insurance by up to $50 million through reciprocal
certificate of deposit accounts. This is accomplished by the Bank entering into reciprocal
depository relationships with other member banks. The individual customers large deposit is broken
into amounts below $250 and placed with other banks that are members of the network. The reciprocal
member bank issues certificate of deposits in amounts that ensure that the entire deposit is
eligible for FDIC insurance. At March 31, 2011, the Bank did not have any deposits in the CDARS®
program. For regulatory purposes, CDARS® is considered a brokered deposit even though reciprocal
deposits can be generated from customers in the local market.
Along with its liquid assets, the Bank 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, correspondent bank lines of credit and access to the Federal Reserve Discount
Window. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides yet
another source of liquidity. At March 31, 2011, the Bank had approximately $7.3 million available
of collateral-based borrowing capacity at FHLB of Cincinnati, supplementing the $927 of
availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a $23.8
million cash management line subject to posting additional collateral. The Bank has access to
approximately 10% of total assets in brokered certificates of deposit that could be used as an
additional source of liquidity. At March 31, 2011, there was no outstanding balance in brokered
certificates of deposit. The Company was also granted a total of $8.5 million in unsecured,
discretionary Federal Funds lines of credit with no funds drawn upon as of March 31, 2011.
Unpledged securities of $54,325 are also available for borrowing under repurchase agreements or as
additional collateral for FHLB lines of credit.
The Company has other more limited sources of liquidity. In addition to its existing liquid assets,
it can raise funds in the securities market through debt or equity offerings or it can receive
dividends from its bank subsidiary. Generally, the Bank may pay dividends without prior approval as
long as the dividend is not more than the total of the current calendar year-to-date earnings plus
any earnings from the previous two years not already paid out in dividends, as long as the Bank
remains well-capitalized after the dividend payment. As of March 31, 2011, the Bank can pay no
dividends to the Company without regulatory approval. Future dividend payments by the Bank to the
Company are based upon future earnings and the approval of the regulators. The Company has cash of
$549 at March 31, 2011 available to meet cash needs. It also holds a $6 million note receivable,
the cash flow from which approximates the debt service on the Junior Subordinated Debentures. Cash
is generally used by the Company to pay quarterly interest payments on the debentures, pay
dividends to common shareholders and to fund operating expenses. Currently, any debt offerings or
cash dividends to shareholders require prior approval of the regulators.
Cash and cash equivalents decreased from $29,328 in March 2010 to $22,587 in March 2011. This
decrease occurred mainly in deposits held at the Federal Reserve Bank, which decreased by $8,669
from March 31, 2010.
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Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
The following table details the cash flows from operating activities for the three months ended:
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 869 | $ | 894 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||
Depreciation, amortization and accretion |
566 | 312 | ||||||
Provision for loan loss |
174 | 175 | ||||||
Investment securities gains |
(83 | ) | | |||||
Impairment losses |
202 | 544 | ||||||
Other real estate (gains) losses |
28 | 4 | ||||||
Originations of loans held for sale |
(582 | ) | (520 | ) | ||||
Proceeds from the sale of loans |
714 | 216 | ||||||
Net gain on the sale of loans |
(16 | ) | (4 | ) | ||||
Changes in: |
||||||||
Deferred tax (benefit) expense |
(142 | ) | (80 | ) | ||||
Prepaid FDIC assessment |
203 | 203 | ||||||
Other assets and liabilities |
(2 | ) | (1,272 | ) | ||||
Net cash flows from operating activities |
$ | 1,931 | $ | 472 | ||||
Key variations stem from: 1) Amortization on investments measured $449 at March 31, 2011 compared
to $207 at March 31, 2010. 2) Gains were recognized on the sale, call or maturity of investments of
$83 in 2011 compared to none in the same period of 2010. 3) Impairment losses of $202 were
recognized in 2011 compared to $544 in 2010. This also accounts for the change in deferred tax
benefit. 4) Other liabilities decreased in 2010 due in part to a net $457 reduction in accrued post
retirement and accrued severance as a result of management reorganization completed in 2010. Refer
to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for 2011
and 2010.
Critical Accounting Policies and Estimates
The discussion and analysis of the Companys financial condition and results of operation are based
upon the Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of our consolidated financial statements. Actual
results may differ from these estimates under different assumptions or conditions.
39
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Certain accounting policies involve significant judgments and assumptions by management which has a
material impact on the carrying value of certain assets and liabilities; management considers such
accounting policies to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are believed to be
reasonable under the circumstances.
Management believes the following are critical accounting policies that require the most
significant judgments and estimates used in the preparation of the Companys consolidated financial
statements.
Accounting for the Allowance for Loan Losses
The determination of the allowance for loan losses and the resulting amount of the provision for
loan losses charged to operations reflects managements current judgment about the credit quality
of the loan portfolio and takes into consideration changes in lending policies and procedures,
changes in economic and business conditions, changes in the nature and volume of the portfolio and,
in the terms of loans, changes in the experience, ability and depth of lending management, changes
in the volume and severity of past due, non-accrual and adversely classified or graded loans,
changes in the quality of the loan review
system, changes in the value of underlying collateral for collateral-dependent loans, the existence
and effect of any concentrations of credit and the effect of competition, legal and regulatory
requirements and other external factors. The nature of the process by which we determine the
appropriate allowance for loan losses requires the exercise of considerable judgment. While
management utilizes its best judgment and information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors beyond our control, including the performance of
the loan portfolio, the economy, changes in interest rates and the view of the regulatory
authorities toward loan classifications. The allowance is increased by the provision for loan
losses and decreased by charge-offs when management believes the uncollectibility of a loan is
confirmed. Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy
or other factors that adversely affect asset quality could result in an increase in the number of
delinquencies, bankruptcies or defaults and a higher level of non-performing assets, net charge
offs, and provision for loan losses in future periods.
The Companys allowance for loan losses methodology consists of three elements: (i) specific
valuation allowances based on probable losses on specific loans; (ii) valuation allowances based on
historical loan loss experience for similar loans with similar characteristics and trends; and
(iii) general valuation allowances based on general economic conditions and other qualitative risk
factors both internal and external to the Company. These elements support the basis for determining
allocations between the various loan categories and the overall adequacy of our allowance to
provide for probable losses inherent in the loan portfolio.
With these methodologies, a general allowance is established for each loan type based on historical
losses for each loan type in the portfolio. Additionally, management allocates a specific allowance
for Impaired Credits, which based on current information and events, it is probable the Company
will not collect all amounts due according to the original contractual terms of the loan agreement.
The level of the general allowance is established to provide coverage for managements estimate of
the credit risk in the loan portfolio by various loan segments not covered by the specific
allowance. Additional information regarding allowance for credit losses can be found in the Notes
to the Consolidated Financial Statements (NOTE 5).
40
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Investment Securities and Impairment
The classification and accounting for investment securities is discussed in detail in Note 3 of the
Consolidated Financial Statements. 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 loss) 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. At each reporting
date, we assess whether there is an other-than-temporary impairment to our investment securities.
Such impairment must be recognized in current earnings rather than in other comprehensive income
(loss).
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 2011 and 2010 in accordance with FASB ASC
topic 320, Investments Debt and Equity Securities. The purpose of this ASC is to provide greater
clarity to investors about the credit and noncredit component of an OTTI event and to communicate
more effectively when an OTTI event has occurred. This ASC amends the OTTI guidance in GAAP for
debt securities, improves the presentation and disclosure of OTTI on investment securities and
changes the calculation of the OTTI recognized in earnings in the financial statements. This ASC
does not amend existing recognition and measurement guidance related to OTTI of equity securities.
For debt securities, ASC topic 320 requires an entity to assess whether it has the intent to sell
the debt security or 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 OTTI 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 OTTI recognized in the income
statement.
In these instances, the impairment is separated into the amount of the total impairment related to
the credit loss and 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 OTTI is presented in the income statement with an offset for the amount of
the total OTTI that is recognized in other comprehensive income (loss). In determining the amount
of impairment related to credit loss, the Company uses a third party discounted cash flow model,
several inputs for which require estimation and judgment. Among these inputs are projected deferral
and default rates and estimated recovery rates. Realization of events different than that projected
could result in a large variance in the values of the securities.
Income Taxes
The provision for income taxes is based on income reported for financial statement purposes and
differs from the amount of taxes currently payable, since certain income and expense items are
reported for financial statement purposes in different periods than those for tax reporting
purposes. Accrued taxes represent the net estimated amount due or to be received from taxing
authorities. In estimating accrued taxes, we assess the relative merits and risks of the
appropriate tax treatment of transactions taking into account statutory, judicial and regulatory
guidance in the context of our tax position.
We account for income taxes using the asset and liability approach, the objective of which is to
establish deferred tax assets and liabilities for the temporary differences between the financial
reporting basis and tax basis of our assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled. We conduct periodic assessments of deferred tax
assets to determine if it is more-likely-than-not that they will be realized. In making these
assessments, we consider taxable income in prior periods, projected future taxable income,
potential tax planning strategies and projected future reversals of deferred tax items. These
assessments involve a certain degree of subjectivity which may change significantly depending on
the related circumstances.
41
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CORTLAND BANCORP AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except for per share amounts)
Authoritative Accounting Guidance
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic
820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments
to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is
effective for interim and annual periods beginning after December 15, 2009, except for disclosures
about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The Company has presented the necessary
disclosures in Note 9 herein. The Company does not expect the adoption of the remaining provisions
of this ASU to have a material impact on the Companys consolidated financial statements.
In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to
provide additional information to assist financial statement users in assessing an entitys credit
risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as
of the end of a reporting period are effective for interim and annual reporting periods ending on
or after December 15, 2010. The disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning on or after December 15, 2010.
The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier
reporting periods that ended before initial adoption. However, an entity should
provide comparative disclosures for those reporting periods ending after initial adoption. Refer
to Note 4.
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditors Determination of
Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide
additional guidance or clarification to help creditors in determining whether a creditor has
granted a concession and whether a debtor is experiencing financial difficulties for purposes of
determining whether a restructuring constitutes a troubled debt restructuring. The amendments in
this Update are effective for the first interim or annual reporting period beginning on or after
June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption.
As a result of applying these amendments, an entity may identify receivables that are newly
considered impaired. For purposes of measuring impairment of those receivables, an entity should
apply the amendments prospectively for the first interim or annual period beginning on or after
June 15, 2011. This ASU is not expected to have a significant impact on the Companys financial
statements.
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.
42
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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)
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 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 Company does not currently use financial derivatives, such as
interest rate options, swaps, caps, floors or other similar instruments.
Run off rate assumptions for loans are based on the consensus speeds for the various loan types.
Investment speeds are based on the characteristics of each individual investment. Re-pricing
characteristics are based upon actual information obtained from the Banks information system data
and other related programs. 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 below shows the Companys current estimate of interest rate sensitivity based on the
composition of its balance sheet at March 31, 2011 and December 31, 2010. 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 next twelve months reaching a level 300
basis points higher (lower) than the rates in effect at March 31, 2011. Under both the rising rate
scenario and the falling rate scenario, the yield curve is assumed to exhibit a parallel shift.
During the previous twelve months, the Federal Reserve kept its target rate for overnight federal
funds constant. At March 31, 2011, the difference between the yield on the ten-year Treasury and
the three-month Treasury had increased to a positive 338 from the positive 318 basis points that
existed at December 31, 2010, indicating that the yield curve had become more steeply upward
sloping. At March 31, 2011, rates peaked at the 30-year point on the Treasury yield curve. The
yield curve remains positively sloping as interest rates continue to increase with a lengthening of
maturities, with rates peaking at the long-end of the Treasury yield curve.
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
$15,779 for the year ending March 31, 2012.
Net Interest Income | $ Change | % Change | ||||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | |||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||
Change in Interest Rates |
||||||||||||||||||||||||
Graduated increase of
+300 basis points |
$ | 17,218 | $ | 16,610 | $ | 1,439 | $ | 1,477 | 9.1 | % | 9.8 | % | ||||||||||||
Short-term rates
unchanged (base case) |
15,779 | 15,133 | | | | | ||||||||||||||||||
Graduated decrease of
-300 basis points |
13,590 | 12,642 | (2,189 | ) | (2,491 | ) | (13.9 | )% | (16.5 | )% |
43
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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)
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
assurances 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, swaps, caps, floors or other
similar instruments.
44
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(Dollars in thousands, except for per share amounts)
Evaluation of Disclosure Controls and Procedures. With the supervision and participation of
management, including the Companys principal executive officer and 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 and chief financial officer has concluded that such disclosure controls and procedures are,
to the best of their 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 and Chief
Financial Officer have 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.
45
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 31, 2011.
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 March 31, 2011.
Item 3. | Defaults upon Senior Securities |
Not applicable
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Not applicable
46
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this report:
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
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(1) | 3.1 | 03/16/06 | ||||||||||
3.2 | Code of Regulations, as amended: |
|||||||||||||
For the Bancorp
|
10-K(1) | 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(1) | 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(1) | 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(1) | 10.2 | 03/16/06 | ||||||||||
*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(1) | 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(1) | 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 | ||||||||||
*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(1) | 10.12 | 03/16/06 | ||||||||||
as amended on December 26, 2006, for Directors Cole, Gessner, Hoffman,
Mahan, Thompson, and Woofter;
|
10-K | 10.12 | 03/15/07 | |||||||||||
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 |
47
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CORTLAND BANCORP AND SUBSIDIARIES
INDEX TO EXHIBITS (continued)
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
10.13 | Directors Retirement Agreement
between Cortland Bancorp and
Director Joseph E. Koch, dated
as of April 19, 2011
|
8-K | 10.13 | 04/22/11 | ||||||||||
10.14 | Split Dollar Agreement and
Endorsement between Cortland
Bancorp and Director Joseph E.
Koch, dated as of April 19, 2011
|
8-K | 10.14 | 04/22/11 | ||||||||||
*10.15 | Form of Indemnification
Agreement entered into by
Cortland Bancorp with each of
its directors
|
10-K(1) | 10.15 | 03/16/06 | ||||||||||
10.16 | Reserved |
|||||||||||||
*10.17 | Fourth Amended Salary
Continuation Agreement between
The Cortland Savings and Banking
Company and Timothy Carney,
dated as of June 1, 2010
|
8-K | 10.17 | 06/02/10 | ||||||||||
*10.18 | Third Amended 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 | Fourth Amended Salary
Continuation Agreement between
The Cortland Savings and Banking
Company and James M. Gasior,
dated as of June 1, 2010
|
8-K | 10.19 | 06/02/10 | ||||||||||
*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 | ||||||||||
*10.20.1 | Amendment of the December 3,
2008 Second Amended Salary
Continuation Agreement between
The Cortland Savings and Banking
Company and Marlene J. Lenio
|
10-Q | 10.20.1 | 05/17/10 | ||||||||||
*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 | ||||||||||
*10.21.1 | Amendment of the December 3,
2008 Second Amended Salary
Continuation Agreement between
The Cortland Savings and Banking
Company and Craig M. Phythyon
|
10-Q | 10.21.1 | 05/17/10 | ||||||||||
*10.22 | Third Amended 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 | ||||||||||
*10.22.1 | Amendment of the December 3,
2008 Third Amended Salary
Continuation Agreement between
The Cortland Savings and Banking
Company and Stephen A. Telego,
Sr.
|
10-Q | 10.22.1 | 05/17/10 | ||||||||||
*10.23 | Salary Continuation Agreement
between The Cortland Savings and
Banking Company and David J.
Lucido dated as of June 1, 2010
|
8-K | 10.23 | 06/02/10 | ||||||||||
*10.24 | Fourth Amended Split Dollar
Agreement and Endorsement
between The Cortland Savings and
Banking Company and Timothy
Carney, dated as of April 19,
2011
|
8-K | 10.24 | 04/22/11 | ||||||||||
*10.25 | Salary Continuation Agreement
between The Cortland Savings and
Banking Company and Stanley P.
Feret dated as of June 1, 2010
|
8-K | 10.25 | 06/02/10 | ||||||||||
*10.26 | Fourth Amended Split Dollar
Agreement and Endorsement
between The Cortland Savings and
Banking Company and James M.
Gasior, dated as of April 19,
2011
|
8-K | 10.26 | 04/22/11 |
48
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
INDEX TO EXHIBITS (continued)
Incorporated by Reference | ||||||||||||||
Exhibit | Filing | Filed | ||||||||||||
No. | Exhibit Description | Form | Exhibit | Date | Herewith | |||||||||
*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 | ||||||||||
*10.27.1 | Termination of Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Marlene Lenio
|
10-Q | 10.27.1 | 05/17/10 | ||||||||||
*10.28.1 | Termination of the Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Craig Phythyon
|
10-Q | 10.28.1 | 05/17/10 | ||||||||||
*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 | ||||||||||
*10.29.1 | Termination of the Split Dollar Agreement and Endorsement between The
Cortland Savings and Banking Company and Stephen A. Telego, Sr.
|
10-Q | 10.29.1 | 05/17/10 | ||||||||||
10.30 | Reserved |
|||||||||||||
*10.31 | Severance Agreement entered into by Cortland Bancorp with each of
Messrs. Timothy Carney, James M. Gasior and David J. Lucido
|
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
J. Lenio, Craig M. Phythyon and Barbara R. Sandrock
|
8-K | 10.32 | 12/12/08 | ||||||||||
*10.32.1 | Termination of Severance Agreement entered into by each of Mses.
Marlene J. Lenio and Barbara R. Sandrock and Messrs. Craig M. Phythyon
and Stephen A. Telego, Sr.
|
10-Q | 10.32.1 | 05/17/10 | ||||||||||
*10.33 | Agreement and General Release with Lawrence A. Fantauzzi
|
8-K | 10.1 | 10/22/09 | ||||||||||
*10.34 | Severance Agreement between Cortland Bancorp and Stanley P. Feret
|
8-K | 10.34 | 06/02/10 | ||||||||||
11 | Statement of 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 | Reports 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 | ||||||||||||
31.1 | Certification of the Chief Executive Officer under Rule 13a-14(a)
|
ü | ||||||||||||
31.2 | Certification of Chief Financial Officer under Rule 13a-14(a)
|
ü | ||||||||||||
32 | Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer required under section 906 of the Sarbanes-Oxley Act
of 2002
|
ü |
(1) | Film number 06691632 |
|
* | Management contract or compensatory plan or arrangement |
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be
directed to Tim Carney, Secretary, Cortland Bancorp, 194 West Main Street, Cortland, Ohio 44410.
49
Table of Contents
CORTLAND BANCORP AND SUBSIDIARIES
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) |
||||
/s/ James M. Gasior
|
Date: May 16, 2011 | |||
President and Chief Executive Officer (Principal Executive Officer) |
||||
/s/ David J. Lucido
|
Date: May 16, 2011 | |||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
50