Chemung Financial Corporation — Q2 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2013; balance-sheet comparisons are against December 31, 2012. The Elmira, New York-based bank holding company provides banking and wealth-management services through its subsidiaries.
Financial performance and condition
| Metric | Q2 2013 / June 30, 2013 | Comparison |
|---|---|---|
| Net income | $2.65 million; diluted EPS $0.57 | Q2 2012: $2.44 million; $0.53 per share |
| Six-month net income and EPS | $5.07 million; $1.09 per share | Six months 2012: $6.06 million; $1.31 per share |
| Net interest income | Q2: $11.33 million; six months: $23.04 million | Q2 2012: $11.38 million; six months 2012: $23.41 million |
| Net interest margin | Q2: 3.87%; six months: 3.97% | Q2 2012: 3.98%; six months 2012: 4.13% |
| Provision for loan losses | Q2: $0.45 million; six months: $0.88 million | 2012 comparable periods: $0.05 million and $0.53 million |
| Assets and loans | Total assets $1.257 billion; portfolio loans $934.0 million | Assets up 0.7% and loans up 4.5% from year-end |
| Deposits and borrowings | Deposits $1.055 billion; repurchase agreements and FHLB advances total $56.7 million | Deposits up $10.2 million; borrowings down $3.3 million from year-end |
| Cash and cash flows | Cash and equivalents $24.8 million; six-month operating cash flow $11.1 million | Cash declined $15.5 million; investing cash use $32.3 million and financing cash provided $5.7 million |
| Capital and credit quality | Equity/assets 10.55%; tangible equity/tangible assets 8.63%; allowance $11.3 million, or 1.21% of loans | Bank capital ratios exceeded well-capitalized thresholds; non-performing assets were $8.1 million, or 0.64% of assets |
Material changes versus comparable periods
- Q2 net income rose 8.6% year over year, supported by $0.4 million higher non-interest income and $0.5 million lower non-interest expense. These benefits were partly offset by a $0.4 million increase in loan-loss provision.
- Six-month net income fell 16.4%. Management attributed the decrease mainly to lower net interest income, the absence of prior-year casualty insurance gains of about $0.8 million, lower securities transaction gains, a higher loan-loss provision, and modestly higher operating expenses.
- Net interest margin contracted in both comparisons as yields on earning assets, particularly loans repricing at historically low rates, fell faster than funding costs. Loan growth helped offset the pressure.
- Portfolio loans grew $40.5 million from year-end, led by commercial mortgages and indirect consumer lending. Non-performing loans rose to $7.5 million from $6.0 million; troubled debt restructurings increased to $7.6 million from $5.7 million.
- Available-for-sale securities declined $14.3 million from year-end. Six-month other comprehensive loss was $1.6 million, reflecting chiefly a decline in unrealized securities gains.
Outlook, risks, contingencies and unusual items
- No numerical earnings or financial guidance was provided. Management anticipated continued loan growth in commercial mortgages and indirect consumer loans.
- On July 10, 2013, the Bank agreed, subject to regulatory approval, to acquire six Bank of America branches in New York. The transaction is expected to close in Q4 2013 and includes approximately $261 million in deposits and $1.6 million in loans. The stated purchase price includes a 1.5% deposit premium based on specified average balances, plus the net book value of assets and accrued loan interest.
- Management identified interest-rate risk as its most significant market risk. Its modeled 200-basis-point rate changes projected a 8.86% decrease in next-12-month net interest income for a rate decline and a 7.45% decrease for a rate increase; both were within its 15% policy limit.
- Two pending trust-account proceedings involve claims of $9.6 million and $24.1 million, plus unspecified legal fees. The Bank disputes the claims; no loss was accrued because management did not consider a loss probable or reasonably estimable.
- Management considered the loan-loss allowance adequate but noted that deterioration in economic conditions, borrower performance, or collateral values could require additional provision. A trust-preferred CDO had a Moody’s Caa3 rating and significant valuation uncertainty; the quarter’s impairment analysis found no additional other-than-temporary impairment.
- Results are not necessarily indicative of full-year performance. Forward-looking risks include economic and real-estate conditions, interest rates, credit quality, competition, regulation, and managing growth.
Important facts for investors to verify
- Regulatory approval, final terms, funding deployment, and integration plans for the six-branch acquisition.
- Trends in non-performing loans, troubled restructurings, criticized credits, and the allowance as loan growth continues.
- Net interest margin and securities valuations as market rates change, including assumptions used for the trust-preferred CDO.
- Developments in the two trust-related legal proceedings and whether potential losses become estimable.