Chemung Financial Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The company is a New York-based financial holding company operating through Chemung Canal Trust Company and subsidiaries. Its principal activities are community banking and wealth management. This unaudited report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016.
Key financial results
| Metric | Q1 2017 | Comparable / change |
|---|---|---|
| Net interest income | $13.5 million | Up 3.6% year over year |
| Non-interest income | $4.8 million | Down 13.5% year over year |
| Non-interest expense | $13.0 million | Down 6.9% year over year |
| Provision for loan losses | $1.0 million | Up 74.8% year over year |
| Net income / diluted EPS | $3.0 million / $0.62 | Net income up 10.0%; EPS was $0.57 a year earlier |
| Fully taxable-equivalent net interest margin | 3.45% | 3.47% in Q1 2016 |
| Return on average assets / equity | 0.71% / 8.24% | 0.67% / 7.73% in Q1 2016 |
| Total assets | $1.736 billion | Up 4.8% from year-end |
| Loans, net of deferred fees | $1.234 billion | Up 2.8% from year-end; commercial mortgages grew 6.0% |
| Deposits | $1.544 billion | Up 6.0% from year-end |
| Shareholders’ equity | $148.3 million | 8.54% of assets; 7.23% tangible equity to tangible assets |
| Cash flow | $6.5 million operating cash provided | $29.4 million used in investing; $74.4 million provided by financing; cash rose $51.5 million to $125.7 million |
Material changes and management commentary
- Net income increased as higher net interest income and lower expenses and taxes more than offset lower non-interest income and a higher loan-loss provision. The year-earlier quarter included a $0.9 million securities-sale gain; Q1 2017 had no securities transaction gains.
- Net interest income benefited from growth in interest-earning assets and lower interest expense, particularly on borrowed funds. The margin nevertheless edged down year over year as asset yields declined.
- Non-interest expense fell primarily with lower pension and employee benefit costs, occupancy expense, and data-processing costs. Management cited the 2016 pension and post-retirement plan freeze, closure of an Ithaca branch, and renegotiated data-processing arrangements.
- Deposits grew partly from new municipal clients and seasonal municipal balances. Management expects future portfolio-loan growth to continue mainly in commercial mortgages and commercial and industrial loans, particularly in the Capital Bank division.
- Non-performing loans rose to $12.9 million, or 1.05% of loans, from $12.0 million, or 1.00%, at year-end; the increase was primarily in commercial mortgages. The allowance was $15.0 million, or 1.21% of loans. Management attributed the higher provision to commercial mortgage growth and additional reserves on identified problem assets.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial forecast. Management’s stated loan-growth expectation is qualitative. The company identifies economic conditions, interest rates, credit quality, competition, growth execution, and legal or regulatory changes as risks.
- Interest-rate modeling estimated that an immediate 200-basis-point rate decrease or increase would reduce projected 12-month net interest income by 12.78% or 7.80%, respectively; both were within the company’s 15% policy limit. A 100-basis-point decline and 300-basis-point increase were estimated to reduce net interest income by 6.85% and 11.86%, respectively.
- The Bank was categorized as well capitalized. At March 31, the Bank’s total risk-based capital ratio was 11.61%, common equity Tier 1 ratio 10.38%, and Tier 1 leverage ratio 7.60%. The company reported $125.2 million of available FHLBNY borrowing capacity and $28.0 million of available unsecured credit lines.
- A landlord dispute concerning the former Ithaca branch remains on appeal. The plaintiff sought $4.0 million; the company recorded a $1.2 million legal reserve in 2016 and deemed it sufficient at quarter-end. The court had granted partial summary judgment to the plaintiff on breach-of-contract liability, while damages remained to be determined.
- The company is evaluating the expected-credit-loss (CECL) standard and anticipates it will increase the allowance for loan losses. It planned to run its existing and CECL models concurrently for 12 months before adoption on January 1, 2020.
- Management reported no material change in the risk factors from its 2016 Form 10-K and stated that disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether commercial mortgage growth and the concentration of real-estate-related lending—44.7% of total loans—are accompanied by stable credit performance.
- Whether non-performing loans and individually impaired commercial mortgage loans continue to rise, and whether the $15.0 million allowance remains adequate as loan growth and economic conditions evolve.
- How much deposit growth reflects durable customer relationships versus seasonal municipal balances and CDARS/ICS funding, which totaled $255.6 million.
- Whether the Ithaca lease litigation outcome could require damages above the recorded $1.2 million reserve.
- How actual net interest income responds to changing rates relative to the modeled sensitivities, and whether the margin can be sustained.