The purpose of this discussion is to focus on information about the financial condition and results of operations of the Corporation for the three and six-month periods ended
June 30, 2014and 2013. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation's 2013 Annual Report on Form 10-K, which was filed with the SECon March 14, 2014, for an understanding of the following discussion and analysis.
This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the PSLRA. Forward-looking statements are not historical in nature, but instead are based on our assumptions, estimates and projections about future events and trends. 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 2013 Annual Report on Form 10-K. These filings are available publicly on the SEC'sweb 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.
Use of Non-GAAP Financial Measures
SEChas 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 SEChas 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 SECand may constitute "non-GAAP financial measures" within the meaning of the SEC'snew rules, although we are unable to state with certainty that the SECwould so regard them. 35 --------------------------------------------------------------------------------
Tax-Equivalent Net Interest Income and Net Interest Margin
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.
Tangible Book Value per Share
Tangible equity is total shareholders' equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total shareholders' equity including intangible assets divided by total shares issued and outstanding. Intangible assets include goodwill and other intangible assets resulting from business combinations.
Adjustments for Certain Items of Income or Expense
In addition to disclosures of certain GAAP financial measures, including net income, earnings per share (i.e. EPS), return on average assets (i.e. ROA), and return on average equity (i.e. 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. The Corporation believes that the non-GAAP financial measures disclosed by it from time-to-time are useful in evaluating the Corporation's performance and that such information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. The Corporation's non-GAAP financial measures may differ from similar measures presented by other companies.
The Corporation is a bank holding company and a financial holding company registered with the FRB. The Bank is a
New Yorkcharted commercial bank established in 1833 and is a wholly owned subsidiary of the Corporation. Through the Bank and CFS Group, Inc., its wholly owned financial services subsidiary, the Corporation provides a wide range of services, including demand, savings and time deposits; commercial, residential and consumer loans and letters of credit; wealth management services, employee benefit plans and securities and insurance brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation does not engage in any material operations apart from its ownership of the Bank and CFS Group, Inc.The Bank derives its income primarily from interest and fees on loans, interest on investment securities, Wealth Management Groupfee 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. 36 --------------------------------------------------------------------------------
Three and Six Months Ended
· Net income for the second quarter of 2014 was
prior year. Net income for the six months ended
the same period in the prior year.
· Net interest margin (fully taxable equivalent) for the second quarter of 2014
was 3.51%, compared with 3.58% for the preceding quarter and 3.93% for the same
quarter in the prior year. Net interest margin (fully taxable equivalent) for
the six months ended
period in the prior year.
· Average interest-earning assets increased
result of organic loan growth and the fourth quarter 2013 Bank of America branch acquisition.
· Total loans increased
31, 2013 to
attributable to growth of
· Non-performing assets to total assets ratio was 0.55% at
with 0.61% at
· Book value per share was
an increase of
or 3.3%, and
· Dividends declared during the quarter ended
level with the prior year.
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.
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. 37 -------------------------------------------------------------------------------- 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. Financial Condition Summary Consolidated assets at
June 30, 2014totaled $1.516 billion, an increase of $39.7 million, or 2.7%, since December 31, 2013. The growth was due primarily to increases of $88.5 million, or 8.9%, in total portfolio loans and $14.7 millionin cash and cash equivalents, partially offset by a decrease of $60.6 millionin investment securities. The increase in portfolio loans was due to strong growth of $62.7 millionin commercial loans and $27.2 millionin consumer loans. The decrease in investment securities was used to fund the growth in the loan portfolio. Total liabilities increased $36.5 millionto $1.374 billionat June 30, 2014, due primarily to an increase of $42.2 millionin deposits, partially offset by decreases of $3.0 millionin other liabilities and $2.0 millionin securities sold under agreement to repurchase. The increase was due in part to the seasonal inflow of public deposits.
Total shareholders' equity was
The market value of total assets under management or administration in the Corporation's
Cash and Cash Equivalents
Total cash and cash equivalents increased since
December 31, 2013, due primarily to increases of $4.4 millionin cash and due from financial institutions and $10.3 millionin interest-bearing deposits in other financial institutions.
increases were due to normal fluctuations in Bank activities. The Corporation continues to evaluate alternative investment of these funds with caution, given the current low interest rate environment.
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. 38 -------------------------------------------------------------------------------- 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 Table 1 as follows (in thousands of dollars): TABLE 1. SECURITIES
AVAILABLE FOR SALE
June 30, 2014 December 31, 2013 Securities Available Amortized Estimated Unrealized Amortized Estimated Unrealized for Sale Cost Fair Value Gains (Losses) Cost Fair Value Gains (Losses) Obligations of U.S. Government and U.S Government sponsored enterprises
$ 166,253 $ 167,946 $ 1,693 $ 187,098 $ 188,106$ 1,008 Mortgage-backed securities, residential 66,933 67,924 991 104,069 104,356 287 Collateralized mortgage obligations 606 614 8 1,001 1,015 14 Obligations of states and political subdivisions 34,958 35,947 989 37,339 38,376 1,037 Corporate bonds and notes 2,610 2,655 45 2,879 2,946 67 SBA loan pools 1,383 1,398 15 1,471 1,488 17 Trust preferred securities 1,902 2,034 132 1,898 2,034 136 Corporate stocks 443 7,880 7,437 444 7,695 7,251 Totals $ 275,088 $ 286,398 $ 11,310 $ 336,199 $ 346,016$ 9,817 The available for sale segment of the securities portfolio totaled $286.4 millionat June 30, 2014, a decrease of $59.6 million, or 17.2%, from $346.0 millionat December 31, 2013. The decrease resulted primarily from sales and calls of $49.8 million, and maturities and principal collected of $13.3 million, partially offset by purchases of $2.6 million. The decrease in securities was used to help fund the growth in the loan portfolio. The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation's market areas. These securities totaled $5.3 millionat June 30, 2014, a net decrease of $1.2 milliondue primarily to maturities and principal collected of $1.8 million, partially offset by purchases of $0.6 million.
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.
Table 2 shows the Corporation's loan composition by segment for the periods indicated, and the dollar and percent change from
TABLE 2. LOANS December June 30, 2014 31, 2013 Dollar Change Percent Change
Commercial and agricultural:
$ 158,877 $ 145,363 $ 13,5149.3 % Commercial mortgages 422,293 373,147 49,146 13.2 % Residential mortgages 194,603 195,997 (1,394 ) -0.7 % Indirect consumer loans 187,082 164,846 22,236 13.5 % Consumer loans 121,498 116,513 4,985 4.3 % Loans, net $ 1,084,353 $ 995,866 $ 88,4878.9 % Portfolio loans totaled $1.084 billionat June 30, 2014, an increase of $88.5 million, or 8.9%, from $995.9 millionat December 31, 2013. The increase in portfolio loans was due to strong growth of $49.1 million, or 13.2%, in commercial mortgages and $22.2 million, or 13.5%, in indirect consumer loans. The growth in commercial mortgages was due primarily to an increase in the Capital Bankdivision in the Albany, New Yorkregion. The growth in indirect consumer loans was a result of the Corporation's plan to extend into 2014 its loan program with reduced pricing on high quality indirect auto loans. 39 -------------------------------------------------------------------------------- Residential mortgage loans totaled $194.6 millionat June 30, 2014, a decrease of $1.4 million, or 0.7%, from December 31, 2013. In addition, during the six months ended June 30, 2014, $5.3 millionof newly originated residential mortgages were sold in the secondary market to Freddie Mac and $0.1 millionin residential mortgages were sold to the State of New York Mortgage Agency. During the twelve months ended December 31, 2013, $18.8 millionof residential mortgages were sold in the secondary market to Freddie Mac, with an additional $0.7 millionof 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, commercial and industrial loans and indirect consumer loans.
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.
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 contractual 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.
Table 3 summarizes the Corporation's non-performing assets, excluding acquired PCI loans (in thousands of dollars):
TABLE 3. NON-PERFORMING ASSETS December 31, June 30, 2014 2013 Non-accrual loans $ 6,986
$ 7,456Non-accrual troubled debt restructurings 726 1,061 Total non-performing loans $ 7,712 $ 8,517Other real estate owned 633 538 Total non-performing assets $ 8,345 $ 9,055Ratio of non-performing loans to total loans 0.71 % 0.86 % Ratio of non-performing assets to total assets 0.55 %
0.61 % Ratio of allowance for loan losses to non-performing loans 176.76 % 150.01 %
Accruing loans past due 90 days or more (1)
Accruing troubled debt restructurings (1)
(1) These loans are not included in non-performing assets above.
The recorded investment in non-performing loans at
June 30, 2014totaled $7.7 millioncompared to $8.5 millionat December 31, 2013, a decrease of $0.8 million. The decrease in non-performing loans was due primarily to a decrease of $0.6 millionin non-accrual commercial and industrial loans, $0.5 millionin non-accrual residential mortgages and $0.3 millionin non-accrual commercial construction loans. These items were partially offset by an increase of $0.6 millionin non-accrual commercial mortgages.
The recorded investment in accruing loans past due 90 days or more totaled
Not included in non-performing loan totals are
$8.9 millionof 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. 40 --------------------------------------------------------------------------------
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, 2014, the Corporation had $0.7 millionof non-accrual TDRs compared with $1.1 millionas of December 31, 2013. As of June 30, 2014, the Corporation had $6.4 millionof accruing TDRs compared with $6.8 millionas of December 31, 2013. The decrease in total TDRs was primarily in the commercial loan segment of the loan portfolio. Impaired Loans Impaired loans at June 30, 2014totaled $11.5 million, including TDRs of $7.1 million, compared to $13.9 millionat December 31, 2013, including TDRs of $7.9 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 decreases of $1.4 millionin commercial and industrial loans and $0.7 millionin commercial mortgages. Included in the impaired loan total at June 30, 2014, are loans totaling $1.5 millionfor which impairment allowances of $0.3 millionhave been specifically allocated to the allowance for loan losses. As of December 31, 2013, the impaired loan total included $2.0 millionof loans for which specific impairment allowances of $1.0 millionwere allocated to the allowance for loan losses. The decrease in the amount of impaired loans for which specific allowances were allocated to the allowance for loan losses was due primarily to a decrease of $0.8 millionin impaired commercial and industrial loans, partially offset by an increase in of $0.3 millionin impaired commercial mortgages. 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) 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. 41 -------------------------------------------------------------------------------- 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
$13.6 millionat June 30, 2014, up from $12.8 millionat December 31, 2013. The ratio of allowance for loan losses to total loans was 1.26% at June 30, 2014, compared with 1.28% at December 31, 2013.
increase in the allowance for loan losses was due primarily to loan portfolio growth, and allowances for the growth after consideration of the factors discussed above, and higher net charge-offs. Net charge-offs for the six months ended
June 30, 2014were $0.9 millioncompared with net recoveries of less than $0.1 millionfor the prior year. The increase in net charge-offs were primarily in the commercial and consumer loan portfolios.
Table 4 summarizes the Corporation's loan loss experience for the six months ended
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE Six Months Ended June 30, 2014 June 30, 2013 Balance at beginning of period
$ 12,776 $ 10,433Charge-offs: Commercial and agricultural 355 18 Commercial mortgages 358 - Residential mortgages 7 54 Consumer loans 776 398 Total charge-offs 1,496 470 Recoveries: Commercial and agricultural 193 294 Commercial mortgages 83 19 Residential mortgages 28 39 Consumer loans 307 124 Total recoveries 611 476 Net charge-offs (recoveries) 885 (6 ) Provision charged to operations 1,741 881 Balance at end of period $ 13,632 $ 11,320Ratio of net charge-offs to average loans outstanding (1) .17 % N/ M Ratio of allowance for loan losses to total loans outstanding 1.26 % 1.21 % (1) Not meaningful 42
Table 5 shows the Corporation's deposit composition by segment for the periods indicated, and the dollar and percent change from
December 31, 2013to June 30, 2014(in thousands of dollars): TABLE 5. DEPOSITS December 31, June 30, 2014 2013 Dollar Change Percent Change Non-interest-bearing demand deposits $ 365,056 $ 351,222 $ 13,8343.9 % Interest-bearing demand deposits 124,803 114,679 10,124 8.8 % Insured money market accounts 393,390 361,095 32,295 8.9 % Savings deposits 199,664 194,768 4,896 2.5 % Time deposits 225,515 244,492 (18,977 ) -7.8 % Total $ 1,308,428 $ 1,266,256 $ 42,1723.3 % Deposits totaled $1.308 billionat June 30, 2014, compared with $1.266 billionat December 31, 2013, an increase of $42.2 million, or 3.3%. The increase was due primarily to growth in public deposits. Sorted by brokered, public, commercial and consumer sources, the growth in deposits was due primarily to increases of $30.8 millionin brokered funds, $8.0 millionin consumer accounts and $4.0 millionin commercial accounts, partially offset by a decrease of $0.7 millionin public funds. 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 Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep Service ("ICS") programs.
CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure
FDICinsurance 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. Deposits obtained through brokers were $3.6 millionat June 30, 2014compared with $5.0 millionas of December 31, 2013. Deposits obtained through the CDARS and ICS programs were $67.9 millionat June 30, 2014compared with $35.7 millionas of December 31, 2013. The increase in CDARS and ICS deposits was due to the Corporation offering the programs to local municipalities. 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 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.
FHLB term advances were
$24.1 millionat June 30, 2014, a decrease of $0.7 millionfrom December 31, 2013. Securities sold under agreements to repurchase decreased $2.0 millionfrom $32.7 millionat December 31, 2013to $30.7 millionat June 30, 2014. The decrease in securities sold under agreements to repurchase was related to normal fluctuations in client accounts.
During the second quarter of 2014, the Bank entered into a
Total shareholders' equity was
$141.8 millionat June 30, 2014compared with $138.6 millionat December 31, 2013. The increase was due primarily to the Corporation's net income of $4.0 millionand an increase of $1.1 millionin accumulated other comprehensive income, partially offset by declared dividends of $2.4 million. The total shareholders' equity to total assets ratio was 9.35% at June 30, 2014compared with 9.39% at December 31, 2013. The tangible equity to tangible assets ratio was 7.68% at June 30, 2014compared with 7.62% at December 31, 2013. Book value per share increased to $30.28at June 30, 2014from $29.67at December 31, 2013. 43 -------------------------------------------------------------------------------- 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, 2014, both the Corporation's and the Bank's capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.
Liquidity and Capital Resources
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
$100,000or 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 $104.7 millionand $73.1 millionat June 30, 2014and December 31, 2013, respectively. The Corporation also had a total of $28.0 millionof unsecured lines of credit with four different financial institutions, all of which was available at June 30, 2014and December 31, 2013. During the six months ended June 30, 2014, cash and cash equivalents increased $14.7 million. The major sources of cash during the six months ended June 30, 2014included $7.5 millionprovided by operating activities, $64.9 millionin proceeds from sales, maturities, calls and principal reductions on investment securities and $42.2 millionin deposit growth. These proceeds were used primarily to fund purchases of securities totaling $3.2 million, an $89.9 millionnet increase in loans and payment of cash dividends in the amount of $2.4 million. Results of Operations
Comparison of Six Months Ended
Net income for the six months ended
June 30, 2014was $4.0 million, a decrease of $1.1 million, or 21.2%, compared with $5.1 millionfor the six months ended June 30, 2013. Earnings per share for the six months ended June 30, 2014was $0.85compared with $1.09for the six months ended June 30, 2013. Return on average assets and return on average equity for the six months ended June 30, 2014were 0.54% and 5.68%, respectively, compared with 0.81% and 7.65%, respectively, for the same period in the prior year.
The decrease in net income for the six months ended
Net Interest Income
Net interest income, which is the difference between the income we receive on interest-earning assets, such as loans and securities and the interest we pay on interest-bearing liabilities, such as deposits and borrowings, is the largest contributor to the Corporation's earnings. Net interest income for the six months ended
June 30, 2014totaled $24.1 million, an increase of $1.1 million, or 4.6%, compared with $23.0 millionfor the same period in the prior year. Fully taxable equivalent net interest margin was 3.55% for the six months ended June 30, 2014compared with 4.04% for the same period in the prior year. The increase in net interest income was due primarily to an increase of $220.7 millionin interest-earning assets related to the branch acquisition in the fourth quarter of 2013. The decline in net interest margin was due in part to a 58 basis point decrease in the yield on interest-earning assets, partially offset by a 13 basis point decline in the cost of funds and the increase in interest-earning assets. The decrease in yield on interest-earning assets was attributable to a 47 basis point decrease in yield on loans, a result of loans continuing to reprice at current historically low market rates. 44 --------------------------------------------------------------------------------
Average Consolidated Balance Sheet and Interest Analysis
Table 6 sets forth certain information related to the Corporation's average consolidated balance sheets and its consolidated statements of income for the six month periods ended
June 30, 2014and 2013. Table 6 also reflects the average yield on assets and average cost of liabilities for the six month periods ended June 30, 2014and 2013. 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.