Chemung Financial Corporation — 2016 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2016; it is not a quarterly report. The New York-based financial holding company operates Chemung Canal Trust Company, wealth management and financial-services subsidiaries, and a captive insurer formed in 2016. It reported 33 bank branches in New York and Pennsylvania and $1.657 billion in year-end assets.
Financial performance and condition
- Earnings: Net income was $10.027 million, up 6.3% from $9.433 million in 2015; diluted EPS was $2.11 versus $2.00. Fourth-quarter net income was $2.954 million and EPS was $0.62. Return on average assets was 0.60%; return on average equity was 7.02%.
- Revenue and margins: Net interest income rose 3.3% to $52.329 million, supported by $94.0 million growth in average interest-earning assets. Fully taxable-equivalent net interest margin narrowed to 3.37% from 3.46%. Noninterest income increased 3.4% to $21.149 million; noninterest expense rose 2.1% to $56.610 million.
- Credit costs and asset quality: Provision for loan losses increased to $2.437 million from $1.571 million; net charge-offs rose to $2.444 million from $0.997 million. Nonperforming loans were $12.043 million, or 1.00% of loans, versus $12.232 million, or 1.05%, in 2015. The allowance was $14.253 million, 1.19% of loans.
- Balance sheet and funding: Loans were $1.200 billion, up 2.7%; deposits were $1.456 billion, up 4.0%. Commercial real estate and business loans totaled $745.2 million, or 62.1% of loans. Shareholders’ equity was $143.748 million; the year-end equity-to-assets ratio was 8.67%. Loans-to-deposits was 82.42%.
- Debt and liquidity: At year-end, FHLBNY advances were $9.093 million, repurchase-agreement funding was $27.606 million, and long-term capital lease obligations were $4.722 million. Cash and cash equivalents increased $47.977 million to $74.162 million. Operating cash flow was $22.141 million; investing activities used $0.729 million and financing activities provided $26.565 million. The company reported $131.6 million of potential FHLBNY borrowing capacity and $28.0 million in available unsecured credit lines.
- Capital and distributions: The Bank was categorized as well capitalized. Its total risk-based capital ratio was 11.71%, common equity Tier 1 ratio 10.52%, and Tier 1 leverage ratio 7.52%. The annual dividend remained $1.04 per share; the Bank could pay approximately $15.2 million in dividends to the parent without prior regulatory approval.
Material changes versus 2015
- Net income improved as higher net interest and noninterest income and lower income tax expense more than offset higher loan-loss provision and expenses.
- Commercial mortgage growth was concentrated in the Capital Bank division; indirect consumer loans declined as the company shifted its portfolio mix. Deposits grew, especially money-market balances, while time deposits decreased. FHLBNY advances fell by $24.0 million.
- Wealth-management assets under management or administration declined 7.3% to $1.721 billion, primarily after the loss of a large nonprofit customer; WMG fee income fell 2.4%.
- Available-for-sale securities declined to $303.4 million, and the company reported a $7.2 million year-to-date unrealized loss. Management attributed losses mainly to interest rates, not credit quality, and reported no other-than-temporary impairment charges.
Outlook, commentary, risks and unusual items
- Management expects future portfolio-loan growth to center on commercial mortgages and commercial and industrial lending, particularly in the Capital Bank division. The filing gives no quantified earnings, revenue, or margin guidance.
- Interest-rate risk remains a key exposure: modeled immediate 200-basis-point rate changes would reduce projected 12-month net interest income by 11.42% for a decline and 9.20% for an increase, within the company’s 15% policy limit.
- Credit risk is significant given commercial real estate and business lending concentration. Other cited risks include economic weakness, competition, deposit sensitivity, regulatory and compliance costs, technology and cybersecurity, and the possibility that the loan-loss allowance proves insufficient.
- A $1.2 million legal reserve was recorded in 2016 for the Fane v. Chemung Canal Trust Company lease dispute concerning former Ithaca premises. The court had found liability on breach-of-contract claims; the company appealed, and the plaintiff had sought $4.0 million in damages. Management considered the reserve sufficient at year-end. A separate 2014 wealth-management legal settlement had been $4.3 million net of insurance proceeds.
- The pension plan was frozen for future benefit accruals after December 31, 2016; the postretirement health plan was closed to new retirees effective January 1, 2017. A new employer 401(k) contribution formula also took effect in 2017.
- The company formed captive insurer CRM in May 2016. It also identified the upcoming expected-credit-loss accounting standard as potentially material; adoption was scheduled for 2020. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether commercial real estate concentration, higher 2016 charge-offs, and the allowance remain appropriate as loan growth continues.
- The outcome and ultimate damages in the Ithaca lease litigation, compared with the $1.2 million reserve.
- Deposit mix and retention, including municipal and CDARS/ICS funding, and the sustainability of cash and liquidity levels.
- Whether margin pressure, securities valuation changes, and the loss of the large WMG client affect future earnings and fee income.
- The effects of the pension and health-plan amendments, CRM operations, and future expected-credit-loss accounting on reported results and capital.