Chemung Financial Corporation — Q1 2014 Form 10-Q
Business context and reporting period. The company is a New York bank holding company operating through Chemung Canal Trust Company and CFS Group, Inc., providing banking and wealth-management services. This unaudited report covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $12.0 million | $11.7 million in Q1 2013 |
| Net interest margin, fully taxable equivalent | 3.58% | 4.14% in Q1 2013; 3.72% in Q4 2013 |
| Non-interest income | $5.0 million | $4.0 million in Q1 2013 |
| Non-interest expense | $13.3 million | $11.7 million in Q1 2013 |
| Provision for loan losses | $0.64 million | $0.43 million in Q1 2013 |
| Net income / diluted EPS | $2.06 million / $0.44 | $2.41 million / $0.52 in Q1 2013 |
| Operating cash flow | $2.6 million | $3.2 million in Q1 2013 |
| Total assets | $1.498 billion | $1.476 billion at December 31, 2013 |
| Loans, net of deferred fees and unearned income | $1.025 billion | $995.9 million at December 31, 2013 |
| Deposits | $1.292 billion | $1.266 billion at December 31, 2013 |
| Shareholders’ equity | $140.5 million; 9.38% of assets | $138.6 million; 9.39% at December 31, 2013 |
Net interest margin declined as asset yields fell, particularly on loans repricing at low market rates; growth in earning assets, including the late-2013 branch acquisition, supported higher net interest income. Net income fell 14.4% year over year as higher operating expense and loan-loss provision more than offset increases in net interest and non-interest income.
Cash and cash equivalents rose to $57.1 million. Q1 cash flows were $2.6 million from operations, negative $19.4 million from investing, and positive $22.3 million from financing. Period-end funding included $25.2 million of FHLB term advances and $30.6 million of repurchase-agreement liabilities. The company reported $103.7 million of additional FHLBNY borrowing capacity and $28.0 million of available unsecured credit lines. Management said both the Corporation and Bank exceeded regulatory capital requirements for well-capitalized status.
Material changes and notable items
- Loans grew $28.7 million, or 2.9%, during the quarter, led by commercial mortgages (+$23.7 million) and indirect consumer loans (+$6.0 million). Securities available for sale declined $8.9 million, principally as maturities and sales helped fund loan growth.
- Deposits increased $25.6 million, or 2.0%, mainly from public funds. Insured money-market deposits increased $26.8 million; time deposits declined $8.6 million.
- Non-performing assets decreased to $8.8 million from $9.1 million at year-end; the ratio to assets improved to 0.59% from 0.61%. Non-performing loans were $8.6 million. The allowance was $13.2 million, or 1.28% of loans; quarterly net charge-offs rose to $0.26 million from $0.04 million a year earlier.
- Non-interest income included a $0.5 million gain from liquidation of a pool of trust-preferred securities. The company reported no other CDOs in its securities portfolio. It also reported a $0.03 million loss on sales of other real estate owned and $0.09 million of merger-related expense.
- Other comprehensive income was $0.63 million, largely reflecting higher unrealized gains on available-for-sale securities. Book value per share was $30.03, and the declared dividend was $0.26 per share, unchanged from the prior year.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management anticipates loan growth to continue primarily in commercial mortgages and indirect consumer loans, and said it is evaluating investment alternatives for cash cautiously in the low-rate environment.
- Management identifies interest-rate risk as its most significant market risk. A modeled immediate 200-basis-point rate decrease or increase was estimated to reduce next-12-month net interest income by 11.52% or 8.62%, respectively; both were within the company’s 15% policy limit. These are scenario estimates, not forecasts.
- Management considers the allowance adequate, but notes that worsening economic or collateral conditions, loan losses, or regulatory review could require additional provisions. The company’s forward-looking statements also identify interest rates, credit risk, growth management, competition, and regulatory or economic changes as risks.
- Two trust-accounting proceedings involve beneficiary claims of $9.6 million and $24.1 million, plus unspecified legal fees. The Bank disputes the claims and is defending them; no loss was accrued because management did not consider a loss probable or reasonably estimable.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in identifying and evaluating troubled debt restructurings. Remediation and testing were ongoing; management expected remediation to be effective by the end of Q2 2014. The filing reports no other material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the TDR-control remediation was completed and independently tested by the stated Q2 2014 target.
- Subsequent loan performance, especially commercial mortgage and indirect consumer growth, consumer charge-offs, non-accrual loans, and the adequacy of the allowance.
- Whether the $0.5 million securities-liquidation gain is nonrecurring and how ongoing margin pressure affects earnings.
- Developments in the two trust litigation matters and whether any loss becomes probable or estimable.
- Deposit mix and liquidity, including public and CDARS funding, borrowing availability, and sensitivity to interest-rate changes.