ANNUAL REPORT
2019
2019 Letter to Shareholders
Dear Fellow Shareholders:
I am pleased to tell you that Cortland Bank finished another successful year, meeting our profitability goals and achieving solid financial
performance in several notable areas. Despite a changing rate environment that challenged the profitability of many banks, we expanded our net
interest margin and our return on assets and equity were in line with those of all publicly traded Ohio Banks.
Throughout calendar year 2019 we achieved modest loan growth despite a higher-than-normal level of loan payoffs, while core deposits and
overall average deposits continued to grow. Highlights of such success are best exemplified by deposit growth in two of our newer branches in the
communities of Hudson and Canfield, which recorded deposit growth rates of 40% and 9% respectively. Our mortgage lending team also receives
special recognition for wrapping up a banner year, demonstrated by strong volume, improved margin and an overall increase in income from
secondary market sales.
Since it has worked so well for us in the past, we continued our focus last year on organic growth through branch expansion. In early 2019, we
opened our branch in Strongsville, which became our 14th location and allowed us to extend our geographic footprint westward. We continued our
long legacy—more than 30 years—in the Hubbard Ohio community by breaking ground on a new contemporary branch facility which opened in
early 2020. The new branch is not only a visibly appealing upgrade from the previous location, but it is also strategically located for growth in the
heart of the community.
A highlight of the year was our transition to the Nasdaq Capital Market stock exchange. This move significantly enhances our visibility on the
national exchange level and allows us to attract more institutional investors in order to better diversify our shareholder base.
Enhancing shareholder value remained a top priority for our Board which rewarded our investors for their continued loyalty to the bank by
authorizing a special $.05 dividend at year end and increasing the regular quarterly dividend (effectively raising the dividend yield to 2.7%). Such
return is highly attractive in light of expectations of margin compression and revenue and earnings pressures, resulting from a low-interest rate
environment. The Bank is working to continue to increase earnings per share through its aggressive stock repurchase program.
As we look to enhance shareholder value, we are working to bring added value to our customers in other ways, as well. Over the last three years,
Cortland Bank has launched online account opening, online mortgage application processing, and online financial education. We also plan to
implement technology solutions to streamline processing of certain small business credits and automated boarding of loans which will reduce
turnaround time for loan approvals and improve the overall customer experience. Ever alert to changes in the market that could threaten the
security of our customers’ finances, we recruited a new board member in 2019—Hicham Chahine—who previously served as an information
systems and security executive. His expertise has proven invaluable in helping us to identify vulnerabilities and put in place new security safeguards
designed to protect customers, as well as the Bank.
As a community bank, we take great pride in reinvesting in the communities that have served us so well for so long. We do that by providing
volunteers and financial support to area schools, as well as multiple nonprofits and community-based organizations. We continue to be recognized
as a United Way Change Maker and, in 2019, Junior Achievement of the Mahoning Valley honored Cortland Bank with its Special Events Partner
award. We sponsored the Mahoning Valley Economic Development Corp’s Edge Revolving Loan Fund that provides access to capital for small
business owners in economically disadvantaged populations. These are just a few of the many examples of our Bank giving back to the community.
Between our strong track record of solid financial performance, our ability to compete with the larger regional and national banks, and our
long-standing reputation for supporting the neighborhoods where we do business, we have continued to demonstrate our superior value
proposition.
On behalf of our directors, officers and employees, we thank you for your ownership, confidence in and commitment to our community bank. I look
forward to updating you as this year unfolds and hope to see you at our annual shareholder meeting on April 29, 2020.
Sincerely,
James M. Gasior
President and Chief Executive Officer
Photography by Libby Greene/Nasdaq, Inc.
1
Financial Highlights
Amounts in thousands, except per share data
SUMMARY OF OPERATIONS
2019
$ 24,089
Net interest income
2018
2017
$ 23,366 $ 20,302
Provision for loan losses
$ 715
$ 725 $ 100
Non-interest income
Non-interest expense
$ 5,022
$ 5,692 $ 5,166
$ 19,755
$ 18,083 $ 18,601
Income before income tax
$ 8,641
$ 10,250 $ 6,767
Federal income tax expense
$ 1,359
$ 1,415 $ 2,417
Net income
$ 7,282
$ 8,835 $ 4,350
PER COMMON SHARE DATA
Earnings per share
Dividends per share
Book value
BALANCE SHEET DATA
Assets
$ 1.68
$ 2.03 $ 0.99
$ 0.50
$ 0.49 $ 0.39
$ 17.19
$ 14.92 $ 13.94
$ 737,162
$ 714,666 $ 711,101
Investment securities
$ 138,966
$ 139,504 $ 162,422
Total loans
Total deposits
Borrowings
$ 518,716
$ 514,392 $ 487,490
$ 618,381
$ 604,419 $ 585,851
$ 31,077
$ 35,361 $ 53,833
Shareholders’ equity
$ 74,338
$ 64,918 $ 61,630
FINANCIAL RATIOS
Return on average equity
Return on average assets
Net interest margin
Efficiency ratio
Dividend payout
10.32%
1.04%
3.79%
67.01%
29.76%
14.36%
1.31%
3.76%
64.82%
24.14%
7.25%
0.68%
3.59%
72.92%
39.39%
ASSET QUALITY RATIOS
Net charge-offs to average loans
Non-performing assets as a % of assets
0.09%
1.16%
0.23%
1.42%
0.09%
0.85%
CAPITAL RATIOS
Tier 1 capital
Total capital
Tier 1 leverage capital
Common Equity tier 1 capital
13.63%
14.43%
10.98%
12.76%
12.88%
13.63%
10.72%
12.01%
12.91%
13.79%
10.77%
11.97%
Earnings Per Share
Well Capitalized
Total Revenues
in thousands
Loans and Deposits
in millions
2
Board of Directors
TIMOTHY K. WOOFTER
Chairman of the Board
President and Chief Executive Officer, Stan-Wade Metal Products
Tank Manufacturer and Oil Equipment Distributor
THOMAS P. PERCIAK
Vice Chairman of the Board
Mayor, Strongsville, OH
Government
TIMOTHY CARNEY
Executive Vice President and Chief Operating Officer
Cortland Bancorp and The Cortland Savings and Banking Company
DAVID C. COLE
Partner and President, Cole Valley Motor Company
Automobile Dealership
HICHAM CHAHINE
Retired Principal
Crowe LLP.
JAMES M. GASIOR
President and Chief Executive Officer
Cortland Bancorp and The Cortland Savings and Banking Company
Executive Officers
JAMES M. GASIOR
President
& Chief Executive Officer
TIMOTHY CARNEY
Executive Vice President
& Chief Operating Officer
JAMES E. HOFFMAN, III
Attorney, Hoffman and Walker
Law Firm
NEIL J. KABACK
Vice President, Cohen & Company, Ltd.
Accounting Firm
JOSEPH E. KOCH
President, Joe Koch Construction
Homebuilding, Developing and Remodeling Company
JOSEPH P. LANGHENRY
Managing Principal, Langhenry Venture Partners
Investment Firm
RICHARD B. THOMPSON
Executive, Therm-O-Link, Inc.
Electrical Wire and Cable Manufacturer
ANTHONY R. VROSS
Executive, Simon Roofing
Commercial Roofing and Industrial Roof Maintenance
DIRECTOR EMERITUS
K. RAY MAHAN
DAVID J. LUCIDO
Senior Vice President
& Chief Financial Officer
STANLEY P. FERET
Senior Vice President
& Chief Lending Officer
Shareholder Information
Shareholder Contact
Information
Cortland Bancorp
194 West Main Street
Cortland, OH 44410
330.282.4132
www.cortlandbank.com/invest
Quarterly Financial
Releases
Cortland Bancorp’s financial results
are available quarterly. Releases are
available on Cortland Bancorp’s
website,
www.cortlandbank.com/invest.
Copies can also be obtained by calling
330.282.4132.
NASDAQ: CLDB
Annual Meeting of Shareholders
The Company’s 2020 Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, April 29, 2020 at
Squaw Creek, 761 Youngstown Kingsville Road SE, Vienna, OH 44473.
American Stock Transfer
Mailing Address and Registered Overnight Packages:
American Stock Transfer & Trust Company, LLC., 6201 15th Avenue , Brooklyn, NY 11219
Toll Free: (800) 934-5449 or (888) 509-4619 Local & International: (718) 921-8124
TDD: (866) 703-9077 (toll free for hearing impaired) TDD: (718) 921-8124 (local & international for hearing impaired)
Email: help@astfinancial.com
Website: ASTFinancial.com
Dividend Reinvestment and Direct Stock Purchase Plan
Cortland Bancorp offers an Amended and Restated Dividend Reinvestment Plan (DRIP) that allows for the automatic
investment of dividends into additional shares of stock without incurring a brokerage commission or service fee.
Interested shareholders should contact our investor relations department, 330.232.4132.
Direct Deposit of Dividends
Shareholders of record may have their dividends directly deposited into their bank accounts. Interested shareholders
should contact our investor relations department, 330.232.4132.
3
2019 Performance
The foundation of our corporate strategy is to build a significant community business bank and cater to
small and medium-sized companies, their owners and professionals.
Market Expansion
Cortland Bank operates across Cuyahoga, Trumbull, Mahoning, Portage, and Summit counties, with a financial services center in
Fairlawn. In February of 2019, the Bank opened its 14th branch in Strongsville, Ohio. This location offers full-service consumer
and personal banking services, mortgage lending, commercial lending, private banking, and treasury management. Since its opening,
the Strongsville office has seen positive deposit and loan growth.
Construction on a new, freestanding and customer friendly office in Hubbard, Ohio was completed and opened on
January 6, 2020.
In 2019, total core deposits for the bank grew by 7.1%. The innovative rewards checking account program was expanded to
include a new, higher rate checking and savings account.
Lending
The Bank’s core loan portfolio grew by more than 4.2%, led by 4.3% core growth in commercial and industrial loans.
The mortgage lending team originated over $87 million in residential real estate loans in 2019, while the commercial lending
team originated more than $119 million in new loans.
Wealth Partner
Cortland Private Wealth Management offers customers access to a robust line of services, expanding investment and wealth
management options to include private asset management, financial and estate planning and advisory services.
Your Partner in Technology
Cortland Bank strives to implement the latest technologies consumers seek while still providing face-to-face interactions and
assistance with everyday banking transactions. In the last three years, Cortland Bank has launched online account opening, an online
mortgage application process, and online financial education. Providing these services online allows consumers to manage their
finances anywhere at any time.
As technology continues to evolve, so does the sophistication of cybercrime incidents and data breaches. As businesses expand their focus
on system securities, in 2019 Cortland recruited to its Board of Directors, an information systems and security executive.
Hicham Chahine, who recently retired as a principal from a professional service firm which provides security and information systems
consulting services to the banking industry, brings a valued skill set to the Cortland Board.
Strongsville Branch
Hubbard Branch
4
Supporting our Community
Cortland Bank takes pride in supporting the community through advocating, giving, partnering,
volunteering and engaging with a variety of non-profit and local organizations. Cortland Bank's commitment
to serving our community is highlighted below in three key areas.
Leaders in Community Service
Our Executives and Officers serve as board members at the following:
• BRITE Energy Innovation Center • Eastern Gateway Community College • Eastern Gateway Community College Foundation •
• Fairhaven Foundation • Ohio Foundation of Independent Colleges • Trumbull Regional Medical Center • Upward Bound •
• South Range Schools Foundation • Community Improvement Corporation of Warren and Trumbull County •
• United Way of Trumbull County • United Way of Youngstown and the Mahoning Valley •
• Youngstown Warren Regional Chamber of Commerce •
Commitment to Education
The Bank is committed to supporting and furthering the educational opportunities for our employees, students and families. Partnering
with Junior Achievement, our staff has taught financial literacy and career readiness lessons to elementary, middle and high school
students. Over the past five years, Cortland Bank has sent more than 30 volunteers into local classrooms, reaching nearly 1,300 students.
Cortland Bank continues to offer a scholarship program to assist students attending one of the 33 Ohio Independent Colleges or
Youngstown State University in the fields of business, finance, accounting, information technology or human resource management.
Contributions and Stewardship
The Bank is proud to provide contributions and volunteers for local organizations such as:
• American Heart Association • Akron Children’s Hospital • Beatitude House • BRITE Energy Innovation Center • Cortland Rotary •
• Junior Achievement of the Mahoning Valley • Relay for Life • Second Harvest Food Bank • The Salvation Army • Someplace Safe •
• Trumbull Family Fitness • United Way •
Additionally, the Bank has invested in affordable housing initiatives in partnership with the Ohio Capital Corporation for Housing.
5
The ringing of either the opening or closing stock market bell is a
time-honored tradition for companies trading on the Nasdaq
capital market stock exchange. On May 17, 2019, Bank officers and
directors participated in that long-standing tradition by ringing the
closing bell to officially mark the Nasdaq listing.
Photography by Libby Greene/Nasdaq, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
" TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 001-38827
(Exact Name of Registrant as Specified in its Charter)
Ohio
(State or Other Jurisdiction
of Incorporation or Organization)
194 West Main Street, Cortland, Ohio
(Address of Principal Executive Offices)
34-1451118
(I.R.S. Employer
Identification No.)
44410
(Zip Code)
Registrant’s telephone number, including area code: (330) 637-8040
Securities registered pursuant to Section l2(g) of the Act: None
Securities registered pursuant to Section l2(b) of the Act:
Common Stock, no par value
(Title of Class)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, No Par Value
Trading Symbol(s)
CLDB
Name of each exchange on which registered
NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. " Yes ⌧ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. " Yes ⌧ No
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934
during the preceding l2 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. ⌧ Yes " No
Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule405 of
Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). ⌧ Yes " No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
"
"
Emerging growth company "
Accelerated filer
Smaller reporting company
⌧
⌧
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. "
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). " Yes ⌧ No
Based upon the closing price of the registrant’s common stock on June 30, 2019, the aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $90,812,857. For purposes of this response, directors and executive officers are considered the affiliates of the
issuer at that date.
The number of shares outstanding of the issuer’s classes of common stock as of February 28, 2020: 4,196,483 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders to be held on April 29, 2020 are incorporated by reference into Part III.
Form 10-K for the Year Ended December 31, 2019
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART I
Business........................................................................................................................................................
Risk Factors ..................................................................................................................................................
Unresolved Staff Comments.........................................................................................................................
Properties......................................................................................................................................................
Legal Proceedings ........................................................................................................................................
Mine Safety Disclosures...............................................................................................................................
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................
Selected Financial Data ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................
Quantitative and Qualitative Disclosures About Market Risk .....................................................................
Financial Statements and Supplementary Data ............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................
Controls and Procedures...............................................................................................................................
Other Information.........................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance ...........................................................................
Executive Compensation ..............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ....
Certain Relationships and Related Transactions, and Director Independence.............................................
Principal Accounting Fees and Services ......................................................................................................
PART IV
Exhibits and Financial Statement Schedules................................................................................................
Item 15.
SIGNATURES.............................................................................................................................................................................
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Form 10-K
Page
3
13
20
21
21
21
22
24
25
51
52
97
97
97
98
98
98
98
98
99
100
Item l. Business
CORTLAND BANCORP
PART I
THE CORPORATION
Cortland Bancorp (the Company) was incorporated under the laws of the State of Ohio in 1984, as a one bank holding company
registered under the Bank Holding Company Act of 1956, as amended (BHC Act). The principal activity of the Company is to own,
manage and supervise The Cortland Savings and Banking Company (Cortland Bank or the Bank). The Company owns all of the
outstanding shares of the Bank.
The Company has made an election to be a financial holding company. The Company is regulated by the Board of Governors of the
Federal Reserve System (Federal Reserve) and the Consumer Financial Protection Bureau (CFPB). The BHC Act provides generally
for “umbrella” regulation of financial holding companies such as the Company by the Federal Reserve Board, and for functional
regulation of banking activities by bank regulators, securities activities by securities regulators, and insurance activities by insurance
regulators. The Company is also under the jurisdiction of the Securities and Exchange Commission (SEC) and is subject to the
disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, as administered by the SEC.
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. The Company operates as a single line of business.
NEW RESOURCES LEASING CO.
New Resources Leasing Co. was formed in December 1987 under Ohio law as a separate entity to handle the function of commercial
and consumer leasing. The wholly owned subsidiary has been inactive since incorporation.
CORTLAND BANK
Cortland Bank is a full service, state-chartered bank engaged in commercial and retail banking. 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. Commercial lending includes
commercial, financial loans, real estate construction and development loans, commercial real estate loans, small business lending and
trade financing. Consumer lending includes residential real estate, home equity and installment lending. Cortland Bank also offers a
variety of Internet and mobile banking options.
Full-service banking business is conducted at a total of fourteen offices, seven of which are located in Trumbull County, Ohio. The
remaining offices are located throughout Portage, Ashtabula, Summit, Cuyahoga and Mahoning Counties in Ohio. There is also a
financial service center located in Fairlawn, Ohio, in Summit County.
The Bank’s main administrative and banking office is located at 194 West Main Street, Cortland, Ohio.
The Bank, as a state-chartered banking organization and member of the Federal Reserve, is subject to periodic examination and
regulation by the Federal Reserve, the State of Ohio Division of Financial Institutions (Ohio Division) and the CFPB. These
examinations, which include such areas as capital, liquidity, asset quality, management practices and other aspects of the Bank’s
operations, 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 Insurance Corporation (FDIC).
The Bank provides brokerage and investment services through an arrangement with LPL Financial. Under this arrangement, financial
advisors can offer customers an extensive range of investment products and services, including estate planning, qualified retirement
plans, mutual funds, annuities, life insurance, fixed income and equity securities, equity research and recommendations, and asset
management services to customers through the brand Cortland Private Wealth Management.
3
CSB MORTGAGE COMPANY, INC.
CSB Mortgage Company, Inc. (CSB) was formed as an Ohio corporation in December 2011. It is a wholly-owned subsidiary of
Cortland Bank and functioned as the originator of wholesale mortgage loans and the seller of company-wide mortgage loans in the
secondary mortgage market. It has been inactive since 2013.
COMPETITION
The Bank actively competes with state and national banks located in Northeastern Ohio and Western Pennsylvania. It also competes
for deposits, loans and other service business with a large number of other financial institutions, such as savings and loan associations,
credit unions, insurance companies, consumer finance companies and commercial 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 convenience, availability, timeliness and quality of the customer
services offered.
EMPLOYEES
As of December 31, 2019, the Company, through the Bank, employed 142 full-time and 22 part-time employees. The Company
provides its employees with a full range of benefit plans and considers its relations with its employees to be satisfactory.
GENERAL LENDING POLICY
The Bank’s lending policy is designed to provide a framework which will meet the credit needs and interests of the community and
the Bank. It is the Bank’s objective to make loans to credit-worthy customers that benefit their interests. The loans made by the Bank
are subject to the guidelines established in the loan policy that is approved by the Bank’s Board of Directors.
There are times when the Bank will go beyond its lending territory to accommodate people who have been customers of the Bank and
have moved out of the lending area. There are also times when excess funds are available and it is profitable to participate in loans
with other banks or to participate in large projects for community development.
Each lending relationship is reviewed and graded in 6 categories, which are (1) ability to pay, (2) financial condition, (3) management
ability, (4) collateral and guarantors, (5) loan structure, and (6) industry and economics.
Further information can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
SUPERVISION AND REGULATION
The Company and the Bank are subject to federal and state banking laws that are intended to protect depositors and borrowers, not
shareholders. Changes in federal and state banking laws, including statutes, regulations, and policies of the bank regulatory agencies,
could have a material adverse impact on our business and prospects. Federal and state laws applicable to bank holding companies and
their financial institution subsidiaries regulate the range of permissible business activities, investments, reserves against deposits,
capital levels, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, business
combinations, dividends, and a variety of other important matters. The Company and the Bank are subject to detailed, complex, and
sometimes overlapping federal and state statutes and regulations affecting routine banking operations. These statutes and regulations
include, but are not limited to, state usury and consumer credit laws, the Truth-in-Lending Act and Regulation Z, the Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, and the Community Reinvestment Act as
the same have been amended from time to time. In addition to minimum capital requirements, federal law imposes other safety and
soundness standards governing factors such as internal controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, and compensation and benefits. The following
discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions
discussed herein.
The Company is a bank holding company that has elected to become a financial holding company within the meaning of the BHC Act.
As such, the Company is subject to regulation, supervision, and examination by the Federal Reserve, acting primarily through the
Federal Reserve Bank of Cleveland. The Company is required to file annual reports and other information with the Federal Reserve.
The Bank is subject to regulation and supervision by the Ohio Division and, as a member bank of the Federal Reserve, by the Federal
Reserve. The Bank is examined periodically by the Federal Reserve and by the Ohio Division to test compliance with various
4
regulatory requirements. If as a result of examination, the Federal Reserve or the Ohio Division determines that a bank’s financial
condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank’s operations are
unsatisfactory, or that the bank or its management is in violation of any law or regulation, the bank regulatory agencies may take a
number of remedial actions. In addition, the Bank is subject to the regulations of the CFPB, established by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, as amended (the Dodd-Frank Act). The CFPB has broad powers to adopt and enforce
consumer protection regulations. Bank regulatory agencies make regular use of their authority to take formal and informal
supervisory actions against banks and bank holding companies for unsafe or unsound practices in the conduct of their businesses and
for violations of any law, rule, or regulation, or any condition imposed in writing by the appropriate federal banking regulatory
authority. Potential supervisory and enforcement actions include appointment of a conservator or receiver, issuance of a cease-and-
desist order that could be judicially enforced, termination of a bank’s deposit insurance, imposition of civil money penalties, issuance
of directives to increase capital, entry into formal or informal agreements, including memoranda of understanding, issuance of
removal and prohibition orders against institution-affiliated parties, and enforcement of these actions through injunctions or restraining
orders.
Regulation of financial holding companies. A bank holding company must serve as a source of financial and managerial strength for
its subsidiary banks and must not conduct operations in an unsafe or unsound manner. The Federal Reserve requires all bank holding
companies to maintain capital at or above prescribed levels. Federal Reserve policy requires that a bank holding company provide
capital to its subsidiary banks during periods of financial stress or adversity and that the bank holding company maintain the financial
flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. Bank holding companies may
also be required under certain circumstances to give written notice to and receive approval from the Federal Reserve before
purchasing or redeeming common stock or other equity securities or paying dividends.
Acquisitions. The BHC Act requires every bank holding company to obtain approval of the Federal Reserve to: directly or indirectly
acquire ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring
company would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company
already owns or controls a majority of the shares); acquire all or substantially all of the assets of another bank; or merge or consolidate
with another bank holding company. The Federal Reserve will consider anticompetitive effects and public benefits of the proposed
transaction, the capital position of the combined organization, the applicant’s performance record under the Community Reinvestment
Act of 1977, as amended (the CRA) and other financial and managerial factors. Approval of the Ohio Division is also necessary to
acquire control of an Ohio-chartered bank.
The BHC Act, the Change in Bank Control Act, and the Federal Reserve Regulation Y require advance approval of the Federal
Reserve to acquire “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of a class of voting securities of the bank holding company. Under certain circumstances, control may also be
presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities.
Interstate banking and branching. Section 613 of the Dodd-Frank Act amended the interstate branching provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994. The amendments authorize a state or national bank to open a de novo
branch in another state if the law of the state where the branch is to be located would permit a bank chartered by that state to open the
branch. Section 607 of the Dodd-Frank Act requires that a bank holding company be well capitalized and well managed as a condition
to approval of an interstate bank acquisition and that an acquiring bank be and remain well capitalized and well managed as a
condition to approval of an interstate bank merger.
Nonbanking activities. Generally, the BHC Act prohibits a bank holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company or from
engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve
regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. A bank holding
company may become a financial holding company if the holding company meets “well-capitalized” and “well-managed”
requirements of the Federal Reserve. In addition, each of the bank holding company’s subsidiary banks must be well capitalized under
the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended, prompt corrective action provisions, must be well
managed, and must have at least a satisfactory rating under the CRA. The Company meets these requirements and has elected to
become a financial holding company. No regulatory approval is required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve.
Activities that are “financial in nature” include:
•
•
securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
5
•
insurance underwriting and agency;
• merchant banking; and
•
activities that the Federal Reserve Board has determined to be closely related to banking.
If a financial holding company or a subsidiary bank fails to meet all requirements for the holding company to maintain financial
holding company status, material restrictions may be placed on the activities of the financial holding company and on the ability of the
financial holding company to enter into certain transactions or obtain regulatory approvals. The financial holding company could also
lose its financial holding company status and be required to divest ownership or control of all banks owned by the financial holding
company. If restrictions are imposed on the activities of a financial holding company, such restrictions may not be made publicly
available pursuant to confidentiality regulations of the banking regulators.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Regulatory Relief Act) was enacted,
which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with
consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including
the Company, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies
and banks with consolidated assets of less than $100 billion, including the Company, from certain record-keeping, reporting and
disclosure requirements. Certain other regulatory requirements applied only to banks with assets in excess of $50 billion and so did
not apply to Cortland even before the enactment of the Regulatory Relief Act.
Capital
Risk-based capital requirements. Financial institutions and their holding companies are required to maintain capital as a way of
absorbing losses that can, as well as losses that cannot, be predicted. The Federal Reserve has adopted risk-based capital guidelines for
financial holding companies as well as state banks that are members of the Federal Reserve Bank. The Office of the Comptroller of
the Currency (the OCC) and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks,
respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to
differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating
capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels, as measured by these standards, are
also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital
Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision. Capital rules adopted by
the United States banking regulators applicable to smaller banking organizations, including the Company and the Bank, became
effective commencing on January 1, 2015. Compliance with the minimum capital requirements was required effective on January 1,
2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016, through
January 1, 2019, and most deductions from common equity tier (CET1) capital phased in from January 1, 2015, through January 1,
2019.
The rules include (a) a minimum CET1 capital ratio of at least 4.5%, (b) a minimum tier 1 capital ratio of 6.0%, (c) a minimum total
capital ratio of 8.0%, and (d) a minimum leverage ratio of 4%.
Common equity capital for the CET1 capital ratio includes common stock (plus related surplus), and retained earnings, plus limited
amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity capital as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and
related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are
not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain
deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and
limited amounts of the allowance for loan and lease losses, subject to specified eligibility criteria, less applicable deductions.
The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above
certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and
investments in the capital of unconsolidated financial institutions (above certain levels).
6
For institutions with less than $250 billion in assets, the final rules also allow a one-time opportunity to permanently opt-out of a
requirement to include all components of accumulated other comprehensive income in the capital calculation. To avoid the possibility
of extreme market volatility in determining capital adequacy, the Company and the Bank have elected to opt-out.
Under the guidelines, capital is compared to the relative risk included in the balance sheet. To derive the risk included in the balance
sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative
credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including
certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight
factor assigned by the regulations based on perceived risks inherit in the type of asset. Higher levels of capital are required for asset
categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and United States government
securities, a risk weight of 50% is generally assigned to prudently unwritten first lien one-to four-family residential mortgages, a risk
weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and
commercial loans that qualify as high-volatility commercial real estate (HVCRE) exposures under federal regulations, and a risk
weight of between 0% and 600% is assigned to permissible equity interest, depending on certain specified factors.
Amendments included in the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”),
enacted in May 2018, provide that federal banking regulators may not impose higher capital standards on HVCRE exposures unless
they are for acquisition, development or construction (ADC) and expand the exclusions from the current definition of an HVCRE
exposure by (1) including loans for (a) the acquisition or refinancing of existing income-producing real property if the cash flow of the
property is sufficient to support the debt service and expenses of the property and (b) for improvements to existing income-
producing real property if the cash flow of the property is sufficient to support the debt service and expenses of the property and
(2) by counting paid development expenses and contributed real property or improvements towards the borrower's contributed
capital. This new two-prong test provides lenders with the flexibility to terminate the HVCRE ADC designation and release the
borrower's additional capital without the need for refinancing. The Regulatory Relief Act also gives lenders discretion to
determinate when and if the two-prong test has been satisfied based on the lenders' own underwriting criteria.
The rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments
to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above
its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation
buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phased in starting on January 1, 2016,
at 0.625% and, effective January 1, 2019, is currently fully phased in at 2.5%.
In November 2019, the Federal Reserve, the OCC, and the FDIC finalized a rule revising the definition of HVCRE exposure under the
capital rules of each agency to conform to the statutory definition included in the Regulatory Relief Act enacted in May 2018.
Specifically, the final rule conforms the agencies’ “HVCRE exposure” definitions to the Regulatory Relief Act’s definition of HVCRE
ADC loans and maintains a risk weight of 150% for HVCRE exposures. The final rule becomes effective on April 1, 2020.
In addition to the capital requirements applicable to bank holding companies generally, the Federal Reserve requires financial holding
companies to be “well-capitalized” under Federal Reserve standards. Pursuant to the Federal Reserve's Small Bank Holding Company
Policy (SBHC Policy), however, a holding company with assets of less than $3 billion and meeting certain other requirements is not
required to comply with the consolidated capital requirements. At December 31, 2019, the Company was deemed to be a small bank
holding company under the SBHC Policy. The Bank must, however, comply with the capital requirements for banks.
In December 2018, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the
current expected credit loss (CECL) model (accounting standard). The rule revised the federal banking agencies’ regulatory capital
rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide
banking organizations the option to phase in over three years the day one adverse effects on regulatory capital that may result from the
adoption of the CECL model.
In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve Board, along with the other federal
bank regulatory agencies, issued a final rule, effective January 1, 2020, that gives community banks, including the Company, the
option to calculate a simple leverage ratio to measure capital adequacy, if the community banks meet certain requirements. Under the
rule, a community bank is eligible to elect the Community Bank Leverage Ratio (CBLR) framework if it has less than $10 billion in
total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a
leverage ratio greater than 9.0%. The final rule adopts tier 1 capital and the existing leverage ratio into the CBLR framework. The
tier 1 numerator takes into account the modifications made in relation to the capital simplifications and CECL methodology transitions
rules as of the compliance dates of those rules. Qualifying institutions that elect to use the CBLR framework (each, a CBLR Bank)
and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk based and leverage capital
requirements in the regulatory agencies’ generally applicable capital rules and to have met the well capitalized ratio requirements.
Each CBLR Bank will not be required to calculate or report risk based capital. A CBLR Bank may opt out of the framework at any
time, without restriction, by reverting to the generally applicable risk based capital rule.
7
Prompt corrective action. In addition to the capital adequacy requirements set forth above, every insured financial institution is
classified into one of five categories based upon the institution’s capital ratios, the results of regulatory examinations of the institution
and whether the institution is subject to enforcement agreements with its regulatory authorities. The categories are “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”
The capital of the Company and the Bank as of December 31, 2019 were as follows:
December 31, 2019
CET1 capital (to risk-weighted assets)
Actual
Amount
Ratio
(Amounts in thousands)
Minimum required for capital
adequacy purposes (1)
Ratio
Amount
To be well-capitalized
under prompt corrective
action regulations
Amount
Ratio
Consolidated ............................................ $
Bank .........................................................
73,091
69,768
12.76% $
12.25%
25,775
25,633
4.5%
4.5% $
N/A
37,026
Tier 1 capital (to risk-weighted assets)
Consolidated ............................................
Bank .........................................................
Total capital (to risk-weighted assets)
Consolidated ............................................
Bank .........................................................
Tier 1 capital (to average assets)
Consolidated ............................................
Bank .........................................................
78,091
69,768
82,640
80,317
78,091
69,768
13.63%
12.25%
14.43%
14.10%
10.98%
9.85%
34,367
34,178
45,823
45,570
28,461
28,321
6.0%
6.0%
8.0%
8.0%
4.0%
4.0%
N/A
45,570
N/A
56,963
N/A
35,401
N/A
6.5%
N/A
8.0%
N/A
10.0%
N/A
5.0%
(1) Currently not required for the Company as a small bank holding company under the SBHC Policy.
A bank with a capital level that might qualify for well capitalized or adequately capitalized status may nevertheless be treated as
though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an
unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital
classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from
accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance
regulatory approval. These deposit-funding limitations can have an adverse effect on the bank’s liquidity. At each successively lower
capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take
specified actions to increase their capital or otherwise decrease the risks to the federal Deposit Insurance Fund (DIF). Bank regulatory
agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized,
unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory
purposes. The Federal Deposit Insurance Act, as amended, provides that a federal bank regulatory authority may require a bank
holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the
bank’s financial condition and prospects.
In order to be “well-capitalized,” a bank must have a CET1 capital ratio of at least 6.5%, a total risk-based capital ratio of at least 10%,
a tier 1 risk-based capital ratio of at least 8% and a leverage ratio of at least 5%, and the bank must not be subject to any written
agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital
measure. The Company’s management believes that the Bank meets the ratio requirements to be deemed “well-capitalized” according
to the guidelines described above.
Federal deposit insurance. Deposits in the Bank are insured by the FDIC up to applicable limits through the DIF. Insured banks must
pay deposit insurance premiums assessed semiannually and paid quarterly. The general insurance limit is $250,000 per separately
insured depositor. This insurance is backed by the full faith and credit of the United States Government.
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by insured institutions, including the Bank, to
prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a threat to the DIF,
and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any institution if the
FDIC finds that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or other regulatory agency.
8
The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution
and may also impose special assessments in emergency situations. The premiums fund the DIF. Pursuant to the Dodd-Frank Act, the
FDIC has established 2.0% as the designated reserve ratio (DRR), which is the amount in the DIF as a percentage of all DIF insured
deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30,
2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with
assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.
Although the FDIC's new rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or
more to be paid until the DRR reaches 1.35%. The DRR reached 1.35% at September 30, 2018. As a result, the previous surcharge
imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by
the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR
to 1.35%. These credits are being applied currently since the DRR reached a minimum of 1.38%. The rules further changed the
method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks
taking on greater risks pay more for deposit insurance than banks that take on less risk.
In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds issued by the Financing
Corporation, which was established by the government to recapitalize a predecessor to the DIF. These assessments continued until the
Financing Corporation bonds matured in September 2019. The final assessment was collected on the March 29, 2019, FDIC invoice.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order, or any condition imposed in writing by or written agreement with the FDIC.
Reciprocal Deposits. The Regulatory Relief Act amended the Federal Deposit Insurance Act to exclude reciprocal deposits of
an insured depository institution from certain limitations on prohibited brokered deposits. A well-capitalized and well-managed
bank may now hold reciprocal deposits in an amount that does not exceed the lesser of $5 billion or 20% of the depository
institution's total liabilities without those reciprocal deposits being treated as brokered deposits. Reciprocal deposits are defined
in the Regulatory Relief Act as deposits that a bank receives through a deposit placement network with the same maturity (if any)
and in the same aggregate amount as deposits (other than deposits obtained through a deposit broker) placed by the bank in
another network bank. The amendment will also have the effect of lowering deposit insurance premiums for well-capitalized
banks that use deposit placement networks.
Transactions with affiliates. The Bank must comply with Section 23A and Section 23B of the Federal Reserve Act and Federal
Reserve Board Regulation W, which govern transactions by member banks with affiliates. These provisions protect banks from abuse
in financial transactions with affiliates. Generally, Section 23A and Section 23B of the Federal Reserve Act: (1) limit the extent to
which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s
capital stock and surplus; (2) limit the aggregate of “covered transactions” with all affiliates to 20% of capital and surplus; (3) impose
strict collateral requirements on loans or extensions of credit by a bank to an affiliate; (4) impose restrictions on investments by a
subsidiary bank in the stock or securities of its holding company; (5) impose restrictions on the use of a holding company’s stock as
collateral for loans by the subsidiary bank; and (6) require that affiliate transactions be on terms substantially the same as those
provided to a non-affiliate.
Loans to insiders. The authority of the Bank to extend credit to insiders — meaning executive officers, directors, and greater than
10% shareholders — or to entities those persons control, is subject to Section 22(g) and Section 22(h) of the Federal Reserve Act and
Federal Reserve Board Regulation O. These laws require that insider loans be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans a bank may make to insiders based in part on the bank’s capital position,
and require specified approval procedures. Loans to an individual insider may not exceed the general legal limit on loans to any one
borrower. The aggregate of all loans to all insiders may not exceed the bank’s unimpaired capital and surplus. Insider loans exceeding
the greater of 5% of capital or $25,000 must be approved in advance by a majority of the board, with any interested director not
participating in the vote. Loans to executive officers are subject to additional limitations based on the purpose of the loan. A violation
of these restrictions could result in the assessment of substantial civil money penalties, the imposition of a cease-and-desist order, or
other regulatory sanctions.
Loans to one borrower. Under Ohio law, the total loans and extensions of credit by an Ohio-chartered bank to a person outstanding
at any time generally may not exceed 15% of the bank’s unimpaired capital, plus 10% of unimpaired capital for loans and extensions
of credit fully secured by readily marketable collateral.
Dividends and Distributions. Current federal banking regulations impose restrictions on the Bank's ability to pay dividends to the
Company. These restrictions include a limit on the amount of dividends that may be paid in a given year without prior approval of the
Federal Reserve and a prohibition on paying dividends that would cause the Bank's total capital to be less than the required minimum
levels under the capital requirements imposed by the Federal Reserve. The capital rules also limit the payment of dividends if the
Bank does not maintain the capital conservation buffer. Ohio law also limits the amount of dividends that may be paid in any given
year without prior approval of the Ohio Superintendent of Financial Institutions. The Bank's regulators may prohibit the payment of
dividends at any time if the regulators determine the dividends represent unsafe and/or unsound banking practices, or reduce the
Bank's total capital below adequate levels.
9
The Company's ability to pay dividends to its shareholders may also be restricted. A financial holding company is required by law
and Federal Reserve policy to act as a source of financial strength to each of its banking subsidiaries. The Federal Reserve may
require the Company to commit resources or contribute additional capital to the Bank, which could restrict the amount of cash
available for dividends.
The Federal Reserve has also issued a policy statement with regard to the payment of cash dividends by financial holding companies
and other bank holding companies. The policy statement provides that, as a matter of prudent banking, the holding company should
not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the
dividends, and the prospective rate of earnings retention appears to be consistent with the holding company's capital needs, asset
quality and overall financial condition. Accordingly, a financial holding company should not pay cash dividends that exceed its net
income or that can only be funded in ways that weaken the holding company's financial health, such as by borrowing.
Executive and incentive compensation. SEC regulations and certain stock exchange rules require the Company to provide various
disclosures about executive compensation and require the Company to permit its shareholders to have non-binding votes on the same.
In addition, the Company's Compensation Committee must meet certain independence standards and must consider the independence
of its advisers. The Company is in compliance with all of these regulations and standards.
Consumer protection laws and regulations. Banks are subject to regular examination to ensure compliance with federal statutes and
regulations applicable to their business, including consumer protection statutes and implementing regulations. Potential penalties
under these laws include, but are not limited to, fines. The Dodd-Frank Act established the CFPB, which has extensive regulatory and
enforcement powers over consumer financial products and services. The CFPB has adopted numerous rules with respect to consumer
protection laws and has commenced related enforcement actions. The following are just a few of the consumer protection laws
applicable to the Bank:
•
•
•
•
The CRA: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low-
and moderate-income neighborhoods.
Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.
Truth in Lending Act: requires that credit terms be disclosed in a manner that permits a consumer to understand and compare
credit terms more readily and knowledgeably.
Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person
on the basis of any of certain criteria.
• Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine
whether the financial institutions are serving the housing credit needs of the communities in which they are located.
•
•
Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and
cost of real estate settlements and prohibits abusive practices that increase borrowers' costs.
Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to
restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from
unauthorized access.
The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action
with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or
consumer finance law.
In October 2017, the CFPB issued a final rule (the Payday Rule) to establish regulations for payday loans, vehicle title loans, and
certain high-cost installment loans. The Payday Rule addressed two discrete topics. First, it contained a set of provisions with respect
to the underwriting of certain covered loans and related reporting and recordkeeping requirements (the Mandatory Underwriting
Provisions). Second, it contained a set of provisions establishing certain requirements and limitations with respect to attempts to
withdraw payments from consumers’ checking or other accounts and related recordkeeping requirements (the Payment Provisions).
The Payday Rule became effective on January 16, 2018. However, most provisions had a compliance date of August 19, 2019.
On February 6, 2019, the CFPB proposed delaying the August 19, 2019, compliance date for the Mandatory Underwriting Provisions
to November 19, 2020. The CFPB proposed in a separate notice to rescind the Mandatory Underwriting Provisions.
10
On June 6, 2019, the CFPB issued a final rule delaying the compliance date for most Mandatory Underwriting Provisions until
November 19, 2020. However, the final rule did not delay the compliance date for the Payment Provisions. The Company does not
currently expect the Payday Rule to have a material effect on its financial condition or results of operations on a consolidated basis.
Monetary policy. The earnings of financial institutions are affected by the policies of regulatory authorities, including the monetary
policy of the Federal Reserve. An important function of the Federal Reserve is the regulation of the aggregate national credit and
money supply, relying on measures such as open market transactions in securities, establishment of the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of financial institutions’ loans, investments, and deposits, and they also affect interest rates charged on
loans or paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-
term changes in the international trade balance, and fiscal policies of the United States government. Federal Reserve Board monetary
policy has had a significant effect on the operating results of financial institutions in the past and it will continue to influence operating
results in the future.
Anti-money laundering and anti-terrorism legislation. The Bank Secrecy Act of 1970 requires financial institutions to maintain
records and report transactions to prevent the financial institutions from being used to hide money derived from criminal activity and
tax evasion. The Bank Secrecy Act establishes: (1) record-keeping requirements to assist government enforcement agencies with
tracing financial transactions and flow of funds; (2) reporting requirements for Suspicious Activity Reports and Currency Transaction
Reports to assist government enforcement agencies with detecting patterns of criminal activity; (3) enforcement provisions authorizing
criminal and civil penalties for illegal activities and violations of the Bank Secrecy Act and its implementing regulations; and (4) safe
harbor provisions that protect financial institutions from civil liability for their cooperative efforts.
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions
against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and
others. OFAC publishes lists of specially designated targets and countries. The Company is responsible for, among other things,
blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with
them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial,
legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition
transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory
authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
The USA PATRIOT Act of 2001 requires financial institutions to establish due diligence policies, procedures, and controls reasonably
designed to detect and report money laundering through correspondent accounts and private banking accounts, share information with
law enforcement about individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money
laundering activities, and comply with regulations setting forth minimum standards regarding customer identification. These
regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open
an account, maintain records of the information used to verify the person’s identity, and consult lists of known or suspected terrorists
and terrorist organizations provided to the financial institution by government agencies.
Cybersecurity. In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that
financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk
management processes also address the risk posed by compromised customer credentials, including security measures to reliably
authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial
institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery,
resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial
institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding
network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack.
If the Company fails to observe such regulatory guidance, it could be subject to various regulatory sanctions, including financial
penalties.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity
risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure
requirements under state and federal banking law and regulations.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently,
several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing
detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently
implemented or modified their data breach notification and data privacy requirements. The Company expects this trend of state-level
activity in those areas to continue and is continually monitoring developments in the states in which its customers are located.
11
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its
operations and to store sensitive data. The Company employs an in-depth, layered, defensive approach that leverages people,
processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and
detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced
persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber-attacks is severe, attacks
are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the
Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity
attacks, the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible
that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected
to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the
expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
Volcker Rule. In December 2013, five federal agencies adopted a final regulation implementing the so-called Volcker Rule provision
of the Dodd-Frank Act (the Volcker Rule). The Volcker Rule places limits on the trading activity of insured depository institutions
and entities affiliated with depository institutions, subject to certain exceptions. Such trading activity includes the purchase or sale as
principal of a security derivative, commodity future, option, or similar instrument in order to benefit from short-term price movements
or to realize short-term profits. The Volcker Rule exempts trading in specified U.S. government, agency, state and/or municipal
obligations. The Volcker Rule also excludes: (1) trading conducted in certain capacities, including as a broker or other agent, through
a deferred compensation or pension plan, as a fiduciary on behalf of customers; (2) to satisfy a debt previously contracted; (3) trading
under certain repurchase and securities lending agreements; and (4) trading in connection with risk-mitigating hedging activities.
Further, the Volcker Rule prohibits a banking entity from having an ownership interest in, or certain relationships with, a hedge fund
or private equity fund, subject to a number of exceptions.
On July 9, 2019, the five federal agencies that adopted the Volcker Rule issued a final rule to exempt certain community banks,
including the Company, from the Volcker Rule, consistent with the Regulatory Relief Act. Under the final rule, community banks
with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets are
excluded from the restrictions of the Volcker Rule.
Ohio Banking Law. As a bank chartered under the laws of the State of Ohio, the Bank is governed by the laws of the State of Ohio
and the regulations of the Ohio Department of Commerce Division of Financial Institutions (ODFI). In 2017, the State of Ohio
completed a substantial re-writing of Ohio’s banking laws that became effective on January 1, 2018. One of the primary purposes of
the revision of the law was to adopt one universal bank charter for depository institutions chartered by the state, rather than having
separate types of state depository institution charters with different powers and limitations for banks, savings banks and savings and
loan associations. As a result, all Ohio-chartered depository institutions are now considered to have full commercial bank powers,
unless an institution elects to continue to be governed by federal restrictions applicable to federal savings and loan associations and
federal savings banks. While the most substantial changes in the law affect institutions chartered by Ohio as savings banks or savings
and loan associations prior to the effectiveness of the new law, some changes also apply to institutions, like the Bank, that were
chartered as commercial banks prior to the change in the law. The changes for all Ohio-chartered banks include provisions allowing
Ohio-chartered banks to exercise the same powers, perform all acts, and provide all services that are permitted for federally chartered
depository institutions, with the exception of laws and regulations dealing with interest rates, thereby enhancing opportunities for
Ohio-chartered banks to compete with other financial institutions. Other provisions clarify previous laws addressing, or allow more
flexibility with respect to, corporate governance matters, mergers and acquisitions and additional reliance on Ohio corporate law,
generally.
AVAILABLE INFORMATION
The Company files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 Amended. The Company’s website
is www.cortlandbank.com. The Company makes available through its website, free of charge, the reports filed with the SEC, as soon
as reasonably practicable after such material is electronically filed, or furnished to, the SEC. The SEC also maintains a website that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov. The public may read and copy any materials filed with the Commission at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain
information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
12
Item 1A. Risk Factors
Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are
outside of our control. In addition to the other information in this report, readers should carefully consider that the following important
factors could materially impact our business and future results of operations.
Economic, Political and Market Risks
Changes in national and local economic and political conditions could adversely affect our earnings through declines in deposits,
quality of investment securities, loan demand, and our borrowers’ ability to repay loans, and the value of the collateral securing
our loans.
Our success depends, in part, on local and national economic and political conditions, as well as governmental fiscal and monetary
policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a United
States withdrawal from a significant renegotiation of trade agreements, trade wars, the election of a new United States President in
2020, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of our assets including
investment securities available for purchase, and the demand for loans, which, in turn, may adversely affect our earnings and capital.
Since substantially all of our loans are to individuals and businesses in Ohio, any decline in the economy of this market area could
have a materially adverse effect on our credit risk and on our deposit and loan levels. In addition, such conditions may adversely
affect the ability of our borrowers to repay their loans and the value of collateral securing the loans, which could adversely affect our
earnings. Changes in government, including the election of a new United States President in 2020, could bring changes in all of such
factors. Economic turmoil in Europe and Asia, trade negotiations and wars, and changes in oil production in the Middle East affect
the economy and stock prices in the United States. The timing and circumstances of the United Kingdom leaving the European Union
(Brexit) and their effects on the U.S. are unknown. Because we have a significant number of real estate loans, a decline in the value of
real estate could have a material adverse effect on us. As of December 31, 2019, 78.2% of our loan portfolio consisted of commercial,
commercial real estate, real estate construction and installment, all of which are generally viewed as having more risk of default than
residential real estate loans and all of which, with the exception of installment loans, are typically larger than residential real estate
loans. Residential real estate loans held in the portfolio are typically originated using conservative underwriting standards that do not
include sub-prime lending.
Adverse changes in the financial markets may adversely impact our results of operations.
While we generally invest in securities issued by U.S. government agencies and sponsored entities and U.S. state and local
governments with limited credit risk, certain investment securities we hold possess higher credit risk since they represent beneficial
interests in structured investments collateralized by residential mortgages, debt obligations and other similar asset-backed assets.
Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates,
implied credit spreads and credit ratings.
Changes in interest rates could adversely affect our financial condition and results of operations.
Our results of operations depend substantially on our net interest income, which is the difference between: (1) the interest earned on
loans, securities and other interest-earning assets; and (2) the interest paid on deposits and borrowings. These rates are highly sensitive
to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, money supply and
the policies of various governmental and regulatory authorities, particularly those of the Federal Reserve Board. If the interest we pay
on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest
income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest we receive on
loans and other investments falls more quickly than the interest we pay on deposits and borrowings. While we have taken measures
intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will
be effective in avoiding undue interest rate risk.
Increases in interest rates can also affect the value of loans and other assets, including our ability to realize gains on the sale of assets.
We originate loans for sale and for our portfolio. Increasing interest rates may reduce the origination of loans for sale and
consequently the fee income we earn on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to
pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income
recognized.
A transition away from London Interbank Offered Rate (LIBOR) as a reference rate for financial contracts could negatively affect
our income and expenses and the value of various financial contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including
adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information
reported by certain banks, which may stop reporting such information after 2021. It is uncertain at this time whether LIBOR will
change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark.
Other benchmarks may perform differently than LIBOR or alternative benchmarks have performed in the past or have other
consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for
future interest rate adjustments and which remain outstanding if LIBOR ceases to exist.
13
Currently approximately 15% of the Company’s loans are floating on a LIBOR index. When a LIBOR substitute becomes effective,
our existing notes with those borrowers allow a conversion to another index. We are uncertain as to the performance of any substitute
index compared to LIBOR and, therefore, cannot project any financial consequence to such conversion.
Operational Risks
The Company has operational risk.
The Company has many types of operational risk, including those discussed in more detail elsewhere in this Risk Factors section, such
as cyber-related risks, insufficient allowances for loan losses, errors in estimates in the preparation of financial statements, and risks
related to future expansion. The Company also has reputational risk, legal and compliance risk, the risk of fraud or theft by employees
or outsiders and unauthorized transactions by employees, and operational errors, including clerical or record-keeping errors and errors
resulting from faulty or disabled computer or telecommunications systems.
The Company's operations may be disrupted by events that are wholly or partially beyond our control, including computer viruses,
cyber-attacks, spikes in transaction volume or customer activity, electrical or telecommunications outages or natural disasters. If our
policies and systems designed to mitigate such problems fail to operate well, such failures could result in reputational damage,
regulatory intervention and civil litigation, leading to financial loss or liability. Negative public opinion could result from the
Company's actual or alleged conduct with respect to a variety of its activities, including lending practices, corporate governance and
acquisitions. Negative public opinion can adversely affect the Company's ability to attract and retain customers.
The Company relies on vendors for certain processes. The Company is exposed to the risk that its vendors may be unable to fulfill
their contractual obligations or will suffer from the same risks as the Company has and that their business continuity systems may be
inadequate, resulting in damage to the Company's reputation, loss of business, regulatory enforcement actions and civil litigation.
Failures or material breaches in security of our systems or those of third-party service providers may have a significant effect on
our business.
We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by
both us and third-party service providers. The Bank’s necessary dependence upon automated systems to record and process the
Bank’s transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks
by third parties will result in losses and may be difficult to detect. We have security and backup and recovery systems in place, as
well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. We also routinely
review documentation of such controls and backups related to third-party service providers. Our inability to use or access these
information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In
recent years, several banks have experienced denial of service attacks in which individuals or organizations flood the bank's website
with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions.
Other businesses have been victims of ransomware attacks in which the business becomes unable to access its own information and is
presented with a demand to pay a ransom in order to once again have access to its information. We could be adversely affected if one
of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual
purposefully sabotages or fraudulently manipulates our operations or systems. We may not be able to prevent employee errors or
misconduct, and the precautions we take to detect this type of activity might prove ineffective. The Bank is further exposed to the risk
that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks as the
Bank). These disruptions may interfere with service to the Bank’s customers. We are also at risk of the impact of natural disasters,
terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications
systems operated by others.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as
customers to initiate wire and automated clearinghouse transactions out of customer accounts. The recent massive breach of the
systems of a credit bureau presents additional threats as criminals now have more information than ever before about a larger portion
of our country's population, which could be used by criminals to pose as customers initiating transfers of money from customer
accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such
policies and procedures will prevent all fraudulent transfers.
We have implemented security controls to prevent unauthorized access to our computer systems, and we require that our third-party
service providers maintain similar controls. However, management cannot be certain that these measures will be successful. A
security breach of the computer systems and loss of confidential information, such as customer account numbers and related
information, could result in a loss of customers’ confidence and, thus, loss of business. We could also lose revenue if competitors gain
access to confidential information about our business operations and use it to compete with us.
14
Further, we may be affected by data breaches at retailers and other third parties who participate in data interchanges with us and our
customers that involve the theft of customer credit and debit card data, which may include the theft of our debit card PIN numbers and
commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us
incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of
operations.
Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-
party vendors who have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber
espionage, blackmail, ransom, and theft.
All of the types of cyber incidents discussed above could result in damage to our reputation, loss of customer business, costs of
incentives to customers or business partners in order to maintain their relationships, litigation, increased regulatory scrutiny and
potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional
technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), increased
insurance premiums, and loss of investor confidence and a reduction in our stock price, all of which could result in financial loss and
material adverse effects on our results of operations and financial condition.
Our allowance for loan losses may be insufficient.
We maintain an allowance for loan losses to provide for probable loan losses based on management’s quarterly analysis of the loan
portfolio. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States (GAAP) requires management to make significant estimates that affect the financial statements. One of our most critical
estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute
assurance that we will not be required to charge earnings for significant unexpected loan losses. For more information on the
sensitivity of these estimates, refer to the discussion of our “Critical Accounting Policies” in this Form 10-K.
We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan
portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of
our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In deciding whether to
extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by
customers and counterparties, including financial statements and other financial information. We may also rely on representations of
customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on
reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s
audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of
operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial
condition, results of operations and cash flows could be negatively impacted to the extent that we rely on financial statements that do
not comply with GAAP or on financial statements and other financial information that are materially misleading.
Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan
losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and
performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may
exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the
future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our
loan portfolio, resulting in additions that could have a material adverse impact on our financial condition and results of operations. In
addition, federal and state regulators periodically review our allowance for loan losses as part of their examination process and may
require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of
management. Any increase in the provision for loan losses would decrease our pre-tax and net income. Moreover, the Financial
Accounting Standards Board has changed its requirements for establishing the allowance for loan losses. The new guidance is
effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019.
Management is currently evaluating the impact of the adoption of this accounting guidance on the Bank's allowance for loan losses.
When we loan money, we incur a risk of losses if our borrowers do not repay their loans.
In deciding whether to extend credit, we may rely on information provided by or on behalf of our borrowers, including financial
statements and other financial information. Although we regularly review our credit exposure to specific clients, as well as industries,
default risk may arise from events or circumstances that we have not detected, such as fraud. We may also fail to receive full
information with respect to the risks of a borrower. In addition, when we have extended credit against collateral, such collateral could
prove inadequate, such as when there are sudden declines in market value of the collateral or due to fraud with respect to such
collateral. If such events occur, it could result in loss of revenue and have an adverse effect on our business, results of operations and
financial condition.
15
If we foreclose on collateral property and own the underlying real estate, we may be subject to the increased costs associated with
the ownership of real property, resulting in reduced revenues.
We may have to foreclose on collateral property to protect our investment and may thereafter own and operate such property, in which
case we will be exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a
default is dependent upon factors outside of our control, including, but not limited to: (i) general or local economic conditions;
(ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) supply of
and demand for rental units or properties; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws;
(ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real
estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of
operating a real property may exceed the rental income earned from such property, and we may have to advance funds in order to
protect our investment, or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could
adversely affect our ability to generate revenues, resulting in reduced levels of profitability.
Environmental liability associated with commercial lending could have a material adverse effect on our business, financial
condition and results of operations.
In the course of our business, we may acquire, through foreclosure, commercial properties securing loans that are in default. There is a
risk that hazardous substances could be discovered on those properties. In this event, we could be required to remove the substances
from and remediate the properties at our cost and expense. The cost of removal and environmental remediation could be substantial.
We may not have adequate remedies against the owners of the properties or other responsible parties and could find it difficult or
impossible to sell the affected properties. These events could have a material adverse effect on our financial condition and results of
operation.
The Bank may be required to repurchase loans it has sold or indemnify loan purchasers under the terms of the sale agreements,
which could adversely affect the Company's liquidity, results of operations and financial condition.
When the Bank sells a mortgage loan, it may agree to repurchase or substitute a mortgage loan if it is later found to have breached any
representation or warranty the Bank made about the loan or if the borrower is later found to have committed fraud in connection with
the origination of the loan. The Bank's underwriting policies and procedures may not prevent every breach or fraud. Repurchases or
indemnifications may have an adverse effect on the Company's financial condition and results of operations.
We may lose business due to trends of consumers deciding not to use banks to complete financial transactions or depositing funds
electronically with banks outside of our market area, which could negatively affect our net financial condition and results of
operations.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills
and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the country,
which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. Further,
consumers can now maintain funds in brokerage accounts or mutual funds that in the past have been held as deposits. These processes
could result in the loss of fee income, as well as the loss of client deposits and the income generated from those deposits, in addition to
increasing our funding costs.
We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.
In our market area, we encounter significant competition from other banks, savings and loan associations, credit unions, mortgage
banking firms, securities brokerage firms, asset management firms and insurance companies. The increasingly competitive
environment is a result primarily of changes in regulation and the accelerating pace of consolidation among financial service
providers. The Company is smaller than many of our competitors. Many of our competitors have substantially greater resources and
lending limits and may offer services that we do not or cannot provide. The OCC has recently announced that it will accept
applications for national bank charters from non-depository financial technology companies engaged in banking activities. Another
increasingly competitive factor in the financial services industry is the competition to attract and retain talented employees, resulting
in increased expenses.
We may not be able to adapt to technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve
customers while reducing costs. Our future success depends, in part, upon our ability to address customer needs by using technology
to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We
may not be able to effectively implement new technology-driven products and services or be successful in marketing these products
and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry
could negatively affect our growth, revenue and profit.
16
The preparation of financial statements requires management to make estimates about matters that are inherently uncertain.
Management’s accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in
order to ensure that they comply with GAAP and reflect management’s judgment as to the most appropriate manner in which to record
and report our financial condition and results of operations. One of the most critical estimates is the level of the allowance of loan
losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not significantly increase the
allowance for loan losses or sustain loan losses that are significantly higher than the provided allowance.
Increases in FDIC insurance premiums may have a material adverse effect on our earnings.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are a significant
number of financial institution failures or changes in the method of calculating premiums, we may be required to pay higher FDIC
premiums. Increases in FDIC insurance premiums may materially adversely affect our results of operations and our ability to continue
to pay dividends on our common shares at the current rate or at all.
The loss of key members of our senior management team could adversely affect our business.
We believe that our success depends largely on the efforts and abilities of our senior management. Their experience and industry
contacts significantly benefit us. In addition, our success depends in part upon senior management’s ability to implement our business
strategy. The competition for qualified personnel in the financial services industry is intense, and the loss of services of any of our
senior executive officers or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.
We cannot be sure that we will be able to retain our existing key personnel or attract additional qualified personnel.
Loss of key employees may disrupt relationships with certain customers.
Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key
employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a
competitor. While we believe that we have strong relationships with our key producers, we cannot guarantee that all of our key
personnel will remain with our organization. Loss of such key personnel, should they enter into an employment relationship with one
of our competitors, could result in a loss of customers.
Our ability to pay cash dividends is limited.
We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common shares. The
payment of dividends by us and our subsidiaries is subject to certain regulatory restrictions. As a result, any payment of dividends in
the future will be dependent, in large part, on our ability to satisfy these regulatory restrictions and our subsidiaries’ earnings, capital
requirements, financial condition and other factors. Although our financial earnings and financial condition have allowed us to declare
and pay periodic cash dividends to our shareholders in the past, there can be no assurance that our dividend policy or size of dividend
distribution will continue in the future.
Trading in our common shares is very limited, which may adversely affect the time and the price at which our shareholders can
sell their common shares.
Although the common shares of the Company are quoted on the NASDAQ Market, trading in the Company’s common shares is
limited, and the bid/ask spread is often wide.
As a result, you may be unable to purchase our common shares at the volume, price or time you desire. The limited trading market for
our common shares may cause fluctuations in the market value of our common shares to be exaggerated, leading to price volatility in
excess of that which would occur in a more active trading market. In addition, even if our common shares develop a more active
market, we cannot be sure that such a market will continue.
Factors that may affect the volatility of our stock include:
•
•
•
our actual or anticipated operating and financial results, including how those results vary from the expectations of
management, securities analysts and investors;
changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken
by rating agencies with respect to other financial institution;
failure to declare dividends on our common stock from time to time;
17
•
•
•
•
•
•
•
•
•
•
•
reports in the press or investment community generally or relating to our reputation or the financial services industry;
developments in our business or operations or in the financial sector generally;
any future offerings by us of our common stock;
legislative or regulatory changes affecting our industry generally or our business and operations specifically;
the operating and stock price performance of companies that investors consider to be comparable to us;
announcements of strategic developments, acquisitions, restructurings, dispositions, financings and other material events by
us or our competitors;
expectations of (or actual) equity dilution, including the actual or expected dilution to various financial measures, including
earnings per share, that may be caused by this offering;
actions by our current shareholders, including future sales of common shares by existing shareholders, including our directors
and executive officers;
proposed or final regulatory changes or developments;
anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us; and
other changes in U.S. or global financial markets, global economies and general market conditions, such as interest or foreign
exchange rates, stock, commodity, credit or asset valuations or volatility.
Our organizational documents may have the effect of discouraging a third party from acquiring us.
Our articles of incorporation and code of regulations contain provisions, including a staggered board of directors and a supermajority
vote requirement, that make it more difficult for a third party to gain control or acquire us without the consent of the board of
directors. These provisions could also discourage proxy contests and may make it more difficult for dissident shareholders to elect
representatives as directors and take other similar corporate actions.
Future expansion may adversely affect our financial condition and results of operations.
We may acquire other financial institutions or parts of institutions in the future and may open new branches. We also may consider
and enter into new lines of business or offer new products or services. Expansions of our business involve a number of expenses and
risks, including:
•
•
•
•
•
•
•
•
•
the time and costs associated with identifying and evaluating potential acquisitions or new products or services;
the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with
respect to the target institutions;
the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between
commencing these activities and the generation of profits from the expansion;
our ability to finance an acquisition or other expansion and the possible dilution to our existing shareholders;
the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel
of the combining businesses;
entry into unfamiliar markets;
the possible failure of the introduction of new products and services into our existing business;
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on
our results of operations; and
the risk of loss of key employees and customers.
We may incur substantial costs to expand, and we can give no assurance that such expansion will prove to be profitable. Further, we
cannot be sure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with
acquisitions, which could dilute the economic and voting interests of our existing shareholders. We may also lose customers as we
close one or more branches as part of a plan to expand into other areas or become more productive from other branches.
18
We may be compelled to seek additional capital in the future but may not be able to access capital when needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Federal
banking agencies have adopted extensive changes to their capital requirements, including raising required amounts and eliminating the
inclusion of certain instruments from the calculation of capital. In addition, we may need to raise additional capital should we
experience significant loan losses. We may elect to raise additional capital to support our business, to finance acquisitions, if any, or
for other purposes. Our ability to raise additional capital, if needed, will depend on our financial performance, conditions in the capital
markets, economic conditions and a number of other factors, many of which are outside of our control. There can be no assurance,
therefore, that we will be able to raise additional capital at all or that the terms of available capital will be acceptable to us. If we
cannot raise additional capital when needed or desired, it may have a material adverse effect on our financial condition, results of
operations and prospects.
A default by another larger financial institution could adversely affect financial markets generally.
Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to
some degree, be interdependent. As a result, concerns about, or a default or threatened default by, one institution could lead to
significant market-wide liquidity and credit problems, losses or defaults by other institutions. This “systemic risk” may adversely
affect our business.
Legal, Regulatory and Accounting Change Risks
The enactment of new legislation or regulations may significantly affect our financial condition and results of operations.
The Company is subject to regulations and supervision of the Federal Reserve, and the Bank is subject to regulation and supervision of
the ODFI, the Federal Reserve, the FDIC and the CFPB. Such regulations are designed to protect customers and the DIF, not
shareholders. Regulations governing financial institutions are constantly undergoing change. New regulations or amendments could
adversely affect the Company's business. Regulatory agencies have great discretion in connection with their supervisory and
enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets held by an
institution and the appropriateness of an institution's allowance for loan losses. In addition, actions by regulatory agencies could cause
us to devote significant time and resources to compliance and defense of the Company's business and may lead to penalties that
materially affect the Company.
In recent years, Congress and the banking regulators have increased their focus on the financial services industry. The laws and
regulations adopted have subjected the Company and the Bank to additional restrictions, oversight and costs that may have an impact
on the financial condition and results of operations of the Company. In 2013, the Company's and the Bank's primary federal regulator
established a new comprehensive capital framework for U.S. banking organizations. The new capital rules became effective for the
Bank on January 1, 2015, subject to a phase-in period. Any future changes to capital requirements may have an adverse effect on our
capital ratios.
The current President of the United States and Congress have taken steps to change laws and regulations applicable to financial
institutions, including the Company and the Bank. While those steps are generally intended to lessen regulatory burden on financial
institutions, the results of such efforts are not yet known, and even the reduction of regulatory restrictions could have an adverse effect
on the Company, the Bank, or the Company's shareholders if such lessening of restrictions increases competition within the financial
services industry or the Company's market area.
Further information about government regulation of the Company and the Bank may be found under the heading, "SUPERVISION
AND REGULATION" in "ITEM 1. BUSINESS" of this Form 10-K.
Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause us to experience
a material financial loss.
The Bank Secrecy Act and the Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and
prevent the use of the U.S. financial system for money laundering
and terrorist financing activities. The Bank Secrecy Act, as amended by the Patriot Act, requires depository institutions and their
holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients,
monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to
requests for information by regulatory authorities and law enforcement agencies. Financial Crimes Enforcement Network (also known
as FinCEN), a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money
penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank
regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service.
19
There is also increased scrutiny of compliance with the rules enforced by OFAC. If our policies, procedures and systems are deemed
deficient, or if the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the
future are deficient, we may be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay
dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition
plans, which could negatively impact our business, financial condition and results of operations. Failure to maintain and implement
adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Changes in accounting standards could materially impact the Company’s consolidated financial statements.
The Company’s accounting policies and methods are fundamental to how our financial condition and results of operations are
recorded and reported. The accounting standard setters, including the Financial Accounting Standards Board, the SEC, and other
regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of the
Company’s consolidated financial statements. These changes can be hard to predict and can materially impact how the Company
records and reports financial condition and results of operations. In some cases, the Company could be required to apply a new or
revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained
earnings. Management may be required to make difficult, subjective, or complex judgments about matters that are uncertain.
Materially different amounts could be reported under different conditions or using different assumptions.
In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL.
CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also
reasonable and supportable forecasts that affect collectability. The Company will be subject to the new standard in the first quarter of
2023. Upon adoption of CECL, credit loss allowances may increase, which will decrease retained earnings and regulatory capital.
The federal banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory
capital over three years. CECL implementation poses operational risk, including the failure to properly transition internal processes or
systems, which could lead to call report errors, financial misstatements, or operational losses.
Changes in tax laws could adversely affect our performance.
We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad
valorem taxes. Changes to our taxes could have a material adverse effect on our results of operations. In addition, our customers are
subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers, including changes in the
deductibility of mortgage loan related expenses, may adversely affect their ability to purchase homes or consumer products, which
could adversely affect their demand for our loans and deposit products. In addition, such negative effects on our customers could
result in defaults on the loans we have made and decrease the value of mortgage-backed securities in which we have invested.
The Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking
statements contained in the above risk factors or in any other statement made at any time by any director, officer, employee or other
representative of the Company unless and until any such revisions or updates are required to be disclosed by applicable securities laws
or regulations.
Item 1B. Unresolved Staff Comments — Not applicable to the Company because it is a smaller reporting company.
20
Item 2. Properties
The Company’s operations are conducted at 194 West Main Street, Cortland, Ohio. Full-service banking business is conducted at a
total of fourteen offices, including:
BRISTOL
6090 State Route 45
Bristolville, Ohio 44402
330-889-3062
BROOKFIELD
7202 Warren-Sharon Road
Brookfield, Ohio 44403
330-448-6814
CANFIELD
3615 Boardman-Canfield Road
Canfield, Ohio 44406
330-941-5867
CORTLAND
194 West Main Street
Cortland, Ohio 44410
330-637-8040
HUBBARD
342 West Liberty Street
Hubbard, Ohio 44425
330-534-2265
HUDSON
75 S. Main St.
Hudson, OH 44236
330-342-1100
MANTUA
11661 State Route 44
Mantua, Ohio 44255
330-274-3111
NILES PARK PLAZA
815 Youngstown-Warren Road
Suite 1
Niles, Ohio 44446
330-652-8700
NORTH LIMA
9001 Market Street
North Lima, Ohio 44452
330-758-5884
STRONGSVILLE
14357 Pearl Road
Strongsville, Ohio 44136
440-238-5917
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
330-394-1438
WARREN
2935 Elm Road
Warren, Ohio 44483
330-372-1520
WILLIAMSFIELD
5917 U.S. Route 322
Williamsfield, Ohio 44093
440-293-7502
WINDHAM
8950 Maple Grove Road
Windham, Ohio 44288
330-326-2340
The Bank’s main and administrative office is located at 194 West Main Street, Cortland, Ohio. The Bank leases one financial service
center in Fairlawn, Ohio. The Niles Park Plaza, Hudson and Strongsville offices are leased, while all of the other offices are owned by
the Bank.
Item 3. Legal Proceedings
The Bank is involved from time to time in legal actions arising in the ordinary course of the Bank’s business. In the opinion of
management, the outcomes from such legal proceedings, either individually or in the aggregate, are not expected to have any material
effect on the Company.
Item 4. Mine Safety Disclosures – Not applicable
Information about our Executive Officers
The names, ages and positions of the executive officers as of February 28, 2020 are as follows:
Name
James M. Gasior ............
Timothy Carney.............
David J. Lucido .............
Stanley P. Feret..............
Age
60
54
62
59
Position Held
President, Chief Executive Officer and Director
Executive Vice President, Chief Operations Officer and Director
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Lending Officer
Principal Occupation and Business Experience of Executive Officers
During the past five years the business experience of each of the executive officers has been as follows:
Mr. Gasior has been President and Chief Executive Officer of the Company and the Bank since November 2, 2009. Mr. Gasior is a
director of the Company and the Bank since November 2005.
Mr. Carney has been Executive Vice President and Chief Operating Officer of the Company and the Bank since November 2, 2009.
Mr. Carney is a director of the Company and the Bank since November 2009.
Mr. Lucido was appointed Senior Vice President and Chief Financial Officer of the Company and the Bank on January 18, 2010.
Mr. Feret was appointed Senior Vice President and Chief Lending Officer of the Company and the Bank on March 10, 2010.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The following is information regarding market information, holders and dividends.
The Company files quarterly reports on Form 10-Q, an annual report on Form 10-K, current reports on Form 8-K, and proxy
statements, as well as any amendments to those reports and statements, with the SEC pursuant to section 13(a) or (15)d of the
Exchange Act. In 2020, the Company’s quarterly reports will be filed within 40 days of the end of each quarter, and the Company’s
annual report will be filed within 75 days of the end of the year. Any person may access these reports and statements free of charge, as
soon as reasonably practicable after such material is electronically filed with or furnished to the SEC, by visiting our web site at
www.cortlandbank.com or by writing to:
Deborah L. Eazor
Cortland Bancorp
194 West Main Street
Cortland, Ohio 44410
The SEC also maintains a website at www.sec.gov where our filings and other information may be obtained free of charge.
The Company’s common shares began trading on the NASDAQ Capital Markets stock exchange under the symbol CLDB on March
8, 2019. The following brokerage firms are registered market makers in the Company’s common shares:
D.A. Davidson & Co.
3773 Attucks Drive
Powell, OH 43065
Telephone: 800-394-9230
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
Telephone: 800-248-8863
Piper Sandler
800 Nicollet Mall, Suite 900
Minneapolis, MN 55402
Telephone: 612-303-6000
The following table shows the dividends declared during the periods indicated and the prices at which the common shares of the
Company have actually been purchased and sold in market transactions. The range of market prices is compiled from data available
the OTCQX, the exchange on which the shares traded prior to March 8, 2019; and from NASDAQ thereafter. The data may not
necessarily represent all transactions. As of February 28, 2020, the Company had approximately 1,143 shareholders of record.
2019
Fourth Quarter .................................................................................... $
Third Quarter......................................................................................
Second Quarter...................................................................................
First Quarter .......................................................................................
2018
Fourth Quarter.................................................................................... $
Third Quarter......................................................................................
Second Quarter...................................................................................
First Quarter .......................................................................................
2017
Fourth Quarter.................................................................................... $
Third Quarter......................................................................................
Second Quarter...................................................................................
First Quarter .......................................................................................
High
Price Per Share
Low
Close
Cash Dividends
Declared Per Share
$
$
$
23.99
24.40
25.00
28.68
24.30
26.00
26.00
26.00
21.00
19.25
19.00
18.93
$
$
$
20.10
21.75
20.47
19.10
20.50
23.46
20.80
20.40
17.95
17.00
17.94
17.50
$
$
$
21.81
21.90
23.10
23.79
20.50
24.40
24.31
23.15
20.50
19.25
18.00
18.60
0.12
0.11
0.11
0.16
0.11
0.16
0.11
0.11
0.08
0.08
0.08
0.15
22
For current share prices, please access our website at www.cortlandbank.com.
The Bank is subject to a dividend restriction that generally limits the amount of dividends that can be paid by an Ohio state-chartered
bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net
profits for the two preceding years less any required transfers to surplus. Under this formula, the amount available for payment of
dividends in 2020 is $9.9 million plus 2020 profits retained up to the date of the dividend declaration.
For the convenience of shareholders, the Company has established a plan whereby shareholders may have their dividends
automatically reinvested in the common shares of the Company. Participation in the plan is completely voluntary and shareholders
may withdraw at any time.
Shareholder and General Inquiries
Cortland Bancorp
194 West Main Street
Cortland, Ohio 44410
(330) 637-8040
Attention: Deborah L. Eazor
Vice President
DEazor@cortlandbank.com
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(888) 509-4619
Please contact our transfer agent directly for assistance in changing your address, elimination of duplicate mailings, transferring shares
or replacing lost, stolen or destroyed share certificates. Other questions regarding your status as a shareholder of the Company may be
addressed to the Company as indicated above.
The following table shows information relating to the repurchase of shares of the Company’s common stock during the quarter ended
December 31, 2019:
Total
Number of
Shares
Purchased
October ............................................
November ........................................
December .........................................
Total ..............................................
— $
4,000
50,000
54,000
Total Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
—
4,000
50,000
54,000
Maximum
Number of
Shares That May
Yet Be
Purchased Under
the Plans or
Programs*
300,000
296,000
246,000
—
Average Price
Paid Per Share
—
22.25
22.50
22.48
*
On December 18, 2018, the Company’s Board of Directors approved a program which allowed the Company to repurchase up
to 300,000 shares, or approximately 6.9% of the 4,349,624 outstanding shares of common stock at December 18, 2018. This
program terminated on December 31, 2019. The Company purchased 54,000 shares under this program. On December 17, 2019,
the Company’s Board of Directors approved a new program which allows the Company to repurchase up to 200,000 shares, or
approximately 4.6% of the 4,323,822 outstanding shares of common stock at December 17, 2019. This program will terminate
on December 31, 2020, or upon purchase of 200,000 shares if earlier or at any time without prior notice.
The Company did not sell any of its shares without registration during 2019, 2018 or 2017.
23
Item 6. Selected Financial Data
SUMMARY OF OPERATIONS
Total interest income ...................................................................................................................... $
Total interest expense .....................................................................................................................
Net interest income (NII)................................................................................................................
Provision for loan losses.................................................................................................................
NII after loss provision ...................................................................................................................
Investment security gains (losses), including impairment losses ...................................................
Mortgage banking gains .................................................................................................................
Other income ..................................................................................................................................
Total non-interest income .......................................................................................................
Total non-interest expenses ............................................................................................................
Income before tax expense .....................................................................................................
Federal income tax expense............................................................................................................
Net income.............................................................................................................................. $
PER COMMON SHARE DATA (1)
Earnings per share, basic and diluted ............................................................................................. $
Cash dividends declared per share .................................................................................................
Book value......................................................................................................................................
BALANCE SHEET DATA
Assets.............................................................................................................................................. $
Investment securities ......................................................................................................................
Loans held for sale..........................................................................................................................
Loans ..............................................................................................................................................
Allowance for loan losses...............................................................................................................
Deposits ..........................................................................................................................................
Borrowings .....................................................................................................................................
Subordinated debt ...........................................................................................................................
Shareholders’ equity .......................................................................................................................
AVERAGE BALANCES
Assets.............................................................................................................................................. $
Investment securities ......................................................................................................................
Loans ..............................................................................................................................................
Loans held for sale..........................................................................................................................
Deposits ..........................................................................................................................................
Borrowings .....................................................................................................................................
Subordinated debt ...........................................................................................................................
Shareholders’ equity .......................................................................................................................
ASSET QUALITY RATIOS
Loan charge-offs............................................................................................................................. $
Recoveries on loans ........................................................................................................................
Net charge-offs ............................................................................................................................... $
Net charge-offs as a percentage of average total loans ..................................................................
Loans 30+ days delinquent as a percentage of total loans..............................................................
Nonperforming loans...................................................................................................................... $
Nonperforming securities ...............................................................................................................
Other real estate owned ..................................................................................................................
Total nonperforming assets ............................................................................................................ $
Allowance for loan losses as a percentage of non-performing loans .............................................
Nonperforming 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 asset ratio ............................................................................................
Tangible equity ratio.......................................................................................................................
Cash dividend payout ratio .............................................................................................................
Net interest margin .........................................................................................................................
(In thousands of dollars, except for ratios and per share amounts)
Years Ended December 31,
2019
2018
2017
2016
2015
29,643
5,554
24,089
715
23,374
(44 )
1,554
3,512
5,022
19,755
8,641
1,359
7,282
1.68
0.50
17.19
737,162
138,966
4,890
518,716
4,465
618,381
25,922
5,155
74,338
697,251
139,824
489,192
3,778
584,138
24,279
5,155
70,587
(554 )
106
(448 )
0.09 %
0.44 %
8,545
—
—
8,545
52.25 %
1.16 %
10.84
10.94
10.32 %
1.04
15.73
10.12
10.98
29.76
3.79
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
27,749
4,383
23,366
725
22,641
(21 )
974
4,739
5,692
18,083
10,250
1,415
8,835
2.03
0.49
14.92
714,666
139,504
1,040
514,392
4,198
604,419
30,206
5,155
64,918
672,506
148,938
471,600
1,927
559,921
35,866
5,155
61,520
(1,338 )
233
(1,105 )
0.23 %
0.41 %
10,140
—
—
10,140
41.40 %
1.42 %
14.67
13.78
14.36 %
1.31
13.80
9.15
10.72
24.14
3.76
$
$
$
$
$
$
$
$
$
23,492
3,190
20,302
100
20,202
7
1,074
4,085
5,166
18,601
6,767
2,417
4,350
0.99
0.39
13.94
711,101
162,422
2,780
487,490
4,578
585,851
48,678
5,155
61,630
636,915
168,654
412,450
2,801
527,653
33,777
5,155
59,998
(840 )
450
(390 )
0.09 %
0.24 %
5,114
895
—
6,009
89.52 %
0.85 %
9.08
8.78
7.25 %
0.68
35.72
9.42
10.77
39.39
3.59
$
$
$
$
$
$
$
$
$
22,555
2,918
19,637
50
19,587
419
1,248
2,930
4,597
18,186
5,998
1,127
4,871
1.11
0.28
13.05
655,184
179,219
4,554
419,768
4,868
539,850
43,202
5,155
57,670
608,298
166,690
385,667
4,506
496,917
36,292
5,155
58,923
(614 )
238
(376 )
0.10 %
1.04 %
8,286
825
—
9,111
58.75 %
1.39 %
14.57
13.88
8.27 %
0.80
18.79
9.69
10.46
25.23
3.63
21,113
2,607
18,506
455
18,051
64
785
3,060
3,909
16,363
5,597
1,219
4,378
0.97
0.24
12.87
612,443
162,035
4,033
394,254
5,194
496,404
44,499
5,155
56,684
568,897
166,155
356,105
2,504
454,920
43,761
5,155
56,625
(723 )
260
(463 )
0.13 %
1.80 %
11,542
778
61
12,381
45.00 %
2.02 %
20.01
19.99
7.73 %
0.77
21.78
9.95
10.62
24.74
3.65
(1)
Basic earnings per common share are based on weighted average shares outstanding. Diluted earnings per share is after consideration of common stock equivalent. Cash
dividends per common share are based on actual cash dividends declared. Book value per common share is based on shares outstanding at each period end.
For more information see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and
Item 8, Financial Statements and Supplementary Data.
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following schedules show average balances of interest-earning and noninterest-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.
Average
Balance
Outstanding
2019
Interest
Earned
or Paid
(Fully taxable equivalent basis in thousands of dollars)
2018
Interest
Earned
or Paid
Average
Balance
Outstanding
Yield
or Rate
Average
Balance
Outstanding
Yield
or Rate
2017
Interest
Earned
or Paid
Yield
or Rate
Interest-earning assets:
Interest-earning deposits and other earning assets....... $
14,122 $
299
2.12% $
8,564 $
162
1.89%
$
8,668 $
98
1.13%
Investment securities (Note 1, 2, 3):
Taxable..................................................................
Nontaxable ............................................................
Total investment securities ...........................................
Loans (Note 1, 2, 3, 4) .................................................
Total interest-earning assets.........................................
Noninterest-earning assets:
Cash and due from banks.............................................
Premises and equipment ..............................................
Other assets ..................................................................
Total assets ..................................................................... $
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits ................................ $
Savings.........................................................................
Time .............................................................................
Total interest-bearing deposits.....................................
Borrowings:
Securities sold under agreement to repurchase............
Subordinated debt ........................................................
Federal Home Loan Bank advances - short term.........
Federal Home Loan Bank advances - long term..........
Total borrowings ...........................................................
Total interest-bearing liabilities ...................................
Noninterest-bearing liabilities:
Demand deposits..........................................................
Other liabilities.............................................................
Shareholders' equity ........................................................
Total liabilities and shareholders' equity .................... $
Net interest income..........................................................
Net interest rate spread (Note 5)......................................
Net interest margin (Note 6)............................................
1,905
78,745
2,028
61,079
3,933
139,824
492,970
25,789
646,916 $ 30,021
2.42%
3.32%
2.81%
5.23%
4.64%
2,270
93,372
1,851
55,566
4,121
148,938
473,527
23,830
631,029 $ 28,113
2.43%
3.33%
2.77%
5.03%
4.46%
2,229
101,768
2,853
66,886
5,082
168,654
415,251
19,257
592,573 $ 24,437
2.19%
4.26%
3.01%
4.64%
4.12%
7,569
10,366
32,400
697,251
7,277
9,089
25,111
672,506
$
197,196 $ 1,879
102
110,473
2,862
141,080
4,843
448,749
0.95% $
0.09%
2.03%
1.08%
197,856 $ 1,378
97
112,508
2,052
120,986
3,527
431,350
5
1,493
203
5,155
129
4,786
374
18,000
29,434
711
478,183 $ 5,554
0.33%
3.89%
2.70%
2.08%
2.42%
1.16%
6
1,679
189
5,155
374
18,899
287
15,288
856
41,021
472,371 $ 4,383
0.70%
0.09%
1.70%
0.82%
0.33%
3.61%
1.98%
1.88%
2.09%
0.93%
135,388
13,093
70,587
697,251
128,571
10,044
61,520
672,506
$
$
$
7,804
9,193
27,345
636,915
168,536 $
114,261
128,251
411,048
751
90
1,730
2,571
7
2,018
138
5,155
175
16,917
299
14,842
38,932
619
449,980 $ 3,190
116,605
10,332
59,998
636,915
$
$ 24,467
$ 23,730
$ 21,247
3.48%
3.79%
3.53%
3.76%
0.45%
0.08%
1.35%
0.63%
0.33%
2.64%
1.03%
2.01%
1.59%
0.71%
3.41%
3.59%
Note 1 – Includes both taxable and tax-exempt securities and loans.
Note 2 – The amounts are presented on a fully taxable equivalent basis using the statutory rate of 21% in 2019 and 2018 and 34% in
2017, and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax-exempt assets. The tax
equivalent income adjustment for loans and investment securities was $6,000 and $372,000, respectively, for December 31,
2019; $7,000 and $357,000, respectively, for December 31, 2018; and $14,000 and $931,000, respectively, for December 31,
2017.
Note 3 – Average balance outstanding includes the average amount outstanding of all non-accrual investment securities and loans.
Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and
include both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average
unearned income.
Note 4 – Interest earned on loans includes net loan fees of $812,000 in 2019, $725,000 in 2018 and $443,000 in 2017.
Note 5 – Net interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing
liabilities.
Note 6 – Net interest margin is calculated by dividing the net interest income by total interest-earning assets.
25
FINANCIAL REVIEW
The following is management’s discussion and analysis of the financial condition and results of operations of the Company. The
discussion should be read in conjunction with the Consolidated Financial Statements and related notes and summary financial
information included elsewhere in this annual report.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In addition to historical
information, certain information included in this discussion and other materials filed or to be filed by the Company with the SEC
(as well as information included in oral statements or other written statements made or to be made by the Company) may contain
forward-looking statements that involve risks and uncertainties. The words “believes,” “expects,” “may,” “will,” “should,” “projects,”
“contemplates,” “anticipates,” “forecasts,” “intends,” or similar terminology identify forward-looking statements. These statements
reflect management’s beliefs and assumptions, and are based on information 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, including the impact of the impairment of securities; political actions,
including failure of the United States Congress to raise the federal debt ceiling or the imposition of changes in the federal budget;
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;
changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchase of mortgage loans
sold and other estimates; and risks associated with other global economic, political and financial factors.
While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no
obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operation are based upon the Consolidated Financial
Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation
of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s
consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Certain accounting policies involve significant judgments and assumptions by management which has a material impact on the
carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Management has discussed the development and selection of these accounting estimates with the
Audit Committee.
Management believes the following are critical accounting policies that require the most significant judgments and estimates used in
the preparation of the Company’s consolidated financial statements.
26
Accounting for the Allowance for Loan Losses
The determination of the allowance for loan losses and the resulting amount of the provision for loan losses charged to operations
reflects management’s current judgment about the credit quality of the loan portfolio and takes into consideration changes in lending
policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio and, in the
terms of loans, changes in the experience, ability and depth of lending management, changes in the volume and severity of past due,
non-accrual and adversely classified or graded loans, changes in the quality of the loan review system, changes in the value of
underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of
competition, legal and regulatory requirements and other external factors. The nature of the process by which we determine the
appropriate allowance for loan losses requires the exercise of considerable judgment. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the
performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan
classifications. The allowance is increased by the provision for loan losses and decreased by charge-offs when management believes
the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy
or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies or defaults
and a higher level of non-performing assets, net charge offs, and provision for loan losses in future periods.
The Company’s allowance for loan losses methodology consists of three elements: specific valuation allowances based on probable
losses on specific loans; valuation allowances based on historical loan loss experience for similar loans with similar characteristics and
trends; and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and
external to the Company. These elements support the basis for determining allocations between the various loan categories and the
overall adequacy of our allowance to provide for probable losses inherent in the loan portfolio.
With these methodologies, a general allowance is established for each loan type based on historical losses for each loan type in the
portfolio. Additionally, management allocates a specific allowance for “Impaired Credits,” which is based on current information and
events; it is probable the Company will not collect all amounts due according to the original contractual terms of the loan agreement.
The level of the general allowance is established to provide coverage for management’s estimate of the credit risk in the loan portfolio
by various loan segments not covered by the specific allowance. Additional information regarding allowance for credit losses can be
found in Item 8, Note 3 to the Consolidated Financial Statements and elsewhere in this Management’s Discussion and Analysis.
Investment Securities and Impairment
The classification and accounting for investment securities is discussed in detail in Item 8, Notes 1 and 2 of the Consolidated Financial
Statements. Investment securities must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is
based partially on our ability to hold the securities to maturity and largely on management’s intentions, if any, with respect to either
holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for
unrealized gains and losses on securities. Unrealized gains and losses on trading securities, if any, flow directly through earnings
during the periods in which they arise, whereas available-for-sale securities are recorded as a separate component of shareholders’
equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment
securities are generally determined by reference to quoted market prices and reliable independent sources. At each reporting date, the
Company assesses whether there is an “other-than-temporary” impairment to the Company’s investment securities. Such impairment
must be recognized in current earnings rather than in other comprehensive income (loss).
The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI)
with formal reviews performed quarterly. OTTI losses on individual investment securities are recognized in accordance with FASB
ASC topic 320, Investments – Debt and Equity Securities. The purpose of this ASC is to provide greater clarity to investors about the
credit and noncredit component of an OTTI event and to communicate more effectively when an OTTI event has occurred. This ASC
amends the OTTI guidance in GAAP for debt securities, improves the presentation and disclosure of OTTI on investment securities
and changes the calculation of the OTTI recognized in earnings in the financial statements. This ASC does not amend existing
recognition and measurement guidance related to OTTI of equity securities.
For debt securities, ASC topic 320 requires an entity to assess whether it has the intent to sell the debt security or it is more-likely-
than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on
the security must be recognized.
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-
likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost
basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation and amount of the
OTTI recognized in the income statement.
27
In these instances, the impairment is separated into the amount of the total impairment related to the credit loss and the amount of the
total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is
recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income
(loss). The total OTTI is presented in the income statement with an offset for the amount of the total OTTI that is recognized in other
comprehensive income (loss). In determining the amount of impairment related to credit loss, the Company uses a third party
discounted cash flow model, several inputs for which require estimation and judgment. Among these inputs are projected deferral and
default rates and estimated recovery rates. Realization of events different than that projected could result in a large variance in the
values of the securities.
Additional information regarding investment securities can be found in Item 8, Notes 2 and 11 to the Consolidated Financial
Statements and elsewhere in this Management’s Discussion and Analysis.
Income Taxes
The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes
currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those
for tax reporting purposes. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In
estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking
into account statutory, judicial and regulatory guidance in the context of the Company’s tax position.
The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax
assets and liabilities for the temporary differences between the financial reporting basis and tax basis of our assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or settled. The Company conducts periodic assessments of
deferred tax assets, including net operating loss carryforwards, to determine if it is more-likely-than-not that they will be realized. In
making these assessments, the Company considers taxable income in prior periods, projected future taxable income, potential tax
planning strategies and projected future reversals of deferred tax items. These assessments involve a certain degree of subjectivity
which may change significantly depending on the related circumstances.
CORPORATE PROFILE
The Company, with total assets of approximately $737 million at December 31, 2019, is a bank holding company headquartered in
Cortland, Ohio whose principle activity is to manage, supervise and otherwise serve as a source of strength to the Bank.
Cortland Bank is a state-chartered bank engaged in commercial and retail banking services. The Bank offers a full range of financial
services to its local communities with an ongoing strategic focus on commercial banking relationships.
The Bank’s results of operations depend primarily on net interest income, which, in part, is a direct result of the market interest rate
environment. Net interest income is the difference between the interest income earned on interest-earning assets and the interest paid
on interest-bearing liabilities. Net interest income is affected by the shape of the market yield curve, the repricing of interest-earning
assets and interest-bearing liabilities and the prepayment rate of mortgage-related assets. Results of operations may be affected
significantly by general and local economic conditions, particularly those with respect to changes in market interest rates, credit
quality, governmental policies and actions of regulatory authority.
2019 OVERVIEW
In 2019, the Company’s net income was $7.3 million compared to $8.8 million in 2018, the primary difference being a $1.55 million
gain on life insurance proceeds from the death of a former executive. Amid rigorous regulatory standards and an uncertain economy,
the Company continues to follow its core strategic direction. Operating results reflect its commitment to growing loans and deposits in
the markets in which it operates and in producing consistent positive earnings.
Highlights of 2019 financial results:
• Net income of $7.23 million, or $1.68 per share for 2019. This compares to net profits of $7.32 million, or $1.68 per share, in
the previous year as stated on a normalized basis, after adjusting for non-recurring items, including $51,000 and $1.55
million gains on life insurance proceeds received on life insurance policies upon the death of former directors or officers that
exceeded the cash value of the policies.
•
•
The Company's net interest margin for the year ended December 31, 2019 improved to 3.79% versus 3.76% for the same
period last year despite three rate cuts enacted by the Federal Open Market Committee in 2019.
The return on average asset ratio for the Company was 1.04% for the year compared to 1.31% for the same period in 2018.
Likewise, the return on average equity ratio for the Company was 10.32% for the year compared to 14.36% for the same
period in 2018. Ratios in 2018 are unadjusted for the $1.55 million life insurance gain.
28
•
The efficiency ratio for the Company was 67.01% for the year versus 64.82% for 2018.
• Non-interest expenses of $19.8 million for the full year represent a 9.2% increase over the $18.1 million reported for 2018.
The increase in expenses is a result of onboarding costs relating to the NASDAQ listing, increased equity awards and new
branch initiatives.
• A quarterly cash dividend of $0.14 per share was payable on March 2, 2020 to shareholders of record on February 10, 2020, a
17% increase over the previous $0.12 per share. In addition, a special cash dividend of $0.05 per share was payable
concurrently, reflecting the consistent earnings performance.
•
The effective tax rate was 15.7% compared to 13.8% for 2019 and 2018, respectively. The tax-free life insurance gain in
2018 significantly reduced the effective rate. Further reductions in the 21% statutory rate are realized by the Company as a
result of tax-free investment income.
In the midst of earnings pressures brought on by economic instability, interest rate compression and increased competition, the
Company devoted substantial attention in the three years 2017-2019 to profit improvement measures and balance sheet positioning.
The Company’s management team continues to focus on measures designed to maintain capital and to provide for adequate liquidity
for lending and business development purposes. New strategies are being pursued to improve market penetration and product
expansion, with the objective of increasing both the interest income and non-interest income revenue base.
Total shareholders’ equity at December 31, 2019 was $74.3 million, representing a ratio of equity capital to total assets of 10.1%. In
comparison, total shareholders’ equity was $64.9 million at December 31, 2018, representing a ratio of equity capital to total assets of
9.1%. A component of shareholders’ equity is accumulated other comprehensive income (loss), which includes the net after-tax
impact of unrealized gains or losses on investment securities classified as available-for-sale. Net unrealized gains on available-for-sale
investment securities, net of tax, were $1.1 million at December 31, 2019, compared with net unrealized losses, net of tax, of $3.7
million at December 31, 2018. Such unrealized gains or losses represent the difference, net of applicable income tax effect, between
the estimated fair value and amortized cost of investment securities classified as available-for-sale and is driven by market interest
rates. The $4.8 million increase in securities valuation is a result of the decline in interest rates during 2019.
Return on average equity was 10.32% in 2019, compared to 14.36% in 2018, while return on average assets measured 1.04% in 2019
and 1.31% in 2018. Adjusted for nonrecurring items, the return on average assets and return on average equity in 2018 were 1.08%
and 11.84%. Book value per share increased by $2.27 to $17.19 at December 31, 2019 from $14.92 at December 31, 2018. The price
of the Company’s common shares traded in a range between a low of $20.10 and a high of $28.68, closing the year at $21.81 per
share.
The Company continues to maintain capital sufficient to be deemed well capitalized under all regulatory measures. In the current
regulatory environment, regulatory oversight bodies expect banks to maintain ratios above the statutory levels as a margin of safety.
CERTAIN NON-GAAP MEASURES
Certain financial information has been determined by methods other than 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 performance
trends and financial condition. Core earnings are a supplemental tool for analysis and not a substitute for GAAP net income.
Reconciliation from GAAP net income to the non-GAAP measure of core earnings is referenced as part of management’s discussion
and analysis of quarterly and year-to-date financial results of operations.
Core earnings, which exclude non-recurring items, were $7.2 million in 2019, $7.3 million in 2018 and $4.7 million in 2017. Core
earnings per share were $1.67 in 2019, $1.68 in 2018 and $1.07 in 2017.
29
The following is a reconciliation between core earnings and earnings under GAAP:
(Amounts in thousands, except per share data)
Years Ended December 31,
2018
2017
2019
GAAP earnings ..................................................................................................... $
Gains recognized on Bank Owned Life Insurance policy (tax free)*...................
Change in corporate tax rate .................................................................................
Recognition (reversal) of deferred tax valuation allowance .................................
Core earnings ........................................................................................................ $
GAAP earnings per share...................................................................................... $
Gains recognized on Bank Owned Life Insurance policy (tax free)*...................
Change in corporate tax rate .................................................................................
Recognition (reversal) of deferred tax valuation allowance .................................
Core earnings per share......................................................................................... $
7,282
(51)
—
—
7,231
1.68
(0.01)
—
—
1.67
$
$
$
$
8,835
(1,548)
—
28
7,315
2.03
(0.36)
—
0.01
1.68
$
$
$
$
4,350
(898)
1,246
—
4,698
0.99
(0.20)
0.28
—
1.07
*
This is the amount of proceeds received on life insurance policies upon the death of former directors or officers that exceeded
the cash value of the policies.
BALANCE SHEET COMPOSITION
The following table illustrates, during the years presented, the mix of the Company’s funding sources and the assets in which those
funds are invested as a percentage of the Company’s average total assets at December 31 for the periods indicated. Average assets
totaled $697.3 million in 2019 compared to $672.5 million in 2018 and $636.9 million in 2017.
Sources of Funds:
Deposits:
Non-interest bearing....................................................................................
Interest bearing............................................................................................
Long-term debt and other borrowings ...........................................................
Subordinated debt ..........................................................................................
Other non-interest bearing liabilities .............................................................
Shareholders' equity .......................................................................................
Total..........................................................................................................
Uses of Funds:
Loans, including loans held for sale ..............................................................
Investment securities......................................................................................
Interest-earning deposits and other earning assets.........................................
Bank-owned life insurance ............................................................................
Partnerships and other investments................................................................
Other non-interest earning assets ...................................................................
Total..........................................................................................................
2019
December 31,
2018
2017
19.4%
64.4
3.5
0.7
1.9
10.1
100.0%
70.7%
20.1
2.0
2.3
1.8
3.1
100.0%
19.1%
64.1
5.3
0.8
1.5
9.2
100.0%
70.4%
22.2
1.3
2.4
1.6
2.1
100.0%
18.3%
64.6
5.3
0.8
1.6
9.4
100.0%
65.2%
26.5
1.4
2.7
1.4
2.8
100.0%
Deposits continue to be the Company’s primary source of funding. During 2019, the relative mix of deposits has remained steady with
interest-bearing being the main source. Average non-interest bearing deposits totaled 23.2% of total average deposits in 2019,
compared to 23.0% in 2018 and 22.1% in 2017. Additional information regarding deposits can be found in Item 8, Note 5 to the
Consolidated Financial Statements and elsewhere in this Management’s Discussion and Analysis.
The Company primarily invests funds in loans and securities. Loans continue to be the focus of the Company’s asset allocation.
Average securities decreased $9.1 million, or 6.1%, to $139.8 million during 2019 from $148.9 million in 2018, while average loans
increased by $19.4 million, or 4.1%, to $493.0 million during 2019 from $473.5 million in 2018.
30
ASSET QUALITY
The Company’s management regularly monitors and evaluates trends in asset quality. Loan review practices and procedures require
detailed monthly analysis of delinquencies, nonperforming assets and other sensitive credits. Loans are moved to non-accrual status
once they reach 90 days past due or when analysis of a borrower’s creditworthiness indicates the collection of interest and principal is
in doubt. Nonperforming loans include loans in non-accrual status, restructured loans and real estate acquired in satisfaction of debts
previously contracted.
Additionally, as part of the Company’s loan review process, management routinely evaluates risks which could potentially affect the
ability to collect loan balances in their entirety. Reviews of individual credits, aggregate account relationships or any concentration of
credits in particular industries are subject to a detailed loan review.
Gross income that would have been recorded in 2019 on these nonperforming loans, had they been in compliance with their original
terms, was $544,000. Interest income that actually was included in income on these loans amounted to $381,000. In addition to
nonperforming loans, nonperforming assets include nonperforming investment securities. At December 31, 2017, there were two
investments classified as nonperforming and both of these investments were sold in June 2018. Gross income that would have been
recorded in the first six months of 2018 on nonperforming investments, had they been in compliance with their original terms, was
$21,000. Interest income that actually was included in income on these investments during this period amounted to $25,000, a higher
amount due to interest collected upon sale. There are no accruing loans which are contractually past due 90 days or more as to
principal or interest payments.
The following table depicts the trend in these potentially problematic asset categories:
2019
2018
(Amounts in thousands)
December 31,
2017
2016
2015
Non-accrual loans:
Commercial ............................................................... $
Commercial real estate ..............................................
Residential real estate ................................................
Consumer - home equity............................................
Consumer - other .......................................................
Total non-accrual loans...........................................
Investment securities ....................................................
Other real estate owned ................................................
Troubled debt restructured loans..................................
Nonperforming assets ............................................. $
Loans past due greater than 30 days
1,152
566
469
147
—
2,334
—
—
6,211
8,545
or on nonaccrual ........................................................ $
2,593
$
$
$
1,291
512
310
120
—
2,233
—
—
7,907
10,140
2,493
$
$
$
— $
506
247
129
—
882
895
—
4,232
6,009
$
— $
1,458
1,265
55
—
2,778
825
—
5,508
9,111
$
$
1,196
2,176
1,252
262
—
4,886
778
61
6,656
12,381
7,242
1,409
$
4,533
Non-accrual loans as a percentage of total loans .............
Nonperforming assets as a percentage of total assets ......
Nonperforming assets as a percentage of equity capital
2019
2018
December 31,
2017
2016
2015
0.45%
1.16%
0.43%
1.42%
0.18%
0.85%
0.66%
1.39%
1.24%
2.02%
plus allowance for loan losses.......................................
10.84%
14.67%
9.08%
14.57%
20.01%
As of December 31, 2019, there were $7.0 million in loans not included in this table where known information about borrowers’
possible credit problems caused management to have some doubts as to the ability of these borrowers to comply with present loan
payment terms and which may result in disclosure of such loans in this table.
Loans accounted for on a non-accrual basis ranged from a high of $4.9 million in 2015 to a low of $882,000 in 2017. Non-accrual
loans in 2019 of $2.3 million is slightly lower than the average of the past five years, which is $2.6 million. In 2015, non-accrual loans
were mainly impacted by loans to one related group in both the commercial and commercial real estate categories, which were
resolved favorably in 2016. In 2015 to 2016, non-accrual loans were impacted by one residential real estate loan for $1.0 million
which paid off in 2017. The total of all loans past due more than 30 days or on non-accrual ranged from a low of $1.4 million in 2017
to a high of $7.2 million in 2015. Loans charged-off, net of recoveries, was $448,000 in 2019, compared to $ 1.1 million in 2018,
$390,000 for 2017, $376,000 for 2016, and $463,000 for 2015. The resulting ratios do not indicate any trends of concern from
management’s perspective.
31
Troubled-debt restructured loans are loans that have been modified when economic concessions have been granted to borrowers who
have experienced or are expected to experience financial difficulties. In 2018, there were $4.2 million in new troubled debt
restructurings. In 2015, there were $3.2 million in new troubled debt restructurings. There were none added in 2019, 2017 or 2016.
Past due loans, potential problem loans, as well as loans on non-accrual have all been stable, helping to require a provision of $715,000 in
2019, and $725,000 in 2018 which is lower than the net charge-off of $1.1 million (of which previously had a specific reserve of
$625,000). In 2017 and 2016, the provision for loan losses was $100,000 and $50,000, respectively, aided by large recoveries.
Additional information regarding loans can be found in Item 8, Note 3 to the Consolidated Financial Statements and elsewhere in this
Management’s Discussion and Analysis.
At December 31, 2017, there was $895,000 of the Company’s holdings in trust preferred securities considered to be in non-accrual
status. The quarterly interest payments for both of its investments in trust preferred securities had been placed in “payment in kind”
status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the
interest payments, management placed these securities in non-accrual status. They were sold in 2018.
RESULTS OF OPERATIONS
Net interest income................................................................................................... $
Tax equivalent income adjustment for investment securities ..................................
Tax equivalent income adjustment for loans............................................................
Net interest income on a fully taxable equivalent basis ........................................... $
Interest and dividends on investment securities....................................................... $
Tax equivalent income adjustment for investment securities ..................................
Investment securities income on a fully taxable equivalent basis............................ $
Interest and fees on loans ......................................................................................... $
Tax equivalent income adjustment for loans............................................................
Loan income on a fully taxable equivalent basis ..................................................... $
(Amounts in thousands)
December 31,
2018
$
$
$
$
$
$
23,366
357
7
23,730
3,764
357
4,121
23,823
7
23,830
2019
24,089
372
6
24,467
3,561
372
3,933
25,783
6
25,789
2017
20,302
931
14
21,247
4,151
931
5,082
19,243
14
19,257
$
$
$
$
$
$
Analysis of Net Interest Income - Years Ended December 31, 2019 and 2018
Net interest income, the principal source of the Company’s earnings, is the amount by which interest and fees generated by interest-
earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable
equivalent basis, net interest income measured $24.5 million for 2019 and $23.7 million for 2018. The resulting net interest margin
was 3.79% for 2019 and 3.76% for 2018.
The increase in interest income, on a fully taxable equivalent basis, of $1.9 million is the product of a 2.5% year-over-year increase in
average earning assets along with a 18 basis point increase in yield. The increase in interest expense of $1.2 million was a product of a
23 basis point increase in rates paid and a 1.2% increase in average interest-bearing liabilities. The net result was a 3.1% increase in
net interest income on a fully taxable equivalent basis, and a 3 basis point increase in the Company’s net interest margin on a growing
asset base with a different mix.
On a fully taxable equivalent basis, income on investment securities decreased by $188,000, or 4.6%. The average invested balances
in these securities decreased by $9.1 million, or 6.1%, from the levels of a year ago. The decrease in the average balance of investment
securities was accompanied by a 4 basis point increase in the tax equivalent yield of the portfolio. The Company will continue
attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when
beneficial. Additional information regarding investment securities can be found in Item 8, Notes 2 and 11 to the Consolidated
Financial Statements and elsewhere in this Management’s Discussion and Analysis.
On a fully taxable equivalent basis, income on loans increased by $2.0 million, or 8.2%, for 2019 compared to the same period in 2018.
A $19.4 million increase in the average balance of the loan portfolio, or 4.1%, was accompanied by a 20 basis point increase in the
portfolio’s tax equivalent yield. The four rate increases in 2018 by the Federal Open Market Committee (FOMC) aggregating to 100
basis points was tempered with three rate reductions in the latter part of 2019. Coupled with strong competition for good credits, there
is continued downward pressure on offering rates. The commercial loan portfolio housed the majority of the net increase in balances.
32
Additional information regarding loans can be found in Item 8, Note 3 to the Consolidated Financial Statements and elsewhere in this
Management’s Discussion and Analysis.
Other interest income increased by $137,000, or 84.6%, from the same period a year ago. The average balance of interest-earning
deposits increased by $5.6 million, or 64.9%. The yield increased by 23 basis points from 2018 to 2019, reflecting the aggregate net
increases in the federal funds rate. Management intends to remain fully invested, minimizing on-balance sheet liquidity.
Average interest-bearing demand deposits and money market accounts decreased by $660,000, or 0.3%, while average savings
balances decreased by $2.0 million, or 1.8%. The average rate paid on interest-bearing demand deposits and money market accounts
increased 25 basis points from 2018 to 2019 to 0.95%, reflecting the promotional specials offered during the year. The average rate
paid on savings accounts was 0.09% for both 2019 and 2018. The average balance of time deposit products increased by $20.1
million, or 16.6%, as the average rate paid increased by 33 basis points, from 1.70% to 2.03%. The current low-rate environment
offers little opportunity for time deposit customers, except for periodic special rates offered on a limited basis. Time deposits also
include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts. Brokered deposits
are one of several borrowing sources, primarily used when rates therein are beneficial versus other sources. Additional information
regarding deposits can be found in Item 8, Note 5 to the Consolidated Financial Statements and elsewhere in this Management’s
Discussion and Analysis.
Average borrowings and subordinated debt decreased by $11.6 million while the average rate paid on borrowings increased by 33
basis points. As lower cost short-term borrowings matured, the longer-term borrowings at higher rates remained. Management
continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives. With the possibility of
continued rate reductions by the FOMC, wholesale and borrowing rates can reprice lower, while deposit rates may show modest
decline. Additional information regarding FHLB Advances and Other Borrowings and Subordinated Debt can be found in Item 8,
Notes 6 and 7 to the Consolidated Financial Statements and elsewhere in this Management’s Discussion and Analysis.
Analysis of Net Interest Income - Years Ended December 31, 2018 and 2017
Net interest income, the principal source of the Company’s earnings, is the amount by which interest and fees generated by interest-
earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable
equivalent basis, net interest income measured $23.7 million for 2018 and $21.2 million for 2017. The resulting net interest margin
was 3.76% for 2018 and 3.59% for 2017.
The increase in interest income, on a fully taxable equivalent basis, of $3.7 million was the product of a 6.5% year-over-year increase
in average earning assets along with a 34 basis point increase in yield. The increase in interest expense of $1.2 million was a product
of a 22 basis point increase in rates paid and a 5.0% increase in average interest-bearing liabilities. The net result was a 11.7% increase
in net interest income on a fully taxable equivalent basis, and a 17 basis point increase in the Company’s net interest margin on a
growing asset base with a different mix. The key driver to the margin expansion was the loan rate increases exceeding the deposit rate
increases by 20 basis points.
On a fully taxable equivalent basis, income on investment securities decreased by $961,000, or 18.9%. The average invested balances
in these securities decreased by $19.7 million, or 11.7%, from the levels of a year ago. The decrease in the average balance of
investment securities was accompanied by a 24 basis point decrease in the tax equivalent yield of the portfolio. The Company
continued attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances
when beneficial. The lower corporate tax rate effective in 2018 had a 22 basis point impact on the tax equivalent yield, otherwise
security yields were comparable among periods. Additional information regarding investment securities can be found in Item 8, Notes
2 and 11 to the Consolidated Financial Statements and elsewhere in this Management’s Discussion and Analysis.
On a fully taxable equivalent basis, income on loans increased by $4.6 million, or 23.7%, for 2018 compared to the same period in
2017. A $58.3 million increase in the average balance of the loan portfolio, or 14.0%, was accompanied by a 39 basis point increase in
the portfolio’s tax equivalent yield. Despite four rate increases by the Federal Reserve Open Market Committee, strong competition
for good credits kept pressure on offering rates. Higher than usual prepayment fees contributed 5 basis points to the loan yield. The
commercial loan portfolio housed the majority of the increase in balances. Additional information regarding loans can be found in
Item 8, Note 3 to the Consolidated Financial Statements and elsewhere in this Management’s Discussion and Analysis.
Other interest income increased by $64,000, or 65.3%, from the same period a year ago. The average balance of interest-earning
deposits decreased by $104,000, or 1.2%. The yield increased by 76 basis points from 2017 to 2018, reflecting increases in the federal
funds rate. Management intended to remain fully invested, minimizing on-balance sheet liquidity.
33
Average interest-bearing demand deposits and money market accounts increased by $29.3 million, or 17.4%, while average savings
balances decreased by $1.8 million, or 1.5%. Total interest paid on interest-bearing demand deposits and money market accounts was
$1.4 million, a $627,000 increase from last year. The average rate paid increased 25 basis points from 2017 to 2018. Total interest
paid on savings accounts was $97,000, a $7,000 increase from last year. The average rate paid on savings accounts increased 1 basis
point from 2017 to 2018. The average balance of time deposit products decreased by $7.3 million, or 5.7%, as the average rate paid
increased by 35 basis points, from 1.35% to 1.70%. Interest expense increased on time deposits by $322,000 from the prior year. The
low-rate environment offered little opportunity for time deposit customers, except for periodic special rates offered on a limited basis.
Time deposits also include wholesale funds obtained at generally higher rates than in-market accounts. Additional information
regarding deposits can be found in Item 8, Note 5 to the Consolidated Financial Statements and elsewhere in this Management’s
Discussion and Analysis.
Average borrowings and subordinated debt increased by $2.1 million while the average rate paid on borrowings increased by 50 basis
points. Cost of borrowings continued to rise in tandem with the Federal funds rate, resulting in higher interest expense, despite
comparable borrowing levels. Management continued to utilize short-term borrowings to bridge liquidity gaps. Additional information
regarding FHLB Advances and Other Borrowings and Subordinated Debt can be found in Item 8, Notes 6 and 7 to the Consolidated
Financial Statements and elsewhere in this Management’s Discussion and Analysis.
The following table provides a detailed analysis of changes in net interest income on a tax equivalent basis, 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.
Increase (decrease) in interest income:
Interest-earning deposits and other money markets .......... $
Investment securities:
Taxable ...........................................................................
Nontaxable......................................................................
Loans .................................................................................
Total interest income change .......................................
Increase (decrease) in interest expense:
Interest-bearing demand deposits ...................................
Savings deposits .............................................................
Time deposits..................................................................
Securities sold under agreements to repurchase .............
FHLB advances - short term...........................................
FHLB advances - long term............................................
Subordinated debt ...........................................................
Total interest expense change ......................................
Increase (decrease) in net interest income on a
2019 Compared to 2018
Rate
Volume
Total
2018 Compared to 2017
Rate
Volume
Total
(Amounts in thousands)
116 $
21 $
137
$
(1) $
65 $
64
(354)
183
998
943
(5)
(2)
371
(1)
(347)
54
—
70
(11)
(6)
961
965
506
7
439
—
102
33
14
1,101
(365)
177
1,959
1,908
501
5
810
(1)
(245)
87
14
1,171
(193)
(437)
2,846
2,215
148
(1)
(103)
(1)
23
8
—
74
234
(565)
1,727
1,461
479
8
425
—
176
(20)
51
1,119
41
(1,002)
4,573
3,676
627
7
322
(1)
199
(12)
51
1,193
taxable equivalent basis ............................................ $
873 $
(136) $
737
$
2,141 $
342 $
2,483
34
PROVISION FOR LOAN LOSSES, NON-INTEREST INCOME, NON-INTEREST EXPENSE & FEDERAL INCOME TAX
During 2019, 2018 and 2017, the amount charged to operations as a provision for loan losses was adjusted to account for charge-offs
against the allowance, as well as an increase in loan balances recorded in the portfolio, expected losses on specific problem loans and
several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company
had allocated a portion of the allowance for a select few specific problem loans in 2019, 2018 and 2017, and has not experienced
significant deterioration in any loan type, including the residential real estate portfolios or the commercial loan portfolio, and accordingly
has not added any special provision for these loan types. Past due loans, potential problem loans, as well as loans on non-accrual have all
been stable, helping to require a provision of $715,000 in 2019 which is higher than the $448,000 net charge offs, providing allocation to
a specific reserve. A $725,000 provision was recorded in 2018 which is lower than the net charge-off of $1.1 million (of which
previously had a specific reserve of $625,000) and required a provision of only $100,000 in the 2017. In 2017, there was a favorable
ruling in a bankruptcy court surrounding the eventual sale of a business to which the Company lent funds, resulting in a large recovery of
amounts previously charged off. These recoveries displaced provisions throughout 2017. Provision expense levels are in recognition of
loan growth and a changing composition of the loan portfolio as the Company manages its balance sheet with a commercially-oriented
focus.
The following table provides a detailed analysis of non-interest income:
(Amounts in thousands)
December 31,
2018
2017
2019
Fees for customer services................................................................................. $
Mortgage banking gains, net .............................................................................
Earnings on bank-owned life insurance ............................................................
Other real estate gains .......................................................................................
Other non-interest income .................................................................................
Non-interest income, excluding investment gains.............................................
Investment securities available-for-sale (losses) gains, net...............................
Total non-interest income ............................................................................... $
2,312
1,554
392
—
808
5,066
(44)
5,022
$
$
2,273
974
1,869
—
597
5,713
(21)
5,692
$
$
2,241
1,074
1,203
170
471
5,159
7
5,166
Total non-interest income, excluding investment gains, decreased by $647,000, or 11.3%, for 2019 compared to an increase of
$554,000, or 10.7%, for 2018. After gains on investment securities and impairment losses, non-interest income decreased by
$670,000, or 11.8%, in 2019 compared to an increase of $526,000, or 10.2%, in 2018.
Fees for customer services increased by $39,000, or 1.7%, in 2019, compared to an increase of $32,000, or 1.4%, in the prior year
driven by customer transactions on deposit accounts.
Mortgage banking gains totaled $1.6 million in 2019, $974,000 in 2018 and $1.1 million in 2017, reflective of the increase in margin
on loan sales.
Earnings on bank-owned life insurance decreased by $1.5 million in 2019 compared to an increase of $666,000 in 2018. Proceeds
received on policies upon the deaths of former executives exceeded the cash value of the policies by $51,000 in 2019 and $1.5 million
in 2018.
A gain of $170,000 was recognized on the sale of property that was recorded as other real estate owned in 2017 with none in 2019 or
2018.
Other sources of non-interest income increased by $211,000 in 2019 from the same period a year ago, and increased by $126,000 in
2018 from 2017. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items.
35
The following table provides a summary of non-interest expenses:
(Amounts in thousands)
December 31,
2018
2017
2019
Salaries and employee benefits ........................................................................... $
Net occupancy and equipment ............................................................................
State and local taxes............................................................................................
FDIC insurance ...................................................................................................
Professional fees .................................................................................................
Advertising and marketing..................................................................................
Data processing fees ...........................................................................................
Other non-interest expense .................................................................................
Total non-interest expenses.............................................................................. $
11,198
2,400
518
63
1,093
388
277
3,818
19,755
$
$
10,260
2,232
493
176
879
322
250
3,471
18,083
$
$
10,631
2,331
463
199
786
478
251
3,462
18,601
Total non-interest expenses increased by $1.7 million, or 9.3%, in 2019. This compares to a decrease of $518,000, or 2.8%, in 2018.
During 2019, expenditures for salaries and employee benefits increased by $938,000, or 9.1%, and in 2018 decreased by $371,000, or
3.5%. The increase in 2019 is mainly due to an increase in equity compensation of $547,000 in connection with attaining the most
profitable year in the Company’s history in 2018, and the result of opening of a new branch in the first quarter of 2019. The decrease
in 2018 is mainly a result of a workforce realignment and a branch consolidation in latter 2017. Full-time equivalent employment
averaged 162 in 2019 compared to 159 in 2018 and 160 in 2017.
Salaries and employee benefits represent 56.7% of all non-interest expenses in 2019 and 2018 and 57.2% in 2017. The following table
details components of these increases and decreases.
Salaries .................................................. $
Employee benefits .................................
Deferred loan origination costs .............
Total ................................................. $
Amounts (in thousands)
December 31,
2018
2019
899
1
900
38
938
$
$
(361)
(39)
(400)
29
(371)
$
$
2017
2019
330
122
452
10
462
11.2%
0.0
8.5
9.8
9.1%
Percentages
December 31,
2018
(4.3)%
(1.5)
(3.6)
6.9
(3.5)%
2017
4.1%
4.8
4.3
(2.3)
4.5%
Salary expense per employee averaged $55,000 in 2019 and $50,000 in 2018 and $52,000 in 2017. Average earning assets per
employee measured approximately $4.2 million in 2019 and in 2018 and $4.1 million in 2017. Charges for insurance premiums paid
to the FDIC decreased from 2018 by $113,000. Because the Deposit Insurance Fund (DIF) reserve ratio exceeded a threshold amount,
the Bank was given a Small Bank Assessment credit against quarterly premiums. We anticipate using the remainder of the credits in
the first quarter of 2020. Deposits are insured by the FDIC up to a maximum amount, which is generally $250,000 per depositor
subject to aggregation rules. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the
FDIC. State and local taxes increased by $25,000 in 2019 or 5.1% compared to a $30,000 increase, or 6.5%, in 2018, reflecting the
growing shareholders’ equity on which the state tax is based. Professional fees increased by $214,000 or 24.4% from 2018, compared
to a $93,000 increase in 2018 from 2017. This is due in part to an increase in legal fees attributable to loan collection efforts. All other
categories of non-interest expenses increased $608,000, or 9.7%, in 2019 compared to a decrease of $247,000, or 3.8%, in 2018.
These expense categories are subject to fluctuation due to non-recurring items. The increase in expenses in 2019 is a result of the
NASDAQ listing, increased equity awards and new branch initiatives.
Income before federal income tax expense amounted to $8.6 million for 2019, compared to $10.3 million and $6.8 million for 2018
and 2017, respectively. The effective tax rate was 15.7% in 2019, 13.8% in 2018 and 35.7% in 2017, resulting in income tax expense
of $1.4 million in 2019 and 2018 and $2.4 million in 2017. The effective rate is affected by the current level of profitability and tax-
free components of the revenue stream. The lower rates in 2019 and 2018 are primarily affected by the change in corporate tax rate
from 34% to 21%. The gains on bank-owned life insurance mentioned previously were tax free and contributed to the lower effective
tax rate in both 2018 and 2017. The increase in the effective tax rate in 2017 was also a result of the Tax Act, which increased the
deferred tax charges by $1.2 million, or 18.4%.
36
The effective federal income tax rate varies from the applicable U.S. statutory federal income tax rate of 21% for 2019 and 2018, and
34% for 2017 due to the following differences:
Provision at statutory rate......................................................................................
(Deduct) add tax effects of:
Earnings on bank-owned life insurance-net.....................................................
Non-taxable interest income ............................................................................
Change in corporate tax rate ............................................................................
Low income housing tax credits ......................................................................
Deferred tax valuation (reversal) recognition ..................................................
Non-deductible expenses .................................................................................
Federal income tax effective rate ..........................................................................
2019
December 31,
2018
2017
21.00%
21.00%
34.00%
(1.08)
(4.02)
—
(1.81)
—
1.64
15.73%
(3.93)
(3.11)
—
(1.37)
0.27
0.94
13.80%
(6.11)
(9.80)
18.41
(2.21)
—
1.43
35.72%
Net income registered $7.3 million in 2019, $8.8 million in 2018 and $4.4 million in 2017, representing per share amounts of $1.68 in
2019, $2.03 in 2018 and $0.99 in 2017. Cash dividends of $0.50, $0.49 and $0.39 per share were paid to shareholders of record in
2019, 2018 and 2017, respectively.
The following table shows unaudited financial results by quarter:
Dec. 31
Interest income ............................................... $ 7,428
1,387
Interest expense ..............................................
6,041
Net interest income......................................
180
Loan loss provision ........................................
—
Investment securities (losses) gains, net ........
381
Mortgage banking gains, net ..........................
958
Other income ..................................................
4,903
Other expenses ...............................................
2,297
Income before tax ........................................
393
Federal income tax expense ...........................
Net income .................................................. $ 1,904
Net income per share...................................... $ 0.44
Net interest income (fully tax-equivalent
$ 6,147
basis) ...........................................................
Net interest rate spread...................................
Net interest margin .........................................
ALLOWANCE FOR LOAN LOSSES
For the 2019 quarter ended:
For the 2018 quarter ended:
(Amounts in thousands)
Sept. 30
$ 7,224
1,402
5,822
180
—
492
935
4,761
2,308
363
$ 1,945
$ 0.45
June 30
$ 7,401
1,399
6,002
180
(44)
344
752
5,339
1,535
207
$ 1,328
$ 0.30
Mar. 31
$ 7,590
1,366
6,224
175
—
337
867
4,752
2,501
396
$ 2,105
$ 0.49
Dec. 31
$ 7,489
1,236
6,253
75
—
203
752
4,643
2,490
466
$ 2,024
$ 0.47
Sept. 30
$ 6,962
1,148
5,814
75
—
272
876
4,529
2,358
386
$ 1,972
$ 0.46
June 30
$ 6,727
1,020
5,707
75
(41)
261
2,357
4,585
3,624
322
$ 3,302
$ 0.75
Mar. 31
$ 6,571
979
5,592
500
20
238
754
4,326
1,778
241
$ 1,537
$ 0.35
$ 5,927
$ 6,086
$ 6,307
$ 6,339
$ 5,900
$ 5,793
$ 5,698
3.45% 3.38%
3.74% 3.70%
3.48% 3.62%
3.80% 3.90%
3.68% 3.48% 3.52% 3.43%
3.95% 3.73% 3.74% 3.62%
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents
management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, with the
judgment of management, is necessary to reserve for estimated loan losses on risks inherent in the loan portfolio. Accordingly, the
methodology to establish the amount of the allowance is based on historical loss experience by type of credit and internal risk grade,
specific homogeneous risk pools, and specific loss allocations, with adjustments for current events and conditions. The Company’s
process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it
occurs.
The Company’s allowance for loan loss methodology consists of three elements: (i) specific valuation allowances on probable losses
on specific loans; (ii) historical valuation allowances based on historical loan loss experience for similar loans with similar
characteristics and trends; and (iii) general valuation allowances based on general economic conditions and other qualitative risk
factors both internal and external to the Company.
37
The allowances established for probable losses on specific loans are based on recurring analyses and evaluations of classified loans.
Loans are categorized into risk grade classifications based on an internal credit risk grading process that evaluates, among other things:
(i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the
borrower operates. The Bank currently divides the loan and lease portfolio into the following major categories: 1) Pooled Loans
(unclassified) with similar risk characteristics; 2) Substandard Loans (classified) defined as being inadequately protected by current
sound net worth, paying capacity of the borrower, or pledged collateral; 3) Special Mention (classified) defined as having potential
weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result
in the deterioration of the repayment prospects for the credit or the Bank’s credit position; 4) Loss or doubtful loans (classified) have
all the weaknesses of the previous classifications, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values highly questionable and improbable; and 5) Impaired Loans which
generally include non-accrual loans. Once a loan is assigned a risk grade of classified, the loan review officer assesses whether the
loan is to be evaluated for impairment based on the Company policy. A portion of the allowance for loan loss is specifically allocated
to those loans which are evaluated for impairment and determined to be impaired. Specific valuation allowances are determined by
analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic
conditions affecting the borrower’s industry, among other things. If after review, the loan is not considered to be impaired, the loan is
included with a pool of similar loans that is assigned a valuation allowance calculated based on the historical loss experience and
qualitative factors of the pool type. The valuation allowance is calculated based on the historical loss experience of specific types of
classified loans. The Company calculates historical loss ratios for pools of loans with similar characteristics based on the proportion of
actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated quarterly based on
actual charge-off experience.
A general valuation allowance is established for pools of homogeneous loans based upon the product of the historical loss ratio
adjusted for qualitative factors and the total dollar amount of the loans in the pool. Specific qualitative factors considered by
management include trends in volume or terms, changes in lending policy levels and trends in charge-offs, classification and non-
accrual loans, concentrations of credit and local and national economic factors. The Company’s pools of similar loans include
similarly risk-graded groups of commercial loans, commercial real estate loans, residential real estate loans, home equity loans and
other consumer loans. Beginning at year-end 2017, due to their growing significance, the pools of commercial and commercial real
estate loans are also broken out further by industry sectors when analyzing the related pools. These industry sectors include non-
residential buildings; skilled nursing and nursing care; residential real estate lessors, agents and managers; hotel and motels and
trucking. Additional factors are used on pools of loans considered special mention; specifically, levels and trends in classification,
declining trends in financial performance, structure and lack of performance measures and migration from special mention to
substandard. For loans graded as substandard, a separate historical loss rate is calculated as a percent of charge-offs net of recoveries
to the balance of substandard loans, which results in a higher historical loss factor. This is also adjusted for the qualitative factors
discussed previously.
Loans identified as losses by management, internal loan review and/or bank examiners are charged off. Furthermore, consumer loan
accounts are charged off in accordance with regulatory requirements.
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 consolidated balance sheets within other liabilities, while the corresponding
provision for these losses is recorded as a component of other non-interest expenses. At both December 31, 2019 and 2018, this
allowance was $84,000.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in
management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate
adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the
Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
Although management believes the Company uses the best information available to make allowance for loan loss determinations,
future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in
making our initial determinations. Increased levels of job loss and high unemployment, home foreclosures and business failures could
result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income.
Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our allowance for loan
losses. The banking agencies could require the recognition of additions to the allowance for loan loss based on their judgment of
information available to them at the time of their examination.
Current Expected Credit Loss Standard
As disclosed in Note 1 to the Consolidated Financial Statements, the adoption of ASC 326, which changes the impairment model for
most financial assets, was delayed for small reporting companies until fiscal years beginning after December 15, 2022. As a small
reporting company, the Company does not currently expect to early adopt the new standard. As the new standard is a significant
change in both philosophy and methodology, the Company has been formulating an approach to adoption. As recommended by
regulators for community banks, the Company has selected the Weighted Average Remaining Maturity (“WARM”) method.
38
As the Company’s loss history is sporadic and statistically insignificant, peer group loss history will be incorporated into the model.
This is likely to produce an allowance greater than the Company’s current level. Near term economic forecasts at the time of adoption
are also likely to affect the level of the allowance. Pending further methodology refinement and nearer adoption, the Company cannot
assess the magnitude of the initial adoption.
The following is an analysis of changes in the allowance for loan losses for the period ended:
2019
Balance at beginning of year ....................................................... $ 4,198
Loan losses:
Commercial .................................................................................
Commercial real estate ................................................................
Residential real estate ..................................................................
Consumer - home equity .............................................................
Consumer - other .........................................................................
Total .......................................................................................
(231)
(40)
(78)
—
(205)
(554)
Recoveries on previous loan losses:
28
Commercial .................................................................................
—
Commercial real estate ................................................................
—
Residential real estate ..................................................................
2
Consumer - home equity .............................................................
76
Consumer - other .........................................................................
106
Total .......................................................................................
(448)
Net loan losses.............................................................................
Provision charged to operations ..................................................
715
Balance at end of year ................................................................. $ 4,465
Ratio of net loan losses to average total loans outstanding .........
Ratio of loan loss allowance to total loans ..................................
0.09%
0.86%
(Amounts in thousands)
December 31,
2017
$ 4,868
2018
$ 4,578
2016
$ 5,194
2015
$ 5,202
(1,163)
—
—
—
(175)
(1,338)
—
166
3
5
59
233
(1,105)
725
$ 4,198
—
(654)
(14)
(26)
(146)
(840)
388
—
5
10
47
450
(390)
100
$ 4,578
—
(287)
(35)
(144)
(148)
(614)
117
35
2
23
61
238
(376)
50
$ 4,868
(470)
(84)
(45)
—
(124)
(723)
134
10
37
17
62
260
(463)
455
$ 5,194
0.23%
0.82%
0.09%
0.94%
0.10%
1.16%
0.13%
1.32%
The commercial charge-off in 2018 is related to loans (to one borrower) that were restructured to a new borrowing relationship with
no principal forgiveness, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off
equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of
$1.1 million is recorded as a loan discount. As loan payments are made, interest is recognized at the market rate versus the negotiated
rate via the amortization of the discount over the various lives of the loans. There was $625,000 in specific reserve previously
allocated to these loans at December 31, 2017. Included in the $654,000 commercial real estate charge-off in 2017 is a loan for
$352,000, which had a $148,000 specific reserve. The $470,000 commercial charge-off in 2015 contains a $468,000 charge-off to an
isolated credit relationship that already had a specific reserve recorded.
The following is an allocation of the year end allowance for loan losses and the percentage to total loans. The allowance has been
allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the
following categories of loans as of:
2019
Balance
Commercial ............................. $
Commercial real estate ............
Residential real estate..............
Consumer - home equity .........
Consumer - other .....................
Total...................................... $
1,756
2,130
334
104
141
4,465
%
0.34
0.41
0.06
0.02
0.03
2018
Balance
$
$
1,232
2,414
314
115
123
4,198
%
0.24
0.47
0.06
0.02
0.02
39
(Amounts in thousands)
December 31,
2017
Balance
$
$
1,591
2,702
117
70
98
4,578
%
0.33
0.55
0.02
0.01
0.02
2016
Balance
$
$
1,394
3,072
163
150
89
4,868
%
0.33
0.73
0.04
0.04
0.02
2015
Balance
$
$
1,977
2,926
153
52
86
5,194
%
0.50
0.74
0.04
0.01
0.02
The allocations of the allowance as shown in the previous table should not be interpreted as an indication that future loan losses will
occur in the same proportions or that the allocations indicate future loan loss trends. Furthermore, the portion allocated to each loan
category is not the total amount available for future losses that might occur within such categories since the total allowance is
applicable to the entire portfolio, and allocation of a portion of the allowance to one category of loans does not preclude availability to
absorb losses in other categories.
LOAN PORTFOLIO
The following table represents the composition of the loan portfolio as of:
2019
2018
(Amounts in thousands)
December 31,
2017
2016
2015
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Commercial .................................... $ 99,864 19.3
302,084 58.2
Commercial real estate ...................
87,172 16.8
Residential real estate.....................
5.0
25,856
Consumer - home equity ................
0.7
3,740
Consumer - other ............................
Total loans ................................... $ 518,716
$ 112,440 21.9
303,804 59.0
69,845 13.6
4.9
25,076
3,227
0.6
$ 514,392
$ 113,341 23.3
283,135 58.1
62,071 12.7
5.3
26,018
0.6
2,925
$ 487,490
$ 96,281 22.9
238,692 56.9
57,008 13.6
6.0
25,061
2,726
0.6
$ 419,768
$ 84,613 21.5
237,137 60.1
45,414 11.5
5.9
23,334
1.0
3,756
$ 394,254
The following schedule sets forth maturities based on remaining scheduled repayments of principal or next re-pricing opportunity for
loans (excluding residential real estate, consumer- home equity and consumer-other).
(Amounts in thousands)
December 31, 2019
1 Year or Less
Over 1 Year
to 5 Years
Over 5 Years
Total
Commercial ......................................................................... $
Commercial real estate ........................................................
Total loans...................................................................... $
61,090
90,478
151,568
$
$
20,294
142,186
162,480
$
$
18,480
69,420
87,900
$
$
99,864
302,084
401,948
The following schedule sets forth loans based on next re-pricing opportunity for floating and adjustable interest rate products, and by
remaining scheduled principal payments for loan products with fixed rates of interest. Residential real estate, consumer - home equity
and consumer – other loans have again been excluded.
Floating or adjustable rates of interest........................................................................... $
Fixed rates of interest ....................................................................................................
Total loans................................................................................................................ $
1 Year or Less
141,922
9,647
151,569
(Amounts in thousands)
December 31, 2019
Over 1 Year
$
$
92,052
158,327
250,379
$
$
Total
233,974
167,974
401,948
The Company recorded an increase of $4.3 million in the loan portfolio in 2019 from the level of $514.4 million recorded at
December 31, 2018. Gross loans as a percentage of earning assets stood at 76.1% as of December 31, 2019 and 77.6% at
December 31, 2018. The loan-to-deposit ratio at December 31, 2019 was 83.9% as compared to 85.1% at December 31, 2018. Despite
the slow economic recovery in the region, the Bank posted year-over-year growth in total loans of 0.8%. However, included in year-
end total loans are 60-day or less, non-core loans closed in December 2019 for $25.2 million, compared to $40.9 million in 2018.
Absent the short-term year end transaction, the Company reported core loan year-over-year growth of 4.2% and 6.5%, respectively for
2019 and 2018. As the balance sheet is adequately structured to accommodate additional loan growth, management remains
committed to fulfilling the credit needs of creditworthy customers. At December 31, 2019, the loan loss allowance of $4.5 million
represented approximately 0.9% of outstanding loans, and at December 31, 2018, the loan loss allowance of $4.2 million represented
approximately 0.8% of outstanding loans.
40
The decrease in commercial real estate and the increase in residential real estate is due to reclassification of loans between these
categories in 2019 by approximately $14.9 million. The portion of the loan portfolio represented by commercial loans (including
commercial real estate) modestly decreased from 80.9% in 2018 to 77.5% in 2019. Consumer loans (including home equity loans)
were approximately 5.7% of the loan portfolio in 2019 and 5.5% in 2018. Between 2018 and 2019, the balance of residential real
estate loans in relationship to total loans increased from 13.6% to 16.8%. However, year-over-year balances grew $17.3 million, or
24.8%, primarily due to the aforementioned re-classification. The Bank’s majority of mortgage originations are sold to the secondary
market in order to take advantage of historically low interest rates as management does not intend to take on material long term
interest rate risk on the balance sheet.
Commercial, commercial real estate and residential real estate loans continue to comprise the largest share of the Company’s loan
portfolio. At the end of 2019, commercial, commercial real estate and residential real estate loans comprised a combined 94.3% of the
portfolio compared to 93.1% at December 31, 2015, reflecting a consistent strategy of portfolio diversification over the five-year
period. The loan portfolio at December 31, 2019 also included home equity loans at 5.0% and consumer installment loans at 0.7%.
These percentages compare to home equity loans at 5.9% and consumer installment loans at 1.0% on December 31, 2015.
The commercial loan portfolio, which includes both commercial and commercial real estate (CRE) loans, is $402.0 million at
December 31, 2019, a decrease of $14.2 million from the balance of $416.2 million recorded at December 31, 2018, or 3.4%.
Commercial loans, including lines of credit, decreased by $12.6 million, or 11.2%, during the year and represented 19.3% of the
portfolio, or a 2.6% composition decrease over the prior period. However, excluding the year-end, 60-day or less, cash-secured loans
that decreased by $15.7 million from 2018 to 2019, commercial loans grew by $3.1 million, or 4.4%. CRE loans decreased $1.7
million, or 0.6%, which substantially represents investment real estate supported by third-party rents and leases along with other
known Bank concentrations such as Skilled Nursing, Assisted Living, Residential Lessors (including Multi-family) and Hotels that are
classified as non-owner occupied CRE. At December 31, 2019, the total CRE portfolio consisted of 23.2% in owner-occupied real
estate and 76.8% in non-owner occupied real estate. Taken into account the aforementioned re-classification from CRE to 1-4
Residential loan, the CRE portfolio grew at a rate of 4.3%, or $13.2 million. The increase in CRE loans was a direct result of
management taking strategic advantage of competitive market conditions and the Bank’s considerable liquidity position since 2010.
The CRE portfolio was also enhanced by lending into the Skilled Nursing, Personal Health Care industries and Multi-family. In 2006,
the federal banking regulatory agencies published interagency guidance on CRE Concentration Risk Management stating that if total
commercial real estate concentration exceeded 300% of a bank’s total capital (or if the CRE portfolio increased by over 50% in the
preceding 3 years), the portfolio may represent significant concentration risk and additional monitoring may be required. The Bank’s
CRE concentration, excluding owner-occupied real estate, as of December 31, 2019 was $232.1 million, which is 288.9% of total
unimpaired or risk-based capital, compared to 313.1% for 2018. As the Company reflected a 0.6% CRE balance decline, it modestly
decreased its concentration risk relative to capital. CRE similarly reflected 7.3% growth in the prior year 2018. Management also
believes that its current level of credit review, portfolio monitoring and stress testing adequately assures that the Bank is mitigating
CRE concentration levels. In a strategic effort to diversify, the Bank continues to develop its commercial loans and, as such, the
December 31, 2019 balance of $99.9 million represents 24.9% of the total commercial loan portfolio, compared to the period ended
December 31, 2018 of 27.0%.
Loan personnel will continue to aggressively pursue both commercial and small business opportunities supported by product
incentives and marketing efforts. When necessary, management will continue to offer competitive fixed-rate and derivative pricing
options on commercial real estate products to qualifying customers in an effort to establish new business relationships, retain existing
relationships, and capture additional market share. The Bank’s lending function continues to provide business services to a wide array
of medium and small businesses, including but not limited to, commercial and industrial accounts such as health care facilities,
grocery stores, manufacturers, trucking companies, physicians and medical groups, service contractors, restaurants, hospitality
industry companies, retailers, wholesalers, educational institutions and other political subdivisions as well as commercial and
residential real estate lessors, developers and builders.
Commercial and small business loans are originated by commercial loan personnel and other loan personnel assigned to the Bank’s
offices within various geographical regions. These loans are all processed in accordance with established business loan underwriting
standards and practices.
41
The following table provides an overview of commercial loans by various business sectors reflecting the areas of largest
concentration. It should be noted that these are current loan balances including executed commitments to fund and do not reflect
existing commitments that have not been accepted or executed.
Non-residential building/apartment building......... $
Residential real estate lessors, agents and
managers (including multi-family) .....................
Skilled nursing .......................................................
Hotels/motels .........................................................
Trucking/courier services ......................................
2019
(Amounts in thousands)
December 31,
2018
2017
Balances
% of
Portfolio
Balances
% of
Portfolio
Balances
% of
Portfolio
103,134
25.66 $
97,411
23.40 $
79,918
20.16
38,849
34,159
29,455
28,311
9.67
8.50
7.33
7.04
50,496
33,818
30,378
24,487
12.13
8.12
7.30
5.88
51,431
26,805
22,072
21,613
12.97
6.76
5.57
5.45
The most substantial increase in concentrations growth by percentage since 2017 occurred in non-residential building/apartment
building, which was a result of a 2016 strategic initiative to target multi-family loans to further diversify CRE into a growing market
segment. This increase remains the largest concentration relative to the total portfolio composition. The single largest customer
relationship had an aggregate balance at year end 2019 of $10.7 million compared to $13.3 million in 2018. This balance represented
approximately 2.7% of the total commercial and CRE portfolio in 2019 and 3.2% in 2018. It is important to note that within this
relationship, there is a 60-day or less note for $4.9 million in 2019 and the entire amount of $13.3 million in 2018, which were fully
secured by segregated deposit accounts with the Bank at the time of origination.
The Bank continues to be modestly active in home equity financing. Home equity term loans and credit lines (HELOCs) remain
popular with consumers wishing to finance home improvement costs, education expenses, vacations and consumer goods purchased at
favorable interest rates. As first mortgage refinancing and elimination of some eligible tax deductions impacted this product line in
2018, this portfolio reflected slight deterioration in 2018 and reflected a small increase of 3.8% for 2019. In order to improve customer
retention and provide better overall loan diversification, management will continue to evaluate and reposition the Company’s portfolio
product offerings during 2020.
In the consumer lending area, the Company provides financing for a variety of consumer purchases, such as: fixed- and variable-rate
amortizing mortgage products that consumers utilize for home improvements; the purchase of consumer goods of all types; and
education, travel and other personal expenditures. The consolidation of credit card balances and other existing debt into term payouts
continues to remain a popular financing option among consumers. In an effort to increase consumer relationship banking, the
Company implemented a Private Bank product line in 2016 that focuses on high net worth and income consumers, the balances from
which are modest and primarily reside in home equity lines.
Additional information regarding the loan portfolio can be found in Item 8, Notes 1, 3, 8, 11 and 14 to the Consolidated Financial
Statements.
MORTGAGE BANKING
Since the May 2013 Taper Tantrum when mortgage rates rose dramatically, the Company shifted its focus from wholesale to retail
origination. With the majority of loans sold into the secondary market, the resulting gains have enhanced non-interest revenue. In
2019, the Company reported net gains on saleable loans of $1.6 million, representing an increase of $580,000 from the prior year’s
gain of $1.0 million, reflecting the 50% improvement in origination volume. As originators were added in the retail footprint, as well
as expanding into adjacent markets, originations grew from $45.8 million in 2018 to $68.8 million in 2019. As previously referenced,
the residential portfolio grew by $17.3 million, or 24.8%. However, deducting the aforementioned reclassification from CRE to 1-4
residential of approximately $14.9 million, this portfolio reflected nominal growth. The Company continues to portfolio quality, non-
secondary market qualified and construction loans.
Currently, the Company is not retaining the servicing on loans sold. Although the Company’s primary strategy is to sell long-term
residential mortgages, loans are occasionally retained in the portfolio when requested by a customer or to enhance account
relationships, and tend to be variable rate or shorter term. The mix of portfolio retained to those sold to investors will vary from year
to year.
The Company maintains reserves for mortgage loans sold to agencies and investors in the event that, either through error or
disagreement between the parties, the Company is required to indemnify the purchase. The reserves take into consideration risks
associated with underwriting, key factors in the mortgage industry, past due loans and potential indemnification by the Company.
Reserves are estimated based on consideration of factors in the mortgage industry, such as declining collateral values and rising levels
of delinquency, default and foreclosure, coupled with increased incidents of quality reviews at all levels of the mortgage industry
seeking justification for pushing back losses to loan originators and wholesalers. As of December 31, 2019 and 2018, the Company
42
had reserves for mortgage loans sold of $700,000. For the years ended December 31, 2019 and 2018, the Company did not repurchase
any mortgage loans sold.
INVESTMENT SECURITIES
Investment securities are segregated into three separate portfolios: available-for-sale, held-to-maturity and trading. Each portfolio type
has its own method of accounting. The Company currently does not maintain a held-to-maturity portfolio. Securities classified as
available-for-sale are those that could be sold for liquidity, investment management, or similar reasons even though management has
no present intentions to do so. Securities available-for-sale are carried at fair value using the specific identification method. Changes
in the unrealized gains and losses on available-for-sale securities are recorded net of tax effect as a component of comprehensive
income.
Held-to-maturity securities are recorded at historical cost and adjusted for amortization of premiums and accretion of discounts.
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. The Company
has no securities classified as held-to-maturity.
Trading securities were an investment in obligations of states and political subdivisions and a short duration bond fund. Management
had purchased these securities principally for the purpose of selling them in the near term. Trading securities were carried at fair value
with valuation adjustments included in other non-interest income. The Company no longer has any investment in trading securities.
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 portfolio to reflect changing economic conditions and shifts in
the relative values of market sectors. Available-for-sale securities tend to be more liquid investments and generally exhibit less price
volatility as interest rates fluctuate.
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes
criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the
loss in value is other-than-temporary. The OTTI is not intended to indicate that the decline is permanent, but indicates that the
prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value
equal to or greater than the carrying value of the investment. Once a decline in value is determined to be an OTTI, the credit-related
OTTI is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other
comprehensive income (loss).
The following table shows the fair value of available-for-sale securities by type of obligation at:
U.S. Treasury and U.S. Government agencies and corporations ................................... $
Obligations of states and political subdivisions .............................................................
U.S. Government-sponsored mortgage-backed and related securities...........................
Trust preferred securities................................................................................................
Total fair value of investment securities available-for-sale ........................................ $
(Amounts in thousands)
December 31,
2018
$
$
9,002
51,658
76,263
—
136,923
$
$
2019
3,310
69,626
63,195
—
136,131
2017
3,205
72,116
83,625
895
159,841
Impairment Analysis of Investment Securities
Item 8, Note 2 in the Notes to the Consolidated Financial Statements contains the accounting and disclosures for securities
impairment.
Fair Value
Trust preferred securities, which are accounted for under FASB ASC Topic 325 Investments Other, were held in the investment
portfolio until early June 2018. Prior to the sale, the Company evaluated current available information in estimating the future cash
flows of securities and determined whether there had been favorable or adverse changes in estimated cash flows from the cash flows
previously projected. The Company considered the structure and term of the pool and the financial condition of the underlying issuers.
Specifically, the evaluation incorporated factors such as interest rates and appropriate risk premiums, the timing and amount of interest
and principal payments and the allocation of payments to the various note classes. Estimates of cash flows were based on the most
recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information.
43
The Company enlisted the aid of an independent third party to perform the trust preferred securities valuations. The approach to
determining fair value involved the following process:
1. Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating
levels).
2. Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with other
banks).
3. Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the
resulting distribution among the securities.
4. Discount the expected cash flows to calculate the present value of the security.
A summary of securities held at December 31, 2019, classified according to the earlier of next re-pricing 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.
(Amounts in thousands)
Fair Value
Weighted
Average
Yield (1)
U.S. Government agencies and corporations:
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 ..........................................................................................
Total U.S. Government agencies and corporations ................................................................. $
Obligations of states and political subdivisions:
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 ..........................................................................................
Total obligations of states and political subdivisions .............................................................. $
U.S. Government mortgage-backed and related securities:
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 ..........................................................................................
Total U.S. Government mortgage-backed and related securities ............................................ $
Regulatory Stock
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 ..........................................................................................
Total regulatory stock .............................................................................................................. $
350
—
2,960
—
3,310
72
—
752
68,802
69,626
931
7,550
3,211
51,503
63,195
—
—
—
2,835
2,835
2.199%
—
2.190
—
2.191%
6.722%
—
3.187
3.363
3.364%
(0.221)%
2.362
2.287
2.349
2.310%
—%
—
—
4.813
4.813%
(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 and political subdivisions has been calculated on a fully taxable equivalent basis. The amount
of adjustment to interest, which is based on the statutory tax rate of 21%, was $372,000.
(2) Regulatory stock is included in the amount maturing or repricing after ten years, and although pays dividends, is not
contractually obligated.
44
As of December 31, 2019, there were $3.0 million in callable U.S. Government agency securities and none in callable obligations of
states and political subdivisions that, given current and expected interest rate environments, have the possibility of being called within
the one-year time horizon. These securities are categorized according to their contractual maturities, with none classified as maturing
or repricing within one year, none classified as maturing after one year but within five years, $3.0 million classified as maturing after
five years but within ten years and none of the callable investments classified as maturing after 10 years.
As of December 31, 2019, there were no callable U.S. Government agency securities and $13.7 million in callable obligations of states
and political subdivisions that, given current and expected interest rate environments, have the possibility of being called within the
time frame defined as after one year but within five years. These securities are categorized according to their contractual maturities,
with none maturing after one year but within five years, none maturing after five years but within ten years and $13.7 million maturing
after 10 years.
As of December 31, 2019, the carrying value of all investment securities totaled $136.1 million, a decrease of $792,000, or 0.6%, from
the prior year. The investment portfolio functions as the balancing factor among the variation in loan and deposit balances, along with
changes in short term borrowings. The investment portfolio represents 22.0% of each deposit dollar, down from 22.7% at the prior
year end. The allocation between single maturity investment securities and mortgage-backed securities shifted to a 54/46 split versus
the 44/56 division of the previous year. The shift toward longer-term single maturity investments aids the strategy of extending asset
duration in a falling interest rate environment.
Holdings of Obligations of States and Political Subdivisions increased by $18.0 million, or 34.8%. This increase was the result of
purchases of $16.5 million as a part of the current investment strategy.
Holdings of U.S. Government-sponsored mortgage-backed securities decreased by $8.4 million, or 14.8%. This decrease was
primarily the result of principal paydowns of $8.0 million.
Holdings of U.S. Government agencies and corporations decreased $5.7 million, or 63.2%. This decrease was due to the sale of $6.0
million in holdings.
Holdings of other securities remained relatively unchanged during the year.
The current year mortgage-backed securities and related portfolio is comprised of investments in mortgage-backed securities of $48.2
million, collateralized mortgage obligations of $8.5 million and U.S. Government-guaranteed small business administration (SBA)
pools of $6.5 million. The prior year mortgage-backed securities and related portfolio is comprised of investments in mortgage-backed
securities of $56.6 million, collateralized mortgage obligations of $12.0 million and U.S. Government-guaranteed small business
administration pools of $7.7 million. Both the current and prior year portfolios, other than the SBA pools, were comprised solely of
fixed rate products and provides a desirable diversification of cash flows.
At December 31, 2019, a net unrealized gain of $1.1 million, net of tax, was included in shareholders’ equity as a component of other
comprehensive income, as compared to a net unrealized loss of $3.7 million, net of tax, as of December 31, 2018. Rising interest rates
generally result in depreciation in the market value of debt securities, while lower interest rates generally translate into more favorable
market prices for debt securities.
Additional information regarding investment securities can be found in Item 8, Notes 1 and 2 to the Consolidated Financial
Statements.
DEPOSITS
The Company’s deposits are primarily derived from the individuals and businesses located in its market area. Total deposits at year-
end exhibited an increase of 2.3% to $618.4 million at December 31, 2019, as compared to $604.4 million at December 31, 2018.
The Company’s deposit base consists of demand deposits, savings, money market and time deposit accounts. Noninterest-bearing
deposits decreased 2.6% during 2019, while interest-bearing deposits increased by 3.7%.
At December 31, 2019, noninterest-bearing deposits were $133.3 million, or 21.6% of total deposits, compared to $136.9 million or
22.7% of total deposits in 2018.
45
Core deposits, which are deposits exclusive of certificates of deposit greater than $250,000, brokered deposits, one-way CDAR’S and
ICS deposits and deposits through listed services represented 91.6% of total deposits at year-end 2019 compared to 90.1% in 2018.
The Company’s portfolio of certificates of deposit is sourced primarily from customers in the Bank’s immediate market area and also
includes $25.4 million of brokered deposits.
Average noninterest-bearing and interest-bearing checking accounts now comprise 23.2% of total deposits compared to 21.6% five
years ago. The largest shift, however, is the flow of funds from CD’s and savings into money market accounts. The preference is to
park funds into this demand account while awaiting interest rate and market movement. This is reflective of the unwillingness of
customers to commit to longer terms in the low interest rate environment, and the expectation of rising rates on the horizon.
The following table depicts how the average deposit mix has shifted during this five-year time frame.
(In percentages)
December 31,
2019
2015
Checking........................................................................................................................................
NOW..............................................................................................................................................
Money market................................................................................................................................
Savings...........................................................................................................................................
CDs ................................................................................................................................................
23.2
9.3
24.5
18.9
24.1
21.6
7.9
16.3
25.0
29.2
Additional information regarding interest-bearing deposits can be found in Item 8, Note 5 to the Consolidated Financial Statements.
OTHER ASSETS AND OTHER LIABILITIES
Premises and equipment totaled $12.0 million at December 31, 2019, an increase of $1.8 million from $10.2 million at December 31,
2018, reflecting the cost of a newly constructed branch replacing a previously leased property. Bank-owned life insurance had a cash
surrender value of $17.8 million at December 31, 2019 and $15.7 million at December 31, 2018. The increase is due mainly to an
insurance purchase of $2.1 million. Comprising approximately 20% of Tier 1 capital plus the allowance for loan losses, management
may consider additional insurance purchases not to exceed a 25% ratio. Other assets increased to $21.5 million at December 31, 2019
from $18.3 million at December 31, 2018. In 2019, the Company recognized an operating lease right-of-use (“ROU”) asset of $1.8
million as a result of implementing ASU 2016-02 “Leases” with offsetting operating lease liability of $1.8 million. Refer to footnote
20. Net deferred tax assets measured $931,000 at December 31, 2019 versus $2.4 million at December 31, 2018. Swap fair value at
2019 is $1.4 million compared to $92,000 in 2018. This is both an asset and a liability. In 2019, a $5.7 million investment in a
partnership fund is included in other assets and $5.3 million at 2018, with an offsetting $3.1 million in 2019 and $2.9 million in 2018
in other liabilities, which is the commitment to fund this affordable housing investment. Also included in other assets is an investment
of $7.7 million in 2019 and $6.0 million in 2018 into privately managed pools of small business administration loans. Both of these
investments are intended to satisfy Community Reinvestment Act requirements.
Other liabilities measured $13.4 million at December 31, 2019 and $10.0 million at December 31, 2018. The increase is mainly due to
the operating lease liability, the commitment to fund the affordable housing investments and the swap fair value described above.
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 of the
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 income 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 has averaged 3.68%
ranging between 3.59% and 3.79% as depicted in the following table.
Net interest margin.....................................................................
3.79
3.76
3.59
3.63
3.65
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
2019
2018
(In percentages)
December 31,
2017
2016
2015
46
interest income volatility under alternative asset deployment strategies, different interest rate environments, various product offerings
and changing growth patterns.
During 2019, the effective maturities of earning assets remained fairly stable with less than a 3 month decrease in average life, as rates
in the credit markets decreased across the curve. Federal Reserve policy makers raised rates four times in 2018, then decreased rates
three times in 2019. With the resulting Fed Fund target now at 1.75%, the Federal Reserve vows to be data dependent henceforth in
setting monetary policy. During the year, management used any excess funds to reduce wholesale borrowings.
The computerized simulation techniques utilized by management provide a sophisticated measure of the degree to which the
Company’s interest sensitive 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 in an acceptable range 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 3.59% to 3.79% 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 a low of 1.50% to 2.50%, as Federal Reserve monetary policy turned from
guarding against deflation to warding off inflationary threats to attempting to recover from a recession and softening the effects of the
housing correction.
LIQUIDITY
The central role of the Company’s liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction
requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion
against unforeseen liquidity needs.
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may
become unduly reliant on alternative funding sources. The objective of liquidity management is to ensure the Company has the ability
to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors
liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. The Company
maintains strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet
growth, properly manage capital markets funding sources and address unexpected liquidity requirements.
Principal sources of on-balance sheet liquidity available to the Company include assets considered relatively liquid, such as interest-
bearing deposits in other banks, federal funds sold, and cash and due from banks, as well as cash flows from maturities and
repayments of loans, investment securities and mortgage-backed securities.
Principal repayments on mortgage-backed securities, collateralized mortgage obligations and small business administration pools,
along with investment securities maturing or called amounted to $12.2 million during 2019, representing 8.8% of the total combined
portfolio, compared to $12.2 million, or 8.7%, of the portfolio a year ago. Loan amortization provides in excess of $50 million
annually.
In order to address the concern of FDIC insurance of larger depositors, the Bank is a member of the Certificate of Deposit Account
Registry Service (CDARS®) program and the Insured Cash Sweep (ICS) program. Through CDARS®, the Bank’s customers can
increase their FDIC insurance by up to $50.0 million through reciprocal certificate of deposit accounts and likewise through ICS, they
can accomplish the same through money market savings accounts. This is accomplished by the Bank entering into reciprocal
depository relationships with other member banks. The individual customer’s large deposit is broken into amounts below $250,000
and placed with other banks that are members of the network. The reciprocal member bank issues certificates of deposit or money
market savings accounts in amounts that ensure that the entire deposit is eligible for FDIC insurance. The Bank can also enter into
one-way buy or sell transactions which are not reciprocated. At December 31, 2019, the Bank had $8.1 million in deposits in the
CDARS® program, of which none was executed as one-way buy transactions and $15.4 million of deposits in the reciprocal ICS
money market program. For regulatory purposes, reciprocal CDARS® and ICS are not considered brokered deposits.
47
Along with its liquid assets, the Bank has other sources of liquidity available to it which help to ensure that adequate funds are
available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest
rates, the purchasing of federal funds, correspondent bank lines of credit and access to the Federal Reserve Discount Window. The
Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides its largest source of liquidity. At December 31,
2019, the Bank had an additional $20.9 million available of collateral-based borrowing capacity at FHLB of Cincinnati,
supplementing the $5.4 million of availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a
$34.4 million cash management line, of which nothing has been disbursed, subject to posting additional collateral. The Bank, by
policy, has access to approximately 25% of total deposits in various forms of wholesale deposits that could be used as an additional
source of liquidity. At December 31, 2019, there was $28.9 million in outstanding balances in wholesale deposits including internet-
based deposits with access to an additional $125.7 million. The Company was also granted a total of $13.5 million in unsecured,
discretionary Federal Funds lines of credit with no funds drawn upon as of December 31, 2019. Unpledged securities of $77.2 million
are also available for borrowing under repurchase agreements or as additional collateral for FHLB lines of credit or to sell to generate
liquidity.
The Company has other more limited sources of liquidity. In addition to its existing liquid assets, it can raise funds in the securities
market through debt or equity offerings or it can receive dividends from the Bank. Generally, the Bank may pay dividends without
prior approval as long as the dividend is not more than the total of the current calendar year-to-date earnings plus any earnings from
the previous two years not already paid out in dividends, as long as the Bank remains well-capitalized after the dividend payment. The
amount available for dividends in 2020 is $9.9 million plus 2020 profits retained up to the date of the dividend declaration. Future
dividend payments by the Bank to the Company are based upon future earnings. The Company had cash of $119,000 at December 31,
2019 available to meet cash needs. It also held a $6.0 million note receivable, the cash flow from which approximates the debt service
on the Junior Subordinated Debentures. Cash is generally used by the Company to pay quarterly interest payments on the debentures,
to pay dividends to common shareholders, to fund operating expenses, and occasionally repurchase shares.
Cash and cash equivalents increased from $19.7 million in 2018 to $27.8 million in 2019. The following table details the cash flows
from operating activities for the years ended 2019, 2018 and 2017.
(Amounts in thousands)
December 31,
2018
2017
2019
7,282
$
8,835
$
4,350
Net income ......................................................................................................... $
Adjustments to reconcile net income to net cash flow from operating
activities:
Depreciation, amortization and accretion........................................................
Provision for loan losses..................................................................................
Investment securities available-for-sale losses (gains), net.............................
Originations of mortgage banking loans held for sale.....................................
Proceeds from the sale of mortgage banking loans .........................................
Mortgage banking gains, net ...........................................................................
Earnings on bank-owned life insurance ..........................................................
Other real estate gains .....................................................................................
Changes in:
2,243
715
44
(68,789)
66,493
(1,554)
(392)
—
Deferred taxes ...............................................................................................
Equity compensation ....................................................................................
Federal income tax receivable ......................................................................
Other assets and liabilities ............................................................................
Net cash flow from operating activities ............................................................. $
209
774
601
367
7,993
$
2,316
725
21
(45,813)
48,527
(974)
(1,869)
—
1,008
214
(625)
769
13,134
$
2,735
100
(7)
(51,730)
54,578
(1,074)
(1,203)
(170)
1,218
143
(243)
436
9,133
Key variations stem from: 1) Large recoveries in 2017 reduced the provision for loan losses. 2) Higher mortgage banking activity in
2019 was driven by lower rates. 3) Earnings on bank-owned life insurance decreased by $1.5 million in 2019 and increased by
$666,000 in 2018 due to gain on proceeds from a policy of $1.5 million in 2018 and $898,000 in 2017. 4) Change in deferred taxes is
due to the Tax Act, which accounted for $904,000 of the decrease in 2018 and $1.2 million of the decrease in 2017. 5) Equity
compensation increased $560,000 in 2019 commensurate with Company performance. 6) In 2018, there was $904,000 in Alternative
Minimum Tax credits that were reclassified to federal income tax receivable. Refer to the Consolidated Statements of Cash Flows in
item 8 for a summary of the sources and uses of cash for 2019, 2018 and 2017.
48
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has various obligations, including contractual obligations and commitments that may require future cash payments.
Contractual Obligations: The following table presents 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 Item 8, Notes to the Consolidated
Financial Statements.
Non-interest bearing deposits .......................
Interest bearing deposits (a)..........................
Average rate (b)............................................
Time deposits (a) ..........................................
Average rate (b)............................................
Federal funds purchased and security
repurchase agreements (a) .........................
Average rate (b)............................................
FHLB advances (a).......................................
Average rate (b)............................................
Subordinated debt.........................................
Average rate (b)............................................
Operating leases............................................
See Note
5
5
6
6
7
8
One Year or
Less
$ 133,340
343,018
0.61%
88,034
1.68%
1,922
0.34%
6,000
2.04%
—
(Amounts in thousands)
December 31, 2019
Payments Due in:
Three to Five
Years
One to Three
Years
Over Five
Years
Total
$
— $
—
— $
—
— $ 133,340
343,018
—
43,656
2.43%
6,579
2.05%
3,754
2.04%
—
—
—
8,000
2.62%
—
—
0.00%
—
10,000
0.96%
5,155
3.34%
1,270
133
211
233
0.61%
142,023
1.94%
1,922
0.34%
24,000
1.78%
5,155
3.34%
1,847
Excludes present and future accrued interest.
(a)
(b) Variable-rate obligations reflect interest rates in effect at December 31, 2019.
The Company’s operating lease obligations represent short- and long-term lease and rental payments for the Bank’s branch facilities.
The Company also has obligations under its supplemental retirement plans as described in Item 8, Note 9 to the Consolidated
Financial Statements. The postretirement benefit payments represent actuarially-determined future benefit payments to eligible plan
participants. The Company does not have any commitments or obligations to the defined contribution retirement plan (401(k) plan) at
December 31, 2019 due to the funded status of the plan. Additional information regarding benefit plans can be found in Item 8, Note 9
to the Consolidated Financial Statements.
Off-balance sheet arrangements/commitments: The following table details the amounts and expected maturities of significant off-
balance sheet commitments. Additional information regarding commitments can be found in Item 8, Note 8 to the Consolidated
Financial Statements.
One Year or
Less
(Amounts in thousands)
December 31, 2019
Three to Five
Years
One to Three
Years
Commitments to extend credit:
Commercial (including commercial real estate) ......... $
Revolving home equity ...............................................
Overdraft protection ....................................................
Other ............................................................................
Residential real estate ..................................................
Standby letters of credit...............................................
$
17,389
14,309
8,070
1,020
9,326
3,830
$
253
—
—
—
148
75
917
—
—
—
—
—
Over Five
Years
$ 27,698
14,801
—
713
8,328
—
$
Total
46,257
29,110
8,070
1,733
17,802
3,905
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not
necessarily represent future cash requirements since these commitments often expire without being drawn upon.
49
CAPITAL RESOURCES
Regulatory standards for measuring capital adequacy require banks and bank holding companies to maintain capital based on “risk-
adjusted” assets so that categories of assets of potentially higher credit risk require more capital backing than assets with lower risk. In
addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance
sheet activities such as standby letters of credit and interest rate swaps.
Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts
of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred
stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered
(but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital
instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and
limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.
The Federal Financial Institutions Examination Council (FFIEC) determines the risk weightings of direct credit substitutions that have
been downgraded below investment grade. Included in the definition of a direct credit substitute are mezzanine and subordinated
tranches of trust preferred securities and non-agency collateralized mortgage obligations. Following these guidelines results in an
increase in total risk-weighted assets with an attendant decrease in the risk-based capital and Tier 1 risk-based capital ratios.
The Company met all capital adequacy requirements to which it was subject as of December 31, 2019 and December 31, 2018.
In early September 2013, the regulatory bodies substantially revised the capital requirements for all banks, varying with the size of the
institution. The new requirements became effective January 1, 2015 and were phased in over four years (through January 1, 2019).
The Company does not expect a material change to its excess capital position currently enjoyed.
Additional information regarding regulatory matters, including capital requirements, can be found in Item 8, Note 13 to the
Consolidated Financial Statements and in the Supervision and Regulation portion of Item 1 - Business.
INTEREST RATE RISK
Interest rate risk is measured as the impact of interest rate changes on the Company’s net interest income. Components of interest rate
risk comprise re-pricing risk, basis risk and yield curve risk. Re-pricing risk arises due to timing differences in the re-pricing of assets
and liabilities as interest rate changes occur. Basis risk occurs when re-pricing assets and liabilities reference different key rates. Yield
curve risk arises when a shift occurs in the relationship among key rates across the maturity spectrum.
The effective management of interest rate risk seeks to limit the adverse impact of interest rate changes on the Company’s net interest
margin, providing the Company with the best opportunity for maintaining consistent earnings growth. Toward this end, management
uses computer simulation to model the Company’s financial performance under varying interest rate scenarios. These scenarios may
reflect changes in the level of interest rates, changes in the shape of the yield curve, and changes in interest rate relationships.
The simulation model allows management to test and evaluate alternative responses to a changing interest rate environment. Typically
when confronted with a heightened risk of rising interest rates, the Company will evaluate strategies that shorten investment and loan
re-pricing intervals and maturities, emphasize the acquisition of floating rate over fixed rate assets, and lengthen the maturities of
liability funding sources. When the risk of falling rates is perceived, management will consider strategies that shorten the maturities of
funding sources, lengthen the re-pricing intervals and maturities of investments and loans, and emphasize the acquisition of fixed rate
assets over floating rate assets. The Company does not currently use financial derivatives, such as interest rate options, caps, floors or
other similar instruments. Interest rate swaps are currently used to accommodate large commercial borrowers desiring longer term
fixed rates.
Run-off rate assumptions for loans are based on the consensus speeds for the various loan types. Investment speeds are based on the
characteristics of each individual investment. Re-pricing characteristics are based upon actual information obtained from the Bank’s
information system data and other related programs. Actual results may differ from simulated results not only due to the timing,
magnitude and frequency of interest rate changes, but also due to changes in general economic conditions, changes in customer
preferences and behavior, and changes in strategies by both existing and potential competitors.
50
The following table shows the Company’s current estimate of interest rate sensitivity based on the composition of its balance sheet at
December 31, 2019. For purposes of this analysis, short-term interest rates as measured by the federal funds rate and the prime lending
rate are assumed to increase (decrease) gradually over the next twelve months reaching a level 300 basis points higher (and 100 basis
points lower) than the rates in effect at December 31, 2019. Because rates on the short end of the curve are below 3%, it is not
practical to review results to the degree of 300 basis points lower. Under both the rising rate scenario and the falling rate scenario, the
yield curve is assumed to exhibit a parallel shift.
During 2019, the Federal Reserve lowered the federal funds rate three times. At December 31, 2019, the difference between the yield
on the ten-year Treasury and the three-month Treasury increased to a positive 37 from the positive 24 basis points that existed at
December 31, 2018, indicating that the yield curve had steepened. At December 31, 2019, rates peaked at the 30-year point on the
Treasury yield curve. The yield curve remains only slightly positively sloping with some inversion in the mid terms.
The base case against which interest rate sensitivity is measured assumes no change in short-term rates. The base case also assumes no
growth in assets and liabilities and no change in asset or liability mix. Under these simulated conditions, the base case projects net
interest income of $24.1 million for the year ending December 31, 2020.
(Amounts in thousands)
December 31, 2020
Net Interest
Income
$ Change
% Change
Change in interest rates:
Graduated increase of +300 basis points ...................................................... $
Short-term rates unchanged (base case) .......................................................
Graduated decrease of -100 basis points ......................................................
25,897
24,100
23,494
$
1,797
(606)
7.5%
(2.5)%
The level of interest rate risk indicated is within limits that management considers acceptable. However, given that interest rate
movements can be sudden and unanticipated and are increasingly influenced by global events and circumstances beyond the purview
of the Federal Reserve, no assurances can be made that interest rate movements will not impact key assumptions and parameters in a
manner not presently embodied by the model.
It is management’s opinion that hedging instruments currently available are not a cost effective means of controlling interest rate risk
for the Company. Accordingly, the Company does not currently use financial derivatives, such as interest rate options, swaps, caps,
floors or other similar instruments, but does utilize swaps to accommodate large commercial borrowers that desire longer term fixed
rates.
IMPACT OF INFLATION
Consolidated financial information included herein has been prepared in accordance with U.S. Generally Accepted Accounting
Principles, which require the Company to measure financial position and operating results in terms of historical dollars. Changes in
the relative value of money due to inflation are generally not considered. Neither the price, timing nor magnitude of changes directly
coincides with changes in interest rates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Not applicable to the Company because it is a smaller
reporting company.
51
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements included in this Annual Report:
Management’s Annual Report on Internal Control Over Financial Reporting ......................................................................
Reports of Independent Registered Public Accounting Firm .................................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 .........................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017 ............................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017 ..................
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017 ......................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 .....................................
Notes to Consolidated Financial Statements ..........................................................................................................................
53
54
56
57
58
59
60
61
52
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any 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 procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5),
or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the
normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) 2013 Internal Control-Integrated Framework. Based on this assessment, management believes that, as of
December 31, 2019, the Company’s internal control over financial reporting was effective.
S.R. Snodgrass, P.C. has audited the effectiveness of the Company’s internal control over financial reporting as of December 31,
2019, as stated in their report dated March 5, 2020.
James M. Gasior
President and Chief Executive Officer
(Principal Executive Officer)
David J. Lucido
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Cortland, Ohio
March 5, 2020
Cortland, Ohio
March 5, 2020
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cortland Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cortland Bancorp and subsidiaries (the “Company”) as of
December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2019; and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report
dated March 5, 2020, which expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2008.
S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 5, 2020
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cortland Bancorp
Opinion on Internal Control over Financial Reporting
We have audited Cortland Bancorp and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of income,
comprehensive income, changes in shareholders equity, and cash flows for each of the three years in the period ended December 31,
2019, of the Company, and our report dated March 5, 2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions 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 company; and (3) provide reasonable assurance regarding
prevention 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, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any 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 procedures may deteriorate.
S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 5, 2020
55
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
December 31,
2019
December 31,
2018
ASSETS
Cash and due from banks........................................................................................................... $
Interest-earning deposits ............................................................................................................
Total cash and cash equivalents ...........................................................................................
Investment securities available-for-sale (Note 2) ......................................................................
Regulatory stock (Note 2).........................................................................................................
Loans held for sale .....................................................................................................................
Total loans (Note 3) ...................................................................................................................
Less allowance for loan losses (Note 3) ....................................................................................
Net loans...............................................................................................................................
Premises and equipment (Note 4) ..............................................................................................
Bank-owned life insurance ........................................................................................................
Other assets ................................................................................................................................
Total assets..................................................................................................................... $
LIABILITIES
Noninterest-bearing deposits ..................................................................................................... $
Interest-bearing deposits (Note 5)..............................................................................................
Total deposits .......................................................................................................................
Securities sold under agreements to repurchase (Note 6)..........................................................
Federal Home Loan Bank advances - short-term (Note 6) ........................................................
Federal Home Loan Bank advances - long term (Note 6) .........................................................
Subordinated debt (Note 7)........................................................................................................
Other liabilities...........................................................................................................................
Total liabilities...............................................................................................................
SHAREHOLDERS’ EQUITY
Common stock - $5.00 stated value - authorized 20,000,000 shares; issued 4,728,267
shares in 2019 and 2018; outstanding shares, 4,323,822 in 2019 and 4,349,624 in 2018......
Additional paid-in capital ..........................................................................................................
Retained earnings.......................................................................................................................
Accumulated other comprehensive income (loss) .....................................................................
Treasury stock, at cost, 404,445 shares in 2019 and 378,643 shares in 2018............................
Total shareholders’ equity ...........................................................................................
Total liabilities and shareholders’ equity ................................................................... $
See accompanying notes to consolidated financial statements
8,448 $
19,367
27,815
136,131
2,835
4,890
518,716
(4,465)
514,251
12,018
17,768
21,454
737,162 $
133,340 $
485,041
618,381
1,922
—
24,000
5,155
13,366
662,824
23,641
21,266
36,187
1,168
(7,924)
74,338
737,162 $
11,333
8,359
19,692
136,923
2,581
1,040
514,392
(4,198)
510,194
10,202
15,711
18,323
714,666
136,886
467,533
604,419
2,206
12,000
16,000
5,155
9,968
649,748
23,641
20,984
31,089
(3,656)
(7,140)
64,918
714,666
56
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
INTEREST INCOME
Interest and fees on loans........................................................................................ $
Interest and dividends on investment securities:
Taxable interest .................................................................................................
Nontaxable interest............................................................................................
Dividends ..........................................................................................................
Other interest income..............................................................................................
Total interest and dividend income..............................................................
INTEREST EXPENSE
Deposits ..................................................................................................................
Short-term borrowings............................................................................................
Federal Home Loan Bank advances - short term....................................................
Federal Home Loan Bank advances - long term.....................................................
Subordinated debt ...................................................................................................
Total interest expense ..................................................................................
Net interest income.................................................................................
PROVISION FOR LOAN LOSSES (Note 3) .....................................................
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.....
NON-INTEREST INCOME
Fees for customer services......................................................................................
Investment securities available-for-sale (losses) gains, net (Note 2)......................
Mortgage banking gains, net...................................................................................
Earnings on bank-owned life insurance..................................................................
Other real estate gains.............................................................................................
Other non-interest income ......................................................................................
Total non-interest income ............................................................................
NON-INTEREST EXPENSES
Salaries and employee benefits...............................................................................
Occupancy and equipment......................................................................................
State and local taxes................................................................................................
FDIC insurance .......................................................................................................
Professional fees .....................................................................................................
Advertising and marketing......................................................................................
Data processing fees ...............................................................................................
Other operating expenses........................................................................................
Total non-interest expenses .........................................................................
INCOME BEFORE FEDERAL INCOME TAX EXPENSE ...........................
Federal income tax expense (Note 10) ...................................................................
NET INCOME ...................................................................................................... $
EARNINGS PER SHARE BASIC AND DILUTED (Note 1)........................... $
CASH DIVIDENDS DECLARED PER SHARE............................................... $
For the years ended December 31,
2018
2017
2019
25,783 $
23,823 $
19,243
1,769
1,655
137
299
29,643
4,843
5
129
374
203
5,554
24,089
715
23,374
2,312
(44)
1,554
392
—
808
5,022
11,198
2,400
518
63
1,093
388
277
3,818
19,755
8,641
1,359
7,282 $
1.68 $
0.50 $
2,118
1,494
152
162
27,749
3,527
6
374
287
189
4,383
23,366
725
22,641
2,273
(21)
974
1,869
—
597
5,692
10,260
2,232
493
176
879
322
250
3,471
18,083
10,250
1,415
8,835 $
2.03 $
0.49 $
2,098
1,922
131
98
23,492
2,571
7
175
299
138
3,190
20,302
100
20,202
2,241
7
1,074
1,203
170
471
5,166
10,631
2,331
463
199
786
478
251
3,462
18,601
6,767
2,417
4,350
0.99
0.39
See accompanying notes to consolidated financial statements
57
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income......................................................................................................... $
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on available-for-sale securities ........
Tax effect ................................................................................................
Reclassification adjustment for net losses (gains) realized in net
income..................................................................................................
Tax effect ................................................................................................
Total securities available-for-sale .....................................................
Change in post-retirement obligations .........................................................
Total other comprehensive income (loss) ........................................
Total comprehensive income ....................................................... $
2019
For the years ended December 31,
2018
2017
7,282
$
8,835
$
4,350
6,023
(1,265)
44
(9)
4,793
31
4,824
12,106
$
(2,426)
510
21
(4)
(1,899)
68
(1,831)
7,004
$
2,153
(733)
(7)
3
1,416
14
1,430
5,780
See accompanying notes to consolidated financial statements
58
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except per share data)
FOR THE YEARS ENDED
DECEMBER 31,
2019
2018
2017
COMMON STOCK
Balance ........................................................................................................................ $
23,641
$
23,641
$
23,641
ADDITIONAL PAID IN CAPITAL
Beginning balance .......................................................................................................
Treasury shares reissued (2,770 shares) ......................................................................
Equity compensation ...................................................................................................
Ending Balance............................................................................................................
RETAINED EARNINGS
Beginning balance .......................................................................................................
Net income...................................................................................................................
Reclassification of certain income tax effects from accumulated other
20,984
11
271
21,266
31,089
7,282
20,928
—
56
20,984
24,403
8,835
20,878
—
50
20,928
21,485
4,350
comprehensive income .............................................................................................
—
—
294
Cash dividend declared, $0.50, $0.49 and $0.39 per share
for the years ended December 31, 2019, 2018 and 2017, respectively ....................
Ending balance ............................................................................................................
(2,184)
36,187
(2,149)
31,089
(1,726)
24,403
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning balance .......................................................................................................
Other comprehensive income (loss) ............................................................................
Reclassification of certain income tax effects from accumulated other
comprehensive income .............................................................................................
Ending balance ............................................................................................................
TREASURY STOCK
Beginning balance .......................................................................................................
Treasury shares reissued (2,770 shares) ......................................................................
Treasury shares purchased (59,352 shares in 2019, 82,637 in 2018 and
13,463 in 2017).........................................................................................................
Equity compensation ...................................................................................................
Ending balance ............................................................................................................
TOTAL SHAREHOLDERS' EQUITY ................................................................... $
(3,656)
4,824
—
1,168
(7,140)
49
(1,336)
503
(7,924)
74,338
$
(1,825)
(1,831)
—
(3,656)
(5,517)
—
(1,781)
158
(7,140)
64,918
$
(2,961)
1,430
(294)
(1,825)
(5,373)
—
(247)
103
(5,517)
61,630
See accompanying notes to consolidated financial statements
59
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
2019
For the years ended December 31,
2018
2017
7,282
$
8,835
$
4,350
Net cash flow from operating activities
Net income .................................................................................................................. $
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation, amortization and accretion.............................................................
Provision for loan losses.......................................................................................
Investment securities available-for-sale losses (gains), net..................................
Originations of mortgage banking loans held for sale..........................................
Proceeds from the sale of mortgage banking loans ..............................................
Mortgage banking gains, net ................................................................................
Earnings on bank-owned life insurance ...............................................................
Other real estate gains ..........................................................................................
Changes in:
Interest receivable.................................................................................................
Interest payable.....................................................................................................
Deferred taxes.......................................................................................................
Equity compensation ............................................................................................
Federal income tax receivable ..............................................................................
Other assets and liabilities ....................................................................................
Net cash flow from operating activities .........................................................
Cash deficit from investing activities
Purchases of available-for-sale securities.............................................................
Proceeds from sale of available-for-sale securities ..............................................
Proceeds from call, maturity and principal payments
on available-for-sale securities ..........................................................................
Purchases of regulatory stock ...............................................................................
Net increase in loans made to customers..............................................................
Proceeds from sale of other real estate .................................................................
Proceeds from bank-owned life insurance ...........................................................
Purchases of bank-owned life insurance ..............................................................
Contributions to partnership funds .......................................................................
Purchases of premises and equipment..................................................................
Net cash deficit from investing activities.......................................................
Cash flow (deficit) from financing activities
Net increase in deposit accounts...........................................................................
Net change in short-term borrowings ...................................................................
Net change in Federal Home Loan Bank advances - short term ..........................
Proceeds from Federal Home Loan Bank advances - long term ..........................
Repayments of Federal Home Loan Bank advances - long term .........................
Dividends paid......................................................................................................
Treasury shares reissued.......................................................................................
Treasury shares purchased....................................................................................
Net cash flow from (deficit) financing activities ...........................................
Net change in cash and cash equivalents ................................................................
Cash and cash equivalents
Beginning of period ....................................................................................................
End of period............................................................................................................... $
Supplemental disclosures:
Cash paid during the period for:
2,243
715
44
(68,789)
66,493
(1,554)
(392)
—
(81)
139
209
774
601
309
7,993
(20,365)
13,622
12,184
(254)
(4,772)
—
403
(2,068)
(2,153)
(2,685)
(6,088)
13,962
(284)
(12,000)
14,000
(6,000)
(2,184)
60
(1,336)
6,218
8,123
2,315
725
21
(45,813)
48,527
(974)
(1,869)
—
(62)
46
1,008
214
(625)
786
13,134
(14,643)
21,418
12,173
—
(28,007)
—
3,808
—
(1,547)
(1,935)
(8,733)
18,568
(472)
(20,000)
8,000
(6,000)
(2,149)
—
(1,781)
(3,834)
567
19,692
27,815
$
19,125
19,692
$
Income taxes......................................................................................................... $
Interest .................................................................................................................. $
Transfer of loans to other real estate owned......................................................... $
Adoption of lease standard:
Increase in ROU asset .......................................................................................... $
Increase in lease liability ...................................................................................... $
5,415
— $
$
— $
2,061
2,061
$
$
600
4,337
$
$
— $
— $
— $
See accompanying notes to consolidated financial statements
60
2,735
100
(7)
(51,730)
54,578
(1,074)
(1,203)
(170)
(152)
37
1,218
153
(243)
541
9,133
(44,962)
44,801
17,255
—
(68,592)
650
1,829
(900)
(4,152)
(802)
(54,873)
46,001
(24)
9,000
12,000
(15,500)
(1,726)
—
(237)
49,514
3,774
15,351
19,125
1,050
3,153
480
—
—
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Cortland Bancorp (the Company), and its bank subsidiary, The Cortland Savings
and Banking Company (the Bank), 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 the Company and its wholly-owned
subsidiaries, the Bank, CSB Mortgage Company, Inc. (dormant) and New Resources Leasing Co. (dormant). 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 the 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. Based on the analysis performed by the Company, management has determined that the Company only
has one operating segment, which is commercial banking. The chief operating decision-makers use consolidated results to make
operating and strategic decisions, and therefore are not required to disclose any additional segment information.
Use of Estimates: The preparation of financial statements in conformity with U.S. 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 of the Consolidated Balance Sheet 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 and amounts due from banks, both interest and non-interest bearing. The
Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial
institutions.
Investment Securities: Investments in debt securities are classified as held-to-maturity, available-for-sale or trading. Securities
classified as held-to-maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as
available-for-sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has
no present intentions to do so. Securities classified as trading are those that management has bought principally for the purpose of
selling in the near term. The Company currently has no securities classified as held-to-maturity or trading.
Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of
shareholders’ equity, net of tax. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of
securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount and is
amortized on the level-yield method without anticipating payments, except for U.S. Government mortgage-backed and related
securities where twelve months of historical prepayments are taken into consideration.
The regulatory stock is carried at cost (its redeemable value) and the Company is required to hold such investments as a condition of
membership in order to transact business with the Federal Home Loan Bank (FHLB) of Cincinnati and the Federal Reserve Bank
(FRB). The stock is bought from and sold based upon its par value. The stock cannot be traded or sold in any market and as such is
classified as restricted stock, carried at cost (its redeemable value) and evaluated by management. The stock’s value is determined by
the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value
will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the
FHLB and FRB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the
FHLB and FRB to make payments required by law or regulation and the level of such payments in relation to the operating
performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and FRB and (d) the liquidity
position of the FHLB and FRB. The Company does not consider these investments to be other-than-temporarily impaired at December
31, 2019.
Other-than-Temporary Investment Security Impairment: Securities are evaluated periodically to determine whether a decline in value
is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with the reasons
underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not
intended to indicate that the decline in value is permanent, but indicates that the prospect for a near-term recovery of value is not
necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the
investment. Unrealized losses on available-for-sale investments have not been recognized into income. However, once a decline in
value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings
while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss).
61
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 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
accrual of interest is discontinued on a loan when management determines that the collection of interest is doubtful. Generally, a loan
is placed on non-accrual status once the borrower is 90 days past due on payments, or whenever sufficient information is received to
question the collectability of the loan or any time legal proceedings are initiated involving a loan. Interest income accrued up to the
date a loan is placed on non-accrual is reversed through interest income. Cash payments received while a loan is classified as non-
accrual are recorded as a reduction to principal or reported as interest income according to management’s judgment as to the
collectability of principal. A loan is returned to accrual status when either all of the principal and interest amounts contractually due
are brought current and future payments are, in management’s judgment, 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.
The same treatment is applied to impaired loans, which means that it is probable that all amounts will not be collected according to the
contractual terms of the loan agreement.
Loans Held for Sale: The Company originates certain residential mortgage loans for sale in the secondary mortgage loan market. The
Company concurrently sells the rights to service the related loans. These loans are classified as loans held for sale, and carried at the
estimated fair value based on secondary market prices. Adjustments to the fair value of loans held for sale are included in “mortgage
banking gains” in the Consolidated Statements of Income. Deferred fees and costs related to loans held for sale are not amortized, but
included in the cost basis at the time of sale.
Allowance for Loan Losses (ALLL) and Allowance for Losses on Lending Related Commitments: Management establishes the
allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio.
Commercial loans and commercial real estate loans are reviewed on a regular basis with a focus on larger loans, along with loans
which have experienced past payment or financial deficiencies. Larger commercial loans and commercial real estate loans are
evaluated for impairment in accordance with the Bank’s loan review policy. These loans are analyzed to determine if they are
impaired. All loans that are delinquent 90 days and are placed on non-accrual status are evaluated on an individual basis. Allowances
for loan losses on impaired loans are determined using the estimated future cash flows of the loan, discounted to their present value
using the loan’s effective interest rate, or in most cases, the estimated fair value of the underlying collateral. If the analysis indicates a
collection shortfall, a specific reserve is allocated to loans on an individual basis which are reviewed for impairment. The remaining
loans are evaluated and classified as groups of loans with similar risk characteristics.
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. Estimates of credit losses should
reflect consideration of all significant factors that affect collectability of the portfolio. While historical loss experience provides a
reasonable starting point, historical losses, or even recent trends in losses are not, by themselves, a sufficient basis to determine the
appropriate level for the ALLL. Management will also consider any factors that are likely to cause estimated credit losses associated
with the Bank’s current portfolio to differ from historical loss experience. Factors include, but are not limited to, changes in lending
policies and procedures, including underwriting standards and collection, charge-offs, and recovery practices; changes in economic
trends; changes in the nature and volume of the portfolio; changes in the experience and ability of lending management and the depth
of staff; changes in the trend, volume and severity of past-due and classified loans, and trends in the volume of non-accrual loans; the
existence and effect of any concentrations of credit and changes in the level of such concentrations; levels and trends in classification;
declining trends in performance; structure and lack of performance measures and migration between risk classifications.
Key risk factors and assumptions are updated to reflect actual experience and changing circumstances. While management may
periodically allocate portions of the ALLL for specific problem loans, the entire ALLL is available for any charge-offs that occur.
Certain 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 internal 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.
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 Consolidated Balance Sheets within other liabilities, while the corresponding
provision for these losses is recorded as a component of other operating expense.
62
Loan Charge-off Policies: Consumer loans are generally fully or partially charged down to the fair value of collateral securing the
asset prior to the loan becoming 180 days past due, unless the loan is well secured and in the process of collection. All other loans are
generally charged down to the net realizable value when the loan is 90 days past due.
Troubled Debt Restructurings (TDR): A loan is classified as a TDR when management grants a concession for other than an
insignificant period of time to the borrower that would not otherwise be considered, except in situations of economic difficulties.
Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before
their loan reaches non-accrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance
and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where
borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on
the restructuring as noted above for impaired loans. In addition to the allowance for the pooled portfolios, management has developed
a separate allowance for loans that are identified as impaired through a TDR. These loans are excluded from pooled loss forecasts and
a separate reserve is provided under the accounting guidance for loan impairment.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed generally on the straight-line method over the estimated useful lives (5 to 40 years) 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 on the
Consolidated Balance Sheets. Such real estate is carried at fair value less estimated costs to sell. Any reduction from the carrying
value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair 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.
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 of the policies, as well as its share of insurance
proceeds received, are recorded in noninterest income, and are not subject to income taxes. The cash surrender value of the policies is
included on the Consolidated Balance Sheets. 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 I Capital. The
Company has purchased BOLI to provide a long-term asset to offset long-term benefit liabilities, while generating competitive
investment yields.
Endorsement Split-Dollar Life Insurance Arrangement: The Company maintains a liability for the death benefit promised under split-
dollar life insurance arrangements.
Derivative Instruments: The Company enters into contracts for the future delivery of residential mortgage loans when interest rate
locks are entered into in order to economically hedge potential adverse effects of changes in interest rates. These contracts are
derivative instruments. All derivative instruments are recognized as either other assets or other liabilities at fair value in the
Consolidated Balance Sheets.
Advertising and Marketing: The Company expenses advertising and marketing costs as incurred.
Income Taxes: A deferred tax liability or asset is determined at each balance sheet date. It is measured by applying currently enacted
tax laws to future amounts that result from differences in the financial statement and tax bases of assets and liabilities.
Other Comprehensive Income (Loss): Accumulated other comprehensive income (loss) for the Company is comprised of unrealized
holding (losses) gains on available-for-sale securities, net of tax, and post-retirement obligations.
Per Share Amounts: Earnings per share is computed by dividing net income available to common shareholders by the weighted
average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is
calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock
outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the
treasury stock method using an average market price for the period. The common stock equivalents are derived from unvested
restricted share awards.
63
The following table sets forth the computation of basic earnings per common share:
Net income (amounts in thousands)................................................................... $
Weighted average common shares outstanding.................................................
Net effect of dilutive common share equivalents ..............................................
Adjusted average shares outstanding - dilutive ................................................. $
Basic earnings per share .................................................................................... $
Dilutive earnings per share ................................................................................ $
2019
7,282
4,340,775
8,698
4,349,473
1.68
1.68
Years ended December 31,
2018
$
$
$
$
8,835
4,357,760
6,474
4,364,234
2.03
2.03
$
$
$
$
2017
4,350
4,407,254
4,220
4,411,474
0.99
0.99
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Off-Balance Sheet Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to
make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded if and when they
are funded.
Revenue Recognition: Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers –
Topic 606 and all subsequent ASUs that modified ASC 606. The Company has elected to apply the standard utilizing the modified
retrospective approach with a cumulative effect of adoption for the impact from uncompleted contracts at the date of adoption. The
implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods.
Management determined that the primary sources of revenue emanating from interest income on loans and investments along with
noninterest revenue resulting from investment security gains, gains on the sale of loans, earnings on bank owned life insurance, wealth
management and other non-interest income are not within the scope of ASC 606. As a result, no changes were made during the period
related to these sources of revenue.
The main types of non-interest income within the scope of the standard are as follows:
Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if the account
balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either
the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an
unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities
resulting from a customer request or activity that include non-sufficient fund fees, overdraft fees, continuous overdraft fees and other
fees such as stop payment fees. All of these fees are attributable to specific performance obligations of the Company where the
revenue is recognized at a defined point in time, namely at the completion of the requested service/transaction.
Fees, exchange, and other service charges- This is primarily comprised of debit card income, ATM fees, merchant services income,
and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit and
credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company
cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly
represents fees charged to merchants to process their debit card transactions, in addition to account management fees. Other service
charges include cashier’s checks, check charges and other services. The Company’s performance obligation for fees, exchange, and
other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.
Payment is typically received immediately or in the following month.
Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the
buyer obtains control of the real estate and all of the performance obligations of Company have been satisfied. Evidence of the buyer
obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of
the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional
analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and
that the contract has a true commercial substance and that collection of amounts due from the buyer is reasonable. In situations where
financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying
value of the asset
64
The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing,
and uncertainty of revenue and cash flows.
Service charges on deposit accounts:
Overdraft fees .............................................................................................
Service charges...........................................................................................
Other fees ...................................................................................................
Fees, exchange, and other service charges.......................................................
Non-interest income (in-scope of Topic 606)..................................................
Non-interest income (out-of-scope of Topic 606) ...........................................
Total non-interest income ................................................................................
$
$
(Amounts in thousands)
Years Ended December 31,
2019
2018
1,057
411
16
828
2,312
2,710
5,022
$
$
1,084
408
16
765
2,273
3,419
5,692
Reclassifications: Certain items in the financial statements for 2018 and 2017 have been reclassified to conform to the 2019
presentation. Such reclassifications did not affect net income or shareholders’ equity.
Authoritative Accounting Guidance:
In February 2016, the FASB issued ASU (Accounting Standard Update) 2016-02, Leases (Topic 842). The standard requires lessees
to recognize the assets and liabilities that arise from leases in the balance sheet. Additionally, in July 2018,the FASB issued ASU
2018- 11, Leases (Topic 842) – Targeted Improvements, which, among other things, provides an additional transition method that
would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have
elected to apply ASU 2016-02 and its related amendments as of the beginning of the period of adoption (January 1, 2019) and have
not restated comparative periods. The Company elected to adopt the transition relief provisions from ASU 2018-11. Our operating
leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease
right-of-use ("ROU") asset and an operating lease liability of $2.1 million on January 1, 2019, with no impact on our consolidated
statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and
operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 20 -
Leases for additional information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve
financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial
institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should
be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized
cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur
over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly
recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the
period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted
for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be
through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the
guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers
that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the
allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet
determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial
statements.
65
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The
amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the
amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for
securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim
period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity
should provide disclosures about a change in accounting principle. This Update did not have a significant impact on the Company’s
financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and
disclosure of the hedge accounting guidance in current generally accepted accounting principles. For public business entities, the
amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods
beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment
hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate
measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance
of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended
presentation and disclosure guidance is required only prospectively. This Update did not have a significant impact on the Company’s
financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for
nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include sharebased
payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following
areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards
with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic
entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities
for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. This Update did not have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the
Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons
for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the
valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses
for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the
reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value
measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This
Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract
and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing
arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is
a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and
hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities,
the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning
after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation
costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial
statements.
66
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of
the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for
hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the
London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry
and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the
amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business
entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in
Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update
2017-12. This Update did not have a significant impact on the Company’s financial statements.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors
sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset
by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that
are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases
within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the
interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The
amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update did not impact the
Company’s financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably
elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses
standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new
credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an
instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that
elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized
through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair
value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13,
the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13,
ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for
ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022,
and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. This Update is not expected to
have a significant impact on the Company’s financial statements.
In November 2019, the FASB issued ASU 2019-08, Compensation ‒ Stock Compensation (Topic 718) and Revenue from Contracts
with Customers (Topic 606), which requires entities to measure and classify sharebased payments to a customer, in accordance with
the guidance in ASC 718, Compensation ‒ Stock Compensation. The amendments in that Update expanded the scope of Topic 718 to
include share-based payment transactions for acquiring goods and services from nonemployees and, in doing so, superseded guidance
in Subtopic 505-50, Equity ‒ Equity-Based Payments to Non-Employees. The amount that would be recorded as a reduction in revenue
would be measured based on the grant date fair value of the sharebased payment, in accordance with Topic 718. The grant date is the
date at which a supplier and customer reach a mutual understanding of the award’s key terms and conditions. The award’s
classification and subsequent measurement would be subject to ASC 718 unless the award is modified or the grantee is no longer a
customer. For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update are effective for
(1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2)
other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. For entities that have adopted the amendments in Update 2018-07, the amendments in this Update are
effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt
the amendments in this Update, but not before it adopts the amendments in Update 2018-07. This Update is not expected to have a
significant impact on the Company’s financial statements.
67
In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be
smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the
goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective
dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. We have elected to apply
ASU 2016-02 and its related amendments as of the beginning of the period of adoption (January 1, 2019) and have not restated
comparative periods. The Company elected to adopt the transition relief provisions from ASU 2018-11. The Company qualifies as a
smaller reporting company and does not expect to early adopt ASUs 2016-13 and 2017-04.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses,
to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update
clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets;
an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the
prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends
the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis.
The effective dates in this Update are the same as those applicable for ASU 2019-10. This Update did not have a significant impact on
the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change
the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election
to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides
guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was
recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss
in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an
investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date
losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income.
For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15,
2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant
impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-1, Investments – Equity Securities (Topic 321), Investments– Equity Method and Joint
Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that
require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in
accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that,
for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward
contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted
for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825.
An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward
contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a
significant impact on the Company’s financial statements.
68
NOTE 2 - INVESTMENT SECURITIES
The following is a summary of investment securities available-for-sale and regulatory stock:
December 31, 2019
U.S. Government agencies and corporations .......................................... $
Obligations of states and political subdivisions......................................
U.S. Government-sponsored mortgage-backed securities ......................
U.S. Government-sponsored collateralized mortgage obligations .........
U.S. Government-guaranteed small business administration pools........
Total investment securities available-for-sale ................................... $
Federal Home Loan Bank (FHLB) stock................................................ $
Federal Reserve Bank (FRB) stock.........................................................
Total regulatory stock........................................................................ $
(Amounts in thousands)
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Amortized Cost
3,348 $
67,794
48,566
8,447
6,576
134,731 $
2,609 $
226
2,835 $
1 $
1,853
75
78
—
2,007 $
— $
—
— $
39 $
21
404
44
99
607 $
— $
—
— $
December 31, 2018
U.S. Government agencies and corporations .......................................... $
Obligations of states and political subdivisions......................................
U.S. Government-sponsored mortgage-backed securities ......................
U.S. Government-sponsored collateralized mortgage obligations .........
U.S. Government-guaranteed small business administration pools........
Total investment securities available-for-sale ................................... $
Federal Home Loan Bank (FHLB) stock................................................ $
Federal Reserve Bank (FRB) stock.........................................................
Total regulatory stock........................................................................ $
(Amounts in thousands)
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized Cost
9,242 $
53,187
59,070
12,112
7,978
141,589 $
2,355 $
226
2,581 $
11 $
26
—
41
—
78 $
— $
—
— $
251 $
1,555
2,483
177
278
4,744 $
— $
—
— $
Fair Value
3,310
69,626
48,237
8,481
6,477
136,131
2,609
226
2,835
Fair Value
9,002
51,658
56,587
11,976
7,700
136,923
2,355
226
2,581
The amortized cost and fair value of debt securities at December 31, 2019, 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.
Due in one year or less ........................................................................................................... $
Due after one year through five years.....................................................................................
Due after five years through ten years....................................................................................
Due after ten years ..................................................................................................................
Total ..................................................................................................................................
U.S. Government-sponsored mortgage-backed and related securities ...................................
Total investment securities available for sale ................................................................... $
418
4,878
5,408
67,014
77,718
57,013
134,731
$
$
422
4,797
5,393
68,801
79,413
56,718
136,131
(Amounts in thousands)
Amortized Cost
Fair Value
The following table sets forth the proceeds, gains and losses realized on securities sold or called for each of the years ended
December 31:
Proceeds on securities sold................................................................................ $
Gross realized gains ..........................................................................................
Gross realized losses .........................................................................................
$
13,622
82
126
$
21,418
123
144
2019
(Amounts in thousands)
2018
2017
44,801
524
517
Investment securities with a carrying value of approximately $59.0 million at December 31, 2019 and $55.1 million at December 31,
2018 were pledged to secure deposits and for other purposes. The remaining securities provide an adequate level of liquidity.
69
The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at
December 31, 2019:
Less than 12 Months
(Amounts in thousands)
12 Months or More
Total
U.S. Government agencies and corporations ............... $
Obligations of states and political subdivisions ...........
U.S. Government-sponsored mortgage-backed
Fair Value
2,961
263
securities....................................................................
U.S. Government-sponsored collateralized
mortgage obligations .................................................
U.S. Government-guaranteed small business
—
931
Unrealized
Losses
$
39
1
—
7
1,332
34,124
3,944
administration pools ..................................................
Total ........................................................................ $
5,600
9,755
$
78
125
877
40,277
$
$
Fair Value
2,961
1,595
— $
20
$
404
37
21
482
34,124
4,875
6,477
50,032
$
$
39
21
404
44
99
607
Unrealized
Losses
Fair Value
$
— $
Unrealized
Losses
The above table represents 32 investment securities where the fair 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, 2018:
Less than 12 Months
(Amounts in thousands)
12 Months or More
Total
U.S. Government agencies and corporations................ $
Obligations of states and political subdivisions ...........
U.S. Government-sponsored mortgage-backed
Fair Value
3,280
23,616
securities ....................................................................
1,598
U.S. Government-sponsored collateralized
mortgage obligations .................................................
—
U.S. Government-guaranteed small business
Unrealized
Losses
$
6
567
18
—
Fair Value
2,755
$
24,607
Unrealized
Losses
$
245
988
Fair Value
6,035
$
48,223
54,989
2,465
56,587
5,350
177
5,350
Unrealized
Losses
$
251
1,555
2,483
177
administration pools ..................................................
Total ........................................................................ $
—
28,494
$
—
591
7,700
95,401
$
$
278
4,153
7,700
$ 123,895
$
278
4,744
The above table represents 121 investment securities where the current value is less than the related amortized cost.
The unrealized losses at December 31, 2019 on the Company’s investments were caused by changes in market rates and related
spreads. The significant decrease in unrealized losses occurred throughout 2019 commensurate with the lack of growth in the
economy, both domestically and globally. It is expected that the securities would not be settled at less than the amortized cost of the
Company’s investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit
quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be
required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not
consider these investments to be other-than-temporarily impaired at December 31, 2019.
Securities Deemed to be Other-Than-Temporarily Impaired
The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI)
with formal reviews performed quarterly.
For debt securities in an unrealized loss position, management assesses whether (a) it has the intent to sell the debt security or (b) it is
more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met,
an OTTI on the security must be recognized.
70
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-
likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost
basis (i.e., the amortized cost basis less any current-period credit loss), the Company presents the amount of the OTTI recognized in
the Consolidated Statements of Income.
In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount
of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings.
The amount of the total impairment related to all other factors is recognized in other comprehensive income. The total other-than-
temporary impairment is presented in the Consolidated Statements of Income with an offset for the amount of the total other-than-
temporary impairment that is recognized in other comprehensive income.
The following provides a cumulative rollforward of credit losses recognized in earnings for trust preferred securities previously held.
Beginning impairment balance.......................................................................... $
Reduction for debt securities for which other-than-temporary impairment has
been previously recognized and there is no related other comprehensive
income ............................................................................................................
Credit losses on debt securities for which other-than-temporary impairment
has not been previously recognized ...............................................................
Additional credit losses on debt securities for which other-than-temporary
impairment was previously recognized..........................................................
Sale of debt securities........................................................................................
Ending impairment balance............................................................................... $
2019
(Amounts in thousands)
December 31,
2018
— $
140
$
2017
—
—
—
—
— $
—
—
—
(140)
— $
140
—
—
—
—
140
At December 31, 2019, there were no investment securities considered to be in non-accrual status due to the delay in the collection of
interest payments. This balance was comprised of two trust preferred securities which were disposed of in the second quarter of the
2018.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern
Ohio and Western Pennsylvania.
The following represents the composition of the loan portfolio for the period ending:
(Amounts in thousands)
December 31,
2019
2018
Balance
%
Balance
%
Commercial ........................................................................................ $
Commercial real estate .......................................................................
Residential real estate .........................................................................
Consumer - home equity ....................................................................
Consumer - other ................................................................................
Total loans..................................................................................... $
99,864
302,084
87,172
25,856
3,740
518,716
19.3
58.2
16.8
5.0
0.7
$
$
112,440
303,804
69,845
25,076
3,227
514,392
21.9
59.0
13.6
4.9
0.6
71
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and
losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in
the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans,
residential real estate loans and consumer loans. The pools of commercial real estate loans and commercial loans are also broken
down further by industry sectors when analyzing the related pools. Using the largest concentrations as the qualifier, these industry
sectors include non-residential buildings; skilled nursing and nursing care; residential real estate lessors, agents and managers; hotel
and motels, and trucking. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity
loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating
allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management
evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the
historical allocation percentage to get the adjusted factor.
These factors include, but are not limited to, the following:
Factor Considered:
Levels of and trends in charge-offs, classifications and non-accruals ......................................................................
Trends in volume and terms......................................................................................................................................
Changes in lending policies and procedures .............................................................................................................
Experience, depth and ability of management, including loan review function.......................................................
Economic trends, including valuation of underlying collateral ................................................................................
Concentrations of credit ............................................................................................................................................
Risk Trend:
Decreasing
Stable
Stable
Stable
Increasing
Stable
The following factors are analyzed and applied to loans internally graded with higher risk credit in addition to the above factors for
non-classified loans:
Factor Considered:
Levels and trends in classification............................................................................................................................
Declining trends in financial performance ...............................................................................................................
Structure and lack of performance measures............................................................................................................
Migration between risk categories............................................................................................................................
Risk Trend:
Stable
Decreasing
Stable
Stable
The provision charged to operations can be allocated to a loan classification either as a positive or negative value as a result of any
material changes to: net charge-offs or recoveries which influence the historical allocation percentage, qualitative risk factors or loan
balances.
The following is an analysis of changes in the allowance for loan losses for the periods ended:
December 31, 2019
Balance at beginning of period..................................... $
Loan charge-offs...........................................................
Recoveries ....................................................................
Net loan recoveries (charge-offs) .................................
Provision charged to operations ...................................
Balance at end of period............................................... $
Commercial
1,232
(231)
28
(203)
727
1,756
December 31, 2018
Balance at beginning of period..................................... $
Loan charge-offs...........................................................
Recoveries ....................................................................
Net loan recoveries (charge-offs) .................................
Provision charged to operations ...................................
Balance at end of period............................................... $
Commercial
1,591
(1,163)
—
(1,163)
804
1,232
(Amounts in thousands)
Commercial
real estate
Residential
real estate
$
$
2,414
(40)
—
(40)
(244)
2,130
$
$
314
(78)
—
(78)
98
334
Consumer -
home equity
115
$
—
2
2
(13)
104
$
(Amounts in thousands)
Commercial
real estate
Residential
real estate
$
$
2,702
—
166
166
(454)
2,414
$
$
117
—
3
3
194
314
Consumer -
home equity
70
$
—
5
5
40
115
$
Consumer -
other
Total
$
$
123
(205)
76
(129)
147
141
Consumer -
other
$
$
98
(175)
59
(116)
141
123
$
$
$
$
4,198
(554)
106
(448)
715
4,465
Total
4,578
(1,338)
233
(1,105)
725
4,198
72
December 31, 2017
Balance at beginning of period .................................... $
Loan charge-offs ..........................................................
Recoveries ....................................................................
Net loan recoveries (charge-offs).................................
Provision charged to operations ...................................
Balance at end of period............................................... $
Commercial
1,394
—
388
388
(191)
1,591
(Amounts in thousands)
Commercial
real estate
Residential
real estate
$
$
3,072
(654)
—
(654)
284
2,702
$
$
163
(14)
5
(9)
(37)
117
Consumer -
home equity
150
$
(26)
10
(16)
(64)
70
$
Consumer -
other
Total
$
$
89
(146)
47
(99)
108
98
$
$
4,868
(840)
450
(390)
100
4,578
The commercial charge-off in 2018 related to loans that were restructured with no principal forgiveness with a new borrowing
relationship, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent
to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is
recorded as a loan discount. As loan payments are made, interest will be recognized at the market rate versus the negotiated rate via
the amortization of the discount over the various lives of the loans. There was $625,000 in specific reserve previously allocated to
these loans at December 31, 2017. The decrease in commercial real estate and the majority of the increase in residential real estate is
due to reclassification of loans between these categories in 2019.
The allowance for commercial loans includes an amount for a single loan impairment, otherwise the provision decreased modestly.
The decrease in the provision for commercial real estate loans is due mainly to a decrease in the concentration of credit factor. The
recent segmentation of the commercial real estate loan portfolio into its five largest concentrations has resulted in lower allocations to
those segments. The residential real estate, consumer-home equity and other household provisions remained fairly constant. The
amount of net charge-offs also impacts the provision charged to operations for any category of loans. Charge-offs affect the historical
rate applied to each category, and the amount needed to replenish the amount charged-off, which impacted residential real estate and
consumer loans as well as commercial real estate loans. Along with the impact of classified loans, the amount of net charge-offs
impacts the provision charged to operations for any category of loans. Charge-offs affect the historical rate applied to each category,
and the amount needed to replenish the charge off to the allowance. The total allowance reflects management’s estimate of loan losses
inherent in the loan portfolio at the Consolidated Balance Sheet date.
The following tables present a full breakdown by portfolio classification of the allowance for loan losses and the recorded investment
in loans for the periods ended December 31, 2019 and 2018:
Commercial
Commercial
real estate
Residential
real estate
Consumer -
home equity
Consumer -
other
Total
(Amounts in thousands)
December 31, 2019
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment ................................ $
579 $
— $
— $
— $
— $
579
Collectively evaluated for
impairment ................................
1,177
2,130
334
104
141
3,886
Total ending allowance
balance ................................. $
1,756 $
2,130 $
334 $
104 $
141 $
4,465
Loan Portfolio:
Individually evaluated for
impairment ................................ $
4,909 $
2,940 $
— $
— $
— $
7,849
Collectively evaluated for
impairment ................................
Total ending loan balance ....... $
94,955
99,864 $
299,144
302,084 $
87,172
87,172 $
25,856
25,856 $
3,740
3,740 $
510,867
518,716
73
Commercial
Commercial
real estate
Residential
real estate
Consumer -
home equity
Consumer -
other
Total
(Amounts in thousands)
December 31, 2018
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment................................. $
— $
— $
— $
— $
— $
—
Collectively evaluated for
impairment.................................
1,232
2,414
314
115
123
4,198
Total ending allowance
balance ................................. $
1,232 $
2,414 $
314 $
115 $
123 $
4,198
Loan Portfolio:
Individually evaluated for
impairment................................. $
5,364 $
4,340 $
— $
— $
— $
9,704
Collectively evaluated for
impairment.................................
Total ending loan balance ....... $
107,076
112,440 $
299,464
303,804 $
69,845
69,845 $
25,076
25,076 $
3,227
3,227 $
504,688
514,392
The following tables represent credit exposures by internally assigned grades for years ended December 31, 2019 and 2018,
respectively. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements
as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.
The Company’s internally assigned grades are as follows:
•
•
•
Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the
underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor.
Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not
corrected.
Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected.
• Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which
makes collection in full highly questionable and improbable, based on existing circumstances.
•
Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not
warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be
charged off now, even though partial or full recovery may be possible in the future.
The following is a summary of credit quality indicators by internally assigned grade as of December 31, 2019 and 2018.
December 31, 2019
Pass...................................................................................................... $
Special Mention...................................................................................
Substandard .........................................................................................
Ending Balance.................................................................................... $
December 31, 2018
Pass ...................................................................................................... $
Special Mention ...................................................................................
Substandard..........................................................................................
Ending Balance .................................................................................... $
74
(Amounts in thousands)
Commercial
Commercial real estate
83,114
6,273
10,477
99,864
$
$
275,763
21,995
4,326
302,084
(Amounts in thousands)
Commercial
Commercial real estate
94,316
6,914
11,210
112,440
$
$
271,370
25,199
7,235
303,804
The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company
becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the
above definitions of special mention and substandard. Nonaccrual loans in these categories are evaluated for charge off or charge
down, and the remaining balance has the same allowance factor as pooled loans.
The following is a summary of consumer credit exposure as of December 31, 2019 and 2018.
Residential real
estate
(Amounts in thousands)
Consumer - home
equity
Consumer- other
December 31, 2019
Performing ......................................................................................................... $
Nonperforming ..................................................................................................
Total ............................................................................................................. $
86,703
469
87,172
$
$
25,709
147
25,856
December 31, 2018
Performing......................................................................................................... $
Nonperforming ..................................................................................................
Total ............................................................................................................. $
69,535
310
69,845
$
$
24,956
120
25,076
Residential real
estate
(Amounts in thousands)
Consumer - home
equity
$
$
$
$
3,740
—
3,740
Consumer- other
3,227
—
3,227
Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be
receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status,
previously accrued but unpaid interest is recorded against interest income. Loans in foreclosure are considered nonperforming. At
December 31, 2019, there were $154,000 of loans in the process of foreclosure.
The following is a summary of classes of loans on non-accrual status as of:
(Amounts in thousands)
December 31,
2019
2018
Commercial............................................................................................................................. $
Commercial real estate............................................................................................................
Residential real estate .............................................................................................................
Consumer:
Consumer - home equity ...................................................................................................
Consumer - other ...............................................................................................................
Total ............................................................................................................................. $
1,152
566
469
147
—
2,334
$
$
1,291
512
310
120
—
2,233
Gross income that should have been recorded in income on nonaccrual loans was $210,000, $191,000 and $57,000 for the years ended
December 31, 2019, 2018 and 2017, respectively. Actual interest included in income on these nonaccrual loans amounts to $46,000,
$42,000 and $16,000 in 2019, 2018 and 2017, respectively.
Troubled Debt Restructuring
Nonperforming loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic
concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These
concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment
extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of
restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a
reasonable period, generally six months.
75
There were no loans modified as TDRs during the years ended December 31, 2019 and 2017. The following presents, by class,
information related to loans modified in a TDR during the period ended December 31, 2018.
Commercial .......................................................................................
Total restructured loans ..................................................................
Subsequently defaulted ................................................................
7
7
$
$
— $
$
$
5,373
5,373
—
Number of
contracts
Pre-modification
recorded
investment
Post-
modification
recorded
investment
Increase in the
allowance
4,210
4,210
$
$
—
—
(Dollar amounts in thousands)
December 31, 2018
The seven commercial loans were all to one new borrowing relationship. The loans were restructured with no principal forgiveness,
but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the
difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is
recorded as loan discount. As loan payments are made, interest will be recognized at the market rate versus the negotiated rate via the
amortization of the discount over the various lives of the loans.
The following is an aging analysis of the recorded investment of past due loans as of the periods ended December 31, 2019 and 2018:
30-59 Days
Past Due
60-89 Days
Past Due
90 Days Or
Greater
Total Past
Due
Current
Total Loans
Recorded
Investment >
90 Days and
Accruing
(Amounts in thousands)
December 31, 2019
Commercial.............................. $
Commercial real estate.............
Residential real estate ..............
Consumer:
Consumer - home equity ....
Consumer - other ................
Total .............................. $
1
—
5
24
14
44
$
$
— $
—
214
25
—
239
$
1,152
253
454
123
—
1,982
$
$
1,153
253
673
172
14
2,265
$
$
98,711
301,831
86,499
25,684
3,726
516,451
$
$
99,864
302,084
87,172
25,856
3,740
518,716
$
$
—
—
—
—
—
—
30-59 Days
Past Due
60-89 Days
Past Due
90 Days Or
Greater
Total Past
Due
Current
Total Loans
Recorded
Investment >
90 Days and
Accruing
(Amounts in thousands)
December 31, 2018
Commercial .............................. $
Commercial real estate .............
Residential real estate ...............
Consumer:
Consumer - home equity .....
Consumer - other.................
Total............................... $
14
—
36
—
17
67
$
$
— $
—
182
141
—
323
$
1,291
167
257
25
—
1,740
$
$
1,305
167
475
166
17
2,130
$
$
111,135
303,637
69,370
24,910
3,210
512,262
$
$
112,440
303,804
69,845
25,076
3,227
514,392
$
$
—
—
—
—
—
—
An impaired loan is a loan on which, based on current information and events, it is probable that the Company will be unable to
collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an
insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.
When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a
loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.
76
The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which
meet the criteria below are evaluated quarterly.
• All borrowers whose loans are classified doubtful by examiners and internal loan review
• All loans on non-accrual status
• Any loan in foreclosure
• Any loan with a specific reserve
• Any loan determined to be collateral dependent for repayment
•
Loans classified as troubled debt restructuring
Commercial loans and commercial real estate loans evaluated for impairment are excluded from the general pool of loans in the ALLL
calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than
the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount),
impairment is recognized through an allowance estimate or a charge-off to the allowance.
The following table presents the recorded investment and unpaid principal balances for impaired loans with the associated allowance
amount, if applicable, at December 31, 2019 and 2018. Also presented are the average recorded investments in the impaired balances
and interest income recognized after impairment for the years ended December 31, 2019, 2018 and 2017.
Recorded
Investment
(Amounts in thousands)
Unpaid Principal
Balance
Related Allowance
December 31, 2019
With no related allowance recorded:
Commercial .................................................................................................. $
Commercial real estate .................................................................................
With an allowance recorded:
Commercial ..................................................................................................
Commercial real estate .................................................................................
Total:
Commercial .................................................................................................. $
Commercial real estate ................................................................................. $
3,925
2,940
984
—
4,909
2,940
$
$
$
4,946
2,940
984
—
5,930
2,940
$
$
$
—
—
579
—
579
—
Recorded
Investment
(Amounts in thousands)
Unpaid Principal
Balance
Related Allowance
December 31, 2018
With no related allowance recorded:
Commercial .................................................................................................. $
Commercial real estate .................................................................................
With an allowance recorded:
Commercial ..................................................................................................
Commercial real estate .................................................................................
Total:
Commercial .................................................................................................. $
Commercial real estate ................................................................................. $
5,364
4,340
—
—
5,364
4,340
$
$
$
6,411
4,340
—
—
6,411
4,340
$
$
$
—
—
—
—
—
—
77
(Amounts in thousands)
Average Recorded
Investment
Interest Income
Recognized
December 31, 2019
With no related allowance recorded:
Commercial ................................................................................................................. $
Commercial real estate ................................................................................................
With an allowance recorded:
Commercial .................................................................................................................
Commercial real estate ................................................................................................
Total:
Commercial ................................................................................................................. $
Commercial real estate ................................................................................................ $
4,298
3,108
823
—
5,121
3,108
$
$
$
300
195
—
—
300
195
(Amounts in thousands)
Average Recorded
Investment
Interest Income
Recognized
December 31, 2018
With no related allowance recorded:
Commercial.................................................................................................................. $
Commercial real estate.................................................................................................
With an allowance recorded:
Commercial..................................................................................................................
Commercial real estate.................................................................................................
Total:
Commercial.................................................................................................................. $
Commercial real estate................................................................................................. $
4,231
4,405
911
—
5,142
4,405
$
$
$
25
293
46
—
71
293
(Amounts in thousands)
Average Recorded
Investment
Interest Income
Recognized
December 31, 2017
With no related allowance recorded:
Commercial ................................................................................................................. $
Commercial real estate ................................................................................................
With an allowance recorded:
Commercial .................................................................................................................
Commercial real estate ................................................................................................
Total:
Commercial ................................................................................................................. $
Commercial real estate ................................................................................................ $
85
5,062
460
527
545
5,589
$
$
$
6
291
—
—
6
291
78
NOTE 4 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
Land......................................................................................................................................... $
Premises...................................................................................................................................
Equipment ...............................................................................................................................
Leasehold improvements.........................................................................................................
Total premises and equipment ...........................................................................................
Less accumulated depreciation................................................................................................
Net book value ................................................................................................................... $
2,984
12,493
11,083
695
27,255
15,237
12,018
$
$
2,984
10,346
10,760
480
24,570
14,368
10,202
(Amounts in thousands)
December 31,
2019
2018
Depreciation expense was $869,000 in 2019, $771,000 in 2018 and $880,000 in 2017.
NOTE 5 - DEPOSITS
The following is a summary of interest-bearing deposits:
(Amounts in thousands)
December 31,
2019
2018
Demand ................................................................................................................................... $
Money market..........................................................................................................................
Savings ....................................................................................................................................
Time:
In denominations $250,000 or under .................................................................................
In denominations of over $250,000 ...................................................................................
Total.............................................................................................................................. $
55,421
176,733
110,864
119,211
22,812
485,041
$
$
54,901
179,430
111,837
101,146
20,219
467,533
Stated maturities of time deposits were as follows:
(Amounts in thousands)
2019
2020....................................................................................................................................................................... $
2021.......................................................................................................................................................................
2022.......................................................................................................................................................................
2023.......................................................................................................................................................................
2024.......................................................................................................................................................................
2025 and beyond ...................................................................................................................................................
Total................................................................................................................................................................. $
The following is a summary of time deposits of $100,000 or more by remaining maturities:
Certificates of
Deposit
(Amounts in thousands)
December 31, 2019
Other Time
Deposits
Three months or less .......................................................................................... $
Three to six months............................................................................................
Six to twelve months..........................................................................................
One through five years.......................................................................................
Over five years ...................................................................................................
Total.............................................................................................................. $
13,980
6,245
6,308
26,106
1,894
54,533
$
$
1,614
2,551
3,840
225
—
8,230
$
$
88,034
36,133
7,523
5,510
1,069
3,754
142,023
Total
15,594
8,796
10,148
26,331
1,894
62,763
79
NOTE 6 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES AND OTHER SHORT-TERM BORROWINGS
The following is a summary of FHLB advances and other short-term borrowings:
FHLB advances - long-term:
Fixed rate payable and convertible fixed rate FHLB advances, with
monthly interest payments:
Due in 2019 ...................................................................................................
Due in 2020 ...................................................................................................
Due in 2021 ...................................................................................................
Due in 2026 ...................................................................................................
Due in 2029 ...................................................................................................
Total FHLB advances - long-term ...........................................................
FHLB advances - short-term:
Short-term......................................................................................................
Cash management..........................................................................................
Total FHLB advances - short-term ..........................................................
Total FHLB advances.........................................................................
Other short-term borrowings:
Securities sold under repurchase agreements .....................................................
Total FHLB advances and other short-term borrowings ..............
The following is a summary of FHLB advances – short term:
Weighted Average
Interest Rate
(Amounts in thousands)
December 31,
2019
2018
$
— $
2.04%
2.62%
0.96%
0.96%
1.78%
—%
—%
—%
1.78%
6,000
8,000
5,000
5,000
24,000
—
—
—
24,000
0.34%
1.68% $
1,922
25,922
$
6,000
6,000
4,000
—
—
16,000
8,000
4,000
12,000
28,000
2,206
30,206
Average balance during the year ...................................................................... $
Average interest rate during the year................................................................
Maximum month-end balance during the year ................................................. $
Weighted average interest rate at year end .......................................................
4,786
2.70%
16,000
$
$
—%
18,899
1.98%
30,000
2.47%
$
$
16,917
1.03%
32,000
1.38%
2019
(Amounts in thousands)
2018
2017
At December 31, 2019, FHLB advances were collateralized by FHLB stock owned by the Bank with a carrying value of $2.6 million,
a blanket lien against the Bank’s qualified mortgage loan portfolio of $90.7 million, $4.9 million in mortgage-backed securities and
$3.1 million in U.S. Government-guaranteed small business administration pools. In comparison, in the prior year FHLB advances
were collateralized by FHLB stock owned by the Bank with a carrying value of $2.4 million, a blanket lien against the Bank’s
qualified mortgage loan portfolio of $71.6 million, $7.0 million in mortgage-backed securities and $3.8 million in U.S. Government-
guaranteed small business administration pools. Maximum borrowing capacities from FHLB totaled $44.9 million and $55.3 million
at December 31, 2019 and 2018, respectively.
At December 31, 2019 there were $10.0 million of the FHLB fixed rate advances that were putable on or after certain specified dates
at the option of the FHLB. At December 31, 2018, there were no FHLB fixed rate advances that were putable on or after certain
specified dates at the option of the FHLB. Should the FHLB elect to exercise the put, the Company is required to pay the advance off
on that date without penalty.
The following is a summary of other short-term borrowings:
Average balance during the year ....................................................................... $
Average interest rate during the year.................................................................
Maximum month-end balance during the year.................................................. $
Weighted average interest rate at year end........................................................
1,493
0.33%
1,922
0.34%
$
$
$
$
1,679
0.33%
2,206
0.34%
2,018
0.33%
2,678
0.34%
2019
(Amounts in thousands)
2018
2017
80
Securities sold under repurchase agreements represent arrangements the Bank has entered into with certain deposit customers within
its local market areas. These borrowings are collateralized with securities. At December 31, 2019 and 2018, securities allocated for
this purpose, owned by the Bank and held in safekeeping accounts at independent correspondent banks, amounted to $2.8 million and
$3.1 million, respectively.
The following table provides additional detail regarding other short-term borrowings:
(Amounts in thousands)
Repurchase Agreements (Sweep)
Accounted for as Secured Borrowings
At December 31, 2019
At December 31, 2018
Remaining Contractual Maturity of the Agreements
Overnight and Continuous
Overnight and Continuous
Repurchase agreements:
U.S. Government-sponsored mortgage-backed securities .................. $
Total collateral carrying value .................................................................. $
Total short-term borrowings ..................................................................... $
2,750
2,750
1,922
$
$
$
3,066
3,066
2,206
NOTE 7 - SUBORDINATED DEBT
In July 2007, a trust formed by the Company issued $5.0 million of floating rate trust preferred securities as part of a pooled offering
of such securities due December 2037. The Company owns all $155,000 of the common securities issued by the trust. The securities
bear interest at the 3-month LIBOR rate plus 1.45%. The rates at December 31, 2019 and 2018 were 3.34% and 4.24%, respectively.
The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The debentures
represent the sole assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at par.
The trust is not consolidated with the Company’s financial statements. Accordingly, the Company does not report the securities issued
by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by the Company and held by the trust.
The subordinated debentures qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital
adequacy.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
At December 31, 2019, the Bank was required to maintain aggregate cash reserves amounting to $6.0 million in order to satisfy
federal regulatory requirements. The reserves are held in useable vault cash and interest-earning balances at the Federal Reserve Bank
of Cleveland.
The Bank grants commercial and industrial loans, commercial and residential mortgage loans, and consumer loans to customers in
Northeastern Ohio and Western Pennsylvania. Although the Bank has a diversified portfolio, exposure to credit loss can be adversely
impacted by downturns in local economic and employment conditions. Approximately 0.23% of total loans are unsecured at
December 31, 2019 and approximately 0.28% at December 31 2018.
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.
Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance
Sheets. The contract or notional amounts on those instruments reflect the extent of involvement the Company has in particular classes
of financial instruments.
In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented
by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any,
is based on management’s credit evaluation.
81
The following is a summary of such contractual commitments:
(Amounts in thousands)
December 31,
2019
2018
Commitments to extend credit:
Fixed rate........................................................................................................................... $
Variable rate ......................................................................................................................
Standby letters of credit ..........................................................................................................
$
19,755
75,147
3,905
31,225
74,050
3,455
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 Company 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment
and income-producing commercial properties. The increase in commitments is in line with the Company’s increased focus on
commercial and industrial lending, and specifically lines of credit.
The Company 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 following table is a summary of overdraft protection for the periods indicated:
(Amounts in thousands)
December 31,
2019
2018
Overdraft protection available on depositors' accounts ......................................................... $
Balance of overdrafts included in loans.................................................................................
Average daily balance of overdrafts ......................................................................................
Average daily balance of overdrafts as a percentage of available.........................................
$
8,070
130
112
1.39%
8,708
116
104
1.19%
Customer Derivatives - Interest Rate Swaps/Floors – The Company enters into interest rate swaps that allow our commercial loan
customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these
agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement,
which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap
agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with
both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through
earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered
in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to
credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on
earnings in any periods presented. At December 31, 2019, based upon the swap contract values, the company had two U.S.
Government-sponsored mortgage-backed securities pledged for collateral on its interest rate swaps with a third-party financial
institution with a fair value $2.8 million. At December 31, 2018, based upon the swap contract values at that time, it was not necessary
for any collateral to be pledged on the interest rate swaps.
82
Summary information regarding these derivatives is presented below:
Notional Amount
December 31,
(Amounts in thousands)
Fair Value
December 31,
2019
2018
Interest Rate Paid
Interest Rate Received
2019
2018
Customer interest rate
swap
Maturing in 2020 ................. $
Maturing in 2025 .................
Maturing in 2026 .................
Maturing in 2027 .................
Maturing in 2028 .................
Maturing in 2029 .................
Maturing in 2030 .................
Maturing in 2033 .................
Total ..................................... $
Third party interest rate
swap
Maturing in 2020 ................. $
Maturing in 2025 .................
Maturing in 2026 .................
Maturing in 2027 .................
Maturing in 2028 .................
Maturing in 2029 .................
Maturing in 2030 .................
Maturing in 2033 .................
Total ..................................... $
2,312
4,557
1,822
13,363
6,068
3,721
3,649
1,121
36,613
2,312
4,557
1,822
13,363
6,068
3,721
3,649
1,121
36,613
$
29,471
$
$
2,410
4,930
1,946
13,790
6,395
—
—
—
29,471
$
2,410
4,930
1,946
13,790
6,395
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
— 1 Mo. Libor + Margin
— 1 Mo. Libor + Margin
— 1 Mo. Libor + Margin
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
$
$
4
134
19
636
548
(19)
44
56
1,422
$
$
(4) $
(134)
(19)
(636)
(548)
19
(44)
(56)
(1,422) $
(30)
(28)
(64)
(54)
268
—
—
—
92
30
28
64
54
(268)
—
—
—
(92)
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
1 Mo. Libor + Margin $
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
1 Mo. Libor + Margin
$
The following table presents the fair values of derivative instruments in the Consolidated Balance Sheet.
Assets
Liabilities
(Amounts in thousands)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Other assets
Other assets
$
$
1,422
Other liabilities
92
Other liabilities
$
$
1,422
92
December 31, 2019
Interest rate derivatives ..................................
December 31, 2018
Interest rate derivatives ..................................
NOTE 9 – BENEFIT PLANS
The Bank has a contributory defined contribution retirement plan (401(k) plan) which covers substantially all employees. Total
expense under the plan was $367,000 for 2019, $337,000 for 2018 and $361,000 for 2017. The Bank matches participants’ voluntary
contributions up to 5% of gross pay. Participants were able to make voluntary contributions to the plan up to a maximum of $19,000
with an additional $6,000 catch-up deferral for plan participants over the age of 50. The Bank makes bi-weekly contributions to this
plan equal to amounts accrued for plan expense.
The Company provides 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. 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 Company accrues the cost of these
post-retirement benefits during the working careers of the officers and directors. At December 31, 2019, the accumulated liability for
these benefits totaled $3.7 million, with $3.2 million accrued for the officers’ plan and $517,000 for the directors’ plan.
83
The following table reconciles the accumulated liability for the benefit obligation of these agreements:
(Amounts in thousands)
Years Ended December 31,
2018
2017
2019
Beginning balance.............................................................................................. $
Benefit expense..................................................................................................
Benefit payments ...............................................................................................
Ending balance ............................................................................................. $
3,465
409
(181)
3,693
$
$
3,182
445
(162)
3,465
$
$
2,957
387
(162)
3,182
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 2020, is expected to be approximately $440,000. The benefits expected to be paid in the next year are
approximately $196,000.
The Bank has purchased insurance contracts on the lives of the participants in the supplemental retirement benefit plan and has named
the Bank as the beneficiary. Similarly, the Company 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.
The Company accrues for the monthly benefit expense of postretirement cost of insurance for split-dollar life insurance coverage. The
following table presents the changes in the accumulated liability.
Beginning balance.............................................................................................. $
(Income) expense recorded ................................................................................
Other comprehensive income recorded .............................................................
Ending balance................................................................................................... $
831
(55)
(31)
745
$
$
876
23
(68)
831
$
$
840
50
(14)
876
(Amounts in thousands)
December 31,
2018
2017
2019
NOTE 10 - FEDERAL INCOME TAXES
With the passage of the Tax Cuts and Jobs Act (“Tax Act”), tax law for corporations had several material changes effective beginning
in 2018. The most significant change is the reduction in the corporate tax rate from 34% to 21%. Because this reduced rate was
signed into law in December 2017, generally accepted accounting principles required recognition of the lower rate on the Company’s
deferred tax position as of December 31, 2017. As the Company is in a net deferred tax asset position, the reduction of this benefit
resulted in a $1.2 million additional charge to Federal Income Tax expense in the Company’s 2017 Consolidated Statements of
Income.
The composition of income tax expense is as follows:
Current ............................................................................................................... $
Deferred .............................................................................................................
Change in corporate tax rate ..............................................................................
Total.............................................................................................................. $
1,150
209
—
1,359
$
$
407
1,008
—
1,415
$
$
(Amounts in thousands)
Years Ended December 31,
2018
2019
2017
1,199
(28)
1,246
2,417
The ability to realize the benefit of deferred tax assets is dependent upon a number of factors, including the generation of future
taxable income, the ability to carry back taxes paid in previous years, the ability to offset capital losses with capital gains, the reversal
of deferred tax liabilities, and certain tax planning strategies. A valuation allowance of $28,000 was established in 2018 to offset in its
entirety capital losses.
84
The following is a summary of net deferred taxes included in other assets:
Gross deferred tax assets:
Allowance for loan and other real estate losses................................................................ $
Deferred loan origination cost - net ..................................................................................
Deferred compensation.....................................................................................................
Capital loss carryforward..................................................................................................
Unrealized loss on available-for-sale securities ...............................................................
Other items........................................................................................................................
Total gross deferred tax assets ....................................................................................
Valuation allowance .........................................................................................................
Total net deferred tax assets ........................................................................................
Gross deferred tax liabilities:
Unrealized gain on available-for-sale securities...............................................................
Premises and equipment ...................................................................................................
Other items........................................................................................................................
Total net deferred tax liabilities ..................................................................................
Net deferred tax asset .................................................................................................. $
The following is a reconciliation of the valuation allowance for net deferred tax assets:
(Amounts in thousands)
December 31,
2019
2018
938
195
775
28
—
868
2,804
(28)
2,776
(294)
(832)
(719)
(1,845)
931
$
$
882
232
727
28
980
390
3,239
(28)
3,211
—
(477)
(320)
(797)
2,414
(Amounts in thousands)
December 31,
2019
2018
Valuation allowance at beginning of year ............................................................................. $
Capital loss carryover ............................................................................................................
Valuation allowance at end of year ....................................................................................... $
28
—
28
$
$
—
28
28
The following is a reconciliation between tax expense using the statutory tax rate of 21% for 2019 and 2018 and 34% for 2017 and the
income tax provision:
(Amounts in thousands)
Years Ended December 31,
2018
2017
2019
Statutory tax expense ......................................................................................... $
Tax effect of non-taxable interest income .........................................................
Tax effect of earnings on bank-owned life insurance-net..................................
Tax effect of deferred tax valuation provision...................................................
Change in corporate tax rate (1).........................................................................
Tax effect of low income housing credit ...........................................................
Tax effect of non-deductible expenses ..............................................................
Federal income tax expense ......................................................................... $
1,815
(347)
(94)
—
—
(156)
141
1,359
$
$
2,153
(319)
(403)
28
—
(140)
96
1,415
$
$
2,301
(663)
(414)
—
1,246
(149)
96
2,417
(1) The tax act lowers the base corporate tax rate from 35% to 21% which was applied to the existing deferred tax balance.
The related income tax (benefit) expense on investment securities gains (losses) amounted to $(9,000) for 2019, $(4,000) for 2018 and
$3,000 for 2017 and is included in the federal income tax expense.
85
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition
threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-
likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold
is no longer met. The provision also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and
penalties. There were no significant unrecognized tax benefits at December 31, 2019 and the Company does not expect any significant
increase in unrecognized tax benefits in the next twelve months. No interest or penalties were incurred for income taxes which would
have been recorded as a component of income tax expense.
There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company’s federal and state
income tax returns for taxable years through 2015 have been closed for purposes of examination by the Internal Revenue Service and
the Ohio Department of Revenue.
NOTE 11 – FAIR VALUE
Measurements
The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair
value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest
and level 3 considered lowest). A brief description of each level follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as
of the reported date. The nature of these assets and liabilities include items for which quoted prices are available
but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of
which can be directly observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have
two-way markets and are measured using management’s best estimate of fair value, where inputs into the
determination of fair value require significant management judgment or estimation.
The following table presents the assets reported on the consolidated balance sheets at their fair value as of December 31, 2019 and
December 31, 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
Description
ASSETS
U.S. Government agencies and corporations.......................................... $
Obligations of states and political subdivisions .....................................
U.S. Government-sponsored mortgage-backed securities......................
U.S. Government-sponsored collateralized mortgage obligations .........
U.S. Government-guaranteed small business administration pools .......
Loans held for sale..................................................................................
Interest rate derivatives...........................................................................
LIABILITIES
(Amounts in thousands)
Fair Value Measurements at December 31, 2019 Using
Significant
Quoted Prices in
Other
Active Markets
Observable
For Identical
Inputs
Assets
(Level 2)
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2019
3,310 $
69,626
48,237
8,481
6,477
4,890
1,422
— $
—
—
—
—
4,890
—
3,310 $
69,626
48,237
8,481
6,477
—
1,422
—
—
—
—
—
—
—
—
Interest rate derivatives........................................................................... $
1,422 $
— $
1,422 $
86
Description
ASSETS
U.S. Government agencies and corporations ........................................ $
Obligations of states and political subdivisions ....................................
U.S. Government-sponsored mortgage-backed securities.....................
U.S. Government-sponsored collateralized mortgage obligations ........
U.S. Government-guaranteed small business administration pools ......
Loans held for sale.................................................................................
Interest rate derivatives..........................................................................
LIABILITIES
(Amounts in thousands)
Fair Value Measurements at December 31, 2018 Using
Quoted Prices in
Significant
Active Markets
Other
For Identical
Observable
Assets
Inputs
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2018
9,002 $
51,658
56,587
11,976
7,700
1,040
92
— $
—
—
—
—
1,040
—
9,002 $
51,658
56,587
11,976
7,700
—
92
—
—
—
—
—
—
—
—
Interest rate derivatives.......................................................................... $
92 $
— $
92 $
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2019, 2018 and 2017.
The Company classifies financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant
unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial
instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.
2019
Trust preferred
securities
(Amounts in thousands)
December 31,
2018
Trust preferred
securities
2017
Trust preferred
securities
Beginning balance .............................................................................................. $
Net realized/unrealized gains/(losses) included in:
Noninterest income .......................................................................................
Other comprehensive income .......................................................................
Discount accretion (premium amortization) ......................................................
Sales ...................................................................................................................
Purchases, issuance, and settlements..................................................................
Ending balance ................................................................................................... $
Losses included in net income for the period relating
to assets held at period end.............................................................................. $
— $
895
$
—
—
—
—
—
— $
— $
—
723
—
(1,618)
—
— $
— $
825
—
72
—
—
(2)
895
—
The Company conducts OTTI analyses on a quarterly basis. The initial indication of other-than-temporary impairment for both debt
and equity securities is a decline in the fair value below the amount recorded for an investment. A decline in value that is considered
to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Income. In determining
whether an impairment is other than temporary, the Company considers a number of factors, including, but not limited to, the length
of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment
downgrades by rating agencies and economic conditions of its industry, and a determination that the Company does not intend to sell
those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its
amortized cost basis less any current period credit loss. Among the factors that are considered in determining the Company’s intent
and ability is a review of its capital adequacy, interest rate risk position and liquidity.
The Company also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities
the Company considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current
ability to make future payments in a timely manner and the issuer’s ability to service debt, the assessment of a security’s ability to
recover any decline in market value, the ability of the issuer to meet contractual obligations and the Company’s intent and ability to
retain the security. All of the foregoing require considerable judgment.
87
Trust Preferred Securities
Trust preferred securities, which are accounted for under FASB ASC Topic 325 Investments Other, were held in the investment
portfolio until June 2018. Prior to the sale, the Company evaluated current available information in estimating the future cash flows of
securities and determined whether there had been favorable or adverse changes in estimated cash flows from the cash flows previously
projected. The Company considered the structure and term of the pool and the financial condition of the underlying issuers.
Specifically, the evaluation incorporated factors such as interest rates and appropriate risk premiums, the timing and amount of interest
and principal payments and the allocation of payments to the various note classes. Estimates of cash flows were based on the most
recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information.
The following table details the breakdown of trust preferred securities for the periods indicated:
Total number of trust preferred securities.............................................................................................................
Par value .......................................................................................................................................................... $
Number not considered OTTI...............................................................................................................................
Par value .......................................................................................................................................................... $
Number considered OTTI .....................................................................................................................................
Par value .......................................................................................................................................................... $
Life-to-date impairment recognized in earnings................................................................................................... $
Life-to-date impairment recognized in other comprehensive income ..................................................................
Total life-to-date impairment................................................................................................................................ $
(Dollar amounts in
thousands)
December 31,
2017
2
1,939
1
903
1
1,036
140
723
863
The following table details the one debt security with other-than-temporary impairment, its credit rating at December 31, 2017 and the
related losses recognized in earnings:
Moody’s/Fitch
Rating
Trapeza IX B-1 ............ Caa2/CC
$
(Dollar amounts in thousands)
Amount of
OTTI
related to
credit loss at
January 1,
2017
Additions in QTD
March 31,
2017
Additions in QTD
June 30,
2017
Additions in QTD
September 30,
2017
Additions in QTD
December 31,
2017
Amount of
OTTI
related to
credit loss at
December 31,
2017
140 $
— $
— $
— $
— $
140
The following table provides additional information related to the Company’s trust preferred securities as of December 31, 2017 used
to evaluate other-than-temporary impairments:
(Dollar amounts in thousands)
Deal
Class
PreTSL XXIII .................. C-2
Trapeza IX........................ B-1
Total ...........................
Amortized Cost
758
$
860
1,618
$
Fair Value
336
$
559
895
$
Unrealized
Gain/(Loss)
$
Moody’s/
Fitch Rating
(422) Ba1/CCC
(301)
Caa2/CC
(723)
$
Number of
Issuers
Currently
Performing
90
30
Deferrals and
Defaults as a %
of Current
Collateral
Excess
Subordination as a
% of Current
Performing
Collateral
20.9%
14.0
7.12%
—
The market for these securities at December 31, 2017 was not active and markets for similar securities are also not active. The
inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred
securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also
inactive as new issuance is essentially nonexistent. There are currently very few market participants who are willing and/or able to
transact for these securities. The pooled market value for these securities remains very depressed relative to historical levels. Although
there has been marked improvement in the credit spread premium in the corporate bond space, little improvement has been noted in
the market for trust preferred securities.
88
Given conditions in the current debt markets and the absence of observable transactions in the secondary and the new issue markets,
the Company determined the following:
•
The few observable transactions and market quotations that are available are not reliable for purposes of determining fair
value;
• An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs
and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market
approach valuation technique used at measurement dates prior to 2008; and
•
The trust preferred securities will be classified within Level 3 of the fair value hierarchy because the Company determined
that significant judgments are required to determine fair value at the measurement date.
The Company enlisted the aid of an independent third party to perform the trust preferred security valuations. The approach to
determining fair value involved the following process:
1. Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating
levels).
2. Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with
other banks).
3. Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the
resulting distribution among the securities, including prepayment and cures.
4. Discount the expected cash flows to calculate the present value of the security.
The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of
December 31, 2019, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair
value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include:
quoted market prices for identical assets classified as Level 1 inputs; observable inputs, employed by certified appraisers, for similar
assets classified as Level 2 inputs. In cases where valuation techniques include inputs that are unobservable and are based on estimates
and assumptions developed by management based on the best information available under each circumstance, the asset valuation is
classified as Level 3 inputs. Other real estate owned is carried at the lower of cost or fair value less estimated costs to sell. There were
no impaired loans carried at fair value in 2018.
Assets measured on a nonrecurring basis:
Impaired loans............................................................................... $
— $
— $
405
$
405
(Amounts in thousands)
December 31, 2019
Level 1
Level 2
Level 3
Total
Financial Instruments
The Company discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance
Sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:
Investment securities available for sale – Fair values of securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of comparable securities. Prices on trust preferred securities
were calculated using a discounted cash-flow technique. Cash flows were estimated based on credit and prepayment assumptions. The
present value of the projected cash flows was calculated using a discount rate equal to the current yield used to accrete the beneficial
interest.
Loans held for sale – Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at
fair value based on what the secondary markets have offered on best efforts commitments.
89
Interest rate derivatives – The fair value is based on settlement values adjusted for credit risks associated with the counter parties and
the Company and observable market interest rate curves.
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures,
such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may
have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core
deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company’s financial instruments measured at amortized cost are as follows:
ASSETS:
Cash and cash equivalents .................................................... $
Loans.....................................................................................
Bank-owned life insurance ...................................................
Accrued interest receivable...................................................
LIABILITIES:
Demand, savings and money market deposits ...................... $
Time deposits ........................................................................
Short-term borrowings ..........................................................
Federal Home Loan Bank advances - short term..................
Federal Home Loan Bank advances - long term...................
Subordinated debt .................................................................
Accrued interest payable.......................................................
ASSETS:
Cash and cash equivalents ..................................................... $
Loans .....................................................................................
Bank-owned life insurance ....................................................
Accrued interest receivable ...................................................
LIABILITIES:
Demand, savings and money market deposits....................... $
Time deposits.........................................................................
Short-term borrowings...........................................................
Federal Home Loan Bank advances - short term ..................
Federal Home Loan Bank advances - long term ...................
Subordinated debt..................................................................
Accrued interest payable .......................................................
$
$
$
$
(Amounts in thousands)
December 31, 2019
Level 1
Level 2
Level 3
Fair Value
$
$
27,815
—
17,768
2,336
476,358
—
1,922
—
—
—
510
— $
—
—
—
— $
—
—
—
—
—
—
— $
517,787
—
—
— $
143,485
—
—
24,005
4,835
—
27,815
517,787
17,768
2,336
476,358
143,485
1,922
—
24,005
4,835
510
(Amounts in thousands)
December 31, 2018
Level 1
Level 2
Level 3
Fair Value
$
$
19,692
—
15,711
2,255
483,054
—
2,206
—
—
—
371
— $
—
—
—
— $
—
—
—
—
—
—
— $
513,103
—
—
— $
122,295
—
11,987
15,880
4,620
—
19,692
513,103
15,711
2,255
483,054
122,295
2,206
11,987
15,880
4,620
371
Carrying
Amount
27,815
514,251
17,768
2,336
476,358
142,023
1,922
—
24,000
5,155
510
Carrying
Amount
19,692
510,194
15,711
2,255
483,054
121,365
2,206
12,000
16,000
5,155
371
The following table presents quantitative information about the Level 3 significant inputs for assets and liabilities measured at fair
value on a recurring and nonrecurring basis at December 31, 2019. There were no such Level 3 measurements at December 31, 2018.
(Amounts in thousands)
Fair value at
December 31,
2019
Impaired loans ........................................... $
405
Valuation
Technique
Appraisal of Collateral
Significant
Unobservable Input
Appraisal Adjustment
Liquidation Expenses
Range of Inputs
(76)%
(10)%
90
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the years
ended December 31, 2019, 2018 and 2017.
(Amounts in thousands)
Unrealized gains
(losses) on
available-for-sale
securities (a)
Change in pension
and postretirement
obligations (a)
Balance as of December 31, 2016 ...................................................................................................... $
Other comprehensive income before reclassification.........................................................................
Reclassification of certain income tax effects from accumulated other comprehensive income.......
Amount reclassified from accumulated other comprehensive loss...............................................
Total other comprehensive income...............................................................................................
Balance as of December 31, 2017 ...................................................................................................... $
Other comprehensive (loss) income before reclassification...............................................................
Amount reclassified from accumulated other comprehensive loss ....................................................
Total other comprehensive (loss) income .....................................................................................
Balance as of December 31, 2018 ...................................................................................................... $
Other comprehensive income before reclassification.........................................................................
Amount reclassified from accumulated other comprehensive income...............................................
Total other comprehensive income...............................................................................................
Balance as of December 31, 2019 ...................................................................................................... $
(2,909)
1,420
(294)
(4)
1,122
(1,787)
(1,916)
17
(1,899)
(3,686)
4,758
35
4,793
1,107
$
$
$
$
(52)
14
—
—
14
(38)
68
—
68
30
31
—
31
61
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income
(loss) for the years ended December 31, 2019, 2018 and 2017.
2019
Amount reclassified
from accumulated other
comprehensive income
(a)
(Amounts in thousands)
December 31,
2018
2017
Amount reclassified
from accumulated other
comprehensive loss (a)
Amount reclassified
from accumulated other
comprehensive loss (a)
Affected line item in the
statement where net
income is presented
Details about other comprehensive
income or loss:
Unrealized (losses) gains on
available-for-sale securities ................. $
$
(44)
$
9
(35)
$
(21)
$
4
(17)
$
Investment securities
available-for-sale
(losses) gains, net
Federal income tax
expense
7
(3)
4
(a) Amounts in parentheses indicate debits to net income.
NOTE 13 - REGULATORY MATTERS
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments
by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial
statements.
91
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over
brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital
restoration are required.
In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel
Committee on Banking Supervision's capital guidelines for U.S. banks and their holding companies (commonly known as Basel III).
Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through
January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank.
The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation
buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III
raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer,
effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to
risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of
4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the
capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital
requirements, as they currently exceed the fully phased in 2019 requirements.
In addition to the capital requirements for bank holding companies generally, financial holding companies are also required to meet
“well-capitalized” requirements of the Federal Reserve Board. A bank holding company or financial holding company that is covered
by the Federal Reserve’s Small Bank Holding Company Policy is not required to comply with the consolidated capital requirements,
although its bank subsidiaries still must comply with the applicable capital requirements. As a bank holding company with assets of
less than $1 billion and meeting certain other requirements, the Company is covered by the Small Bank Holding Company Policy.
At December 31, 2019 and December 31, 2018, actual capital levels and minimum required levels for the Company, if it were not
covered by the Small Bank Holding Company Policy, were:
December 31, 2019
CET1 capital (to risk-weighted assets) ................................... $
Tier 1 capital (to risk-weighted assets)...................................
Total capital (to risk-weighted assets) ....................................
Tier 1 capital (to average assets) ............................................
December 31, 2018
CET1 capital (to risk-weighted assets) ................................... $
Tier 1 capital (to risk-weighted assets) ...................................
Total capital (to risk-weighted assets).....................................
Tier 1 capital (to average assets).............................................
(Amounts in thousands)
Actual
Amount
Ratio
Minimum required for capital
adequacy purposes
Amount
Ratio
73,091
78,091
82,640
78,091
12.76% $
13.63%
14.43%
10.98%
25,775
34,367
45,823
28,461
(Amounts in thousands)
Actual
Amount
Ratio
Minimum required for capital
adequacy purposes
Amount
Ratio
68,574
73,574
77,856
73,574
12.01% $
12.88%
13.63%
10.72%
25,700
34,267
45,689
27,452
4.5%
6.0%
8.0%
4.0%
4.5%
6.0%
8.0%
4.0%
$5.0 million of trust preferred securities outstanding at December 31, 2019 and December 31, 2018, respectively, qualified as Tier 1
capital. Refer to Note 7, “Subordinated Debt.”
The Bank met all capital requirements to be categorized as "well capitalized" at December 31, 2019 and December 31, 2018.
92
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with whom they are affiliated were loan customers during 2019. The following is
an analysis of such loans:
Total related-party loans at December 31, 2018 ............................................................................................... $
New related-party loans ....................................................................................................................................
Repayments or other .........................................................................................................................................
Total related-party loans at December 31, 2019.......................................................................................... $
(Amounts in thousands)
4,462
2,742
(2,617)
4,587
Deposit balances of executive officers, directors, and their affiliates at December 31, 2019 and 2018 were $8.1 million and $8.4
million, respectively.
The banking relationships were made in the ordinary course of business with the Bank.
NOTE 15 - CONDENSED FINANCIAL INFORMATION – PARENT COMPANY
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, adjusted for any unrealized gains or
losses on available-for-sale securities.
BALANCE SHEETS
(Amounts in thousands)
ASSETS
Cash ................................................................................................................................... $
Investment in bank subsidiary ...........................................................................................
Subordinated note from subsidiary bank ...........................................................................
Other assets........................................................................................................................
Total assets.................................................................................................................. $
LIABILITIES
Other liabilities .................................................................................................................. $
Subordinated debt (Note 7)................................................................................................
Total liabilities ............................................................................................................
SHAREHOLDERS’ EQUITY
Common stock ...................................................................................................................
Additional paid-in capital ..................................................................................................
Retained earnings ..............................................................................................................
Accumulated other comprehensive income (loss).............................................................
Treasury stock....................................................................................................................
Total shareholders’ equity.........................................................................................
Total liabilities & shareholders’ equity .............................................................. $
December 31,
2019
2018
119
70,936
6,000
3,326
80,381
888
5,155
6,043
23,641
21,266
36,187
1,168
(7,924)
74,338
80,381
$
$
$
$
240
61,272
6,000
3,538
71,050
977
5,155
6,132
23,641
20,984
31,089
(3,656)
(7,140)
64,918
71,050
93
STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
2019
Years ended December 31,
2018
2017
Dividends from bank subsidiary........................................................................ $
Interest and dividend income.............................................................................
Other income .....................................................................................................
Interest on subordinated debt.............................................................................
Other expenses...................................................................................................
Income before income tax and equity in undistributed earnings of
subsidiaries....................................................................................................
Income tax benefit .............................................................................................
Equity in undistributed earnings of subsidiaries ...............................................
Net income ........................................................................................................ $
Comprehensive income ................................................................................... $
3,400
231
101
(203)
(1,399)
2,130
313
4,839
7,282
12,106
$
$
$
4,150
213
56
(189)
(606)
3,624
136
5,075
8,835
7,004
$
$
$
1,900
153
58
(138)
(568)
1,405
106
2,839
4,350
5,780
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flow from operating activities
Net income................................................................................................... $
Adjustments to reconcile net income to net cash flow from operating
activities:
Equity in undistributed earnings of subsidiaries..........................................
Deferred tax benefit .....................................................................................
Equity compensation....................................................................................
Change in other assets and liabilities...........................................................
Net cash flow from operating activities .................................................
Cash deficit from financing activities
Dividends paid .............................................................................................
Treasury shares purchased ...........................................................................
Treasury shares reissued ..............................................................................
Net cash deficit from financing activities...............................................
Net change in cash .......................................................................................
Cash
2019
Years ended December 31,
2018
2017
7,282
$
8,835
$
4,350
(4,839)
(35)
774
157
3,339
(2,184)
(1,336)
60
(3,460)
(121)
(5,075)
(13)
214
(52)
3,909
(2,149)
(1,781)
—
(3,930)
(21)
(2,839)
62
153
178
1,904
(1,726)
(237)
—
(1,963)
(59)
320
261
Beginning of year.........................................................................................
End of year................................................................................................... $
240
119
$
261
240
$
94
NOTE 16 - DIVIDEND RESTRICTIONS
The Bank is subject to a dividend restriction that generally limits the amount of dividends that can be paid by an Ohio state-chartered
bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net
profits for the two preceding years less any required transfers to surplus. Under this formula, the amount available for payment of
dividends in 2020 is $9.9 million plus 2020 profits retained up to the date of the dividend declaration.
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.
NOTE 18 – STOCK REPURCHASE PROGRAM
On January 24, 2017, the Company’s Board of Directors approved a program which allowed the Company to repurchase up to
100,000 shares, or approximately 2.3% of the 4,420,055 shares outstanding at January 24, 2017, of the Company’s outstanding
common stock. This program terminated on December 31, 2017. The Company purchased 12,863 shares under this program. On
January 23, 2018, the Company’s Board of Directors approved a program which allowed the Company to repurchase up to 100,000
shares, or approximately 2.3% of the 4,420,136 shares outstanding at January 23, 2018, of the Company’s outstanding common stock.
On May 22, 2018 the Company’s Board of Directors approved an increase in the number of shares authorized for repurchase under the
January 23, 2018 plan by 200,000 shares bringing the total to 300,000 shares authorized. This program terminated on December 31,
2018. The Company purchased 80,944 shares under this program. On December 18, 2018, the Company’s Board of Directors
approved a program which allowed the Company to repurchase up to 300,000 shares, or approximately 6.9% of the 4,349,624
outstanding shares of common stock at December 18, 2018. This program terminated on December 31, 2019. The Company
purchased 54,000 shares under this program. On December 17, 2019, the Company’s Board of Directors approved a new program
which allows the Company to repurchase up to 200,000 shares, or approximately 4.6% of the 4,323,822 outstanding shares of
common stock at December 17, 2019. This program will terminate on December 31, 2020, or upon purchase of 200,000 shares if
earlier or at any time without prior notice. 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. Based on the value of the Company’s stock on December 31, 2019, the remaining authorization to
repurchase the stock for the program is approximately $4.4 million.
NOTE 19 – EQUITY COMPENSATION
During 2015, the Company, created the 2015 Omnibus Equity Plan and The Director Equity Plan.
The Omnibus Equity Plan permits the award of up to 340,000 shares to the Company’s employees to promote the long-term financial
success of the Company, increasing shareholder value by providing employees the opportunity to acquire an ownership interest in the
Company and enabling the Company and its related entities to attract and retain the services of those upon whom the successful
conduct of business depends. There were 30,156 restricted Board approved shares granted under the plan in calendar 2019 and 12,593
restricted Board approved shares granted under the plan in calendar 2018. The Company is expensing the grant date fair value of all
share-based compensation over the requisite vesting periods on a prorated straight-line basis. In 2019 and 2018, compensation
expense of $740,000 and $192,000, respectively, was recorded in the Consolidated Statements of Income. As of December 31, 2019,
there was $113,000 of total unrecognized compensation expense related to the non-vested shares granted under the Plan. Shares
awarded under this plan can vest immediately and/or on the anniversary of the award date from one to three years out if the employee
remains employed with Cortland Bancorp. The remaining cost is expected to be recognized over a weighted average period of 5.8
months.
Granted shares are awarded upon meeting achievement of performance objectives derived from one or more of the performance
criteria. The main metrics used for the periods presented were three-year earnings per share growth and three-year total shareholder
return each ranked versus a peer group.
95
The following is the activity under the Omnibus Equity Plan during the period ended December 31, 2019:
Nonvested at January 1, 2019 .............................................................................
Granted................................................................................................................
Vested .................................................................................................................
Forfeited..............................................................................................................
Nonvested at December 31, 2019 .......................................................................
Restricted Stock Units
Units
Price at Grant Date
23,591
30,156
(26,821)
(901)
26,025
$
$
19.67
22.58
20.81
22.41
21.78
The Director Equity Plan permits the award of up to 113,000 shares to nonemployee directors to promote the long-term financial
success of the Company, increasing shareholder value by enabling the Company and its related entities to attract and retain the
services of those directors upon whom the successful conduct of business depends. There were 1,525 Board approved shares granted
under the plan in calendar 2019 with immediate vesting, and 989 Board approved shares granted under the plan in calendar 2018 with
immediate vesting. In 2019 and 2018, expense of $34,000 and $22,000 was recorded in the Consolidated Statements of Income,
respectively.
NOTE 20 – LEASES
Operating leases in which the Company is the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease
liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Company does not
currently have any significant finance leases in which it is the lessee. Operating lease ROU assets represent the Company’s right to use
an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from
the lease. The Company elected to adopt the transition method, which uses a modified retrospective transition approach. ROU assets
and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments
using a discount rate that represents the incremental borrowing rate at the date of initial application. Operating lease expense, which is
comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a
straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income
and other comprehensive income. The Company leases relate primarily to office space and bank branches with remaining lease terms
of generally 5 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 15 years at the then
fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the
lease term. As of December 31, 2019, operating lease ROU assets and liabilities were $1.8 million. For year ended December 31, 2019,
the Company recognized $320,000 in operating lease cost, $300,000 is operating cash flows from operating leases and $20,000 is
noncash expense amortization of the ROU asset and the implicit interest, respectively.
The following table summarizes other information related to operating leases:
Weighted-average remaining lease term-operating leases in years....................................................................
Weighted-average discount rate - operating leases ............................................................................................
The following table presents aggregate lease maturities and obligations as of December 31, 2019:
December 31, 2019
16.49
3.29%
(Amounts in thousands)
December 31, 2019
2020.....................................................................................................................................................................
2021.....................................................................................................................................................................
2022.....................................................................................................................................................................
2023.....................................................................................................................................................................
2024.....................................................................................................................................................................
2025 and thereafter..............................................................................................................................................
Total lease payments ...........................................................................................................................................
Less: interest .......................................................................................................................................................
Present value of lease liabilities ..........................................................................................................................
$
$
185
151
155
157
160
1,506
2,314
467
1,847
96
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures - None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. With the supervision and participation by management, including the Company’s
principal executive officer and principal financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) has been evaluated as of the end of the
period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer
have concluded that these controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting. The report on management’s assessment of internal
control over financial reporting is included in Item 8.
Changes in Internal Control Over Financial Reporting. Our Chief Executive Officer and Chief Financial Officer have concluded that
there have been no changes during the fourth quarter of 2019 in the Company’s internal control over financial reporting (as defined in
Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal
control over financial reporting.
S.R. Snodgrass, P.C., the Company’s registered public accounting firm, has audited the Company’s internal control over financial
reporting as of December 31, 2019. The audit report by S.R. Snodgrass, P.C. is located in Item 8 of this report.
Item 9B. Other Information – Not applicable.
97
PART III
Item l0. Directors, Executive Officers and Corporate Governance
Information relating to this item will be set forth in the Company’s definitive proxy statement to be filed on or about March 11, 2020
in connection with the Annual Meeting of Shareholders to be held April 29, 2020 (the “Proxy Statement”). The information contained
in the Proxy Statement under the following captions is incorporated herein by reference: “Board Nominees,” “Continuing Directors,”
“The Board of Directors and Committees of the Board,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information about our Executive Officers of the Company is set forth in Part I of this Form 10-K.
Item ll. Executive Compensation
Information relating to this item is incorporated herein by reference to the information in the Proxy Statement that is set forth under
the following captions of “Executive Compensation” and “Director Compensation in 2019.”
Item l2. Security Ownership of Certain Beneficial Owners and Management and Related Shareholders Matters
Information relating to this item is incorporated herein by reference to the information in the Proxy Statement that is set forth under
the caption “Share Ownership of Directors and Executive Officers.”
Information relating to equity compensation is incorporated herein by reference to the information in the Proxy Statement that is set
forth under the caption “Outstanding Equity Awards.”
Item l3. Certain Relationships and Related Transactions, and Director Independence
Information relating to this item is incorporated herein by reference to the information in the Proxy Statement that is set forth under
the captions of “Transactions with Related Persons” and “The Board of Directors and Committees of the Board.”
Item l4. Principal Accountant Fees and Services
Information relating to this item is incorporated herein by reference to the information in the Proxy Statement that is set forth under
the caption “Ratification of Independent Auditors.”
98
PART IV
Item l5. Exhibits, Financial Statement Schedules
(a)
l. Financial Statements
Included in Part II of this report:
Item 8. Financial Statements
Consolidated Financial Statements included in this Annual Report:
Management’s Annual Report on Internal Control Over Financial Reporting.........................................................................
Reports of Independent Registered Public Accounting Firm ...................................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 ...........................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017...............................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017 ....................
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017.........................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017........................................
Notes to Consolidated Financial Statements.............................................................................................................................
53
54
56
57
58
59
60
61
(a)
2. Financial Statement Schedules
Financial statements schedules are omitted because the required information is either not applicable, not required or is not
shown in the respective financial statements or in the notes thereto.
(a)
3. Exhibits Required by Item 601 of Regulation S-K
All exhibits omitted.
99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 5, 2020
CORTLAND BANCORP
By:
/s/ James M. Gasior
James M. Gasior
President, Chief Executive Officer, Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Timothy K. Woofter
Timothy K. Woofter
/s/ Thomas P. Perciak
Thomas P. Perciak
/s/ James M. Gasior
James M. Gasior
/s/ Timothy Carney
Timothy Carney
/s/ David C. Cole
David C. Cole
/s/ James E. Hoffman, III
James E. Hoffman, III
/s/ Neil J. Kaback
Neil J. Kaback
/s/ Joseph E. Koch
Joseph E. Koch
/s/ Joseph P. Langhenry
Joseph P. Langhenry
/s/ Richard B. Thompson
Richard B. Thompson
/s/ Anthony R. Vross
Anthony R. Vross
/s/ David J. Lucido
David J. Lucido
Director and Chairman of the Board
Director and Vice Chairman of the Board
President, Chief Executive Officer and
Director (Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Director
Director
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
March 5, 2020
Date
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 5, 2020
Date
100
CORTLAND BANCORP AND
THE CORTLAND SAVINGS AND BANKING COMPANY
BOARD OF DIRECTORS
TIMOTHY K. WOOFTER
Chairman of the Board
President and Chief Executive Officer, Stan-Wade Metal Products
Tank Manufacturer and Oil Equipment Distributor
THOMAS P. PERCIAK
Vice Chairman of the Board
Mayor, Strongsville, OH
Government
JAMES M. GASIOR
President and Chief Executive Officer
Cortland Bancorp and The Cortland Savings and Banking Company
TIMOTHY CARNEY
Executive Vice President and Chief Operating Officer
Cortland Bancorp and The Cortland Savings and Banking Company
ANTHONY R. VROSS
Executive, Simon Roofing
Commercial Roofing and Industrial Roof Maintenance
DAVID C. COLE
Partner and President, Cole Valley Motor Company
Automobile Dealership
HICHAM S. CHAHINE
Retired Principal, Crowe LLP
Accounting, Consulting and Technology Firm
JAMES E. HOFFMAN, III
Attorney, Hoffman and Walker
Law Firm
JOSEPH E. KOCH
President, Joe Koch Construction
Homebuilding, Developing and Remodeling Company
JOSEPH P. LANGHENRY
Managing Principal, Langhenry Venture Partners
Investment Firm
NEIL J. KABACK
Vice President, Cohen & Company, Ltd.
Accounting Firm
RICHARD B. THOMPSON
Executive, Therm-O-Link, Inc.
Electrical Wire and Cable Manufacturer
DIRECTOR EMERITUS
K. RAY MAHAN
CORTLAND BANCORP
EXECUTIVE OFFICERS
JAMES M. GASIOR
President and Chief Executive Officer
TIMOTHY CARNEY
Executive Vice President, Chief Operating Officer and Corporate Secretary
DAVID J. LUCIDO
Senior Vice President and Chief Financial Officer
STANLEY P. FERET
Senior Vice President and Chief Lending Officer
THE CORTLAND SAVINGS AND BANKING COMPANY
OFFICERS
JAMES M. GASIOR
President and Chief Executive Officer
DAVID J. LUCIDO
Senior Vice President and Chief Financial Officer
TIMOTHY CARNEY
Executive Vice President, Chief Operating Officer and Corporate Secretary
STANLEY P. FERET
Senior Vice President and Chief Lending Officer
SHIRLEY A. WADE
Assistant Vice President
Executive Secretary
ROCCO PAGE
Senior Vice President
Mortgage Sales Manager
MARK CHUEY
Vice President
CRA Mortgage Banking Officer
DEBORAH L. EAZOR
Vice President
Operations Manager
JOAN M. FRANGIAMORE
Vice President
Controller
MELANIE CHRISTIE
Vice President
BSA/Compliance Officer/Director of Security
KAREN JINDRA
Vice President
Retail Mortgage Banking Officer
KEITH STINSON
Vice President
Retail Mortgage Banking Officer
PETER OPPERMAN
Vice President
Business Banking and Private Bank Services
MARK E. TAYLOR
Vice President
Commercial Banking Officer
JACQUELINE TREHARNE
Vice President
Mortgage Operations Manager
HEATHER J. BOWSER
Assistant Vice President
Collection Officer
BRENT MARAKAS
Assistant Vice President
Commercial Banking Portfolio Manager
JAMES RING
Vice President
Retail Mortgage Banking Officer
NATHANIEL J. MARSHALL
Vice President
Business Banking and Private Bank Services
SHERRY SNYDER
Assistant Vice President
Commercial Banking Portfolio Manager
MICHAEL LIPKE
Senior Vice President
Chief Credit Officer
JULIANNA BEGALLA
Vice President
Marketing, Communications and Investor Relations Officer
J. MICHAEL BRAINARD
Vice President
Commercial Banking Officer
NICOLE WHITSEL
Vice President
Risk Manager/Compliance
KEITH MROZEK
Senior Vice President
Senior Credit Officer
PATRICIA JONES
Assistant Vice President
Human Resources Manager
MICHAEL KANE
Assistant Vice President
Private Bank Officer/Hudson
MICHELLE REILLY
Vice President, Assistant Treasurer
Mortgage Banking/ Funds Management
BARBARA R. SANDROCK
Vice President
Information Systems Manager
KAREN SHARP
Vice President
Mortgage Manager/Fairlawn
PAULA PETERSON
Assistant Vice President
Commercial Banking Portfolio Manager
CARRIE STACKHOUSE
Vice President
Commercial Banking Officer
JANET K. HOUSER
Assistant Vice President
Electronic Banking Specialist
JAMES E. WELLINGTON
Vice President
Retail Mortgage Banking Officer
STANLEY MAGIELSKI
Vice President
Senior Commercial Banking Officer
[THIS PAGE INTENTIONALLY LEFT BLANK]
WWW.CORTLANDBANK.COM
Bank Local.
Invest Local.
Cortland Bank Locations
BRISTOL
HUBBARD
6090 State Route 45
342 West Liberty Street
Bristolville, Ohio 44402
Hubbard, Ohio 44425
330-534-2265
330-889-3062
BROOKFIELD
7202 Warren-Sharon Road
Brookfield, Ohio 44403
330-448-6814
HUDSON
75 S. Main Street
Hudson, Ohio 44236
330-342-1100
CANFIELD
3615 Boardman-Canfield Road
Canfield, Ohio 44406
330-941-5867
MANTUA
11661 State Route 44
Mantua, Ohio 44255
330-274-3111
NORTH LIMA
9001 Market Street
North Lima, Ohio 44452
330-758-5884
STRONGSVILLE
14357 Pearl Road
Strongsville, Ohio 44136
440-238-5917
VIENNA
4434 Warren-Sharon Road
Vienna, Ohio 44473
330-394-1438
CORTLAND
194 West Main Street
Cortland, Ohio 44410
330-637-8040
NILES
815 Youngstown-Warren Road
Suite 1, Niles, Ohio 44446
330-652-8700
WARREN
2935 Elm Road
Warren, Ohio 44483
330-372-1520
NASDAQ: CLDB
WINDHAM
8950 Maple Grove Road
Windham, Ohio 44288
330-326-2340
FAIRLAWN
Financial Services Center
3480 W. Market Street, Suite 302
Fairlawn, Ohio 44333
330-576-3729
M A I N :
194 W. Main St.
Cortland, Ohio 44410
O F F I C E :
800-366-2334
FA X :
330-638-3018
W E B :
www.cortlandbank.com
NMLS #531589