Cortland Bancorp Reports Third Quarter Earnings
October 31, 2013
CORTLAND BANCORP (the “Company,” OTCQB: CLDB) today reported net income of $617,000, or $.14 per share for the quarter ending September 30, 2013 compared to net income of $1.3 million for the same three month period a year ago, or $.28 per share. Year-to-date net income for the nine months ended September 30, 2013 was $2.2 million or $.50 per share versus $3.4 million, or $.75 per share for the same period in 2012.
Of significance in comparing the results, Mortgage Banking revenues were $109,000 in the current quarter versus $1 million in the same period a year ago. The driver of mortgage banking revenues is mortgage application volume, and mortgage application volume declined to $42.7 million in the third quarter, 2013 compared to $123.9 million for the similar period in 2012.
President and Chief Executive Officer James Gasior stated, “The increase in mortgage interest rates that occurred in the third quarter had a dramatic effect on mortgage volume.” As recent as the first and second quarters this year, mortgage banking revenues were $688,000 and $638,000, respectively, on application volume of $82.9 million and $94.2 million. Gasior continued, “In response to this sudden drop in volume and revenues, the Company significantly curtailed its residential mortgage operations as of September 13th by exiting the wholesale arena and limiting residential mortgage lending operations to the retail banking footprint.” While mortgage banking remains an important component of both the customer and shareholder value initiative, the extraordinary mortgage lending opportunities of prior years are not expected to return. Third quarter expenses include $249,000 in costs to exit, including severance and facility-related write-offs. “By rightsizing the residential mortgage lending operation, the remaining infrastructure is now commensurate with the expected in-market volume.”
Exclusive of mortgage banking results the core bank, as measured by net interest income, performed consistently with prior periods. The Company has been following a strategy of increasing earning assets in the loan portfolio while deploying cash, other earning assets and cash flows from the investment securities intended to achieve a relatively level earnings stream. Total loans at September 30, 2013 were $314.9 million as compared to $293.2 million a year ago, a 7.4% increase. This strategy has enabled the Company to effectively offset the impact of lower short-term interest rates with moderate loan growth, resulting in interest and fees on loans of $4.0 million for the quarter. This remains unchanged between the September 30, 2013 and 2012 quarters. Mr. Gasior noted, “The Company’s consistent philosophy throughout this extended low rate environment has helped maintain the core earnings. This focus will also maximize preparedness for the interest rate movements relative to the Federal Reserve’s tapering of its quantitative easing.”
Relative to the operating results, highlights of operations are as follows:
Net Interest Income
Net interest income of $4.1 million, which provides the core earnings base for the Company, remained relatively unchanged from the same quarter a year ago, despite the decline in net interest margin from 3.51% to 3.42%. The 7.4% loan growth provided the impetus to achieve this consistency in net interest income.
Despite less than favorable economic conditions over the past several years, the Company has been able to grow its loan portfolio without experiencing any substantive deterioration in credit quality. Nonaccrual loans declined to $2.3 million at September 30, 2013 or .72% of loans, versus $3.0 million or .94% of loans at December 31, 2012 and the Company’s allowance for loan losses now covers 173% of nonaccrual loans at September 30, 2013 compared to 129% at December 31, 2012. Net loan charge-offs were $352,000 in the third quarter of 2013 or .46% of total average loans versus a net charge off rate of .03% for the third quarter of 2012. The allowance for loan loss to total loans ratio was 1.25% at September 30, 2013 versus 1.23% a year ago.
Mr. Gasior noted, “With the fragile state of today’s economy, it is prudent to address the potential for losses based upon the possibility of conditions worsening. The Company proactively continues to set aside reserves for future losses, both in the allowance for loan losses and capital.”
Non-interest income, excluding the previously noted mortgage banking revenues, in the third quarter increased by $479,000 over the same period last year, and by $572,000 on a nine month year-to-date basis, led primarily by securities gains. Consistent with the balance sheet strategy, the Company periodically reviews its investment portfolio to clean up odd-lot securities and to reduce interest rate risk. Recent government programs, such as HARP, promote prepayment activities in mortgage backed securities, thus cutting short the intended investment performance. Proactively removing the securities with higher prepayment risk allows the Company to reinvest into securities that produce consistent cash flows.
As a revenue diversification initiative, the Company continues to expand wealth management efforts. Two advisors now sell non-deposit investment products to customers in the bank’s branch network through a third party provider. As assets under management grow, fee income paid by the third party provider of non-deposit investment products will enhance non-interest income revenue.
Non-interest expenses increased $661,000 in the third quarter 2013 versus 2012, reflecting the additional personnel and other expenses to operate the mortgage banking operation prior to its curtailment. Also included therein is the $249,000 in costs to curtail the mortgage operation as previously noted.
Included in non-interest expenses for the nine months ended September 30, 2012 is the one-time investment of $444,000 in a Historic Tax Credit partnership which generated $634,000 in tax credits. The Company reported no tax credit through the nine month period ended September 30, 2013.
Capital and Dividends
With capital as the ultimate cushion to absorb any unforeseen negative consequences of the struggling economy, capital levels for banks across the industry have been under the watchful eye of bank regulators. The Company continues to remain well capitalized under all regulatory measures. The Company’s regulatory capital ratios exceed the statutory well-capitalized thresholds by a more than ample margin. In the current regulatory environment, regulatory oversight bodies expect banks to maintain ratios above the statutory levels as a margin of safety. The calculated ratios are as follows for the quarter ended September 30, 2013: a Tier 1 leverage ratio of 10.58% (compared to a “well-capitalized” threshold of 5.0%); a Tier 1 risk-based capital ratio of 13.58% (compared to a “well-capitalized” threshold of 6.00%); and a total risk-based capital ratio of 14.55% (compared to a “well-capitalized” threshold of 10.00%).
The Company’s total risk-based capital is $19 million in excess of the 10% well-capitalized threshold.
In October 2012 the Company announced the reinstatement of a cash dividend reflecting the growing confidence supported by strong core earnings, increasing loan production, and restored capital levels. A dividend of $.03 per share was paid to shareholders of record on August 12, 2013, for a total of $.09 for the three quarters to date.
Cortland Bancorp is a financial holding company headquartered in Cortland, Ohio. Founded in 1892, the Company’s bank subsidiary, The Cortland Savings and Banking Company conducts business through thirteen full-service community banking offices located in the counties of Trumbull, Mahoning, Portage, Geauga and Ashtabula in Northeastern Ohio.
For additional information about Cortland Banks visit http://www.cortland-banks.com.
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For additional information, please contact:
David J. Lucido, CPA
SVP & Chief Financial Officer
194 W. Main St.
Cortland, OH 44410
330.637.8040, Ext 1164