Chemung Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Chemung provides community banking, lending, fiduciary and wealth-management services through its subsidiaries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $13.95 | $12.97 | $27.44 | $25.99 |
| Provision for loan losses | $0.42 | $0.39 | $1.46 | $0.98 |
| Non-interest income | $5.02 | $5.22 | $9.87 | $10.82 |
| Non-interest expense | $14.33 | $15.57 | $27.38 | $29.58 |
| Net income | $2.96 | $1.62 | $5.94 | $4.33 |
| Diluted EPS | $0.62 | $0.34 | $1.24 | $0.91 |
| FTE net interest margin | 3.47% | 3.36% | 3.46% | 3.41% |
Q2 net income rose 82.4%; first-half net income rose 37.1%. Management attributed the improvement mainly to higher net interest income and lower expenses, partly offset by reduced non-interest income, higher loan-loss provision and higher taxes. Q2 return on average assets was 0.69% and return on average equity 7.90%; the first-half figures were 0.70% and 8.06%. The reported efficiency ratio improved to 69.28% in Q2 from 77.00% a year earlier.
- Q2 net interest income increased 7.6%, as earning assets grew and interest expense declined. Management cited higher commercial-loan and investment income and lower costs on repurchase agreements and borrowings.
- First-half non-interest income fell 8.8%, largely because the prior-year period included a $0.9 million securities gain; wealth-management fees increased 3.9%.
- First-half expenses fell 7.4%. Lower pension and benefit costs reflected the 2016 freeze of pension and post-retirement plan accruals; lower occupancy, technology, professional-service and legal costs also contributed.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.719 billion, up 3.7% from year-end 2016. Loans, net of deferred fees but before allowance, were $1.253 billion, up 4.4%; deposits were $1.525 billion, up 4.7%.
- Loan growth was concentrated in commercial mortgages, up $36.1 million, and commercial and agricultural loans, up $12.9 million. Management expects future portfolio growth to continue mainly in commercial mortgages and commercial and industrial loans, particularly in the Capital Bank division.
- Cash and cash equivalents were $64.5 million, down $9.6 million from year-end. For the first six months, operating cash flow was $9.0 million, investing cash outflow was $69.4 million, and financing cash inflow was $50.7 million. Investing outflow primarily reflected loan growth and securities purchases.
- Funding included $1.525 billion in deposits, $11.9 million in repurchase agreements, $9.0 million in FHLBNY term advances and a $4.6 million capital-lease obligation. Repurchase agreements declined from $27.6 million at year-end, largely reflecting maturities and product discontinuation.
- Management reported $127.9 million of additional FHLBNY borrowing capacity and $28.0 million of available unsecured lines. The Bank was categorized as well-capitalized. Consolidated total risk-based capital was 12.06%, Tier 1 risk-based capital 10.84%, and the equity-to-assets ratio was 8.84%.
- Shareholders’ equity was $152.0 million. The allowance for loan losses was $15.1 million, or 1.21% of loans; the allowance covered 99.32% of non-performing loans.
Asset quality, contingencies and outlook
- Non-performing loans increased to $15.2 million, or 1.21% of loans, from $12.0 million, or 1.00%, at year-end. Management said the increase was primarily due to a large commercial mortgage relationship. Non-performing assets were $15.5 million, or 0.90% of assets.
- First-half provision was $1.46 million versus $0.98 million a year earlier, reflecting commercial mortgage portfolio growth, higher loss factors in indirect lending and additional reserves on identified problem assets. Net charge-offs were $0.61 million, versus $0.58 million.
- Troubled debt restructurings totaled $10.0 million; $7.2 million were on non-accrual status, compared with $4.4 million at year-end. The filing also reports $1.0 million of acquired credit-impaired loans, accounted for separately.
- A lease dispute concerning the former Ithaca branch remains material. The appellate court affirmed liability, with damages to be determined in a later proceeding; the plaintiff had sought $4.0 million. The Bank added an $0.85 million reserve in Q2, bringing its total reserve to $2.3 million, including $0.2 million for related accrued expenses.
- No formal earnings guidance is provided. Management identifies interest rates, credit quality, economic conditions, competition, growth management and regulatory changes as risks. It estimates a 200-basis-point rate decrease or increase would reduce next-12-month net interest income by 10.62% or 9.38%, respectively, within its 15% policy limit.
- The company anticipates CECL adoption will increase the allowance for loan losses and was preparing for planned adoption on January 1, 2020. Management expected no material impact from the specified new revenue and financial-asset standards; lease-standard implementation was expected to create a right-of-use asset and related obligation of less than $5 million.
Important facts for investors to verify
- Progress and eventual damages in the Ithaca lease litigation, and whether the $2.3 million reserve remains adequate.
- Whether the increase in commercial-mortgage non-performing loans and non-accrual TDRs leads to further provisions, charge-offs or collateral losses.
- Sustainability of commercial loan and municipal deposit growth, including funding costs and concentration exposure; real estate-related commercial loans were 44.7% of total loans.
- Changes in net interest margin and deposit pricing as interest rates move, alongside the disclosed rate-sensitivity estimates.
- CECL implementation assumptions and resulting allowance impact; the filing states the company anticipates an increase but does not quantify it.