Chemung Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 13, 2015. The Corporation is a New York community banking holding company operating Chemung Canal Trust Company and financial-services subsidiary CFS Group. It reported 34 branches across New York and Pennsylvania.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets | $1.525 billion | $1.476 billion |
| Loans | $1.122 billion | $995.9 million |
| Deposits | $1.280 billion | $1.266 billion |
| Net interest income | $49.6 million | $46.6 million |
| Net interest margin, fully taxable equivalent | 3.59% | 3.91% |
| Non-interest income | $26.8 million | $18.1 million |
| Provision for loan losses | $4.0 million | $2.8 million |
| Non-interest expense | $60.5 million | $49.4 million |
| Net income / diluted EPS | $8.2 million / $1.74 | $8.7 million / $1.87 |
| Operating cash flow | $18.4 million | $23.0 million |
- Net income fell 6.6%; return on average assets was 0.54% (0.67% in 2013) and return on average equity was 5.74% (6.50%).
- Loan growth was 12.6%, including about $100.5 million of commercial-loan growth and $19.9 million of indirect consumer-loan growth. Commercial real estate and business loans represented 55.2% of total loans.
- Net charge-offs rose to $3.1 million from $0.4 million; the allowance was $13.7 million, or 1.22% of loans. Non-performing assets were 0.71% of assets, up from 0.61%.
- Cash and cash equivalents declined $22.4 million to $29.2 million. Loans-to-deposits rose to 87.62% from 78.65%.
- Year-end funding included $1.280 billion of deposits, $50.1 million of FHLB advances, $29.7 million of repurchase agreements, and a $3.0 million capital lease obligation. Shareholders’ equity was $133.6 million, down $5.0 million; the total equity-to-assets ratio was 8.77%.
- The Bank was categorized as well capitalized. Its total risk-based capital ratio was 11.35%, Tier 1 risk-based ratio 10.10%, and Tier 1 leverage ratio 7.41%. The Bank had $13.6 million available for dividends to the parent without prior regulatory approval.
- Quarterly data shows fourth-quarter net income of $4.5 million, including $6.9 million of annual net securities gains and $0.5 million of income from liquidation of a remaining trust-preferred CDO.
Material changes and unusual items
- Higher net interest income and non-interest income were outweighed by increased credit provisioning and operating costs. Non-interest income benefited from $6.9 million of securities gains, versus $16,000 in 2013; excluding the gains, the year-over-year increase in fee and other income was more modest.
- Non-interest expense included a $4.25 million net legal-settlement expense. In two Wealth Management Group trust disputes, the Bank accrued $12.1 million and recorded a $7.9 million insurance receivable; settlement stipulations were submitted to the court. Plaintiffs had claimed $13.2 million and $24.1 million, plus unspecified legal fees.
- After its January 2015 earnings release, the Corporation recorded an additional $0.7 million loan-loss provision for an impaired commercial loan. This reduced previously announced 2014 net income from $8.6 million to $8.2 million and EPS from $1.83 to $1.74. The filing also says the release omitted the $7.9 million insurance receivable gross-up, which did not affect income.
- Accumulated other comprehensive income fell $8.9 million, mainly reflecting pension and benefit-plan remeasurement and securities-related changes. The defined-benefit pension plan moved from a $5.6 million surplus to a $2.2 million deficit.
- The 2013 acquisition of six Bank of America branches contributed to the year-over-year growth in operating costs and deposits; no material change in the manner of doing business was reported for 2014.
Outlook, commentary, and risks
- Management expected future loan growth to remain concentrated in commercial mortgages and commercial and agricultural lending. Its strategy emphasizes relationship banking and stable, relatively low-cost deposits; brokered and networked deposits are used as secondary funding sources.
- Management identified interest-rate risk as the principal market risk. A modeled immediate 200-basis-point rate increase was estimated to reduce next-12-month net interest income by 9.62%; a 200-basis-point decrease by 9.45%. Both were within the stated 15% policy limit. Derivatives were not used for hedging in 2014.
- Key risks include concentration in commercial real estate and business lending, loan-loss estimate uncertainty, margin pressure and interest-rate sensitivity, deposit competition and funding mix, regulatory and Basel III requirements, acquisitions, technology and cybersecurity, and fiduciary litigation.
- The Bank’s $1.4 million of loans at least 90 days past due but still accruing largely comprised acquired construction loans with third-party credit enhancements; management expected no losses on them. OREO increased to $3.1 million, primarily from two acquired purchased-credit-impaired commercial loans.
- The filing gives no specific earnings or revenue guidance. The Bank exceeded applicable capital requirements at year-end and was reported well capitalized; Basel III requirements became effective beginning January 1, 2015.
- Management reported effective disclosure controls and internal control over financial reporting. A previously identified material weakness in identifying troubled debt restructurings was reported as remediated during 2014. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the final resolution and insurance recovery for the two trust-related legal proceedings, including whether the submitted settlement stipulations received court approval.
- Review subsequent performance and reserve adequacy for the impaired commercial loan that prompted the additional $0.7 million provision, and track commercial real estate concentration and charge-offs.
- Assess whether margin compression, loan pricing, deposit costs, and reliance on networked or brokered funding affect future profitability and liquidity.
- Monitor pension-plan assumptions and funded status, as well as the effect of accumulated other comprehensive losses on equity and regulatory capital.
- Check capital and dividend capacity under the rules effective in 2015 and the planned Basel III phase-in; confirm the status of the $13.6 million bank-to-parent dividend capacity.