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 June 30, 2015 | |||||
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 | [X] | Smaller reporting company | [ ] | ||
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 August 6, 2015 was 4,656,052. |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGES | ||
Glossary of Abbreviations and Terms | 3 | |
PART I. | FINANCIAL INFORMATION | |
Item 1: | Financial Statements – Unaudited | |
Consolidated Balance Sheets | 6 | |
Consolidated Statements of Income | 7 | |
Consolidated Statements of Comprehensive Income | 8 | |
Consolidated Statements of Shareholders’ Equity | 9 | |
Consolidated Statements of Cash Flows | 10 | |
Notes to Unaudited Consolidated Financial Statements | 12 | |
Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | 40 |
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 65 |
Item 4: | Controls and Procedures | 66 |
PART II. | OTHER INFORMATION | |
Item 1: | Legal Proceedings | 67 |
Item 1A: | Risk Factors | 67 |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 67 |
Item 3: | Defaults Upon Senior Securities | 67 |
Item 4: | Mine Safety Disclosures | 67 |
Item 5: | Other Information | 67 |
Item 6: | Exhibits | 68 |
SIGNATURES | 69 | |
EXHIBIT INDEX |
2
GLOSSARY OF ABBREVIATIONS AND TERMS | |
To assist the reader the Corporation has provided the following list of commonly used abbreviations and terms included in the Notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
Abbreviations | |
ALCO | Asset-Liability Committee |
ASU | Accounting Standards Update |
Bank | Chemung Canal Trust Company |
CDARS | Certificate of Deposit Account Registry Service |
CDO | Collateralized Debt Obligation |
CFS | CFS Group, Inc. |
Corporation | Chemung Financial Corporation |
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act |
EPS | Earnings per share |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
FHLBNY | Federal Home Loan Bank New York |
FRB | Board of Governors of the Federal Reserve System |
FRBNY | Federal Reserve Bank of New York |
Freddie Mac | Federal Home Loan Mortgage Corporation |
GAAP | U.S. Generally Accepted Accounting Principles |
ICS | Insured Cash Sweep Service |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
NAICS | North American Industry Classification System |
OPEB | Other postemployment benefits |
OREO | Other real estate owned |
OTTI | Other-than-temporary impairment |
PCI | Purchased credit impaired |
ROA | Return on average assets |
ROE | Return on average equity |
RWA | Risk-weighted assets |
SBA | Small Business Administration |
SEC | Securities and Exchange Commission |
TDRs | Troubled debt restructurings |
WMG | Wealth Management Group |
Terms | |
Allowance for loan losses to total loans | Represents period-end allowance for loan losses divided by retained loans. |
Assets under administration | Represents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients. |
Assets under management | Represents assets that are managed on behalf of clients. |
Basel III | A comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. |
Benefit obligation | Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans. |
Capital Bank | Division of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga. |
CDARS | Program involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. |
3
Collateralized debt obligation | A structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans. |
Collateralized mortgage obligations | A type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk. The mortgages serve as collateral and are organized into classes based on their risk profile. |
Dodd-Frank Act | The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. |
Fully taxable equivalent basis | Income from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense. |
GAAP | Accounting principles generally accepted in the United States of America. |
Holding company and other | Consists of the operations for Chemung Financial Corporation (parent only) and CFS. |
ICS | Program involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. |
Loans held for sale | Residential real estate loans originated for sale on the secondary market with maturities from 15-30 years. |
Mortgage-backed securities | A type of asset-backed security that is secured by a collection of mortgages. |
Municipal clients | A political unit, such as a city, town, or village, incorporated for local self-government. |
N/A | Data is not applicable or available for the period presented. |
N/M | Not meaningful. |
Non-GAAP | A calculation not made according to GAAP. |
Obligations of state and political subdivisions | An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax. |
Obligations of U.S. Government | A federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds. |
Obligations of U.S. Government sponsored enterprise obligations | Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government. |
Other real estate owned | Represents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property. |
OTTI | Impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security. |
PCI loans | Represents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB. |
4
Political subdivision | A county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation. |
Pre-provision profit/(loss) | Represents total net revenue less noninterest expense. The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses. |
RWA | Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets. |
SBA loan pools | Business loans partially guaranteed by the SBA |
Securities sold under agreements to repurchase | Sale of securities together with an agreement for the seller to buy back the securities at a later date. |
TDR | A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty. |
Trust preferred securities | A hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value. |
Unaudited | Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion. |
Wealth Management Group | Provides services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, financial planning, pension, estate planning and employee benefit administration services. |
5
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
UNAUDITED | ||||||||
(in thousands, except share and per share data) | June 30, 2015 | December 31, 2014 | ||||||
ASSETS | ||||||||
Cash and due from financial institutions | $ | 28,014 | $ | 28,130 | ||||
Interest-bearing deposits in other financial institutions | 1,650 | 1,033 | ||||||
Total cash and cash equivalents | 29,664 | 29,163 | ||||||
Trading assets, at fair value | 635 | 549 | ||||||
Securities available for sale, at estimated fair value | 290,571 | 280,507 | ||||||
Securities held to maturity, estimated fair value of $6,351 at June 30, 2015 and $6,197 at December 31, 2014 | 6,045 | 5,831 | ||||||
FHLBNY and FRBNY Stock, at cost | 4,873 | 5,535 | ||||||
Loans, net of deferred loan fees | 1,150,406 | 1,121,574 | ||||||
Allowance for loan losses | (14,028 | ) | (13,686 | ) | ||||
Loans, net | 1,136,378 | 1,107,888 | ||||||
Loans held for sale | 668 | 665 | ||||||
Premises and equipment, net | 30,874 | 32,287 | ||||||
Goodwill | 21,824 | 21,824 | ||||||
Other intangible assets, net | 4,478 | 5,067 | ||||||
Bank owned life insurance | 2,801 | 2,764 | ||||||
Accrued interest receivable and other assets | 24,822 | 32,459 | ||||||
Total assets | $ | 1,553,633 | $ | 1,524,539 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Non-interest-bearing | $ | 385,467 | $ | 366,298 | ||||
Interest-bearing | 946,510 | 913,716 | ||||||
Total deposits | 1,331,977 | 1,280,014 | ||||||
FHLBNY overnight advances | 15,600 | 30,830 | ||||||
Securities sold under agreements to repurchase | 31,882 | 29,652 | ||||||
FHLBNY term advances | 19,256 | 19,310 | ||||||
Long term capital lease obligation | 2,945 | 2,976 | ||||||
Dividends payable | 1,210 | 1,204 | ||||||
Accrued interest payable and other liabilities | 14,243 | 26,925 | ||||||
Total liabilities | 1,417,113 | 1,390,911 | ||||||
Shareholders' equity: | ||||||||
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at June 30, 2015 and December 31, 2014 | 53 | 53 | ||||||
Additional-paid-in-capital | 45,468 | 45,355 | ||||||
Retained earnings | 116,817 | 114,383 | ||||||
Treasury stock, at cost (654,560 shares at June 30, 2015; 680,948 shares at December 31, 2014) | (16,704 | ) | (17,378 | ) | ||||
Accumulated other comprehensive loss | (9,114 | ) | (8,785 | ) | ||||
Total shareholders' equity | 136,520 | 133,628 | ||||||
Total liabilities and shareholders' equity | $ | 1,553,633 | $ | 1,524,539 | ||||
See accompanying notes to unaudited consolidated financial statements.
6
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands, except per share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 12,096 | $ | 11,449 | $ | 23,999 | $ | 22,617 | ||||||||
Taxable securities | 1,164 | 1,264 | 2,253 | 2,768 | ||||||||||||
Tax exempt securities | 239 | 258 | 458 | 522 | ||||||||||||
Interest-bearing deposits | 20 | 25 | 43 | 43 | ||||||||||||
Total interest and dividend income | 13,519 | 12,996 | 26,753 | 25,950 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 492 | 517 | 978 | 1,040 | ||||||||||||
Securities sold under agreements to repurchase | 212 | 212 | 421 | 420 | ||||||||||||
Borrowed funds | 168 | 192 | 365 | 382 | ||||||||||||
Total interest expense | 872 | 921 | 1,764 | 1,842 | ||||||||||||
Net interest income | 12,647 | 12,075 | 24,989 | 24,108 | ||||||||||||
Provision for loan losses | 259 | 1,103 | 649 | 1,741 | ||||||||||||
Net interest income after provision for loan losses | 12,388 | 10,972 | 24,340 | 22,367 | ||||||||||||
Non-interest income: | ||||||||||||||||
WMG fee income | 2,198 | 1,989 | 4,324 | 3,872 | ||||||||||||
Service charges on deposit accounts | 1,224 | 1,350 | 2,362 | 2,582 | ||||||||||||
Net gains on securities transactions | 252 | 522 | 302 | 522 | ||||||||||||
Net gains on sales of loans held for sale | 98 | 83 | 150 | 125 | ||||||||||||
Net gains (losses) on sales of other real estate owned | 42 | (14 | ) | 120 | (44 | ) | ||||||||||
Income from bank owned life insurance | 19 | 19 | 37 | 39 | ||||||||||||
Other | 1,493 | 1,457 | 3,217 | 3,274 | ||||||||||||
Total non-interest income | 5,326 | 5,406 | 10,512 | 10,370 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Salaries and wages | 5,188 | 5,156 | 10,288 | 10,309 | ||||||||||||
Pension and other employee benefits | 1,557 | 1,479 | 3,286 | 2,838 | ||||||||||||
Net occupancy expenses | 1,757 | 1,659 | 3,607 | 3,452 | ||||||||||||
Furniture and equipment expenses | 789 | 715 | 1,522 | 1,345 | ||||||||||||
Data processing expense | 1,552 | 1,414 | 3,113 | 2,895 | ||||||||||||
Professional services | 420 | 421 | 689 | 643 | ||||||||||||
Amortization of intangible assets | 285 | 324 | 589 | 669 | ||||||||||||
Marketing and advertising expenses | 271 | 332 | 506 | 625 | ||||||||||||
Other real estate owned expenses | 224 | 45 | 308 | 132 | ||||||||||||
FDIC insurance | 280 | 274 | 566 | 543 | ||||||||||||
Loan expense | 175 | 146 | 315 | 295 | ||||||||||||
Merger and acquisition related expenses | - | 29 | - | 115 | ||||||||||||
Other | 1,325 | 1,585 | 2,770 | 3,062 | ||||||||||||
Total non-interest expenses | 13,823 | 13,579 | 27,559 | 26,923 | ||||||||||||
Income before income tax expense | 3,891 | 2,799 | 7,293 | 5,814 | ||||||||||||
Income tax expense | 1,314 | 869 | 2,440 | 1,820 | ||||||||||||
Net income | $ | 2,577 | $ | 1,930 | $ | 4,853 | $ | 3,994 | ||||||||
Weighted average shares outstanding | 4,717 | 4,681 | 4,712 | 4,679 | ||||||||||||
Basic and diluted earnings per share | $ | 0.55 | $ | 0.41 | $ | 1.03 | $ | 0.85 |
See accompanying notes to unaudited consolidated financial statements.
7
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income | $ | 2,577 | $ | 1,930 | $ | 4,853 | $ | 3,994 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized holding gains (losses) on securities available for sale | (2,229 | ) | 1,131 | (964 | ) | 2,015 | ||||||||||
Reclassification adjustment for gains realized in net income | (252 | ) | (522 | ) | (302 | ) | (522 | ) | ||||||||
Net unrealized gains (losses) | (2,481 | ) | 609 | (1,266 | ) | 1,493 | ||||||||||
Tax effect | (931 | ) | 234 | (490 | ) | 574 | ||||||||||
Net of tax amount | (1,550 | ) | 375 | (776 | ) | 919 | ||||||||||
Change in funded status of defined benefit pension plan and other benefit plans: | ||||||||||||||||
Net gain (loss) arising during the period | - | - | - | - | ||||||||||||
Reclassification adjustment for amortization of prior service costs | (21 | ) | (22 | ) | (43 | ) | (44 | ) | ||||||||
Reclassification adjustment for amortization of net actuarial loss | 384 | 165 | 767 | 330 | ||||||||||||
Total before tax effect | 363 | 143 | 724 | 286 | ||||||||||||
Tax effect | 140 | 55 | 277 | 110 | ||||||||||||
Net of tax amount | 223 | 88 | 447 | 176 | ||||||||||||
Total other comprehensive income (loss) | (1,327 | ) | 463 | (329 | ) | 1,095 | ||||||||||
Comprehensive income | $ | 1,250 | $ | 2,393 | $ | 4,524 | $ | 5,089 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
8
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share data) | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||
Balances at January 1, 2014 | $ | 53 | $ | 45,399 | $ | 111,031 | $ | (18,060 | ) | $ | 155 | $ | 138,578 | |||||||||||
Net income | - | - | 3,994 | - | - | 3,994 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 1,095 | 1,095 | ||||||||||||||||||
Restricted stock awards | - | 74 | - | - | - | 74 | ||||||||||||||||||
Restricted stock units for directors' deferred compensation plan | - | 48 | - | - | - | 48 | ||||||||||||||||||
Cash dividends declared ($0.52 per share) | - | - | (2,401 | ) | - | - | (2,401 | ) | ||||||||||||||||
Distribution of 8,385 shares of treasury stock for directors' compensation | - | 59 | - | 214 | - | 273 | ||||||||||||||||||
Distribution of 990 shares of treasury stock for employee restricted stock awards, net | - | (26 | ) | - | 26 | - | - | |||||||||||||||||
Distribution of 3,595 shares of treasury stock for employee stock compensation | - | 25 | - | 92 | - | 117 | ||||||||||||||||||
Distribution of 3,467 shares of treasury stock for deferred directors’ compensation | - | (85 | ) | - | 88 | - | 3 | |||||||||||||||||
Balances at June 30, 2014 | $ | 53 | $ | 45,494 | $ | 112,624 | $ | (17,640 | ) | $ | 1,250 | $ | 141,781 | |||||||||||
Balances at January 1, 2015 | $ | 53 | $ | 45,355 | $ | 114,383 | $ | (17,378 | ) | $ | (8,785 | ) | $ | 133,628 | ||||||||||
Net income | - | - | 4,853 | - | - | 4,853 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (329 | ) | (329 | ) | ||||||||||||||||
Restricted stock awards | - | 104 | - | - | - | 104 | ||||||||||||||||||
Restricted stock units for directors' deferred compensation plan | - | 49 | - | - | - | 49 | ||||||||||||||||||
Cash dividends declared ($0.52 per share) | - | - | (2,419 | ) | - | - | (2,419 | ) | ||||||||||||||||
Distribution of 9,673 shares of treasury stock for directors' compensation | - | 24 | - | 247 | - | 271 | ||||||||||||||||||
Distribution of 3,303 shares of treasury stock for employee stock compensation | - | 8 | - | 85 | - | 93 | ||||||||||||||||||
Sale of 9,814 shares of treasury stock | - | 17 | - | 250 | - | 267 | ||||||||||||||||||
Distribution of 3,598 shares of treasury stock for deferred directors’ compensation | - | (89 | ) | - | 92 | - | 3 | |||||||||||||||||
Balances at June 30, 2015 | $ | 53 | $ | 45,468 | $ | 116,817 | $ | (16,704 | ) | $ | (9,114 | ) | $ | 136,520 | ||||||||||
See accompanying notes to unaudited consolidated financial statements.
9
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) | Six Months Ended June 30, | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | 2015 | 2014 | ||||||
Net income | $ | 4,853 | $ | 3,994 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of intangible assets | 589 | 669 | ||||||
Provision for loan losses | 649 | 1,741 | ||||||
Gains on disposal of fixed assets | (9 | ) | (7 | ) | ||||
Depreciation and amortization of fixed assets | 2,062 | 1,808 | ||||||
Amortization of premiums on securities, net | 1,014 | 1,223 | ||||||
Gains on sales of loans held for sale, net | (150 | ) | (125 | ) | ||||
Proceeds from sales of loans held for sale | 7,004 | 5,477 | ||||||
Loans originated and held for sale | (6,857 | ) | (5,571 | ) | ||||
Net gains on trading assets | (12 | ) | (30 | ) | ||||
Proceeds from sales of trading assets | - | 7 | ||||||
Net gains on securities transactions | (302 | ) | (522 | ) | ||||
Net (gains) losses on sales of other real estate owned | (120 | ) | 44 | |||||
Purchase of trading assets | (74 | ) | (61 | ) | ||||
Decrease in other assets | 7,068 | 1,672 | ||||||
Decrease in accrued interest payable | (19 | ) | (46 | ) | ||||
Expense related to restricted stock units for directors' deferred compensation plan | 49 | 48 | ||||||
Expense related to employee stock compensation | 93 | 117 | ||||||
Expense related to restricted stock awards | 104 | 74 | ||||||
Decrease in other liabilities | (11,452 | ) | (3,041 | ) | ||||
Proceeds from bank owned life insurance | - | 110 | ||||||
Income from bank owned life insurance | (37 | ) | (39 | ) | ||||
Net cash provided by operating activities | 4,453 | 7,542 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from sales and calls of securities available for sale | 54,319 | 49,765 | ||||||
Proceeds from maturities and principal collected on securities available for sale | 17,546 | 13,272 | ||||||
Proceeds from maturities and principal collected on securities held to maturity | 1,184 | 1,813 | ||||||
Purchases of securities available for sale | (83,907 | ) | (2,627 | ) | ||||
Purchases of securities held to maturity | (1,398 | ) | (592 | ) | ||||
Purchase of FHLBNY and FRBNY stock | (5,852 | ) | (293 | ) | ||||
Redemption of FHLBNY and FRBNY stock | 6,514 | 45 | ||||||
Proceeds from sale of equipment | 9 | 7 | ||||||
Purchases of premises and equipment | (649 | ) | (1,707 | ) | ||||
Proceeds from sales of other real estate owned | 699 | 298 | ||||||
Net increase in loans | (29,149 | ) | (89,949 | ) | ||||
Net cash used by investing activities | (40,684 | ) | (29,968 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts | 83,081 | 61,148 | ||||||
Net decrease in time deposits | (31,118 | ) | (18,976 | ) | ||||
Net increase (decrease) in securities sold under agreements to repurchase | 2,230 | (1,955 | ) | |||||
Repayments of FHLBNY overnight advances, net | (15,230 | ) | - | |||||
Repayments of FHLBNY long term advances | (54 | ) | (1,107 | ) | ||||
Increase in capital lease obligation | - | 384 | ||||||
Payments made on capital lease | (31 | ) | - | |||||
Sale of treasury stock | 267 | - | ||||||
Cash dividends paid | (2,413 | ) | (2,395 | ) | ||||
Net cash provided by financing activities | 36,732 | 37,099 | ||||||
Net increase in cash and cash equivalents | 501 | 14,673 | ||||||
Cash and cash equivalents, beginning of period | 29,163 | 51,609 | ||||||
Cash and cash equivalents, end of period | $ | 29,664 | $ | 66,282 |
(continued)
10
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
(in thousands) | Six Months Ended June 30, | |||||||
Supplemental disclosure of cash flow information: | 2015 | 2014 | ||||||
Cash paid for: | ||||||||
Interest | $ | 1,783 | $ | 1,888 | ||||
Income taxes | $ | 4,651 | $ | 1,246 | ||||
Supplemental disclosure of non-cash activity: | ||||||||
Transfer of loans to other real estate owned | $ | 10 | $ | 578 | ||||
Dividends declared, not yet paid | $ | 1,210 | $ | 1,201 | ||||
See accompanying notes to unaudited consolidated financial statements.
11
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Corporation, through its wholly owned subsidiaries, the Bank and CFS, provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation and the Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. These financial statements include the accounts of the Corporation and its subsidiaries, and all significant intercompany balances and transactions are eliminated in consolidation. Amounts in the prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current period's presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included.
Subsequent Events
The Corporation has evaluated events and transactions through the time the unaudited consolidated financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the unaudited consolidated financial statements or disclosed in the notes to the unaudited consolidated financial statements.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, an amendment to Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring. The objective of this ASU is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that all or a portion of the loan should be derecognized and the real estate property recognized. The main provisions would also require additional disclosures regarding the amount of foreclosed residential real estate property held by the creditor and the recorded investments of consumer mortgage loans that are in the process of foreclosure at each interim and annual reporting period. This ASU became effective for the Corporation in fiscal years and interim periods within those years, beginning after December 15, 2014. The Corporation has adopted this guidance for the reporting periods after December 15, 2014 and did not have a material impact on its financial statements.
In May 2014, the FASB issued ASU 2014-09, an amendment to Revenue from Contracts with Customers (Topic 606). The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU are effective for annual reported period beginning after December 15, 2017, including interim periods within that reporting period. The standard allows an entity to apply the amendments in the ASU using either the retrospective or cumulative effect transition method. The Corporation is evaluating the potential impact on the Corporation’s financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under ASU 2015-03 the Corporation will present debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. Amortization of such costs will continue to be reported as interest expense. ASU 2015-03 will be effective for the Corporation beginning January 1, 2016, though early adoption is permitted. Retrospective adoption is required. The Corporation is evaluating the potential impact on the Corporation’s financial statements.
12
Effective April 2015, the Corporation adopted ASU No. 2014-11, Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. Additionally, ASU 2014-11 requires certain disclosures for repurchase agreements that are accounted for as secured borrowings. The Corporation has historically used repurchase agreements as part of its treasury management offering and accounts for these transactions as secured borrowings. The required disclosures under ASU 2014-11 are included in Note 7. Adoption of ASU 2014-11 did not otherwise have a material impact on the Corporation’s financial statements.
NOTE 2 EARNING PER COMMON SHARE (shares in thousands)
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 non-forfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. 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 4,717 and 4,681 weighted average shares outstanding for the three month periods ended June 30, 2015 and 2014, respectively. Earnings per share were computed by dividing net income by 4,712 and 4,679 weighted average shares outstanding for the six month periods ended June 30, 2015 and 2014, respectively. There were no dilutive common stock equivalents during the three or six month periods ended June 30, 2015 or 2014.
NOTE 3 SECURITIES
Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):
June 30, 2015 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 130,736 | $ | 1,160 | $ | 2 | $ | 131,894 | ||||||||
Mortgage-backed securities, residential | 115,727 | 672 | 723 | 115,676 | ||||||||||||
Collateralized mortgage obligations | 139 | 2 | - | 141 | ||||||||||||
Obligations of states and political subdivisions | 39,379 | 671 | 83 | 39,967 | ||||||||||||
Corporate bonds and notes | 1,249 | 13 | 2 | 1,260 | ||||||||||||
SBA loan pools | 1,138 | 10 | 2 | 1,146 | ||||||||||||
Corporate stocks | 285 | 202 | - | 487 | ||||||||||||
Total | $ | 288,653 | $ | 2,730 | $ | 812 | $ | 290,571 |
December 31, 2014 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 180,535 | $ | 1,300 | $ | 162 | $ | 181,673 | ||||||||
Mortgage-backed securities, residential | 60,787 | 892 | 19 | 61,660 | ||||||||||||
Collateralized mortgage obligations | 335 | 3 | - | 338 | ||||||||||||
Obligations of states and political subdivisions | 30,677 | 802 | 28 | 31,451 | ||||||||||||
Corporate bonds and notes | 1,502 | 35 | 4 | 1,533 | ||||||||||||
SBA loan pools | 1,296 | 11 | 3 | 1,304 | ||||||||||||
Trust preferred securities | 1,906 | 122 | - | 2,028 | ||||||||||||
Corporate stocks | 285 | 235 | - | 520 | ||||||||||||
Total | $ | 277,323 | $ | 3,400 | $ | 216 | $ | 280,507 |
13
Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):
June 30, 2015 | ||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||
Obligations of states and political subdivisions | $ | 5,605 | $ | 304 | $ | - | $ | 5,909 | ||||
Time deposits with other financial institutions | 440 | 2 | - | 442 | ||||||||
Total | $ | 6,045 | $ | 306 | $ | - | $ | 6,351 |
December 31, 2014 | ||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||
Obligations of states and political subdivisions | $ | 5,175 | $ | 360 | $ | - | $ | 5,535 | ||||
Time deposits with other financial institutions | 656 | 6 | - | 662 | ||||||||
Total | $ | 5,831 | $ | 366 | $ | - | $ | 6,197 |
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 (in thousands):
June 30, 2015 | ||||||||||||||||
Available for Sale | Held to Maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Within one year | $ | 40,628 | $ | 41,060 | $ | 3,397 | $ | 3,430 | ||||||||
After one, but within five years | 110,547 | 111,777 | 2,431 | 2,674 | ||||||||||||
After five, but within ten years | 20,189 | 20,284 | 217 | 247 | ||||||||||||
After ten years | - | - | - | - | ||||||||||||
171,364 | 173,121 | 6,045 | 6,351 | |||||||||||||
Mortgage-backed securities, residential | 115,727 | 115,676 | - | - | ||||||||||||
Collateralized mortgage obligations | 139 | 141 | - | - | ||||||||||||
SBA loan pools | 1,138 | 1,146 | - | - | ||||||||||||
Total | $ | 288,368 | $ | 290,084 | $ | 6,045 | $ | 6,351 |
The proceeds from sales and calls of securities resulting in gains or losses for the three months ended June 30, 2015 and 2014 are listed below (in thousands):
2015 | 2014 | |||||||
Proceeds | $ | 54,268 | $ | 49,765 | ||||
Gross gains | $ | 252 | $ | 522 | ||||
Tax expense | $ | 97 | $ | 201 |
The proceeds from sales and calls of securities resulting in gains or losses for the six months ended June 30, 2015 and 2014 are listed below (in thousands):
2015 | 2014 | |||||||
Proceeds | $ | 54,319 | $ | 49,765 | ||||
Gross gains | $ | 302 | $ | 522 | ||||
Tax expense | $ | 116 | $ | 201 |
14
The following tables summarize the investment securities available for sale with unrealized losses at June 30, 2015 and December 31, 2014 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
June 30, 2015 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 4,997 | $ | 2 | $ | - | $ | - | $ | 4,997 | $ | 2 | ||||||||||||
Mortgage-backed securities, residential | 80,393 | 723 | - | - | 80,393 | 723 | ||||||||||||||||||
Obligations of states and political subdivisions | 12,857 | 80 | 737 | 3 | 13,594 | 83 | ||||||||||||||||||
Corporate bonds and notes | 245 | 2 | - | - | 245 | 2 | ||||||||||||||||||
SBA loan pools | - | - | 506 | 2 | 506 | 2 | ||||||||||||||||||
Total temporarily impaired securities | $ | 98,492 | $ | 807 | $ | 1,243 | $ | 5 | $ | 99,735 | $ | 812 |
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
December 31, 2014 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 57,512 | $ | 108 | $ | 4,945 | $ | 54 | $ | 62,457 | $ | 162 | ||||||||||||
Mortgage-backed securities, residential | 11,051 | 19 | - | - | 11,051 | 19 | ||||||||||||||||||
Obligations of states and political subdivisions | 4,625 | 22 | 1,056 | 6 | 5,681 | 28 | ||||||||||||||||||
Corporate bonds and notes | - | - | 243 | 4 | 243 | 4 | ||||||||||||||||||
Corporate stocks | 276 | 1 | 316 | 2 | 592 | 3 | ||||||||||||||||||
Total temporarily impaired securities | $ | 73,464 | $ | 150 | $ | 6,560 | $ | 66 | $ | 80,024 | $ | 216 |
Other-Than-Temporary Impairment
As of June 30, 2015, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage backed securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because it is not likely that the Corporation will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
During the first quarter of 2014, the Corporation received notice that one CDO consisting of a pool of trust preferred securities was liquidated and recorded $500 thousand in other operating income during the first quarter of 2014. The Corporation does not own any other CDO’s in its investment securities portfolio.
15
There were no cumulative credit losses recognized in earnings for the three month periods ended June 30, 2015 and 2014. The table below presents a roll forward of the cumulative credit losses recognized in earnings for the six month periods ended June 30, 2015 and 2014 (in thousands):
2015 | 2014 | |||||||
Beginning balance, January 1, | $ | - | $ | 1,939 | ||||
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 Corporation intends to sell or that it will be more likely than not that the Corporation 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 | - | - | ||||||
Reductions for previous credit losses realized in securities liquidated during the period | - | (1,939 | ) | |||||
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized | - | - | ||||||
Ending balance, June 30, | $ | - | $ | - |
NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio, net of deferred origination fees and cost, and unearned income is summarized as follows (in thousands):
June 30, 2015 | December 31, 2014 | |||||||
Commercial and agricultural: | ||||||||
Commercial and industrial | $ | 179,880 | $ | 165,385 | ||||
Agricultural | 1,832 | 1,021 | ||||||
Commercial mortgages: | ||||||||
Construction | 37,557 | 54,831 | ||||||
Commercial mortgages, other | 446,034 | 397,762 | ||||||
Residential mortgages | 198,469 | 196,809 | ||||||
Consumer loans: | ||||||||
Credit cards | 1,521 | 1,654 | ||||||
Home equity lines and loans | 100,701 | 99,354 | ||||||
Indirect consumer loans | 164,890 | 184,763 | ||||||
Direct consumer loans | 19,522 | 19,995 | ||||||
Total loans, net of deferred loan fees | $ | 1,150,406 | $ | 1,121,574 | ||||
Interest receivable on loans | 2,693 | 2,780 | ||||||
Total recorded investment in loans | $ | 1,153,099 | $ | 1,124,354 |
The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.
16
The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2015 and 2014 (in thousands):
Three Months Ended | ||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||
Allowance for loan losses | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Beginning balance: | $ | 1,671 | $ | 6,530 | $ | 1,594 | $ | 4,097 | $ | 13,892 | ||||||||||
Charge-offs: | - | (28 | ) | (10 | ) | (245 | ) | (283 | ) | |||||||||||
Recoveries: | 23 | 17 | - | 120 | 160 | |||||||||||||||
Net recoveries (charge-offs) | 23 | (11 | ) | (10 | ) | (125 | ) | (123 | ) | |||||||||||
Provision | 131 | 106 | (39 | ) | 61 | 259 | ||||||||||||||
Ending balance | $ | 1,825 | $ | 6,625 | $ | 1,545 | $ | 4,033 | $ | 14,028 |
Three Months Ended | ||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Allowance for loan losses | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Beginning balance: | $ | 1,945 | $ | 6,484 | $ | 1,552 | $ | 3,174 | $ | 13,155 | ||||||||||
Charge-offs: | (300 | ) | (315 | ) | - | (308 | ) | (923 | ) | |||||||||||
Recoveries: | 100 | 45 | 28 | 124 | 297 | |||||||||||||||
Net recoveries (charge-offs) | (200 | ) | (270 | ) | 28 | (184 | ) | (626 | ) | |||||||||||
Provision | 4 | 698 | (82 | ) | 483 | 1,103 | ||||||||||||||
Ending balance | $ | 1,749 | $ | 6,912 | $ | 1,498 | $ | 3,473 | $ | 13,632 |
Six Months Ended | ||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||
Allowance for loan losses | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Beginning balance: | $ | 1,460 | $ | 6,326 | $ | 1,572 | $ | 4,328 | $ | 13,686 | ||||||||||
Charge-offs: | - | (28 | ) | (32 | ) | (613 | ) | (673 | ) | |||||||||||
Recoveries: | 38 | 84 | - | 244 | 366 | |||||||||||||||
Net recoveries (charge-offs) | 38 | 56 | (32 | ) | (369 | ) | (307 | ) | ||||||||||||
Provision | 327 | 243 | 5 | 74 | 649 | |||||||||||||||
Ending balance | $ | 1,825 | $ | 6,625 | $ | 1,545 | $ | 4,033 | $ | 14,028 |
Six Months Ended | ||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Allowance for loan losses | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Beginning balance: | $ | 1,979 | $ | 6,243 | $ | 1,517 | $ | 3,037 | $ | 12,776 | ||||||||||
Charge-offs: | (355 | ) | (358 | ) | (7 | ) | (776 | ) | (1,496 | ) | ||||||||||
Recoveries: | 193 | 83 | 28 | 307 | 611 | |||||||||||||||
Net recoveries (charge-offs) | (162 | ) | (275 | ) | 21 | (469 | ) | (885 | ) | |||||||||||
Provision | (68 | ) | 944 | (40 | ) | 905 | 1,741 | |||||||||||||
Ending balance | $ | 1,749 | $ | 6,912 | $ | 1,498 | $ | 3,473 | $ | 13,632 |
17
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015 | ||||||||||||||||||||
Allowance for loan losses: | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 244 | $ | 1,289 | $ | - | $ | - | $ | 1,533 | ||||||||||
Collectively evaluated for impairment | 1,581 | 5,278 | 1,514 | 4,033 | 12,406 | |||||||||||||||
Loans acquired with deteriorated credit quality | - | 58 | 31 | - | 89 | |||||||||||||||
Total ending allowance balance | $ | 1,825 | $ | 6,625 | $ | 1,545 | $ | 4,033 | $ | 14,028 |
December 31, 2014 | ||||||||||||||||||||
Allowance for loan losses: | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||
Individually evaluated for impairment | $ | 89 | $ | 1,145 | $ | - | $ | 1 | $ | 1,235 | ||||||||||
Collectively evaluated for impairment | 1,335 | 5,145 | 1,550 | 4,327 | 12,357 | |||||||||||||||
Loans acquired with deteriorated credit quality | 36 | 36 | 22 | - | 94 | |||||||||||||||
Total ending allowance balance | $ | 1,460 | $ | 6,326 | $ | 1,572 | $ | 4,328 | $ | 13,686 |
June 30, 2015 | ||||||||||||||||||||
Loans: | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Loans individually evaluated for impairment | $ | 1,508 | $ | 13,071 | $ | 243 | $ | 481 | $ | 15,303 | ||||||||||
Loans collectively evaluated for impairment | 180,627 | 469,759 | 198,457 | 286,809 | 1,135,652 | |||||||||||||||
Loans acquired with deteriorated credit quality | - | 1,883 | 261 | - | 2,144 | |||||||||||||||
Total ending loans balance | $ | 182,135 | $ | 484,713 | $ | 198,961 | $ | 287,290 | $ | 1,153,099 |
December 31, 2014 | ||||||||||||||||||||
Loans: | Commercial and Agricultural | Commercial Mortgages | Residential Mortgages | Consumer Loans | Total | |||||||||||||||
Loans individually evaluated for impairment | $ | 1,452 | $ | 13,712 | $ | 254 | $ | 486 | $ | 15,904 | ||||||||||
Loans collectively evaluated for impairment | 164,748 | 438,246 | 196,783 | 306,042 | 1,105,819 | |||||||||||||||
Loans acquired with deteriorated credit quality | 620 | 1,761 | 250 | - | 2,631 | |||||||||||||||
Total ending loans balance | $ | 166,820 | $ | 453,719 | $ | 197,287 | $ | 306,528 | $ | 1,124,354 |
18
The following tables present loans individually evaluated for impairment recognized by class of loans as of June 30, 2015 and December 31, 2014, the average recorded investment and interest income recognized by class of loans as of the three and six month periods ended June 30, 2015 and 2014 (in thousands):
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
With no related allowance recorded: | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | ||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||
Commercial and industrial | $ | 1,260 | $ | 1,263 | $ | - | $ | 1,359 | $ | 1,364 | $ | - | ||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | 445 | 446 | - | 1,927 | 1,910 | - | ||||||||||||||||||
Commercial mortgages, other | 7,766 | 7,679 | - | 7,803 | 7,708 | - | ||||||||||||||||||
Residential mortgages | 243 | 243 | - | 253 | 253 | - | ||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||
Home equity lines and loans | 478 | 481 | - | 429 | 432 | - | ||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||
Commercial and industrial | 244 | 245 | 244 | 89 | 89 | 89 | ||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Commercial mortgages, other | 4,995 | 4,946 | 1,289 | 4,210 | 4,094 | 1,145 | ||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||
Home equity lines and loans | - | - | - | 54 | 54 | 1 | ||||||||||||||||||
Total | $ | 15,431 | $ | 15,303 | $ | 1,533 | $ | 16,124 | $ | 15,904 | $ | 1,235 |
19
Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||||||||
With no related allowance recorded: | Average Recorded Investment | Interest Income Recognized (1) | Average Recorded Investment | Interest Income Recognized (1) | Average Recorded Investment | Interest Income Recognized (1) | Average Recorded Investment | Interest Income Recognized (1) | ||||||||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,467 | $ | 17 | $ | 1,386 | $ | 16 | $ | 1,433 | $ | 32 | $ | 1,566 | $ | 30 | ||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||||||
Construction | 1,172 | 4 | 2,101 | 25 | 1,418 | 29 | 2,231 | 51 | ||||||||||||||||||||||||
Commercial mortgages, other | 7,636 | 63 | 6,489 | 66 | 7,660 | 126 | 6,806 | 129 | ||||||||||||||||||||||||
Residential mortgages | 246 | 1 | 112 | - | 249 | 2 | 114 | - | ||||||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||||||
Home equity lines & loans | 482 | 6 | 71 | 1 | 465 | 12 | 72 | 1 | ||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||||||||||
Commercial and industrial | 274 | - | 512 | - | 212 | 3 | 784 | - | ||||||||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||||||
Commercial mortgages, other | 4,611 | 24 | 1,010 | - | 4,438 | 47 | 912 | - | ||||||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||||||
Home equity lines and loans | - | - | 57 | 1 | 18 | - | 58 | 2 | ||||||||||||||||||||||||
Total | $ | 15,888 | $ | 115 | $ | 11,738 | $ | 109 | $ | 15,893 | $ | 136 | $ | 12,543 | $ | 213 |
(1) | Cash basis interest income approximates interest income recognized. |
20
The following tables present the recorded investment in past due and non-accrual status by class of loans as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015 | Current | 30-89 Days Past Due | 90 Days or more Past Due and accruing | Loans acquired with deteriorated credit quality | Non-Accrual (1) | Total | ||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||
Commercial and industrial | $ | 179,913 | $ | 120 | $ | 11 | $ | - | $ | 254 | $ | 180,298 | ||||||||||||
Agricultural | 1,837 | - | - | - | - | 1,837 | ||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | 37,498 | - | - | - | 146 | 37,644 | ||||||||||||||||||
Commercial mortgages, other | 434,106 | 3,313 | - | 1,883 | 7,767 | 447,069 | ||||||||||||||||||
Residential mortgages | 193,301 | 1,857 | - | 261 | 3,542 | 198,961 | ||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||
Credit cards | 1,472 | 33 | 16 | - | - | 1,521 | ||||||||||||||||||
Home equity lines and loans | 99,974 | 124 | - | - | 840 | 100,938 | ||||||||||||||||||
Indirect consumer loans | 163,789 | 1,164 | - | - | 292 | 165,245 | ||||||||||||||||||
Direct consumer loans | 19,500 | 65 | - | - | 21 | 19,586 | ||||||||||||||||||
Total | $ | 1,131,390 | $ | 6,676 | $ | 27 | $ | 2,144 | $ | 12,862 | $ | 1,153,099 |
(1) Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of June 30, 2015.
December 31, 2014 | Current | 30-89 Days Past Due | 90 Days or more Past Due and accruing | Loans acquired with deteriorated credit quality | Non-Accrual (1) | Total | ||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||
Commercial and industrial | $ | 164,109 | $ | 756 | $ | - | $ | 620 | $ | 312 | $ | 165,797 | ||||||||||||
Agricultural | 1,023 | - | - | - | - | 1,023 | ||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||
Construction | 53,371 | - | 1,446 | - | 150 | 54,967 | ||||||||||||||||||
Commercial mortgages, other | 391,096 | 3,064 | - | 1,761 | 2,831 | 398,752 | ||||||||||||||||||
Residential mortgages | 191,089 | 2,333 | - | 250 | 3,615 | 197,287 | ||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||
Credit cards | 1,641 | 5 | 8 | - | - | 1,654 | ||||||||||||||||||
Home equity lines and loans | 98,340 | 736 | - | - | 515 | 99,591 | ||||||||||||||||||
Indirect consumer loans | 183,103 | 1,789 | - | - | 325 | 185,217 | ||||||||||||||||||
Direct consumer loans | 19,988 | 48 | - | - | 30 | 20,066 | ||||||||||||||||||
Total | $ | 1,103,760 | $ | 8,731 | $ | 1,454 | $ | 2,631 | $ | 7,778 | $ | 1,124,354 |
(1) Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of December 31, 2014.
21
Troubled Debt Restructurings:
A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan.
As of June 30, 2015 and December 31, 2014, the Corporation has a recorded investment in TDRs of $9.6 million and $9.7 million, respectively. There were specific reserves of $0.4 million and $0.3 million allocated for TDRs at June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, TDRs totaling $7.0 million were accruing interest under the modified terms and $2.6 million were on non-accrual status. As of December 31, 2014, TDRs totaling $8.7 million were accruing interest under the modified terms and $1.0 million were on non-accrual status. The Corporation had committed additional amounts up to $0.4 million as of June 30, 2015 and less than $0.1 million as of December 31, 2014, to customers with outstanding loans that are classified as TDRs.
During the three and six months ended June 30, 2015 and 2014, the terms of certain loans were modified as TDRs. The modification of the terms of such loans included one or a combination of the following: reduced scheduled payments for greater than three months or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.
The following table presents loans by class modified as TDRs that occurred during the three months ended June 30, 2015 (in thousands):
June 30, 2015 | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||
Troubled debt restructurings: | |||||||||
Commercial mortgages: | |||||||||
Commercial mortgages | 1 | 110 | 110 | ||||||
Total | 1 | $ | 110 | $ | 110 |
There were no loans modified as TDRs during the three months ended June 30, 2014.
The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2015 and 2014 (in thousands):
June 30, 2015 | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||
Troubled debt restructurings: | |||||||||
Commercial and agricultural: | |||||||||
Commercial and industrial | 1 | $ | 477 | $ | 477 | ||||
Commercial mortgages: | |||||||||
Commercial mortgages | 1 | 110 | 110 | ||||||
Total | 2 | $ | 587 | $ | 587 |
22
June 30, 2014 | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||
Troubled debt restructurings: | |||||||||
Commercial and agricultural: | |||||||||
Commercial and industrial | 1 | $ | 503 | $ | 503 | ||||
Commercial mortgages: | |||||||||
Commercial mortgages | 2 | 367 | 323 | ||||||
Total | 3 | $ | 870 | $ | 826 |
The TDRs described above increased the allowance for loan losses by less than $0.1 million and resulted in no charge-offs during the six months ended June 30, 2015. The TDRs described above did not increase the allowance for loan losses and resulted in less than $0.1 million in charge-offs during the six months ended June 30, 2014.
There were no payment defaults on any loans previously modified as TDRs during the three and six months ended June 30, 2015 or 2014, 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 are 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 residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, 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 at 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.
23
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. Based on the analyses performed as of June 30, 2015 and December 31, 2014, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):
June 30, 2015 | ||||||||||||||||||||||||||||
Not Rated | Pass | Loans acquired with deteriorated credit quality | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | - | $ | 174,500 | $ | - | $ | 3,696 | $ | 1,938 | $ | 164 | $ | 180,298 | ||||||||||||||
Agricultural | - | 1,837 | - | - | - | - | 1,837 | |||||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Construction | - | 37,198 | - | 300 | 146 | - | 37,644 | |||||||||||||||||||||
Commercial mortgages | - | 415,280 | 1,883 | 12,486 | 13,296 | 4,124 | 447,069 | |||||||||||||||||||||
Residential mortgages | 194,926 | - | 261 | - | 3,774 | - | 198,961 | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Credit cards | 1,521 | - | - | - | - | - | 1,521 | |||||||||||||||||||||
Home equity lines and loans | 100,093 | - | - | - | 845 | - | 100,938 | |||||||||||||||||||||
Indirect consumer loans | 164,946 | - | - | - | 299 | - | 165,245 | |||||||||||||||||||||
Direct consumer loans | 19,565 | - | - | - | 21 | - | 19,586 | |||||||||||||||||||||
Total | $ | 481,051 | $ | 628,815 | $ | 2,144 | $ | 16,482 | $ | 20,319 | $ | 4,288 | $ | 1,153,099 |
December 31, 2014 | ||||||||||||||||||||||||||||
Not Rated | Pass | Loans acquired with deteriorated credit quality | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||
Commercial and agricultural: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | - | $ | 158,140 | $ | 620 | $ | 3,695 | $ | 3,306 | $ | 36 | $ | 165,797 | ||||||||||||||
Agricultural | - | 1,023 | - | - | - | - | 1,023 | |||||||||||||||||||||
Commercial mortgages: | ||||||||||||||||||||||||||||
Construction | - | 51,525 | - | 3,292 | 150 | - | 54,967 | |||||||||||||||||||||
Commercial mortgages | - | 365,448 | 1,761 | 20,871 | 10,266 | 406 | 398,752 | |||||||||||||||||||||
Residential mortgages | 193,422 | - | 250 | - | 3,615 | - | 197,287 | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Credit cards | 1,654 | - | - | - | - | - | 1,654 | |||||||||||||||||||||
Home equity lines and loans | 99,076 | - | - | - | 515 | - | 99,591 | |||||||||||||||||||||
Indirect consumer loans | 184,940 | - | - | - | 277 | - | 185,217 | |||||||||||||||||||||
Direct consumer loans | 20,045 | - | - | - | 21 | - | 20,066 | |||||||||||||||||||||
Total | $ | 499,137 | $ | 576,136 | $ | 2,631 | $ | 27,858 | $ | 18,150 | $ | 442 | $ | 1,124,354 |
24
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 table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015 | |||||||||||||||
Consumer Loans | |||||||||||||||
Residential Mortgages | Credit Card | Home Equity Lines and Loans | Indirect Consumer Loans | Other Direct Consumer Loans | |||||||||||
Performing | $ | 195,419 | $ | 1,521 | $ | 100,098 | $ | 164,953 | $ | 19,565 | |||||
Non-Performing | 3,542 | - | 840 | 292 | 21 | ||||||||||
$ | 198,961 | $ | 1,521 | $ | 100,938 | $ | 165,245 | $ | 19,586 |
December 31, 2014 | |||||||||||||||
Consumer Loans | |||||||||||||||
Residential Mortgages | Credit Card | Home Equity Lines and Loans | Indirect Consumer Loans | Other Direct Consumer Loans | |||||||||||
Performing | $ | 193,672 | $ | 1,654 | $ | 99,076 | $ | 184,892 | $ | 20,036 | |||||
Non-Performing | 3,615 | - | 515 | 325 | 30 | ||||||||||
$ | 197,287 | $ | 1,654 | $ | 99,591 | $ | 185,217 | $ | 20,066 |
At the time of the merger with Fort Orange Financial Corp., the Corporation identified certain loans with evidence of deteriorated credit quality, and the probability that the Corporation would be unable to collect all contractually required payments from the borrower. These loans are classified as PCI loans. The Corporation adjusted its estimates of future expected losses, cash flows, and renewal assumptions on the PCI loans 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 table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the PCI loans from April 1, 2015 to June 30, 2015 and January 1, 2015 to June 30, 2015 (in thousands):
Three months ended June 30, 2015 | Balance at March 31, 2015 | Income Accretion | All Other Adjustments | Balance at June 30, 2015 | ||||||||||||
Contractually required principal and interest | $ | 2,945 | $ | - | $ | 91 | $ | 3,036 | ||||||||
Contractual cash flows not expected to be collected (nonaccretable discount) | (595 | ) | - | 27 | (568 | ) | ||||||||||
Cash flows expected to be collected | 2,350 | - | 118 | 2,468 | ||||||||||||
Interest component of expected cash flows (accretable yield) | (333 | ) | 36 | (27 | ) | (324 | ) | |||||||||
Fair value of loans acquired with deteriorating credit quality | $ | 2,017 | $ | 36 | $ | 91 | $ | 2,144 |
Six months ended June 30, 2015 | Balance at December 31, 2014 | Income Accretion | All Other Adjustments | Balance at June 30, 2015 | ||||||||||||
Contractually required principal and interest | $ | 3,621 | $ | - | $ | (585 | ) | $ | 3,036 | |||||||
Contractual cash flows not expected to be collected (nonaccretable discount) | (570 | ) | - | 2 | (568 | ) | ||||||||||
Cash flows expected to be collected | 3,051 | - | (583 | ) | 2,468 | |||||||||||
Interest component of expected cash flows (accretable yield) | (420 | ) | 99 | (3 | ) | (324 | ) | |||||||||
Fair value of loans acquired with deteriorating credit quality | $ | 2,631 | $ | 99 | $ | (586 | ) | $ | 2,144 |
25
NOTE 5 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).
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.
OREO: 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.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (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.
26
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurement at June 30, 2015 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 | $ | 131,894 | $ | 14,578 | $ | 117,316 | $ | - | ||||||||
Mortgage-backed securities, residential | 115,676 | - | 115,676 | - | ||||||||||||
Collateralized mortgage obligations | 141 | - | 141 | - | ||||||||||||
Obligations of states and political subdivisions | 39,967 | - | 39,967 | - | ||||||||||||
Corporate bonds and notes | 1,260 | - | 1,260 | - | ||||||||||||
SBA loan pools | 1,146 | - | 1,146 | - | ||||||||||||
Corporate stocks | 487 | 60 | 427 | - | ||||||||||||
Total available for sale securities | $ | 290,571 | $ | 14,638 | $ | 275,933 | $ | - | ||||||||
Trading assets | $ | 635 | $ | 635 | $ | - | $ | - |
Fair Value Measurement at December 31, 2014 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 | $ | 181,673 | $ | 31,115 | $ | 150,558 | $ | - | ||||||||
Mortgage-backed securities, residential | 61,660 | - | 61,660 | - | ||||||||||||
Collateralized mortgage obligations | 338 | - | 338 | - | ||||||||||||
Obligations of states and political subdivisions | 31,451 | - | 31,451 | - | ||||||||||||
Corporate bonds and notes | 1,533 | - | 1,533 | - | ||||||||||||
SBA loan pools | 1,304 | - | 1,304 | - | ||||||||||||
Trust Preferred securities | 2,028 | - | 2,028 | - | ||||||||||||
Corporate stocks | 520 | 104 | 416 | - | ||||||||||||
Total available for sale securities | $ | 280,507 | $ | 31,219 | $ | 249,288 | $ | - | ||||||||
Trading assets | $ | 549 | $ | 549 | $ | - | $ | - |
There were no transfers between Level 1 and Level 2 during the six month period ended June 30, 2015 or the year ended December 31, 2014.
27
Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):
Fair Value Measurement at June 30, 2015 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 mortgages: | ||||||||||||||||
Commercial mortgages | $ | 3,657 | $ | - | $ | - | $ | 3,657 | ||||||||
Total impaired loans | $ | 3,657 | $ | - | $ | - | $ | 3,657 | ||||||||
Other real estate owned: | ||||||||||||||||
Commercial mortgages: | ||||||||||||||||
Commercial mortgages | $ | 2,376 | $ | - | $ | - | $ | 2,376 | ||||||||
Total other real estate owned, net | $ | 2,376 | $ | - | $ | - | $ | 2,376 |
Fair Value Measurement at December 31, 2014 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 mortgages: | ||||||||||||||||
Commercial mortgages | $ | 3,593 | $ | - | $ | - | $ | 3,593 | ||||||||
Consumer loans: | ||||||||||||||||
Home equity lines and loans | 52 | - | - | 52 | ||||||||||||
Total impaired loans | $ | 3,645 | $ | - | $ | - | $ | 3,645 | ||||||||
Other real estate owned: | ||||||||||||||||
Commercial mortgages: | ||||||||||||||||
Commercial mortgages | $ | 3,063 | $ | - | $ | - | $ | 3,063 | ||||||||
Consumer loans: | ||||||||||||||||
Home equity lines and loans | 2 | - | - | 2 | ||||||||||||
Total other real estate owned, net | $ | 3,065 | $ | - | $ | - | $ | 3,065 |
The following tables presents information related to Level 3 non-recurring fair value measurement at June 30, 2015 and December 31, 2014 (in thousands):
Description | Fair Value at June 30, 2015 | Valuation Technique | Unobservable Inputs | Unobservable Inputs Value or Range | |||||
Impaired loans | $ | 3,657 | Third party appraisals | Appraisal adjustments by management for qualitative factors such as market conditions and collateral characteristics | 0% - 100% discount | ||||
Other real estate owned | $ | 2,376 | Third party appraisals | Appraisal adjustments by management for qualitative factors such as market conditions and estimated liquidation expenses | 31% discount |
28
Description | Fair Value at December 31, 2014 | Valuation Technique | Unobservable Inputs | Unobservable Inputs Value or Range | |||||
Impaired loans | $ | 3,645 | Third party appraisals | Appraisal adjustments by management for qualitative factors such as market conditions and collateral characteristics | 0% - 100% discount | ||||
Other real estate owned | $ | 3,065 | Third party appraisals | Appraisal adjustments by management for qualitative factors such as market conditions and estimated liquidation expenses | 7% - 27% discount |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $5.2 million with a valuation allowance of $1.5 million as of June 30, 2015, resulting in $53 thousand decrease and $254 thousand increase in the provision for loan losses for the three and six month periods ended June 30, 2015. Impaired loans had a principal balance of $4.9 million, with a valuation allowance of $1.2 million as of December 31, 2014, resulting in an increase of $232 thousand in the provision for loan losses for the year ended December 31, 2014.
OREO, which is measured by the lower of cost or fair value less costs to sell had an outstanding balance of $2.5 million, before a valuation allowance of $120 thousand at June 30, 2015. Expense associated with the valuation allowance of properties held as of June 30, 2015 was $120 thousand for the three and six month periods ended June 30, 2015. OREO had an outstanding balance of $3.1 million, before a valuation allowance of $2 thousand at December 31, 2014. For properties held as of December 31, 2014, there was no expense associated with the valuation allowance recognized during the year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
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 FHLBNY and FRBNY are classified as Level 1.
FHLBNY and FRBNY Stock
It is not practicable to determine the fair value of FHLBNY and FRBNY 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
Certain mortgage loans are originated with the intent to sell. Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Loans held for sale are classified as Level 2.
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.
29
Securities Sold Under Agreements to Repurchase
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.
FHLBNY Term 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.
Commitments to Extend Credit
The fair value of commitments to extend credit is based on fees currently charged to enter into similar agreements, the counter-party's credit standing and discounted cash flow analysis. The fair value of these commitments to extend credit approximates the recorded amounts of the related fees and is not material at June 30, 2015 and December 31, 2014.
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.
The carrying amounts and estimated fair values of other financial instruments, at June 30, 2015 and December 31, 2014, are as follows (in thousands):
Fair Value Measurements at June 30, 2015 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 | $ | 28,014 | $ | 28,014 | $ | - | $ | - | $ | 28,014 | ||||||||||
Interest-bearing deposits in other financial institutions | 1,650 | 1,650 | - | - | 1,650 | |||||||||||||||
Trading assets | 635 | 635 | - | - | 635 | |||||||||||||||
Securities available for sale | 290,571 | 14,638 | 275,933 | - | 290,571 | |||||||||||||||
Securities held to maturity | 6,045 | - | 6,351 | - | 6,351 | |||||||||||||||
FHLBNY and FRBNY stock | 4,873 | - | - | - | N/A | |||||||||||||||
Loans, net | 1,136,378 | - | - | 1,160,285 | 1,160,285 | |||||||||||||||
Loans held for sale | 668 | - | 668 | - | 668 | |||||||||||||||
Accrued interest receivable | 3,764 | 38 | 1,067 | 2,659 | 3,764 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Demand, savings, and insured money market accounts | $ | 1,151,252 | $ | 1,151,252 | $ | - | $ | - | $ | 1,151,252 | ||||||||||
Time deposits | 180,725 | - | 181,167 | - | 181,167 | |||||||||||||||
Securities sold under agreements to repurchase | 31,882 | - | 32,814 | - | 32,814 | |||||||||||||||
FHLBNY overnight advances | 15,600 | - | 15,601 | 15,601 | ||||||||||||||||
FHLBNY term advances | 19,256 | - | 19,940 | - | 19,940 | |||||||||||||||
Accrued interest payable | 218 | 14 | 204 | - | 218 |
(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.
30
Fair Value Measurements at December 31, 2014 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 | $ | 28,130 | $ | 28,130 | $ | - | $ | - | $ | 28,130 | ||||||||||
Interest-bearing deposits in other financial institutions | 1,033 | 1,033 | - | - | 1,033 | |||||||||||||||
Trading assets | 549 | 549 | - | - | 549 | |||||||||||||||
Securities available for sale | 280,507 | 31,219 | 249,288 | - | 280,507 | |||||||||||||||
Securities held to maturity | 5,831 | - | 6,197 | - | 6,197 | |||||||||||||||
FHLBNY and FRBNY stock | 5,535 | - | - | - | N/A | |||||||||||||||
Loans, net | 1,107,888 | - | - | 1,135,590 | 1,135,590 | |||||||||||||||
Loans held for sale | 665 | - | 665 | - | 665 | |||||||||||||||
Accrued interest receivable | 4,185 | 145 | 1,295 | 2,745 | 4,185 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Demand, savings, and insured money market accounts | $ | 1,068,171 | $ | 1,068,171 | $ | - | $ | - | $ | 1,068,171 | ||||||||||
Time deposits | 211,843 | - | 212,397 | - | 212,397 | |||||||||||||||
Securities sold under agreements to repurchase | 29,652 | - | 30,853 | - | 30,853 | |||||||||||||||
FHLBNY overnight advances | 30,830 | - | 30,832 | - | 30,832 | |||||||||||||||
FHLBNY term advances | 19,310 | - | 20,235 | - | 20,235 | |||||||||||||||
Accrued interest payable | 237 | 15 | 222 | - | 237 |
(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.
NOTE 6 GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill included in the core banking segment during the periods ended June 30, 2015 and 2014 were as follows (in thousands):
2015 | 2014 | |||||||
Beginning of year | $ | 21,824 | $ | 21,824 | ||||
Acquired goodwill | - | - | ||||||
End balance June 30, | $ | 21,824 | $ | 21,824 |
Acquired intangible assets were as follows at June 30, 2015 and December 31, 2014 (in thousands):
At June 30, 2015 | At December 31, 2014 | |||||||||||
Balance Acquired | Accumulated Amortization | Balance Acquired | Accumulated Amortization | |||||||||
Core deposit intangibles | $ | 5,975 | $ | 3,686 | $ | 5,975 | $ | 3,279 | ||||
Other customer relationship intangibles | 5,633 | 3,444 | 5,633 | 3,262 | ||||||||
Total | $ | 11,608 | $ | 7,130 | $ | 11,608 | $ | 6,541 |
Aggregate amortization expense was $0.3 million for the three month periods ended June 30, 2015 and 2014. Aggregate amortization expense was $0.6 million and $0.7 million for the six month periods ended June 30, 2015 and 2014, respectively.
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The remaining estimated aggregate amortization expense at June 30, 2015 is listed below (in thousands):
Year | Estimated Expense | |||
2015 | $ | 548 | ||
2016 | 986 | |||
2017 | 859 | |||
2018 | 734 | |||
2019 | 609 | |||
2020 and thereafter | 742 | |||
Total | $ | 4,478 |
NOTE 7 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of securities sold under agreements to repurchase as of June 30, 2015 and December 31, 2014 is as follows (in thousands):
June 30, 2015 | ||||||||||||||||||||
Overnight and Continuous | Up to 1 Year | 1 - 3 Years | 3+ Years | Total | ||||||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 12,420 | $ | - | $ | 15,614 | $ | - | $ | 28,034 | ||||||||||
Mortgage-backed securities, residential | 8,709 | - | 6,607 | - | 15,316 | |||||||||||||||
Total | $ | 21,129 | $ | - | $ | 22,221 | $ | - | 43,350 | |||||||||||
Excess collateral held | (11,468 | ) | ||||||||||||||||||
Gross amount of recognized liabilities for repurchase agreements | $ | 31,882 |
December 31, 2014 | ||||||||||||||||||||
Overnight and Continuous | Up to 1 Year | 1 - 3 Years | 3+ Years | Total | ||||||||||||||||
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | 21,056 | $ | - | $ | 6,990 | $ | 8,595 | $ | 36,641 | ||||||||||
Mortgage-backed securities, residential | 669 | - | 3,507 | 4,174 | 8,350 | |||||||||||||||
Collateralized mortgage obligations | - | - | 48 | - | 48 | |||||||||||||||
Total | 21,725 | $ | - | $ | 10,545 | $ | 12,769 | 45,039 | ||||||||||||
Excess collateral held | (15,387 | ) | ||||||||||||||||||
Gross amount of recognized liabilities for repurchase agreements | $ | 29,652 |
The Corporation enters into sales of securities under agreements to repurchase and the amounts received under these agreements represent borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets.
The Corporation has no control over the market value of the securities which fluctuate due to market conditions, however, the Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Corporation manages this risk by utilizing highly marketable and easily priced securities, monitoring these securities for significant changes in market valuation routinely, and maintaining an unpledged securities portfolio believed to be sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
32
NOTE 8 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 changes in accumulated other comprehensive income or loss by component, net of tax, for the periods indicated (in thousands):
Unrealized Gains and Losses on Securities Available for Sale | Defined Benefit and Other Benefit Plans | Total | ||||||||||
Balance at March 31, 2015 | $ | 2,734 | $ | (10,521 | ) | $ | (7,787 | ) | ||||
Other comprehensive income before reclassification | (1,394 | ) | - | (1,394 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | (156 | ) | 223 | 67 | ||||||||
Net current period other comprehensive gain | (1,550 | ) | 223 | (1,327 | ) | |||||||
Balance at June 30, 2015 | $ | 1,184 | $ | (10,298 | ) | $ | (9,114 | ) |
Unrealized Gains and Losses on Securities Available for Sale | Defined Benefit and Other Benefit Plans | Total | ||||||||||
Balance at January 1, 2015 | $ | 1,960 | $ | (10,745 | ) | $ | (8,785 | ) | ||||
Other comprehensive income before reclassification | (589 | ) | - | (589 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | (187 | ) | 447 | 260 | ||||||||
Net current period other comprehensive gain | (776 | ) | 447 | (329 | ) | |||||||
Balance at June 30, 2015 | $ | 1,184 | $ | (10,298 | ) | $ | (9,114 | ) |
Unrealized Gains and Losses on Securities Available for Sale | Defined Benefit and Other Benefit Plans | Total | ||||||||||
Balance at March 31, 2014 | $ | 6,587 | $ | (5,800 | ) | $ | 787 | |||||
Other comprehensive income before reclassification | 696 | - | 696 | |||||||||
Amounts reclassified from accumulated other comprehensive income | (321 | ) | 88 | (233 | ) | |||||||
Net current period other comprehensive gain | 375 | 88 | 463 | |||||||||
Balance at June 30, 2014 | $ | 6,962 | $ | (5,712 | ) | $ | 1,250 |
33
Unrealized Gains and Losses on Securities Available for Sale | Defined Benefit and Other Benefit Plans | Total | ||||||||||
Balance at January 1, 2014 | $ | 6,043 | $ | (5,888 | ) | $ | 155 | |||||
Other comprehensive income before reclassification | 1,240 | - | 1,240 | |||||||||
Amounts reclassified from accumulated other comprehensive income | (321 | ) | 176 | (145 | ) | |||||||
Net current period other comprehensive gain | 919 | 176 | 1,095 | |||||||||
Balance at June 30, 2014 | $ | 6,962 | $ | (5,712 | ) | $ | 1,250 |
The following is the reclassification out of accumulated other comprehensive income for the periods indicated (in thousands):
Details about Accumulated Other Comprehensive Income Components | Three Months Ended June 30, | Affected Line Item in the Statement Where Net Income is Presented | |||||||
2015 | 2014 | ||||||||
Unrealized gains and losses on securities available for sale: | |||||||||
Realized gains on securities available for sale | $ | (252 | ) | $ | (522 | ) | Net gains on securities transactions | ||
Tax effect | 96 | 201 | Income tax expense | ||||||
Net of tax | (156 | ) | (321 | ) | |||||
Amortization of defined pension plan and other benefit plan items: | |||||||||
Prior service costs (a) | (21 | ) | (22 | ) | Pension and other employee benefits | ||||
Actuarial losses (a) | 384 | 165 | Pension and other employee benefits | ||||||
Tax effect | (140 | ) | (55 | ) | Income tax expense | ||||
Net of tax | 223 | 88 | |||||||
Total reclassification for the period, net of tax | $ | 67 | $ | (233 | ) |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 9 for additional information).
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Details about Accumulated Other Comprehensive Income Components | Six Months Ended June 30, | Affected Line Item in the Statement Where Net Income is Presented | |||||||
2015 | 2014 | ||||||||
Unrealized gains and losses on securities available for sale: | |||||||||
Realized gains on securities available for sale | $ | (302 | ) | $ | (522 | ) | Net gains on securities transactions | ||
Tax effect | 115 | 201 | Income tax expense | ||||||
Net of tax | (187 | ) | (321 | ) | |||||
Amortization of defined pension plan and other benefit plan items: | |||||||||
Prior service costs (a) | (43 | ) | (44 | ) | Pension and other employee benefits | ||||
Actuarial losses (a) | 767 | 330 | Pension and other employee benefits | ||||||
Tax effect | (277 | ) | (110 | ) | Income tax expense | ||||
Net of tax | 447 | 176 | |||||||
Total reclassification for the period, net of tax | $ | 260 | $ | (145 | ) |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 9 for additional information).
NOTE 9 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 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.
The following table lists the contractual amounts of financial instruments with off-balance sheet risk at June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015 | December 31, 2014 | |||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||
Commitments to make loans | $ | 30,088 | $ | 30,092 | $ | 23,756 | $ | 11,082 | ||||
Unused lines of credit | $ | 1,657 | $ | 187,940 | $ | 812 | $ | 185,235 | ||||
Standby letters of credit | $ | - | $ | 14,121 | $ | - | $ | 16,747 |
On March 26, 2015, the New York Surrogate’s Court for Chemung County entered an order approving two stipulations that discontinued litigation against the WMG of the Bank and approved settlements of the litigations. Under the terms of the settlements, the Bank agreed to pay the two parties $12.1 million, in total. Payments for the two settlements, offset by $7.9 million of insurance proceeds, occurred during the second quarter of 2015.
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.
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NOTE 10 COMPONENTS OF QUARTERLY AND YEAR TO DATE NET PERIODIC BENEFIT COSTS
The components of net periodic expense for the Corporation’s pension and other benefit plans for the periods indicated are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Qualified Pension Plan | ||||||||||||||||
Service cost, benefits earned during the period | $ | 353 | $ | 271 | $ | 707 | $ | 542 | ||||||||
Interest cost on projected benefit obligation | 457 | 435 | 914 | 870 | ||||||||||||
Expected return on plan assets | (824 | ) | (793 | ) | (1,647 | ) | (1,586 | ) | ||||||||
Amortization of unrecognized transition obligation | - | - | - | - | ||||||||||||
Amortization of unrecognized prior service cost | 3 | 2 | 5 | 4 | ||||||||||||
Amortization of unrecognized net loss | 369 | 160 | 737 | 320 | ||||||||||||
Net periodic pension cost | $ | 358 | $ | 75 | $ | 716 | $ | 150 | ||||||||
Supplemental Pension Plan | ||||||||||||||||
Service cost, benefits earned during the period | $ | 11 | $ | 10 | $ | 22 | $ | 20 | ||||||||
Interest cost on projected benefit obligation | 12 | 13 | 24 | 26 | ||||||||||||
Expected return on plan assets | - | - | - | - | ||||||||||||
Amortization of unrecognized prior service cost | - | - | - | - | ||||||||||||
Amortization of unrecognized net loss | 13 | 5 | 26 | 10 | ||||||||||||
Net periodic supplemental pension cost | $ | 36 | $ | 28 | $ | 72 | $ | 56 | ||||||||
Postretirement Plan, Medical and Life | ||||||||||||||||
Service cost, benefits earned during the period | $ | 12 | $ | 11 | $ | 24 | $ | 22 | ||||||||
Interest cost on projected benefit obligation | 16 | 18 | 32 | 36 | ||||||||||||
Expected return on plan assets | - | - | - | - | ||||||||||||
Amortization of unrecognized prior service cost | (24 | ) | (24 | ) | (48 | ) | (48 | ) | ||||||||
Amortization of unrecognized net loss | 2 | - | 4 | - | ||||||||||||
Net periodic postretirement, medical and life cost | $ | 6 | $ | 5 | $ | 12 | $ | 10 |
NOTE 11 SEGMENT REPORTING
The Corporation manages its operations through two primary business segments: core banking and WMG. 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 WMG services segment provides revenues by providing trust and investment advisory services to clients.
Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity 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 (in thousands).
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Three Months Ended June 30, 2015 | ||||||||||||||||
Core Banking | WMG | Holding Company And Other | Consolidated Totals | |||||||||||||
Net interest income | $ | 12,647 | $ | - | $ | - | $ | 12,647 | ||||||||
Provision for loan losses | 259 | - | - | 259 | ||||||||||||
Net interest income after provision for loan losses | 12,388 | - | - | 12,388 | ||||||||||||
Other non-interest income | 2,925 | 2,198 | 203 | 5,326 | ||||||||||||
Other non-interest expenses | 12,127 | 1,390 | 306 | 13,823 | ||||||||||||
Income before income tax expense | 3,186 | 808 | (103 | ) | 3,891 | |||||||||||
Income tax expense (benefit) | 1,048 | 321 | (55 | ) | 1,314 | |||||||||||
Segment net income (loss) | $ | 2,138 | $ | 487 | $ | (48 | ) | $ | 2,577 | |||||||
Three Months Ended June 30, 2014 | ||||||||||||||||
Core Banking | WMG | Holding Company And Other | Consolidated Totals | |||||||||||||
Net interest income | $ | 12,073 | $ | - | $ | 2 | $ | 12,075 | ||||||||
Provision for loan losses | 1,103 | - | - | 1,103 | ||||||||||||
Net interest income after provision for loan losses | 10,970 | - | 2 | 10,972 | ||||||||||||
Other non-interest income | 3,190 | 1,989 | 227 | 5,406 | ||||||||||||
Other non-interest expenses | 11,969 | 1,371 | 239 | 13,579 | ||||||||||||
Income before income tax expense | 2,191 | 618 | (10 | ) | 2,799 | |||||||||||
Income tax expense (benefit) | 651 | 238 | (20 | ) | 869 | |||||||||||
Segment net income | $ | 1,540 | $ | 380 | $ | 10 | $ | 1,930 | ||||||||
Six Months Ended June 30, 2015 | ||||||||||||||||
Core Banking | WMG | Holding Company And Other | Consolidated Totals | |||||||||||||
Net interest income | $ | 24,986 | $ | - | $ | 3 | $ | 24,989 | ||||||||
Provision for loan losses | 649 | - | - | 649 | ||||||||||||
Net interest income after provision for loan losses | 24,337 | - | 3 | 24,340 | ||||||||||||
Other non-interest income | 5,639 | 4,324 | 549 | 10,512 | ||||||||||||
Other non-interest expenses | 24,275 | 2,694 | 590 | 27,559 | ||||||||||||
Income before income tax expense | 5,701 | 1,630 | (38 | ) | 7,293 | |||||||||||
Income tax expense (benefit) | 1,863 | 623 | (46 | ) | 2,440 | |||||||||||
Segment net income | $ | 3,838 | $ | 1,007 | $ | 8 | $ | 4,853 | ||||||||
Segment assets | $ | 1,547,854 | $ | 4,552 | $ | 1,227 | $ | 1,553,633 |
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Six Months Ended June 30, 2014 | ||||||||||||||||
Core Banking | WMG | Holding Company And Other | Consolidated Totals | |||||||||||||
Net interest income | $ | 24,101 | $ | - | $ | 7 | $ | 24,108 | ||||||||
Provision for loan losses | 1,741 | - | - | 1,741 | ||||||||||||
Net interest income after provision for loan losses | 22,360 | - | 7 | 22,367 | ||||||||||||
Other non-interest income | 6,079 | 3,872 | 419 | 10,370 | ||||||||||||
Other non-interest expenses | 23,782 | 2,689 | 452 | 26,923 | ||||||||||||
Income before income tax expense | 4,657 | 1,183 | (26 | ) | 5,814 | |||||||||||
Income tax expense (benefit) | 1,410 | 455 | (45 | ) | 1,820 | |||||||||||
Segment net income | $ | 3,247 | $ | 728 | $ | 19 | $ | 3,994 | ||||||||
Segment assets | $ | 1,509,539 | $ | 4,743 | $ | 1,599 | $ | 1,515,881 |
NOTE 12 STOCK 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 2015 and 2014, 9,673 and 8,385 shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation. An expense of $67 thousand and $68 thousand related to this compensation was recognized during the three month periods ended June 30, 2015 and 2014, respectively. An expense of $136 thousand and $124 thousand related to this compensation was recognized during the six month periods ended June 30, 2015 and 2014, respectively. This expense is accrued as shares are earned.
Restricted Stock Plan
Pursuant to the Corporation’s Restricted Stock 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.
A summary of restricted stock activity for the three month period ended June 30, 2015 is presented below:
Shares | Weighted–Average Grant Date Fair Value | |||||||
Nonvested at April 1, 2015 | 26,015 | $ | 27.94 | |||||
Granted | - | $ | - | |||||
Vested | - | $ | - | |||||
Forfeited or cancelled | - | $ | - | |||||
Nonvested at June 30, 2015 | 26,015 | $ | 27.94 |
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A summary of restricted stock activity for the six month period ended June 30, 2015 is presented below:
Shares | Weighted–Average Grant Date Fair Value | |||||||
Nonvested at January 1, 2015 | 26,428 | $ | 27.92 | |||||
Granted | - | $ | - | |||||
Vested | (413 | ) | $ | 26.61 | ||||
Forfeited or cancelled | - | $ | - | |||||
Nonvested at June 30, 2015 | 26,015 | $ | 27.94 |
As of June 30, 2015, there was $614 thousand 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 3.54 years. The total fair value of shares vested during the six month period ended June 30, 2015 was $11 thousand.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is the MD&A of the Corporation in this Form 10-Q for the six months period ended June 30, 2015 and 2014. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2014 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2015, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–5.
The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporations’ management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below and Part I, Item 1A, Risk Factors, on pages 14–19 of the Corporation’s 2014 Annual Report. For a discussion of use of non-GAAP financial measures, see page 62.
The Corporation has been a financial holding company since 2000, and the Bank was established in 1833 and CFS in 2001. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest on investment securities, WMG fee income and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans and general operating expenses.
Forward-looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding 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 the Corporation’s growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2014 Annual Report on Form 10-K. These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site 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.
40
Consolidated Financial Highlights
As of or for the | ||||||||||||||||||||||||||||
As of or for the Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
(in thousands, except share and per share data) | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
2015 | 2015 | 2014 | 2014 | 2014 | 2015 | 2014 | ||||||||||||||||||||||
RESULTS OF OPERATIONS | ||||||||||||||||||||||||||||
Interest income | $ | 13,519 | $ | 13,234 | $ | 13,922 | $ | 13,341 | $ | 12,996 | $ | 26,753 | $ | 25,950 | ||||||||||||||
Interest expense | 872 | 892 | 888 | 915 | 921 | 1,764 | 1,842 | |||||||||||||||||||||
Net interest income | 12,647 | 12,342 | 13,034 | 12,426 | 12,075 | 24,989 | 24,108 | |||||||||||||||||||||
Provision for loan losses | 259 | 390 | 1,650 | 589 | 1,103 | 649 | 1,741 | |||||||||||||||||||||
Net interest income after provision for loan losses | 12,388 | 11,952 | 11,384 | 11,837 | 10,972 | 24,340 | 22,367 | |||||||||||||||||||||
Non-interest income | 5,326 | 5,186 | 11,400 | 4,986 | 5,406 | 10,512 | 10,370 | |||||||||||||||||||||
Non-interest expense | 13,823 | 13,736 | 15,792 | 17,763 | 13,579 | 27,559 | 26,923 | |||||||||||||||||||||
Income (loss) before income tax expense (benefit) | 3,891 | 3,402 | 6,992 | (940 | ) | 2,799 | 7,293 | 5,814 | ||||||||||||||||||||
Income tax expense (benefit) | 1,314 | 1,126 | 2,510 | (621 | ) | 869 | 2,440 | 1,820 | ||||||||||||||||||||
Net income (loss) | $ | 2,577 | $ | 2,276 | $ | 4,482 | $ | (319 | ) | $ | 1,930 | $ | 4,853 | $ | 3,994 | |||||||||||||
Basic and diluted earnings (loss) per share | $ | 0.55 | $ | 0.48 | $ | 0.96 | $ | (0.07 | ) | $ | 0.41 | $ | 1.03 | $ | 0.85 | |||||||||||||
Average basic and diluted shares outstanding | 4,716,734 | 4,706,774 | 4,690,519 | 4,683,797 | 4,680,776 | 4,711,699 | 4,678,977 | |||||||||||||||||||||
PERFORMANCE RATIOS | ||||||||||||||||||||||||||||
Return on average assets | 0.66 | % | 0.59 | % | 1.17 | % | (0.08 | )% | 0.51 | % | 0.63 | % | 0.54 | % | ||||||||||||||
Return on average equity | 7.52 | % | 6.79 | % | 12.54 | % | (0.90 | )% | 5.44 | % | 7.16 | % | 5.68 | % | ||||||||||||||
Return on average tangible equity (a) | 9.32 | % | 8.45 | % | 15.49 | % | (1.11 | )% | 6.75 | % | 8.89 | % | 7.08 | % | ||||||||||||||
Efficiency ratio (b) | 75.83 | % | 76.26 | % | 85.10 | % | 75.07 | % | 77.21 | % | 76.04 | % | 77.25 | % | ||||||||||||||
Non-interest expense to average assets (c) | 3.55 | % | 3.57 | % | 4.11 | % | 3.55 | % | 3.62 | % | 3.56 | % | 3.63 | % | ||||||||||||||
Loans to deposits | 86.37 | % | 83.59 | % | 87.62 | % | 84.99 | % | 82.87 | % | 86.37 | % | 82.87 | % | ||||||||||||||
YIELDS / RATES - Fully Taxable Equivalent | ||||||||||||||||||||||||||||
Yield on loans | 4.26 | % | 4.28 | % | 4.49 | % | 4.33 | % | 4.40 | % | 4.27 | % | 4.45 | % | ||||||||||||||
Yield on investments | 1.91 | % | 1.83 | % | 1.98 | % | 1.95 | % | 1.91 | % | 1.87 | % | 2.00 | % | ||||||||||||||
Yield on interest-earning assets | 3.74 | % | 3.74 | % | 3.96 | % | 3.82 | % | 3.77 | % | 3.74 | % | 3.81 | % | ||||||||||||||
Cost of interest-bearing deposits | 0.21 | % | 0.20 | % | 0.21 | % | 0.22 | % | 0.22 | % | 0.21 | % | 0.23 | % | ||||||||||||||
Cost of borrowings | 2.64 | % | 2.74 | % | 2.65 | % | 2.85 | % | 2.93 | % | 2.69 | % | 2.92 | % | ||||||||||||||
Cost of interest-bearing liabilities | 0.34 | % | 0.35 | % | 0.36 | % | 0.37 | % | 0.37 | % | 0.35 | % | 0.37 | % | ||||||||||||||
Interest rate spread | 3.40 | % | 3.39 | % | 3.60 | % | 3.45 | % | 3.40 | % | 3.39 | % | 3.44 | % | ||||||||||||||
Net interest margin, fully taxable equivalent | 3.50 | % | 3.49 | % | 3.71 | % | 3.55 | % | 3.51 | % | 3.50 | % | 3.55 | % | ||||||||||||||
CAPITAL | ||||||||||||||||||||||||||||
Total equity to total assets at end of period | 8.79 | % | 8.60 | % | 8.77 | % | 9.16 | % | 9.35 | % | 8.79 | % | 9.35 | % | ||||||||||||||
Tangible equity to tangible assets at end of period (a) | 7.22 | % | 7.04 | % | 7.13 | % | 7.51 | % | 7.68 | % | 7.22 | % | 7.68 | % | ||||||||||||||
Book value per share | $ | 28.92 | $ | 28.92 | $ | 28.44 | $ | 29.78 | $ | 30.28 | $ | 28.92 | $ | 30.28 | ||||||||||||||
Tangible book value per share | 23.35 | 23.28 | 22.71 | 23.98 | 24.40 | 23.35 | 24.40 | |||||||||||||||||||||
Period-end market value per share | 26.48 | 28.30 | 27.66 | 28.09 | 29.54 | 26.48 | 29.54 | |||||||||||||||||||||
Dividends declared per share | 0.26 | 0.26 | 0.26 | 0.26 | 0.26 | 0.52 | 0.52 | |||||||||||||||||||||
AVERAGE BALANCES | ||||||||||||||||||||||||||||
Loans (d) | $ | 1,141,412 | $ | 1,132,473 | $ | 1,112,297 | $ | 1,097,133 | $ | 1,047,181 | $ | 1,136,967 | $ | 1,027,408 | ||||||||||||||
Earning assets | 1,462,842 | 1,450,249 | 1,410,804 | 1,404,165 | 1,400,156 | 1,456,580 | 1,390,922 | |||||||||||||||||||||
Total assets | 1,563,346 | 1,558,919 | 1,522,834 | 1,509,315 | 1,504,153 | 1,561,056 | 1,496,412 | |||||||||||||||||||||
Deposits | 1,353,895 | 1,338,913 | 1,307,305 | 1,301,083 | 1,298,159 | 1,346,452 | 1,290,581 | |||||||||||||||||||||
Total equity | 137,386 | 135,974 | 141,845 | 142,944 | 142,318 | 136,684 | 141,693 | |||||||||||||||||||||
Tangible equity (a) | 110,945 | 109,219 | 114,786 | 115,553 | 114,603 | 110,087 | 113,804 | |||||||||||||||||||||
ASSET QUALITY | ||||||||||||||||||||||||||||
Net charge-offs (recoveries) | $ | 123 | $ | 184 | $ | 1,116 | $ | 1,070 | $ | 625 | $ | 307 | $ | 885 | ||||||||||||||
Non-performing loans (e) | 12,862 | 10,419 | 7,778 | 7,209 | 7,712 | 12,862 | 7,712 | |||||||||||||||||||||
Non-performing assets (f) | 15,238 | 12,925 | 10,843 | 10,328 | 8,345 | 15,238 | 8,345 | |||||||||||||||||||||
Allowance for loan losses | 14,028 | 13,892 | 13,686 | 13,151 | 13,632 | 14,028 | 13,632 | |||||||||||||||||||||
Annualized net charge-offs to average loans | 0.04 | % | 0.07 | % | 0.40 | % | 0.39 | % | 0.24 | % | 0.05 | % | 0.17 | % | ||||||||||||||
Non-performing loans to total loans | 1.12 | % | 0.91 | % | 0.69 | % | 0.65 | % | 0.71 | % | 1.12 | % | 0.71 | % | ||||||||||||||
Non-performing assets to total assets | 0.98 | % | 0.82 | % | 0.71 | % | 0.68 | % | 0.55 | % | 0.98 | % | 0.55 | % | ||||||||||||||
Allowance for loan losses to total loans | 1.22 | % | 1.21 | % | 1.22 | % | 1.18 | % | 1.26 | % | 1.22 | % | 1.26 | % | ||||||||||||||
Allowance for loan losses to non-performing loans | 109.07 | % | 133.33 | % | 175.96 | % | 182.42 | % | 176.76 | % | 109.07 | % | 176.76 | % | ||||||||||||||
(a) See the GAAP to Non-GAAP reconciliations. | ||||||||||||||||||||||||||||
(b) Efficiency ratio is non-interest expense less merger and acquisition expenses less amortization of intangible assets less legal settlement divided by the total of fully taxable equivalent | ||||||||||||||||||||||||||||
net interest income plus non-interest income less net gains on securities transactions less gain from bargain purchase less gain on liquidation of trust preferred securities. | ||||||||||||||||||||||||||||
(c) For the non-interest expense to average assets ratio, non-interest expense does not include legal settlement expense. See footnote 9 for further discussion. | ||||||||||||||||||||||||||||
(d) Loans include loans held for sale. Loans do not reflect the allowance for loan losses. | ||||||||||||||||||||||||||||
(e) Non-performing loans include non-accrual loans only. | ||||||||||||||||||||||||||||
(f) Non-performing assets include non-performing loans plus other real estate owned. | ||||||||||||||||||||||||||||
N/M - Not meaningful. |
41
Executive Summary
This executive summary of the MD&A includes selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of the trends and uncertainties, as well as the risks and critical accounting estimates affecting the Corporation, this Form 10-Q should be read in its entirety.
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
Three Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Net interest income | $ | 12,647 | $ | 12,075 | $ | 572 | 4.7 | % | ||||||||
Non-interest income | 5,326 | 5,406 | (80 | ) | (1.5 | )% | ||||||||||
Non-interest expense | 13,823 | 13,579 | 244 | 1.8 | % | |||||||||||
Pre-provision income | 4,150 | 3,902 | 248 | 6.4 | % | |||||||||||
Provision for loan losses | 259 | 1,103 | (844 | ) | (76.5 | )% | ||||||||||
Income tax expense | 1,314 | 869 | 445 | 51.2 | % | |||||||||||
Net income | $ | 2,577 | $ | 1,930 | $ | 647 | 33.5 | % | ||||||||
Basic and diluted earnings per share | $ | 0.55 | $ | 0.41 | $ | 0.14 | 34.1 | % | ||||||||
Selected financial ratios | ||||||||||||||||
Return on average assets | 0.66 | % | 0.51 | % | ||||||||||||
Return on average equity | 7.52 | % | 5.44 | % | ||||||||||||
Net interest margin, fully taxable equivalent | 3.50 | % | 3.51 | % | ||||||||||||
Efficiency ratio | 75.83 | % | 77.21 | % | ||||||||||||
Non-interest expense to average assets | 3.55 | % | 3.62 | % |
Net income for the second quarter of 2015 was $2.6 million, or $0.55 per share, compared with $1.9 million, or $0.41 per share, for the prior year quarter. Return on equity for the quarter was 7.52%, compared with 5.44% for the prior year quarter. The increase in net income from the prior year quarter was driven by higher net interest income and a reduction in the provision for loan losses, partially offset by a reduction in non-interest income and increases in non-interest expense and income tax expense.
Net interest income
Net interest income increased $0.6 million, or 4.7%, compared with the prior year quarter. The increase was due primarily to interest income from the commercial loan portfolio, offset by a decrease in interest and dividends from taxable securities.
Non-interest income
Non-interest income decreased $0.1 million, or 1.5%, compared to the prior year quarter. The decrease was due primarily to decreases in net gains on security transactions and services charges on deposit accounts, offset by an increase in WMG fee income.
Non-interest expense
Non-interest expense increased $0.2 million, or 1.8%, compared to the prior year quarter. The increase was due primarily to increases in other real estate owned expenses, net occupancy, pension and other employee benefits, data processing, and furniture and equipment. These increases were offset by a decrease in other non-interest expense.
Provision for loan losses
The provision for loan losses decreased $0.8 million, or 76.5%, compared to the prior year quarter. The decrease was the result of lower specific allocations for PCI loans and lower net charge-offs during the current quarter. Net charge-offs were $0.1 million, compared with $0.6 million for the prior year quarter.
42
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
Six Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Net interest income | $ | 24,989 | $ | 24,108 | $ | 881 | 3.7 | % | ||||||||
Non-interest income | 10,512 | 10,370 | 142 | 1.4 | % | |||||||||||
Non-interest expense | 27,559 | 26,923 | 636 | 2.4 | % | |||||||||||
Pre-provision income | 7,942 | 7,555 | 387 | 5.1 | % | |||||||||||
Provision for loan losses | 649 | 1,741 | (1,092 | ) | (62.7 | )% | ||||||||||
Income tax expense | 2,440 | 1,820 | 620 | 34.1 | % | |||||||||||
Net income | $ | 4,853 | $ | 3,994 | $ | 859 | 21.5 | % | ||||||||
Basic and diluted earnings per share | $ | 1.03 | $ | 0.85 | $ | 0.18 | 21.2 | % | ||||||||
Selected financial ratios | ||||||||||||||||
Return on average assets | 0.63 | % | 0.54 | % | ||||||||||||
Return on average equity | 7.16 | % | 5.68 | % | ||||||||||||
Net interest margin, fully taxable equivalent | 3.50 | % | 3.55 | % | ||||||||||||
Efficiency ratio | 76.04 | % | 77.25 | % | ||||||||||||
Non-interest expense to average assets | 3.56 | % | 3.63 | % |
Net income for the six months ended 2015 was $4.9 million, or $1.03 per share, compared with $4.0 million, or $0.85 per share, for the same period in the prior year. Return on equity for the quarter was 7.16%, compared with 5.68% for the same period in the prior year. The increase in net income from the same period in the prior year was driven by higher net interest income, non-interest income, and a reduction in the provision for loan losses, partially offset by increases in non-interest expense and income tax expense.
Net interest income
Net interest income increased $0.9 million, or 3.7%, compared with the same period in the prior year. The increase was due primarily to interest income from the commercial loan portfolio, offset by a decrease in interest and dividends from taxable securities.
Non-interest income
Non-interest income increased $0.1 million, or 1.4%, compared to the same period in the prior year. The increase was due primarily to increases in WMG fee income and sales of other real estate owned, offset by decreases in service charges on deposit accounts and net gains on securities.
Non-interest expense
Non-interest expense increased $0.6 million, or 2.4%, compared to the same period in the prior year. The increase was due primarily to increases in pension and other employee benefits, data processing, furniture and equipment, other real estate owned expenses, and net occupancy. These increases were offset by decreases in other non-interest expense, marketing and advertising, and merger and acquisition expenses.
Provision for loan losses
The provision for loan losses decreased $1.1 million, or 62.7%, compared to the same period in the prior year. The decrease was the result of lower specific allocations for PCI loans and lower net charge-offs during the current year. Net charge-offs were $0.3 million, compared with $0.9 million for the same period in the prior year.
43
Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and six months ended June 30, 2015 and 2014. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 62 of this Form 10-Q and pages 28-29 of the Corporation’s 2014 Annual Report.
Net Interest Income
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
Three Months Ended June 30, | ||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||
Interest and dividend income | $ | 13,519 | $ | 12,996 | $ | 523 | 4.0 | % | ||||
Interest expense | 872 | 921 | (49 | ) | (5.3 | )% | ||||||
Net interest income | $ | 12,647 | $ | 12,075 | $ | 572 | 4.7 | % |
Net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities and the interest expense accrued on interest-bearing liabilities, such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.
Net interest income for the three months ended June 30, 2015 totaled $13.5 million, an increase of $0.5 million, or 4.0%, compared with $13.0 million for the same period in the prior year. Fully taxable equivalent net interest margin was 3.50% for the three months ended June 30, 2015 compared with 3.51% for the same period in the prior year. The increase in net interest income was due primarily to an increase of $62.7 million in interest-earning assets. The yield on average interest-earning assets and cost of interest-bearing liabilities both decreased three basis points, respectively. The decrease in yield on average interest-earning assets was attributable to a 14 basis point decrease in yield on loans, a result of loans continuing to reprice at current historically low market rates.
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
Six Months Ended June 30, | ||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||
Interest and dividend income | $ | 26,753 | $ | 25,950 | $ | 803 | 3.1 | % | ||||
Interest expense | 1,764 | 1,842 | (78 | ) | (4.2 | )% | ||||||
Net interest income | $ | 24,989 | $ | 24,108 | $ | 881 | 3.7 | % |
Net interest income for the six months ended June 30, 2015 totaled $26.8 million, an increase of $0.8 million, or 3.1%, compared with $26.0 million for the same period in the prior year. Fully taxable equivalent net interest margin was 3.50% for the six months ended June 30, 2015 compared with 3.55% for the same period in the prior year. The increase in net interest income was due primarily to an increase of $65.7 million in interest-earning assets. The decline in net interest margin was due in part to a seven basis point decline in the yield on interest-earning assets, partially offset by a two basis point decline in the cost of average interest-bearing liabilities. The decrease in yield on average interest-earning assets was attributable to an 18 basis point decrease in yield on loans, a result of loans continuing to reprice at current historically low market rates.
Average Consolidated Balance Sheet and Interest Analysis
The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and six months periods ended June 30, 2015 and 2014. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the three and six months periods ended June 30, 2015 and 2014. 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. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.
44
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS | ||||||||||||||||||||||||
(in thousands) | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | ||||||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Commercial loans | $ | 654,226 | $ | 7,507 | 4.60 | % | $ | 555,277 | $ | 6,768 | 4.89 | % | ||||||||||||
Mortgage loans | 199,322 | 2,050 | 4.13 | % | 195,548 | 2,055 | 4.22 | % | ||||||||||||||||
Consumer loans | 287,864 | 2,570 | 3.58 | % | 296,356 | 2,657 | 3.60 | % | ||||||||||||||||
Taxable securities | 246,784 | 1,166 | 1.90 | % | 270,849 | 1,284 | 1.90 | % | ||||||||||||||||
Tax-exempt securities | 43,019 | 339 | 3.16 | % | 42,392 | 377 | 3.57 | % | ||||||||||||||||
Interest-bearing deposits | 31,627 | 20 | 0.25 | % | 39,734 | 25 | 0.25 | % | ||||||||||||||||
Total interest-earning assets | 1,462,842 | 13,652 | 3.74 | % | 1,400,156 | 13,166 | 3.77 | % | ||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 27,066 | 25,454 | ||||||||||||||||||||||
Premises and equipment, net | 31,387 | 29,569 | ||||||||||||||||||||||
Other assets | 52,157 | 50,643 | ||||||||||||||||||||||
Allowance for loan losses | (14,135 | ) | (13,109 | ) | ||||||||||||||||||||
AFS valuation allowance | 4,029 | 11,440 | ||||||||||||||||||||||
Total assets | $ | 1,563,346 | $ | 1,504,153 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 124,568 | $ | 25 | 0.08 | % | $ | 123,249 | $ | 24 | 0.08 | % | ||||||||||||
Savings and insured money market deposits | 664,867 | 293 | 0.18 | % | 589,909 | 246 | 0.17 | % | ||||||||||||||||
Time deposits | 184,303 | 174 | 0.38 | % | 231,157 | 247 | 0.43 | % | ||||||||||||||||
FHLBNY advances, securities sold under agreements to repurchase, and other debt | 57,627 | 380 | 2.64 | % | 55,179 | 404 | 2.93 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,031,365 | 872 | 0.34 | % | 999,494 | 921 | 0.37 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 380,157 | 353,844 | ||||||||||||||||||||||
Other liabilities | 14,438 | 8,497 | ||||||||||||||||||||||
Total liabilities | 1,425,960 | 1,361,835 | ||||||||||||||||||||||
Shareholders' equity | 137,386 | 142,318 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,563,346 | $ | 1,504,153 | ||||||||||||||||||||
Fully taxable equivalent net interest income | 12,780 | 12,245 | ||||||||||||||||||||||
Net interest rate spread (1) | 3.40 | % | 3.40 | % | ||||||||||||||||||||
Net interest margin, fully taxable equivalent (2) | 3.50 | % | 3.51 | % | ||||||||||||||||||||
Taxable equivalent adjustment | (133 | ) | (170 | ) | ||||||||||||||||||||
Net interest income | $ | 12,647 | $ | 12,075 |
(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
45
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS | ||||||||||||||||||||||||
(in thousands) | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 | ||||||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Commercial loans | $ | 644,873 | $ | 14,805 | 4.63 | % | $ | 541,671 | $ | 13,285 | 4.95 | % | ||||||||||||
Mortgage loans | 198,426 | 4,064 | 4.13 | % | 195,686 | 4,073 | 4.20 | % | ||||||||||||||||
Consumer loans | 293,668 | 5,192 | 3.57 | % | 290,051 | 5,321 | 3.70 | % | ||||||||||||||||
Taxable securities | 245,906 | 2,256 | 1.85 | % | 285,579 | 2,810 | 1.98 | % | ||||||||||||||||
Tax-exempt securities | 39,376 | 662 | 3.39 | % | 42,623 | 764 | 3.61 | % | ||||||||||||||||
Interest-bearing deposits | 34,331 | 43 | 0.25 | % | 35,312 | 43 | 0.25 | % | ||||||||||||||||
Total interest-earning assets | 1,456,580 | 27,022 | 3.74 | % | 1,390,922 | 26,296 | 3.81 | % | ||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 27,256 | 26,398 | ||||||||||||||||||||||
Premises and equipment, net | 31,705 | 29,674 | ||||||||||||||||||||||
Other assets | 55,432 | 51,175 | ||||||||||||||||||||||
Allowance for loan losses | (13,991 | ) | (12,995 | ) | ||||||||||||||||||||
AFS valuation allowance | 4,074 | 11,238 | ||||||||||||||||||||||
Total assets | $ | 1,561,056 | $ | 1,496,412 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 126,140 | $ | 49 | 0.08 | % | $ | 124,866 | $ | 49 | 0.08 | % | ||||||||||||
Savings and insured money market deposits | 651,940 | 569 | 0.18 | % | 579,763 | 475 | 0.17 | % | ||||||||||||||||
Time deposits | 191,875 | 360 | 0.38 | % | 234,994 | 516 | 0.44 | % | ||||||||||||||||
FHLBNY advances, securities sold under agreements to repurchase, and other debt | 58,873 | 786 | 2.69 | % | 55,394 | 802 | 2.92 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,028,828 | 1,764 | 0.35 | % | 995,017 | 1,842 | 0.37 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 376,497 | 350,958 | ||||||||||||||||||||||
Other liabilities | 19,047 | 8,744 | ||||||||||||||||||||||
Total liabilities | 1,424,372 | 1,354,719 | ||||||||||||||||||||||
Shareholders' equity | 136,684 | 141,693 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,561,056 | $ | 1,496,412 | ||||||||||||||||||||
Fully taxable equivalent net interest income | 25,258 | 24,454 | ||||||||||||||||||||||
Net interest rate spread (1) | 3.39 | % | 3.44 | % | ||||||||||||||||||||
Net interest margin, fully taxable equivalent (2) | 3.50 | % | 3.55 | % | ||||||||||||||||||||
Taxable equivalent adjustment | (269 | ) | (346 | ) | ||||||||||||||||||||
Net interest income | $ | 24,989 | $ | 24,108 |
(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
46
Changes Due to Rate and Volume
Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrate the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and six months ended June 30, 2015 and 2014. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME | |||||||||
Three Months Ended June 30, 2015 vs. 2014 | |||||||||
Increase/(Decrease) | |||||||||
Total Change | Due to Volume | Due to Rate | |||||||
(in thousands) | |||||||||
Interest and dividend income on: | |||||||||
Commercial loans | $ | 739 | $ | 1,150 | $ | (411 | ) | ||
Mortgage loans | (5 | ) | 39 | (44 | ) | ||||
Consumer loans | (87 | ) | (73 | ) | (14 | ) | |||
Taxable investment securities | (118 | ) | (118 | ) | - | ||||
Tax-exempt investment securities | (38 | ) | 6 | (44 | ) | ||||
Interest-earning deposits | (5 | ) | (5 | ) | - | ||||
Total interest and dividend income | $ | 486 | $ | 999 | $ | (513 | ) | ||
Interest expense on: | |||||||||
Interest-bearing demand deposits | $ | 1 | $ | 1 | $ | - | |||
Savings and insured money market deposits | 47 | 32 | 15 | ||||||
Time deposits | (73 | ) | (47 | ) | (26 | ) | |||
FHLBNY advances, securities sold under agreements to repurchase and other debt | (24 | ) | 17 | (41 | ) | ||||
Total interest expense | (49 | ) | 3 | (52 | ) | ||||
Net interest income | $ | 535 | $ | 996 | $ | (461 | ) |
Six Months Ended June 30, 2015 vs. 2014 | |||||||||
Increase/(Decrease) | |||||||||
Total Change | Due to Volume | Due to Rate | |||||||
(in thousands) | |||||||||
Interest and dividend income on: | |||||||||
Commercial loans | $ | 1,520 | $ | 1,773 | $ | (253 | ) | ||
Mortgage loans | (9 | ) | 27 | (36 | ) | ||||
Consumer loans | (129 | ) | 15 | (144 | ) | ||||
Taxable investment securities | (554 | ) | (376 | ) | (178 | ) | |||
Tax-exempt investment securities | (102 | ) | (56 | ) | (46 | ) | |||
Interest-earning deposits | - | - | - | ||||||
Total interest and dividend income | $ | 726 | $ | 1,383 | $ | (657 | ) | ||
Interest expense on: | |||||||||
Interest-bearing demand deposits | $ | - | $ | - | $ | - | |||
Savings and insured money market deposits | 94 | 64 | 30 | ||||||
Time deposits | (156 | ) | (89 | ) | (67 | ) | |||
FHLBNY advances, securities sold under agreements to repurchase and other debt | (16 | ) | 21 | (37 | ) | ||||
Total interest expense | (78 | ) | (4 | ) | (74 | ) | |||
Net interest income | $ | 804 | $ | 1,387 | $ | (583 | ) |
47
Provision for loan losses
Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Based on this analysis, the provision for loan losses for the second quarter of 2015 and 2014 were $0.3 million and $1.1 million, respectively. Provision for loan losses for the six months ended 2015 and 2014 were $0.6 million and $1.7 million, respectively. Net charge-offs for the quarter were $0.1 million compared with $0.6 million for the same period in the prior year. Net charge-offs for the six months ended 2015 and 2014 were $0.3 million and $0.9 million, respectively.
Non-interest income
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
WMG fee income | $ | 2,198 | $ | 1,989 | $ | 209 | 10.5 | % | ||||||||
Service charges on deposit accounts | 1,224 | 1,350 | (126 | ) | (9.3 | )% | ||||||||||
Net gains on securities transactions | 252 | 522 | (270 | ) | 51.7 | % | ||||||||||
Net gains on sales of loans held for sale | 98 | 83 | 15 | 18.1 | % | |||||||||||
Net gains (losses) on sales of other real estate owned | 42 | (14 | ) | 56 | N/M | |||||||||||
CFS fee and commission income | 204 | 229 | (25 | ) | (10.9 | )% | ||||||||||
Check card interchange income | 859 | 863 | (4 | ) | (0.5 | )% | ||||||||||
Income from bank owned life insurance | 19 | 19 | - | - | % | |||||||||||
Other | 430 | 365 | 65 | 17.8 | % | |||||||||||
Total non-interest income | $ | 5,326 | $ | 5,406 | $ | (80 | ) | (1.5 | )% |
Total non-interest income for the second quarter of 2015 decreased $0.1 million compared with the same period in the prior year. The decrease was due to decreases in net gains on securities and service charges on deposit accounts, offset by increases in WMG fee income, net gains on sales of other real estate owned, and other non-interest income.
WMG fee income
WMG fee income increased compared to the same period in the prior year due to an increase in total assets under management or administration, along with higher fee levels, as fees were adjusted to reflect current market fee levels.
Service charges on deposit accounts
Service charges on deposit accounts decreased compared to the same period in the prior year due to a decline in overdraft fees.
Net gains on securities transactions
Net gains on securities transactions decreased compared to the same period in the prior year due to $48.3 million of U.S. government sponsored agencies and Treasury securities sold in the second quarter of 2015 to reallocate funds to higher yielding mortgage-backed securities which resulted in a gain on sale of $0.2 million, compared to $29.2 million sold during the same period in the prior year, which generated a gain on sale of $0.5 million.
Net gain on sales of other real estate owned
Net gains on sales of other real estate owned increased due to the sale of one parcel of undeveloped land during the quarter.
CFS fee and commission income
CFS fee and commission income decreased compared to the same period in the prior year due to a decrease in fee income.
Other
Other non-interest income increased due to additional rental income in 2015 from properties included within OREO.
48
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
Six Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
WMG fee income | $ | 4,324 | $ | 3,872 | $ | 452 | 11.7 | % | ||||||||
Service charges on deposit accounts | 2,362 | 2,582 | (220 | ) | (8.5 | )% | ||||||||||
Net gains on securities transactions | 302 | 522 | (220 | ) | (42.1 | )% | ||||||||||
Net gains on sales of loans held for sale | 150 | 125 | 25 | 20.0 | % | |||||||||||
Net gains (losses) on sales of other real estate owned | 120 | (44 | ) | 164 | N/M | |||||||||||
CFS fee and commission income | 552 | 423 | 129 | 30.5 | % | |||||||||||
Check card interchange income | 1,668 | 1,677 | (9 | ) | (0.5 | )% | ||||||||||
Income from bank owned life insurance | 37 | 39 | (2 | ) | (5.1 | )% | ||||||||||
Other | 997 | 1,174 | (177 | ) | 15.1 | % | ||||||||||
Total non-interest income | $ | 10,512 | $ | 10,370 | $ | 142 | 1.4 | % |
Total non-interest income for the six months ended 2015 increased $0.1 million compared with the same period in the prior year. The increase was mostly due to increases in WMG fee income, net gains on sales of other real estate owned, CFS fee and commission income, offset by decreases in service charges on deposit accounts, net gains on securities transactions, and other non-interest income.
WMG fee income
WMG fee income increased compared to the same period in the prior year due to an increase in total assets under management or administration, along with higher fee levels, as fees were adjusted to reflect current market fee levels.
Service charges on deposit accounts
Service charges on deposit accounts decreased compared to the same period in the prior year due to a decline in overdraft fees.
Net gains on securities transactions
Net gains on securities transactions decreased compared to the same period in the prior year due to $48.3 million of U.S. government sponsored agencies and Treasury securities sold in the second quarter of 2015 to reallocate funds to higher yielding mortgage-backed securities which resulted in a gain on sale of $0.2 million, compared to $29.2 million sold during the same period in the prior year, which generated a gain on sale of $0.5 million.
Net gain on sales of other real estate owned
Net gains on sales of other real estate owned increased due to the sale of one commercial property and one parcel of undeveloped land.
CFS fee and commission income
CFS fee and commission income increased compared to the same period in the prior year due to an increase in the volume of insurance annuity products sold during the first quarter.
Other
Other non-interest income decreased due to a gain on the liquidation of the Corporation’s investment in a pool of trust preferred securities recognized during the prior year, offset by additional rental income in 2015 from properties included within OREO.
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Non-interest expense
The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Compensation expense: | ||||||||||||||||
Salaries and wages | $ | 5,188 | $ | 5,156 | $ | 32 | 0.6 | % | ||||||||
Pension and other employee benefits | 1,557 | 1,479 | 78 | 5.3 | % | |||||||||||
Total compensation expense | 6,745 | 6,635 | 110 | 1.7 | % | |||||||||||
Non-compensation expense: | ||||||||||||||||
Net occupancy | 1,757 | 1,659 | 98 | 5.9 | % | |||||||||||
Furniture and equipment | 789 | 715 | 74 | 10.3 | % | |||||||||||
Data processing | 1,552 | 1,414 | 138 | 9.8 | % | |||||||||||
Professional services | 420 | 421 | (1 | ) | (0.2 | )% | ||||||||||
Amortization of intangible assets | 285 | 324 | (39 | ) | (12.0 | )% | ||||||||||
Marketing and advertising | 271 | 332 | (61 | ) | (18.4 | )% | ||||||||||
Other real estate owned expense | 224 | 45 | 179 | 397.8 | % | |||||||||||
FDIC insurance | 280 | 274 | 6 | 2.2 | % | |||||||||||
Loan expense | 175 | 146 | 29 | 19.9 | % | |||||||||||
Merger and acquisition expenses | - | 29 | (29 | ) | (100.0 | )% | ||||||||||
Other | 1,325 | 1,585 | (260 | ) | (16.4 | )% | ||||||||||
Total non-compensation expense | 7,078 | 6,944 | 134 | 1.9 | % | |||||||||||
Total non-interest expense | $ | 13,823 | $ | 13,579 | $ | 244 | 1.8 | % |
Total non-interest expense for the second quarter of 2015 increased $0.2 million compared with the same period in the prior year. The increase was primarily due to increases in both compensation and non-compensation expenses.
Compensation expense
Compensation expense increased compared to the same period in the prior year due to pension and other employee benefits and salaries and wages. The $0.1 million increase in pension and other employee benefits was due to the adoption of updated mortality tables at December 31, 2014, which reflected improved life expectancies of employees and a reduced discount rate for determining pension costs, offset by a reduction in healthcare claims and workers’ compensation costs. The increase in salaries and wages was due to merit increases, which was offset by a reduction in full-time equivalent employees.
Non-compensation expense
Non-compensation expense increased compared to the same period in the prior year primarily due to increases in other real estate owned expense, data processing, net occupancy, and furniture and equipment, offset by a decline in other non-interest expense. The increase in other real estate owned expense was due to a $0.1 million fair market adjustment on three properties with pending accepted offers.
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The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
Six Months Ended June 30, | �� | |||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Compensation expense: | ||||||||||||||||
Salaries and wages | $ | 10,288 | $ | 10,309 | $ | (21 | ) | (0.2 | )% | |||||||
Pension and other employee benefits | 3,286 | 2,838 | 448 | 15.8 | % | |||||||||||
Total compensation expense | 13,574 | 13,147 | 427 | 3.2 | % | |||||||||||
Non-compensation expense: | ||||||||||||||||
Net occupancy | 3,607 | 3,452 | 155 | 4.5 | % | |||||||||||
Furniture and equipment | 1,522 | 1,345 | 177 | 13.2 | % | |||||||||||
Data processing | 3,113 | 2,895 | 218 | 7.5 | % | |||||||||||
Professional services | 689 | 643 | 46 | 7.2 | % | |||||||||||
Amortization of intangible assets | 589 | 669 | (80 | ) | (12.0 | )% | ||||||||||
Marketing and advertising | 506 | 625 | (119 | ) | (19.0 | )% | ||||||||||
Other real estate owned expense | 308 | 132 | 176 | 133.3 | % | |||||||||||
FDIC insurance | 566 | 543 | 23 | 4.2 | % | |||||||||||
Loan expense | 315 | 295 | 20 | 6.8 | % | |||||||||||
Merger and acquisition expenses | - | 115 | (115 | ) | (100.0 | )% | ||||||||||
Other | 2,770 | 3,062 | (292 | ) | (9.5 | )% | ||||||||||
Total non-compensation expense | 13,985 | 13,776 | 209 | 1.5 | % | |||||||||||
Total non-interest expense | $ | 27,559 | $ | 26,923 | $ | 636 | 2.4 | % |
Total non-interest expense for the six months ended 2015 increased $0.6 million compared with the same period in the prior year. The increase was due to increases in both compensation and non-compensation expenses.
Compensation expense
Compensation expense increased compared to the same period in the prior year due to pension and other employee benefits, offset by salaries and wages. The $0.4 million increase in pension and other employee benefits was due to the adoption of updated mortality tables at December 31, 2014, which reflected improved life expectancies of employees and a reduced discount rate for determining pension costs, offset by a reduction in healthcare claims and workers’ compensation costs. The decrease in salaries and wages was due to a reduction in full-time equivalent employees, offset by merit increases.
Non-compensation expense
Non-compensation expense increased compared to the same period in the prior year primarily due to increases in data processing, other real estate owned expense, furniture and equipment, and net occupancy, offset by a decline in other non-interest expense, marketing and advertising, and merger and acquisition expenses.
Income tax expense
The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
Three Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Income before income tax expense | $ | 3,891 | $ | 2,799 | $ | 1,092 | 39.0 | % | ||||||||
Income tax expense | $ | 1,314 | $ | 869 | $ | 445 | 51.2 | % | ||||||||
Effective tax rate | 33.8 | % | 31.0 | % |
The increase in the effective tax rate can be attributed to higher pre-tax income and changes in the mix of income and expense subject to U.S. federal, state, and local income taxes.
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The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
Six Months Ended June 30, | ||||||||||||||||
2015 | 2014 | Change | Percentage Change | |||||||||||||
Income before income tax expense | $ | 7,293 | $ | 5,814 | $ | 1,479 | 25.4 | % | ||||||||
Income tax expense | $ | 2,440 | $ | 1,820 | $ | 620 | 34.1 | % | ||||||||
Effective tax rate | 33.5 | % | 31.3 | % |
The increase in the effective tax rate can be attributed to higher pre-tax income and changes in the mix of income and expense subject to U.S. federal, state, and local income taxes.
Financial Condition
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands):
June 30, 2015 | December 31, 2014 | Change | Percentage Change | |||||||||||||
Assets | ||||||||||||||||
Total cash and cash equivalents | $ | 29,664 | $ | 29,163 | $ | 501 | 1.7 | % | ||||||||
Total investment securities | 301,489 | 291,873 | 9,616 | 3.3 | % | |||||||||||
Loans, net of deferred loan fees | 1,150,406 | 1,121,574 | 28,832 | 2.6 | % | |||||||||||
Allowance for loan losses | (14,028 | ) | (13,686 | ) | (342 | ) | 2.5 | % | ||||||||
Loans, net | 1,136,378 | 1,107,888 | 28,490 | 2.6 | % | |||||||||||
Goodwill and other intangible assets, net | 26,302 | 26,891 | (589 | ) | (2.2 | )% | ||||||||||
Other assets | 59,800 | 68,724 | (8,924 | ) | (13.0 | )% | ||||||||||
Total assets | $ | 1,553,633 | $ | 1,524,539 | $ | 29,094 | 1.9 | % | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Total deposits | $ | 1,331,977 | $ | 1,280,014 | $ | 51,963 | 4.1 | % | ||||||||
FHLBNY advances and other debt | 69,683 | 82,768 | (13,085 | ) | (15.8 | )% | ||||||||||
Other liabilities | 15,453 | 28,129 | (12,676 | ) | (45.1 | )% | ||||||||||
Total liabilities | 1,417,113 | 1,390,911 | 26,202 | 1.9 | % | |||||||||||
Total shareholders’ equity | 136,520 | 133,628 | 2,892 | 2.2 | % | |||||||||||
Total liabilities and shareholders’ equity | $ | 1,553,633 | $ | 1,524,539 | $ | 29,094 | 1.9 | % |
Cash and cash equivalents
The increase in cash and cash equivalents can be attributed to the seasonal inflow of municipal deposits, offset by increases in investment securities and loans, along with the reduction of FHLBNY overnight advances.
Investment securities
The increase in investment securities can be mostly attributed to the investment of excess cash from our municipal client deposits into higher yielding mortgage-backed securities during the second quarter of this year. During the year mortgage-backed securities and municipal securities increased $53.8 million and $8.5 million, respectively, offset by a $49.8 million decrease in U.S. Government sponsored enterprise securities.
Loans, net
The increase in loans can be attributed to increases of $46.3 million in commercial loans and $1.6 million in mortgages, offset by a $19.1 million decrease in consumer loans, attributed mostly to the indirect loan portfolio. The increase in the allowance for loan losses can be attributed to growth in the commercial loan portfolio.
52
Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net can be attributed to amortization of intangible assets.
Other assets
The decrease in other assets can be mostly attributed to depreciation of premises and equipment, the sale of one commercial property and one parcel of undeveloped land from other real estate owned, and the receipt of $7.9 million of insurance proceeds from the WMG legal settlement during the second quarter. See footnote 9 for further discussion.
Deposits
The increase in deposits can be attributed to increases of $54.5 million in money market accounts, $19.2 million in non-interest bearing demand deposits, and $8.2 million in interest bearing demand deposits. Partially offsetting the increases noted above was a $31.1 million decrease in time deposits. The changes in money market accounts and demand deposits can be attributed to the seasonal net inflow of deposits of our municipal clients.
FHLBNY advances and other debt
FHLBNY advances and other debt were reduced with the large increase in deposits received during the quarter from municipal clients, which decreased overnight borrowing needs.
Other liabilities
The decrease in other liabilities can be mostly attributed to the $12.1 million payment from the WMG legal settlement during the second quarter. See footnote 9 for further discussion.
Shareholders’ equity
The increase in shareholders’ equity was primarily due to earnings of $4.9 million, a reduction of $0.7 million in treasury stock, offset by a $0.3 million increase in accumulated other comprehensive loss and $2.4 million in dividends declared during the year.
Assets under management or administration
The market value of total assets under management or administration in our WMG was $1.917 billion at June 30, 2015 compared with $1.956 billion at December 31, 2014, a decrease of $38.8 million, or 2.0%.
Securities
The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "A". After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.
Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity. The composition of the available for sale segment of the securities portfolio is summarized in the table as follows (in thousands):
SECURITIES AVAILABLE FOR SALE | ||||||||||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Amortized Cost | Estimated Fair Value | Percent of Total Estimated Fair Value | Amortized Cost | Estimated Fair Value | Percent of Total Estimated Fair Value | |||||||||||||||||||
Obligations of U.S. Government | $ | 14,477 | $ | 14,579 | 5.0 | % | $ | 30,841 | $ | 31,115 | 11.1 | % | ||||||||||||
Obligations of U.S. Government sponsored enterprises | 116,259 | 117,315 | 40.4 | % | 149,694 | 150,558 | 53.7 | % | ||||||||||||||||
Mortgage-backed securities, residential and collateralized mortgage obligations | 115,866 | 115,817 | 39.9 | % | 61,122 | 61,998 | 22.1 | % | ||||||||||||||||
Obligations of states and political subdivisions | 39,379 | 39,967 | 13.7 | % | 30,677 | 31,451 | 11.2 | % | ||||||||||||||||
Other securities | 2,672 | 2,893 | 1.0 | % | 4,989 | 5,385 | 1.9 | % | ||||||||||||||||
Totals | $ | 288,653 | $ | 290,571 | 100.0 | % | $ | 277,323 | $ | 280,507 | 100.0 | % |
53
The available for sale segment of the securities portfolio totaled $290.6 million at June 30, 2015, an increase of $10.1 million, or 3.6%, from $280.5 million at December 31, 2014. The increase resulted primarily from purchases of mortgage-backed securities and obligations of states and political subdivisions, offset by sales, calls, and maturities of obligations of U.S. Government and U.S. Government sponsored enterprises.
The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas. These securities totaled $6.0 million at June 30, 2015, an increase of $0.2 million December 31, 2014 due primarily to purchases, offset by maturities and principal collected.
Loans
The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, and other real estate owned, (iv) impaired loans, and (v) potential problem loans. Management reviews these systems on a regular basis.
The table below presents the Corporation’s loan composition by segment for the periods indicated, and the dollar and percent change from December 31, 2014 to June 30, 2015 (in thousands):
LOANS | ||||||||||||||||
June 30, 2015 | December 31, 2014 | Dollar Change | Percentage Change | |||||||||||||
Commercial and agricultural | $ | 181,712 | $ | 166,406 | $ | 15,306 | 9.2 | % | ||||||||
Commercial mortgages | 483,591 | 452,593 | 30,998 | 6.8 | % | |||||||||||
Residential mortgages | 198,469 | 196,809 | 1,660 | 0.8 | % | |||||||||||
Indirect consumer loans | 164,890 | 184,763 | (19,873 | ) | (10.8 | )% | ||||||||||
Consumer loans | 121,744 | 121,003 | 741 | 0.6 | % | |||||||||||
Total loans | $ | 1,150,406 | $ | 1,121,574 | $ | 28,832 | 2.6 | % |
Portfolio loans totaled $1.150 billion at June 30, 2015, an increase of $28.8 million, or 2.6%, from $1.122 billion at December 31, 2014. The increase in loans can be attributed to increases of $46.3 million in commercial loans and $1.7 million in mortgages, offset by a $19.1 million decrease in consumer loans, attributed to the indirect loan portfolio. The growth in commercial mortgages was due primarily to an increase in the Capital Bank division in the Albany, New York region. The decline in indirect consumer loans was a result of the Corporation’s decision to end its reduced pricing loan program during the fourth quarter of 2014.
Residential mortgage loans totaled $198.5 million at June 30, 2015, an increase of $1.7 million, or 0.8%, from December 31, 2014. In addition, during the six months ended June 30, 2015, $6.9 million of newly originated residential mortgages were sold in the secondary market to Freddie Mac. During the twelve months ended December 31, 2014, $13.6 million of residential mortgages were sold in the secondary market to Freddie Mac, with an additional $0.1 million of residential mortgages sold to the State of New York Mortgage Agency.
The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and commercial and industrial loans, especially within the Capital Bank division of the Bank. The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):
LOANS BY DIVISION | ||||||||||||||||
June 30, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||
Chemung Canal Trust Company* | $ | 705,831 | $ | 724,099 | $ | 687,256 | $ | 645,808 | $ | 609,778 | ||||||
Capital Bank Division | 444,575 | 397,475 | 308,610 | 247,709 | 187,137 | |||||||||||
Total loans | $ | 1,150,406 | $ | 1,121,574 | $ | 995,866 | $ | 893,517 | $ | 796,915 |
* All loans, excluding those originated by the Capital Bank division.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At June 30, 2015 and December 31, 2014, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 38.6% and 36.1% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of June 30, 2015 and December 31, 2014.
54
Non-Performing Assets
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.
Past due status on all loans is based on the contractual terms of the loan. 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. At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. 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 following table summarizes the Corporation's non-performing assets, excluding acquired PCI loans (in thousands):
NON-PERFORMING ASSETS | ||||||||
June 30, 2015 | December 31, 2014 | |||||||
Non-accrual loans | $ | 10,292 | $ | 6,798 | ||||
Non-accrual troubled debt restructurings | 2,570 | 980 | ||||||
Total non-performing loans | 12,862 | 7,778 | ||||||
Other real estate owned | 2,376 | 3,065 | ||||||
Total non-performing assets | $ | 15,238 | $ | 10,843 |
Ratio of non-performing loans to total loans | 1.12 | % | 0.69 | % | ||||
Ratio of non-performing assets to total assets | 0.98 | % | 0.71 | % | ||||
Ratio of allowance for loan losses to non-performing loans | 109.07 | % | 175.96 | % | ||||
Accruing loans past due 90 days or more (1) | $ | 27 | $ | 1,454 | ||||
Accruing troubled debt restructurings (1) | $ | 7,038 | $ | 8,705 | ||||
(1) These loans are not included in non-performing assets above. |
Non-Performing Loans
Non-performing loans totaled $12.9 million at June 30, 2015, or 1.12% of total loans, compared with $7.8 million at December 31, 2014, or 0.69% of total loans. The increase in non-performing loans at June 30, 2015 was primarily in the commercial loan segment of the loan portfolio. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $15.2 million, or 0.98% of total assets, at June 30, 2015, compared with $10.8 million, or 0.71% of total assets, at December 31, 2014.
The recorded investment in accruing loans past due 90 days or more totaled less than $0.1 million at June 30, 2015, a decrease of $1.4 million from December 31, 2014.
Not included in non-performing loan totals are $2.1 million of acquired loans which the Corporation has identified as PCI loans. The PCI loans 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 4 of the financial statements.
55
Troubled Debt Restructurings
The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. As of June 30, 2015, the Corporation had $2.6 million of non-accrual TDRs compared with $1.0 million as of December 31, 2014. As of June 30, 2015, the Corporation had $7.0 million of accruing TDRs compared with $8.7 million as of December 31, 2014. The increase in non-accrual TDRs was primarily due to one commercial loan moving to non-accrual status.
Impaired Loans
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at June 30, 2015 totaled $15.3 million, including TDRs of $9.6 million, compared to $15.9 million at December 31, 2014, including TDRs of $9.7 million. Not included in the impaired loan totals are acquired loans 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 in impaired loans was due primarily to a decrease of $1.5 million in commercial construction loans, offset by a $0.8 million increase in commercial mortgages. Included in the recorded investment of impaired loans at June 30, 2015, are loans totaling $5.2 million for which impairment allowances of $1.5 million have been specifically allocated to the allowance for loan losses. As of December 31, 2014, the impaired loan total included $4.9 million of loans for which specific impairment allowances of $1.2 million were allocated to the allowance for loan losses. The increase in the amount of impaired loans for which specific allowances were allocated to the allowance for loan losses was due primarily to an increase in impaired commercial loans.
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, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. 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. 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. Real estate values in the Corporation's market area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analyses of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on nonaccrual status, all future payments received are applied to principal and 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.
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The general component 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 two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy.
The allowance for loan losses is increased through a provision for loan losses charged to operations. 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. 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 impaired loans. 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.
The allowance for loan losses was $14.0 million at June 30, 2015, up from $13.7 million at December 31, 2014. The ratio of allowance for loan losses to total loans was 1.22% at June 30, 2015 and December 31, 2014, respectively. Net charge-offs for the three and six months ended June 30, 2015 were $0.1 million and $0.3 million, respectively, compared with $0.6 million and $0.9 million for the same periods in the prior year, respectively.
The table below summarizes the Corporation’s loan loss experience for the six months ended June 30, 2015 and 2014 (in thousands, except ratio data):
SUMMARY OF LOAN LOSS EXPERIENCE | ||||||||
Six Months Ended | ||||||||
June 30, 2015 | June 30, 2014 | |||||||
Balance at beginning of period | $ | 13,686 | $ | 12,776 | ||||
Charge-offs: | ||||||||
Commercial and agricultural | - | 355 | ||||||
Commercial mortgages | 28 | 358 | ||||||
Residential mortgages | 32 | 7 | ||||||
Consumer loans | 613 | 776 | ||||||
Total charge-offs | 673 | 1,496 | ||||||
Recoveries: | ||||||||
Commercial and agricultural | 38 | 193 | ||||||
Commercial mortgages | 84 | 83 | ||||||
Residential mortgages | - | 28 | ||||||
Consumer loans | 244 | 307 | ||||||
Total recoveries | 366 | 611 | ||||||
Net charge-offs | 307 | 885 | ||||||
Provision for loan losses | 649 | 1,741 | ||||||
Balance at end of period | $ | 14,028 | $ | 13,632 | ||||
Ratio of net charge-offs to average loans outstanding | 0.05 | % | 0.17 | % | ||||
Ratio of allowance for loan losses to total loans outstanding | 1.22 | % | 1.26 | % |
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Deposits
The table below summarizes the Corporation’s deposit composition by segment for the periods indicated, and the dollar and percent change from December 31, 2014 to June 30, 2015 (in thousands):
DEPOSITS | ||||||||||||||||
June 30, 2015 | December 31, 2014 | Dollar Change | Percentage Change | |||||||||||||
Non-interest-bearing demand deposits | $ | 385,467 | $ | 366,298 | $ | 19,169 | 5.2 | % | ||||||||
Interest-bearing demand deposits | 118,988 | 110,819 | 8,169 | 7.4 | % | |||||||||||
Insured money market accounts | 447,360 | 392,871 | 54,489 | 13.9 | % | |||||||||||
Savings deposits | 199,437 | 198,183 | 1,254 | 0.6 | % | |||||||||||
Time deposits | 180,725 | 211,843 | (31,118 | ) | (14.7 | )% | ||||||||||
Total | $ | 1,331,977 | $ | 1,280,014 | $ | 51,963 | 4.1 | % |
Deposits totaled $1.332 billion at June 30, 2015 compared with $1.280 billion at December 31, 2014, an increase of $52.0 million, or 4.1%. The increase was mostly attributable to increases of $54.5 million in money market accounts, $19.2 million in non-interest bearing demand deposits, and $8.2 million in interest bearing demand deposits. Partially offsetting the increases noted above was a $31.1 million decrease in time deposits. The changes in money market accounts, interest-bearing demand deposits, and time deposits can be attributed to the seasonal net inflow of deposits of our municipal clients. At June 30, 2015, demand deposit and money market accounts comprised 71.5% of total deposits compared with 68.0% at December 31, 2014.
In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. Brokered deposits include funds obtained through brokers, and the Bank’s participation in the CDARS and ICS programs. Deposits obtained through brokers were $1.3 million and $2.3 million as of June 30, 2015 and December 31, 2015, respectively. Deposits obtained through the CDARS and ICS programs were $126.5 million and $76.7 million as of June 30, 2015 and December 31, 2014, respectively. The increase in CDARS and ICS deposits was due to the Corporation offering the programs to new municipal clients, in addition to seasonality of current municipal client balances.
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits include: (i) acquire deposits by entering new markets through branch acquisitions or de novo branching, (ii) an annual checking account marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) link business and consumer loans to primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services.
The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it will continue using brokered deposits as a secondary source of funding to support growth.
Borrowings
FHLBNY overnight advances were $15.6 million at June 30, 2015 compared with $30.8 million at December 31, 2014. The decrease was primarily due to the large increase in deposits which reduced the need for borrowed funds. Securities sold under agreements to repurchase increased $2.2 million from $29.7 million at December 31, 2014 to $31.9 million at June 30, 2015. The increase in securities sold under agreements to repurchase was related to normal fluctuations in client accounts.
Shareholders’ Equity
Shareholders’ equity was $136.5 million at June 30, 2015 compared with $133.6 million at December 31, 2014. The increase was primarily due to earnings of $4.9 million and a reduction of $0.7 million in treasury stock, offset by a $0.3 million increase in accumulated other comprehensive loss and $2.4 million in dividends declared during the year. The total shareholders’ equity to total assets ratio was 8.79% at June 30, 2015 compared with 8.77% at December 31, 2014. The tangible equity to tangible assets ratio was 7.22% at June 30, 2015 compared with 7.13% at December 31, 2014. Book value per share increased to $28.92 at June 30, 2015 from $28.44 at December 31, 2014.
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The Corporation and the Bank are subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial holding companies and financial institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of June 30, 2015, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines and the Corporation met capital requirements under regulatory guidelines.
Off-balance Sheet Arrangements
See Note 9 – Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements for a discussion of off-balance sheet arrangements.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of deposit clients, 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 FHLBNY 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 $106.4 million and $86.0 million at June 30, 2015 and December 31, 2014, respectively. The Corporation also had a total of $28.0 million of unsecured lines of credit with four different financial institutions, all of which was available at June 30, 2015 and December 31, 2014.
Consolidated Cash Flows Analysis
For a discussion of activities affecting the Corporation’s cash flows, see the Balance Sheet Analysis in this Form 10-Q.
CONSOLIDATED SUMMARY OF CASH FLOWS | ||||||||
Six Months Ended | ||||||||
(in thousands) | June 30, | |||||||
2015 | 2014 | |||||||
Net cash provided by operating activities | $ | 4,453 | $ | 7,542 | ||||
Net cash used by investing activities | (40,684 | ) | (29,968 | ) | ||||
Net cash provided by financing activities | 36,732 | 37,099 | ||||||
Net increase in cash and cash equivalents | $ | 501 | $ | 14,673 |
Operating activities
The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short- and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs.
Cash provided by operating activities in the first six months of 2015 predominantly resulted from net income after noncash operating adjustments, but included a nonrecurring $4.3 million WMG legal settlement payment. Cash provided by operating activities in the second quarter of 2014 predominantly resulted from net income after noncash operating adjustments.
Investing activities
Cash used in investing activities during the first six months of 2015 predominantly resulted from a net increase in loans and purchases of securities available for sale, offset by sales, calls, maturities, and principal collected on securities available for sale. Cash outflows in 2014 resulted from a net increase of loans, offset by net proceeds received from sales, calls, maturities, and principal collected on securities available for sale.
Financing activities
Cash provided by financing activities during the first six months of 2015 and 2014 predominantly resulted from an increase in deposits. The increase in deposits reflected the seasonable inflow of funds from municipal investors into demand and money market accounts. Cash inflows in 2015 were offset by the redemption of FHLBNY overnight advances that were no longer needed with the inflow of municipal deposits.
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Capital Resources
Basel III Capital Rules
On October 11, 2013, the Federal Reserve approved a final rule that amends the regulatory capital rules for state member banks effective January 1, 2015. The Federal Reserve approved the new capital rules in coordination with substantially identical final rules approved by the FDIC and the Office of the Comptroller of the Currency for other types of banking organizations. The revisions make the capital rules consistent with agreements that were reached by Basel III and certain provisions of the Dodd-Frank Act. In general, the new capital rules revise regulatory capital definitions and minimum ratios; redefine Tier 1 Capital as two components (common equity Tier 1 capital and additional Tier 1 capital); create a new “common equity Tier 1 risk-based capital ratio”; implement a capital conservation buffer; revise prompt corrective action thresholds; and change risk weights for certain assets and off-balance sheet exposures.
The new capital rules implement a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement of 4.5%, and a higher minimum Tier 1 capital requirement of 6.0% (which is an increase from 4.0%). Under the new rules, the total capital ratio remains at 8.0%, and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations, regardless of supervisory rating, is 4.0%. Additionally, under the new capital rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. The final rules also enhance risk sensitivity and address weaknesses identified by the regulators over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with the requirements of the Dodd-Frank Act.
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk weights (from 0% to up to 600%) for equity exposures.
The new minimum capital requirements became effective for all banking organizations (except for the largest internationally active banking organizations) on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in over time, beginning on January 1, 2016.
The Corporation is subject to Federal Reserve capital requirements applicable to bank holding companies, which are similar to those applicable to the Bank.
In assessing a state member bank’s capital adequacy, the Federal Reserve takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary. The Bank, in accordance with its internal prudential standards, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with its risk profile. As of June 30, 2015, the Bank exceeded all regulatory capital ratios necessary to be considered well capitalized.
The new capital rules maintain the general structure of the current prompt corrective action framework while increasing some of the thresholds for the prompt corrective action capital categories. For example, an adequately capitalized bank is required to maintain a Tier 1 risk-based capital ratio of 6.0% (increased from the current level of 4.0%). The rule also introduces the common equity Tier 1 capital ratio as a new prompt corrective action capital category threshold.
As an institution’s capital decreases within the three undercapitalized categories listed above, the severity of the action that is authorized or required to be taken by the Federal Reserve for state member banks under the prompt corrective action regulations increases. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The Federal Reserve is required to monitor closely the condition of an undercapitalized institution and to restrict the growth of its assets.
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An undercapitalized state member bank is required to file a capital restoration plan with the Federal Reserve within 45 days (or other timeframe prescribed by the Federal Reserve) of the date the bank receives notice that it is within any of the three undercapitalized categories, and the plan must be guaranteed by its parent holding company, subject to a cap on the guarantee that is the lesser of: (i) an amount equal to 5.0% of the bank’s total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary to restore the bank’s capital ratios to the levels required to be classified as “adequately classified,” as those ratios and levels are defined as of the time the bank failed to comply with the plan. If the bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions.
The regulatory capital ratios as of June 30, 2015 were calculated under Basel III rules and the regulatory capital ratios as of December 31, 2014 were calculated under Basel I rules. There is no threshold for well-capitalized status for bank holding companies.
The Corporation’s and the Bank’s actual and required regulatory capital ratios were as follows (in thousands, except ratio data):
Actual | Required To Be Adequately Capitalized | Required To Be Well Capitalized | ||||||||||||||||||||||
As of June 30, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
Consolidated | $ | 135,987 | 12.22 | % | $ | 89,059 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 132,113 | 11.89 | % | $ | 88,905 | 8.00 | % | $ | 111,131 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
Consolidated | $ | 121,979 | 10.96 | % | $ | 66,794 | 6.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 118,193 | 10.64 | % | $ | 66,678 | 6.00 | % | $ | 88,905 | 8.00 | % | ||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
Consolidated | $ | 121,979 | 10.96 | % | $ | 50,096 | 4.50 | % | N/A | N/A | ||||||||||||||
Bank | $ | 118,193 | 10.64 | % | $ | 50,009 | 4.50 | % | $ | 72,235 | 6.50 | % | ||||||||||||
Tier 1 Capital (to Average Assets): | ||||||||||||||||||||||||
Consolidated | $ | 121,979 | 7.93 | % | $ | 61,533 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 118,193 | 7.69 | % | $ | 61,473 | 4.00 | % | $ | 76,841 | 5.00 | % |
Actual | Required To Be Adequately Capitalized | Required To Be Well Capitalized | ||||||||||||||||||||||
As of December 31, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
Consolidated | $ | 129,211 | 11.84 | % | $ | 87,271 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 123,685 | 11.35 | % | $ | 87,178 | 8.00 | % | $ | 108,972 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
Consolidated | $ | 115,483 | 10.59 | % | $ | 43,636 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 110,014 | 10.10 | % | $ | 43,589 | 4.00 | % | $ | 65,383 | 6.00 | % | ||||||||||||
Tier 1 Capital (to Average Assets): | ||||||||||||||||||||||||
Consolidated | $ | 115,483 | 7.78 | % | $ | 44,556 | 3.00 | % | N/A | N/A | ||||||||||||||
Bank | $ | 110,014 | 7.41 | % | $ | 44,512 | 3.00 | % | $ | 74,187 | 5.00 | % |
Dividend Restrictions
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table below. At June 30, 2015, the Bank could, without prior approval, declare dividends of approximately $9.7 million.
Adoption of New Accounting Standards
There are no recently issued accounting standards that the Corporation feels will have a material impact on its consolidated financial statements.
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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 GAAP. 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.
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.
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.
Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures
The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages 6–11. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.
In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are unable to state with certainty that the SEC would so regard them.
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Fully Taxable Equivalent Net Interest Income, Net Interest Margin, and Efficiency Ratio
Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Corporation follows these practices.
The efficiency ratio is a non-GAAP financial measures which represents the Corporation’s ability to turn resources into revenue and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest income), adjusted for one-time occurrences and amortization. This measure is meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.
As of or for the | ||||||||||||||||||||||||||||
As of or for the Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||
(in thousands, except ratio data) | 2015 | 2015 | 2014 | 2014 | 2014 | 2015 | 2014 | |||||||||||||||||||||
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT | ||||||||||||||||||||||||||||
AND EFFICIENCY RATIO | ||||||||||||||||||||||||||||
Net interest income (GAAP) | $ | 12,647 | $ | 12,342 | $ | 13,034 | $ | 12,426 | $ | 12,075 | $ | 24,989 | $ | 24,108 | ||||||||||||||
Fully taxable equivalent adjustment | 133 | 136 | 148 | 156 | 170 | 269 | 346 | |||||||||||||||||||||
Fully taxable equivalent net interest income (non-GAAP) | $ | 12,780 | $ | 12,478 | $ | 13,182 | $ | 12,582 | $ | 12,245 | $ | 25,258 | $ | 24,454 | ||||||||||||||
Non-interest income (GAAP) | $ | 5,326 | $ | 5,186 | $ | 11,400 | $ | 4,986 | $ | 5,406 | $ | 10,512 | $ | 10,370 | ||||||||||||||
Less: net gains on security transactions | (252 | ) | (50 | ) | (6,347 | ) | - | (522 | ) | (302 | ) | (522 | ) | |||||||||||||||
Less: recoveries from other-than-temporary impairments | - | - | (50 | ) | - | - | - | (465 | ) | |||||||||||||||||||
Adjusted non-interest income (non-GAAP) | $ | 5,074 | $ | 5,136 | $ | 5,003 | $ | 4,986 | $ | 4,884 | $ | 10,210 | $ | 9,383 | ||||||||||||||
Non-interest expense (GAAP) | $ | 13,823 | $ | 13,736 | $ | 15,792 | $ | 17,763 | $ | 13,579 | $ | 27,559 | $ | 26,923 | ||||||||||||||
Less: merger and acquisition expenses | - | - | - | - | (29 | ) | - | (115 | ) | |||||||||||||||||||
Less: amortization of intangible assets | (285 | ) | (304 | ) | (317 | ) | (324 | ) | (324 | ) | (589 | ) | (669 | ) | ||||||||||||||
Less: legal settlements | - | - | - | (4,250 | ) | - | - | - | ||||||||||||||||||||
Adjusted non-interest expense (non-GAAP) | $ | 13,538 | $ | 13,432 | $ | 15,475 | $ | 13,189 | $ | 13,226 | $ | 26,970 | $ | 26,139 | ||||||||||||||
Average interest-earning assets (GAAP) | $ | 1,462,842 | $ | 1,450,249 | $ | 1,410,804 | $ | 1,404,165 | $ | 1,400,156 | $ | 1,456,580 | $ | 1,390,922 | ||||||||||||||
Net interest margin - fully taxable equivalent (non-GAAP) | 3.50 | % | 3.49 | % | 3.71 | % | 3.55 | % | 3.51 | % | 3.50 | % | 3.55 | % | ||||||||||||||
Efficiency ratio (non-GAAP) | 75.83 | % | 76.26 | % | 85.10 | % | 75.07 | % | 77.21 | % | 76.04 | % | 77.25 | % |
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Tangible Equity and Tangible Assets (Period-End)
Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s equity divided by common shares at period-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
As of or for the | ||||||||||||||||||||||||||||
As of or for the Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
(in thousands, except per share and ratio data) | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
2015 | 2015 | 2014 | 2014 | 2014 | 2015 | 2014 | ||||||||||||||||||||||
TANGIBLE EQUITY AND TANGIBLE ASSETS | ||||||||||||||||||||||||||||
(PERIOD END) | ||||||||||||||||||||||||||||
Total shareholders' equity (GAAP) | $ | 136,520 | $ | 136,293 | $ | 133,628 | $ | 139,561 | $ | 141,781 | $ | 136,520 | $ | 141,781 | ||||||||||||||
Less: intangible assets | (26,302 | ) | (26,587 | ) | (26,891 | ) | (27,208 | ) | (27,532 | ) | (26,302 | ) | (27,532 | ) | ||||||||||||||
Tangible equity (non-GAAP) | $ | 110,218 | $ | 109,706 | $ | 106,737 | $ | 112,353 | $ | 114,249 | $ | 110,218 | $ | 114,249 | ||||||||||||||
Total assets (GAAP) | $ | 1,553,633 | $ | 1,584,772 | $ | 1,524,539 | $ | 1,523,557 | $ | 1,515,881 | $ | 1,553,633 | $ | 1,515,881 | ||||||||||||||
Less: intangible assets | (26,302 | ) | (26,587 | ) | (26,891 | ) | (27,208 | ) | (27,532 | ) | (26,302 | ) | (27,532 | ) | ||||||||||||||
Tangible assets (non-GAAP) | $ | 1,527,331 | $ | 1,558,185 | $ | 1,497,648 | $ | 1,496,349 | $ | 1,488,349 | $ | 1,527,331 | $ | 1,488,349 | ||||||||||||||
Total equity to total assets at end of period (GAAP) | 8.79 | % | 8.60 | % | 8.77 | % | 9.16 | % | 9.35 | % | 8.79 | % | 9.35 | % | ||||||||||||||
Book value per share (GAAP) | $ | 28.92 | $ | 28.92 | $ | 28.44 | $ | 29.78 | $ | 30.28 | $ | 28.92 | $ | 30.28 | ||||||||||||||
Tangible equity to tangible assets at end of period (non-GAAP) | 7.22 | % | 7.04 | % | 7.13 | % | 7.51 | % | 7.68 | % | 7.22 | % | 7.68 | % | ||||||||||||||
Tangible book value per share (non-GAAP) | $ | 23.35 | $ | 23.28 | $ | 22.71 | $ | 23.98 | $ | 24.40 | $ | 23.35 | $ | 24.40 |
Tangible Equity (Average)
Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
As of or for the | ||||||||||||||||||||||||||||
As of or for the Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||
(in thousands, except ratio data) | 2015 | 2015 | 2014 | 2014 | 2014 | 2015 | 2014 | |||||||||||||||||||||
TANGIBLE EQUITY (AVERAGE) | ||||||||||||||||||||||||||||
Total average shareholders' equity (GAAP) | $ | 137,386 | $ | 135,974 | $ | 141,845 | $ | 142,944 | $ | 142,318 | $ | 136,684 | $ | 141,693 | ||||||||||||||
Less: average intangible assets | (26,441 | ) | (26,755 | ) | (27,059 | ) | (27,391 | ) | (27,715 | ) | (26,597 | ) | (27,889 | ) | ||||||||||||||
Average tangible equity (non-GAAP) | $ | 110,945 | $ | 109,219 | $ | 114,786 | $ | 115,553 | $ | 114,603 | $ | 110,087 | $ | 113,804 | ||||||||||||||
Return on average equity (GAAP) | 7.52 | % | 6.79 | % | 12.54 | % | (0.90 | )% | 5.44 | % | 7.16 | % | 5.68 | % | ||||||||||||||
Return on average tangible equity (non-GAAP) | 9.32 | % | 8.45 | % | 15.49 | % | (1.11 | )% | 6.75 | % | 8.89 | % | 7.08 | % |
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Adjustments for Certain Items of Income or Expense
In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.
As of or for the | ||||||||||||||||||||||||||||
As of or for the Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
(in thousands, except share, per share and ratio data) | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
2015 | 2015 | 2014 | 2014 | 2014 | 2015 | 2014 | ||||||||||||||||||||||
CORE NET INCOME | ||||||||||||||||||||||||||||
Reported net income (loss) (GAAP) | $ | 2,577 | $ | 2,276 | $ | 4,482 | $ | (319 | ) | $ | 1,930 | $ | 4,853 | $ | 3,994 | |||||||||||||
Net gains on security transactions (net of tax) | (156 | ) | (31 | ) | (3,907 | ) | - | (322 | ) | (187 | ) | (322 | ) | |||||||||||||||
Legal settlements (net of tax) | - | - | - | 2,617 | - | - | - | |||||||||||||||||||||
Merger and acquisition related expenses (net of tax) | - | - | - | - | 18 | - | 71 | |||||||||||||||||||||
Core net income (non-GAAP) | $ | 2,421 | $ | 2,245 | $ | 575 | $ | 2,298 | $ | 1,626 | $ | 4,666 | $ | 3,743 | ||||||||||||||
Average basic and diluted shares outstanding | 4,716,734 | 4,706,774 | 4,690,519 | 4,683,797 | 4,680,776 | 4,711,699 | 4,678,977 | |||||||||||||||||||||
Reported basic and diluted earnings (loss) per share (GAAP) | $ | 0.55 | $ | 0.48 | $ | 0.96 | $ | (0.07 | ) | $ | 0.41 | $ | 1.03 | $ | 0.85 | |||||||||||||
Reported return on average assets (GAAP) | 0.66 | % | 0.59 | % | 1.17 | % | (0.08 | )% | 0.51 | % | 0.63 | % | 0.54 | % | ||||||||||||||
Reported return on average equity (GAAP) | 7.52 | % | 6.79 | % | 12.54 | % | (0.90 | )% | 5.44 | % | 7.16 | % | 5.68 | % | ||||||||||||||
Core basic and diluted earnings per share (non-GAAP) | $ | 0.51 | $ | 0.48 | $ | 0.12 | $ | 0.49 | $ | 0.35 | $ | 0.99 | $ | 0.80 | ||||||||||||||
Core return on average assets (non-GAAP) | 0.62 | % | 0.58 | % | 0.15 | % | 0.60 | % | 0.43 | % | 0.60 | % | 0.50 | % | ||||||||||||||
Core return on average equity (non-GAAP) | 7.07 | % | 6.70 | % | 1.61 | % | 6.38 | % | 4.58 | % | 6.88 | % | 5.33 | % |
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the Corporation as a result of changes in interest rates.
The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and credit quality of earning assets.
The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates. The Corporation's ALCO has the strategic responsibility for setting the policy guidelines on acceptable exposure to interest rate risk. These guidelines contain specific measures and limits regarding the risks, which are monitored on a regular basis. The ALCO is made up of the president and chief executive officer, the chief financial officer, the asset liability management officer, and other officers representing key functions.
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, with appropriate floors set for interest-bearing liabilities. At June 30, 2015, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 10.27% and an immediate 200-basis point increase would negatively impact the next 12 months net interest income by 9.68%. Both are within the Corporation's policy guideline of 15%. 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 4.49% and 14.41%, respectively.
65
A related component of interest rate risk is the expectation that the market value of the Corporation’s 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 June 30, 2015, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 6.65% and an immediate 200-basis point increase in interest rates would negatively impact the market value by 5.73%. Both are within the Corporation’s policy guideline of 15%. Management also modeled the impact to the market value of the Corporation’s 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 the Corporation’s capital of 3.25% and 8.46%, respectively.
Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management. These strategies were not employed during the six months ended June 30, 2015.
Credit Risk
The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.
The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Administrative and Risk Officer (non-voting member), business client division manager, retail client division manager, commercial loan manager, consumer loan manager, mortgage loan manager, and the President and commercial loan manager of the Capital Bank division, implements the Board-approved loan policy.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of June 30, 2015 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 June 30, 2015. 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.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Corporation under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
66
PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS |
For information related to this item, please see Note 8 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, 2014, filed with the Securities and Exchange Commission on March 13, 2015. | |
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 | ||||||||||||
4/1/15-4/30/15 | - | $ | - | - | 121,906 | |||||||||||
5/1/15-5/31/15 | - | $ | - | - | 121,906 | |||||||||||
6/1/15-6/30/15 | - | $ | - | - | 121,906 | |||||||||||
Quarter ended 3/31/15 | - | $ | - | - | 121,906 | |||||||||||
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock. 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. For the year ended December 31, 2014, no shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the plan. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable |
ITEM 5. | OTHER INFORMATION |
Not applicable |
67
ITEM 6. | EXHIBITS |
The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888. | |
3.1 | Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
3.2 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
3.3 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006). |
3.4 | Amended and Restated Bylaws of Chemung Financial Corporation, as amended to June 17, 2015 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on June 18, 2015). |
31.1 | Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
31.2 | Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
32.1 | Certification of Principal 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 Principal 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* |
* | Filed herewith. |
68
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: August 7, 2015 | By: /s/ Ronald M. Bentley |
Ronald M. Bentley Chief Executive Officer (Principal Executive Officer) |
DATED: August 7, 2015 | By: /s/ Karl F. Krebs |
Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer) |
69
EXHIBIT INDEX
The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888
3.1 | Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
3.2 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
3.3 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006). |
3.4 | Amended and Restated Bylaws of Chemung Financial Corporation, as amended to June 17, 2015 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on June 18, 2015). |
31.1 | Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
31.2 | Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
32.1 | Certification of Principal 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 Principal 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* |
* | Filed herewith. |