Chemung Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results. The company provides banking, lending, fiduciary, wealth-management and related financial services through its subsidiaries.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $12.65 | $12.08 | $24.99 | $24.11 |
| Non-interest income | $5.33 | $5.41 | $10.51 | $10.37 |
| Non-interest expense | $13.82 | $13.58 | $27.56 | $26.92 |
| Provision for loan losses | $0.26 | $1.10 | $0.65 | $1.74 |
| Net income | $2.58 | $1.93 | $4.85 | $3.99 |
| Diluted EPS | $0.55 | $0.41 | $1.03 | $0.85 |
| Fully taxable-equivalent net interest margin | 3.50% | 3.51% | 3.50% | 3.55% |
- Quarterly net income rose 33.5%; six-month net income rose 21.5%. Management attributed improvement principally to higher net interest income and lower credit-loss provisions.
- Pre-provision income was $4.15 million in Q2, up 6.4%, and $7.94 million for six months, up 5.1%. The efficiency ratio was 75.83% for Q2 and 76.04% year to date.
- Quarterly net interest income increased 4.7% as average interest-earning assets grew, led by commercial lending. Loan yields continued to decline as loans repriced in a low-rate environment; the six-month margin fell five basis points year over year.
- WMG fees increased 10.5% in Q2 and 11.7% for six months, supported by higher assets under management or administration and adjusted fee levels. Deposit service charges and securities gains declined.
Financial condition, cash flow and capital
- At June 30, total assets were $1.554 billion, up 1.9% from year-end 2014; net loans were $1.136 billion, up 2.6%; and deposits were $1.332 billion, up 4.1%. Loan growth was concentrated in commercial and commercial mortgage lending, while indirect consumer loans contracted.
- Cash and cash equivalents were $29.7 million. First-half operating cash flow was $4.5 million, investing cash outflow was $40.7 million, financing cash inflow was $36.7 million, and cash increased $0.5 million. Investing outflows primarily reflected loan growth and securities purchases; deposit inflows funded much of this activity.
- Deposits increased mainly from seasonal municipal-client balances. Non-interest-bearing demand and money-market deposits grew, while time deposits declined $31.1 million. Management expects to continue using brokered deposits as a secondary funding source.
- Period-end borrowings included $15.6 million of FHLBNY overnight advances, $19.3 million of term advances and $31.9 million of repurchase agreements; the overnight advances declined from $30.8 million at year-end. FHLBNY borrowing capacity was $106.4 million, and $28.0 million of unsecured credit lines was available.
- Shareholders’ equity was $136.5 million; equity to assets was 8.79%, tangible equity to tangible assets was 7.22%, and book value per share was $28.92. The Bank exceeded regulatory well-capitalized thresholds; its Basel III common equity Tier 1 ratio was 10.64% and total capital ratio 11.89%.
Material changes and credit quality
- Non-performing loans rose to $12.9 million, or 1.12% of loans, from $7.8 million, or 0.69%, at year-end. Non-performing assets increased to $15.2 million, or 0.98% of assets, from $10.8 million, or 0.71%; management cited deterioration primarily in commercial loans and one commercial TDR moving to non-accrual.
- The allowance for loan losses was $14.0 million, 1.22% of loans, compared with $13.7 million at year-end. Its coverage of non-performing loans declined to 109.07% from 175.96%. First-half net charge-offs were $0.3 million, versus $0.9 million in 2014.
- Total TDRs were $9.6 million; $2.6 million were non-accrual, compared with $1.0 million at year-end. Commercial real estate, real estate rental and lending borrowers represented 38.6% of total loans, up from 36.1% at year-end.
- Available-for-sale securities were $290.6 million. Unrealized losses were $0.8 million, mainly on mortgage-backed securities; management attributed declines to interest rates rather than credit quality and did not consider the securities other-than-temporarily impaired.
Outlook, risks and unusual items
- No specific earnings or financial-target guidance is provided. Management expects future portfolio loan growth to remain focused on commercial mortgages and commercial and industrial loans, particularly in the Capital Bank division.
- Interest-rate risk is identified as the principal market risk. Modeling estimated that an immediate 200-basis-point rate decrease or increase would reduce next-12-month net interest income by 10.27% or 9.68%, respectively; both estimates were within the company’s 15% policy limit. A 300-basis-point increase was estimated to reduce it by 14.41%.
- On March 26, 2015, a court approved settlements of two WMG-related litigations. The Bank agreed to pay $12.1 million; $7.9 million of insurance proceeds offset the payments, which occurred in Q2. The filing describes a net cash outflow of approximately $4.3 million. Management said other pending claims and proceedings were not expected to materially adversely affect results or liquidity.
- Other stated risks include credit losses, interest-rate and economic changes, competition, growth management and regulatory changes. Management notes that adverse economic conditions, weaker loan-loss experience or lower collateral values could require additional provisions. No material changes to the 2014 Form 10-K risk factors were reported.
- Disclosure controls were considered effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track the rise in non-performing commercial loans and TDRs, and whether allowance coverage remains adequate as the commercial portfolio grows.
- Assess sustainability of municipal deposit inflows, the resulting funding mix, and reliance on brokered/CDARS/ICS deposits and borrowing capacity.
- Review securities valuation and interest-rate exposure, including the modeled sensitivity of earnings and capital value to rate changes.
- Confirm settlement cash and accounting effects, including the insurance recovery and the net outflow reported for Q2.
- Monitor loan concentration in commercial real estate and the continuing decline in indirect consumer lending.