Chemung Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Dollar figures below are in millions unless otherwise noted. Chemung provides banking, lending and wealth-management services, primarily through Chemung Canal Trust Company.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $12.43 | $11.52 | $36.53 | $34.56 |
| Net interest margin, fully taxable equivalent | 3.56% | 3.90% | 3.55% | 3.99% |
| Other operating income | $4.99 | $4.35 | $15.36 | $12.85 |
| Provision for loan losses | $0.59 | $0.87 | $2.33 | $1.76 |
| Operating expenses | $17.76 | $11.81 | $44.69 | $34.93 |
| Net income (loss) | ($0.32) | $2.18 | $3.68 | $7.25 |
| EPS | ($0.07) | $0.47 | $0.79 | $1.56 |
For the nine months, net income fell 49.3%. Net interest income rose 5.7% as average interest-earning assets grew, but margin contracted as asset yields declined. Management attributed lower loan yields to repricing in a low-rate environment. Other income increased 19.5%, including securities gains and a gain from liquidation of a trust-preferred securities pool.
Financial position, liquidity and credit
- At September 30, total assets were $1.524 billion, up 3.2% from year-end 2013. Loans rose 11.9% to $1.114 billion, led by commercial mortgages and indirect consumer lending. Available-for-sale securities fell 16.7% to $288.1 million, partly as proceeds funded loan growth.
- Deposits increased 3.5% to $1.311 billion. Non-interest-bearing deposits were $372.9 million; time deposits declined $33.2 million. Cash and cash equivalents were $35.0 million, down $16.6 million since year-end.
- Nine-month cash flow was $12.4 million from operations, ($67.2) million from investing and $38.3 million from financing; cash decreased $16.6 million. The company reported $108.3 million of FHLBNY borrowing capacity and $28.0 million of available unsecured credit lines.
- FHLBNY term advances were $24.1 million and repurchase-agreement funding was $31.0 million. The balance sheet also recorded $3.0 million of capital-lease obligations.
- Shareholders’ equity was $139.6 million; total equity to assets was 9.16%, down from 9.39% at year-end. Both the Corporation and Bank exceeded regulatory minimums to be considered well-capitalized.
- The allowance for loan losses was $13.2 million, or 1.18% of loans. Nine-month net charge-offs were $2.0 million versus $0.3 million in the prior-year period. Non-performing assets were $10.3 million, or 0.68% of assets, versus $9.1 million and 0.61% at year-end; non-performing loans declined to $7.2 million.
Material changes and unusual items
- A $4.3 million legal-settlement accrual, approved November 14, was recorded in Q3 in connection with two Wealth Management Group trust-account proceedings. A related $1.7 million tax benefit was recognized. This reduced previously reported year-to-date net income from $6.3 million to $3.7 million and EPS from $1.34 to $0.79; reported expenses increased from $40.4 million to $44.7 million.
- The Bank faces claims of $13.2 million in one proceeding and $24.1 million in another, plus unspecified legal fees. Non-binding mediation began November 10; the accrual reflects anticipated settlement, but no formal agreement had been executed. If settlement is not finalized, litigation continues, with trials scheduled for January and February 2015.
- Q3 operating expenses increased 50.4% year over year, principally because of the settlement accrual and expenses related to branches acquired in Q4 2013. The branch acquisition also contributed to larger earning assets and deposit growth.
- Disclosure controls and procedures were deemed ineffective because of a previously identified material weakness in identifying and evaluating troubled debt restructurings. Remediation was ongoing; management expected it to be effective by year-end 2014.
Outlook, risks and management commentary
Management anticipated future loan growth in commercial mortgages, commercial and industrial loans, and indirect consumer loans. No specific earnings or revenue guidance was provided. Key stated risks include credit quality and allowance estimates, interest-rate changes, growth management, competition, and regulatory or economic changes. Management estimated that an immediate 200-basis-point rate move in either direction would reduce next-12-month net interest income by approximately 9%, within its 15% policy limit. A 300-basis-point increase was estimated to reduce it by 13.45%.
Investor verification priorities
- Track whether the two trust-related cases reach formal settlement and whether the $4.3 million accrual proves adequate.
- Review remediation and testing of the material weakness involving troubled debt restructuring identification.
- Monitor charge-offs, non-performing assets, commercial real-estate exposure, and allowance adequacy as loans grow.
- Assess whether loan growth and funding mix can offset continued margin pressure and the decline in securities and cash.
- Confirm reported capital and liquidity remain adequate as growth, deposit composition and interest rates change.