Chemung Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company is a New York-based financial holding company providing banking, lending, wealth management and related services, primarily through Chemung Canal Trust Company and CFS.
Financial results and condition
| Metric | Q1 2018 | Comparable / change |
|---|---|---|
| Net interest income | $14.9 million | Up 10.4% from Q1 2017 |
| Fully taxable equivalent net interest margin | 3.75% | 3.45% in Q1 2017 |
| Non-interest income | $5.5 million | Up 13.0% year over year |
| Non-interest expense | $14.2 million | Up 8.6% year over year |
| Provision for loan losses | $0.7 million | Compared with $1.0 million in Q1 2017 |
| Net income / diluted EPS | $4.4 million / $0.92 | $3.0 million / $0.62 in Q1 2017 |
| Return on average assets / equity | 1.06% / 11.96% | 0.71% / 8.24% in Q1 2017 |
| Operating cash flow | $7.0 million | $6.5 million in Q1 2017 |
At March 31, total assets were $1.700 billion, down 0.4% from year-end 2017. Loans, net of deferred fees, were $1.320 billion, up 0.6%; deposits were $1.518 billion, up 3.5%. Shareholders’ equity was $150.3 million, or 8.84% of assets. Cash and cash equivalents were $31.0 million. Period-end borrowings and other debt were $14.5 million, down from $74.2 million at December 31, chiefly after repayment of $57.7 million in overnight FHLBNY advances.
The allowance for loan losses was $21.4 million, or 1.62% of loans. Non-performing loans were $17.3 million (1.31% of loans); non-performing assets were $19.1 million (1.12% of assets). Net charge-offs were $0.5 million. The efficiency ratio was 68.21%, compared with 69.25% a year earlier.
Material changes and management commentary
- Net interest income rose with higher commercial loan balances and yields, including the impact of higher Prime and LIBOR rates; the average yield on interest-earning assets increased 28 basis points year over year.
- Non-interest income growth reflected higher wealth-management fees and other income. The company received a $0.4 million New York State sales-tax refund, a potentially nonrecurring item.
- Expenses increased, particularly salaries, data processing, professional services, marketing and OREO costs. The Bank opened a de novo branch in Schenectady in January 2018.
- The effective tax rate declined to 19.3% from 30.0%, primarily reflecting the federal corporate tax rate reduction from 34% to 21%, with additional benefit from income generated by a bank REIT subsidiary.
- Available-for-sale securities fell to $279.0 million from $293.1 million at year-end. Net-of-tax other comprehensive loss was $3.3 million for the quarter, largely associated with securities valuation; management attributed unrealized losses primarily to interest-rate changes, not credit deterioration.
- Deposit growth was concentrated in money-market accounts and included seasonal municipal-client inflows. Management attributed the reduction in borrowings mainly to those deposit inflows.
Outlook, risks and contingencies
- Management anticipates future portfolio loan growth primarily in commercial mortgages and commercial and industrial loans, particularly in the Capital Bank division. This is a stated expectation, not numerical earnings guidance.
- Management said the Bank was well-capitalized under regulatory guidelines. At quarter-end, available FHLBNY borrowing capacity was $130.6 million and $38.0 million of unsecured credit lines were available.
- Interest-rate modeling estimated that an immediate 200-basis-point decrease would reduce next-12-month net interest income by 11.39%, while a 200-basis-point increase would raise it by 3.34%; both were within the company’s 15% policy limit. These are scenario estimates, not forecasts.
- Management expects adoption of the CECL credit-loss standard on January 1, 2020 to increase the allowance for loan losses; the amount is not stated. The company was preparing for implementation and planned a 12-month parallel run of its existing and CECL models.
- A lease dispute concerning a vacated Ithaca branch remained pending on damages. The plaintiff sought $4.0 million; the Bank had recorded a total reserve of $2.3 million, including related accrued expenses. Mediation was scheduled for May 30, 2018.
- Risks highlighted include changing economic conditions and interest rates, credit quality, competition, growth management, and regulatory or legal changes. The filing reported no material change to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether seasonal municipal deposits persist and how deposit pricing affects funding costs and net interest margin.
- Whether expected commercial loan growth materializes, and whether real-estate-related lending concentration—45.5% of total loans—remains manageable.
- Trends in criticized and non-performing credits, charge-offs, collateral values, and the adequacy of the allowance, including the eventual CECL impact.
- Whether the $0.4 million sales-tax refund and associated consulting costs affect comparisons in later periods.
- The outcome and final damages, if any, in the Ithaca lease litigation relative to the $2.3 million reserve.
- Changes in securities values and accumulated other comprehensive loss as interest rates move.