Annual Report (Form 10-K), fiscal year 1994

Item 1. Business - ------- -------- General - --------
THE CORPORATION ---------------
The registrant, Cortland Bancorp (herein sometimes referred to as the "Corporation"), is a bank holding company which was incorporated under the laws of the State of Ohio in 1984, and is registered under the Bank Holding Company Act of 1956, as amended. Its subsidiaries are The Cortland Savings and Banking Company ("Cortland Banks" or the "Bank"), which was acquired at the Corporation's inception in 1985, and New Resources Leasing Company, which was formed in 1988. The Corporation and its subsidiaries operate in one industry, domestic banking.
The Corporation conducts no business activities except for investment in securities as permitted under the Bank Holding Company Act.
The business of the Corporation and its subsidiaries is not seasonal to any significant extent and is not dependent on any single customer or group of customers.
CORTLAND BANKS --------------
Cortland Banks is a full service, state chartered bank engaged in commercial and retail banking and trust services. Cortland Banks' commercial and consumer banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, leasing, night depository, automated teller services, safe deposit boxes, money order services, travelers checks, utility bill payments and other miscellaneous services normally offered by commercial banks. In addition, Cortland Banks participates in bank charge card plans and discount brokerage services with correspondent banks. Cortland Banks' Trust Department offers a broad range of fiduciary services, including the administration of decedent and trust estates and other personal and corporate fiduciary services. Business is conducted at a total of ten offices, six of which are located in Trumbull County, Ohio. Three offices are located in the communities of Hiram, Windham and Mantua, Portage County, Ohio and one office is located in the community of Williamsfield, Ashtabula County, Ohio. Chartered by the State of Ohio, Cortland Banks is also a member of the Federal Reserve System.
NEW RESOURCES LEASING COMPANY -----------------------------
New Resources Leasing Company was formed in December 1988 as a separate entity to handle the function of commercial and consumer leasing. The company has been inactive since incorporation.
SUPERVISION AND REGULATION --------------------------
The Corporation is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended. Generally, this Act limits the business of bank holding companies to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
I-2 Supervision and Regulation (Continued): - --------------------------------------
Cortland Banks, as a state banking organization, is subject to periodic examination and regulation by the Federal Reserve Bank of Cleveland and the State of Ohio Division of Banks. Cortland Banks is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
COMPETITION -----------
Cortland Banks actively competes with state and national banks located in the Ohio counties of Trumbull, Portage and Ashtabula. It also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions and commercial finance and leasing companies, for deposits, loans and service business. Money market mutual funds, brokerage houses and similar institutions provide in a relatively unregulated environment many of the financial services offered by banks. In the opinion of management, the principal methods of competition are the rates of interest charged for loans, the rates of interest paid for funds, the fees charged for services and the availability of services.
EMPLOYEES ---------
At March 7, 1995, the Corporation and its subsidiaries had 158 full-time and 52 part-time employees. The Corporation considers its relations with its employees to be satisfactory.
I-3 Statistical Disclosure - -----------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; - ---------------------------------------------------------------- INTEREST RATES AND INTEREST DIFFERENTIAL ----------------------------------------
AVERAGE BALANCE SHEETS ----------------------
(In Thousands of Dollars)
The following shows consolidated balances of average assets, liabilities and shareholders' equity for the years indicated. The averages are based on daily balances.
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ANALYSIS OF NET INTEREST EARNINGS ---------------------------------
(In Thousands of Dollars)
The following schedules show the average amounts of interest-earning assets and interest-bearing liabilities, the related amounts of interest earned or paid and the related average yields or interest rates paid for the year indicated:
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I-10 II. INVESTMENT PORTFOLIO - ------------------------
The following table shows the book value of investment securities by type of obligation at the dates indicated:
A summary of securities held at December 31, 1994, classified according to the earlier of next repricing or the maturity date and the weighted average yield for each range of maturities, is set forth below. Fixed rate mortgage-backed securities are classified by their estimated contractual cash flow, adjusted for current prepayment assumptions. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
I-11
Excluding obligations of the U.S. Treasury and other agencies and corporations of the U.S. government, there were no investment or mortgage- backed securities of any one issuer which exceeded 10% of consolidated shareholders' equity at December 31, 1994.
As of December 31, 1994, there were $2,287 in callable U.S. Treasury Securities and $3,957 in callable U.S. Government Agencies, that are likely to be called within the next twelve months, given current and expected interest rate environments. However, these securities have been categorized according to their contractual maturities, with $1,996 scheduled to mature after one year but within five years and $4,248 scheduled to mature after five years but within ten years.
Also, as of December 31, 1994, there were $2,079 in callable U.S. Government Agencies that, given current and expected interest rate environments, are likely to be called during the next 1-5 year period. These securities have also been categorized according to their contractual maturities, with $2,079 scheduled to mature after five years but within ten years.
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III. LOAN PORTFOLIO (ALL DOMESTIC) - ----------------------------------
MATURITIES AND SENSITIVITIES OF LOANS TO INTEREST RATES -------------------------------------------------------
(In Thousands of Dollars)
The following schedule sets forth maturities based on remaining scheduled repayments of principal or next repricing opportunity for various categories of loans listed above as of December 31, 1994:
The amounts of total loans (excluding mortgage and consumer loans) as of December 31, 1994, based on remaining scheduled repayments of principal, are shown in the following table:
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The following shows the amounts of contractual interest income and interest income actually reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring as of December 31, 1994.
A loan is placed on a nonaccrual basis whenever sufficient information is received to question the collectibility of the loan or any time legal proceedings are initiated involving a loan. Once a loan is charged-off, any interest that may be accrued and not collected on the loan is charged against earnings.
As of December 31, 1994, there are $2,416 in loans, not included in the above categories, which may be considered potential problem loans. Management has established specific allocations of the allowance for loan loss of $350, which it considers adequate, based on current information, to cover potential loss related to these credits.
Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
As of December 31, 1994, the Bank had $124 in investment securities accounted for on a nonaccrual basis. On February 15, 1994 a pre-refunded, escrowed municipal bond with a par value of $100 issued by Northeast Randolph County, Alabama, was placed on nonaccrual status by the Bank. These bonds were pre-refunded with U.S. treasury securities financed by a subsequent bond issue of Northern Randolph County, Alabama, which has since defaulted. Holders of this issue have filed suit, seeking to have the escrow unwound with proceeds distributed to the claimants. The bond trustee has suspended interest payments pending a ruling from the court on this matter. The probability of an unfavorable outcome regarding this litigation cannot be ascertained at this time; management is unable to determine if any write-down will be required.
On December 31, 1992 the Bank had investment securities with a carrying value of $74, and a par value of $500 accounted for on a nonaccrual basis. During 1993, the LTV Corporation reached an agreement with its creditors and emerged from chapter XI bankruptcy proceedings. As a result of the settlement, in which the Bank received cash, common stock and other securities in exchange for its debt securities of the LTV Corporation, the bank realized a gain of $106 on LTV related securities in its investment portfolio.
I-14 IV. SUMMARY OF LOAN LOSS EXPERIENCE - -----------------------------------
For each of the periods presented above, the provision for loan losses charged to operations is based on management's judgment after taking into consideration all known factors connected with the collectibility of the existing portfolio. Management evaluates the portfolio in light of economic conditions, changes in the nature and volume of the portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operations include previous loan loss experience, the status of past due interest and principal payments, the quality of financial information supplied by the customers and the general economic conditions present in the corporation's lending area.
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The following is an allocation of the allowance for loan losses. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated:
The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in l995 will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
LOAN COMMITMENTS AND LINES OF CREDIT ------------------------------------
In the normal course of business, the bank subsidiary has extended various commitments for credit. Commitments for mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one year. Normally, no fees are charged on any unused portion. A fee of 1% is typically charged for the issuance of a letter of credit.
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V. DEPOSITS (ALL DOMESTIC) - --------------------------
The following table shows the classification of average deposits for the periods indicated:
I-17 VI. RETURN ON EQUITY AND ASSETS - -------------------------------
I-18 Item 2.



Item 2. Properties - ------- ----------
CORTLAND BANCORPS' PROPERTY ---------------------------
Cortland Bancorp owns no property. Operations are conducted at 194 West Main Street, Cortland, Ohio.
CORTLAND BANKS' PROPERTY ------------------------
Cortland Banks' main office (as described in its charter) is located at 194 West Main Street, Cortland, Ohio. Administrative offices are located at the main office. The other offices are:
The Brookfield, Windham, Hubbard and Mantua Offices are leased, while all of the other above offices are owned by Cortland Banks.
Item 3.

Item 3. Legal Proceedings - ------- -----------------
The subsidiary Bank was a defendant in a consumer class action lawsuit, filed on June 8, 1990 in the Court of Common Pleas of Fayette County, Pennsylvania involving the demise of a campground real estate development known as Alpine Valley Resorts, Inc. While the Bank denied liability, it negotiated a settlement agreement dated February 2, 1994. Payment on the settlement, which was fully provided for as of December 31, 1993, was fully disbursed during the quarter ended June 30, 1994.
The Bank is also involved in other legal actions arising in the ordinary course of business. In the opinion of management, the outcome of these matters is not expected to have a material effect on the Corporation.
I-19 Item 4.

Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant - ------------------------------------
The names, ages and positions of the executive officers as of March 7, 1995 are as follows:
All of the officers listed above will hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified.
Principal Occupation and Business Experience of Executive Officers - ------------------------------------------------------------------
During the past five years the business experience of each of the executive officers has been as follows:
Rodger W. Platt has been Chairman of the Board of Cortland Bancorp and the subsidiary bank since November 1987. He became Chairman of the Board of New Resources Leasing Company in December of 1988. He has been a Director and President of Cortland Bancorp since its formation in April of 1985. He has been a Director of the subsidiary bank since 1974 and has been President since 1976.
Dennis E. Linville has been Executive Vice President of Cortland Bancorp and the subsidiary bank since November 1987. He became a Director of the subsidiary bank in June of 1989. He has been a Director of Cortland Bancorp and New Resources Leasing Company since December 1988. He has been the Secretary of Cortland Bancorp since 1985 and has been Vice President and Secretary of the subsidiary bank since 1984.
Lawrence A. Fantauzzi has been the Controller of Cortland Bancorp and the subsidiary bank since April 1987. He became Treasurer of Cortland Bancorp in December 1992.
I-20 PART II -------
Information relating to Items 5, 6, 7 and 8 is set forth in the Corporation's 1994 Annual Report to Shareholders under the captions and on the pages indicated below and is incorporated herein by reference:
II-1 PART III --------
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
Information relating to directors of the Corporation will be set forth in the Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders to be held April 11, 1995. Such information is incorporated herein by reference. Information relating to executive officers of the Corporation is set forth in Part I. Pages 3-6
Item 11. Executive Compensation - -------- ----------------------
Information relating to this item will be set forth in the Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders to be held April 11, 1995. Such information is incorporated herein by reference. Pages 6-9
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
Information relating to this item will be set forth in the Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders to be held April 11, 1995. Such information is incorporated herein by reference. Page 2
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
Information relating to this item will be set forth in the Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders to be held April 11, l995. Such information is incorporated herein by reference. Page 12
III-1 PART IV -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------- ---------------------------------------------------------------
(a) 1. Financial Statements --------------------
Included in Part II of this report:
Item 8.





Item 8., Financial Statements and Accompanying Information, is set forth in the Corporation's 1994 Annual Report to Shareholders and is incorporated by reference in Part II of this report.
(a) 2. Financial Statement Schedules -----------------------------
Included in Part IV of this report as Exhibit 23:
Independent Accountants' Consent
Schedules: All schedules are omitted because they are not applicable.
(a) 3. Exhibits --------
The exhibits filed or incorporated by reference as a part of this report are listed in the Index to Exhibits which appears at page IV-3 hereof and is incorporated herein by reference.
(b) Report on Form 8-K ------------------
No reports on Form 8-K were filed for the three months ended December 31, 1994.
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SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) 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
March 7, 1995 By Rodger W. Platt, President - ---------------------- ------------------------------ Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
IV-2 INDEX TO EXHIBITS -----------------
The following exhibits are filed or incorporated by reference as part of this report:
3.1. Articles of Incorporation of the Corporation as currently in effect and any amendments thereto (incorporated by reference to Exhibit 3 of the Corporation's Report on Form S-1 filed February 5, 1988).
3.2. Bylaws of the Corporation as currently in effect and any amendments thereto (incorporated by reference to Exhibit 3a of the Corporation's Report on Form S-1 filed February 5, l988).
4 The rights of holders of equity securities are defined in portions of the Articles of Incorporation and Bylaws as referenced in 3.1. and 3.2.
11 Statement regarding computation of earnings per share (filed herewith).
13 Annual Report to security holders (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consents of experts and counsel - Consent of independent accountants (filed herewith).
27 Financial Data Schedule (filed herewith).
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to Dennis E. Linville, Secretary, Cortland Bancorp, 194 West Main Street, Cortland, Ohio 44410.
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