Chemung Financial Corporation — FY 2012 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. Chemung is a New York-based financial holding company operating through Chemung Canal Trust Company and CFS Group, providing banking, lending, wealth management, brokerage, insurance and related services. Its footprint includes upstate New York and northern Pennsylvania. The filing reports no material change in business during 2012.
Financial performance and position
| Metric | FY 2012 / Dec. 31, 2012 | Prior comparable period |
|---|---|---|
| Net income | $11.0 million | $10.5 million in 2011; up 4.6% |
| Basic and diluted EPS | $2.38 | $2.40 in 2011 |
| Net interest income | $46.8 million | $43.8 million in 2011; up 6.7% |
| Net interest margin / spread | 4.07% / 3.89% | 4.07% / 3.85% in 2011 |
| Other operating income | $17.3 million | $17.5 million in 2011 |
| Other operating expenses | $46.8 million | $44.8 million in 2011 |
| Return on average assets / equity | 0.88% / 8.41% | 0.90% / 8.77% in 2011 |
| Total assets | $1.248 billion | $1.216 billion in 2011; up 2.6% |
| Loans / deposits | $893.5 million / $1.045 billion | $796.9 million / $998.5 million in 2011 |
| Shareholders’ equity | $131.1 million | $125.9 million in 2011 |
- Profitability and costs: Net interest income increased as average earning assets grew and funding costs fell; average cost of interest-bearing liabilities declined 21 basis points to 0.64%. The margin was unchanged. Non-interest expense rose 4.6% year over year, or 10.1% excluding 2011 merger costs. The efficiency ratio was 71.99%, versus 71.18%.
- Credit and allowance: Provision for loan losses was $0.8 million, versus $1.0 million in 2011. Net charge-offs fell to $0.2 million (0.02% of average loans), from $0.8 million (0.11%). The allowance was $10.4 million, or 1.17% of loans, compared with $9.7 million, or 1.21%, a year earlier.
- Cash flow: Operating activities provided $24.6 million. Investing activities used $56.9 million, principally reflecting $97.1 million of net loan growth, partly offset by securities proceeds; financing activities provided $19.6 million. Cash and cash equivalents declined $12.7 million to $40.2 million.
- Debt and liquidity: Repurchase-agreement funding was $32.7 million and FHLB advances were $27.2 million, together $59.9 million versus $80.5 million in 2011. The Bank had access to up to $104.5 million of FHLB borrowing based on collateral and outstanding advances, plus $28 million in available unsecured lines. Time deposits totaled $236.7 million, with $157.5 million scheduled to mature in 2013.
- Capital and shareholder returns: Year-end equity-to-assets was 10.50%; tangible equity-to-tangible assets was 8.53%. The Bank was categorized as well-capitalized, with total risk-based capital of 12.64%, Tier 1 risk-based capital of 11.22% and Tier 1 leverage of 8.39%. Dividends declared were $1.00 per share for the year; the payout ratio was 41.5%.
Material changes and fourth-quarter data
- Portfolio loans grew 12.1%, led by commercial mortgages and indirect consumer lending. Commercial real estate and business loans totaled $454 million, or 50.8% of loans. Available-for-sale securities fell 14.7% to $239.7 million as the portfolio was reduced in part to fund loan growth.
- Deposits increased 4.6%, driven by non-interest-bearing demand, money-market and NOW accounts; time deposits declined. Borrowings fell 25.6% as the Bank did not replace certain maturing advances.
- Reported non-performing assets declined to $16.4 million, or 1.32% of assets, from $21.8 million, or 1.79%. The adjusted ratio, excluding accruing TDRs and accruing loans past due 90 days or more, was 0.53%, versus 1.19%. Accruing TDRs increased to $5.4 million from none in 2011.
- Fourth-quarter unaudited net income was $2.1 million, or $0.46 per share, versus $3.0 million, or $0.64 per share, in fourth-quarter 2011. Q4 2012 included $0.8 million of casualty gains related to 2011 flooding; other operating expenses were $12.6 million, up from $11.5 million a year earlier.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said future portfolio loan growth was expected to focus on commercial mortgages and indirect consumer loans. Wealth Management planned initiatives in private banking and retirement services; year-end assets under management or administration were $1.735 billion, up from $1.596 billion.
- Management attributed improved annual earnings mainly to higher net interest income, $2.2 million less in pre-tax merger costs than in 2011, and $0.8 million in insurance casualty gains. Higher personnel, technology and professional-services costs and lower securities gains partly offset these benefits.
- Interest-rate sensitivity analysis estimated that an immediate 200-basis-point decrease or increase would reduce next-12-month net interest income by 10.86% or 4.68%, respectively; both were within the company’s 15% policy limit. Management identifies interest-rate risk as its most significant market risk.
- Key risks include economic weakness, credit deterioration and collateral values, concentration in commercial real estate and business lending, competition, acquisition integration, regulatory change, technology and operational security, and dependence on Bank dividends. Basel III implementation and the effects of Dodd-Frank remained uncertain.
- The Bank was defending two trust-account proceedings in which beneficiaries alleged imprudent investment diversification and claimed $9.6 million and $24.1 million, plus unspecified legal fees. The matters were in discovery; the Bank considered the claims without merit. Outcomes are uncertain.
- No OTTI charge on investment securities was recorded in 2012. One trust-preferred CDO remained a Level 3-valued security with $629,000 amortized cost and a Caa3 rating; quarterly interest payments were being received. Management reported no impairment of goodwill or other intangible assets at year-end.
- The independent auditor gave an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective. Management also reported effective disclosure controls.
Investor verification priorities
- Review the commercial real estate and business credit exposure, including borrower and industry concentrations, loan risk ratings, acquired credit-impaired loans, and the increase in accruing TDRs.
- Assess whether loan growth and the shift from securities to loans can be sustained without weakening underwriting, liquidity or the allowance for loan losses.
- Reconcile the reported 1.32% non-performing-assets ratio with the adjusted 0.53% ratio and examine the treatment and collectability of accruing TDRs and past-maturity construction loans.
- Evaluate recurring earnings separately from the $0.8 million casualty gain and the effects of reduced merger costs; monitor rising operating expenses and modest wealth-management fee growth.
- Track near-term deposit maturities, funding mix, borrowing capacity, interest-rate sensitivity and the pension plan’s year-end funded status, which shifted to an $0.8 million deficit from a $2.5 million surplus.
- Follow the two trust litigation matters, the Level 3 trust-preferred security valuation, and the eventual U.S. capital rules implementing Basel III.