UNITED STATES
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 June 30, 1997
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
The number of shares outstanding of the registrant's common stock on June 30,
1997: 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
June 30, 1997 December 31, 1996
(Unaudited) (Note)
000's Omitted
ASSETS
Cash and Due From Banks $ 9,811 $ 10,500
Federal Funds Sold 2,200 4,900
Investment Securities -
Held to Maturity 2,461 2,378
Available for Sale 91,311 81,750
(Market Value 93,784 & 84,141)
Loans (Net of Unearned Discount of
(3,429 & 3,774) 112,975 113,632
Reserve for Possible Loan Losses (1,222) (1,271)
Net Loans 111,753 112,361
Premises and Equipment 3,566 3,342
Other Assets 4,171 3,841
TOTAL ASSETS $225,273 $219,072
LIABILITIES
Non-Interest Bearing Deposits $ 24,195 22,802
Interest Bearing Deposits 173,237 169,036
Total Deposits $197,432 $191,838
Accrued Int, Taxes, & Other Liabilities 1,060 1,021
Accrued Post-Retirement Benefits 862 835
TOTAL LIABILITIES 199,354 193,694
SHAREHOLDERS' EQUITY
Common Stock (par value $1.6667) 3,360 3,360
Outstanding 2,016,000 shares
Surplus 3,360 3,360
Undivided Profits 18,995 18,283
Net Unrealized Gains/(Losses)Securities 204 375
TOTAL SHAREHOLDERS' EQUITY 25,919 25,378
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $225,273 $219,072
Note: The balance sheet at December 31, 1996 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)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Interest Income:
Interest & fees on loans $2,578 $2,588 $5,119 $5,208
Interest on investment securities 1,413 1,154 2,687 2,239
Interest on Federal Funds sold 78 145 182 283
TOTAL INTEREST INCOME $4,069 $3,887 $7,988 $7,730
Interest Expense:
Interest on deposits 1,675 1,548 3,259 3,064
NET INTEREST INCOME $2,394 $2,339 $4,729 $4,666
Provision for loan losses 105 58 180 133
INTEREST INCOME AFTER PROVISION
FOR LOSSES $2,289 $2,281 $4,549 $4,533
Other Income: 368 324 764 682
TOTAL OPERATING INCOME $2,657 $2,605 $5,313 $5,215
Non-interest expenses 1,802 1,621 3,573 3,297
INCOME BEFORE INCOME TAXES $ 855 $ 984 $1,740 $1,918
Income Taxes: 239 266 464 534
NET INCOME $ 616 $ 718 $1,276 $1,384
Net Income per Common Share $.31 $.36 $.63 $.69
(2,016,000 shares outstanding)
<PAGE>
Consolidated Statement of Cash Flow (Unaudited) (000's OMITTED)
Six Months Ended June 30,
1997 1996
OPERATING ACTIVITIES
Net Income $ 1,276 $ 1,384
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 180 133
Provision for depreciation 222 181
Provision for deferred income taxes (64) 44
Amortization of investment security premiums
(discounts), net 153 196
(Increase) Decrease in interest receivable (107) (38)
(Increase) Decrease in other assets (159) (42)
Increase (Decrease) in interest payable (8) (8)
Increase (Decrease) in other liabilities 187 57
Loss on disposition of investments &
Other Real Estate Owned 0 43
Loss on disposal of Fixed Assets 3 0
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,683 $ 1,950
INVESTING ACTIVITIES
Proceeds from sales/maturities of
investment securities $ 10,570 $ 11,858
Purchase of investment securities (20,652) (21,240)
Net (increase) decrease in credit card/
short term loans 167 120
Longer-term loans sold 639 0
Net longer term loans originated (377) (1,093)
Purchase of premises and equipment, net (506) (100)
Proceeds from disposition of
Other Real Estate Owned 0 14
Proceeds from disposal of Fixed Assets 57 0
NET CASH USED BY INVESTING ACTIVITIES $(10,102) $(10,441)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW & savings $ 4,143 $ 12,056
Net proceeds from sales of certificates
of deposits 1,451 1,200
Cash dividends (564) (477)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 5,030 $ 12,779
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (3,389) $ 4,287
Cash and cash equivalents at beginning of year $ 15,400 $ 10,355
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,011 $ 14,642
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and short
term borrowings: $ 3,267 $ 3,072
Income taxes: 514 543
Non Cash Investing Activities:
Change in unrealized gain/(loss) on
investment securities (285) (1,108)<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 Consolidate Financial Statements in the
Corporation's Annual Report to Shareholders on Form 10-K, for the year
ended December 31, 1996.
B. Investment Securities
June 30, 1997
(000's Omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $48,780 $ 999
Securities issued by State & Political
subdivisions in the U.S. 26,502 1,462
Other securities (includes F.R. stock) 865 0
Mortgage back securities 15,164 0
TOTAL INVESTMENT SECURITIES $91,311 $ 2,461
December 31, 1996
(000's Omitted)
Available for Sale Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $42,088 $ 0
Securities issued by State & Political
subdivisions in the U.S. 24,912 2,378
Other securities (includes F.R. stock) 819 0
Mortgage backed securities 13,931 0
TOTAL INVESTMENT SECURITIES $81,750 $ 2,378
C. Provision for Loan Loss
June 30, 1997 June 30, 1996
(000's Omitted)
Balance at January 1 $ 1,271 $ 1,176
Provision for the year 180 133
Recoveries on loans 43 27
Total 1,494 1,336
Less loans charged off 272 91
Balance at June 30, $ 1,222 $ 1,245
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
(Amount in thousands of dollars unless otherwise indicated)
The purpose of this discussion is to provide the reader with information
designed to understand the financial statements of Cortland First Financial
Corporation included herewith and to provide information as to material events
or changes which affected the financial condition or results of operation since
the last reporting period. This discussion will, in general, not repeat
numerical data contained in the financial statements nor will it recite the
amount of change from period to period since these changes are readily
computable from the financial statements. References to "Bank" are to Cortland
First Financial Corporation and its wholly owned operating subsidiary First
National Bank of Cortland. First National Bank of Cortland is an independent
community bank with offices in Cortland, southern Onondaga, and northern Broome
counties. In March of 1997, a new in-store facility was opened in the Wal-Mart
store located in Cortlandville, New York.
The primary regulator of Cortland First Financial Corporation is the Federal
Reserve Bank of New York in New York City, while its subsidiary, First National
Bank of Cortland, is regulated by the Office of the Comptroller of the Currency
in Washington, DC.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1997 was .31 per share compared
to .36 per share for the same period in 1996. Several factors contributed to
this change. The increase in non-interest income is due mainly to an increase
in customer service fees and credit card fees of $23 and the absence of
securities losses during the second quarter of 1997 when compared with the same
quarter of 1996 (when $24 in securities losses were taken). This increase was
offset, however, by increased non-interest expense of $110 in salaries and
benefits for the second quarter of 1997 over the comparable period in 1996
which is attributable to additional staff required for the Wal-Mart location
of $26 as well as increases in medical expense of $40 and retirement benefits
expense of $31 and normal merit increases for personnel. Equipment
depreciation and software amortization expense also increased by $50 due to the
installation of a new mainframe computer in late 1996 to enhance our customer
service and delivery systems including expanded processing capacity,
additional ATM's, and telephone banking, as well as providing for future
expansion.
Net income for the six months ended June 30, 1997 was .63 per share compared to
.69 per share for the comparable period in 1996. An increase in Trust and
service charge income of $14, coupled with an increase of $45 in customer
service fees and credit card income and an absence of securities losses in 1997
were offset by increased non-interest expenses of $276. An increase in salary
expense of $78 (which includes $45 for the additional Wal-Mart staff) and
benefits expenses of $97 (including $58 increase in medical expense) were major
contributors to this increase. The remainder of the increase for this six
month period was primarily attributable to an increase of $84 in equipment
expense and software amortization as discussed in the quarter to quarter
comparison above. In addition, the provision for loan losses was increased by
$47 for the six months ended June 30, 1997 to offset the increase in net
charge offs experienced during the current year.
The table below shows net interest revenue, average balances and average rates.
The taxable equivalent adjustment is made to present the revenue and yields on
certain assets, primarily tax-exempt securities and loans, as if such revenue
were taxable.
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
NET INTEREST REVENUE (in thousands)
Book Basis $ 2,394 $ 2,339 $ 4,729 $ 4,666
Tax equivalent adjustment 169 170 337 314
Fully taxable basis $ 2,563 $ 2,509 $ 5,066 $ 4,980
AVERAGE BALANCES (in thousands)
Interest-earning assets $211,975 $201,869 $209,753 $200,050
Interest-bearing liabilities
176,308 166,372 173,986 164,533
Earning assets financed by
non-interest bearing funds
35,667 35,497 35,767 35,517
AVERAGE RATES (fully taxable basis)
Yield on interest-earning assets
8.02% 8.05% 7.99% 8.07%
Cost of interest-bearing
liabilities 3.81 3.74 3.78 3.75
Interest Rate Spread 4.21 4.31 4.21 4.32
Contribution of non
interest-bearing funds .64 .66 .65 .67
Net interest margin 4.85 4.97 4.86 4.99
As evidenced by the above table, we are continuing to experience a reduction in
the net interest margin. Changes in net interest income occur from year to
year due to changes in both the levels of earning assets and interest bearing
liabilities, as well as the average rates paid on deposits or earned on assets.
Changes in the levels of earning assets and interest bearing liabilities are
referred to as volume related variances, while changes in average rates
received on earning assets and average rates paid on deposits are referred to
as rate related variances. Year to date analysis indicates that our earning
asset income increase of $259 was due to a volume related increase of $329 and
a rate related decrease of $70. The volume related changes in interest earning
assets occurred largely in our investment portfolio, while the decline of 8
basis points in weighted average rates was related to a lower rate environment
on our loan portfolio. Our interest bearing liabilities expense increase of
$195 was due to an increase of $188 involume related changes coupled with an
increase of $6 in rate related changes. The weighted average rates paid on
interest bearing deposits increased 3 basis points as the mix on those deposits
became more concentrated in higher cost time deposits.
Although loan demand has been low, enhanced efforts to attract high quality
loans within our commercial loan portfolio, in conjunction with diversification
to higher yielding investments, is anticipated to slow this reduction. Given
the relatively stable rate environment, our cost of funds should remain near
the current level.
PROVISION FOR LOAN LOSSES
The Bank places a strong emphasis on asset quality and performs a thorough
analysis of the risks in its loan portfolio and the allowance for loan losses.
Review of the loan portfolio and assessment of the adequacy of the allowance
for loan losses is a continuing process in light of changing economic
conditions and changes in the strength of borrowers. Net charge offs year to
date 1997 of $229 compares to $64 one year ago for the same period. This trend
may continue throughout the remainder of 1997 reflecting the national trend in
consumer delinquencies and charge offs; however, appropriate collection
measures and underwriting standards have been implemented to mitigate the
negative aspects of the current trend. The allowance for loans losses was
1.08% of loans outstanding as of June 30, 1997 which compares with a 1.10% for
the same period in 1996. In management's opinion, the allowance for loan
losses is adequate as of June 30, 1997.
CAPITAL ADEQUACY
Capital adequacy continued strong at the end of the second quarter as equity
continues to grow. At the end of the quarter, the Company's capital leverage
ratio was 11.38% which compares favorably with 11.18% for quarter ended
June 30, 1996. Tier 1 and Total Risk-based capital ratios were 22.47% and
23.54%, respectively, compared to 21.15% and 22.24% at June 30, 1996.
Regulatory minimums to qualify as "well capitalized" are 5% for capital
leverage, 6% for Tier 1 Risk-based capital, and 10% for Total Risk-based
capital. The Company filed a Schedule 13E4 with the Securities and Exchange
Commission on May 28, 1997 regarding an Offer to Repurchase up to 150,000
shares of its outstanding common stock. The Offer to Repurchase was conducted
through a procedure commonly referred to as a "Dutch Auction". The offer
period expired on July 2, 1997. Given the Bank's strong capital position,
the Board of Directors of the Company determined that the offer to repurchase
directly to stockholders would provide a fair and easy means for stockholders
who may have desired to sell some or all of their stock. While not reflected
in the second quarter financial results, the Company repurchased approximately
30,538 shares at $22.50 per share in accordance with the Offer to Repurchase,
and the Company may continue to repurchase common stock from time to time in
open market repurchases or private transactions subject to regulatory and
compliance requirements. The repurchase program will not affect our strategic
plan to continue to grow First National Bank of Cortland as a strong,
independent community bank.
LIQUIDITY AND INTEREST RATE RISK
Liquidity describes the ability of the Bank to meet financial obligations that
arise out of the ordinary course of business. Liquidity is primarily needed to
meet the borrowing and deposit withdrawal requirements of the Bank's customers
and to fund current and planned expenditures. The Bank derives liquidity from
increased customer deposits, the maturity distribution of the investment
portfolio, loan repayments, and income from earning assets. The Bank also
maintains a line of credit with the Federal Home Loan Bank which provides
additional liquidity. Additionally, the Bank's securities classified as
available-for-sale, which totaled $91,311, were available for the management of
liquidity and interest rate risk. At June 30,1997, the ratio of net liquid
assets to net deposits amounted to 33.21%, an increase of over 2 percent
over the year-end 1996 ratio of 31.1%, further indicating a high level of
liquidity. Management is not aware of any trends, demands, commitments, or
uncertainties that are reasonably likely to result in material changes in
liquidity.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of earning assets and funding sources.
The Asset/Liability committee of the Bank manages the interest rate sensitivity
position in order to maintain an appropriate balance between the maturity and
repricing characteristics of assets and liabilities that is consistent with
liquidity, growth, and capital adequacy goals.
Our new in-store branch at the Wal-Mart store in Cortlandville, which opened in
March of this year, provides a full-service facility available to our customers
64 hours a week and includes an ATM for added convenience. During the second
quarter of 1997, construction began on a new facility in Cincinnatus which will
allow us to relocate our current branch and enhance service to our customers in
that area with the inclusion of a drive-up ATM as well. The Bank has added an
Assistant Vice President in the lending area who will be based in our Tully
office which should enable us to increase our penetration into the Onondaga
County market.
PART 2.
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
(11) Statement re Computation of earnings per share
(21) Subsidiaries of the registrant
- First National Bank of Cortland, State of New York
(27) Financial Data Schedule
b) Reports filed on Form 8-K during the second quarter of 1997.
A Form 8-K report was filed on May 29, 1997 with the Securities
and Exchange Commission regarding a tender offer by Cortland
First Financial Corporation to purchase up to 150,000 shares
of its outstanding common stock from stockholders desiring to
sell. The Offer to Repurchase shares was conducted through a
process commonly referred to as a "Dutch Auction". Details of
the Offer to Repurchase are contained in the Schedule 13E4 filed
with the Securities and Exchange Commission on May 28, 1997 and
amended on July 11, 1997.
<PAGE>
EXHIBIT 11
CORTLAND FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
Six Months Ended
June 30,
1997 1996
Primary earnings
Net Income $1,276 $1,384
Shares
Weighted average number of 2,016 2,016
common shares outstanding
Primary earnings per common share $ 0.63 $ 0.69
<PAGE>
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 August 13, 1997
David R. Alvord, President & CEO
DATE August 13, 1997
Bob Derksen, Treasurer
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<PERIOD-END> JUN-30-1997
<CASH> 9,811
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,200
<TRADING-ASSETS> 0
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<TOTAL-ASSETS> 225,273
<DEPOSITS> 197,432
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<COMMON> 6,720
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