Chemung Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company provides community banking, lending, wealth management and related financial services through its subsidiaries.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $13.0 million | $12.7 million | $39.0 million | $37.7 million |
| Provision for loan losses | $1.1 million | $0.3 million | $2.0 million | $1.0 million |
| Non-interest income | $5.4 million | $4.9 million | $16.3 million | $15.4 million |
| Non-interest expense | $13.5 million | $13.6 million | $43.0 million | $41.2 million |
| Net income | $2.7 million | $2.5 million | $7.1 million | $7.3 million |
| Basic and diluted EPS | $0.58 | $0.52 | $1.49 | $1.55 |
| Fully taxable-equivalent net interest margin | 3.33% | 3.45% | 3.38% | 3.48% |
Q3 net income rose 12.0%, supported by higher net interest and non-interest income and lower expenses, partly offset by a substantially higher loan-loss provision. Nine-month net income fell 3.2%, as higher expenses and credit provisions outweighed revenue growth and lower tax expense. Q3 return on average assets was 0.65% and return on average equity 7.55%; nine-month figures were 0.57% and 6.62%, respectively. The Q3 efficiency ratio was 71.28% (non-GAAP).
Financial position, liquidity and credit
- At September 30, 2016, total assets were $1.729 billion, up 6.7% from year-end 2015. Loans, net of deferred fees, were $1.217 billion, up 4.1%; deposits were $1.509 billion, up 7.8%.
- Cash and cash equivalents were $135.5 million, compared with $26.2 million at December 31, 2015. Available-for-sale and held-to-maturity securities totaled $307.8 million, down from $349.4 million.
- Total shareholders’ equity was $144.8 million; equity/assets were 8.38% and tangible equity/tangible assets were 7.03%. The Bank exceeded regulatory thresholds for well-capitalized status.
- Funding included $30.0 million in repurchase agreements, $19.1 million in FHLBNY term advances and $4.8 million in capital lease obligations; FHLBNY overnight advances were repaid. Available borrowing capacity was reported at $120.7 million from FHLBNY and $28.0 million under unsecured lines of credit.
- Operating cash flow for the first nine months was $19.8 million; investing activities used $3.2 million and financing activities provided $92.8 million. Cash increased $109.3 million, primarily reflecting deposit inflows.
- The allowance for loan losses was $15.3 million, or 1.26% of loans, versus $14.3 million, or 1.22%, at year-end. Nine-month net charge-offs were $1.0 million, compared with $0.6 million a year earlier. Non-performing loans were $12.9 million (1.06% of loans); non-performing assets were $13.3 million (0.77% of assets).
Material changes and management commentary
- Commercial mortgages grew $69.3 million, or 13.7%, since year-end, primarily in the Capital Bank division. Management expects future portfolio loan growth to continue mainly in commercial mortgages and commercial and industrial loans. Indirect consumer loans declined as the company chose not to lower pricing to compete for new-car loans.
- Deposit growth was largely attributed to municipal customers and seasonal municipal inflows. Demand and money-market balances increased, while time deposits declined. CDARS/ICS deposits rose to $234.3 million from $165.0 million.
- Net interest income increased, but margin declined year over year as yields on interest-earning assets fell. Management’s rate simulations estimated a 12-month net-interest-income decline of 12.17% under an immediate 200-basis-point rate decrease and 8.08% under a 200-basis-point increase; both were within its 15% policy limit.
- Wealth Management Group assets under management or administration were $1.714 billion, down 7.6% from year-end, primarily because of the loss of one large nonprofit customer. WMG fee income declined year over year.
- Management attributed higher credit provisions to commercial mortgage growth, increased specific reserves on impaired loans and higher net charge-offs. Real-estate-related commercial lending represented 44.4% of total loans, up from 40.6% at year-end.
Outlook, risks and unusual items
- The filing gives no formal earnings or EPS guidance. Management identifies interest-rate risk, credit risk, economic conditions, competition, growth execution and regulatory changes as factors that could affect results.
- A New York court granted partial summary judgment for the landlord in a lease dispute involving the former Ithaca branch, on liability for anticipatory breach and breach of contract. The plaintiff seeks $4.0 million; the company recorded a $1.2 million legal reserve in Q2 2016. Damages remained to be determined, and management was assessing an appeal.
- After quarter-end, the company froze future defined-benefit pension accruals effective January 1, 2017, increased 401(k) contributions, and closed its retiree health plan to new retirees. It estimated a $2.6 million reduction in 2017 pension expense, partly offset by a $0.7 million increase in 401(k) expense; it also expected a $0.3 million curtailment gain in Q4 2016 and a $0.1 million reduction in 2017 postretirement health expense.
- The company formed a captive insurance subsidiary in May 2016. It also noted that the expected-credit-loss accounting standard could materially change its allowance-estimation process; adoption was not yet required.
Investor verification priorities
- Track commercial mortgage growth and concentration, impaired loans, non-performing loans, charge-offs and allowance adequacy.
- Assess whether municipal deposit inflows are sustainable and monitor funding mix, liquidity and securities portfolio changes.
- Review the outcome and potential damages of the Ithaca lease litigation, including any appeal and reserve reassessment.
- Monitor net interest margin and actual sensitivity to rate changes against the filing’s modeled scenarios.
- Confirm the financial effects of the pension and retiree-health amendments as they are recognized in later periods.