UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q | |||||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For Quarterly period ended September 30, 2012 | |||||
Or | |||||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File No. 0-13888 | |||||
CHEMUNG FINANCIAL CORPORATION | |||||
(Exact name of registrant as specified in its charter) | |||||
New York | 16-1237038 | ||||
(State or other jurisdiction of incorporation or organization) | I.R.S. Employer Identification No. | ||||
One Chemung Canal Plaza, P.O. Box 1522, Elmira, NY | 14902 | ||||
(Address of principal executive offices) | (Zip Code) | ||||
(607) 737-3711 or (800) 836-3711 | |||||
(Registrant's telephone number, including area code) | |||||
Indicate by check mark whether the registrant (1) has filed all reports required 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 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 and post such files). | |||||
YES: X NO:____ | |||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. | |||||
Large accelerated filer | [ ] | Non-accelerated filer | [ ] | ||
Accelerated filer | [ ] | Smaller reporting company | [X] | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): | |||||
YES: NO: X | |||||
The number of shares of the registrant's common stock, $.01 par value, outstanding on November 12, 2012 was 4,572,875. |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. | FINANCIAL INFORMATION | PAGE |
Item 1: | Financial Statements – Unaudited | |
Consolidated Balance Sheet | 3 | |
Consolidated Statements of Income | 4 | |
Consolidated Statements of Comprehensive Income | 5 | |
Consolidated Statements of Shareholders’ Equity | 6 | |
Consolidated Statements of Cash Flows | 7 | |
Notes to Unaudited Consolidated Financial Statements | 9 | |
Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | 40 |
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 56 |
Item 4: | Controls and Procedures | 56 |
PART II. | OTHER INFORMATION | 57 |
Item 1A: | Risk Factors | 57 |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 57 |
Item 6: | Exhibits | 58 |
SIGNATURES | 59 | |
INDEX TO EXHIBITS |
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2012 | DECEMBER, 31, 2011 | |||||||
ASSETS | ||||||||
Cash and due from financial institutions | $ | 35,323,663 | $ | 28,204,699 | ||||
Interest-bearing deposits in other financial institutions | 45,908,073 | 24,697,154 | ||||||
Total cash and cash equivalents | 81,231,736 | 52,901,853 | ||||||
Trading assets, at fair value | 274,995 | 294,381 | ||||||
Securities available for sale, at estimated fair value | 253,668,954 | 280,869,810 | ||||||
Securities held to maturity, estimated fair value of $6,881,172 at September 30, 2012 and $9,175,956 at December 31, 2011 | 6,162,503 | 8,311,921 | ||||||
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost | 4,760,500 | 5,509,350 | ||||||
Loans, net of deferred origination fees and costs, and unearned income | 876,358,135 | 796,915,177 | ||||||
Allowance for loan losses | (10,827,971 | ) | (9,659,320 | ) | ||||
Loans, net | 865,530,164 | 787,255,857 | ||||||
Loans held for sale | 1,164,750 | 395,427 | ||||||
Premises and equipment, net | 24,862,825 | 24,762,405 | ||||||
Goodwill | 21,824,443 | 21,983,617 | ||||||
Other intangible assets, net | 5,382,282 | 6,190,540 | ||||||
Bank owned life insurance | 2,689,944 | 2,625,104 | ||||||
Other assets | 19,426,761 | 25,159,322 | ||||||
Total assets | $ | 1,286,979,857 | $ | 1,216,259,587 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Non-interest-bearing | $ | 302,508,720 | $ | 258,835,961 | ||||
Interest-bearing | 780,666,800 | 739,656,878 | ||||||
Total deposits | 1,083,175,520 | 998,492,839 | ||||||
Securities sold under agreements to repurchase | 32,917,656 | 37,106,842 | ||||||
Federal Home Loan Bank term advances | 28,045,741 | 43,343,918 | ||||||
Accrued interest payable | 462,902 | 800,148 | ||||||
Dividends payable | 1,143,770 | 1,141,081 | ||||||
Other liabilities | 8,354,161 | 9,445,319 | ||||||
Total liabilities | 1,154,099,750 | 1,090,330,147 | ||||||
Shareholders' equity: | ||||||||
Common stock, $.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2012 and December 31, 2011 | 53,101 | 53,101 | ||||||
Additional-paid-in capital | 45,537,843 | 45,582,861 | ||||||
Retained earnings | 106,091,543 | 100,628,900 | ||||||
Treasury stock, at cost (734,997 shares at September 30, 2012; 741,003 shares at December 31, 2011) | (18,730,525 | ) | (18,894,044 | ) | ||||
Accumulated other comprehensive income (loss) | (71,855 | ) | (1,441,378 | ) | ||||
Total shareholders' equity | 132,880,107 | 125,929,440 | ||||||
Total liabilities and shareholders' equity | $ | 1,286,979,857 | $ | 1,216,259,587 | ||||
See accompanying notes to unaudited consolidated financial statements. |
3
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
Interest and dividend income: | 2012 | 2011 | 2012 | 2011 | |||||||||
Loans, including fees | $ | 34,078,132 | $ | 31,456,406 | $ | 11,373,583 | $ | 11,673,216 | |||||
Taxable securities | 4,142,224 | 4,347,409 | 1,306,484 | 1,504,393 | |||||||||
Tax exempt securities | 976,622 | 1,035,068 | 300,374 | 350,557 | |||||||||
Interest-bearing deposits | 122,693 | 166,955 | 34,573 | 65,139 | |||||||||
Total interest and dividend income | 39,319,671 | 37,005,838 | 13,015,014 | 13,593,305 | |||||||||
Interest expense: | |||||||||||||
Deposits | 2,532,630 | 3,325,900 | 774,741 | 1,138,130 | |||||||||
Borrowed funds | 868,131 | 783,022 | 234,155 | 285,084 | |||||||||
Securities sold under agreements to repurchase | 763,343 | 1,056,095 | 231,043 | 326,542 | |||||||||
Total interest expense | 4,164,104 | 5,165,017 | 1,239,939 | 1,749,756 | |||||||||
Net interest income | 35,155,567 | 31,840,821 | 11,775,075 | 11,843,549 | |||||||||
Provision for loan losses | 753,897 | 833,333 | 225,000 | 583,333 | |||||||||
Net interest income after provision for loan losses | 34,401,670 | 31,007,488 | 11,550,075 | 11,260,216 | |||||||||
Other operating income: | |||||||||||||
Wealth management group fee income | 5,170,016 | 5,131,119 | 1,667,628 | 1,746,958 | |||||||||
Service charges on deposit accounts | 3,143,061 | 3,180,733 | 1,110,897 | 1,130,824 | |||||||||
Net gain on securities transactions | 300,516 | 1,108,091 | 597 | 428,882 | |||||||||
Other-than-temporary loss on investment securities: | |||||||||||||
Total impairment losses | - | (67,400 | ) | - | (67,400 | ) | |||||||
Loss recognized in other comprehensive income | - | - | - | - | |||||||||
Net impairment loss recognized in earnings | - | (67,400 | ) | - | (67,400 | ) | |||||||
Net gain on sales of loans held for sale | 270,265 | 132,902 | 125,885 | 53,571 | |||||||||
Casualty gains | 790,248 | - | 9,813 | - | |||||||||
Gains on sales of other real estate owned | 20,426 | 89,404 | - | 442 | |||||||||
Income from bank owned life insurance | 64,840 | 65,932 | 21,571 | 22,321 | |||||||||
Other | 3,328,329 | 3,779,231 | 1,123,830 | 1,012,865 | |||||||||
Total other operating income | 13,087,701 | 13,420,012 | 4,060,221 | 4,328,463 | |||||||||
Other operating expenses: | |||||||||||||
Salaries and wages | 13,710,584 | 12,534,215 | 4,661,858 | 4,272,613 | |||||||||
Pension and other employee benefits | 4,137,878 | 3,296,814 | 1,381,401 | 1,172,044 | |||||||||
Net occupancy expenses | 3,849,173 | 3,663,005 | 1,269,165 | 1,230,490 | |||||||||
Furniture and equipment expenses | 1,599,842 | 1,549,048 | 503,995 | 486,518 | |||||||||
Data processing expense | 3,279,379 | 2,881,150 | 971,601 | 976,050 | |||||||||
Amortization of intangible assets | 808,258 | 753,192 | 260,069 | 288,001 | |||||||||
Marketing and advertising expense | 915,632 | 790,797 | 270,567 | 307,986 | |||||||||
Losses on sales of other real estate owned | 92,430 | 1,671 | 67,503 | - | |||||||||
Other real estate owned expenses | 286,137 | 86,040 | 154,238 | 37,549 | |||||||||
FDIC insurance | 615,360 | 737,281 | 205,317 | 294,897 | |||||||||
Merger related expenses | 30,145 | 2,243,919 | 21,600 | 20,500 | |||||||||
Other | 4,874,856 | 4,724,854 | 1,625,686 | 1,530,740 | |||||||||
Total other operating expenses | 34,199,674 | 33,261,986 | 11,393,000 | 10,617,388 | |||||||||
Income before income tax expense | 13,289,697 | 11,165,514 | 4,217,296 | 4,971,291 | |||||||||
Income tax expense | 4,397,279 | 3,589,455 | 1,383,451 | 1,680,351 | |||||||||
Net income | $ | 8,892,418 | $ | 7,576,059 | $ | 2,833,845 | $ | 3,290,940 | |||||
Weighted average shares outstanding | 4,639,985 | 4,297,777 | 4,641,547 | 4,637,392 | |||||||||
Basic and diluted earnings per share | $ | 1.92 | $ | 1.76 | $ | 0.61 | $ | 0.71 | |||||
See accompanying notes to unaudited consolidated financial statements. |
4
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended September 30 | Three Months Ended September 30, | |||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||
Net income | $ | 8,892,418 | $ | 7,576,059 | $ | 2,833,845 | $ | 3,290,940 | ||||||
Other comprehensive income | ||||||||||||||
Unrealized holding gains on securities available for sale | 1,633,195 | 5,448,351 | 959,668 | 294,210 | ||||||||||
Change in unrealized gains (losses) on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassification | - | 27,725 | - | (9,425 | ) | |||||||||
Reclassification adjustment gains realized in net income | (300,516 | ) | (1,108,091 | ) | (597 | ) | (428,882 | ) | ||||||
Net unrealized gains (losses) | 1,332,679 | 4,367,985 | 959,071 | (144,097 | ) | |||||||||
Less: Tax effect | 544,460 | 1,689,798 | 368,668 | (55,746 | ) | |||||||||
Net of tax amount | 788,219 | 2,678,187 | 590,403 | (88,351 | ) | |||||||||
Change in funded status of defined benefit pension plan and other benefit plans | 944,286 | 464,097 | 314,762 | 154,699 | ||||||||||
Less: Tax effect | 362,982 | 179,541 | 120,994 | 59,847 | ||||||||||
Net of tax amount | 581,304 | 284,556 | 193,768 | 94,852 | ||||||||||
Total other comprehensive income | 1,369,523 | 2,962,743 | 784,171 | 6,501 | ||||||||||
Comprehensive income | $ | 10,261,941 | $ | 10,538,802 | $ | 3,618,016 | $ | 3,297,441 | ||||||
See accompanying notes to unaudited consolidated financial statements. |
5
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
Balances at December 31, 2010 | $ | 43,001 | $ | 22,022,122 | $ | 94,407,620 | $ | (19,166,655 | ) | $ | 102,475 | $ | 97,408,563 | |||||||||||
Net income | - | - | 7,576,059 | - | - | 7,576,059 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 2,962,743 | 2,962,743 | ||||||||||||||||||
Restricted stock awards | - | 21,226 | - | - | - | 21,226 | ||||||||||||||||||
Restricted stock units for directors' deferred compensation plan | - | 61,129 | - | - | - | 61,129 | ||||||||||||||||||
Cash dividends declared ($.75 per share) | - | - | (3,175,394 | ) | - | - | (3,175,394 | ) | ||||||||||||||||
Distribution of 10,378 shares of treasury stock for directors’ compensation | - | (33,831 | ) | - | 265,262 | - | 231,431 | |||||||||||||||||
Distribution of 2,392 shares of treasury stock for employee compensation | - | (6,140 | ) | - | 61,140 | - | 55,000 | |||||||||||||||||
Distribution of 286 shares of treasury stock for deferred directors’ compensation | - | (7,364 | ) | - | 7,310 | (54 | ) | |||||||||||||||||
Distribution of 4,387 shares of treasury stock for employee restricted stock awards | - | (60,800 | ) | - | 112,090 | - | 51,290 | |||||||||||||||||
Purchase of 13,981 shares of treasury stock | - | - | - | (327,413 | ) | - | (327,413 | ) | ||||||||||||||||
Sale of 3,900 shares of treasury stock | - | (10,101 | ) | - | 99,606 | - | 89,505 | |||||||||||||||||
Issuance of 1,009,942 shares related to FOFC Merger | 10,100 | 23,723,538 | - | - | - | 23,733,638 | ||||||||||||||||||
Balances at September 30, 2011 | $ | 53,101 | $ | 45,709,779 | $ | 98,808,285 | $ | (18,948,660 | ) | $ | 3,065,218 | $ | 128,687,723 | |||||||||||
Balances at December 31, 2011 | $ | 53,101 | $ | 45,582,861 | $ | 100,628,900 | $ | (18,894,044 | ) | $ | (1,441,378 | ) | $ | 125,929,440 | ||||||||||
Net income | - | - | 8,892,418 | - | - | 8,892,418 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 1,369,523 | 1,369,523 | ||||||||||||||||||
Restricted stock awards | - | 61,062 | - | - | - | 61,062 | ||||||||||||||||||
Restricted stock units for directors' deferred compensation plan | - | 65,151 | - | - | - | 65,151 | ||||||||||||||||||
Cash dividends declared ($.75 per share) | - | - | (3,429,775 | ) | - | - | (3,429,775 | ) | ||||||||||||||||
Distribution of 10,238 shares of treasury stock for directors' compensation | - | (28,121 | ) | - | 261,069 | - | 232,948 | |||||||||||||||||
Distribution of 3,453 shares of treasury stock for employee compensation | - | (8,052 | ) | - | 88,052 | - | 80,000 | |||||||||||||||||
Distribution of 3,240 shares of treasury stock for deferred directors’ compensation | - | (81,747 | ) | - | 82,588 | 841 | ||||||||||||||||||
Distribution of 2,095 shares of treasury stock for employee restricted stock awards | - | (53,412 | ) | - | 53,412 | - | - | |||||||||||||||||
Purchase of 23,120 shares of treasury stock | - | - | - | (579,051 | ) | - | (579,051 | ) | ||||||||||||||||
Sale of 10,100 shares of treasury stock | - | 101 | - | 257,449 | - | 257,550 | ||||||||||||||||||
Balances at September 30, 2012 | $ | 53,101 | $ | 45,537,843 | $ | 106,091,543 | $ | (18,730,525 | ) | $ | (71,855 | ) | $ | 132,880,107 | ||||||||||
See accompanying notes to unaudited consolidated financial statements. |
6
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | 2012 | 2011 | ||||||
Net income | $ | 8,892,418 | $ | 7,576,059 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of intangible assets | 808,258 | 753,192 | ||||||
Provision for loan losses | 753,897 | 833,333 | ||||||
Depreciation and amortization of fixed assets | 2,187,234 | 2,129,738 | ||||||
Amortization of premiums on securities, net | 1,343,743 | 960,973 | ||||||
Gains on sales of loans held for sale, net | (270,265 | ) | (132,902 | ) | ||||
Proceeds from sales of loans held for sale | 8,992,854 | 5,523,214 | ||||||
Loans originated and held for sale | (9,491,912 | ) | (4,977,727 | ) | ||||
Net losses (gains) on sale of other real estate owned | 72,004 | (87,733 | ) | |||||
Net (gains) losses on trading assets | (28,261 | ) | 14,966 | |||||
Net gains on securities transactions | (300,516 | ) | (1,108,091 | ) | ||||
Net impairment loss recognized on investment securities | - | 67,400 | ||||||
Proceeds from sales of trading assets | 96,498 | - | ||||||
Purchase of trading assets | (48,851 | ) | (264,244 | ) | ||||
Decrease in other assets | 4,294,238 | 3,001,325 | ||||||
Decrease (increase) in prepaid FDIC assessment | 559,406 | (49,464 | ) | |||||
Decrease in accrued interest payable | (337,246 | ) | (265,000 | ) | ||||
Expense related to restricted stock units for directors' deferred compensation plan | 65,151 | 61,129 | ||||||
Expense related to employee stock compensation | 80,000 | 55,000 | ||||||
Expense related to employee stock awards | 61,062 | 21,226 | ||||||
Decrease in other liabilities | (820,424 | ) | (2,243,010 | ) | ||||
Income from bank owned life insurance | (64,840 | ) | (65,932 | ) | ||||
Net cash provided by operating activities | 16,844,448 | 11,803,452 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from sales and calls of securities available for sale | 70,370,086 | 67,741,210 | ||||||
Proceeds from maturities and principal collected on securities available for sale | 21,396,640 | 23,608,123 | ||||||
Proceeds from maturities and principal collected on securities held to maturity | 3,731,924 | 3,448,732 | ||||||
Purchases of securities available for sale | (64,276,418 | ) | (95,911,022 | ) | ||||
Purchases of securities held to maturity | (1,582,507 | ) | (3,319,281 | ) | ||||
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock | (26,250 | ) | (1,002,500 | ) | ||||
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock | 775,100 | 237,250 | ||||||
Purchases of premises and equipment | (2,287,654 | ) | (1,307,723 | ) | ||||
Cash paid Fort Orange Financial Corporation acquisition | - | (8,137,816 | ) | |||||
Cash received Fort Orange Financial Corporation acquisition | - | 33,284,995 | ||||||
Proceeds from sales of other real estate owned | 294,229 | 356,207 | ||||||
Net increase in loans | (78,356,344 | ) | (10,967,168 | ) | ||||
Net cash (used) provided by investing activities | (49,961,194 | ) | 8,031,007 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts | 112,724,881 | 70,452,474 | ||||||
Net decrease in time deposits and individual retirement accounts | (28,042,200 | ) | (15,073,756 | ) | ||||
Net decrease in securities sold under agreements to repurchase | (4,189,186 | ) | (13,889,730 | ) | ||||
Repayments of Federal Home Loan Bank long term advances | (15,298,177 | ) | (317,990 | ) | ||||
Purchase of treasury stock | (579,051 | ) | (327,413 | ) | ||||
Sale of treasury stock | 257,449 | 89,505 | ||||||
Cash dividends paid | (3,427,087 | ) | (2,914,582 | ) | ||||
Net cash provided by financing activities | 61,446,629 | 38,018,508 | ||||||
Net increase in cash and cash equivalents | 28,329,883 | 57,852,967 | ||||||
Cash and cash equivalents, beginning of period | 52,901,853 | 60,619,777 | ||||||
Cash and cash equivalents, end of period | $ | 81,231,736 | $ | 118,472,744 |
7
(continued)
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 4,501,350 | $ | 5,126,397 | ||||
Income Taxes | $ | 3,500 | $ | 3,340,847 | ||||
Supplemental disclosure of non-cash activity: | ||||||||
Transfer of loans to other real estate owned | $ | 512,686 | $ | 308,976 | ||||
See accompanying notes to unaudited consolidated financial statements. |
8
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Chemung Financial Corporation (the "Corporation"), through its wholly owned subsidiaries, Chemung
Canal Trust Company (the "Bank") and CFS Group, Inc., a financial services company, provides a wide
range of banking, financing, fiduciary and other financial services to its local market area. The
consolidated financial statements include the accounts of the Corporation and its wholly owned
subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
The data in the consolidated balance sheet as of December 31, 2011 was derived from the audited
consolidated financial statements in the Corporation's 2011 Annual Report on Form 10-K, which was
filed with the Securities and Exchange Commission on March 28, 2012. That data, along with the other
interim financial information presented in the consolidated balance sheets, statements of income,
comprehensive income and shareholders' equity, and cash flows should be read in conjunction with the
audited consolidated financial statements, including the notes thereto, contained in the 2011 Annual
Report on Form 10-K. Amounts in prior periods' consolidated interim financial statements are
reclassified whenever necessary to conform to the current period's presentation.
The consolidated financial statements included herein reflect all adjustments which are, in the opinion of
management, of a normal recurring nature and necessary to present fairly the Corporation's financial
position as of September 30, 2012 and December 31, 2011, and results of operations for the three and
nine-month periods ended September 30, 2012 and 2011, and changes in shareholders' equity and cash
flows for the nine-month periods ended September 30, 2012 and 2011. Subsequent events were
evaluated for any required recognition or disclosure. The results for the periods presented are not
necessarily indicative of results to be expected for the entire fiscal year or any other interim period.
2. Earnings Per Common Share
Basic earnings per share is net income divided by the weighted average number of common shares
outstanding during the period. Issuable shares, including those related to directors’ restricted stock units
and directors’ stock compensation, are considered outstanding and are included in the computation of
basic earnings per share. All outstanding unvested share based payment awards that contain rights to
nonforfeitable dividends are considered participating securities for this calculation. Restricted stock
awards are grants of participating securities. The impact of the participating securities on earnings per
share is not material. Earnings per share information is adjusted to present comparative results for stock
splits and stock dividends that occur. Earnings per share were computed by dividing net income by
4,639,985 and 4,297,777 weighted average shares outstanding for the nine-month periods ended
September 30, 2012 and 2011, respectively and 4,641,547 and 4,637,392 weighted average shares
outstanding for the three-month periods ended September 30, 2012 and 2011, respectively. There were
no dilutive common stock equivalents during the three and nine-month periods ended September 30,
2012 or 2011.
9
3. Adoption of New Accounting Standards
In May, 2011, the FASB issued an amendment to achieve common fair value measurement and
disclosure requirements between U.S. and international accounting principles. Overall, the guidance is
consistent with existing U.S. accounting principles; however, there are some amendments that change a
particular principle or requirement for measuring fair value or for disclosing information about fair value
measurements. The amendments in this guidance are effective for interim and annual reporting periods
beginning after December 15, 2011. The effect of adopting this standard did not have a material effect
on the Corporation’s operating results or financial condition, but the additional disclosures are included
in Note 4.
In June 2011, the FASB amended existing guidance and eliminated the option to present the components
of other comprehensive income as part of the statement of changes in shareholders’ equity. The
amendment requires that comprehensive income be presented in either a single continuous statement or
in two separate consecutive statements. The amendments in this guidance are effective as of the
beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15,
2011. In connection with the adoption of this amendment, the Corporation changed the presentation of
the statement of comprehensive income for the Corporation to two consecutive statements instead of
presenting it as part of the consolidated statements of shareholders’ equity.
4. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of inputs that may be used to measure fair
value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods and significant assumptions to estimate fair value:
Investment Securities: The fair values of securities available for sale are usually determined by
obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix
pricing, which is a mathematical technique widely used to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on the securities'
relationship to other benchmark quoted securities (Level 2 inputs).
10
The Corporation's investment in collateralized debt obligations consisting of pooled trust preferred
securities which are issued by financial institutions were historically priced using Level 2 inputs. The
lack of observable inputs and market activity in this class of investments has been significant and
resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, have varied
widely. The once active market has become comparatively inactive. As a result, these investments are
now priced using Level 3 inputs.
The Corporation utilizes an external model for pricing these securities. This is the same model used in
determining other-than-temporary impairment (“OTTI”) as further described in Note 8. Information
such as historical and current performance of the underlying collateral, deferral/default rates, collateral
coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums
required by a market participant, and financial trend analysis with respect to the individual issuing
financial institutions, are utilized in determining individual security valuations. Discount rates were
utilized along with the cash flow projections in order to calculate an appropriate fair value. These
discount rates were calculated based on industry index rates and adjusted for various credit and liquidity
factors. Due to current market conditions as well as the limited trading activity of these securities, the
market value of the securities is highly sensitive to assumption changes and market volatility.
Trading Assets: Securities that are held to fund a deferred compensation plan are recorded at fair value
with changes in fair value included in earnings. The fair values of trading assets are determined by
quoted market prices (Level 1 inputs).
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value.
Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part
of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based
on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in the
appraisal process by independent appraisers to adjust for differences between the comparable sales and
income data available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value. Non-real estate collateral may be valued using an
appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or
discounted based on management’s historical knowledge, changes in market conditions from the time of
the valuation, and management’s expertise and knowledge of the client and client’s business, typically
resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for
additional impairment and adjusted accordingly.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosures are initially recorded
at fair value less costs to sell when acquired, establishing a new cost basis. These assets are
subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is
commonly based on recent real estate appraisals. These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually
significant and typically result in a Level 3 classification of the inputs for determining fair value.
11
Appraisals for both collateral-dependent impaired loans and other real estate owned (“OREO”) are
performed by certified general appraisers (for commercial properties) or certified residential appraisers
(for residential properties) whose qualifications and licenses have been reviewed and verified by the
Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches
utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well
as the overall resulting fair value in comparison with independent data sources such as recent market
data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period
prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on
the age of the appraisal, the position of the lien, the type of the property and its condition.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurement at September 30, 2012 Using | ||||||||||||||||
Financial Assets: | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 146,650,654 | $ | 37,917,000 | $ | 108,733,654 | $ | - | ||||||||
Mortgage-backed securities, residential | 36,285,767 | - | 36,285,767 | - | ||||||||||||
Obligations of states and political subdivisions | 41,609,614 | - | 41,609,614 | - | ||||||||||||
Collateralized mortgage obligations | 4,727,378 | - | 4,727,378 | - | ||||||||||||
Corporate bonds and notes | 13,764,840 | - | 13,764,840 | - | ||||||||||||
SBA loan pools | 1,783,390 | - | 1,783,390 | - | ||||||||||||
Trust Preferred securities | 2,462,006 | - | 2,016,406 | 445,600 | ||||||||||||
Corporate stocks | 6,385,305 | 5,731,308 | 653,997 | - | ||||||||||||
Total available for sale securities | $ | 253,668,954 | $ | 43,648,308 | $ | 209,575,046 | $ | 445,600 | ||||||||
Trading assets | $ | 274,995 | $ | 274,995 | $ | - | $ | - |
Fair Value Measurement at December 31, 2011 Using | ||||||||||||||||
Financial Assets: | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 152,079,770 | $ | 35,950,000 | $ | 116,129,770 | $ | - | ||||||||
Mortgage-backed securities, residential | 50,766,604 | - | 50,766,604 | - | ||||||||||||
Obligations of states and political subdivisions | 46,512,971 | - | 46,512,971 | - | ||||||||||||
Trust Preferred securities | 2,310,066 | - | 2,015,156 | 294,910 | ||||||||||||
Corporate bonds and notes | 13,684,199 | - | 13,684,199 | - | ||||||||||||
Collateralized mortgage obligations | 7,536,753 | - | 7,536,753 | - | ||||||||||||
SBA loan pools | 1,949,606 | - | 1,949,606 | - | ||||||||||||
Corporate stocks | 6,029,841 | 5,339,839 | 690,002 | - | ||||||||||||
Total available for sale securities | $ | 280,869,810 | $ | 41,289,839 | $ | 239,285,061 | $ | 294,910 | ||||||||
Trading assets | $ | 294,381 | $ | 294,381 | $ | - | $ | - |
There were no transfers between Level 1 and Level 2 during the three or nine-month periods ending
September 30, 2012 or the year ending December, 31, 2011.
12
The significant unobservable inputs used in the fair value measurement of the Corporation’s
collateralized debt obligations are probabilities of specific-issuer defaults and deferrals and specific-
issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases
in specific-issuer recovery assumptions would result in a significantly lower fair value measurement.
Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery
assumptions would result in a higher fair value measurement. The Corporation treats all interest
payment deferrals as defaults and assumes no recoveries on defaults.
The tables below present a reconciliation of all assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the three and nine-month periods ending
September 30, 2012 and 2011:
Fair Value Measurement for Nine-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3) | Fair Value Measurement for Nine-Months Ended September 30, 2011 Using Significant Unobservable Inputs (Level 3) | |||||||
Trust Preferred Securities Available for Sale | ||||||||
Beginning balance | $ | 294,910 | $ | 334,585 | ||||
Total gains/losses (realized/unrealized): | ||||||||
Included in earnings: | ||||||||
Income on securities | - | - | ||||||
Impairment charge on investment securities | - | (67,400 | ) | |||||
Included in other comprehensive income | 150,690 | 27,725 | ||||||
Transfers in and/or out of Level 3 | - | - | ||||||
Ending balance September 30 | $ | 445,600 | $ | 294,910 |
Fair Value Measurement for Three-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3) | Fair Value Measurement for Three-Months Ended September 30, 2011 Using Significant Unobservable Inputs (Level 3) | |||||||
Trust Preferred Securities Available for Sale | ||||||||
Beginning balance | $ | 343,035 | $ | 371,735 | ||||
Total gains/losses (realized/unrealized): | ||||||||
Included in earnings: | ||||||||
Income on securities | - | - | ||||||
Impairment charge on investment securities | - | (67,400 | ) | |||||
Included in other comprehensive income | 102,565 | (9,425 | ) | |||||
Transfers in and/or out of Level 3 | - | - | ||||||
Ending balance September 30 | $ | 445,600 | $ | 294,910 |
13
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurement at September 30, 2012 Using | ||||||||||||||||
Financial Assets: | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired Loans: | ||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial and industrial | $ | 1,324,350 | $ | - | $ | - | $ | 1,324,350 | ||||||||
Commercial mortgages: | - | - | ||||||||||||||
Other | 423,036 | - | - | 423,036 | ||||||||||||
Total Impaired Loans | $ | 1,747,386 | $ | - | $ | - | $ | 1,747,386 | ||||||||
Other real estate owned: | ||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial and industrial | $ | 101,200 | $ | - | $ | - | $ | 101,200 | ||||||||
Commercial mortgages: | ||||||||||||||||
Other | 400,755 | - | - | 400,755 | ||||||||||||
Residential mortgages | 427,871 | - | - | 427,871 | ||||||||||||
Consumer loans: | ||||||||||||||||
Home equity lines & loans | 4,000 | - | - | 4,000 | ||||||||||||
Total Other real estate owned, net | $ | 933,826 | $ | - | $ | - | $ | 933,826 |
Fair Value Measurement at December 31, 2011 Using | ||||||||||||||||
Financial Assets: | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired Loans: | ||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial and industrial | $ | 831,601 | $ | - | $ | - | $ | 831,601 | ||||||||
Commercial mortgages: | - | - | ||||||||||||||
Other | 3,321,838 | - | - | 3,321,838 | ||||||||||||
Total Impaired Loans | $ | 4,153,439 | $ | - | $ | - | $ | 4,153,439 | ||||||||
Other real estate owned: | ||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial and industrial | $ | 218,040 | $ | - | $ | - | $ | 218,040 | ||||||||
Commercial mortgages: | ||||||||||||||||
Other | 366,760 | - | - | 366,760 | ||||||||||||
Residential mortgages | 276,355 | - | - | 276,355 | ||||||||||||
Consumer loans: | ||||||||||||||||
Home equity lines & loans | 36,600 | - | - | 36,600 | ||||||||||||
Total Other real estate owned, net | $ | 897,755 | $ | - | $ | - | $ | 897,755 |
14
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a principal balance of $2,790,932 with a valuation allowance of $1,043,546 as of
September 30, 2012, resulting in no additional provision for loan losses for the three and nine-month
periods ending September 30, 2012. Impaired loans had a principal balance of $6,095,645, with a
valuation allowance of $1,942,206 as of December 31, 2011, resulting in a $958,333 provision for loan
losses for the year ending December 31, 2011.
OREO, which is measured by the lower of carrying or fair value less costs to sell, had a net carrying
amount of $933,826 at September 30, 2012. The net carrying amount reflects the outstanding balance of
$1,126,193 net of a valuation allowance of $192,367 at September 30, 2012, which resulted in a write
down of $96,600 and $116,840 for the three and nine-month periods ending September 30, 2012.
OREO had a net carrying amount of $897,755 at December 31, 2011. The net carrying amount reflects
the outstanding balance of $1,009,162 net of a valuation allowance of $111,407 at December 31, 2011,
which resulted in write downs of $12,120 for the year ending December 31, 2011.
The carrying amounts and estimated fair values of other financial instruments, at September 30, 2012
and December 31, 2011, are as follows (dollars in thousands):
Fair Value Measurements at September 30, 2012 Using | ||||||||||||||
Financial assets: | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | | Estimated Fair Value (1) | ||||||||
Cash and due from financial institutions | $ | 35,324 | $ | 35,324 | $ | - | - | $ | 35,324 | |||||
Interest-bearing deposits in other financial institutions | 45,908 | 42,796 | 3,112 | - | 45,908 | |||||||||
Trading assets | 275 | 275 | - | - | 275 | |||||||||
Securities available for sale | 253,669 | 43,648 | 209,575 | 446 | 253,669 | |||||||||
Securities held to maturity | 6,163 | - | 6,881 | - | 6,881 | |||||||||
Federal Home Loan and Federal Reserve Bank stock | 4,761 | - | - | - | N/A | |||||||||
Net loans | 865,530 | - | - | 899,909 | 899,909 | |||||||||
Loans held for sale | 1,165 | - | 1,165 | - | 1,165 | |||||||||
Accrued interest receivable | 4,411 | 333 | 1,634 | 2,444 | 4,411 | |||||||||
Financial liabilities: | ||||||||||||||
Deposits: | ||||||||||||||
Demand, savings, and insured money market accounts | 834,228 | 834,228 | - | - | 834,228 | |||||||||
Time deposits | 248,948 | - | 250,568 | - | 250,568 | |||||||||
Securities sold under agreements to repurchase | 32,918 | - | 35,671 | - | 35,671 | |||||||||
Federal Home Loan Bank advances | 28,046 | - | 30,740 | - | 30,740 | |||||||||
Accrued interest payable | 463 | 15 | 448 | - | 463 | |||||||||
Dividends payable | 1,144 | 1,144 | - | - | 1,144 |
15
December 31, 2011 | |||||||||
Financial assets: | Carrying Amount | Estimated Fair Value (1) | |||||||
Cash and due from financial institutions | $ | 28,205 | $ | 28,205 | |||||
Interest-bearing deposits in other financial institutions | 24,697 | 24,697 | |||||||
Trading assets | 294 | 294 | |||||||
Securities available for sale | 280,870 | 280,870 | |||||||
Securities held to maturity | 8,312 | 9,176 | |||||||
Federal Home Loan and Federal Reserve Bank stock | 5,509 | N/A | |||||||
Net loans | 787,256 | 805,760 | |||||||
Loans held for sale | 395 | 395 | |||||||
Accrued interest receivable | 3,882 | 3,882 | |||||||
Financial liabilities: | |||||||||
Deposits: | |||||||||
Demand, savings, and insured money market accounts | 721,503 | 721,503 | |||||||
Time deposits | 276,990 | 279,441 | |||||||
Securities sold under agreements to repurchase | 37,107 | 40,019 | |||||||
Federal Home Loan Bank advances | 43,344 | 46,603 | |||||||
Accrued interest payable | 800 | 800 | |||||||
Dividends payable | 1,141 | 1,141 |
(1) Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
The methods and assumptions used to estimate fair value are described as follows:
Cash, Due From and Interest-Bearing Deposits in Other Financial Institutions
For those short-term instruments that generally mature in 90 days or less, the carrying value
approximates fair value of which non interest-bearing deposits are classified as Level 1 and interest-
bearing deposits with the Federal Home Loan Bank of New York (“FHLB”) and Federal Reserve Bank
of New York (“FRB”) are classified as Level 1, and time deposits are classified as Level 2.
FHLB and FRB Stock
It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on its
transferability.
Loans Receivable
For variable-rate loans that reprice frequently, fair values approximate carrying values. The fair values
for other loans are estimated through discounted cash flow analysis using interest rates currently being
offered for loans with similar terms and credit quality. Loans are classified as Level 3. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit price. Loans held for sale
are classified as Level 2.
16
Deposits
The fair values disclosed for demand deposits, savings accounts and money market accounts are, by
definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values) and
classified as Level 1.
The fair value of certificates of deposits is estimated using a discounted cash flow approach that applies
interest rates currently being offered on certificates to a schedule of the weighted-average expected
monthly maturities and classified as Level 2.
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
These instruments bear both variable and fixed rates of interest. Therefore, the carrying value
approximates fair value for the variable rate instruments and the fair value of fixed rate instruments is
based on discounted cash flows to maturity. These are classified as Level 2.
Federal Home Loan Bank Advances
These instruments bear a stated rate of interest to maturity and, therefore, the fair value is based on
discounted cash flows to maturity and classified as Level 2.
Accrued Interest Receivable and Payable
For these short-term instruments, the carrying value approximates fair value resulting in a classification
of Level 1, Level 2 or Level 3 depending upon the classification of the asset/liability they are associated
with.
5. Goodwill and Intangible Assets
The changes in goodwill included in the core banking segment during the periods ending September 30,
2012 and 2011 were as follows:
2012 | 2011 | |||||||
Beginning of year | $ | 21,983,617 | $ | 9,872,375 | ||||
Acquired goodwill | - | 12,284,838 | ||||||
Adjustment of Acquired goodwill (1) | (159,174 | ) | - | |||||
September 30, | $ | 21,824,443 | $ | 22,157,213 | ||||
(1) Adjustment related to Fort Orange Financial Corp. acquisition. |
Acquired intangible assets were as follows at September 30, 2012 and December 31, 2011:
At September 30, 2012 | At December 31, 2011 | |||||||||||||||
Balance Acquired | Accumulated Amortization | Balance Acquired | Accumulated Amortization | |||||||||||||
Core deposit intangibles | $ | 3,819,798 | $ | 1,655,826 | $ | 3,819,798 | $ | 1,213,118 | ||||||||
Other customer relationship intangibles | 6,063,423 | 2,845,113 | 6,063,423 | 2,479,563 | ||||||||||||
Total | $ | 9,883,221 | $ | 4,500,939 | $ | 9,883,221 | $ | 3,692,681 |
Aggregate amortization expense was $808,258 and $753,192 for the nine-month periods ended
September 30, 2012 and 2011, respectively.
17
The remaining estimated aggregate amortization expense at September 30, 2012 is listed below:
Year | Estimated Expense | |||
2012 | $ | 238,462 | ||
2013 | 876,524 | |||
2014 | 777,801 | |||
2015 | 681,176 | |||
2016 | 607,713 | |||
2017 and thereafter | 2,200,606 | |||
Total | $ | 5,382,282 |
6. Accumulated Other Comprehensive Income or Loss
Accumulated other comprehensive income or loss represents the net unrealized holding gains or losses
on securities available for sale and the funded status of the Corporation's defined benefit pension plan
and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.
The following is a summary of the accumulated other comprehensive income or loss balance, net of tax:
Balance at December 31, 2011 | Current Period Change | Balance at September 30, 2012 | ||||||||||
Unrealized gains on securities available for sale | $ | 7,987,055 | $ | 788,219 | $ | 8,775,274 | ||||||
Unrealized loss on pension plans and other benefit plans | (9,428,433 | ) | 581,304 | (8,847,129 | ) | |||||||
Total | $ | (1,441,378 | ) | $ | 1,369,523 | $ | (71,855 | ) |
18
7. Commitments and Contingencies
The Corporation is a party to certain financial instruments with off-balance sheet risk such as
commitments under standby letters of credit, unused portions of lines of credit, overdraft protection and
commitments to fund new loans. In accordance with U.S. GAAP, these financial instruments are not
recorded in the financial statements. The Corporation's policy is to record such instruments when
funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are generally used by the Corporation to manage clients' requests for funding
and other client needs.
On February 14, 2011 and April 14, 2011, the Bank received separate settlement demands from
representatives of beneficiaries of certain trusts for which the Bank has acted as trustee. The settlement
demands relate to alleged claims of, among other things, breach of the Bank’s fiduciary duties as trustee,
including the Bank’s alleged failure to adequately diversify the relevant trust portfolios. The
beneficiaries seek aggregate damages of up to approximately $27.0 million. On September 16, 2011,
the beneficiaries objected in the Surrogate’s Court of the State of New York, County of Chemung (the
“Surrogate’s Court”) to accountings with respect to the above-mentioned trusts provided by the Bank,
based on allegations similar to those offered in the settlement demands. The matter remains pending at
the Surrogate’s Court. Although these matters are inherently unpredictable, management will defend
against these claims vigorously. Management has concluded that it is reasonably possible, but not
probable, that the financial position, results of operations or cash flows of the Corporation could be
materially adversely affected in any particular period by the unfavorable resolution of these claims, not
withstanding any potential recovery under applicable insurance coverage. An amount of loss or range of
loss cannot be reasonably estimated at this time.
In the normal course of business, there are various outstanding claims and legal proceedings involving
the Corporation or its subsidiaries. Except for the above matter, we believe that we are not a party to
any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on
our financial results or liquidity.
8. Securities
Amortized cost and estimated fair value of securities available for sale are as follows:
September 30, 2012 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 142,730,477 | $ | 3,920,177 | $ | - | $ | 146,650,654 | ||||||||
Mortgage-backed securities, residential | 33,801,646 | 2,484,121 | - | 36,285,767 | ||||||||||||
Collateralized Mortgage obligations | 4,653,401 | 74,909 | 931 | 4,727,379 | ||||||||||||
Obligations of states and political subdivisions | 39,800,910 | 1,810,542 | 1,838 | 41,609,614 | ||||||||||||
Corporate bonds and notes | 13,421,730 | 346,574 | 3,464 | 13,764,840 | ||||||||||||
SBA loan pools | 1,743,803 | 39,587 | - | 1,783,390 | ||||||||||||
Trust Preferred securities | 2,517,440 | 127,991 | 183,425 | 2,462,006 | ||||||||||||
Corporate stocks | 744,715 | 5,645,849 | 5,260 | 6,385,304 | ||||||||||||
Total | $ | 239,414,122 | $ | 14,449,750 | $ | 194,918 | $ | 253,668,954 |
19
December 31, 2011 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 149,140,715 | $ | 3,022,726 | $ | 83,671 | $ | 152,079,770 | ||||||||
Mortgage-backed securities, residential | 48,129,271 | 2,637,334 | - | 50,766,605 | ||||||||||||
Collateralized mortgage obligations | 7,412,471 | 135,603 | 11,321 | 7,536,753 | ||||||||||||
Obligations of states and political subdivisions | 44,561,789 | 1,954,265 | 3,083 | 46,512,971 | ||||||||||||
Corporate bonds and notes | 13,461,675 | 418,969 | 196,446 | 13,684,198 | ||||||||||||
SBA loan pools | 1,915,419 | 34,187 | - | 1,949,606 | ||||||||||||
Trust preferred securities | 2,538,285 | 132,516 | 360,735 | 2,310,066 | ||||||||||||
Corporate stocks | 788,030 | 5,246,655 | 4,844 | 6,029,841 | ||||||||||||
Total | $ | 267,947,655 | $ | 13,582,255 | $ | 660,100 | $ | 280,869,810 |
Amortized cost and estimated fair value of securities held to maturity are as follows:
September 30, 2012 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of states and political subdivisions | $ | 6,162,503 | $ | 718,669 | $ | - | $ | 6,881,172 |
December 31, 2011 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of states and political subdivisions | $ | 8,311,921 | $ | 864,035 | $ | - | $ | 9,175,956 |
The amortized cost and estimated fair value of debt securities are shown below by expected maturity.
Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date are
shown separately:
September 30, 2012 | ||||||||||||||||
Available for Sale | Held to Maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Within One Year | $ | 58,024,142 | $ | 58,383,376 | $ | 1,606,365 | $ | 1,633,074 | ||||||||
After One, But Within Five Years | 133,178,606 | 138,326,611 | 3,147,444 | 3,490,139 | ||||||||||||
After Five, But Within Ten Years | 6,638,784 | 7,331,527 | 1,408,694 | 1,757,959 | ||||||||||||
After Ten Years | 629,025 | 445,600 | - | - | ||||||||||||
Mortgage-backed securities, residential | 33,801,646 | 36,285,767 | - | - | ||||||||||||
Collateralized mortgage obligations | 4,653,401 | 4,727,379 | - | - | ||||||||||||
SBA loan pools | 1,743,803 | 1,783,390 | - | - | ||||||||||||
Total | $ | 238,669,407 | $ | 247,283,650 | $ | 6,162,503 | $ | 6,881,172 |
20
Proceeds from sales and calls of securities available for sale for the three and nine months ended
September 30, 2012 were $1,002,052 and $70,370,086, respectively. Realized gross gains on these sales
and calls were $597 and $300,516 during the three and nine month periods ended September 30, 2012,
respectively. There were no sales or calls of securities available for sale that resulted in losses for the
three or nine-months ended September 30, 2012.
Proceeds from sales and calls of securities available for sale for the three and nine months ended
September 30, 2011, were $11,085,156 and $67,741,210, respectively. Realized gross gains on these
sales and calls were $428,882 and $1,108,091 during the three and nine month periods ended
September 30, 2011, respectively. There were no sales or calls of securities available for sale that
resulted in losses for the three or nine-months ended September 30, 2011.
The following tables summarize the investment securities available for sale and held to maturity with
unrealized losses at September 30, 2012 and December 31, 2011 by aggregated major security type and
length of time in a continuous unrealized loss position:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
September 30, 2012 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Collateralized mortgage obligations | $ | 22,087 | 70 | $ | 178,729 | $ | 861 | $ | 200,816 | $ | 931 | |||||||||||||
Obligations of states and political subdivisions | 430,847 | 1,838 | - | - | 430,847 | 1,838 | ||||||||||||||||||
Corporate bonds and notes | - | - | 494,297 | 3,464 | 494,297 | 3,464 | ||||||||||||||||||
Trust preferred securities | - | - | 445,600 | 183,425 | 445,600 | 183,425 | ||||||||||||||||||
Corporate stocks | - | - | 48,370 | 5,260 | 48,370 | 5,260 | ||||||||||||||||||
Total temporarily impaired securities | $ | 452,934 | $ | 1,908 | $ | 1,166,996 | $ | 193,010 | $ | 1,619,930 | $ | 194,918 |
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
December 31, 2011 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 27,365,920 | $ | 83,671 | $ | - | $ | - | $ | 27,365,920 | $ | 83,671 | ||||||||||||
Collateralized mortgage obligations | 2,546,461 | 11,321 | - | - | 2,546,461 | 11,321 | ||||||||||||||||||
Obligations of states and political subdivisions | 947,203 | 3,083 | - | - | 947,203 | 3,083 | ||||||||||||||||||
Corporate bonds and notes | 5,261,074 | 196,446 | - | - | 5,261,074 | 196,446 | ||||||||||||||||||
Trust preferred securities | - | - | 294,910 | 360,735 | 294,910 | 360,735 | ||||||||||||||||||
Corporate stocks | 1,669 | 1,969 | 47,117 | 2,875 | 48,786 | 4,844 | ||||||||||||||||||
Total temporarily impaired securities | $ | 36,122,327 | $ | 296,490 | $ | 342,027 | $ | 363,610 | $ | 36,464,354 | $ | 660,100 |
21
Other-Than-Temporary Impairment (“OTTI”)
When OTTI occurs, for either debt securities or purchased beneficial interests, the amount of the OTTI
recognized in earnings depends on whether an entity intends to sell the security or more likely than not
will be required to sell the security before recovery of its amortized cost basis, less any current-period
credit loss. If an entity intends to sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in
earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not
that the entity will be required to sell the security before recovery of its amortized cost basis less any
current-period loss, the OTTI shall be separated into the amount representing the credit loss and the
amount related to all other factors. The amount of the total OTTI related to the credit loss is determined
based on the present value of cash flows expected to be collected and is recognized in earnings. The
amount of the total OTTI related to other factors is recognized in other comprehensive income, net of
applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the
new amortized cost basis of the investment.
As of September 30, 2012, the majority of the Corporation's unrealized losses in the investment
securities portfolio related to one pooled trust preferred security. The decline in fair value on this
security is primarily attributable to the financial crisis and resulting credit deterioration and financial
condition of the underlying issuers, all of which are financial institutions. This deterioration may affect
the future receipt of both principal and interest payments on this security. This fact combined with the
current illiquidity in the market makes it unlikely that the Corporation would be able to recover its
investment in this security if it was sold at this time.
Our analysis of this investment includes a $629,025 book value collateralized debt obligation ("CDO")
which is a pooled trust preferred security. This security was rated high quality at inception, but at
September 30, 2012 Moody's rated this security as Caa3, which is defined as substantial risk of default.
The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to
the previous estimate to determine if there are adverse changes in cash flows during each quarter. The
OTTI model considers the structure and term of the CDO and the financial condition of the underlying
issuers. Specifically, the model details interest rates, principal balances of note classes and underlying
issuers, the timing and amount of interest and principal payments of the underlying issuers, and the
allocation of the payments to the note classes. The current estimate of expected cash flows is based on
the most recent trustee reports and any other relevant market information including announcements of
interest payment deferrals or defaults of underlying trust preferred securities.
Upon completion of the September 30, 2012 analysis, our model indicated no additional OTTI on this
CDO. This security remained classified as available for sale and represented $183,425 of the unrealized
losses reported at September 30, 2012. Payments continue to be made as agreed on this security.
22
When conducting the September 30, 2012 analysis, the present value of expected future cash flows
using a discount rate equal to the yield in effect at the time of purchase was compared to the previous
quarters' analysis. The analysis indicated no further decline in value attributed to credit related factors
stemming from further deterioration in the underlying collateral payment streams. Additionally, to
estimate fair value the present value of the expected future cash flows was calculated using a current
estimated discount rate that a willing market participant might use to value the security based on current
market conditions and interest rates. This comparison indicated an increase in value during the quarter,
based on factors other than credit, which resulted in a gain reported in other comprehensive income.
Changes in credit quality may or may not correlate to changes in the overall fair value of the impaired
securities as the change in credit quality is only one component in assessing the overall fair value of the
impaired securities. Therefore, the recognition of additional credit related OTTI could result in a gain
reported in other comprehensive income. Total OTTI recognized in accumulated other comprehensive
income was $111,329 and $220,459 for securities available for sale at September 30, 2012 and
December 31, 2011, respectively.
The tables below present a roll forward of the cumulative credit losses recognized in earnings for the
three and nine-month periods ending September 30, 2012 and 2011:
2012 | 2011 | |||||||
Beginning balance, January 1, | $ | 3,506,073 | $ | 3,438,673 | ||||
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized | - | - | ||||||
Additions/Subtractions: | ||||||||
Amounts realized for securities sold during the period | - | - | ||||||
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis | - | - | ||||||
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security | - | - | ||||||
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized | - | 67,400 | ||||||
Ending balance, September 30, | $ | 3,506,073 | $ | 3,506,073 |
Beginning balance, July 1, | $ | 3,506,073 | $ | 3,438,673 | ||||
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized | - | - | ||||||
Additions/Subtractions: | ||||||||
Amounts realized for securities sold during the period | - | - | ||||||
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis | - | - | ||||||
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security | - | - | ||||||
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized | - | 67,400 | ||||||
Ending balance, September 30, | $ | 3,506,073 | $ | 3,506,073 |
23
9. Loans and Allowance for Loan Losses
The composition of the loan portfolio is summarized as follows:
September 30, 2012 | December 31, 2011 | |||||||
Commercial, financial and agricultural | $ | 133,365,046 | $ | 142,209,279 | ||||
Commercial mortgages | 311,126,130 | 264,589,013 | ||||||
Residential mortgages | 193,049,212 | 193,599,853 | ||||||
Indirect consumer loans | 130,969,296 | 97,165,447 | ||||||
Consumer loans | 107,848,451 | 99,351,585 | ||||||
$ | 876,358,135 | $ | 796,915,177 |
Loans are charged against the allowance for loan losses when management believes that the
collectability of all or a portion of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb probable incurred losses on existing loans.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic
basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical
loan loss experience and review of specific problem loans (including evaluations of the underlying
collateral). Historical loss experience is adjusted by management based on their judgment as to the
current impact of qualitative factors including changes in the composition and volume of the loan
portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers'
ability to pay. Management believes that the allowance for loan losses is adequate to absorb probable
incurred losses. While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgments about information available to them at the time of
their examination.
Management, after considering current information and events regarding a borrower's ability to repay its
obligations, classifies a loan as impaired when it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the loan agreement. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and
residential real estate loans are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures. Troubled debt restructurings are separately identified
for impairment disclosures and are measured at the present value of estimated future cash flows using
the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral
dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt
restructurings that subsequently default, the Corporation determines the amount of reserve in accordance
with the accounting policy for the allowance for loan losses.
24
The general component of the allowance for loan losses covers non-impaired loans and is based on
historical loss experience adjusted for current factors. Loans not impaired but classified as substandard
and special mention use a historical loss factor on a rolling five year history of net losses. For all other
unclassified loans, the historical loss experience is determined by portfolio class and is based on the
actual loss history experienced by the Corporation over the most recent eight quarters. This actual loss
experience is supplemented with other economic factors based on the risks present for each portfolio
class. These economic factors include consideration of the following: levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume
and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures, and practices; experience, ability, and depth of lending management and
other relevant staff; national and local economic trends and conditions; industry conditions; and effects
of changes in credit concentrations. The following portfolio segments have been identified: commercial,
financial and agricultural; commercial mortgages; residential mortgages; and consumer loans.
Risk Characteristics
Commercial, financial and agricultural loans primarily consist of loans to small to mid-sized businesses
in our market area in a diverse range of industries. These loans are of higher risk and typically are made
on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.
Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may
fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic
conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral,
if any.
Commercial mortgage loans generally have larger balances and involve a greater degree of risk than
residential mortgage loans, inferring higher potential losses on an individual customer basis. Loan
repayment is often dependent on the successful operation and management of the properties and/or the
businesses occupying the properties, as well as on the collateral securing the loan. Economic events or
conditions in the real estate market could have an adverse impact on the cash flows generated by
properties securing the Company’s commercial real estate loans and on the value of such properties.
Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment
from his or her employment and other income, but are secured by real property whose value tends to be
more easily ascertainable. Credit risk for these types of loans is generally influenced by general
economic conditions, the characteristics of individual borrowers and the nature of the loan collateral.
The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit
many of the same risk characteristics as residential mortgages. Indirect and other consumer loans may
entail greater credit risk than residential mortgage and home equity loans, particularly in the case of
other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by
depreciable assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In
addition, consumer loan collections are dependent on the borrower’s continuing financial stability, thus
are more likely to be affected by adverse personal circumstances such as job loss, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
25
The following tables present activity in the allowance for loan losses for the three and nine months
ending September 30, 2012, by portfolio segment and by loans originated by the Corporation (referred
to as “Legacy” loans) and loans acquired (referred to as “Acquired” loans) in the merger with Fort
Orange Financial Corp. (“FOFC”), which was completed on April 8, 2011. The allowance for loan
losses on Acquired loans represents any valuation allowances established after acquisition for decreases
in cash flows expected to be collected on purchased credit impaired loans.
In addition, the following tables present activity in the allowance for loan losses for the three and nine
months ending September 30, 2011, by portfolio segment for Legacy loans. The allowance for loan
losses on Acquired loans was established during the quarter ending March 31, 2012, therefore, there was
no activity for the three and nine months ending September 30, 2011.
Legacy Loans | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | 3,143,373 | $ | 2,570,149 | $ | 1,309,649 | $ | 2,192,729 | $ | 443,420 | $ | 9,659,320 | ||||||||||||
Charge Offs: | (5,792 | ) | (39,314 | ) | (82,442 | ) | (342,867 | ) | - | (470,415 | ) | |||||||||||||
Recoveries: | 591,497 | 43,031 | - | 176,139 | - | 810,667 | ||||||||||||||||||
Net recoveries (charge offs) | 585,705 | 3,717 | (82,442 | ) | (166,728 | ) | - | 340,252 | ||||||||||||||||
Provision | (1,300,269 | ) | 682,991 | 232,793 | 884,943 | 32,542 | 533,000 | |||||||||||||||||
Ending balance | $ | 2,428,809 | $ | 3,256,857 | $ | 1,460,000 | $ | 2,910,944 | $ | 475,962 | $ | 10,532,572 |
Acquired Loans | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Reclassification of acquired loan discount | 73,228 | 50,331 | - | - | - | 123,559 | ||||||||||||||||||
Charge Offs: | - | (49,057 | ) | - | - | - | (49,057 | ) | ||||||||||||||||
Recoveries: | - | - | - | - | - | - | ||||||||||||||||||
Net recoveries | 73,228 | 1,274 | - | - | - | 74,502 | ||||||||||||||||||
Provision | 134,427 | 86,470 | - | - | - | 220,897 | ||||||||||||||||||
Ending balance | $ | 207,655 | $ | 87,744 | $ | - | $ | - | $ | - | $ | 295,399 |
26
Legacy Loans | Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | 2,796,556 | $ | 2,987,968 | $ | 1,424,816 | $ | 2,474,185 | $ | 413,648 | $ | 10,097,173 | ||||||||||||
Charge Offs: | - | (31,019 | ) | (9,829 | ) | (69,439 | ) | - | (110,287 | ) | ||||||||||||||
Recoveries: | 239,735 | 12,535 | - | 68,416 | - | 320,686 | ||||||||||||||||||
Net recoveries (charge offs) | 239,735 | (18,484 | ) | (9,829 | ) | (1,023 | ) | - | 210,399 | |||||||||||||||
Provision | (607,482 | ) | 287,373 | 45,013 | 437,782 | 62,314 | 225,000 | |||||||||||||||||
Ending balance | $ | 2,428,809 | $ | 3,256,857 | $ | 1,460,000 | $ | 2,910,944 | $ | 475,962 | $ | 10,532,572 |
Acquired Loans | Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | 207,655 | $ | 87,744 | $ | - | $ | - | $ | - | $ | 295,399 | ||||||||||||
Reclassification of acquired loan discount | - | - | - | - | - | - | ||||||||||||||||||
Charge Offs: | - | - | - | - | - | - | ||||||||||||||||||
Recoveries: | - | - | - | - | - | - | ||||||||||||||||||
Net charge offs | - | - | - | - | - | - | ||||||||||||||||||
Provision | - | - | - | - | - | |||||||||||||||||||
Ending balance | $ | 207,655 | $ | 87,744 | $ | - | $ | - | $ | - | $ | 295,399 |
Legacy Loans | Nine Months Ended September 30, 2011 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | 2,118,299 | $ | 2,575,058 | $ | 1,301,780 | $ | 2,727,022 | $ | 775,972 | $ | 9,498,131 | ||||||||||||
Charge Offs: | (593,995 | ) | (3,764 | ) | (39,312 | ) | (542,621 | ) | - | (1,179,692 | ) | |||||||||||||
Recoveries: | 314,797 | 33,304 | 30,324 | 146,726 | - | 525,151 | ||||||||||||||||||
Net recoveries (charge offs) | (279,198 | ) | 29,540 | (8,988 | ) | (395,895 | ) | - | (654,541 | ) | ||||||||||||||
Provision | 1,444,245 | (69,375 | ) | (61,068 | ) | (184,348 | ) | (296,121 | ) | 833,333 | ||||||||||||||
Ending balance | $ | 3,283,346 | $ | 2,535,223 | $ | 1,231,724 | $ | 2,146,779 | $ | 479,851 | $ | 9,676,923 |
Legacy Loans | Three Months Ended September 30, 2011 | |||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Beginning balance: | $ | 3,081,433 | $ | 2,612,655 | $ | 1,246,880 | $ | 2,297,459 | $ | 517,245 | $ | 9,755,672 | ||||||||||||
Charge Offs: | (590,992 | ) | - | (39,312 | ) | (201,966 | ) | - | (832,270 | ) | ||||||||||||||
Recoveries: | 109,391 | 7,201 | - | 53,596 | - | 170,188 | ||||||||||||||||||
Net recoveries (charge offs) | (481,601 | ) | 7,201 | (39,312 | ) | (148,370 | ) | - | (662,082 | ) | ||||||||||||||
Provision | 683,514 | (84,633 | ) | 24,156 | (2,310 | ) | (37,394 | ) | 583,333 | |||||||||||||||
Ending balance | $ | 3,283,346 | $ | 2,535,223 | $ | 1,231,724 | $ | 2,146,779 | $ | 479,851 | $ | 9,676,923 |
27
The following tables present the balance in the allowance for loan losses and the recorded investment in
loans by portfolio segment based on impairment method as of September 30, 2012 and December 31,
2011. The recorded investment excludes Acquired loans except for those loans acquired with
deteriorated credit quality:
September 30, 2012 | ||||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 946,255 | $ | 97,291 | $ | - | $ | - | $ | - | $ | 1,043,546 | ||||||||||||
Collectively evaluated for impairment | 1,482,554 | 3,159,566 | 1,460,000 | 2,910,944 | 475,962 | 9,489,026 | ||||||||||||||||||
Acquired with deteriorated credit quality | 207,655 | 87,744 | - | - | - | 295,399 | ||||||||||||||||||
Total ending allowance balance | $ | 2,636,464 | $ | 3,344,601 | $ | 1,460,000 | $ | 2,910,944 | $ | 475,962 | $ | 10,827,971 |
December 31, 2011 | ||||||||||||||||||||||||
Allowance for loan losses | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Unallocated | Total | ||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,528,651 | $ | 413,555 | $ | - | $ | - | $ | - | $ | 1,942,206 | ||||||||||||
Collectively evaluated for impairment | 1,614,722 | 2,156,594 | 1,309,649 | 2,192,729 | 443,420 | 7,717,114 | ||||||||||||||||||
Total ending allowance balance | $ | 3,143,373 | $ | 2,570,149 | $ | 1,309,649 | $ | 2,192,729 | $ | 443,420 | $ | 9,659,320 |
September 30, 2012 | ||||||||||||||||||||
Loans: | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Loans individually evaluated for impairment | $ | 2,445,154 | $ | 1,777,782 | $ | 136,844 | $ | - | $ | 4,359,780 | ||||||||||
Loans collectively evaluated for impairment | 112,741,589 | 234,567,883 | 179,469,401 | 233,911,200 | 760,690,073 | |||||||||||||||
Acquired with deteriorated credit quality | 1,152,448 | 11,400,980 | 239,911 | - | 12,793,339 | |||||||||||||||
Total ending loans balance | $ | 116,339,191 | $ | 247,746,645 | $ | 179,846,156 | $ | 233,911,200 | $ | 777,843,192 |
December 31, 2011 | ||||||||||||||||||||
Loans: | Commercial, Financial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Loans individually evaluated for impairment | $ | 5,275,043 | $ | 4,603,563 | $ | 179,337 | $ | - | $ | 10,057,943 | ||||||||||
Loans collectively evaluated for impairment | 111,532,413 | 169,658,759 | 175,405,950 | 190,904,630 | 647,501,752 | |||||||||||||||
Total ending loans balance | $ | 116,807,456 | $ | 174,262,322 | $ | 175,585,287 | $ | 190,904,630 | $ | 657,559,695 |
28
The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2012 and December 31, 2011, the average recorded investment and interest income recognized by class of loans as of the three and nine-month periods ending September 30, 2012 and 2011:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||
Commercial & industrial | $ | 372,788 | $ | 174,129 | $ | - | $ | 3,512,860 | $ | 2,914,776 | $ | - | ||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | 10,454 | 10,454 | - | 10,454 | 10,454 | - | ||||||||||||||||||
Other | 1,854,966 | 1,246,775 | - | 1,091,026 | 860,648 | - | ||||||||||||||||||
Residential mortgages | 136,844 | 136,844 | - | 178,925 | 179,337 | - | ||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||
Commercial & industrial | 2,670,391 | 2,271,025 | 946,255 | 2,360,252 | 2,360,267 | 1,528,651 | ||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | - | - | - | 8,295 | 8,295 | 8,295 | ||||||||||||||||||
Other | 520,327 | 520,553 | 97,291 | 4,098,627 | 3,724,166 | 405,260 | ||||||||||||||||||
Total | $ | 5,565,770 | $ | 4,359,780 | $ | 1,043,546 | $ | 11,260,439 | $ | 10,057,943 | $ | 1,942,206 |
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | ||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||||||||
Commercial & industrial | $ | 843,910 | $ | - | $ | 3,100,655 | $ | 25,049 | $ | 177,457 | $ | - | $ | 3,032,483 | $ | 6,290 | |||||||||||||||
Commercial mortgages: | |||||||||||||||||||||||||||||||
Construction | 10,454 | - | 24,490 | - | 10,454 | - | 20,602 | - | |||||||||||||||||||||||
Other | 932,358 | - | 3,447,948 | - | 1,081,307 | - | 3,397,079 | - | |||||||||||||||||||||||
Residential mortgages | 117,737 | - | 307,997 | - | 74,441 | - | 257,799 | - | |||||||||||||||||||||||
Consumer loans: | |||||||||||||||||||||||||||||||
Home equity lines & loans | 14,892 | 2,289 | - | - | - | - | - | - | |||||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||||||||
Commercial & industrial | 2,328,728 | - | 1,953,474 | 82,548 | 2,295,003 | - | 2,918,444 | 82,548 | |||||||||||||||||||||||
Commercial mortgages: | |||||||||||||||||||||||||||||||
Construction | 4,148 | - | 27,351 | - | - | - | 15,557 | - | |||||||||||||||||||||||
Other | 1,712,578 | - | 821,994 | 17,070 | 830,049 | - | 823,995 | 17,070 | |||||||||||||||||||||||
Residential mortgages | 32,001 | - | - | - | 64,003 | - | - | - | |||||||||||||||||||||||
Total | $ | 5,996,806 | $ | 2,289 | $ | 9,683,909 | $ | 124,667 | $ | 4,532,714 | $ | - | $ | 10,465,959 | $ | 105,908 |
29
The following table presents the recorded investment in non accrual and loans past due over 90 days still
on accrual by class of loans as of the periods ending September 30, 2012 and December 31, 2011. This table
includes Acquired loans except for those loans with evidence of credit deterioration at the time of
the FOFC merger:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Non-Accrual | Loans Past Due Over 90 Days Still Accruing | Non-Accrual | Loans Past Due Over 90 Days Still Accruing | |||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial & industrial | $ | 2,806,183 | $ | 17,281 | $ | 5,611,805 | $ | - | ||||||||
Commercial mortgages: | ||||||||||||||||
Construction | 434,338 | 4,565,392 | 18,749 | 7,295,104 | ||||||||||||
Other | 2,054,326 | - | 4,778,384 | - | ||||||||||||
Residential mortgages | 2,363,170 | - | 2,611,096 | - | ||||||||||||
Consumer loans | ||||||||||||||||
Credit cards | - | 11,921 | - | 9,053 | ||||||||||||
Home equity lines & loans | 473,981 | - | 455,418 | - | ||||||||||||
Indirect consumer loans | 501,745 | - | 113,349 | - | ||||||||||||
Other direct consumer loans | 31,316 | - | 22,287 | - | ||||||||||||
Total | $ | 8,665,059 | $ | 4,594,594 | $ | 13,611,088 | $ | 7,304,157 |
The commercial mortgages included in loans past due over 90 days still accruing at September 30, 2012
and December 31, 2011, were construction loans acquired in the FOFC acquisition, which for a variety
of reasons are 90 days or more past their stated maturity dates. However, the borrowers continue to
make required interest payments. Additionally, these loans carry third party credit enhancements, and
based upon the strength of those credit enhancements, the Corporation has not identified these loans as
purchased credit impaired loans and expects to incur no losses on these loans.
30
The following tables present the aging of the recorded investment in loans past due (including non-accrual loans) by class of loans as of September
30, 2012 and December 31, 2011 and by Legacy loans and Acquired loans:
September 30, 2012 | ||||||||||||||||||||||||||||
Legacy Loans: | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Acquired with deteriorated credit quality | Loans Not Past Due | Total | |||||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||||||
Commercial & industrial | $ | 7,353 | $ | - | $ | 189,912 | $ | 197,265 | $ | - | $ | 114,455,637 | $ | 114,652,902 | ||||||||||||||
Agricultural | - | - | - | - | - | 533,841 | 533,841 | |||||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Construction | - | - | 10,454 | 10,454 | - | 30,653,785 | 30,664,239 | |||||||||||||||||||||
Other | 59,389 | 73,584 | 305,495 | 438,468 | - | 205,242,958 | 205,681,426 | |||||||||||||||||||||
Residential mortgages | 1,571,579 | 428,641 | 622,623 | 2,622,843 | - | 176,983,403 | 179,606,246 | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Credit cards | 10,399 | 3,629 | 11,921 | 25,949 | - | 1,753,893 | 1,779,842 | |||||||||||||||||||||
Home equity lines & loans | 196,670 | 272,940 | 198,814 | 668,424 | - | 79,586,618 | 80,255,042 | |||||||||||||||||||||
Indirect consumer loans | 656,927 | 127,026 | 414,905 | 1,198,858 | - | 130,130,094 | 131,328,952 | |||||||||||||||||||||
Other direct consumer loans | 19,295 | 14,865 | 23,221 | 57,381 | - | 20,489,982 | 20,547,363 | |||||||||||||||||||||
Total | $ | 2,521,612 | $ | 920,685 | $ | 1,777,345 | $ | 5,219,642 | $ | - | $ | 759,830,211 | $ | 765,049,853 |
September 30, 2012 | ||||||||||||||||||||||||||||
Acquired Loans: | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Acquired with deteriorated credit quality | Loans Not Past Due | Total | |||||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||||||
Commercial & industrial | $ | 95,799 | $ | 4,994 | $ | 361,159 | $ | 461,952 | $ | 1,152,448 | $ | 18,760,978 | $ | 20,375,378 | ||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Construction | - | - | 4,989,277 | 4,989,277 | 1,179,177 | 1,728,428 | 7,896,882 | |||||||||||||||||||||
Other | 547,737 | - | 286,997 | 834,734 | 10,221,803 | 54,897,378 | 65,953,915 | |||||||||||||||||||||
Residential mortgages | 614,844 | - | 201,442 | 816,286 | 239,911 | 12,923,490 | 13,979,687 | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Home equity lines & loans | - | - | - | - | - | 5,470,998 | 5,470,998 | |||||||||||||||||||||
Other direct consumer loans | - | - | - | - | - | 92,309 | 92,309 | |||||||||||||||||||||
Total | $ | 1,258,380 | $ | 4,994 | $ | 5,838,875 | $ | 7,102,249 | $ | 12,793,339 | $ | 93,873,581 | $ | 113,769,169 |
31
December 31, 2011 | |||||||||||||||||||||||||||
Legacy Loans: | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Acquired with deteriorated credit quality | Loans Not Past Due | Total | ||||||||||||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||||
Commercial & industrial | $ | 4,571 | $ | 10,940 | $ | 2,920,906 | $ | 2,936,417 | $ | - | $ | 113,612,941 | $ | 116,549,358 | |||||||||||||
Agricultural | - | - | - | - | - | 258,098 | 258,098 | ||||||||||||||||||||
Commercial mortgages: | |||||||||||||||||||||||||||
Construction | - | - | - | - | - | 7,383,731 | 7,383,731 | ||||||||||||||||||||
Other | 82,986 | - | 2,977,010 | 3,059,996 | - | 163,818,595 | 166,878,591 | ||||||||||||||||||||
Residential mortgages | 1,418,234 | 293,337 | 1,221,056 | 2,932,627 | - | 172,652,660 | 175,585,287 | ||||||||||||||||||||
Consumer loans: | |||||||||||||||||||||||||||
Credit cards | 3,660 | 8,031 | 9,053 | 20,744 | - | 1,934,471 | 1,955,215 | ||||||||||||||||||||
Home equity lines & loans | 368,556 | 27,717 | 212,573 | 608,846 | - | 76,280,502 | 76,889,348 | ||||||||||||||||||||
Indirect consumer loans | 597,180 | 75,817 | 85,763 | 758,760 | - | 96,781,480 | 97,540,240 | ||||||||||||||||||||
Other direct consumer loans | 21,876 | 10,243 | 9,644 | 41,763 | - | 14,478,064 | 14,519,827 | ||||||||||||||||||||
Total | $ | 2,497,063 | $ | 426,085 | $ | 7,436,005 | $ | 10,359,153 | $ | - | $ | 647,200,542 | $ | 657,559,695 |
December 31, 2011 | |||||||||||||||||||||||||||
Acquired Loans: | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Acquired with deteriorated credit quality | Loans Not Past Due | Total | ||||||||||||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||||
Commercial & industrial | $ | 275,121 | $ | 82,677 | $ | 195,687 | $ | 553,485 | $ | 1,499,141 | $ | 25,335,874 | $ | 27,388,500 | |||||||||||||
Commercial mortgages: | |||||||||||||||||||||||||||
Construction | - | 418,518 | 7,295,104 | 7,713,622 | 2,022,149 | 2,715,270 | 12,451,041 | ||||||||||||||||||||
Other | - | - | 193,570 | 193,570 | 11,063,483 | 65,836,938 | 77,093,991 | ||||||||||||||||||||
Residential mortgages | 405,087 | 62,017 | 84,083 | 551,187 | 226,937 | 17,753,898 | 18,532,022 | ||||||||||||||||||||
Consumer loans: | |||||||||||||||||||||||||||
Home equity lines & loans | - | - | - | - | - | 6,168,831 | 6,168,831 | ||||||||||||||||||||
Other direct consumer loans | 171 | - | - | 171 | - | 147,439 | 147,610 | ||||||||||||||||||||
Total | $ | 680,379 | $ | 563,212 | $ | 7,768,444 | $ | 9,012,035 | $ | 14,811,710 | $ | 117,958,250 | $ | 141,781,995 |
32
Troubled Debt Restructurings:
The Corporation has no allocated specific reserves to customers whose loan terms have been modified in
troubled debt restructurings included in non-accrual loans as of September 30, 2012. The Corporation
had $217,866 allocated specific reserves to customers whose loan terms have been modified in troubled
debt restructurings which are included in non-accrual loans as of December 31, 2011. The Corporation
has not committed to lend any additional amounts as of September 30, 2012 or December 31, 2011 to
customers with outstanding loans that are classified as trouble debt restructurings.
During the nine months ended September 30, 2012, two loans in the aggregate amount of $133,661 were
modified as troubled debt restructurings by the Corporation. One of these loans totaling $58,823 was
paid off during the second quarter of 2012. The modifications of the terms of these loans included an
extension of a maturity date and the postponement of scheduled amortized payments for greater than a
three month period. During the three months ended September 30, 2012, one loan with a principal
balance of $74,838 was modified as a troubled debt restructuring by the Corporation. Additionally,
there were no payment defaults on any loans previously modified as troubled debt restructurings within
twelve months following the modification. A loan is considered to be in payment default once it is 90
days contractually past due under the modified terms.
Credit Quality Indicators:
The Corporation establishes a risk rating at origination for all commercial loans. The main factors
considered in assigning risk ratings include, but not limited to: historic and future debt service coverage,
collateral position, operating performance, liquidity, leverage, payment history, management ability, and
the customer’s industry. Commercial relationship managers monitor all loans in their respective
portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for
the loans at least annually.
For the retail loans, which include lines of credit, installment, mortgage, and home equity loans, once a
loan is properly approved and closed, the Corporation evaluates credit quality based upon loan
repayment.
The Corporation uses the risk rating system to identify criticized and classified loans. Commercial
relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation
uses the following definitions for criticized and classified loans (which are consistent with regulatory
guidelines):
Special Mention – Loans classified as special mention have a potential weakness that deserves
management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration
of the repayment prospects for the loan or the institution’s credit position as some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth
and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-
defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by
the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as
substandard, 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.
33
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be not rated loans. Based on the analysis’s performed as of September 30,
2012 and December 31, 2011, the risk category of the recorded investment of loans by class of loans is
as follows:
September 30, 2012 | ||||||||||||||||||||
Legacy Loans: | Not Rated | Pass | Special Mention | Substandard | Doubtful | |||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||
Commercial & industrial | $ | - | $ | 102,309,471 | $ | 7,723,549 | $ | 2,348,857 | $ | 2,271,025 | ||||||||||
Agricultural | - | 533,841 | - | - | - | |||||||||||||||
Commercial mortgages: | ||||||||||||||||||||
Construction | - | 29,708,671 | 198,373 | 757,195 | - | |||||||||||||||
Other | - | 189,704,790 | 10,730,594 | 4,887,276 | 358,766 | |||||||||||||||
Residential mortgages | 177,499,107 | - | - | 2,107,139 | - | |||||||||||||||
Consumer loans: | ||||||||||||||||||||
Credit cards | 1,779,842 | - | - | - | - | |||||||||||||||
Home equity lines & loans | 79,780,903 | - | - | 474,139 | - | |||||||||||||||
Indirect consumer loans | 130,827,207 | - | - | 501,745 | - | |||||||||||||||
Other direct consumer loans | 20,516,047 | - | - | 31,316 | - | |||||||||||||||
Total | $ | 410,403,106 | $ | 322,256,773 | $ | 18,652,516 | $ | 11,107,667 | $ | 2,629,791 |
September 30, 2012 | |||||||||||||||||||||||||
Acquired Loans: | Not Rated | Pass | Loans Acquired with deteriorated credit quality | Special Mention | Substandard | Doubtful | |||||||||||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||
Commercial & industrial | $ | - | $ | 18,341,646 | $ | 1,152,448 | $ | 520,125 | $ | 278,788 | $ | 82,371 | |||||||||||||
Commercial mortgages: | |||||||||||||||||||||||||
Construction | - | 251,220 | 1,179,177 | 5,044,630 | 1,421,855 | - | |||||||||||||||||||
Other | - | 52,881,017 | 10,221,803 | 1,329,016 | 1,328,509 | 193,570 | |||||||||||||||||||
Residential mortgages | 13,483,746 | - | 239,911 | - | 256,030 | - | |||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||
Home equity lines & loans | 5,470,998 | - | - | - | - | - | |||||||||||||||||||
Other direct consumer loans | 92,309 | - | - | - | - | - | |||||||||||||||||||
Total | $ | 19,047,053 | $ | 71,473,883 | $ | 12,793,339 | $ | 6,893,771 | $ | 3,285,182 | $ | 275,941 |
December 31, 2011 | ||||||||||||||||||||
Legacy Loans: | Not Rated | Pass | Special Mention | Substandard | Doubtful | |||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||
Commercial & industrial | $ | - | $ | 93,923,356 | $ | 14,957,683 | $ | 4,139,413 | $ | 3,528,906 | ||||||||||
Agricultural | - | 258,098 | - | - | - | |||||||||||||||
Commercial mortgages: | ||||||||||||||||||||
Construction | - | 6,391,614 | 208,360 | 783,757 | - | |||||||||||||||
Other | - | 152,435,884 | 6,503,087 | 7,423,514 | 516,106 | |||||||||||||||
Residential mortgages | 173,120,292 | - | - | 2,464,995 | - | |||||||||||||||
Consumer loans: | ||||||||||||||||||||
Credit cards | 1,955,215 | - | - | - | - | |||||||||||||||
Home equity lines & loans | 76,432,196 | - | - | 457,152 | - | |||||||||||||||
Indirect consumer loans | 97,426,891 | - | - | 113,349 | - | |||||||||||||||
Other direct consumer loans | 14,497,795 | - | - | 22,032 | - | |||||||||||||||
Total | $ | 363,432,389 | $ | 253,008,952 | $ | 21,669,130 | $ | 15,404,212 | $ | 4,045,012 |
34
December 31, 2011 | ||||||||||||||||||||||||
Acquired Loans: | Not Rated | Pass | Loans Acquired with deteriorated credit quality | Special Mention | Substandard | Doubtful | ||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||
Commercial & industrial | $ | - | $ | 25,164,742 | $ | 1,499,141 | $ | 602,006 | $ | 24,635 | $ | 97,976 | ||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | - | 1,790,731 | 2,022,149 | 7,447,661 | 1,190,500 | - | ||||||||||||||||||
Other | - | 62,684,708 | 11,063,483 | 475,036 | 2,677,194 | 193,570 | ||||||||||||||||||
Residential mortgages | 18,158,984 | - | 226,937 | - | 146,101 | - | ||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
Home equity lines & loans | 6,168,831 | - | - | - | - | - | ||||||||||||||||||
Other direct consumer loans | 147,610 | - | - | - | - | - | ||||||||||||||||||
Total | $ | 24,475,425 | $ | 89,640,181 | $ | 14,811,710 | $ | 8,524,703 | $ | 4,038,430 | $ | 291,546 |
The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan
losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on
the aging status of the loan, which was previously presented, and by payment activity. The following
tables present the recorded investment in residential and consumer loans based on payment activity as of
September 30, 2012 and December 31, 2011:
September 30, 2012 | ||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||
Legacy Loans: | Residential Mortgages | Credit Card | Home Equity Lines & Loans | Indirect Consumer Loans | Other Direct Consumer Loans | |||||||||||||||
Performing | $ | 177,499,107 | $ | 1,767,921 | $ | 79,781,061 | $ | 130,827,207 | $ | 20,516,047 | ||||||||||
Non-Performing | 2,107,139 | 11,921 | 473,981 | 501,745 | 31,316 | |||||||||||||||
$ | 179,606,246 | $ | 1,779,842 | $ | 80,255,042 | $ | 131,328,952 | $ | 20,547,363 |
Acquired Loans: | ||||||||||||||||||||
Performing | $ | 13,723,657 | $ | - | $ | 5,470,998 | $ | - | $ | 92,309 | ||||||||||
Non-Performing | 256,030 | - | - | - | ||||||||||||||||
Total | $ | 13,979,687 | $ | - | $ | 5,470,998 | $ | - | $ | 92,309 |
December 31, 2011 | ||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||
Legacy Loans: | Residential Mortgages | Credit Card | Home Equity Lines & Loans | Indirect Consumer Loans | Other Direct Consumer Loans | |||||||||||||||
Performing | $ | 173,120,292 | $ | 1,946,162 | $ | 76,432,196 | $ | 97,426,891 | $ | 14,497,878 | ||||||||||
Non-Performing | 2,464,995 | 9,053 | 457,152 | 113,349 | 21,949 | |||||||||||||||
Total | $ | 175,585,287 | $ | 1,955,215 | $ | 76,889,348 | $ | 97,540,240 | $ | 14,519,827 |
Acquired Loans: | ||||||||||||||||||||
Performing | $ | 18,385,921 | $ | - | $ | 6,168,831 | $ | - | $ | 147,610 | ||||||||||
Non-Performing | 146,101 | - | - | - | - | |||||||||||||||
Total | $ | 18,532,022 | $ | - | $ | 6,168,831 | $ | - | $ | 147,610 |
35
Acquired loans include loans acquired with deteriorated credit quality. The Corporation adjusted its
estimates of future expected losses, cash flows, and renewal assumptions during the current year. These
adjustments were made for changes in expected cash flows due to loans refinanced beyond original
maturity dates, impairments recognized subsequent to the acquisition, advances made for taxes or
insurance to protect collateral held and payments received in excess of amounts originally expected.
The tables below summarize the changes in total contractually required principal and interest cash
payments, management’s estimate of expected total cash payments and carrying value of the loans from
January 1, 2012 to September 30, 2012 and from July 1, 2012 to September 30, 2012:
Nine Months Ended September 30, 2012 | Balance at December 31, 2011 | Income Accretion | All Other Adjustments | Balance at September 30, 2012 | ||||||||||||
Contractually required principal and interest | $ | 21,260,381 | $ | - | $ | (1,811,021 | ) | $ | 19,449,360 | |||||||
Contractual cash flows not expected to be collected (nonaccretable discount) | (4,662,346 | ) | - | 776,839 | (3,885,507 | ) | ||||||||||
Cash flows expected to be collected | 16,598,035 | - | (1,034,182 | ) | 15,563,853 | |||||||||||
Interest component of expected cash flows (accretable yield) | (1,843,603 | ) | 1,481,515 | (2,391,636 | ) | (2,753,724 | ) | |||||||||
Fair value of loans acquired with deteriorating credit quality | $ | 14,754,432 | $ | 1,481,515 | $ | (3,425,818 | ) | $ | 12,810,129 |
Three Months Ended September 30, 2012 | Balance at June 30, 2012 | Income Accretion | All Other Adjustments | Balance at September 30, 2012 | ||||||||||||
Contractually required principal and interest | $ | 19,834,397 | $ | - | $ | (385,037 | ) | $ | 19,449,360 | |||||||
Contractual cash flows not expected to be collected (nonaccretable discount) | (3,978,427 | ) | - | 92,920 | (3,885,507 | ) | ||||||||||
Cash flows expected to be collected | 15,855,970 | - | (292,117 | ) | 15,563,853 | |||||||||||
Interest component of expected cash flows (accretable yield) | (2,971,148 | ) | 310,344 | (92,920 | ) | (2,753,724 | ) | |||||||||
Fair value of loans acquired with deteriorating credit quality | $ | 12,884,822 | $ | 310,344 | $ | (385,037 | ) | $ | 12,810,129 |
36
10. Components of Quarterly and Year-to-Date Net Periodic Benefit Costs
Nine Months Ended | Three Months Ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Qualified Pension | |||||||||||||
Service cost, benefits earned during the period | $ | 970,053 | $ | 777,402 | $ | 323,351 | $ | 259,134 | |||||
Interest cost on projected benefit obligation | 1,218,330 | 1,178,868 | 406,110 | 392,956 | |||||||||
Expected return on plan assets | (1,990,479 | ) | (1,757,019 | ) | (663,493 | ) | (585,673 | ) | |||||
Amortization of unrecognized transition obligation | - | - | - | - | |||||||||
Amortization of unrecognized prior service cost | 10,392 | 22,410 | 3,464 | 7,470 | |||||||||
Amortization of unrecognized net loss | 991,704 | 507,339 | 330,568 | 169,113 | |||||||||
Net periodic pension expense | $ | 1,200,000 | $ | 729,000 | $ | 400,000 | $ | 243,000 | |||||
Supplemental Pension | |||||||||||||
Service cost, benefits earned during the period | $ | 26,076 | $ | 22,968 | $ | 8,692 | $ | 7,656 | |||||
Interest cost on projected benefit obligation | 38,320 | 40,330 | 12,773 | 13,443 | |||||||||
Expected return on plan assets | - | - | - | - | |||||||||
Amortization of unrecognized prior service cost | - | - | - | - | |||||||||
Amortization of unrecognized net loss | 14,940 | 7,098 | 4,980 | 2,366 | |||||||||
Net periodic supplemental pension expense | $ | 79,336 | $ | 70,396 | $ | 26,445 | $ | 23,465 | |||||
Postretirement, Medical and Life | |||||||||||||
Service cost, benefits earned during the period | $ | 26,250 | $ | 24,750 | $ | 8,750 | $ | 8,250 | |||||
Interest cost on projected benefit obligation | 54,000 | 56,250 | 18,000 | 18,750 | |||||||||
Expected return on plan assets | - | - | - | - | |||||||||
Amortization of unrecognized prior service cost | (72,750 | ) | (72,750 | ) | (24,250 | ) | (24,250 | ) | |||||
Amortization of unrecognized net gain | - | - | - | - | |||||||||
Net periodic postretirement, medical and life expense | $ | 7,500 | $ | 8,250 | $ | 2,500 | $ | 2,750 |
37
11. Segment Reporting
The Corporation manages its operations through two primary business segments: core banking and wealth management group services. The core banking segment
provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential
mortgage loans, primarily in the Corporation's local markets and to invest in securities. The wealth management group services segment provides revenues by
providing trust and investment advisory services to clients.
Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results is shown in the
following table. Income taxes are allocated based on the separate taxable income of each segment and indirect overhead expenses are allocated based on reasonable
and equitable allocations applicable to the reportable segment. Holding company amounts are the primary differences between segment amounts and consolidated
totals, and are reflected in the "Holding Company and Other" column below, along with amounts to eliminate transactions between segments (dollars in thousands):
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | ||||||||||||||||||||||||||||
Core Banking | Wealth Management Group Services | Holding Company And Other | Consolidated Totals | Core Banking | Wealth Management Group Services | Holding Company And Other | Consolidated Totals | ||||||||||||||||||||||
Net interest income | $ | 11,774 | $ | - | $ | 1 | $ | 11,775 | $ | 35,149 | $ | - | $ | 7 | $ | 35,156 | |||||||||||||
Provision for loan losses | 225 | - | - | 225 | 754 | - | - | 754 | |||||||||||||||||||||
Net interest income after provision for loan losses | 11,549 | - | 1 | 11,550 | 34,395 | - | 7 | 34,402 | |||||||||||||||||||||
Other operating income | 2,180 | 1,668 | 212 | 4,060 | 7,396 | 5,170 | 522 | 13,088 | |||||||||||||||||||||
Other operating expenses | 9,510 | 1,708 | 175 | 11,393 | 28,344 | 5,279 | 577 | 34,200 | |||||||||||||||||||||
Income or (loss) before income tax expense | 4,219 | (40 | ) | 38 | 4,217 | 13,447 | (109 | ) | (48 | ) | 13,290 | ||||||||||||||||||
Income tax expense (benefit) | 1,400 | (15 | ) | (2 | ) | 1,383 | 4,512 | (42 | ) | (72 | ) | 4,398 | |||||||||||||||||
Segment net income (loss) | $ | 2,819 | $ | (25 | ) | $ | 40 | $ | 2,834 | $ | 8,935 | $ | (67 | ) | $ | 24 | $ | 8,892 | |||||||||||
Segment assets | $ | 1,279,107 | $ | 5,249 | $ | 2,624 | $ | 1,286,980 |
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||||||
Core Banking | Wealth Management Group Services | Holding Company And Other | Consolidated Totals | Core Banking | Wealth Management Group Services | Holding Company And Other | Consolidated Totals | ||||||||||||||||||||||
Net interest income | $ | 11,842 | $ | - | $ | 1 | $ | 11,843 | $ | 31,834 | $ | - | $ | 6 | $ | 31,840 | |||||||||||||
Provision for loan losses | 583 | - | - | 583 | 833 | - | - | 833 | |||||||||||||||||||||
Net interest income after provision for loan losses | 11,259 | - | 1 | 11,260 | 31,001 | - | 6 | 31,007 | |||||||||||||||||||||
Other operating income | 2,465 | 1,747 | 116 | 4,328 | 7,284 | 5,131 | 1,005 | 13,420 | |||||||||||||||||||||
Other operating expenses | 8,638 | 1,843 | 136 | 10,617 | 27,259 | 5,450 | 553 | 33,262 | |||||||||||||||||||||
Income or (loss) before income tax expense | 5,086 | (96 | ) | (19 | ) | 4,971 | 11,026 | (319 | ) | 458 | 11,165 | ||||||||||||||||||
Income tax expense (benefit) | 1,742 | (37 | ) | (25 | ) | 1,680 | 3,589 | (123 | ) | 123 | 3,589 | ||||||||||||||||||
Segment net income (loss) | $ | 3,344 | $ | (59 | ) | $ | 6 | $ | 3,291 | $ | 7,437 | $ | (196 | ) | $ | 335 | $ | 7,576 | |||||||||||
Segment assets | $ | 1,257,067 | $ | 5,856 | $ | 3,001 | $ | 1,265,924 |
38
12. Stock Based Compensation
Board of Director’s Stock Compensation
Members of the Board of Directors receive common shares of the Corporation equal in value to the
amount of fees individually earned during the previous year for service as a director. The common
shares are distributed to the Corporation's individual board members from treasury shares of the
Corporation on or about January 15 following the calendar year of service.
Additionally, the President and Chief Executive Officer of the Corporation, who does not receive cash
compensation as a member of the Board of Directors, is awarded common shares equal in value to the
average of those awarded to board members not employed by the Corporation who have served for 12
months during the prior year.
During January 2012, 10,238 shares were re-issued from treasury to fund the stock component of
directors' compensation. An expense of $156,863 related to this compensation was recognized during
the period ending September 30, 2012. This expense is accrued as shares are earned.
Restricted Stock Plan
Pursuant to the Corporation’s Restricted Stock Plan (the “Plan”), the Corporation may make
discretionary grants of restricted stock to officers other than the Corporation's Chief Executive Officer.
Compensation expense is recognized over the vesting period of the awards based on the fair value of the
stock at issue date. The maximum number of shares as to which stock awards may be granted under the
Plan is 10,000 per year, with these shares vesting over a five year period.
A summary of restricted stock activity from December 31, 2011 to September 30, 2012 is presented below:
Shares | Weighted –Average Grant Date Fair Value | |||
Nonvested at December 31, 2011 | 12,458 | $ | 22.33 | |
Granted | 2,095 | 23.87 | ||
Vested | (824 | ) | 22.59 | |
Forfeited or Cancelled | - | - | ||
Nonvested at September 30, 2012 | 13,729 | $ | 22.55 |
As of September 30, 2012, there was $262,866 of total unrecognized compensation cost related to
nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average
period of 3.97 years.
39
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The review that follows focuses on the significant factors affecting the financial condition and results of
operations of the Corporation during the three and nine-month periods ended September 30, 2012, with
comparisons to the comparable periods in 2011, as applicable. The following discussion and the
unaudited consolidated interim financial statements and related notes included in this report should be
read in conjunction with our 2011 Annual Report on Form 10-K, which was filed with the Securities and
Exchange Commission on March 28, 2012. The results for the periods presented are not necessarily
indicative of results to be expected for the entire fiscal year or any other interim period.
Forward-looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Corporation intends its forward-
looking statements to be covered by the safe harbor provisions for forward-looking statements in these
sections. Statements regarding, among other things, the Corporation's expected financial position and
operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted
demographic and economic trends relating to the Corporation's industry and similar matters are forward-
looking statements. These statements can sometimes be identified by the Corporation's use of forward-
looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation
cannot promise that its expectations in such forward-looking statements will turn out to be correct. The
Corporation's actual results could be materially different from expectations because of various factors,
including changes in economic conditions or interest rates, credit risk, difficulties in managing our growth,
competition, changes in law or the regulatory environment, including as a result of regulations or rules
promulgated pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, and changes in
general business and economic trends. Information concerning risks facing the Corporation can be found in
our periodic filings with the Securities and Exchange Commission, including in our 2011 Annual Report on
Form 10-K. These filings are available publicly on the SEC's website at http://www.sec.gov, on the
Corporation's website at http://www.chemungcanal.com or upon request from the Corporate Secretary at
(607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly
update or revise its forward-looking statements, whether as a result of new information, future events or
otherwise.
Critical Accounting Policies, Estimates and Risks and Uncertainties
Critical accounting policies include the areas where the Corporation has made what it considers to be
particularly difficult, subjective or complex judgments concerning estimates, and where these estimates
can significantly affect the Corporation's financial results under different assumptions and conditions.
The Corporation prepares its financial statements in conformity with accounting principles generally
accepted in the United States of America. As a result, the Corporation is required to make certain
estimates, judgments and assumptions that it believes are reasonable based upon the information
available at that time. These estimates, judgments and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the periods presented. Actual results could be different from these estimates.
40
Allowance for Loan Losses
Management considers the accounting policy relating to the allowance for loan losses to be a critical
accounting policy given the uncertainty in evaluating the level of the allowance required to cover
probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments
can have on the Corporation's results of operations. While management's current evaluation of the
allowance for loan losses indicates that the allowance is adequate, under adversely different conditions
or assumptions the allowance would need to be increased. For example, if historical loan loss
experience significantly worsened or if current economic conditions significantly deteriorated,
additional provisions for loan losses would be required to increase the allowance. In addition, the
assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and
potential problem loans, and the associated evaluation of the related collateral coverage for these loans,
has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real
estate values in the Corporation’s market area did not increase dramatically in the prior several years,
and, as a result, any declines in real estate values have been modest. While management has concluded
that the current evaluation of collateral values is reasonable under the circumstances, if collateral
evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also
require additional provisions for loan losses.
Other-Than-Temporary Impairment
Management also considers the accounting policy relating to other-than-temporary impairment ("OTTI")
of investment securities to be a critical accounting policy. The determination of whether a decline in
market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and
amount of any realized losses reported in the Corporation's financial statements could vary if
management's conclusions were to change as to whether other-than-temporary impairment exists. The
Corporation assesses whether it intends to sell, or it is more likely than not that it will be required to sell
a security in an unrealized loss position before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost and fair value is recognized through a
charge to earnings. For those securities that do not meet the aforementioned criteria, such as those that
management has determined to be other-than-temporarily impaired, the amount of impairment charged
to earnings is limited to the amount related to credit losses, while impairment related to other factors is
recognized in other comprehensive income. For the three and nine-month periods ended September 30,
2012, the Corporation recognized no OTTI charges.
Goodwill and Other Intangible Assets
Management also considers the accounting policy relating to the valuation of goodwill and other
intangible assets to be a critical accounting policy. The initial carrying value of goodwill and other
intangible assets is determined using estimated fair values developed from various sources and other
generally accepted valuation techniques. Estimates are based upon financial, economic, market and
other conditions as they existed as of the date of a particular acquisition. These estimates of fair value
are the results of judgments made by the Corporation based upon estimates that are inherently uncertain
and changes in the assumptions upon which the estimates were based may have a significant impact on
the resulting estimates. In addition to the initial determination of the carrying value, on an ongoing basis
management must assess whether there is any impairment of goodwill and other intangible assets that
would require an adjustment in carrying value and recognition of a loss in the consolidated statement of
income.
41
Financial Condition
Consolidated assets at September 30, 2012 totaled $1.287 billion, an increase of $70.7 million, or 5.8%,
since December 31, 2011. The growth was primarily due to increases of $79.4 million, or 10.0%, in
total portfolio loans and $28.3 million in cash and cash equivalents, partially offset by a decrease of
$29.4 million in investment securities. Total liabilities increased $63.8 million to $1.154 billion at
September 30, 2012, compared with December 31, 2011, primarily due to an increase of $84.7 million
in deposits, partially offset by a decrease of $19.5 million in borrowings. Total equity was $132.9
million at September 30, 2012, an increase of $7.0 million from December 31, 2011, primarily due to
the Corporation’s net income of $8.9 million for the nine months ended September 30, 2012.
Loans
The composition of the loan portfolio is summarized as follows:
September 30, 2012 | December 31, 2011 | |||||||
Commercial, financial and agricultural | $ | 133,365,046 | $ | 142,209,279 | ||||
Commercial mortgages | 311,126,130 | 264,589,013 | ||||||
Residential mortgages | 193,049,212 | 193,599,853 | ||||||
Indirect Consumer loans | 130,969,296 | 97,165,447 | ||||||
Consumer loans | 107,848,451 | 99,351,585 | ||||||
Total loans, net of deferred origination fees and cost, and unearned income | $ | 876,358,135 | $ | 796,915,177 |
The increase in portfolio loans was due to strong growth of $42.3 million, or 21.5%, in consumer loans
and $37.7 million, or 9.3%, in commercial loans. The growth in consumer loans was primarily due to
increases of $33.8 million in indirect consumer loans and $5.2 million in direct consumer installment
loans and $2.7 million in home equity loans. During the second quarter of 2012, the Corporation
implemented an indirect consumer loan program with reduced pricing on high quality indirect auto loans
in an effort to put excess liquidity to better use. In addition, the Corporation implemented a marketing
campaign for direct consumer loans during the second quarter of 2012. The growth in commercial loans
was primarily due to an increase of $33.9 million in commercial loans in the Capital Bank (as defined
herein) division in the Albany, New York region, which was the former market area of Fort Orange
Financial Corp ("FOFC"), which was acquired in April 2011.
For the nine months ended September 30, 2012, $8.7 million of newly originated residential mortgages
were sold in the secondary market to Freddie Mac, with an additional $0.6 million originated and sold to
the State of New York Mortgage Agency.
Securities
The available-for-sale segment of the securities portfolio totaled $253.7 million at September 30, 2012,
a decrease of $27.2 million, or 9.7%, from December 31, 2011. The decrease resulted from sales and
calls of $70.4 million, maturities of $4.1 million and principal paydowns of $17.3 million. These items
were partially offset by purchases of $64.3 million. Sales and calls of securities included a $25.4 million
U.S. Treasury bond, $43.0 million in federal agency bonds and $2.0 million in municipal bonds. All of
the maturities were in municipal bonds. Principal paydowns were primarily in mortgage-backed securities
and collateralized mortgage obligations. Purchases included a $27.5 million U.S. Treasury bond,
$35.0 million in federal agency bonds and $1.8 million in municipal bonds.
The held-to-maturity segment of the securities portfolio, consisting of local municipal obligations,
totaled $6.2 million at September 30, 2012, a decrease of $2.1 million from December 31, 2011.
42
Cash and Cash Equivalents
As noted above, cash and cash equivalents increased $28.3 million since December 31, 2011, primarily
due to a $21.2 million increase in interest-bearing deposits at other financial institutions. The increase in
interest-bearing deposits at other financial institutions was a result of the significant increase in deposits
and a decrease in the securities portfolio, partially offset by the growth in the loan portfolio and the
paydown of borrowings. Additionally, cash and due from financial institutions increased $7.1 million
due to an $8.1 million increase in the volume of items in process of clearing through the Federal Reserve
Bank and JP Morgan Chase, offset by a $1.0 million decrease in branch cash levels. With total cash and
due from banks totaling $81.2 million at September 30, 2012, the Corporation continues to maintain a
strong liquidity position and evaluate alternative investment of these funds with caution given the
historically low interest rate environment and the inherent interest rate risk associated with longer term
securities portfolio investments.
Other Assets
A $5.7 million decrease in other assets was due principally to a $4.0 million decrease in the over
payment of 2011 estimated income taxes and a $1.9 million decrease in net deferred tax assets.
Deposits
Since December 31, 2011, total deposits increased $84.7 million, or 8.5%, to $1.083 billion, with public
fund balances increasing $44.8 million and all other deposits increasing $39.9 million. The increase in
public fund deposits was primarily due to increases in NOW account and insured money market account
(“IMMA”) balances totaling $25.0 million and $11.5 million, respectively, as well as a $7.4 million
increase in demand deposits. The increase in all other period-end deposits reflects a $59.2 million
increase in IMMA balances, as well as increases in demand deposits and NOW accounts totaling $36.3
million and $9.6 million, respectively. These increases were partially offset by a $37.2 million decrease
in savings balances and a $28.0 million decrease in certificates of deposit. Both the decrease in savings
balances and the increase in IMMA accounts were impacted by an initiative to convert funds from the
former Capital Bank tiered interest rate savings accounts into the Capital Bank Privilege IMMA
account.
Other Borrowings
Both a $15.3 million decrease in Federal Home Loan Bank of New York (“FHLB”) term advances and a
$4.2 million decrease in securities sold under agreements to repurchase reflect the maturity of obligations
during the nine months ended September 30, 2012.
Shareholders’ Equity
Since December 31, 2011, shareholders’ equity increased $7.0 million, or 5.5%, primarily due to net
income of $8.9 million for the nine months ended September 30, 2012 and a $1.4 million increase in
accumulated other comprehensive income, partially offset by cash dividends of $3.4 million.
43
Asset Quality
Non-Performing Loans
The recorded investment in non-performing loans at September 30, 2012, totaled $13.3 million
compared to $20.9 million at year-end 2011, a decrease of $7.6 million. Not included in the non-
performing loan totals are loans acquired in the April 2011 acquisition of FOFC and its wholly owned
subsidiary, Capital Bank & Trust Company ("Capital Bank"), which the Corporation has identified as
purchased credit impaired (“PCI”) loans totaling $12.8 million at September 30, 2012, which are
accounted for under separate accounting guidance, Accounting Standards Codification (“ASC”)
Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality”
as disclosed in Note 9 of the financial statements. The decrease in non-performing loans was due to
decreases in non-accrual loans and loans 90 days or more past due totaling $4.9 million and $2.7
million, respectively. The decrease in non-accrual loans was primarily due to a $5.2 million reduction in
non-accrual commercial loans to one borrower. Included in the $5.2 million reduction were $5.1 million
of funds received from United States Department of Agriculture (“USDA”) guarantees. Other non-
accrual commercial loans increased slightly from December 31, 2011 to September 30, 2012.
Additionally, during the nine months ended September 30, 2012, non-accrual residential mortgages
decreased $0.2 million, while non-accrual consumer loans increased $0.4 million. It is generally the
Corporation's policy that a loan 90 days past due be placed in non-accrual status unless factors exist that
would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at
any time if payment of principal or interest in full is not expected due to deterioration in the financial
condition of the borrower. Loans remain in non-accrual status until the loans have been brought current
and remain current for a period of six months. In the case of non-accrual loans where a portion of the
loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal
balance has been recovered.
The recorded investment in accruing loans 90 days or more past due totaled $4.6 million at September
30, 2012, compared with $7.3 million at year-end 2011, a decrease of $2.7 million. This decrease was
primarily due to a $2.7 million decrease in construction loans not considered by management to be PCI
loans acquired in the FOFC acquisition, which for a variety of reasons are 90 days or more past their
stated maturity dates. These loans totaled $4.6 million at September 30, 2012. However, the borrowers
continue to make required interest payments. Additionally, these loans carry third party credit
enhancements, and based upon the strength of those credit enhancements, the Corporation has not
identified these loans as PCI loans and expects to incur no losses on these loans.
At September 30, 2012, there was no change to other real estate owned (“OREO”) compared with
December 31, 2011, as it remained at $0.9 million. During the nine months ended September 30, 2012,
seven properties totaling $0.5 million were placed in OREO and seven properties totaling $0.4 million
were sold. Additionally, the Corporation recognized a write-down on one property totaling $0.1 million
following the acceptance of a purchase offer on this property.
44
Impaired Loans
Impaired loans at September 30, 2012, totaled $4.4 million compared to $10.1 million at December 31,
2011. Not included in the impaired loan totals are loans acquired in the FOFC acquisition which the
Corporation has identified as PCI loans, as these loans are accounted for under ASC Subtopic 310-30 as
noted under the above discussion of non-performing loans. The decrease of $5.7 million in impaired
loans was primarily due to a $5.2 million reduction in non-accrual commercial loans to one borrower.
Included in the $5.2 million reduction were $5.1 million of funds received from USDA guarantees.
Included in the impaired loan total at September 30, 2012, are loans totaling $2.8 million for which
impairment allowances of $1.0 million have been specifically allocated to the allowance for loan losses.
As of December 31, 2011, the impaired loan total included $6.1 million of loans for which specific
impairment allowances of $1.9 million were allocated to the allowance for loan losses. The decrease
in the amount of impaired loans for which specific allowances were allocated to the allowance for loan
losses was due in large part to the above mentioned receipt of funds under USDA guarantees. The
reduction in specific impairment allowances allocated to the allowance for loan losses was also related
to the above mentioned receipt of funds as well as improvement in the collateral position on an impaired
loan. The majority of the Corporation's impaired loans are secured and measured for impairment based
on collateral evaluations. It is the Corporation's policy to obtain updated appraisals on loans secured by
real estate at the time a loan is determined to be impaired. Prior to the receipt of the updated appraisal,
an impairment measurement is performed based upon the most recent appraisal on file to determine the
amount of any specific allocation or charge-off. Upon receipt and review of the updated appraisal, an
additional measurement is performed to determine if any adjustments are necessary to reflect the proper
provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any
changes in credit quality or market conditions would require any additional allocation or recognition of
additional charge-offs. If market conditions warrant, future appraisals are obtained. Real estate values
in the Corporation's market area had not increased dramatically in the prior several years, and, as a
result, declines in real estate values have been modest.
Appraisals are performed by independent third parties and reflect the properties market value "as is". In
determining the amount of any specific allocation or charge-off, the Corporation will make adjustments
to reflect the estimated costs to sell the property. In situations where partial charge-offs have been
recognized, any balance remaining continues to be reflected as non-performing until the loan has been
paid in full. Non-real estate collateral may be valued using an appraisal, net book value per the
borrower’s financial statements, or aging reports, adjusted or discounted based on management’s
historical knowledge, changes in market conditions from the time of the valuation, and management’s
expertise and knowledge of the client and client’s business.
The following table summarizes the Corporation's recorded investment in non-performing assets:
September 30, 2012 | December 31, 2011 | |||||||
Non-accrual loans | $ | 8,665,059 | $ | 13,611,088 | ||||
Accruing loans past due 90 days or more | 4,594,392 | 7,304,157 | ||||||
Total non-performing loans | $ | 13,259,451 | $ | 20,915,245 | ||||
Other real estate owned | 933,826 | 897,755 | ||||||
Total non-performing assets | $ | 14,193,277 | $ | 21,813,000 |
45
In addition to non-performing loans, as of September 30, 2012, the Corporation has identified
commercial relationships totaling $7.3 million as potential problem loans, as compared to $8.2 million at
December 31, 2011. Potential problem loans are loans that are currently performing, but known
information about possible credit problems of the related borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with the present loan repayment terms, which may
result in the disclosure of such loans as non-performing at some time in the future. Potential problem
loans are typically loans that are performing but are classified in the Corporation's loan rating system as
"substandard." Management cannot predict the extent to which economic conditions may worsen or
other factors which may impact borrowers and the potential problem loans. Accordingly, there can be
no assurance that other loans will not become 90 days or more past due, be placed on non-accrual status,
be restructured, or require increased allowance coverage and provisions for loan losses.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic
basis and takes into consideration such factors as historical loan loss experience, review of specific
problem loans (including evaluation of the underlying collateral), changes in the composition and
volume of the loan portfolio, recent charge-off experience, overall portfolio quality, current economic
conditions that may affect the borrowers' ability to pay and, as of the first quarter of 2012, global and
national fiscal uncertainties, including their potential effects on our borrowers.
For the three months ended September 30, 2012, the provision for loan loss expense totaled $0.2 million
compared with $0.6 million for the same period in 2011, a decrease of $0.4 million. This decrease was
due principally to the improvement in the volume of non-performing and impaired loans, resulting in a
reduction in allocations to the allowance for loan losses related to these loans, which was offset in part
by loan portfolio growth and allowances for this growth after consideration of the factors discussed
above. For the nine months ended September 30, 2012 and September 30, 2011, the provision for loan
loss expense totaled $0.8 million.
During the third quarter of this year, the Corporation recorded net recoveries of $0.2 million compared
with net charge-offs of $0.7 million during the third quarter of the prior year. This improvement was
primarily due to lower commercial loan charge-offs in the current quarter compared with the same
quarter in the prior year. The prior year quarter had one large commercial loan charge-off for $0.6
million. In addition, consumer loan charge-offs declined in the current quarter compared with the same
quarter in the prior year. For the nine months ended September 30, 2012, net recoveries totaled $0.3
million compared with net charge-offs of $0.7 million for the same period in the prior year. This
improvement was primarily in commercial loans as net recoveries were $0.5 million for the nine months
ended September 30, 2012, compared with net charge-offs of $0.3 million for the same period in the
prior year. In addition, consumer loan net charge-offs declined by $0.2 million for the current year
compared with the prior year. At September 30, 2012, the Corporation's allowance for loan losses on
Legacy loans (which are defined as total loans excluding loans acquired in the FOFC acquisition) totaled
$10.5 million, resulting in a coverage ratio of allowance to non-performing loans of 79.4%. This ratio,
as well as the ratio of allowance to total loans, was impacted by the April 2011 FOFC acquisition, as
current accounting rules do not allow the acquiror to transfer the acquiree’s allowance for loan losses to
the acquiror’s balance sheet. Rather, the acquiree’s overall loan quality is a component in determining
the fair value of loans acquired, which are carried on the balance sheet at fair value. The ratio of the
allowance for loan losses to total loans was 1.24% at September 30, 2012. Excluding loans acquired in
the FOFC acquisition, the allowance for loan losses on Legacy loans to total Legacy loans was 1.38%
and represents an amount that management believes is adequate to absorb probable incurred loan losses
on the Corporation’s Legacy loan portfolio.
46
The allocated portions of the allowance reflect management's estimates of specific known risk elements
in the respective portfolios. Management's methodology followed in evaluating the allowance for loan
losses includes a detailed analysis of historical loss factors for pools of similarly graded loans, as well as
specific collateral reviews of relationships graded special mention, substandard or doubtful with
outstanding balances of $1.0 million or greater. Among the factors considered in allocating portions of
the allowance by loan type are the current levels of past due, non-accrual and impaired loans, as well as
historical loss experience and the evaluation of collateral. In addition, management has formally
documented factors considered in determining the appropriate level of general reserves, including
current economic conditions, forecasted trends in the credit quality cycle, loan growth, entry into new
markets, and industry and peer group trends. These amounts have been included in the allocated portion
of the loan categories to which they relate.
At September 30, 2012, in addition to the qualitative factors allocated within the allowance, the
Corporation maintained $0.5 million of the allowance as unallocated. While some improvements have
been seen in the local economy and some loans have improved, the recovery is still fragile and
management believes it is prudent to see a longer period of sustained improvement before completely
reflecting this in the allowance. Additionally, management monitors coverage ratios of nonperforming
loans and total loans compared to peers on a regular basis. This analysis also suggests that it would be
prudent to maintain the unallocated portion of the allowance at this time.
47
Activity in the allowance for loan losses was as follows:
Nine Months Ended September 30, 2012 | |||||||
Legacy Loans | Acquired Loans | ||||||
Balance at beginning of period | $ | 9,659,320 | $ | - | |||
Reclassification of acquired loan discount | - | 123,599 | |||||
Charge-offs: | |||||||
Commercial, financial and agricultural | (5,792 | ) | - | ||||
Commercial mortgages | (39,314 | ) | (49,057 | ) | |||
Residential mortgages | (82,442 | ) | - | ||||
Consumer loans | (342,867 | ) | - | ||||
Total | (470,415 | ) | (49,057 | ) | |||
Recoveries: | |||||||
Commercial, financial and agricultural | 591,497 | - | |||||
Commercial mortgages | 43,031 | - | |||||
Residential mortgages | - | - | |||||
Consumer loans | 176,139 | - | |||||
Total | 810,667 | - | |||||
Net recoveries (charge-offs) | 340,252 | (49,057 | ) | ||||
Provision charged to operations | 533,000 | 220,897 | |||||
Balance at end of period | $ | 10,532,572 | $ | 295,399 |
Nine Months Ended September 30, 2011 | ||||
Balance at beginning of period | $ | 9,498 | ||
Charge-offs: | ||||
Commercial, financial and agricultural | (594 | ) | ||
Commercial mortgages | (4 | ) | ||
Residential mortgages | (39 | ) | ||
Consumer loans | (543 | ) | ||
Total | (1,180 | ) | ||
Recoveries: | ||||
Commercial, financial and agricultural | 315 | |||
Commercial mortgages | 33 | |||
Residential mortgages | 30 | |||
Consumer loans | 148 | |||
Total | 526 | |||
Net recoveries (charge-offs) | (654 | ) | ||
Provision charged to operations | 833 | |||
Balance at end of period | $ | 9,677 |
48
Results of Operations
Third Quarter of 2012 vs. Third Quarter of 2011
Net income for the third quarter of 2012 totaled $2.8 million, a decrease of $0.5 million, or 13.9%,
compared with third quarter 2011 net income of $3.3 million. Earnings per share for the current quarter
totaled $0.61 compared with $0.71 for the same period in the prior year. The decline was attributable to
an increase of $0.8 million in non-interest expense and a reduction of $0.4 million in net gain on
securities transactions. These items were partially offset by reductions of $0.4 million in the provision
for loan loss expense and $0.3 million in income taxes. Return on average assets and return on average
equity for the current quarter were 0.89% and 8.53%, respectively, compared with 1.05% and 10.18%,
respectively, for the third quarter of 2011.
Net interest income, which is the difference between the income we make on interest-earning assets and
the expense we incur on interest-bearing liabilities, is the largest component of the Corporation’s net
income. Net interest income for the third quarter of 2012 decreased slightly compared with the third
quarter of 2011, and the net interest margin decreased seven basis points to 4.04%. The decrease in net
interest income and margin was due to a 26 basis point decrease in the yield on average earning assets,
partially offset by a 21 basis point decrease in the cost of average interest-bearing liabilities. Average
earning assets increased $17.7 million, or 1.5%, as an $82.8 million increase in average loans was
partially offset by decreases in average interest bearing deposits at other financial institutions and
average investment securities totaling $43.6 million and $21.5 million, respectively. While average
earning assets increased 1.5%, total interest and dividend income decreased $0.6 million, or 4.3%, as the
yield on average earning assets decreased 26 basis points to 4.46%.
Total average funding liabilities for the third quarter of 2012, including non-interest bearing demand
deposits, totaled $1.121 billion, an increase of $11.8 million, or 1.1%, compared with the third quarter
of last year. The increase in average funding liabilities was primarily due to an increase of $33.2 million
in average deposits, partially offset by a decrease of $21.5 million in average borrowings. Average non-
interest-bearing deposits increased $38.7 million, while total average interest-bearing deposits were down
$5.4 million. The decrease in average interest-bearing deposits was due to a $61.5 million decrease in
average time deposits and a $34.4 million decrease in average savings accounts. These decreases were
partially offset by a $78.4 million increase in average IMMA accounts and a $12.0 million increase in
average NOW accounts. The decrease in average borrowings was primarily due to decreases in average
securities sold under agreements to repurchase and average FHLB term borrowings totaling $9.9 million
and $11.6 million, respectively. While average interest-bearing liabilities decreased $26.9 million, or 3.2%,
interest expense decreased $0.5 million or 29.1%, as the cost of average interest-bearing liabilities
decreased 21 basis points to 0.60%.
For the three months ended September 30, 2012, the provision for loan loss expense totaled $0.2 million
compared with $0.6 million for the same period in 2011, a decrease of $0.4 million. This decrease was
principally due to the improvement in the volume of non-performing and impaired loans, resulting in a
reduction in allocations to the allowance for loan losses related to these loans, which was offset in part
by loan portfolio growth and allowances for this growth. Management’s evaluation of the adequacy of
the allowance for loan losses takes into consideration several factors, including an analysis of historical
loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality, current
economic conditions, global and national fiscal uncertainties and loan growth.
49
For the third quarter of 2012, non-interest income totaled $4.1 million, a decrease of $0.3 million, or
6.2%, compared with the third quarter of last year due primarily to a $0.4 million decrease in net gain on
securities transactions.
For the third quarter of 2012, non-interest expense totaled $11.4 million, an increase of $0.8 million, or
7.3%, compared with $10.6 million for the third quarter of last year. The increase was primarily due to
increases of $0.4 million in salaries and wages, $0.2 million in pension and other employee benefits and
$0.1 million in other real estate owned expenses. The increase in salaries and wages was primarily due
to an increase in employees in the Capital Bank division and additional compensation related to merit
increases and incentive compensation. The increase in pension and other employee benefits was
primarily due to higher pension costs and health benefits. The increase in other real estate owned
expense was due to the write-down of a commercial property.
A $0.3 million decrease in income tax expense reflects a $0.8 million reduction in pre-tax income, and a
decrease in the effective tax rate from 33.8% to 32.8%, due primarily to an increase in the relative
percentage of tax exempt income to pre-tax income.
Year-to-Date 2012 vs. Year-to-Date 2011
Net income for the nine-month period ended September 30, 2012, totaled $8.9 million, an increase of
$1.3 million, or 17.4%, compared with $7.6 million for the nine-month period ended September 30,
2011. The improvement was attributable to an increase of $3.3 million in net interest income, partially
offset by increases of $0.9 million in non-interest expense and $0.8 million in income taxes, and a
reduction of $0.3 million in non-interest income. Earnings per share for the nine months ended
September 30, 2012, was $1.92 compared with $1.76 for the same period in the prior year. Return on
average assets and return on average equity for the nine months ended September 30, 2012, were 0.95%
and 9.12%, respectively, compared with 0.88% and 8.66%, respectively, for the same period in the prior
year. Year-to-date net income improved significantly due primarily to an increase in net interest income
and a $2.2 million decrease in pre-tax one-time merger transaction costs, both related to the FOFC
acquisition. In addition, the Corporation recognized $0.8 million in pre-tax casualty gains from
insurance reimbursements related to the September 2011 flooding of the Owego and Tioga offices.
For the nine months ended September 30, 2012, net interest income totaled $35.2 million, an increase of
$3.3 million, or 10.4%, compared with the same period in 2011, and the net interest margin increased
eight basis points to 4.10%. These increases reflect a higher level of average earning assets due in large
part to the FOFC acquisition and a 20 basis point decrease in the cost of average interest-bearing
liabilities, partially offset by a ten basis point decrease in the yield on average earning assets. Average
earning assets increased $88.0 million or 8.3%, as increases in average loans and investment securities
totaling $106.8 million and $9.1 million, respectively, were partially offset by a $27.9 million decrease
in average interest-bearing deposits at other financial institutions. Included in the growth in average
loans and investment securities are the Capital Bank division’s assets for a full nine months in 2012
compared with six months in 2011. Due to the increase in average earning assets, total interest and
dividend income increased $2.3 million or 6.3% despite a ten basis point decrease in yield to 4.58%.
50
For the nine months ended September 30, 2012, total average funding liabilities, including non-interest-
bearing demand deposits, increased $83.4 million, or 8.1%, to $1.111 billion compared with the same
period in the prior year. The growth was primarily due to an increase of $89.4 million in average deposits,
partially offset by a decrease of $6.0 million in borrowings. These increases include increases in average
deposits and borrowings in the Capital Bank division of $47.4 million and $4.1 million, respectively. In
total, average non-interest bearing deposits increased $42.8 million, with the Capital Bank division's non-
interest bearing deposits comprising $11.8 million of that increase. Average interest-bearing deposits
increased $46.6 million, including a $35.6 million increase in average interest-bearing deposits in the
Capital Bank’s division. The increase in average interest-bearing deposits was reflected principally in a $60.9
million increase in average IMMA balances, a $3.1 million increase in average savings balances and a
$16.1 million increase in average NOW accounts. These increases were partially offset by a $33.5 million
decrease in average time deposits. While average interest-bearing liabilities increased $40.6 million or
5.1%, interest expense decreased $1.0 million or 19.4%, as the average cost of interest-bearing liabilities
decreased 20 basis points to 0.67%.
For the nine months ended September 30, 2012, the provision for loan loss expense totaled $0.8 million,
level with the prior year.
Year-to-date non-interest income for 2012 was $13.1 million compared with $13.4 million for the same
period in the prior year, a decrease of $0.3 million, or 2.5%. The decline was primarily due to decreases
of $0.8 million in net gain on securities transactions and $0.5 million in revenue from our equity
investment in Cephas Capital Partners, L.P. (“Cephas”). The decrease in revenue from our equity
investment in Cephas was due in large part to a gain recognized during the first quarter of last year on
the exercise of stock warrants held in one of their investments. These items were partially offset by $0.8
million in casualty gains from insurance reimbursements related to the September 2011 flooding of the
Owego and Tioga offices and an increase in net gain on sale of loans held for sale.
Year-to-date non-interest expense for 2012 was $34.2 million compared with $33.3 million for the same
period in the prior year, an increase of $0.9 million, or 2.8%. Excluding $2.2 million in merger related
expenses from the prior year, non-interest expense increased $3.2 million, or 10.2% for the nine months
ended September 30, 2012. This increase was primarily due to increases of $1.2 million in salaries and
wages, $0.8 million in pension and other employee benefits, $0.4 million in data processing expenses
and $0.2 million in other real estate owned expenses. The increase in salaries and wages was primarily
due to the operation of the Capital Bank division for nine months during 2012 compared with six
months during 2011, and additional compensation related to merit increases and incentive compensation.
The increase in pension and other employee benefits was primarily due to higher pension costs, health
benefits and payroll taxes. The increase in data processing expenses was primarily due to higher
hardware and software maintenance fees and check card processing costs that included conversion
costs for a new processor.
A $0.8 million increase in income tax expense reflects a $2.1 million increase in pre-tax income, and an
increase in the effective tax rate to 33.1% from 32.2%, due primarily to a decrease in the relative
percentage of tax exempt income to pre-tax income.
51
Average Consolidated Balance Sheet and Interest Analysis
For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance
computations. Investment securities are stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on obligations of states and
political subdivisions. (dollars in thousands)
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||
Assets | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | ||||||||||||||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 829,396 | $ | 34,078 | 5.49 | % | $ | 722,583 | $ | 31,456 | 5.82 | % | $ | 867,972 | $ | 11,374 | 5.21 | % | $ | 785,193 | $ | 11,673 | 5.90 | % | ||||||||||||||||||||||||
Taxable securities | 219,985 | 4,142 | 2.52 | % | 208,891 | 4,348 | 2.78 | % | 208,000 | 1,306 | 2.50 | % | 223,282 | 1,504 | 2.67 | % | ||||||||||||||||||||||||||||||||
Tax-exempt securities | 49,796 | 977 | 2.62 | % | 51,813 | 1,035 | 2.67 | % | 46,811 | 300 | 2.55 | % | 53,014 | 351 | 2.62 | % | ||||||||||||||||||||||||||||||||
Interest-bearing deposits | 47,075 | 123 | 0.35 | % | 75,012 | 167 | 0.30 | % | 37,696 | 35 | 0.36 | % | 81,313 | 65 | 0.32 | % | ||||||||||||||||||||||||||||||||
Total earning assets | 1,146,252 | 39,320 | 4.58 | % | 1,058,299 | 37,006 | 4.68 | % | 1,160,479 | 13,015 | 4.46 | % | 1,142,802 | 13,593 | 4.72 | % | ||||||||||||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 23,967 | 22,380 | 24,823 | 23,783 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 24,762 | 24,270 | 24,585 | 24,327 | ||||||||||||||||||||||||||||||||||||||||||||
Other assets | 51,815 | 45,863 | 49,482 | 51,867 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (10,262 | ) | (9,731 | ) | (10,534 | ) | (9,894 | ) | ||||||||||||||||||||||||||||||||||||||||
AFS valuation allowance | 13,698 | 11,690 | 13,813 | 13,727 | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,250,232 | $ | 1,152,771 | $ | 1,262,648 | $ | 1,246,612 | ||||||||||||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 88,005 | $ | 70 | 0.11 | % | $ | 71,906 | $ | 63 | 0.12 | % | $ | 92,703 | $ | 25 | 0.11 | % | $ | 80,665 | $ | 25 | 0.13 | % | ||||||||||||||||||||||||
Savings and insured money market deposits | 409,081 | 668 | 0.22 | % | 345,040 | 663 | 0.26 | % | 415,368 | 222 | 0.21 | % | 371,306 | 248 | 0.26 | % | ||||||||||||||||||||||||||||||||
Time deposits | 261,549 | 1,795 | 0.92 | % | 295,080 | 2,600 | 1.18 | % | 252,826 | 528 | 0.83 | % | 314,348 | 865 | 1.09 | % | ||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances and securities sold under agreements to Repurchase | 73,944 | 1,631 | 2.95 | % | 79,984 | 1,839 | 3.07 | % | 65,039 | 465 | 2.85 | % | 86,520 | 612 | 2.80 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 832,579 | 4,164 | 0.67 | % | 792,010 | 5,165 | 0.87 | % | 825,936 | 1,240 | 0.60 | % | 852,839 | 1,750 | 0.81 | % | ||||||||||||||||||||||||||||||||
Non-interest-bearing liabilities: | �� | |||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 278,473 | 235,656 | 294,612 | 255,957 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 8,962 | 8,096 | 9,914 | 9,511 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 1,120,014 | 1,035,762 | 1,130,462 | 1,118,307 | ||||||||||||||||||||||||||||||||||||||||||||
Shareholders' equity | 130,218 | 117,009 | 132,186 | 128,305 | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,250,232 | $ | 1,152,771 | $ | 1,262,648 | $ | 1,246,612 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 35,156 | $ | 31,841 | $ | 11,775 | $ | 11,843 | ||||||||||||||||||||||||||||||||||||||||
Net interest rate spread(1) | 3.91 | % | 3.81 | % | 3.86 | % | 3.91 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin(2) | 4.10 | % | 4.02 | % | 4.04 | % | 4.11 | % | ||||||||||||||||||||||||||||||||||||||||
(1) Net interest rate spread is the difference in the yield received on earning assets less the rate paid on interest-bearing liabilities. | ||||||||||||||||||||||||||||||||||||||||||||||||
(2) Net interest margin is the ratio of net interest indcome divided by average earning assets. |
52
The following table demonstrates the impact on net interest income of the changes in the volume of
earning assets and interest-bearing liabilities and changes in rates earned and paid by the Corporation.
For purposes of constructing this table, average investment securities are at average amortized
ost and earning asset averages include non-performing loans. Therefore, the impact of changing levels
of non-performing loans is reflected in the change due to rate, but does not affect changes due to
volume. No tax equivalent adjustments were made.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011 | Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011 | |||||||||||||||||||||||
Increase (Decrease) Due to (1) | Increase (Decrease) Due to (1) | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
Interest and dividends earned on: | ||||||||||||||||||||||||
Loans | $ | 4,483 | $ | (1,861 | ) | $ | 2,622 | $ | 1,144 | $ | (1,443 | ) | $ | (299 | ) | |||||||||
Taxable securities | 225 | (431 | ) | (206 | ) | (102 | ) | (96 | ) | (198 | ) | |||||||||||||
Tax-exempt securities | (39 | ) | (19 | ) | (58 | ) | (41 | ) | (10 | ) | (51 | ) | ||||||||||||
Interest-bearing deposits | (69 | ) | 25 | (44 | ) | (39 | ) | 9 | (30 | ) | ||||||||||||||
Total earning assets | $ | 3,056 | $ | (742 | ) | $ | 2,314 | $ | 199 | (777 | ) | (578 | ) | |||||||||||
Interest paid on: | ||||||||||||||||||||||||
Demand deposits | $ | 13 | $ | (6 | ) | $ | 7 | $ | 4 | $ | (4 | ) | $ | - | ||||||||||
Savings and insured money market deposits | 114 | (109 | ) | 5 | 27 | (53 | ) | (26 | ) | |||||||||||||||
Time deposits | (273 | ) | (532 | ) | (805 | ) | (152 | ) | (185 | ) | (337 | ) | ||||||||||||
Federal Home Loan Bank advances and securities sold under agreements to repurchase | (135 | ) | (73 | ) | (208 | ) | (156 | ) | 9 | (147 | ) | |||||||||||||
Total interest-bearing liabilities | $ | 255 | $ | (1,256 | ) | $ | (1,001 | ) | $ | (54 | ) | $ | (456 | ) | $ | (510 | ) | |||||||
Net interest income | $ | 2,801 | $ | 514 | $ | 3,315 | $ | 253 | $ | (321 | ) | $ | (68 | ) | ||||||||||
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of deposit customers,
borrowers, and the operating, investing, and financing activities of the Corporation. The Corporation
uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow
from lending and investing activities, core deposit growth and non-core funding sources, such as time
deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.
The Corporation is a member of the FHLB, which allows it to access borrowings which enhance
management's ability to satisfy future liquidity needs. Based on available collateral and current
advances outstanding, the Corporation was eligible to borrow up to a total of $96.2 million and $69.8
million at September 30, 2012 and December 31, 2011, respectively.
53
During the nine months ended September 30, 2012, cash and cash equivalents increased $28.3 million
compared with an increase of $57.9 million during the same period for the prior year. In addition to
cash provided by operating activities, major sources of cash during the nine months ended September
30, 2012, included proceeds from sales, maturities, calls and principal reductions on securities totaling
$95.5 million and a $84.7 million increase in deposits. Proceeds from the above were used primarily to
fund purchases of securities totaling $65.9 million, a $78.4 million increase in loans, a $15.3 million
reduction in FHLB long term advances, a decrease in securities sold under agreements to repurchase
totaling $4.2 million, the payment of cash dividends in the amount of $3.4 million and purchases of
fixed assets totaling $2.3 million.
In addition to cash provided by operating activities, major sources of cash during the nine months ended
September 30, 2011, included proceeds from sales, maturities, calls and principal reductions on
securities totaling $94.8 million, a $55.4 million increase in deposits and $25.1 million in net cash
received in the FOFC acquisition. These proceeds were used primarily to fund purchases of securities
totaling $99.2 million, a net decrease in securities sold under agreements to repurchase totaling $13.9
million, a $11.0 million net increase in loans, the payment of cash dividends in the amount of $2.9
million and purchases of fixed assets totaling $1.3 million, as well as $0.8 million increase in FHLB and
Federal Reserve Bank stock and purchases of treasury shares totaling $0.3 million.
As of September 30, 2012, the Bank’s leverage ratio was 8.30%. The Tier I and Total Risk Adjusted
Capital ratios were 11.18% and 12.65%, respectively. All of the above ratios are in excess of the
requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New
York State Department of Financial Services.
During the nine months ended September 30, 2012, the Corporation declared cash dividends totaling
$0.75 per share, unchanged from the dividends declared during the same period of 2011.
When shares of the Corporation become available in the market, the Corporation may purchase them after
careful consideration of its capital position. On November 16, 2011, the Corporation’s Board of Directors
approved a one year extension of the stock repurchase program that had been initially approved on
November 18, 2009 and extended for one year on November 17, 2010. The extension authorizes the
purchase of up to 90,000 shares of the Corporation’s outstanding common stock, including those shares
purchased during the first two years of the plan. Purchases may be made from time to time on the open
market or in privately negotiated transactions at the discretion of management. Through September 30,
2012, a total of 66,364 shares had been purchased under this program. During the nine months ended
September 30, 2012, the Corporation purchased 23,120 shares at an average cost of $25.05 per share.
During the nine months ended September 30, 2012, the Corporation re-issued 29,126 shares from treasury
to fund the stock component of directors’ 2011 compensation, distributions under the directors’ deferred
compensation plan, stock grants to executive officers and funding for the Corporation’s Profit Sharing,
Savings and Investment Plan.
Interest Rate Risk
As intermediaries between borrowers and savers, commercial banks incur both interest rate risk and
liquidity risk. The Corporation's Asset/Liability Committee (ALCO) has the strategic responsibility for
setting the policy guidelines on acceptable exposure to these areas. These guidelines contain specific
measures and limits regarding these risks, which are monitored on a regular basis. The ALCO is made
up of the president & chief executive officer, the chief financial officer, the asset liability management
officer, and other officers representing key functions.
54
The ALCO is also responsible for supervising the preparation and annual revisions of the financial
segments of the annual budget, which is built upon the committee's economic and interest-rate
assumptions. It is the responsibility of the ALCO to modify prudently the Corporation's asset/liability
policies.
Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates.
It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a
financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basis
point change in interest rates. At September 30, 2012, it is estimated that an immediate 200-basis point
decrease in interest rates would negatively impact the next 12 months net interest income by 10.05% and
an immediate 200-basis point increase would negatively impact the next 12 months net interest income
by 3.97%. Both are within the Corporation's policy guideline of 15% established by ALCO. Given the
overall low level of current interest rates and the unlikely event of a 200-basis point decline from this
point, management additionally modeled an immediate 100-basis point decline and an immediate 300-
basis point increase in interest rates. When applied, it is estimated these scenarios would result in
negative impacts to net interest income of 5.29% and 6.32%, respectively. Management is comfortable
with the amount of exposure at these levels.
A related component of interest rate risk is the expectation that the market value of our capital account
will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact
component: an institution exposed to earnings erosion is also exposed to shrinkage in market value. At
September 30, 2012, it is estimated that an immediate 200-basis point decrease in interest rates would
negatively impact the market value of our capital account by 5.40% and an immediate 200-basis point
increase in interest rates would positively impact the market value by 1.37%. Both are within the
established tolerance limit of 15%. Management also modeled the impact to the market value of our
capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest
rates, based on the current interest rate environment. When applied, it is estimated these scenarios
would result in negative impacts to the market value of our capital of 7.10% and 0.32%, respectively.
Management is also comfortable with the level of exposures at these levels.
Management does recognize the need for certain hedging strategies during periods of anticipated higher
fluctuations in interest rates and the Board-approved Funds Management Policy provides for limited use
of certain derivatives in asset liability management. These strategies were not employed during the nine
months ended September 30, 2012.
Adoption of New Accounting Standards
In May, 2011, the FASB issued an amendment to achieve common fair value measurement and
disclosure requirements between U.S. and International accounting principles. Overall, the guidance is
consistent with existing U.S. accounting principles; however, there are some amendments that change a
particular principle or requirement for measuring fair value or for disclosing information about fair value
measurements. The amendments in this guidance are effective for interim and annual reporting periods
beginning after December 15, 2011. The effect of adopting this standard did not have a material effect
on the Corporation’s operating results or financial condition, but the additional disclosures are included
in Note 4.
55
In June 2011, the FASB amended existing guidance and eliminated the option to present the components
of other comprehensive income as part of the statement of changes in shareholders’ equity. The
amendment requires that comprehensive income be presented in either a single continuous statement or
in two separate consecutive statements. The amendments in this guidance are effective as of the
beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15,
2011. In connection with the adoption of this amendment, the Corporation changed the presentation of
the statement of comprehensive income for the Corporation to two consecutive statements instead of
presenting it as part of the consolidated statements of shareholders’ equity.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item is set forth herein in Management's Discussion and Analysis of
Financial Condition and Results of Operations under the heading "Interest Rate Risk."
Item 4: Controls and Procedures
The Corporation's management, with the participation of our President and Chief Executive Officer,
who is the Corporation's principal executive officer, and our Treasurer and Chief Financial Officer, who
is the Corporation's principal financial officer, has evaluated the effectiveness of the Corporation's
disclosure controls and procedures as of September 30, 2012 pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the principal executive officer and
principal financial officer have concluded that the Corporation's disclosure controls and procedures are
effective as of September 30, 2012. In addition, there have been no changes in the Corporation's
internal control over financial reporting during the most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
56
PART II. | OTHER INFORMATION | ||||||||||||||||
Item 1. | Legal Proceedings | ||||||||||||||||
For information related to this item please see Note 7 to the Corporation’s financial statements included herein. | |||||||||||||||||
Item 1A. | Risk Factors | ||||||||||||||||
There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 28, 2012. | |||||||||||||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||||||||
(c) | Issuer Purchases of Equity Securities (1) | ||||||||||||||||
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | |||||||||||||
7/1/12-7/31/12 | 73 | $ | 25.70 | 73 | 27,585 | ||||||||||||
8/1/12-8/31/12 | 3,949 | $ | 24.59 | 3,949 | 23,636 | ||||||||||||
9/1/12-9/30/12 | - | $ | - | - | 23,636 | ||||||||||||
Quarter ended 9/30/12 | 4,022 | $ | 24.61 | 4,022 | 23,636 | ||||||||||||
(1) On November 16, 2011, the Corporation’s Board of Directors approved a one year extension of the stock repurchase program that had been initially approved on November 18, 2009 and extended for one year on November 17, 2010. The extension authorizes purchases of up to 90,000 shares of the Corporation's outstanding common stock, including those shares purchased during the first two years of the plan. Purchases may be made from time to time on the open-market or in private negotiated transactions and will be at the discretion of management. Through September 30, 2012, a total of 66,364 shares had been purchased under this program. |
57
Item 6. | EXHIBITS |
The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference: | |
3.1 Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984. Filed as Exhibit 3.1 to Registrant’s Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference. | |
3.2 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988. Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference. | |
3.3 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998. Filed as Exhibit 3.4 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. | |
3.4 Amended and Restated Bylaws of the Registrant, as amended to May 16, 2012. Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 18, 2012 and incorporated herein by reference. | |
31.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
31.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
32.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350. | |
32.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350. | |
101.INS Instance Document | |
101.SCH XBRL Taxonomy Schema | |
101.CAL XBRL Taxonomy Calculation Linkbase | |
101.DEF XBRL Taxonomy Definition Linkbase | |
101.LAB XBRL Taxonomy Label Linkbase | |
101.PRE XBRL Taxonomy Presentation Linkbase |
58
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.
CHEMUNG FINANCIAL CORPORATION
DATED: November 13, 2012 | By: /s/ Ronald M. Bentley |
Ronald M. Bentley, President and Chief Executive Officer (Principal Executive Officer) |
DATED: November 13, 2012 | By: /s/ Mark A. Severson |
Mark A. Severson, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |
59
EXHIBIT INDEX
3.1 Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984. Filed as Exhibit 3.1 to Registrant’s Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference. |
3.2 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988. Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference. |
3.3 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998. Filed as Exhibit 3.4 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference. |
3.4 Amended and Restated Bylaws of the Registrant, as amended to May 16, 2012. Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 18, 2012 and incorporated herein by reference. |
31.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
31.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
32.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350. |
32.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350. |
101.INS Instance Document |
101.SCH XBRL Taxonomy Schema |
101.CAL XBRL Taxonomy Calculation Linkbase |
101.DEF XBRL Taxonomy Definition Linkbase |
101.LAB XBRL Taxonomy Label Linkbase |
101.PRE XBRL Taxonomy Presentation Linkbase |