Chemung Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company provides banking and wealth-management services through Chemung Canal Trust Company and CFS Group; comparisons below are with Q1 2015 unless otherwise noted.
Financial performance
- Net income: $2.707 million, up 18.9%; diluted EPS was $0.57 versus $0.48. Core net income, excluding after-tax securities gains, was $2.142 million versus $2.245 million.
- Net interest income: $13.025 million, up 5.5%. Fully taxable-equivalent net interest margin was 3.47%, down from 3.49%. Higher average earning assets and commercial-loan income supported growth; management cited continued loan repricing at low market rates.
- Noninterest income: $5.601 million, up 8.0%, including $908,000 in securities gains, compared with $50,000 in the prior-year quarter. Excluding securities gains, adjusted noninterest income was $4.693 million versus $5.136 million.
- Expenses and credit costs: Noninterest expense rose 2.0% to $14.008 million. Provision for loan losses increased 52.6% to $595,000; net charge-offs were $328,000 versus $184,000.
- Returns and efficiency: ROA was 0.67% versus 0.59%; ROE was 7.73% versus 6.79%. Efficiency ratio was 76.89%, compared with 76.26%.
- Cash flow: Operating activities provided $5.821 million; investing activities provided $4.532 million; financing activities provided $19.321 million. Cash and cash equivalents increased $29.674 million to $55.859 million.
Financial position and material changes
- Assets and loans: Total assets were $1.643 billion, up 1.4% from year-end 2015. Loans, net of deferred fees and before allowance, grew 1.6% to $1.187 billion, led by $28.6 million growth in commercial mortgages; indirect and other consumer lending declined.
- Deposits and liquidity: Deposits increased 2.4% to $1.434 billion, primarily from seasonal municipal-client balances. Cash rose from $26.185 million at year-end. The company paid off $13.9 million of FHLBNY overnight advances; it had $19.175 million of term advances and $28.825 million of repurchase-agreement borrowings at quarter-end. Available FHLBNY borrowing capacity was $121.2 million, and $28.0 million of unsecured credit lines was available.
- Credit quality: Nonperforming loans increased to $12.774 million, or 1.08% of loans, from $12.232 million, or 1.05%, at year-end. Nonperforming assets were $14.416 million, or 0.88% of assets. Allowance for loan losses was $14.527 million, equal to 1.22% of loans. A $2.2 million commercial mortgage was past due 90 days or more but still accruing; the filing says it was well collateralized and in collection.
- Capital: Shareholders’ equity was $141.046 million; total equity to assets was 8.58% and tangible equity to tangible assets was 7.14%. The Bank exceeded regulatory thresholds to be considered well capitalized; its total risk-based capital ratio was 11.91% and common equity Tier 1 ratio was 10.66%.
Outlook, commentary, and risks
- Management anticipated continued portfolio-loan growth in commercial mortgages and commercial and industrial lending, particularly in the Capital Bank division. The filing provides no quantified earnings or revenue guidance.
- Wealth-management assets under management or administration fell 9.5% from year-end to $1.680 billion, attributed to the loss of one large nonprofit client and lower market values.
- Interest-rate modeling estimated that an immediate 200-basis-point rate decrease or increase would reduce next-12-month net interest income by 12.61% or 8.71%, respectively; both were within the company’s 15% policy limit. Management identifies interest-rate and credit risk as key exposures.
- A landlord sued over the Ithaca 202 East State Street lease, seeking a declaration that the lease runs through 2025 or $4.0 million in damages. The Bank denies the claims, is defending the case, and recorded no accrual because loss was not considered probable or reasonably estimable. A motion to dismiss was pending after quarter-end.
- The Bank announced closure of that Ithaca branch at the end of May 2016 and recorded $125,000 of accelerated depreciation. It also incurred $83,000 of professional services costs related to a captive insurance subsidiary expected to be established in Q2. A new 20-year Clifton Park branch lease commenced April 4, 2016, with a $2.0 million capitalized obligation.
Important facts for investors to verify
- Whether earnings growth persists without the unusually large securities gain; compare reported EPS of $0.57 with core EPS of $0.45.
- Trends in nonperforming loans, delinquency, charge-offs, and commercial real-estate concentration, which was 42.7% of total loans.
- Whether seasonal municipal deposits remain stable and how deposit growth and funding costs affect liquidity and margins.
- Developments in the $4.0 million Ithaca lease dispute and any resulting financial exposure.
- Progress toward planned commercial lending growth, and the associated credit quality and capital implications.