THE MISSION STATEMENT OF CORTLAND BANKS
Cortland Banks' mission is to eam the enthusiastic, long-term
Loyalty of customers by being responsive to their needs for
products, convenience and personal service in a manner that
routinely exceeds expectations. In building long-lasting
relationships with our customers, we will generate solid financial
returns for our shareholders, rewarding careers for our employees,
and economic benefits for our communities. Success in this
mission is vital to our continued independence as a community
bank. Our success will require relentless focus on identifying
and meeting the wants and needs of our constituents, as we
demonstrate a genuine caring for customers, employees,
shareholders and community.
J^LAND
CONTENTS
Chairman's Message
B
Brief Description of the Business
Report on Management's Assessment of
Intemal Control Over Financial Reporting
Report of Packer Thomas Independent
Registered PubHc Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of
Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Five Year Summary
Average Balance Sheet, Yields and Rates
Selected Financial Data
Management's Discussion and Analysis
Information as to Stock Prices and Dividends of
Cortland Bancorp
Cortland Bancorp
Directors and Officers
M
Cortland Savings & Banking
Directors and Officers
Offices and Locations
CHAIRMAN'S MESSAGE
To Our Shareholders:
In a period of economic uncertainty headlined by
disruptions in the credit market and an overall weak
ening of the mortgage and housing market, 1 am
pleased to report that Cortland Bancorp remains a
sound and profitable community bank.
Our net income for 2007 totaled $4,350,000 or $0.97
per share which represents a return on average assets
of 0.89%. Return on average equity measured 8.68%.
This level of profitability is below the net income
amount reported for the previous year, but in line
with peer group measures of 0.87% for retum on
average assets and 8.51% for return on average
equity.
The Company's capital position also remains strong.
Capital ratios exceed all regulatory thresholds for
capital adequacy, and consistently fall in the upper
tiers among all financial institutions in our peer
group.
OTHER HIGHLIGHTS FOR 2007 INCLUDE:
• Our Company's assets topped $500 million during
the year, before closing at $492.7 million, an
increase of more than 4% from the level reported
at year end 2006.
• Loans grew more than twice as fast as overall
assets, producing an increase of approximately
9% in the loan portfolio, with residential real
estate, commercial real estate and consumer loans
all reflecting increases in portfolio balances.
• The most significant loan growth came in the area
of new commercial relationships, with commercial
real estate originations increasing by approxi
mately 14% from the previous year.
• Asset quality improved during the year, as non-
performing loans as a percentage of total loans
decreased from 1.91 % at year end 2006 to 1.02% at
year end 2007. The improvement in asset quality
had a direct and positive impact on the Company's
net income, as the loan loss provision required
decreased from $225,000 in 2006 to $40,000 in
2007.
B
• The Company repurchased 205,986 shares of its
common stock. This Stock Repurchase Program,
approved by the Board of Directors in February of
2007, inifially permitted the Company to repur
chase up to 100,000 shares. In August, the direc
torate increased the authorization by an additional
100,000 shares, and followed that up with an iden
tical increase in November. There are 94,014 shares
remaining that may yet be purchased under the
program.
• The Company's dividend payout remains aggres
sive as 89.7% of 2007 earnings were distributed to
shareholders as cash dividends compared to 84.3%
in the prior year. In addition, shareholders contin
ued to receive an annual stock dividend as well.
• Construction was completed on a new 2,500 square
foot full service office in the Village of Windham.
Our newest branch facility opened in May of 2007.
• The Company's market footprint and physical
plant will continue to grow, with the Board of
Directors approving to open a fourteenth office
in Middlefield. Our newest community banking
office is expected to open in May of 2008.
• Additionally during 2007, property was purchased
in Brookfield to replace an aging rental facility
housing our existing branch office. Our Brookfield
office will relocate to a newly constructed bank
building in June of 2008.
• Property was also purchased for a new branch
location in southern Mahoning County, and an
existing branch office will relocate to this property
located in North Lima by the early fall of 2008.
• Selection and installation of a customer relation
ship management ( CRM ) platform to accommo
date growing demand while preserving responsive
and personalized service was completed. The
CRM platform will enable lenders and customer
service personnel to better match customer needs
with products and services and facilitate opportu
nities to extend or increase credit for business-
related accounts.
• All of our branches were converted to electronic
delivery during the year, eliminating the need to
physically transport paper checks. Also during the
year a pilot Remote Merchant Capture program
was developed with plans for broad-scale intro
duction in 2008.
• Our Bank continues to give back generously to the
communities we serve. Bank employees raised
more than $10,000 for Relay for Life. The Bank
also finished on top in Second Harvest Food's first-
ever bank challenge, providing more in donations
than our much larger competitors. The Bank also
continued to contribute generously to Children's
Rehabilitation, various United Way campaigns,
and numerous local non profit organizations.
The Board of Directors and I believe that the Com
pany has made significant progress in meeting the
strategic plan initiatives which I outlined for you last
year. While we are proud of our many accomplish
ments, and remain optimistic regarding the success
of our Strategic Plan, we do realize that these are
difficult times for consumers and businesses alike.
Deteriorating economic conditions stemming from
financial turbulence in the credit and housing mar
kets will prove to be a challenge in our efforts to
further
improve
profitability.
grow Company
assets
and
In addition to these deteriorating economic condi
fions, profitability across the banking industry has
been adversely affected by Federal Reserve mone
tary policy efforts directed at containing inflation.
Banks throughout the region and the nation have
reported declining net interest margin ratios. Our
own Company's net interest margin ratio narrowed
from the 3.67% reported at year end 2006 to 3.45% at
year end 2007.
To compensate for this margin compression, the
Company remains highly focused on asset quality
issues, establishing fundamentally sound internal
loan
controls, maintaining effective and timely
nriAND
review pracfices, identifying and addressing problem
loans on a timely basis, and subscribing to conser
vative lending practices and stringent underwriting
standards.
Both lenders and borrowers have struggled with the
consequences of the deteriorating market for resi
denfial real estate. Foreclosure acfivity, restructuring
of mortgage business units and the building of loan
loss reserves have become quite notable in reviewing
recent public records and competitor press releases
and earning reports.
I am pleased to report that, unlike many in the
industry, our Company has noted no significant dete
rioration in its residential real estate portfolio. As a
matter of fact, contrary to general financial industry
trends, our Company has experienced improvements
in its overall asset quality. This is reflected in the
reduction of problem loans, as 1 have previously
noted. We are cautiously optimistic that these trends
will continue, allowing us to remain an extremely
safe and sound financial institution, and contributing
to our efforts to improve profitability.
In closing, I would like to thank our officers and
employees for their many contributions to our suc
cess, and to tell them that we are proud of them. For
our customers, we wish to thank you for your loyalty
and commitment to Cortland Banks and its philos
ophy of community banking. Finally, the support and
encouragement of our shareholders
is sincerely
appreciated, for it is what makes everything else
possible. Thank you for your investment in Cortland
Bancorp.
Sincerely,
^ J / f ^ ^ f ^ ^-
Karl Ray Mahan
Chairman of the Board
B
BRIEF DESCRIPTION OF THE BUSINESS
C O R T L A ND B A N C O RP
incorporated
Cortland Bancorp (the "Company") was
under the laws of the State of Ohio in 1984, as a one bank
holding company registered under the Bank Holding Com
pany Act of 1956, as amended. On March 13, 2000, the
Board of Governors of the Federal Reserve system
approved the Company's application to become a financial
holding company as authorized by the Gramm-Leach-
Bliley Act of 1999. The principal activity ofthe Company
is to own, manage and supervise the Cortland Savings and
Banking Company ("Cortland Banks" or the "Bank"). The
Company owns all of the outstanding shares of the Bank.
The Company is subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As a financial holding com
pany, the Company may engage in activities that are
financial in nature or incidental to a financial activity, as
authorized by the Gramm-Leach-Bliley Act of 1999 (The
Financial Services Reform Act). Under the Financial Ser
vices Reform Act, the Company may continue to claim the
benefits of financial holding company status as long as
each depository institution that it controls remains well
capitalized and well managed. The Company is required to
provide notice to the Board of Governors of the Federal
Reserve System when it becomes aware that any deposi
tory institution controlled by the Company ceases to be
well capitalized or well managed. Furthermore, current
regulation specifies that prior to initiating or engaging in
any new activities that are authorized for financial holding
companies, the Company's insured depository institutions
must be rated "satisfactory" or better under the Community
Reinvestment Act (CRA). As ofDecember 31, 2007, the
Company's bank subsidiary was rated "satisfactory" for
CRA purposes, and remained well capitalized and, in
management's opinion, well managed. Cortland Bancorp
owns no property. Operations are conducted at 194 'West
Main Street, Cortland, Ohio.
The business of the Company and the Bank is not seasonal
to any significant extent and is not dependent on any single
customer or group of customers.
N EW R E S O U R C ES L E A S I NG C O M P A NY
New Resources Leasing Company was
in
December 1988 as a separate entity to handle the function
of commercial and consumer leasing. The wholly owned
subsidiary has been inactive since incorporation.
formed
T HE C O R T L A ND SAVINGS
A ND B A N K I NG C O M P A NY
The Cortland Savings and Banking Company is a full
service state chartered bank engaged in commercial and
retail banking and tmst services. The Bank's services
include checking accounts, savings accounts, time deposit
accounts, commercial, mortgage and installment loans,
night depository, automated teller services, safe deposit
boxes and other miscellaneous services normally offered
by commercial banks. Cortland Banks also offers a variety
B
of Intemet Banking products as well as discount brokerage
services.
Business is conducted at a total of thirteen offices, eight of
which are located in Tmmbull County, Ohio. Two offices
are located in the communities of Windham and Mantua, in
Portage County, Ohio. One office is located in the com
munity of Williamsfield, Ashtabula County, Ohio, while
two are located in the community of Boardman, Mahoning
County, Ohio.
Cortland Bank's main office (as described in its charter) is
located at 194 West Main Street, Cortland, Ohio. Admin
istrative offices are located at the main office. The Brook
field, Hubbard, Niles Park Plaza and both Boardman
offices are leased, while all of the other offices are owned
by Cortland Banks.
The Bank, as a state chartered banking organization and
member of the Federal Reserve System, is subject to
periodic examination and regulation by both the Federal
Reserve Bank of Cleveland and the State of Ohio Division
of Financial Institutions. These examinations, which
include such areas as capital, liquidity, asset quahty, man
agement practices and other aspects of the Bank's opera
tions, are primarily for the protection of the Bank's
depositors. In addition to these regular examinations, the
Bank must furnish periodic reports to regulatory authorities
containing a full and accurate statement of its affairs. The
Bank's deposits are insured by the Federal Deposit Insur
ance Corporation (FDIC) up to the statutory limit of
$100,000 per customer. Individual Retirement Account
deposits are insured by the FDIC to $250,000 per customer.
C O M P E T I T I ON
Cortland Banks actively competes with state and national
banks located in Northeast Ohio and Westem Pennsylva
nia. It also competes for deposits, loans and other service
business with a large number ofother financial institutions,
such as savings and loan associations, credit unions, insur
ance companies, consumer finance companies and com
mercial finance companies. Also, 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 on loans, the rates of interest paid on
deposit funds, the fees charged for services, and the con
venience, availability, timeliness and quality of the cus
tomer services offered.
E M P L O Y E ES
As of December 31, 2007 the Company through its sub
sidiary bank, employed 143 full-time and 34 part-time
employees. The CTompany provides its employees with a
full range of benefit plans, and considers its relations with
its employees to be satisfactory.
REPORT ON MANAGEMENT'S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
tJIAND
Cortland Bancorp is responsible for the preparation,
integrity, and fair presentation of the consolidated
financial statements included in this annual report.
The consolidated financial statements and notes
included in this annual report have been prepared
in conformity with United States generally accepted
accounting principles and necessarily include some
amounts that are based on management's best esti
mates and judgments.
We, as management of Cortland Bancorp, are respon
sible for estabUshing and maintaining effective inter
nal control over financial reporting that is designed to
produce reliable financial statements in conformity
with United States generally accepted accounting
principles. The system of internal control over finan
cial reporting as it relates to the financial statements
is evaluated for effectiveness by management and
tested for reliability through a program of intemal
audits. Actions are taken to correct potential defi
ciencies as they are identified. Any system of internal
control, no matter how well designed, has inherent
limitations, including the possibility that a control
can be circumvented or overridden and misstate
ments due to error or fraud may occur and not be
detected. Also, because of changes in conditions,
intemal control effectiveness may vary over time.
Accordingly, even an effective system of internal
control will provide only reasonable assurance with
respect to financial statement preparation.
Management assessed the Company's system of
reporting as of
intemal control over financial
December 31, 2007, in relation to criteria for effec
tive internal control over financial reporting as
described in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organization
of the Treadway Commission. Based on this assess
ment, management concludes that, as of Decem
ber 31, 2007, its system of intemal control over
financial reporting is effective and meets the criteria
Internal Control-Integrated Framework.
of
Packer Thomas,
registered public
independent
accounting firm, has issued an attestation report on
the Company's
financial
reporting.
internal control over
the
''ao'v^tji-
' O t » C ^ > -^
Lawrence A. Fantauzzi
President and
Chief Executive
Officer
James M. Gasior
Secretary
Chief Financial
Officer
Cortland, Ohio
February 29, 2008
B
REPORT OF PACKER THOMAS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SHAREHOLDERS AND BOARD OF DKECTORS
Cortland Bancorp
We have audited the accompanying consolidated balance
sheets of Cortland Bancorp and subsidiaries as of Decem
ber 31, 2007 and 2006, and the related consolidated state
ments of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended Decem
ber 31, 2007. We also have audited Cortland Bancorp and
subsidiaries internal control over financial reporting as of
December 31, 2007, based on criteria established in Inter
nal Control-Integrated Framework issued by the Commit
tee of Sponsoring Organizations of
the Treadway
Commission (COSO). Cortland Bancorp's management
is responsible for these financial statements, for maintain
ing effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on these financial statements, and an opinion on
the company's internal control over financial reporting
based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects.
Our audit of financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting prin
ciples used and significant estimates made by manage
ment, and evaluating
the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating
effectiveness of intemal control, and performing such other
procedures as we considered necessary in the circum
stances. We believe that our audits provide a reasonable
basis for our opinions.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regard
ing the reliability of financial reporting and the preparation
offinancial statements for external purposes in accordance
with generally accepted accounting principles. A compa
ny's internal control over financial reporting includes those
policies and procedures that (I) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions ofthe assets ofthe
company; (2) provide reasonable assurance that transac
tions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of
the company are being made only in accordance with
authorizations of management and directors of the com
pany; and (3) provide reasonable assurance regarding pre
vention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have
a material effect on the financial statements.
Because of its inherent limitations, intemal control over
financial reporting may not prevent or detect misstate
ments. Also, projections ofany evaluation of effectiveness
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or
that the degree of compliance with the policies or proce
dures may deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Cortland Bancorp and subsidiaries as
of December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of
the years in the three-year period ended December 31,
2007 in conformity with accounting principles generally
accepted in the United States of America. In our opinion,
Cortland Bancorp and subsidiaries maintained, in all mate
rial respects, effective
internal control over financial
reporting as of December 31, 2007, based on criteria
in Intemal Control-Integrated Framework
established
issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
Youngstown, Ohio
Febmary 29, 2008
Packer Thomas
B
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2007, 2006 and 2005
(Amounts in thousands except per share data)
nriAND
Interest income
Interest and fees on loans
Interest and dividends on investment securities:
Taxable interest
Nontaxable interest
Dividends
Interest on mortgage-backed securifies
Other interest income
Total interest income
Interest expense
Deposits
Borrowed funds
Subordinated debt
Total interest expense
Net interest income
Provision for loan losses (Note 4)
Net interest income after provision for loan losses
Other income
Fees for other customer services
Investment securities gains - net
Gain on sale of loans - net
Other real estate losses - net
Earnings on bank owned life insurance
Other non-interest income
Total other income
Other expenses
Salaries and employee benefits
Net occupancy and equipment expense
State and local taxes
Office supplies
Bank exam and audit expense
Other operating expenses
Total other expenses
Income before federal income taxes
Federal income taxes (Note 11)
Net income
2007
2006
2005
$15,784
$14,291
$12,941
6,788
1,811
235
4,008
366
28,992
10,456
3,375
154
13,985
15,007
40
14,967
2,307
77
88
(1)
521
97
3,089
7,199
1,871
580
396
443
2,106
12,595
5,461
1,111
$ 4,350
5,943
2,051
202
3,795
215
26,497
4,387
2,162
167
3,810
119
23,586
8,509
3,073
6,159
2,506
11,582
14,915
225
14,690
8,665
14,921
545
14,376
2,239
18
106
(47)
433
86
2,835
2,254
308
89
(3)
341
126
3,115
6,776
1,811
552
367
486
2,029
12,021
5,504
928
$ 4,576
7,052
1,870
548
338
427
1,965
12,200
5,291
957
$ 4,334
Net income per share, both basic and diluted (Note 1)
$ 0.97
$ 1.01
$ 0.97
Dividends declared per share
$ 0.87
$ 0.85
$ 1.04
See accompanying notes to consolidated financial statements
B
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(Amounts in thousands except per share data)
ASSETS
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Investment securifies available for sale (Note 2)
Investment securities held to maturity (approximate
market value of $113,087 in 2007 and $124,136 in 2006) (Note 2)
Total loans (Note 3)
Less allowance for loan losses (Note 4)
Net loans
Premises and equipment (Note 5)
Other assets
Total assets
LIABILITIES
Noninterest-bearing deposits
Interest-bearing deposits (Note 6)
Total deposits
Federal Home Loan Bank advances and other borrowings (Note 7)
Subordinated debt (Note 8)
Other liabilifies
Total liabilities
Commitments and contingent liabilities (Notes 9 and 17)
2007
2006
$ 9,441
9,441
$ 10,100
4,275
14,375
126,507
108,484
112,115
223,109
(1,621)
221,488
6,206
16,937
124,619
205,208
(2,211)
202,997
4,780
16,496
$492,694
$471,751
$ 58,224
306,564
364,788
70,413
5,155
3,514
443,870
$ 60,983
294,835
355,818
62,015
3,326
421,159
SHAREHOLDERS' EQUITY
Common stock - $5.00 stated value - authorized 20,000,000 shares;
issued 4,639,973 shares in 2007 and 4,594,344 shares in 2006 (Note 1)
Addifional paid-in capital (Note 1)
Retained eamings
Accumulated other comprehensive (loss) income (Note 1)
Treasury stock, at cost, 250,545 shares in 2007 and 95,809 shares in 2006
Total shareholders' equity (Note 16)
23,200
20,976
9,386
(94)
(4,644)
48,824
22,972
20,835
9,553
(455)
(2,313)
50,592
Total liabilities and shareholders' equity
$492,694
$471,751
See accompanying notes to consolidated financial statements
B
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2007, 2006 and 2005
)
(Amounts in thousands except per share data
J'LAND
slGOl^
Balance at December 31, 2004
Comprehensive Income:
Net income
Other comprehensive income, net of tax:
Unrealized gains on available for sale
securities, net of reclassification
adjustment
Total comprehensive income
Common Stock Transactions:
Treasury shares reissued net of shares
repurchased
Cash dividends declared ($0.83 per share)
Special cash dividend ($0.21 per share) . .
3% stock dividend
Cash paid in lieu of fractional shares . . . .
Balance at December 31, 2005
Comprehensive Income:
Net income
Other comprehensive income, net of tax:
Unrealized gains on available for sale
securities, net of reclassification
adjustment
Total comprehensive income
Common Stock Transactions:
Treasury shares reissued net of shares
repurchased
Cash dividends declared ($0.85 per share)
2% stock dividend
Cash paid in lieu of fractional shares . ..
Balance at December 31, 2006
Comprehensive Income:
Net income
Other comprehensive income, net of tax:
Unrealized gains on available for sale
securities, net of reclassification
adjustment
Total comprehensive income
Common Stock Transactions:
Treasury shares reissued
Treasury shares purchased
Cash dividends declared ($0.87 per share)
1% stock dividend
Cash paid in lieu of fractional shares . . .
Common
Stock
$21,869
Additional
Paid-in
Capital
$18,531
Retained
Earnings
$13,131
4,334
Accumulated
Other
Comprehensive
Income (Loss)
$ 1,061
Treasury
Stock
$(5,194)
(184)
654
1,864
22,523
20,211
(390)
449
1,014
22,972
20,835
(249)
228
390
(1,938)
1,352
(877)
(3,842)
422
1,529
(455)
(2,313)
(3,701)
(929)
(2,518)
(7)
10,310
4,576
(3,865)
(1,463)
(A)
9,553
4,350
361
1,195
(3,526)
$
(94)
$(4,644)
(3,895)
(618)
(4)
$ 9,386
Total
Share
holders
Equity
$49,398
4,334
(1,938)
2,396
1,168
(3,701)
(929)
(2)
48,325
4,576
422
4,998
1,139
(3,865)
(5)
50,592
4,350
361
4,711
946
(3,526)
(3,895)
(4)
$48,824
Balance at December 31, 2007
$23,200
$20,976
DISCLOSURE OF RECLASSIFICATION FOR AVAILABLE
FOR SALE SECURITY GAINS AND LOSSES:
Unrealized holding gains (losses) on available for sale securities arising during
the period net of tax of $212, $224 and $(894)
Less: Reclassification adjustment for gains realized in net income,
net of tax of $26, $6 and $105
Net unrealized gains (losses) on available for sale securities, net of tax
See accompanying notes to consolidated financial statements
2007
2006
2005
$412
51
$361
$434
$(1,735)
12
$422
203
$(1,938)
B
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2007, 2006 and 2005
(Amounts in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation, amortization and accretion
Provision for loan loss
Deferred tax expense (benefit)
Investment securities gains
Gains on sales of loans
Loss on the sale or disposal of fixed assets
Other real estate losses
Loans originated for sale
Proceeds from sale of loans originated for sale
Changes in:
Interest and fees receivable
Interest payable
Other assets and liabilities
Net cash flows from operating activities
Cash flows from investing activities
Purchases of securities available for sale
Purchases of securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from call, maturity and principal
payments on securities
Net (increase) decrease in loans made to customers
Proceeds from disposition of other real estate
Purchases of premises and equipment
Net cash flows from investing activities
Cash flows from financing activities
Net increase in deposit accounts
Net increase in borrowings
Proceeds from subordinated debt issuance
Dividends paid
Purchases of treasury stock
Treasury shares reissued
Net cash flows from financing acfivities
Net change in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
2007
2006
2005
$ 4,350
$ 4,576
$ 4,334
775
40
189
(77)
(88)
4
1
(6,199)
6,396
(59)
174
(497)
5,009
(13,502)
(36,283)
44,692
(18,922)
34
(2,006)
(25,987)
8,970
8,398
5,155
(3,899)
(3,526)
946
16,044
(4,934)
991
225
(205)
(18)
(106)
3
47
(6,978)
6,975
(245)
185
(368)
5,082
1,469
545
50
(308)
(89)
3
(6,618)
6,707
(341)
(30)
(1,447)
4,275
(13,339)
(12,017)
1,006
(19,593)
(47,280)
1,479
26,050
(17,223)
143
(1,180)
(16,560)
53,082
2,462
22
(316)
(10,144)
5,443
3,904
5,456
10,222
(3,870)
1,139
6,616
(4,862)
(4,637)
(3)
1,171
12,209
6,340
14,375
$ 9,441
19,237
$ 14,375
12,897
$ 19,237
See accompanying notes to consolidated financial statements
I
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
TIAND
iJCDl^
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Cortland Bancorp, and its bank subsidiary, Cortland Savings and
Banking Co., reflect banking industry practices and conform to U.S. generally accepted accounting principles. A
summary of the significant accounting policies followed by the Company in the preparation of the accompanying
consolidated financial statements is set forth below.
Principles of Consolidation: The consolidated financial statements include the accounts of Cortland Bancorp
(the Company) and its wholly-owned subsidiaries, Cortiand Savings and Banking Company (the Bank) and New
Resources Leasing Co. All significant intercompany balances and transactions have been eliminated.
Industry Segment Information: The Company and its subsidiaries operate in the domestic banking industry
which accounts for substantially all of the Company's assets, revenues and operating income. The Company,
through its subsidiary bank, grants residential, consumer, and commercial loans and offers a variety of saving
plans to customers located primarily in the Northeastern Ohio and Western Pennsylvania area.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date ofthe fmancial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash Flow: Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods. The Company reports net cash flows for
customer loan transactions, deposit transactions and deposits made with other financial institutions.
The Company paid interest of $13,810,000, $11,397,000 and $8,695,000 in 2007, 2006 and 2005, respectively.
Cash paid for income taxes was $950,000 in 2007, $1,120,000 in 2006 and $993,000 in 2005. Transfers ofloans
to other real estate were $282,000 in 2007, $144,000 in 2006 and $107,000 in 2005.
Investment Securities: Investments in debt and equity securities are classified as held to maturity, trading or
available for sale. 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.
Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts,
with such amortization or accretion included in interest income. Securities available for sale 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 on securities is accrued and credited to
operations based on the principal balance outstanding, adjusted for amortization of premiums and accretion
of discounts.
Unrealized losses on corporate bonds have not been recognized into iticome. Management has the intent and
ability to hold these securities for the foreseeable future. The fair value is expected to recover as the bonds
approach their maturity date and/or market conditions become more favorable to the bonds' intrinsic value.
Trading Securities: Trading securities are principally held with the intention of selling in the near term and are
carried at market value. Realized and unrealized gains and losses on trading account securities are recognized in
the Statement of Income as they occur. The Company did not hold any trading securities at December 31, 2007,
2006 or 2005. There was no trading activity in 2007, 2006 or 2005.
Loans: Loans are stated at the principal amount outstanding net of the unamortized balance of deferred loan
origination fees and costs. Deferred loan origination fees and costs are amortized as an adjustment to the related
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
loan yield over the contractual life using the level yield method. Interest income on loans is accrued over the term
of the loans based on the amount of principal outstanding. The accmal of interest is discontinued on a loan when
management determines that the collection of interest is doubtful. Generally a loan is placed on nonaccrual status
once the borrower is 90 days past due on payments, or whenever sufficient information is received to question the
collectability ofthe loan or any time legal proceedings are initiated involving a loan. Interest income accrued up
to the date a loan is placed on nonaccrual is reversed through interest income. Cash payments received while a
loan is classified as nonaccrual are recorded as a reduction to principal or reported as interest income according to
management'sjudgment as to the collectibility of principal. A loan is returned to accraal status when either all of
the principal and interest amounts contractually due are brought current and future payments are, in manage
ment'sjudgment, collectable, or when it otherwise becomes well secured and in the process of collection. When a
loan is charged-off, any interest accrued but not collected on the loan is charged against earnings.
Loans Held for Sale: The Company originates certain residential mortgage loans for sale in the secondary
mortgage loan market. For the majority of loan sales, the Company concurrently sells the rights to service the
related loans. In addition, the Company may periodically idenfify other loans which may be sold. These loans are
classified as loans held for sale, and carried, in the aggregate, at the lower of cost or estimated market value based
on secondary market prices. To mitigate interest rate risk, the Company may obtain fixed commitments to sell
such loans at the time loans are originated or identified as being held for sale. Such a commitment would be
referred to as a derivative loan commitment if the loan that will result from exercise of the commitment will be
held for sale upon funding under Statement of Financial Accounfing Standards No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities, as amended by Statement ofFinancial Account
ing Standards No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. Loans held for sale was $109,000 at December 31, 2006, and none at December 31, 2007.
Allowance for Loan Losses and Allowance for Losses on Lending Related Commitments: Because some loans
may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance consist of
provisions for loan losses charged to expense and recoveries of previously charged-off loans. Reductions to the
allowance result from the charge-off of loans deemed uncollectable by management. After a loan is charged-off,
collection efforts continue and future recoveries may occur.
A loan is considered impaired when it appears probable that all principal and interest amounts will not be
collected according to the loan contract. Allowances for loan losses on impaired loans are determined using the
estimated future cash flows ofthe loan, discounted to their present value using the loan's effective interest rate.
Allowances for loan losses for impaired loans that are collateral dependent are generally determined based on the
estimated fair value of the underlying collateral. Smaller balance homogeneous loans are evaluated for
impairment in the aggregate. Such loans include one-to-four family residential, home equity and consumer
loans. Commercial loans and commercial mortgage loans are evaluated individually for impairment. Impaired
loans are generally classified as nonaccrual loans.
Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover possible losses that are currently
anticipated. 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 manage
ment in determining the amounts charged to operations include previous loss experience; the status of past due
interest and principal payments; the quality of financial information supplied by customers; the cash flow
coverage and trends evidenced by financial information supplied by customers; the nature and estimated value of
any collateral supporting specific loan credits; risk classifications determined by the Company's loan review
systems or as the result of regulatory examination process; and general economic conditions in the lending area of
the Company's bank subsidiary. Key risk factors and assumptions are dynamically updated to reflect actual
i
(Continued)
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
TLAND
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
experience and changing circumstances. While management may periodically allocate portions ofthe allowance
for specific problem loans, the entire allowance is available for any charge-offs that occur.
The Company maintains an allowance for losses on unfunded commercial lending commitments to provide for
the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that
used to determine the allowance for loan losses. This allowance is reported as a liability on the balance sheet
within accrued expenses and other liabilities, while the corresponding provision for these losses is recorded as a
component of other expense.
Certain asset-specific loans are evaluated individually for impairment, based on management's best estimate of
discounted cash repayments and the anticipated proceeds from liquidating collateral. The actual timing and
amount of repayments and the ultimate realizable value of the collateral may differ from management's
estimates.
The expected loss for certain other commercial credits utilizes intemal risk ratings. These loss estimates are
sensitive to changes in the customer's risk profile, the realizable value of collateral, other risk factors and the
related loss experience of other credits of similar risk. Consumer credits generally employ statistical loss factors,
adjusted for other risk indicators, applied to pools of similar loans stratified by asset type. These loss estimates
are sensitive to changes in delinquency status and shifts in the aggregate risk profile.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreci
ation is computed generally on the straight-line method over the estimated useful lives of the various assets.
Maintenance and repairs are expensed and major improvements are capitalized.
Other Real Estate: Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other
assets. Such real estate is carried at the lower of cost or fair value less estimated costs to sell. Any reduction from
the carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any
subsequent reduction in fair market value is reflected as a valuation allowance through a charge to income. Costs
of significant property improvements are capitalized, whereas costs relating to holding and maintaining the
property are charged to expense.
Intangible Asset: A core deposit intangible asset resulting from a branch acquisition is being amortized over a 15
year period. The intangible asset, net of accumulated amortization, was $98,000 and $134,000 at December 31,
2007 and 2006, respectively, and is included in other assets. The annual expense was $37,000 at December 31,
2007, 2006 and 2005. The estimated aggregate amortization expense for the next two years is $37,000 per year,
and $24,000 in the third year.
Cash Surrender Value of Life Insurance: Bank-owned life insurance ("BOLI") represents life insurance on the
lives of certain Company employees, officers and directors who have provided positive consent allowing the
Company to be the co-beneficiary of such policies. Since the Company is the owner of the insurance policies,
increases in the cash value ofthe policies, as well as its share of insurance proceeds received, are recorded in other
noninterest income, and are not subject to income taxes. The cash value ofthe policies is included in other assets.
The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and quarterly
thereafter. The amount of BOLI with any individual carrier is limited to 15% of Tier 1 Capital. The Company has
purchased BOLI to provide a long-term asset to offset long-term benefit liabilities, while generating competifive
investment yields.
Advertising: The Company expenses advertising costs as incurred.
(Continued)
I
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 2 - INVESTMENT SECURITIES
The following is a summary of investment securities:
(Amounts in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
December 31, 2007
Investment securities available for sale
U.S. Government agencies and corporations
Obligations of states and poUtical subdivisions
Mortgage-backed and related securities
Corporate securities
Total debt securities
Other securities
Total available for sale
Investment securities held to maturity
U.S. Treasury securities
U.S. Govemment agencies and corporations
Obligations of states and political subdivisions
Mortgage-backed and related securities
Total held to maturity
December 31, 2006
Investment securities available for sale
U.S. Government agencies and corporations
Obligations of states and political subdivisions
Mortgage-backed and related securities
Corporate securities
Total debt securities
Other securities
Total available for sale
Investment securities held to maturity
U.S. Treasury securities
U.S. Government agencies and corporations
Obligations of states and political subdivisions
Mortgage-backed and related securities
Total held to maturity
$ 12,365
8,428
66,508
35,769
123,070
3,581
$126,651
$
139
71,179
23,990
16,807
$112,115
$ 12,919
9,451
55,062
28,160
105,592
3,581
$109,173
$
143
73,743
31,009
19,724
$124,619
$ 314
344
607
36
1,301
$
2
268
1,175
1,445
$1,301
$1,445
$
7
361
886
63
$1,317
$
13
348
192
101
654
$
24
7
314
$ 345
$ 136
1
1,057
149
1,343
$ 654
$1,343
$
1,067
$1,067
$
1,239
13
298
$1,550
$ 12,677
8,772
66,847
34,630
122,926
3,581
$126,507
$
146
71,516
24,869
16,556
$113,087
$ 12,796
9,798
54,197
28,112
104,903
3,581
$108,484
$
143
72,504
32,063
19,426
$124,136
At December 31, 2007 and 2006, other securities consisted of $3,355,000 in Federal Home Loan Bank (FHLB)
stock and $226,000 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.
B
(Continued)
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
tJIAND
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at December 31, 2007, 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.
(Amounts in thousands)
December 31, 2007
Amortized
Cost
Estimated
Fair Value
Investment securities available for sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Mortgage-backed securities
Total
Investment securities held to maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Mortgage-backed securities
Total
$ 3,447
4,048
4,506
44,561
56,562
66,508
$123,070
$ 17,780
4,443
22,048
51,037
95,308
16,807
$112,115
$ 3,459
4,110
4,282
44,228
56,079
66,847
$122,926
$ 17,784
4,473
22,213
52,061
96,531
16,556
$113,087
The following table sets forth the proceeds, gains and losses realized on securities sold or called for each of the
years ended December 31:
(Amounts in thousands)
2007
2006
2005
$9,991
77
$1,526
18
$13,563
308
Proceeds
Gross realized gains
Gross realized losses
Investment securities with a carrying value of approximately $95,137,000 at December 31, 2007 and
$75,489,000 at December 31, 2006 were pledged to secure deposits and for other purposes.
I
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 2 - INVESTMENT SECURITIES (Continued)
The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized
losses at December 31, 2007:
U.S. Govemment agencies
and corporations
Obligations of states and
political subdivisions
Mortgage-backed and related
securities
Corporate securities
(Amounts in thousands)
Less than 12 Months
Unrealized
Losses
Fair
Value
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$ 3,466
$ 23
$ 2,741
$
105
24,930
1
761
391
29,695
5,949
3
7
581
414
$ 6,207
$
26
391
7
29,800
30,879
582
1,175
$28,501
$785
$38,776
$1,005
$67,277
$1,790
The above table represents 123 investment securities where the current value is less than the related amortized
cost.
The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized
losses at December 31, 2006:
U.S. Government agencies
and corporations
Obligations of states and
political subdivisions
Mortgage-backed and related
securities
Corporate securities
(Amounts in thousands)
Less than 12 Months
Unrealized
Losses
Fair
Value
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$11,716
$125
$ 69,233
$1,250
$ 80,949
$1,375
1,043
14
1,043
14
10,812
2,012
159
6
52,351
4,215
1,196
143
63,163
6,227
1,355
149
$24,540
$290
$126,842
$2,603
$151,382
$2,893
The above table represents 201 investment securities where the current value is less than the related amortized
cost.
The unrealized losses on the Bank's investment in U.S. Government agencies and corporations, obligations of
states and political subdivisions, and mortgage-backed and related securities were caused by interest rate
increases. Accordingly, it is expected that the securities would not be settied at a price less than the amortized cost
of the Bank's investment because the decline in market value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold those investments until a recovery of
fair value, which may be maturity. The Bank does not consider those investments to be other than temporarUy
impaired at December 31, 2007.
The Bank's unrealized loss on investments in corporate securities relates to a $2,350,000 investment in the
General Motors Corporation. The unrealized loss was primarily caused by (a) the decrease in profitability and
I
(Continued)
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
TIAND
NOTE 2 - INVESTMENT SECURITIES (Confinued)
profit forecasts by industry analysts resulting from intense competitive pressure in the automotive industry and
(b) a sector downgrade by industry analysts. The contractual terms of those investments do not permit General
Motors Corporation to settle the security at a price less than the amortized cost of the investment. While the
General Motors Corporation credit rating has decreased from A3 to Caal (Moodys), the Bank believes it is
probable that it will be able to collect all amounts due according to the contractual terms of the investment.
Therefore, it is expected that the bonds would not be settled at a price less than the amortized cost of the
investment. Because the Bank has the ability and intent to hold the investments until a recovery of fair value,
which may be maturity, it does not consider the investment in the General Motors Corporate notes to be other-
than-temporarily impaired at December 31, 2007.
The remaining loss on investments in corporate securities relates to a $31,410,000 investment at December 31,
2007, in Collateralized Debt Obligations, (CDO's), representing pools of tmst preferred debt. The credit ratings
on the securities range from Aa3 to Baa3 at Moody's, with none of the securities experiencing downgrades at
December 31, 2007.
NOTE 3 - LOANS RECEIVABLE
The following is a summary of loans:
(Amounts in thousands)
1-4 family residential mortgage loans
1-4 family residential mortgage loans held for sale
Commercial mortgage loans
Consumer loans
Commercial loans
Home equity loans
Total loans
December 31,
2007
2006
$ 68,135
$ 62,882
120,950
8,484
14,981
10,559
109
106,160
7,745
17,505
10,807
$223,109
$205,208
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses for the year ended:
(Amounts in thousands)
Balance at beginning of year
Loan charge-offs
Recoveries
Net loan charge-offs
Provision charged to operations
Balance at end of year
December 31,
2007
2006
2005
$2,211
(728)
98
(630)
40
$1,621
$2,168
(288)
106
(182)
225
$2,211
$2,629
(1,119)
113
(1,006)
545
$2,168
Loans on which the accrual of interest has been discontinued because circumstances indicate that collection is
questionable amounted to $2,285,000, $3,923,000 and $3,746,000 at December 31, 2007, 2006 and 2005,
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
respectively. Interest income on these loans, if accraed, would have increased pretax income by approximately
$188,000, $315,000 and $266,000 for 2007, 2006 and 2005, respectively.
Impaired loans are generally included in nonaccraal loans. Management does not individually evaluate certain
smaller balance loans for impairment as such loans are evaluated on an aggregate basis. These loans generally
include 1-4 family, consumer and home equity loans. Impaired loans are generally evaluated using the fair value
of collateral as the measurement method. At December 31, 2007, December 31, 2006 and December 31, 2005,
the recorded investment in impaired loans was $2,274,000, $1,939,000 and $1,857,000 while the aUocated
portion of the aUowance for loan losses for such loans was $716,000, $815,000 and $714,000, respectively.
Interest income recognized on impaired loans using the cash basis was $68,000 for 2007, $44,000 for 2006 and
$51,000 for 2005.
There were $546,000 in renegotiated loans at December 31, 2007 and none at December 31, 2006 and 2005. The
total interest recognized on these loans was $12,000 at December 31, 2007.
There were no renegotiated loans for which interest has been reduced at December 31, 2007, December 31, 2006
and December 31, 2005.
As of December 31, 2007, 2006 and 2005, there were $14,691,000, $13,765,000 and $5,304,000 in loans that
were neither classified as nonaccrual nor considered impaired, but which can be considered potential problem
loans.
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.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
(Amounts in thousands)
Land
Premises
Equipment
Leasehold improvements
Construction in progress
Less accumulated depreciation
December 31,
2007
2006
$ 1,384
6,522
7,789
275
280
16,250
10,044
$
877
5,720
7,488
291
349
14,725
9,945
Net book value
$ 6,206
$ 4,780
Depreciation expense was $576,000 in 2007, $485,000 in 2006 and $597,000 for 2005.
(Continued)
m
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 6 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
Demand
Money Market
Savings
Time:
In denominations under $100,000
In denominations of $100,000 or more
Total
December 31,
2007
2006
$ 23,460
19,698
74,024
120,864
68,518
$306,564
$ 27,136
19,117
79,585
114,052
54,945
$294,835
The following is a summary of time deposits of $100,000 or more by remaining maturities:
(Amounts in thousands)
2007
Certificates
of Deposit
Other Time
Deposits
$17,572
$17,572
12,811
24,193
4,668
1,381
$60,625
$ 435
288
340
5,316
1,514
$7,893
December 31,
2006
Certificates
of Deposit
Other Time
Deposits
$17,997
7,775
11,786
8,219
1,529
$47,306
$
543
749
2,087
4,260
$7,639
Total
$18,007
13,099
24,533
9,984
2,895
$68,518
Total
$17,997
8,318
12,535
10,306
5,789
$54,945
Three months or less
Three to six months
Six to twelve months
One through five years
Over five years
Total
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 9 - COMMITMENTS (Continued)
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 instraments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These financial instraments include
commitments to extend credit, standby letters of credit and financial guarantees. Such instraments involve, to
varying degrees elements of credit risk in excess of the amount recognized on the balance sheet. The contract or
notional amounts or those instraments reflect the extent of involvement the Company has in particular classes of
financial instruments.
In the event of nonperformance by the other party, the Company's exposure to credit loss on these financial
instraments 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 instraments recorded on the
balance sheet. The amount and nature of collateral obtained, if any, is based on management's credit evaluation.
The following is a summary of such contractual commitments:
(Amounts in thousands)
Financial instraments whose contract
amounts represent credit risk:
Commitments to extend credit
Fixed rate
Variable rate
Standby letters of credk
December 31,
2007
2006
$ 2,125
36,576
1,179
$ 3,102
44,422
1,810
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 customer's 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
management's credit evaluation ofthe counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial properties.
The Company's 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 December 31, 2007, totaled $11,698,000. The total average daily
balance of overdrafts used in 2007 was $153,000, or less than 2% of the total aggregate overdraft protection
available to depositors.
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
rriAND
NOTE 10 - BENEFIT PLANS
The Bank has a contributory defined contribution retirement plan (a 401(k) plan) which covers substantially all
employees. Total expense under the plan was $244,000 for 2007, $229,000 for 2006 and $224,000 for 2005. The
Bank matches participants' voluntary contributions up to 5% of gross pay. Participants may make voluntary
contributions to the plan up to a maximum of $15,500 with an additional $5,000 catchup deferral for plan
participants over the age of 50. The Bank makes monthly contributions to this plan equal to amounts accrued for
plan expense.
The Bank and Bancorp provide supplemental retirement benefit plans for the benefit of certain officers and non
officer directors. The plan for officers is designed to provide post-retirement benefits to supplement other sources
of retirement income such as social security and 401(k) benefits. The benefits will be paid for a period of 15 years
after retirement. The amount of each officer's benefit is determined by their salary at retirement as well as their
other sources of retirement income. Director Retirement Agreements provide for a benefit of $10,000 annually
on or after the director reaches normal retirement age, which is based on a combination of age and years of
service. Director retirement benefits are paid over a period of 10 years following retirement. The Bank and
Bancorp accrae the cost ofthese post-retirement benefits during the working careers ofthe officers and directors.
At December 31, 2007, the cumulative expense accrued for these benefits totaled $1,689,000, with $1,386,000
accrued for the officers' plan and $303,000 for the directors' plan.
The following table reconciles the accumulated liability for the benefit obUgafion of these agreements:
(Amounts in thousands)
Beginning balance
Benefit expense
Benefit payments
Ending balance
Years Ended
December 31,
2007
2006
$1,484 $1,283
275
263
(70)
(62)
$1,689 $1,484
Supplemental executive retirement agreements are unfunded plans and have no plan assets. The benefit
obligation represents the vested net present value of future payments to individuals under the agreements.
The benefit expense, as specified in the agreements for the entire year 2007, is expected to be under $300,000.
The benefits expected to be paid in the next year is $70,000.
The Bank has purchased insurance contracts on the lives ofthe participants in the supplemental retirement benefit
plan and has named the Bank as the beneficiary. Similarly, the Bancorp has purchased insurance contracts on the
lives of the directors with the Bancorp as beneficiary. While no direct linkage exists between the supplemental
retirement benefit plan and the life insurance contracts, it is management's current intent that the revenue from
the insurance contracts be used as a funding source for the plan. At December 31, 2007, the cumulative income
accraed on these contracts totaled $2,542,000 on a tax equivalent basis, with $1,750,000 accraed on the officers'
contracts and $792,000 on the directors' contracts.
In accordance with the Emerging Issues Task Force issue 06-04 "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" the Bank and the
Bancorp will begin to accrue for the monthly benefit expense of postretirement cost of insurance for split-dollar
life insurance coverage. The accrual for the year ended December 31,2008 is expected to be under $50,000. Also,
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 10 - BENEFIT PLANS (Continued)
as of January 1,2008, the Bank and Bancorp will record the cumulative effect of a change in accounting principle
for recognizing a liability for the death benefit promised under a split-dollar Ufe insurance arrangement. The total
liability will be $539,000 with the offset to retained earnings.
NOTE 11 - FEDERAL INCOME TAXES
The composition of income tax expense is as follows:
(Amounts in thousands)
Current
Deferred
Total
Years Ended December 31,
2005
2006
2007
$ 922
189
$L111
$1,133
(205)
$ 928
$907
50
$957
The following is a summary of net deferred taxes included in other assets:
(Amounts in thousands)
Gross deferred tax assets:
Provision for loan and other real estate losses . . ..
AMT credit*
Other items
Loan origination cost - net
Unrealized loss (gain) on available for sale
securities
Gross deferred tax liabilities:
Depreciation
Other items
Net deferred tax asset (Uability)
December 31,
2006
2005
2007
$ 227
776
141
49
$ 428
47
764
103
$ 413
29
641
28
235
452
(330)
(572)
$ 2 91
(350)
(561)
$ 666
(387)
(498)
$ 678
* Represents the Company's cumulative alternative minimum tax credit which was used in 2007.
The following is a reconciliation between tax expense using the statutory tax rate of 34% and the income tax
provision:
(Amounts in thousands)
Statutory tax
Tax effect of non-taxable income
Tax effect of non-deductible expense
Tax effect of change in estimate*
Total income taxes
Years Ended December 31,
2005
2006
2007
$1,798
$1,871
$1,857
(921)
(909)
(846)
80
111
100
(145)
$ 928
$ 957
$1,111
* A one time adjustment to tax accrual estimate was recorded in the first quarter of 2006.
The related income tax expense on investment securities gains and losses amounted to $26,000 for 2007, $6,000
for 2006 and $105,000 for 2005, and is included in the total federal income tax provision.
(Continued)
m
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
TIAND
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
(Amounts in thousands)
December 31, 2007
December 31, 2006
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
ASSETS:
Cash and cash equivalents
Federal Funds sold
Investment securities
Loans, net of allowance for loan losses
LIABILITIES:
Demand and savings deposits
Timedeposits
FHLB advances
Other borrowings
Subordinated Debt
$ 9,441
$ 9,441
238,766
221,488
239,594
220,692
$175,406
189,382
64,000
6,413
5,155
$175,406
190,656
64,952
6,413
5,155
$ 10,100
4,275
233,792
202,997
$186,821
168,997
55,000
7,015
$ 10,100
4,275
232,620
201,269
$186,821
169,113
54,917
7,015
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of
December 31, 2007 and 2006. The estimated fair value for cash and cash equivalents is considered to
approximate cost. The estimated fair value for securities is based on quoted market values for individual
securities or for equivalent securities when specific quoted prices are not available. Carrying value is considered
to approximate fair value for loans, FHLB advances and other borrowings that reprice frequently and for deposit
liabilities subject to immediate withdrawal. The fair values of loans, FHLB advances and other borrowings and
time deposits that reprice less frequently are approximated by a discount rate valuation technique utilizing
estimated market interest rates as of December 31, 2007 and 2006. The fair value of unrecorded commitments at
December 31, 2007 and 2006, is not material.
In addition, other assets and liabilities of the Company that are not defined as financial instraments are not
included in the above disclosures, such as property and equipment. Also, non-financial instraments 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.
NOTE 13 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
(Continued)
B
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 13 - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain:
(1) a minimum ratio of 4% both for total Tier 1 risk-based capital to risk-weighted assets and for Tier 1 risk-based
capital to average assets, and (2) a minimum ratio of 8% for total risk-based capital to risk-weighted assets.
Under the regulatory framework for prompt corrective action, the Company is categorized as well capitalized,
which requires minimum capital ratios of 10% for total risk-based capital to risk-weighted assets, 6% for Tier I
risk-based capital to risk-weighted assets, and 5% for Tier 1 risk-based capital to average assets (also known as
the leverage ratio). There are no conditions or events since the most recent communication from regulators that
management believes would change the Company's capital classification.
Total Risk-Based Capital
Ratio to Risk-Weighted Assets
Tier 1 Risk-Based Capital
Ratio to Risk-Weighted Assets
Ratio to Average Assets
(Amounts in thousands)
December 31,
2007
December 31,
2006
Amount
Ratio
Amount
Ratio
$55,455
$53,820
$53,151
$50,913
19.18%
18.62 %>
10.99%
19.93%
19.09%
11.04%
Tier 1 risk-based capital is shareholders' equity, noncumulative and cumulative perpetual preferred stock,
qualifying trust preferred securities and minority interests less intangibles and the unrealized market value
adjustment of investment securities available for sale. Total risk-based capital is Tier 1 risk-based capital plus the
qualifying portion of the allowance for loan losses. Assets and certain off balance sheet items adjusted in
accordance with risk classification comprise risk-weighted assets of $289,081,000 and $266,686,000 as of
December 31, 2007 and 2006, respectively. Assets less intangibles and the net unrealized market value
adjustment of investment securities available for sale averaged $489,443,000 and $461,215,000 for the years
ended December 31, 2007 and 2006, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are affiliated were loan customers during
2007. The following is an analysis of such loans:
(Amounts in thousands)
Total related-party loans at December 31, 2006
New related-party loans
Repayments or other
$1,648
858
121
Total related-party loans at December 31, 2007 . . . $2,385
B
(Continued)
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
TIAND
NOTE 15 - CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Cortland Bancorp (parent company only). In this information, the
parent's investment in subsidiaries is stated at cost, including equity in the undistributed earnings of the
subsidiaries since inception, adjusted for any unrealized gains or losses on available for sale securities.
BALANCE SHEETS
(Amounts in thousands)
Assets:
Cash
Investment securities available for sale
Investment in bank subsidiary
Investment in non-bank subsidiary
Subordinated note from subsidiary bank
Other assets
Liabilities:
Other liabilities
Subordinated debt
Shareholders' equity:
Common stock (Note 1)
Additional paid-in capital (Note 1)
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total shareholders' equity
December 31,
2007
2006
$ 2,293
650
42,500
15
6,000
2,837
$54,295
$
316
5,155
23,200
20,976
9,386
(94)
(4,644)
48,824
$54,295
$ 2,949
684
44,638
15
2,507
$50,793
$
201
22,972
20,835
9,553
(455)
(2,313)
50,592
$50,793
STATEMENTS OF INCOME
(Amounts in thousands)
Dividends from bank subsidiary
Interest and dividend income
Other income
Interest on subordinated debt
Other expenses
Income before income tax and equity in
undistributed net income of subsidiaries
Income tax benefit (expense)
Equity in undistributed net income of subsidiaries
Net income
(Continued)
Years ended December 31,
2006
2007
$2,800
$ 7,000
46
51
110
89
(154)
(257)
2005
$3,500
56
70
(283)
(270)
6,750
120
(2,520)
$ 4,350
2,652
78
1,846
$4,576
3,356
72
906
$4,334
m
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 15 - CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash flows from operating
$ 4,350
$ 4,576
$ 4,334
Years ended December 31,
2007
2006
2005
activities:
Equity in undistributed net income of subsidiaries
Accretion on securities
Deferred tax benefit
Change in other assets and liabilities
Net cash flows from operating activities
Cash flows from investing activities
Purchases of investment securities available for sale
Purchases of investment securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from call, maturity and principal payments
on securities
Purchase of subordinated note from subsidiary bank
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from subordinated debt
Dividends paid
Net treasury shares (repurchased) reissued
Net cash flows from financing activities
Net change in cash
Cash
Beginning of year
End of year
2,520
2
(12)
(192)
6,668
(1,846)
2
(13)
(141)
2,578
(906)
3
(7)
(148)
3,276
(356)
450
94
(6,000)
(6,000)
5,155
(3,899)
(2,580)
(1,324)
(656)
(3,870)
1,139
(2,731)
(153)
(4,637)
1,168
(3,469)
(99)
2,949
$ 2,293
3,102
$ 2,949
3,201
$ 3,102
NOTE 16 - DIVIDEND RESTRICTIONS
The Bank is subject to regulations ofthe Ohio Division of Banks which restrict dividends to retained earnings (as
defined by statute) of the current and prior two years. Under this restriction, at December 31, 2007, approx
imately $232,000 is available for the payment of dividends by the Bank without seeking prior regulatory
approval. In addition, regulations specify that dividend payments may not reduce capital levels below minimum
regulatory guidelines.
NOTE 17 - LITIGATION
The Bank is involved in legal actions arising in the ordinary course of business. In the opinion of management,
the outcomes from these other matters, either individually or in the aggregate, are not expected to have any
material effect on the Company.
Q
(Continued)
CORTLAND BANCORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
NOTE 18 - STOCK REPURCHASE PROGRAM
TIAND
J*JC0I^
On February 27, 2007, the Company's Board of Directors approved a Stock Repurchase Program which
permitted the Company to repurchase up to 100,000 shares of its outstanding common shares in the over-the-
counter market or in privately negotiated transactions in accordance with applicable regulations of the Securities
and Exchange Commission. Based on the value ofthe Company's stock on February 27, 2007, the commitment
to repurchase the stock over the program was approximately $1,715,000. Subsequently, on August 14, 2007, the
Company's Board ofDirectors authorized the repurchase of up to an additional 100,000 shares ofits outstanding
common shares in over-the-counter market or in privately negotiated transactions. Based on the value of the
Company's stock on August 14, 2007, the commitment to repurchase these additional shares over the program
was approximately $1,635,000. Once again, on November 27,2007, the Company's Board ofDirectors increased
to 300,000 shares the size of its current stock buyback program by authorizing the repurchase of up to an
additional 100,000 ofits outstanding common shares in the over-the-counter market or in privately negotiated
transactions. Based on the value ofthe Company's stock on November 27, 2007, the commitment to repurchase
these additional shares over the program was approximately $1,375,000. The repurchase program will terminate
on Febraary 28, 2009 or upon the purchase of 300,000 shares, if earlier. Repurchased shares are designated as
treasury shares, available for general corporate purposes, including possible use in connection with the
Company's dividend reinvestment program, employee benefit plans, acquisitions or other distributions. Under
the program the Company has repurchased 205,986 shares. The Company has also reissued 53,670 shares to
existing shareholders through its dividend reinvestment program during 2007, net of repurchased fractional
shares. The 1% common stock dividend paid January 1, 2008 increased treasury shares by an additional
2,420 shares. Based on the price of the Company's stock at December 31, 2007, the remaining commitment to
repurchase the 94,014 remaining shares of stock was approximately $1,170,000.
The following table shows information relating to the repurchase of shares of the Company's common stock
during 2007:
October
November
. . ..
December
. . ..
Fourth Quarter.
Third Quarter. .
Second Quarter
First Quarter . .
TOTAL
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
22,000
25,843
6,000
53,843
66,929
85,214
NONE
$ 15.40
15.12
15.00
$ 15.22
$ 16.90
$ 18.47
NONE
22,000
25,843
6,000
53,843
66,929
85,214
NONE
205,986
$ 17.11
205,986
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Number
of Shares
That May Yet Be
Purchased Under
the Plans or
Programs
25,857
100,014
94,014
94,014
47,857
14,786
NONE
94,014
B
F I VE Y E AR S U M M A RY
A V E R A GE B A L A N CE S H E E T, Y I E L DS A ND R A T ES
The following schedules show average balances of interest-eaming and non interest-earning assets and liabilities, and Shareholders'
equity for the years indicated. Also shown are the related amounts of interest earned or paid and the related average yields or interest
rates paid for the years indicated. The averages are based on daily balances.
(Fully taxable equivalent basis in thousands of dollars)
2007
2006
Interest-eaming assets:
Federal funds sold and other money markets
Investment securities:
U.S. Treasury and other U.S.
Government agencies and corporations
U.S. Government mortgage-backed
pass through certificates
States of the U.S. and political
subdivisions (Note 1, 2, 3)
Other securities
TOTAL INVESTMENT SECURITIES
Loans (Note 2, 3, 4)
Trading account securities
TOTAL INTEREST-EARNING ASSETS
Non interest-eaming assets:
Cash and due from banks
Premises and equipment
Other
TOTAL ASSETS
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits
Savings
Time
TOTAL INTEREST-BEARING DEPOSITS
Borrowings:
Federal funds purchased
Securities sold under agreement to repurchase
Subordinated debt
Other borrowings under one year
Other borrowings over one year
TOTAL BORROWINGS
TOTAL INTEREST-BEARING LIABILITIES
Non interest-bearing liabilities:
Demand deposits
Other liabilities
Shareholders equity
Average
Balance
Outstanding
Interest Yield
E a r n ed
or P a id Rate
or
Average
Balance
Interest Yield
Earned
or
Outstanding or Paid Rate
$ 6,950
$
366
5.3%
$ 4,228
$
215 5.1%
87,867
4,772
5.4%
83,615
4,257
5.1%
80,689
4,008
5.0%
79,317
3,795
4.8%
37,488
32,860
238,904
215,496
2,633
2,251
13,664
15,856
7.0%
6.9%
5.7%
7.4%
42,409
29,628
234,969
195,838
2,995
1,888
12,935
14,381
7.1%
6.4%
5.5%
7.4%
461,350
$29,886
6.5%
435,035
$27,531
6.3%
8,220
5,374
14,103
$489,047
8,733
4,226
12,365
$460,359
$ 46,508
78,072
184,586
309,166
$ 888
799
8,769
10,456
1.9%
1.0%
4.8%
3.4%
$ 47,415
82,845
161,050
291,310
$ 752
850
6,907
8,509
1.6%
1.0%
4.3%
2.9%
605
5,764
2,175
13,963
45,843
68,350
377,516
57,668
3,775
50,088
29
243
154
715
2,388
3,529
$13,985
4.8%
4.2%
7.1%
5.1%
5.2%
5.2%
3.7%
478
3,991
25
158
5.3%
4.0%
7,924
46,858
59,251
350,561
365
2,525
3,073
$11,582
4.6%
5.4%
5.2%
3.3%
57,271
3,214
49,313
$460,359
$15,901
$15,949
2 ^%
3.5%
3X)%
3.7%
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
$489,047
Net interest income
Net interest rate spread (Note 5)
Net interest margin (Note 6)
Note 1 ~ Includes both taxable and tax exempt securities.
Note 2 - The amounts are presented on a fully taxable equivalent basis using the statutory tax rate of 34% in 2007, 2006, 2005, 2004 and
2003, and have been adjusted to retlect the effect of disallowed interest expense related to carrying tax exempt assets. Tax-free
income from states ofthe U.S. and political subdivisions, and loans amounted to $1,809 and $155 for 2007, $2,045 and $192 for
2006, $2,156 and $209 for 2005, $2,545 and $193 for 2004 and $2,466 and $214 for 2003, respectively.
Note 3 - Average balance outstanding includes the average amount outstanding of all nonaccmal investment securities and loans. States
and political subdivisions consist of average total principal adjusted for amortization of premium and accretion of discount less
average allowance for estimated losses, and include both taxable and tax exempt securities. Loans consist of average total loans
less average uneamed income.
(Fully taxable equivalent basis in thousands of dollars)
2005
2004
2003
Average
Balance
Outstanding
Interest
Earned
or Paid
Yield
or
Rate
Average
Balance
Outstanding
Interest
Earned
or Paid
Yield
or
Rate
Average
Balance
Outstanding
Interest
Earned
or Paid
Yield
or
Rate
$ 3,619
119
3.3%
$ 5,623
$
83
1.5%
$ 10,338
$
118
1.1%
67,402
3,259
4.8%
62,418
2,920
4.7%
52,587
2,640
5.0%
84,928
3,810
4.5%
85,357
3,634
4.3%
89,652
4,009
4.5%
44,756
24,758
221,844
192,873
3,184
1,294
11,547
13,040
7.1%
5.2%
5.2%
6.8%
53,832
14,953
216,560
193,927
3,764
716
11,034
12,474
7.0%
4.8%
5.1%
6.4%
418,336
$24,706
5.9%
416,110
$23,591
5.7%
51,363
10,997
204,599
191,392
1,190
407,519
3,649
559
10,857
13,141
68
$24,184
7.1%
5.1%
5.3%
6.9%
5.7%
5.9%
9,417
4,316
12,418
$444,487
9,276
4,637
14,252
$444,275
10,140
5,119
13,461
$436,239
$ 49,355
89,107
144,793
283,255
$ 389
647
5,123
6,159
0.8%
0.7%
3.5%
2.2%
$ 48,945
90,584
147,662
287,191
$ 263
501
5,023
5,787
0.5%
0.6%
3.4%
2.0%
$ 50,714
88,953
139,568
279,235
$ 249
540
5,030
5,819
0.5%
0.6%
3.6%
2.1%
428
2,540
15
59
3.5%
2.3%
599
46,365
49,932
333,187
21
2,411
2,506
$ 8,665
3.5%
5.2%
5.0%
2.6%
58,320
3.315
49,665
$444,487
289
2,698
2,781
40,325
46,093
333,284
56,778
4,385
49,828
$444,275
4
26
1.4%
1.0%
57
1,999
1
17
1.8%
0.9%
37
2,156
2,223
$ 8,010
1.3%
5.3%
4.8%
2.4%
3,671
39,178
44,905
324,140
160
2,135
2,313
$ 8,132
4.4%
5.4%
5.2%
2.5%
55,898
4,394
51,807
$436,239
$16,041
$15,581
$16,052
3.3%
3.8%
3.3%
3.7%
3.4%
3.9%
Note 4 - Interest eamed on loans includes net loan fees of $219 in 2007, $291 in 2006, $242 in 2005, $203 in 2004 and $241 in 2003.
Note 5 - Net interest rate spread represents the difference between the yield on eaming assets and the rate paid on interest-bearing
liabilities.
Note 6 - Net interest margin is calculated by dividing the difference between total interest eamed and total interest expensed by total
interest-eaming assets.
B
CORTLAND BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands of dollars, except for ratios and per share amounts)
S U M M A RY OF O P E R A T I O NS
Total Interest Income
Total Interest Expense
NET INTEREST INCOME (NII)
Provision for Loan Losses
NII After Loss Provision
Security Gains (losses)
Gain on Sale of Loans
Total Other Income
INCOME BEFORE EXPENSE
Total Other Expenses
INCOME BEFORE TAX
Federal Income Tax
NET INCOME
BALANCE SHEET DATA
Assets
Investments
Total Loans
Allowance for Loan losses
Deposits
Borrowings
Subordinated Debt
Shareholders' Equity
AVERAGE BALANCES
Assets
Investments
Net Loans
Deposits
Subordinated Debt
Borrowings
Shareholders' Equity
PER COMMON SHARE DATA (1)
Net Income, both Basic arid Diluted
Cash Dividends Declared
Book Value
ASSET QUALITY RATIOS
Loans 30 days or more beyond their contractual due
date as a percent of total loans
Underperforming Assets as a
Percentage of:
Total Assets
Equity plus Allowance for Loan Losses
Tier I Capital
FINANCIAL RATIOS
Return on Average Equity
Return on Average Assets
Effective Tax Rate
Average Equity to Average Assets
Equity to Asset Ratio
Tangible Equity to Tangible Asset Ratio
Cash Dividend Payout Ratio
Net Interest Margin Ratio
. . ..
Years Ended December 31,
2006
2005
2004
$ 26,497
11,582
14,915
225
14,690
18
106
2,711
17,525
12,021
5,504
928
$ 4,576
$ 23,586
8,665
14,921
545
14,376
308
89
2,718
17,491
12,200
5,291
957
$ 4,334
$ 22,288
8,010
14,278
415
13,863
1,052
54
2,725
17,694
11,861
5,833
990
$ 4,843
2003
$ 22,907
8,132
14,775
240
14,535
946
470
2,433
18,384
11,529
6,855
1,371
$ 5,484
$471,751
233,103
205,208
2,211
355,818
62,015
$459,701
234,652
188,202
2,168
350,375
58,111
$446,393
225,841
191,777
2,629
344,919
47,889
$438,392
222,775
189,262
2,408
337,556
47,886
50,592
48,325
49,398
49,881
$460,359
234,969
193,648
348,581
59,251
49,313
$444,487
221,844
190,329
341,575
49,932
49,665
$444,275
216,560
191,428
343,969
46,093
49,828
$436,239
204,599
188,360
335,133
44,905
51,807
^ ^ ^ '^
$ 28,992
13,985
15,007
40
14,967
77
88
2,924
18,056
12,595
5,461
1,111
$ 4,350
$492,694
238,622
223,109
1,621
364,788
70,413
5,155
48,824
$489,047
238,904
213,568
366,834
2,175
66,175
50,088
0.97
0.87
11.12
1.01
0.85
11.14
0.97
1.04
10.78
1.10
1.01
11.17
1.23
0.98
11.31
1.32%
2.26%
2.95%
2.45%
1.77%
0.63
6.17
6.38
8.68%,
0.89
20.34
10.24
9.91
9.89
89.69
3.45
0.84
7.50
7.78
9.28%
0.99
16.86
10.71
10.72
10.70
84.31
3.67
0.83
7,58
7.81
8.73%
0.98
18.09
11.17
10.51
10.48
107.00
3.83
0.76
6.52
7.05
9,72%
1.09
16.97
11.22
11.07
11.02
91.45
3.74
0.70
5.84
6.44
10.59%
1.26
20.00
11.88
11.38
11.33
79.85
3.94
(1) Basic and diluted earnings per common share are based on weighted average shares outstanding adjusted retroactively for stock dividends. Cash
dividends per common share are based on actual cash dividends declared, adjusted retroactively for the stock dividends. Book value per common
share is based on shares outstanding at each period, adjusted retroactively for the stock dividends.
B
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
FINANCIAL REVIEW
The following is management's discussion and anal
ysis of the financial condition and results of opera
tions of Cortiand Bancorp (the "Company"). The
discussion should be read in conjunction with the
Consolidated Financial Statements and related notes
and summary financial information included else
where in this annual report.
NOTE REGARDING FORWARD-LOOKING
STATEMENTS
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking state
ments. 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 writ
ten statements made or to be made by the Company)
may contain forward-looking statements that involve
risks and uncertainties. The words "believes,"
"expects," "may," "wiU," "should," "projects," "con
templates," "anticipates," "forecasts," "intends," or
similar terminology identify forward-looking state
ments. These statements
reflect management's
beliefs and assumptions, and are based on informa
tion currently available to management.
Economic circumstances, the Company's 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 Company's
market area; changes in customer preferences and
consumer behavior; increased competitive pressures
or changes in either the nature or composition of
competitors; changes in the legal and regulatory
environment; changes in factors influencing liquidity
such as expectations regarding the rate of inflation or
deflation, currency exchange rates, and other factors
influencing market volatility; unforeseen risks asso
ciated 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 rea
son, even if new information becomes available.
CERTAIN NON GAAP MEASURES
Certain financial information has been determined by
methods other than Generally Accepted Accounting
Principles (GAAP). Specifically, certain financial
measures are based on core earnings rather than
net income. Core earnings exclude income, expense,
gains and losses that either 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 Company's current per
formance trends and financial condition. Core earn
ings 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 management's discussion
and analysis of quarterly and year-to-date financial
results of operations.
OVERVIEW and OUTLOOK
Net income for 2007 was $4,350. The performance
represented a decrease of $226 from the $4,576
in 2006. Earnings per share measured
earned
$0.97, down $0.04 or 4.0% from $1.01 in 2006.
Core earnings, which exclude the net gains on loans
sold and investment securities either sold or called,
loss on other real estate, and certain other non recur
ring items, were $4,244 million in 2007, compared to
the $4,382 million earned in 2006. Core eamings per
share were $0.94 in 2007 and $0.97 in 2006, down
$0.03 or 3.0%.
R
C O R T L A ND B A N C O RP A ND S U B S I D I A R I ES
M A N A G E M E N T 'S D I S C U S S I ON A ND A N A L Y S IS
(In t h o u s a n ds of dollars, except for p er share a m o u n t s)
Analysis of Net Interest Income — Years Ended December 31, 2006 and 2005
INTEREST-EARNING ASSETS
Federal funds sold and other money market funds
Investment securities(l)(2)
Loans(2)(3)
NET INTEREST MARGIN FOR YEAR ENDED
December 31, 2006
December 31, 2005
Average
Balance(l)
Interest
Average
Rate
Average
Balance(l)
Interest
Average
Rate
$ 4,228 $ 215 5.1%
12,935 5.5 %e
14,381 7.4%,
234,969
195,838
$ 3,619 $ 119 3.3%
11,547 5.2%
13,040 6.8%
221,844
192,873
Total interest-earning assets
$435,035
$27,531
6.3%,
$418,336
$24,706
5.9%
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits
Savings
Time
Total interest-bearing deposits
Federal funds purchased
Other borrowings
Total interest-bearing liabilities
Net interest income
Net interest rate spread(4)
Net interest margin(5)
$ 47,415
82,845
161,050
$ 752
850
6,907
1.6%,
1.0%,
4.3%
$ 49,355
89,107
144,793
$ 389
647
5,123
291,310
478
58,773
8,509
25
3,048
2.9%
5.3%
5.2%,
283,255
428
49,504
6,159
15
2,491
0.8%
0.7%
3.5%
2.2%
3.5%
5.0%
$350,561
$11,582
3.3%
$333,187
$ 8,665
2.6%
$15,949
$16,041
3.0%
3.7%
3.3%
3.8%
(1) Includes both taxable and tax exempt securities.
(2) Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%.
(3) Includes loan origination and commitment fees.
(4) Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.
(5) Interest margin is calculated by dividing the difference between total interest eamed and total interest expensed by total interest-eaming
assets.
The increase in interest income was the product of a
4.0% year-over-year increase in average earning
assets and a 43 basis point increase in interest rates
earned, while the increase in interest expense was a
product of a 5.2% increase in interest-bearing liabil
ities and a 70 basis point increase in rates paid. The
net result was a 0.6% decrease in net interest income
on a fully tax equivalent basis and a 16 basis point
decrease in the net interest margin.
Interest and dividend income on securities registered
an increase of $1,465, or 13.9%, during the year
ended December 31, 2006 when compared
to
2005. On a fully tax equivalent basis, income on
investment securities increased by $1,388, or 12.0%.
The average invested balances increased by $13,125
from the levels of a year ago. The increase in the
average balance of investment securities was accom
panied by a 30 basis point increase in the tax equiv
alent yield of the portfolio.
Interest and fees on loans increased by $1,341 on a
fully tax equivalent basis, or 10.3%, for the twelve
months of 2006 compared to 2005. A $2,965 increase
in the average balance ofthe loan portfoUo, or 1.5%,
was accompanied by a 60 basis point increase in the
portfolio's tax equivalent yield. Also contributing to
the increase in loan income in 2006 was $185 in back
interest and loan fees collected on three loans which
had been in foreclosure.
Other interest income increased by $96 from the
same period a year ago. The average balance of
federal funds sold and other money market funds
increased by $609, or 16.8%. The yield increased by
180 basis points during 2006 compared to 2005.
Average interest-bearing demand deposits and money
market accounts decreased by $1,940, and savings
decreased by $6,262. The average rate paid on these
products increased by 48 basis points in the aggre
gate. The average balance on time deposit products
increased by $16,257, as the average rate paid
increased by 75 basis points, from 3.5% to 4.3%.
Compared to last year, average borrowings and fed
eral funds purchased increased by $9,319 while the
average rate paid on borrowings increased by 17 basis
points.
I
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
TIAND
The following table provides a detailed analysis of changes in net interest income, identifying that portion of the
change that is due to a change in the volume of average assets and liabilities outstanding versus that portion which
is due to a change in the average yields on earning assets and average rates on interest-bearing liabilities. Changes
in interest due to both rate and volume which cannot be segregated have been allocated to rate and volume
changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Analysis of Net Interest Income Changes (Taxable Equivalent Basis)
Increase (Decrease) in Interest Income:
Federal funds sold and other money
markets
Investment Securities
U.S. Treasury and other U.S.
Government agencies and
corporations
U.S. Government mortgage-backed
pass-through certificates
States of the U.S. and political
subdivisions
Other securities
Loans
2007 Compared to 2006
Total
Volume Rate
2006 Compared to 2005
Total
Rate
Volume
$ 143
$
8
$ 151
$ 23
$ 73
$ 96
223
292
66
147
(346)
215
1,446
(16)
148
29
515
213
(362)
363
1,475
818
180
998
(260)
245
(15)
(166)
281
203
(23)
313
1,138
(189)
594
1,341
Total Interest Income Change
1,747
608
2,355
899
1,926
2,825
Increase (Decrease) in Interest Expense:
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased
Securities sold under agreements to
repurchase
Other borrowings under one year
Other borrowings over one year
Subordinated debt
150
(2)
790
(2)
11
45
(83)
(14)
(49)
1,072
6
74
305
(54)
154
136
(51)
1,862
4
85
350
(137)
154
(16)
(48)
617
2
44
335
26
379
251
363
203
1,167
1,784
8
55
9
88
10
99
344
114
Total Interest Expense Change
1,494
909
2,403
960
1,957
2,917
Increase (Decrease) in Net Interest Income
on a Taxable Equivalent Basis
$ 253
$(301)
$
(48)
$ (61)
$
(31)
$
(92)
B
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
Analysis of Other Income, Other Expense and
Federal Income Tax
Total other income for 2007 increased $254, or 9.0%
compared to a decrease of $280, or 9.0% in 2006.
Fees for customer services increased by $68, or 3.0%,
compared to a decrease of $15 or 0.7% in the prior
year. The increase is primarily due to an increase in
service charge income.
Loans originated for sale in the secondary market
showed gains of $88 in 2007, compared to $106 and
$89 in 2006 and 2005, respectively. The early call of
held to maturity securities, and transactions involving
available for sale securities, combined to produce net
gains of $77 in 2007, $18 in 2006 and $308 in 2005.
Other real estate losses amounted to $1 in 2007, $47
in 2006 and $3 in 2005. Earnings on bank owned life
insurance showed an increase of $88 in 2007 com
pared to an increase of $92 in 2006. Other non-
interest income increased by $11 during 2007 fol
lowing a $40 decrease in 2006. This income category
is subject to fluctuation due to nonrecurring items.
Other Income
2007
2006
2005
2004
2003
Fees for other
customer services
$2,307
$2,239
$2,254
$2,327
$1,636
88
106
89
54
470
(1)
(47)
(3)
(171)
265
Gaiu on sale of
loans
Other real estate
losses
Gain on sale of
trading Securities
Eamings on bank
owned
life insurance
Other operating
income
97
86
126
125
123
3,012
2,817
2,807
2,779
2,903
Investment securities
net gains
77
18
308
1,052
946
Total other income
$3,089
$2,835
$3,115
$3,831
$3,849
Total other expenses increased by $574 or 4.8% in
2007. This compares to adecrease of $179 or 1.5% in
2006. During 2007, expenditures for salaries and
employee benefits increased by $423 or 6.2%. This
increase is a combination of regular staff salary and
these expenditures
In 2006
benefit
increases.
^
decreased by $276 or 3.9%. This is due mainly to
a one time cash bonus of $243 awarded to the retiring
President and CEO in 2005. Occupancy and equip
ment expense increased by $60, or 3.3%, during 2007
and decreased by $59, or 3.2%, in 2006. The increase
in 2007 is due in part to construction of a banking
facility to replace an existing leased bank location.
The decrease in 2006 is due mainly to a $112
decrease in depreciation expense as some assets
became fully depreciated, and a $36 increase in
equipment and building maintenance.
the
State and local taxes stayed fairly consistent from
2005
to 2007. Bank exam and audit expense
decreased by $43 or 8.8% in 2007 following an
increase of $59 or 13.8% in 2006 primarily due to
requirements of
expenses associated with
Section 404 of the Sarbanes-Oxley Act of 2002.
All other categories of non-interest expense increased
by $ 106 in 2007 following an increase of $93 in 2006.
This expense category is subject to fluctuation due to
non-recurring items. The increase in 2007 is due in
part to expenses associated with the Company's Stra
tegic Growth Plan. These expenses include costs for
professional consulting, information system software
licensing and maintenance and educational programs
for the Company's employees. The increase in 2006
is due partly to an increase in collection and fore
closure expense of $41, a one-time sundry charge-off
of $22, and a $29 increase in office supplies expense.
Non-Interest Expense
Salaries and
benefits
Net occupancy and
equipment
expense
State and local
taxes
Office supplies
Bank exam and
audit
Other operating
expense
Total other
expenses
$ 7,199
$ 6,776
$ 7,052
$ 6,722
$ 6,586
1,871
1,811
1,870
1853
1,963
580
396
552
367
548
338
544
346
524
347
443
486
427
515
349
2,106
2,029
1,965
1,881
1,760
$12,595
$12,021
$12,200
$11,861
$11,529
521
433
341
444
409
2007
2006
2005
2004
2003
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
nriAND
NCGB^
Salaries and employee benefits represented 57.2% of
all non-interest expenses in 2007, 56.4% in 2006 and
57.8% in 2005. Salaries and employee benefits
decreased by $276 in 2006 followed by an increase
of $423 in 2007. The following details components of
these increases:
Salaries
Benefits
Profit Sharing
Analysis of Changes in
Salaries & Benefits
2007
2006
Amounts
2005
2004
2003
2007
2006
Percent
2005
2004
2003
$252
$(176)
$317
$(28)
$
67
4.7%
(3.2)% 6.1%c
(1.14)%o
1.3%o
145
(77)
(29)
85
112
(336)
(157)
(55)
9.0
(4.6)
(1.7)
5.2
5.7
16.1
(3.5)
(16,7)
4.2
23.3
0.8
30.5
7.3
(100.0)
(2.2)
(27.0)
Def'd Loan Origination
397
26
(253)
(23)
288
42
57
79
$423
$(276)
$330
$136
($212)
6.2%
(3.9)%) 4.9%)
2.1%
(3.1%)
Wage and salary expense per employee averaged
$33,994 in 2007, $33,063 in 2006, and $33,942 in
2005. Excluding the one-time retirement bonus, the
average per employee would have been $32,444 in
2005. Full-time equivalent employment averaged
164 employees in 2007, 161 employees in 2006
and 162 employees in 2005. Average earning assets
per employee measured $2,813 in 2007, $2,702 in
2006 and $2,582 in 2005.
Income before income tax expense amounted to
$5,461 for
to
$5,504 and $5,291 for the similar periods of 2006
and 2005, respectively. The effective tax rate was
the year ended 2007 compared
20.3% in 2007, 16.9% in 2006 and 18.1% in 2005,
resulting in income tax of $1,111, $928 and $957,
respectively. The decrease in the effective tax rate in
2006 reflects a one time adjustment to tax expense of
$145 due to a change in tax accrual estimate. The
effective tax rate before the $145 adjustment was
19.5%. The increase in 2007 is an increase from prior
years because of a reduction in tax free income. The
provision for income taxes differs from the amount of
income
the applicable
U.S. statutory federal income tax rate to pre-tax
income as a result of the following differences:
tax determined applying
Provision at statutory rate
Add (Deduct):
Tax effect of non-taxable income
Tax effect of non-deductible expense . . . .
Tax effect of change in estimate*
. . ..
2007
2006
2005
2004
December 31
. . .. $1,857
$1,871
$1,798
$ 1,983
2003
$ 2,331
(846)
100
(909)
111
(145)
(921)
80
(1,084)
91
(1,052)
92
Federal income taxes
. . .. $1,111
$ 928
$ 957
$ 990
$ 1,371
One time adjustment to tax accraal estimate
I
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
Net income registered $4,350 in 2007, $4,576 in 2006
and $4,334 in 2005 representing per share amounts of
$0.97 in 2007, $1.01 in 2006 and $0.97 in 2005.
Dividends declared per share were $0.87 in 2007,
$0.85 in 2006 and $1.04 in 2005. The decrease in
FOURTH QUARTER 2007 AS
COMPARED TO FOURTH QUARTER 2006
(Unaudited)
INTEREST-EARNING ASSETS
Federal funds sold and other money market funds
Investment securities(l)(2)
Loans(2)(3)
Total interest-earning assets
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits
Savings
Time
Total interest-bearing deposits
Federal funds purchased
Other borrowings
Subordinated debt
Total interest-bearing liabilities
Net interest income
Net interest rate spread(4)
Net interest margin(5)
2007 and 2006 is due to elimination of the special
dividend. Per share amounts have been restated to
give retroactive effect to the 1% common stock div
idend of January 1, 2008.
NET INTEREST MARGIN FOR QUARTER ENDED
December 31, 2006
December 31, 2007
Average
Balance(l)
Interest
Average Average
Balance(l)
Rate
Interest
Average
Rate
$
951
242,596
222,208
$465,755
$
13
3,541
4,125
$7,679
$ 47,497
75,332
185,152
$ 235
197
2,220
307,981
2,374
68,589
5,155
2,652
29
849
93
5.2%c
5.8%e
7.4%)
6.6%e
2.0%e
1.0%c
4.S%
3.4%
4.8%
4.9%
7.0%e
$ 9,882
231,009
202,709
$443,600
$ 132
3,231
3,773
$7,136
5.3%c
5.6%
7.3%
6.4%
$ 48,286
80,207
169,222
$ 225
207
1,942
1.9%c
1.0%
4.6%
297,715
2,374
3.2%
59,795
792
5.2%
$384,099
$3,623
3.7%e
$357,510
$3,166
3.5%
$4,056
$3,970
2.9%
3.5%,
2.9%
3.5%
(1) Includes both taxable and tax exempt securities.
(2) Tax exempt interest is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%.
(3) Includes loan origination and commitment fees.
(4) Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest bearing liabilities.
(5) Interest margin is calculated by dividing the difference between total interest earned and total interest expensed by total interest-earning
assets.
Tax equivalent net interest income for the Company
during the fourth quarter of 2007 increased by $86, a
2.2% increase from the fourth quarter of 2006. The
yield on eaming assets increased by 19 basis points
while fourth quarter average earning assets increased
by 5.0%, or $22,155, when compared to a year ago.
The result was an increase in tax equivalent interest
income of $543. The rate paid on interest-bearing
liabilities increased by 23 basis points, while fourth
quarter average interest-bearing liabilities increased
by $26,589 when compared to a year ago, resulting in
an increase in total interest expense of $457. The net
interest margin for the quarter registered 3.49%,
down 6 basis points from the same quarter a year ago.
Q
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
TIAND
The following table shows financial results by quarter for the years ending December 31, 2007 and 2006:
FINANCIAL RESULTS BY QUARTER
(Unaudited)
2007
For the Quarter Ended
Sept. 30
June 30
March 31
Dec. 31
2006
For the Quarter Ended
Sept. 30
June 30
March 31
$ 7,344
3,651
$ 7,251
3,495
$ 6,930
3,216
$ 6,889
3,166
$ 6,796
2,980
$ 6,493
2,783
$ 6,319
2,653
3,693
3,756
3,714
5
35
749
(3,132)
1,350
275
$ 1,075
$ 0.24
$ 1,048
$ 0.23
20
27
(1)
719
(3,206)
1,315
258
$ 1,057
$ 0.24
$ 1,027
$ 0.23
12
16
696
(3,063)
1,375
273
$ 1,102
$ 0.24
$ 1,086
$ 0.24
3,723
(50)
3,816
(45)
37
(12)
747
(2,962)
1,483
301
13
(7)
703
(3,041)
1,439
296
3,710
(64)
18
42
(28)
700
(3,049)
1,329
253
$ 1,182
$ 0.26
$ 1,166
$ 0.26
$ 1,143
$ 0.25
$ 1,139
$ 0.25
$ 1,076
$ 0.24
$ 1,057
$ 0.24
3,666
(66)
14
608
(2,969)
1,253
78
$ 1,175
$ 0.26
$ 1,020
$ 0.23
Dec. 31
$ 7,467
3,623
3,844
(40)
40
10
761
(3,194)
1,421
305
$ 1,116
$ 0.25
$ 1,083
$ 0.24
$ 4,056
2.9%
3.5%
$ 3,911
2.7%
3.4%
$ 3,984
2 . 7%
3.5%
$ 3,950
2.8%,
3.5%
$ 3,970
2.9%)
3.5%
$ 4,067
3.1%,
3.7%)
$ 3,973
3.0%
3.7%
$ 3,939
3.1%o
3.1%
Interest Income
Interest Expense
Net Interest Income
Loan Loss Provision
Net Security Gains
Net Gain on Loans
Other real estate losses
Other Income
Other Expenses
Income Before Tax
Federal Income Tax
Net Income
Net Income Per Share
Net Core Income
Net Core Income Per Share
Net Interest Income
(fully taxable equivalent
basis)
Net Interest Rate Spread
Net Interest Margin
Loan charge-offs during the quarter were $191 in
2007 compared to $67 in 2006, while the recovery of
previously charged-off loans amounted to $28 during
the fourth quarter of 2007 compared to $19 in the
same period of 2006. The Company's provision for
loan losses during the quarter was $40 compared to
$50 a year ago.
Other income increased by $14 or 1.9% from a year
ago. The net gain on loans sold during the quarter
amounted to $10, compared to $37 a year ago. Loss
on the sale of other real estate decreased from $12 in
2006 to none in 2007. The early call of held to
maturity securities, and transactions involving avail
able for sale securities produced gains of $40 in the
fourth quarter of 2007 compared to none in the same
quarter of 2006.
Total other non-interest expenses in the fourth quarter
were $3,194 in 2007 compared to $2,962 in 2006, an
increase of $232 or 7.8%. Salaries and benefits con
stituted a $72 increase, or 4.3%. Bank exam and audit
fees increased by $14 or 11.6% mainly due to the
the
timing
associated with
expenses
of
implementation of the requirements of Section 404
of the Sarbanes-Oxley Act of 2002. Other expenses
increased by $146 or 12.7%. The increase is due in
part to expenses associated with the Company's Stra
tegic Growth Plan. These expenses include costs for
professional consulting, information system software
licensing and maintenance and educational programs
for Company's employees.
Income before income tax during the fourth quarter
amounted to $1,421 in 2007 compared to $1,483 in
2006. Income tax expense for the fourth quarter of 2007
was $305 as compared to $301 in 2006. Fourth quarter
net income was $1,116 in 2007 compared to $1,182 in
2006, representing a decrease of $66, or 5.6%.
Earnings per share for the fourth quarter, adjusted for
the 1% stock dividend paid January 1, 2008, were
$0.25 in 2007 and $0.26 in 2006.
Core earnings (earnings before gains on loans sold,
investment securities sold or called and certain other
non recurring items) decreased by 7.1% in the fourth
quarter of 2007 compared to 2006. Core eamings for
the fourth quarter of 2007 were $1,083 compared to
s
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
LOAN PORTFOLIO
The following table represents the composition ofthe loan portfolio as ofDecember 31, for the years indicated:
Types of Loans
1 -4 family residential
mortgages
Commercial mortgages
Consumer loans
Commercial loans
Home equity loans
1-4 family residential loans
held for sale
2007
2006
Balance
%
Balance
2005
Balance
2004
2003
Balance
Balance
$ 68,135
120,950
8,484
14,981
10,559
30.5
54.3
3.8
6.7
4.7
$ 62,882
106,160
7,745
17,505
10,807
30.6
5L7
3.8
8.5
5.3
$ 59,910
90,983
6,714
19,767
10,828
31.8
48.3
3.6
10.5
5.8
$ 61,238
94,019
6,087
19,188
11,245
31.9
49.0
3.2
10.0
5.9
$ 57,854
92,822
7,231
21,711
9,541
30.6
49.0
3.8
11.5
5.0
109
0.1
103
0.1
Total loans
$223,109
$205,208
$188,202
$191,777
$189,262
The following schedule sets forth maturities based on remaining scheduled repayments of principal or next
repricing opportunity for loans (excluding mortgage and consumer loans) as ofDecember 31, 2007:
Types of Loans
Commercial loans
Home equity
1 Year
or Less
l to
5 Years
Over
5 Years
. . $ 4,737
$4,560
$5,684
10,559
Total
$14,981
10,559
Total loans (excluding
consumer loans) . .
mortgage and
. . $15,296
$4,560
$5,684
$25,540
The following schedule sets forth loans as of December 31, 2007 based on next repricing opportunity for floating
and adjustable interest rate products, and by remaining scheduled principal payments for loan products with fixed
rates of interest. Mortgage and consumer loans have again been excluded.
Types of Loans
Floating or adjustable rates of interest
Fixed rates of interest
Total loans (excluding mortgage and
consumer loans)
1 Year
or Less
. . $14,962
334
Over
1 Year
$ 1,243
9,001
Total
$16,205
9,335
. . $15,296
$10,244
$25,540
D
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
The Company recorded an increase of $17,901 in the
loan portfolio from the level of $205,208 recorded at
December 31, 2006.
Between 2006 and 2007, the balance of residential
mortgage loans remained relatively unchanged. 1-4
family residential mortgages represent 30.5% oftotal
loans in the loan portfolio compared to 30.7% in
2006. The portion ofthe loan portfolio represented by
commercial loans (including commercial real estate)
increased from 60.2% in 2006 to 61.0% in 2007.
Consumer
loans)
decreased from 9.1% in 2006 to 8.5% in 2007.
loans (including home equity
Real estate loans which include residential loans and
commercial loans continue to comprise the largest
share of the Company's loan portfolio. At the end of
2007, residential loans and commercial loans com
prised a combined 91.5% of the portfolio, compared
to 90.5% five years ago. Home equity loans at 4.7%
and consumer installment at 3.8% comprise the
remainder of the portfolio in 2007.
LOAN PORTFOLIO COMPOSITION
(In Percentages)
Home Equity
47
Consumer
3.8
1-4 Family
iVlortgages
30.5
Home Equity
4 4
1-4 Family
Mortgages
33.6
2007
2002
During 2007, approximately $16,300 in new mort
gage loans were originated by the Company, an
increase of approximately $1,100 from 2006.
The following shows the disposition of mortgage
loans originated during 2003 to 2007 (in millions):
2007
2006
2005
2004
2003
Retained in
Portfolio
Loans Sold to
Investors with
Servicing
Rights
Released
$10.1 $8.3 $7.6 $8.0 $11.6
$ 6.2 $6.9 $6.6 $4.0 $27.3
TLAND
The Company's product offerings continue to include
a service release sales program, which permits the
Company to offer competitive long-term fixed inter
est rates without incurring additional credit or interest
rate risk.
During 2007, the Company sold fewer residential
mortgage loans under the service release sales pro
gram but originated and retained approximately
$1.5 miUion more in portfolio loans in comparision
to 2006 totals. Mortgage loan originations are typi
cally qualified for sale to investors in the secondary
market, but are occasionally retained in portfolio
when requested by a customer or to enhance account
relationship for certain customers. The mix of port
folio retained to those sold to investors will vary from
year to year.
The Bank is also active in home equity financing.
Home Equity term loans and credit lines remain
popular with consumers wishing to finance home
improvements, educational costs, vacations and con
sumer goods purchased at favorable interest rates.
In order to improve customer retention and provide
better overall balance, management also will con
tinue to revamp and reposition the Company's In-
Portfolio product offerings during 2008.
The balance of the commercial loan portfolio as of
December 31, 2007 was $135,931, an increase of
$12,266 from the balance of $123,665 recorded at
term, asset based
December 31, 2006. Short
commercial loans including lines of credit decreased
by $2,524. Commercial real estate loans increased by
$14,790 during the same period. The increase in these
loans has primarily resulted from a marketing cam
paign and an aggressive calling program designed to
increase market share for commercial and small
business loans secured by real estate.
rate commercial
real estate products
Management in recent years has offered longer term
fixed
to
qualifying customers in an effort to establish new
business relationships and capture additional market
share. Loan personnel will continue to aggressively
pursue both commercial and small business oppor
incentives and
tunities
supported by product
Q
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
marketing efforts. The Bank's lending function con
tinues to provide business services to a wide array of
medium and small businesses, including but not lim
ited to commercial and residential real estate build
trucking
ers, automobile dealers, manufacturers,
companies, nursing homes, physicians and medical
groups, funeral homes, general contractors, service
contractors,
retailers,
wholesalers, as well as area educational institutions
and other political subdivisions.
restaurants, hotels/motels,
Small business loans are originated by loan personnel
assigned to the Community Bank offices. These loans
are processed in accordance with established busi
ness loan underwriting standards and practices.
The following table provides an overview of com
mercial loans by various business sectors reflecting
the areas of largest concentration. It should be noted
that these are open balances and do not reflect exist
ing commitments that may be currently outstanding
but unfunded.
Commercial Loan Concentrations
Sector
Non Residential
Building/
Apartment
Building
Hotels/Motels
Real Property
Lessors
Eating Places
Steel Related
Industries
2007
% of
2006
% of
Balances Portfolio
Balances Portfoho
$25,879
23,608
19.36%)
17.66 %c
$17,963 14.82%
12,374 10.21%
7.175
6,925
5.31%
5.18 %c
8,315
7,575
6.86%
6.25%
5,268
3.94 %c
5,200
4.29%
The single largest customer balance at year end had a
balance of $7,047 in 2007 compared to $4,900 in
2006. This balance represented approximately 5.2%
of the total commercial portfolio, compared to 4.0%
in 2006.
In the consumer lending area, the Company provides
financing for a variety of consumer purchases: fixed
rate amortizing mortgage products that consumers
utilize for home improvements; the purchase of con
sumer goods of all types; education, travel and other
personal expenditures. The consolidation of credit
card and other existing debt into term payout
m
continues to remain a popular financing option
among consumers.
Additional information regarding the loan portfolio
can be found in the Notes to the Consolidated Finan
cial Statements (NOTES 1, 3, 9, 12 and 14).
INVESTMENT SECURITIES
In accordance with Statement of Financial Account
ing Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities,"
investment securities are segregated into three sepa
rate portfolios: held to maturity, available for sale,
and trading. Each portfolio type has its own method
of accounting.
Held to maturity securities are recorded at historical
cost, adjusted for amortization of premiums and
accretion of discounts. Trading
securities are
marked-to-market, with any gain or loss reflected
in the determination of income. Securities designated
as available for sale are similarly carried at their fair
market value. However, any unrealized gain or loss
(net of tax) is recorded as an adjustment to share
holders' equity as a component of Other Compre
hensive Income.
One effect of SFAS 115 is to expose shareholders'
equity to fluctuations resulting from market volatility
related to the available for sale portfolio. The poten
tial adverse impact of this volatility is somewhat
mitigated as bank regulatory agencies measure cap
ital adequacy for regulatory purposes without regard
to the effects of SFAS 115.
Securities designated by the Company as held to
maturity tend to be higher yielding but less liquid
either due to maturity, size or other characteristics of
the issue. The Company must have both the intent and
the ability to hold such securities to maturity.
Securities the Company has designated as available
for sale may be sold prior to maturity in order to fund
loan demand, to adjust for interest rate sensitivity, to
reallocate bank resources, or to reposition the port
folio to reflect changing economic conditions and
shifts in the relative values of market sectors. Avail
able for sale securities tend to be more liquid invest
ments and generally exhibit less price volatility as
interest rates fluctuate.
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
ITIAND
The following table shows the book value of investment securities by type of obligation at the dates indicated:
U.S. Treasury and other U.S. Government
agencies and corporations
U.S. Govemment mortgage-backed pass-
through certificates
States of the U.S. and political
subdivisions
Other securities
2007
2006
December 31,
2005
2004
2003
$ 83,995
$ 86,682
$ 80,053
$ 69,670
$ 62,524
83,654
73,921
82,992
91,226
92,499
32,762
38,211
$238,622
40,807
31,693
$233,103
44,714
26,893
$234,652
45,689
19,256
$225,841
53,503
14,249
$222,775
A summary of securities held at December 3 1, 2007, 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.
Type and Maturity or Repricing Grouping
December 31, 2007
Book
Value
Weighted
Average Yield(l)
U.S. Treasury and other U.S. Government agencies and corporations:
Maturing or repricing within one year
Maturing or repridng after one year but within five years
Maturing or repricing after five years but within ten years
Maturing or repricing after ten years
$21,084
8,108
19,114
35,689
Total U.S. Treasury and other U.S. Government agencies and corporations . . . $83,995
U.S. Government mortgage-backed pass-through certificates, REMICS & CMO's:
Maturing or repricing within one year
Maturing or repricing after one year but within five years
Maturing or repricing after five years but within ten years
Maturing or repricing after ten years
$48,570
33,670
1,414
5.484%
4.581
5.305
6.104
5.620%
5.271%
4.963
4.713
Total U.S. Government mortgage-backed pass-through certificates, REMICS
& CMO's
$83,654
5.138%
States of the U.S. and political subdivisions:
Maturing or repridng within one year
Maturing or repricing after one year but within five years
Maturing or repricing after five years but within ten years
Maturing or repricing after ten years
Total States of the U.S. and political subdivisions
Other securities:
Maturing or repricing within one year
Maturing or repridng after one year but within five years
Maturing or repricing after five years but within ten years
Maturing or repridng after ten years
Total other securities
$
155
445
5,185
26,977
$32,762
$28,192
2,403
2,031
5,585
$38,211
8.376%
7.525
6.998
7.234
7.206%
6.953%
5.733
7.182
7.629
6.987%
(1) The weighted average yield has been computed by dividing the total interest income adjusted for amortization of premium
or accretion of discount over the life of the security by the amortized cost of the securities outstanding. The weighted
average yield of tax-exempt obligations of states of the U.S. and political subdivisions has been calculated on a fully
taxable equivalent basis. The amounts of adjustments to interest which are based on the statutory tax rate of 34%, were $5,
$10, $111 and $585 for the four ranges of maturities.
As of December 31, 2007, there were $42,156 in
callable U.S. Government Agencies, and $9,591 in
callable obligations of states and political subdivi-
sions that given current and expected interest rate
I
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
ASSET-LIABILITY MANAGEMENT
The Company's executive management and Board of Directors routinely review the Company's balance sheet
structure for stability, liquidity and capital adequacy. The Company has defined a set of key control parameters
which provide various measures ofthe Company's exposure to changes in interest rates. The Company's asset-
liability management goal is to produce a net interest margin that is relatively stable despite interest rate volatility
while maintaining an acceptable level of earnings. Net interest margin is the difference between total interest
earned on a fully taxable equivalent basis and total interest expensed. The net interest margin ratio expresses this
difference as a percentage of average earning assets. In the past five years, the net interest margin ratio has
averaged 3.73% ranging between 3.45% and 3.94%.
Included among the various measurement techniques used by the Company to identify and manage exposure to
changing interest rates is the use of computer based simulation models. Computerized simulation techniques
enable the Company to explore and measure net interest income volatility under altemative asset deployment
strategies, different interest rate environments, various product offerings and changing growth patterns.
GAP TABLE
December 31, 2007
Maturity or
Repricing
3 Months
or Less
3 to 12
Months
l to 5
Years
Interval
Non Rate
Sensitive
or >5
Years
$
76
91,432
65,819
155
$
58,316
56,225
$
78,811
89,847
$
157,482
114,541
168,658
10,063
11,218
21,281
30,732
Total
$
76
238,622
223,109
155
461,962
30,732
$ 157,482
$114,541
$168,658
$ 52,013
$492,694
$ 23,460
19,698
74,024
18,522
26,729
4,644
594
1,175
5,155
5,500
179,501
$
$
$
37,527
49,914
9,574
32,047
2,895
12,174
6,000
93,441
28,000
69,621
24,500
39,569
58,224
3,514
48,824
$ 23,460
19,698
74,024
68,518
120,864
4,644
594
1,175
5,155
64,000
382,132
58,224
3,514
48,824
$ 179,501
$ 93,441
$ 69,621
$ 150,131
$492,694
$ (22,019)
$ 21,100
$ 99,037
($18,288)
($22,019)
($919)
$ 98,118
$ 79,830
Interest-Earning Assets
Interest-Bearing Balance from Depository
Institution
Investments
Loans & Leases
Investment in Nonconsolidated Subsidiary
Total Eaming Assets
Other Assets
Total Assets
Interest-Bearing Liabilities
Interest-bearing Checking
Money Market Accounts
Passbook Savings
Time Deposits £100,000
Time Deposits < 100,000
Repurchase Agreements
U.S. Treasury Demand
Federal Funds Purchased
Subordinated Debt
Other Borrowings
Total Interest-Bearing Liabilities
Demand Deposits
Other Liabilities
Shareholders' Equity
Total Liabilities & Equity
Rate Sensitivity Gap
Cumulative Gap
Cumulative Gap to Total Assets
(4.5)%.
(0.2) %<,
19.9%
16.2%,
B
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
The preceding Gap Table presents an analysis of the
Company's earliest repricing opportunity for each of
its interest-earning assets and interest-bearing liabil
ities. Assets are distributed according to the earlier of
interest rate repricing opportunity or expected cash
flows. Time deposits and liabilities with defined
maturities are distributed according to the earlier
of the repricing interval or contractual maturity.
Other core deposit accounts (Interest-bearing check
ing. Money Market and Savings accounts) are shown
as being available for repricing in the earliest time
frame, although management can exert considerable
influence over the timing and manner of repricing
such core deposits. Therefore, these accounts may
reprice in later time intervals and reflect smaller
interest-eaming
incremental changes
assets and interest-bearing liabilities. Since manage
ment may reprice these accounts at its discretion, the
impact of changing rates on net interest income is
likely to be considerably different than inferred by
this table.
than other
During 2007, the effective maturities of eaming assets
tended to shorten as rates in the credit markets fell
sharply. Federal Reserve policy makers decreased
short-term interest rates three times during the year,
from 5.25% to 4.25% in an attempt to ease strains in the
financial market, soften the effects of the housing cor
rection and to help avoid a recession. With rates faUing
during the year, the volume of investment securities
eUgible to be called increased, while prepayments on
similarly
loans and mortgage-backed
increased, causing the effective maturities of existing
earning assets to shorten. Management invested excess
ovemight funds (federal funds sold balances), with an
increased allocation towards adjustable and floating
rate corporate bonds, and U.S. Govemment agencies
purchased at a discount that contain a lock-out period
prior to the first caU date and mortgage-backed
securities.
securities
While the preceding Gap Table provides a general
indication of the potential effect that changing inter
est rates may have on net interest income, it does not
by itself present a complete picture of interest rate
sensitivity. Because the repricing of the various cat
to
egories of assets and
is subject
liabilities
a^IAND
competitive pressures, customer preferences and
other factors, such assets and liabilities may in fact
reprice in different time periods and in different
increments than assumed.
The computerized simulation techniques utilized by
management provide a more sophisticated measure
of the degree to which the Company's interest sen
sitive assets and liabilities may be impacted by
changes in the general level of interest rates. These
analyses show the Company's net interest income
remaining relatively neutral within the economic and
interest rate scenarios anticipated by management.
As previously noted, the Company's net interest
margin has remained in the range of 3.45% to
3.94% over the past five years, a period characterized
by significant shifts in the mix of earning assets and
the direction and level of interest rates. The targeted
federal funds rate during that period ranged from
1.00% to 5.25%, as Federal Reserve monetary policy
tumed from guarding against deflation to warding off
inflationary threats and now back to attempting to
avoid a recession.
NET INTEREST MARGIN RATIO
(In Percentages)
3.67
3.83
3.74
3.94
^ ^m ^m M
• •• —
2007
2006
2005
2004
2003
5.0
4.5
4.0
3.5
3.0
2.5
2.0
LIQUIDITY
The central role of the Company's liquidity manage
ment is to (1) ensure sufficient liquid funds to meet
the normal transaction requirements of its customers,
(2) take advantage of market opportunities requiring
flexibility and speed, and (3) provide a cushion
against unforeseen liquidity needs.
Principal sources of liquidity for the Company
include assets considered relatively liquid, such as
M
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
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.
Consolidated Statements of Cash Flows for a sum
mary of the sources and uses of cash for 2007, 2006
and 2005. The following table details the cash flows
from operating activities.
December 31,
Net income
Adjustments to
reconcile net
income to net cash
flows from
operating activities:
Depreciation,
amortization and
accretion
Provision for loan
loss
Investment
securities gains
Other real estate
losses
Impact of loans
held for sale
Changes in:
Securities to
settie and
securities sold
to setde
Purchase of
insurance
contracts
Other assets and
liabilities
2006
2007
2005
$4,350 $4,576 $ 4,334 $ 4,843 $ 5,484
2003
2004
775
991
1,469
2,176
2,382
40
225
545
415
240
(77)
(18)
(308)
(1,052)
(946)
1
47
3
171
109
(109)
103
1,919
(1,270)
1,270
(128)
(500) (2,500)
(189)
(502)
(498)
(44)
469
Net cash flows from
operating activities
$5,009 $5,082 $ 4,275 $ 7,382 $ 7,048
CONTRACTUAL OBLIGATIONS AND
COMMITMENTS
The Corporation has various obligations, including
contractual obUgations and commitments that may
require future cash payments.
Contractual Obligations: The following table pre
sents, as of December 31, 2007, significant fixed
and determinable contractual obligations to third
parties by payment date. Further discussion of the
nature of each obligation is included in the referenced
note to the consolidated financial statements.
Anticipated principal repayments on mortgage-
backed securities along with investment securities
maturing, repricing, or expected to be called in one
year or less amounted to $149,748 at December 31,
2007, representing 62.8% ofthe total combined port
foUo, as compared to $77,463 or 33.2% of the port
folio a year ago.
Along with its liquid assets, the Company has other
sources of liquidity avaUable to it which help to
ensure that adequate funds are available as needed.
These other sources include, but are not limited to,
the ability to obtain deposits through the adjustment
of interest rates, the purchasing of federal funds, and
access to the Federal Reserve Discount Window. The
Company is also a member ofthe Federal Home Loan
Bank of Cincinnati, which provides yet another
source of liquidity.
Cash and cash equivalents decreased from $19,237 in
2005 to $14,375 in 2006, then to $9,441 in 2007.
Operating activities provided cash of $5,009 in 2007,
$5,082 in 2006 and $4,275 in 2005. Key differences
stem mainly from: 1) a decrease in net income of
$226 between 2007 and 2006 and a $242 increase
between 2005 and 2006; 2) there were no loans held
for sale at December 31, 2007 and 2005 and $109 at
2006; 3) gains on the sale of investments, was $308 at
December 31, 2005, $18 at December 31, 2006 and
$77 in 2007; 4) amortization on securities was $199
in 2007 compared to $506 in 2006 and $872 in 2005 ;
5) loss on the sale of other real estate totaled $47 in
2006 and $3 in 2005 compared to $1 in 2007; 6) the
purchase ofan additional $128 of insurance contracts
on the lives of participants in the supplemental post
retirement benefit plan in 2006 and none in 2007 or
2005; 7) a liability for securities purchased yet to
settie totaled $ 1,270 at December 31,2004, with none
at December 31, 2005, 2006 or 2007. Refer to the
M
CORTLAND BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In thousands of dollars, except for per share amounts)
IIAND
Contractual Obligations
as of December 31, 2007
Payments Due in
Three
to
Five
Years
One
to
Three
Years
Over
Five
Years
One
Year
or
Less
5 58,224
117,182
1.33%
Total
& 58,224
117,182
1.33%
124,637
29,772
18,989
15,984
189,382
4.69%
4.63%
5.01%
4.63%
4.71%
5,819
3.80%
594
3.59%
6,000
5.24%
24,000
5.50%
9,500
5.09%
131
168
45
5,819
3.80%
594
3.59%
24,500
64,000
4.13%
5,155
6.44%
4.89%
5,155
6.44%
344
Sec
Note
6
6
7
7
7
8
9
Non-interest bearing deposits
Interest bearing deposits(a)
Average Rate(b)
Certificates of deposit(a)
Average Rate(b)
Federal funds purchased and security
repurchase agreements(a)
Average Rate(b)
U.S. Treasury interest-bearing demand
note(a)
Average Rate(b)
Federal Home Loan Bank advances(a)
Average Rate(b)
Subordinated debt
Average Rate(b)
Operating leases
(a) Excludes present and future accrued interest.
(b) Variable rate obligations reflect interest rates in effect at December 31, 2007.
The Corporation's operating lease obligations repre
sent short and long-term lease and rental payments
for the subsidiary bank's branch facilities.
The Corporation also has obUgations under its sup
plemental retirement plans as described in Note 10 to
the consolidated financial statements. The postretire
ment benefit payments represent actuarially deter
to eligible plan
mined future benefit payments
participants. The Corporation does not have any
commitments or obligations to the defined contribu
tion retirement plan (401(k) plan) at December 31,
2007 due to the funded status ofthe plan. (See further
discussion in Note 10.)
table details
Commitments: The
the
following
amounts and expected maturities of significant com
mitments as ofDecember 31, 2007. (Further discus
sion of these commitments is included in Note 9 to
the consolidated financial statements.)
Expected Maturities of Commitments
as of December 31, 2007
One
Year
or
Less
One
to
Three
Years
Tiiree
to
Five
Years
Over
Five
Years
Total
Commitments to extend
credit:
Commercial
$ 8,672
$1,522
$348
$16,007
$26,549
Residential real estate
224
Revolving home equity
11,468
Overdraft protection
11,698
Ottier
Standby letters of credit
460
1,179
224
11,468
11,698
460
1,179
Commitments to extend credit, including loan com
mitments, standby letters of credit, and commercial
letters of credit do not necessarily represent future
cash requirements, in that these commitments often
expire without being drawn upon.
B
THE CORTLAND SAVINGS AND BANKING COMPANY
TLAND
BOARD OF DIRECTORS
JERRYA. CARLETON
President, Carleton Enterprises Inc.
DAVID C. COLE
Partner and President
Cole Valley Motor Company
LAWRENCE A. FANTAUZZI
President and Chief Executive Officer
JAMES M. GASIOR
Senior Vice President, Chief Financial Officer
and Secretary
GEORGE E. GESSNER
Attorney
JAMES E. HOFFMAN III
Attomey
NEIL J. KABACK
Partner, Cohen & Company
K. RAY MAHAN
President, Mahan Packing Co.
and Chairman of the Board
RICHARD B. THOMPSON
Executive, Therm-O-Link, Inc.
TIMOTHY K. WOOFTER
President, Stan-Wade Metal Products
WILLIAM A. HAGOOD
Director Emeritus
RODGER W. PLATT
Director Emeritus
OFFICERS
LAWRENCE A. FANTAUZZI
President and Chief Executive Officer
JAMES M. GASIOR
Senior Vice President, Chief Financial Officer
and Secretary
STEPHEN A. TELEGO, SR.
Senior Vice President and Director of Human Resources and Corporate
Administration
TIMOTHY CARNEY
Senior Vice President & Chief Operations Officer
CRAIG M. PHYTHYON
Senior Vice President, Chief Investment Officer and Treasurer
DANNY L. WHITE
Senior Vice President and Chief Lending Officer
CHARLES J. COMMONS
Vice President
MARLENE LENIO
Vice President
M
EMMA JEAN WOLLAM
Vice President
ROBERT J. HORVATH
Vice President
JUDY RUSSELL
Vice President
JAMES DUFF
Vice President
KEITH MROZEK
Vice President
DEBORAH L. EAZOR
Vice President
KAREN GLOWER
Vice President
GREG YURCO
Group-Vice President
JOAN M. FRANGIAMORE
Vice President
BARBARA R. SANDROCK
Vice President
WILLIAM J. HOLLAND
Group-Vice President
MICHAEL MATTOCKS
Group-Vice President
DEAN S. EVANS
Vice President
MARCEL R ARNAL
Assistant Vice President
GRACE J. BACOT
Assistant Vice President
SHIRLEY E ROOT
Assistant Vice President
DARLENE MACK
Assistant Vice President
and Trust Officer
JANET K. HOUSER
Assistant Vice President
RUSSELL E. TAYLOR
Assistant Vice President
BARBARA McKENZIE
Assistant Vice President
JAMES HUGHES
Assistant Vice President
SHIRLEY A. WADE
Assistant Vice President
CHRISTOPHER MADURA
Assistant Vice President
MICHELE LEE
Assistant Vice President
LANA MUIR
Assistant Secretary-Treasurer
HEATHER J. BOWSER
Assistant Secretary-Treasurer
KAREN MILLER
Assistant Secretary
CORTLAND BANKS OFFICES AND LOCATIONS
Thirteen Offices Serving These Fine Communities
BOARDMAN
8580 South Avenue
Youngstown, Ohio 44514
330-758-5884
CORTLAND
194 West Main Street
Cortiand, Ohio 44410
330-637-8040
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
330-394-1438
BOARDMAN
Victor Hills Plaza
6538 South Avenue
Boardman, Ohio 44512
330-629-9151
BRISTOL
6090 State Route 45
Bristolville, Ohio 44402
330-889-3062
HUBBARD
890 West Liberty Street
Hubbard, Ohio 44425
330-534-2265
WARREN
2935 Elm Road
Warren, Ohio 44483
330-372-1520
MANTUA
11661 State Route 44
Mantua, Ohio 44255
330-274-3111
WILLIAMSFIELD
5917 U.S. Route 322
Williamsfield, Ohio 44093
440-293-7502
BROOKFIELD
7325 Warren-Sharon Road
Brookfield, Ohio 44403
330-448-6814
NILES PARK PLAZA
815 Youngstown-Warren Road
Suite 1
Niles, Ohio 44446
330-652-8700
WINDHAM
8950 Maple Grove Road
Windham, Ohio 44288
330-326-2340
NORTH BLOOMFIELD
8837 State Route 45
North Bloomfield, Ohio 44450
440-685-4731
Member
Federal Reserve System
and
Federal Deposit Insurance Corporation
Visit US at our home page on the world wide web at
www.cortland-banks.com
or e-mail us at cbinfoCs'cortland-banks.com
M e m b er
FDIC
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