SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-15366
CORTLAND FIRST FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
New York 16-1276885
(State or other jurisdiction of (IRS Employer I.D. #)
incorporation or organization)
65 Main Street, Cortland, New York 13045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (607) 756-2831
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of the registrant's common stock on
September 30, 1996: Common Stock, $1.6667 Par Value -- 2,016,000 shares.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORTLAND FIRST FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, 1996 December 31, 1995
(Unaudited) (Note)
ASSETS
<S> <C> <C>
Cash and Due From Banks $ 10,176,948 $ 7,854,521
Federal Funds Sold 700,000 2,500,000
Investment Securities
Held to Maturity 2,405,914 3,305,689
Available for Sale 82,231,705 71,956,527
(Market Value 84,639,411 & 75,267,155)
Loans (Net of Unearned Discount of
(3,874,049 & 3,662,724) 113,527,144 112,204,325
Reserve for Possible Loan Losses (1,252,489) (1,175,959)
Net Loans 112,274,655 111,028,366
Premises and Equipment 3,204,748 3,303,196
Other Real Estate 15,000 135,397
Other Assets 3,910,914 3,775,851
TOTAL ASSETS $214,919,884 $203,859,547
LIABILITIES
Non-Interest Bearing Deposits $ 23,383,892 $ 23,018,352
Interest Bearing Deposits 165,170,834 155,427,200
Total Deposits 188,554,726 178,445,552
Accrued Interest, Taxes, &
Other Liabilities 875,054 993,932
Accrued Post-Retirement Benefits 819,144 766,412
TOTAL LIABILITIES 190,248,924 180,205,896
SHAREHOLDERS' EQUITY
Common Stock (par value 5.00) 3,360,067 3,360,000
Outstanding 2,016,000 shares
Surplus 3,360,000 3,360,000
Undivided Profits 17,850,736 16,438,145
Net Unrealized Gains/(Losses)
on Securities 100,157 495,506
TOTAL SHAREHOLDERS' EQUITY 24,670,960 23,653,651
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $214,919,884 $203,859,547
</TABLE>
Note: The balance sheet at December 31, 1995, has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.<PAGE>
CORTLAND FIRST FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(000's omitted)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Interest Income:
<S> <C> <C> <C> <C>
Interest & fees on loans $2,617 $2,645 $ 7,826 $ 7,820
Interest on bank deposits 0 0 0 0
Interest on investment securities 1,221 1,092 3,460 3,253
Interest on Federal Funds sold 113 110 395 338
TOTAL INTEREST INCOME $3,951 $3,847 $11,681 $11,411
Interest Expense:
Interest on deposits 1,557 1,447 4,622 4,336
NET INTEREST INCOME $2,394 $2,400 $ 7,059 $ 7,075
Provision for loan losses 75 75 208 225
INTEREST INCOME AFTER
PROVISION FOR LOSSES $2,319 $2,325 $ 6,851 $ 6,850
Other Income: 403 362 1,086 1,015
Non-interest expenses 1,668 1,703 4,966 5,065
INCOME BEFORE INC TAXES $1,054 $ 984 $ 2,971 $ 2,800
Income Taxes: 316 288 849 809
NET INCOME $ 738 $ 696 $ 2,122 $ 1,991
Net Income per Common Share $ .37 $ .35 $ 1.05 $ .99
(2,016,000 shares outstanding)
</TABLE>
<PAGE>
<TABLE>
Consolidated Statement of Cash Flow (Unaudited)
(000's OMITTED)
Nine Months Ended September 30,
1996 1995
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 2,122 $ 1,991
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 208 225
Provision for depreciation 271 280
Provision for deferred income taxes 44 (109)
Amortization of investment security premiums
(discounts), net 290 300
(Increase) Decrease in interest receivable (28) 17
(Increase) Decrease in other assets (79) (513)
Increase (Decrease) in interest payable (19) 6
Increase (Decrease) in other liabilities 222 31
Loss on disposition of investments &
Other Real Estate Owned 68 0
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,099 $ 2,228
INVESTING ACTIVITIES
Proceeds from sales/maturities
of investment securities $ 20,575 $ 16,234
Purchase of investment securities (30,929) (16,972)
Net (increase) decrease in credit card
and short term loans 120 105
Longer-term loans sold 0 873
Net longer term loans originated (1,574) (2,185)
Purchase of premises and equipment, net (173) (443)
Proceeds from disposition of
Other Real Estate Owned 14 0
NET CASH USED BY INVESTING ACTIVITIES $(11,967) $ (2,388)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW & savings $ 9,940 $ 2,630
Net proceeds from sales of
certificates of deposit 169 4,046
Cash dividends (719) (437)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 9,390 $ 6,239
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 522 6,079
Cash and cash equivalents at beginning of year $ 10,355 $ 12,717
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,877 $ 18,796
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and short term borrowings: $ 4,640 $ 4,330
Income taxes: 803 986
Non Cash Investing Activities:
Change in unrealized gain/(loss)
on investment securities (664) 1,439
</TABLE>
<PAGE>
Cortland First Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. The foregoing financial statements are unaudited; however, in the opinion of
Management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of the Corporation's significant accounting policies is
set forth in Note 1 to the Consolidated Financial Statements in the
Corporation's Annual Report to Shareholders on Form 10-K, for the year ended
December 31, 1995.
B. Investment Securities
<TABLE>
September 30, 1996
(000's omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and obligations
of U.S. government corporations
<S> <C> <C>
and agencies $44,103,978 $ 0
Securities issued by State & Political
subdivisions in the U.S. 24,246,308 2,405,914
Other securities (includes F.R. stock) 819,475 0
Mortgage back securities 13,061,944 0
TOTAL INVESTMENT SECURITIES $82,231,705 $ 2,405,914
</TABLE>
<TABLE>
December 31, 1995
(000's omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and obligations
of U.S. government corporations
<S> <C> <C>
and agencies $40,924,445 $ 0
Securities issued by State & Political
subdivisions in the U.S. 20,108,131 3,305,689
Other securities (includes F.R. stock) 462,640 0
Mortgage backed securities 10,461,311 0
TOTAL INVESTMENT SECURITIES $71,956,527 $ 3,305,689
</TABLE>
C. Provision for Loan Loss
<TABLE>
September 30, 1996 September 30, 1995
<S> <C> <C>
Balance at January 1 $ 1,175,959 $ 1,225,737
Provision for the year 208,000 225,000
Recoveries on loans 38,370 44,544
Total 1,422,329 1,495,281
Less loans charged off 169,840 329,168
Balance at September 30, $ 1,252,489 $ 1,166,113
</TABLE>
The appropriateness of allowance for loan losses is determined by quarterly
detailed review of the loan portfolio.
<PAGE>
PART 1.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cortland First Financial Corporation is a one-bank holding company formed
in 1986. Its only subsidiary and operating entity is First National Bank of
Cortland, chartered in 1869. First National Bank of Cortland is an independent
bank delivering financial services from its seven offices in Cortland,
Cortlandville, Marathon, McGraw, Cincinnatus, and Tully, to its customers in
Cortland County and the surrounding area, and includes our newest branch
location in Whitney Point which opened in 1994 expanding our service area into
Broome County. The primary regulator of Cortland First Financial Corporation
is the Federal Reserve Bank of New York, while its subsidiary, First National
Bank of Cortland, is regulated by the Office of the Comptroller of the Currency
in Washington, DC.
At the end of the third quarter 1996, total assets of $214,919,884 had
increased $11,060,337, or 5.4% from $203,859,547 on December 31, 1995.
Increased funding from deposits has allowed management to increase the
securities portfolio by $9,375,403 with available for sale securities
increasing by $10,275,178 and a decrease in the held to maturity category of
$899,775. Net unrealized gains on securities available for sale was $167,177,
or .2% of the total portfolio as of September 30, 1996, which is reflected in
the carrying value of those securities. Investment quality remains high with
over 92% of the portfolio rated AAA or better. Of the remaining 8% of the
portfolio, 5% are rated A or higher with the balance consisting of local
municipal bonds for which we maintain financial data. There are no derivatives
or structured notes in the investment portfolio. The Bank does not have a
trading portfolio nor does it anticipate one in the future.
Net loans outstanding of $112,274,655 increased 1.1% from year-end. No
significant changes were seen in the various loan categories from December 31,
1995. Loan demand continued to show some improvement during the third quarter.
While the local economy has been somewhat lethargic, the expansion of Buckbee
Mears, a large manufacturer of video aperture masks, is anticipated to add 300
to 400 new jobs. With the relocation of our loan department into newly
renovated and expanded quarters, our loan delivery system has been streamlined
for more efficient customer service. The introduction of our loan-by-phone
product during the third quarter has also enhanced the availability of our
loan services. Year-to-date net charge-offs of $131,470 represent a marked
improvement over the same period last year of $284,624 which included one large
loan of $190,000. Our allowance for loan losses, which currently stands at
1.1% of total net loans, is reviewed on a quarterly basis and is judged to be
sufficient to absorb any inherent loss in the portfolio.
Deposits increased $10,109,174, or 5.7% since December 31, 1995. Over 80%
of this growth was in the traditional savings and money market accounts, while
less than 1% was attributable to time deposits, and the balance of the growth
was in the NOW accounts. Forecasts indicate about a 5% growth for the year
based on averages.
On March 25, 1996, a three-for-one stock split was declared increasing the
shares issued and outstanding from 672,000 to 2,016,000, and a reduction in the
par value from $5 per share to $1.6667 per share was approved. Dividends paid
year-to-date amount to $.3567 per share compared to $.2167 paid for the same
period in 1995, as adjusted for the stock split. Shareholders' equity grew
from $23,653,651 at December 31, 1995 to $24,670,960 as of September 30, 1996.
Components of shareholders' equity reflect retention of net income of
$1,412,659 as well as a decrease in net unrealized gains on securities of
$395,348 as required by FAS 115 accounting treatment. The regulatory capital
leverage ratio was 11.24% at September 30, 1996, which was slightly higher than
the September 1995 ratio of 11.19%. The leverage ratio represents the ratio of
Tier 1 capital (stock, surplus, and retained earnings) to the average total
assets for the quarter. Our Tier 1 risk based capital ratio of 21.49% was
again more than twice the minimum requirement for institutions considered to be
well capitalized. Book value per share increased by 4.4% to $12.24 per share,
when adjusted for the stock split.
Managing the asset and liability sensitivity position to achieve an
acceptable balance of risk versus return is achieved through loans,
investments, and retail deposits rather than reliance on swaps, futures, or
off-balance sheet derivative products. The Asset and Liability Committee of
the Bank is also responsible for assessing interest rate risk. This
measurement provides a forward looking assessment regarding the impact interest
rate movement may have on net interest income. Analysis indicates that the
Bank is well positioned with minimal impact on income when subjected to a 200
basis point (2.00%) shock - the equivalent of an immediate increase or decrease
of 2% in all interest rates on both assets and liabilities.
The Bank manages its liquidity position by maintaining adequate cash levels
to service normal customer demands. In addition, the investment portfolio
provides funds from maturing instruments on a regular basis. While there are
no known demands, commitments, events, or uncertainties which will result in
any material increase or decrease of liquidity requirements, the Bank recently
became a member of the Federal Home Loan Bank which will act as an additional
source of funding. With a stable deposit base, the Bank is not dependent on
volatile deposits (certificates of deposit larger than $100,000 - also known as
jumbo CD's) which tend to be more market sensitive. Investments maturing
within one year exceed the total jumbo CD deposits, thereby providing more than
adequate coverage for any reduction in funding from this source. Federal funds
sold, which also provide liquidity, averaged $8,525,000 during the third
quarter.
Trust Department assets (book value) on September 30, 1996 amounted to
$60,770,774 as compared to $57,880,581 at September 30, 1995. Trust assets are
not part of the consolidated balance sheet. Our recently updated Trust
services area provides expanded services and more convenience for our
customers.
Net income for the third quarter of 1996 was $737,808, an increase of 6.0%
from $695,948 from the same period of 1995, while net income year-to-date
1996 of $2,121,699 shows an increase of 6.6% from $1,990,583 for the comparable
period in 1995, resulting in a return on average assets (ROA) of 1.32% for the
nine months ended September 30, 1996. Net interest income was $7,059,346 for
the nine months ended September 30, 1996, a decrease of $15,397 (.2%) from the
same period in 1995. Earning assets grew 2.9% from $193,289,931 at
September 30, 1995 to $198,864,763, while interest income grew only 2.7% on a
taxable equivalent basis, due to decreases in the prime rate and lower yields
available on investment securities replacing the higher yields on those
maturing. These changes in interest income are the result of an increase due
to volume of $589,000 which was offset by a reduction due to rates of
$319,000. Interest bearing liabilities grew 2.6% from $161,054,413 as of
September 30, 1995 to $165,170,834 at the period end resulting in an increase
in interest expense of 6.6% from $4,336,377 to $4,621,370. Of this change in
interest expense, $305,000 is due to the increase in volume while a change in
rate accounted for a $20,000 decrease. With the cost of funds increasing from
3.70% in 1995 to 3.72% in 1996, and our yield on earning assets declining from
8.32% for the three quarters of 1995 to 8.05% for the comparable period in
1996, our net interest margin on earning assets continues to show a narrowing
from 5.27% in 1995 to the current level of 4.99%. This tightening should slow
since rates have remained relatively stable during the past few months. Other
key ratios were: average loans to average deposits at 59.30% as of September
30, 1996 compared to 60.92% in 1995 and average earning assets to average total
assets at 93.89% as of September 30, 1996 compared to 93.54% as of September
30, 1995.
Non-interest income of $1,085,446 increased by $70,291 on a year-to-date
basis versus $1,015,155, while non-interest expense of $4,965,505 decreased by
$99,520 over the same period in 1995 of $5,065,025. Trust income of $288,436
for 1996 year-to-date increased $78,844, or 37.6% over $209,592 for the
comparable period in 1996. Service charge income showed a modest increase as
well from $456,203 in 1995 to $479,475 in 1996. The single most significant
factor in the reduction of non-interest expense is the recapitalization of the
Federal Deposit Insurance Corporation (FDIC) insurance fund resulting in the
lowering of the premium payments from $185,134 year-to-date 1995 to $1,000 for
the comparable period in 1996. Since the Bank meets the requirements for a
well capitalized institution, it pays the lowest premium available. The FDIC
insurance expense is expected to increase in 1997 by approximately $25,000
since Congress has mandated that the Bank Insurance Fund (BIF) must pay part of
the interest on bonds which were issued to fund the deficit of the Savings
Association Insurance Fund (SAIF). The current year savings on the FDIC
insurance were offset in part by an increase of over $68,000 in outside
services expense with $26,000 of that increase being the result of the
outsourcing of the internal audit function. Additional increases were noted as
follows: $13,000 in marketing and public relations expense, $43,993 in losses
on disposition of other real estate owned, $36,000 in holding company expense,
and over $46,000 in both equipment maintenance and depreciation expense.
Salary expense was maintained at the same level as the previous year since the
above-mentioned audit changes allowed for more efficient allocation of
personnel. Benefits expense saw a decrease of over $50,000 due to a reduction
of $78,000 in our self-insured medical expense offset by small increases in
post-retirement benefits expense as well as workmen's compensation and other
deferred benefits. Provision for income taxes increased over $40,000 as
compared to the same period for 1995. Net income per common share increased
to $1.05 year-to-date 1996 compared to $.99 in the same period for 1995, when
adjusted for the stock split.
In a continuing commitment to provide the technology necessary to compete
in the marketplace, the mainframe computer will be upgraded during the fourth
quarter of 1996. This will allow for more efficient processing of data and
provide the increased capacity to allow for the continued growth of our
customer base.
Our financial services and product offerings will be enhanced with the
introduction of First National Bank of Cortland's debit card during October
1996, allowing our customers to access their checking account at all locations
that honor the Visa card. Quality service and convenience for our customers
are essential to our continued success which will translate to enhanced
shareholder benefit.
PART 2.
ITEM 1.
In April 1996, the Corporation noted that certain reports required by the
Securities and Exchange Act of 1934 had inadvertently note been filed -
specifically, Forms 3, 4, and 5. Shortly after the discovery, the Corporation
notified the Securities and Exchange Commission of these omissions. Since that
date, the Corporation and the directors and officers have filed the omitted
reports. As of the date hereof, no proceeding has been instituted against the
Corporation or any of its officers or directors. Instead, the parties are
attempting to resolve the matter administratively. In the event the matter
cannot be resolved, a formal proceeding will likely be commenced.
ITEM 2-6. Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORTLAND FIRST FINANCIAL CORPORATION
DATE November 13, 1996
David R. Alvord, President
DATE November 13, 1996
Bob Derksen, Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,177
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,232
<INVESTMENTS-CARRYING> 2,406
<INVESTMENTS-MARKET> 2,408
<LOANS> 113,527
<ALLOWANCE> 1,252
<TOTAL-ASSETS> 214,920
<DEPOSITS> 188,555
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,694
<LONG-TERM> 0
0
0
<COMMON> 6,720
<OTHER-SE> 17,951
<TOTAL-LIABILITIES-AND-EQUITY> 214,920
<INTEREST-LOAN> 7,826
<INTEREST-INVEST> 3,460
<INTEREST-OTHER> 395
<INTEREST-TOTAL> 11,681
<INTEREST-DEPOSIT> 4,622
<INTEREST-EXPENSE> 4,622
<INTEREST-INCOME-NET> 7,059
<LOAN-LOSSES> 208
<SECURITIES-GAINS> (24)
<EXPENSE-OTHER> 4,966
<INCOME-PRETAX> 2,971
<INCOME-PRE-EXTRAORDINARY> 2,971
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,122
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 3.55
<LOANS-NON> 99
<LOANS-PAST> 98
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,074
<ALLOWANCE-OPEN> 1,176
<CHARGE-OFFS> 170
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,252
<ALLOWANCE-DOMESTIC> 1,252
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
