Chemung Financial Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The unaudited filing covers the Corporation and its banking, wealth-management, and other subsidiaries. Unless noted otherwise, dollar amounts below are in millions.
Financial results and condition
- Third-quarter earnings: Net income was $3.65 million, or $0.76 per diluted share, versus $2.75 million, or $0.58 per share, in Q3 2016. Return on average assets was 0.85% and return on average equity was 9.46%.
- Third-quarter revenue and margin: Net interest income rose 13.2% to $14.76 million; fully taxable-equivalent net interest margin increased to 3.68% from 3.33%. Noninterest income fell 4.9% to $5.17 million, while noninterest expense declined 1.4% to $13.28 million. Pre-provision income was $6.65 million. Provision for loan losses increased 22.8% to $1.29 million.
- Nine-month results: Net income rose 35.6% to $9.59 million, or $2.00 per share. Net interest income increased 8.1% to $42.21 million, and fully taxable-equivalent margin was 3.53% versus 3.38%. Noninterest income decreased 7.5% to $15.04 million; noninterest expense decreased 5.6% to $40.65 million. Provision expense increased 35.3% to $2.75 million.
- Balance-sheet growth: At September 30, total assets were $1.732 billion, up 4.5% from year-end 2016. Loans before allowance were $1.289 billion, up 7.4%; deposits were $1.537 billion, up 5.5%. Shareholders’ equity was $154.3 million, or 8.91% of assets. Tangible equity to tangible assets was 7.62%.
- Funding, debt and liquidity: Cash and cash equivalents were $56.4 million, down from $74.2 million at December 31, 2016. Repurchase-agreement borrowings declined to $10.0 million from $27.6 million; FHLBNY term advances were $9.0 million, and capital lease obligations were $4.6 million. The Corporation reported $126.2 million of available FHLBNY borrowing capacity and $38.0 million of available unsecured credit lines.
- Cash flow, nine months: Operating activities provided $16.6 million; investing activities used $94.0 million, mainly reflecting loan growth and securities purchases; financing activities provided $59.6 million. Cash decreased $17.8 million over the period.
- Credit quality: Nonperforming loans were $14.0 million, or 1.09% of loans, versus $12.0 million, or 1.00%, at year-end. The allowance was $15.7 million, or 1.22% of loans. Net charge-offs for the first nine months were $1.31 million versus $0.97 million in 2016. Commercial real estate, real estate rental and lending exposures together represented 47.1% of total loans.
Material changes and management commentary
- Management attributed stronger net interest income to loan and securities growth, higher asset yields, and lower borrowing costs following maturities and the discontinuation of the customer repurchase-agreement product.
- Loan growth was concentrated in commercial mortgages, which increased $69.1 million from year-end, and commercial and agricultural lending, up $12.2 million. Management said it expects future portfolio growth to continue primarily in commercial mortgages and commercial and industrial loans, especially in the Capital Bank division; this is commentary, not quantified earnings guidance.
- Management cited a large commercial mortgage loan as the primary driver of the increase in nonperforming loans. Nonaccrual TDRs increased to $7.2 million from $4.4 million at year-end, while accruing TDRs decreased to $2.0 million from $5.8 million.
- Noninterest income was pressured by lower debit-card interchange revenue and, year to date, by the absence of significant securities-sale gains recorded in 2016. Wealth-management fee income increased, which the Corporation attributed to higher assets under management or administration.
- Lower employee-benefit expense helped reduce operating costs; management linked much of the decrease to freezing pension and post-retirement benefit accruals in late 2016. The nine-month comparison also benefited from lower legal expense, occupancy, data processing and other costs.
Outlook, risks, contingencies and unusual items
- Legal contingency: A New York lease dispute involving the former Ithaca branch remains pending after appellate affirmance of liability; damages are to be determined. The plaintiff originally sought $4.0 million. The Bank’s recorded reserve was $2.3 million, including $0.2 million of related accrued expenses; a request for reargument or leave to appeal was pending.
- Interest-rate risk: The Corporation estimated that an immediate 200-basis-point rate decline or increase would reduce next-12-month net interest income by 10.43% or 8.37%, respectively. Estimated impacts to the market value of capital were negative 13.30% and 4.15%, respectively. Management stated these scenarios were within its 15% policy limit.
- Credit and concentration risk: Loan growth, higher provisions and nonperforming commercial mortgages warrant attention. Management noted that weaker economic conditions, collateral values or loan-loss experience could require additional reserves.
- Accounting changes: The Corporation anticipated that adoption of the CECL expected-credit-loss model, planned for January 1, 2020, would increase the allowance; the amount was not stated. It expected no significant effect from the 2018 revenue-recognition standard and was evaluating the effect of the lease standard, estimating a right-of-use asset and related obligation below $8 million.
- The filing provided no specific full-year earnings or revenue guidance. Management reported the Bank was well capitalized, and stated disclosure controls were effective with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial-mortgage and indirect-consumer loan growth is accompanied by stable delinquency, nonperforming-loan and charge-off trends.
- Developments in the large commercial mortgage exposure, TDR performance, and the adequacy of the allowance for loan losses.
- The outcome and potential damages in the Ithaca lease litigation compared with the $2.3 million reserve.
- Whether deposit growth—particularly municipal, CDARS and ICS balances—remains stable and supports loan growth without materially increasing funding costs.
- How interest-rate movements affect net interest margin, asset values and funding costs, and how the CECL implementation may change reserves.