Chemung Financial Corporation — Q3 2015 Form 10-Q
Business context and period. The New York financial holding company provides community banking, lending, deposit, trust and investment-advisory services through Chemung Canal Trust Company and CFS. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $12.691 | $12.426 | $37.680 | $36.534 |
| Provision for loan losses | $0.307 | $0.589 | $0.956 | $2.330 |
| Noninterest income | $4.912 | $4.986 | $15.424 | $15.356 |
| Noninterest expense | $13.634 | $17.763 | $41.193 | $44.685 |
| Net income (loss) | $2.451 | ($0.319) | $7.304 | $3.676 |
| Diluted EPS | $0.52 | ($0.07) | $1.55 | $0.79 |
- Q3 pre-tax income was $3.662 million; nine-month pre-tax income was $10.955 million. Effective tax rates were 33.1% for Q3 and 33.3% year to date.
- Fully taxable-equivalent net interest margin was 3.45% in Q3 and 3.48% for nine months, down from 3.56% and 3.55%, respectively. Management attributed higher net interest income to growth in earning assets and commercial lending; loan yields faced pressure as loans repriced at low market rates.
- Q3 return on average assets and equity was 0.62% and 7.05%; nine-month returns were 0.62% and 7.12%. The nine-month efficiency ratio was 75.78%.
Balance sheet, cash flow and liquidity
- At September 30, total assets were $1.632 billion, up 7.0% from year-end 2014. Loans, net of allowance, were $1.128 billion; deposits were $1.410 billion; shareholders’ equity was $138.7 million.
- Loans grew 1.8% from year-end. Commercial and agricultural loans increased 5.9% and commercial mortgages 7.9%, while indirect consumer loans declined 15.0%. Commercial real estate, rental and lending businesses represented 39.7% of total loans, compared with 36.1% at year-end.
- Deposits rose 10.2%, largely from seasonal municipal balances. Cash and cash equivalents were $75.2 million, compared with $29.2 million at year-end. The company repaid $30.8 million of FHLBNY overnight advances; remaining term advances were $19.2 million and repurchase-agreement liabilities were $30.4 million.
- For the first nine months, operating cash flow was $10.1 million, investing cash outflow $60.8 million, and financing cash inflow $96.9 million; cash increased $46.1 million. Investing outflows largely reflected securities purchases and loan growth; financing inflows chiefly reflected deposit growth.
- Available FHLBNY borrowing capacity was $121.1 million, and $28.0 million of unsecured credit lines was available. The Bank reported Basel III capital ratios above well-capitalized thresholds, including 10.77% common equity Tier 1 versus a 6.50% well-capitalized threshold.
Changes, outlook and risks
- Year-to-date net income nearly doubled, primarily reflecting lower loan-loss provision and lower expenses than in 2014. The comparison is significantly affected by the $4.3 million WMG-related legal-settlement expense recorded in Q3 2014. For the 2015 settlement, the Bank paid $12.1 million in Q2, offset by $7.9 million of insurance proceeds.
- Credit indicators weakened: nonperforming loans rose to $12.4 million, or 1.08% of loans, from $7.8 million, or 0.69%, at year-end. Nonperforming assets were $14.7 million, or 0.90% of assets. The allowance was $14.0 million, 1.23% of loans and 113.37% of nonperforming loans. Management cited deterioration primarily in commercial loans and one commercial TDR moving to nonaccrual.
- Net charge-offs declined to $0.6 million for nine months from $2.0 million a year earlier. Management said the lower provision reflected lower specific allocations for purchased credit-impaired loans and lower charge-offs, partly offset by loan growth; it considered the allowance adequate but noted adverse economic or collateral changes could require additional provision.
- Management expects future portfolio loan growth to be concentrated in commercial mortgages and commercial and industrial lending, particularly in the Capital Bank division. No quantified earnings or margin guidance is provided.
- Interest-rate risk is material: modeled immediate 200-basis-point decreases and increases would reduce projected 12-month net interest income by 11.20% and 9.20%, respectively; both were within the company’s 15% policy limit. Other stated risks include credit conditions, competition, economic and regulatory changes, and managing growth.
- WMG assets under management or administration fell 7.2% to $1.815 billion from year-end, which management attributed mainly to market declines. A new related-party Clifton Park branch lease is expected to commence in Q1 2016, with a 20-year initial term and $3.042 million of minimum rent before renewal options.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states there were no material changes to the risk factors in the 2014 Form 10-K.
Important facts for investors to verify
- Whether the rise in nonperforming loans and commercial real-estate concentration leads to further credit losses or higher provisions.
- How much of deposit growth is seasonal municipal funding, and whether balances persist or require replacement funding.
- Whether commercial loan growth can offset ongoing yield compression and declining net interest margin.
- The distinction between recurring earnings and period comparisons affected by the prior-year WMG settlement, insurance recovery, and securities gains.
- The assumptions behind collateral valuations, the allowance for loan losses, and the reported interest-rate sensitivity estimates.