Chemung Financial Corporation — 2015 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015; quarterly figures below include the three months ended December 31. The New York-based financial holding company operates Chemung Canal Trust Company and CFS Group, providing banking, lending, wealth management, insurance, brokerage and related services through 34 branches. Wealth management reported $1.856 billion of assets under management or administration at year-end.
Financial performance and position
- Earnings: Net income was $9.43 million, up 15.6% from $8.16 million in 2014; diluted EPS was $2.00 versus $1.74. Return on average assets was 0.60% (0.54% in 2014), and return on average equity was 6.84% (5.74%).
- Revenue and margins: Net interest income rose 2.2% to $50.64 million. Noninterest income fell 23.6% to $20.45 million, primarily because 2014 included a $6.4 million securities-sale gain. Wealth management fees increased 10.0% to $8.52 million. Fully taxable-equivalent net interest margin declined to 3.46% from 3.59%; the efficiency ratio improved to 76.18% from 78.75%.
- Expenses and credit costs: Noninterest expense declined 8.4% to $55.43 million, mainly reflecting the absence of the $4.25 million WMG legal-settlement expense recorded in 2014. Provision for loan losses decreased 60.5% to $1.57 million; net charge-offs were $1.0 million versus $3.1 million.
- Fourth quarter: Net income was $2.13 million, or $0.45 per share, compared with $4.48 million, or $0.96 per share, in fourth-quarter 2014. The comparison is affected by the prior-year securities-sale gain; Q4 2015 provision expense was $615,000.
- Balance sheet: Total assets grew 6.3% to $1.620 billion. Loans, net of deferred fees, increased 4.2% to $1.169 billion, while deposits rose 9.4% to $1.400 billion. Shareholders’ equity was $137.2 million; year-end equity-to-assets was 8.47%, and tangible equity-to-tangible-assets was 6.99%.
- Funding and liquidity: Cash and cash equivalents were $26.2 million. Borrowings and capital-lease obligations totaled $64.4 million, down from $82.8 million. Loans-to-deposits improved to 83.46% from 87.62%. The company reported $106.2 million of FHLBNY borrowing capacity and $28.0 million of available unsecured credit lines.
- Cash flow: Operating activities provided $14.1 million; investing activities used $114.6 million, chiefly reflecting securities purchases and loan growth; financing activities provided $97.5 million, principally from deposit inflows. Cash and cash equivalents decreased $3.0 million.
- Capital: The Bank was categorized as well capitalized. Its year-end total risk-based capital ratio was 11.93%, common equity Tier 1 ratio 10.68%, and Tier 1 leverage ratio 7.59%.
Material changes versus 2014
- Commercial loans grew $80.7 million, led by the Capital Bank division; indirect consumer loans declined $33.4 million following the end of a promotional-rate program.
- Nonperforming loans rose to $12.2 million, or 1.05% of loans, from $7.8 million, or 0.69%. Management attributed the increase primarily to two commercial real estate loans placed on nonaccrual. Nonperforming assets were 0.85% of assets, up from 0.71%.
- Deposits increased substantially, including $104.8 million more in insured money market accounts; time deposits declined $45.8 million. CDARS and ICS deposits increased to $165.0 million from $76.7 million, including balances associated with municipal relationships.
- Available-for-sale securities increased to $344.8 million from $280.5 million, primarily due to purchases of mortgage-backed and municipal securities. Accumulated other comprehensive loss increased to $10.9 million from $8.8 million.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management anticipates continued loan growth, particularly in commercial mortgages and commercial and industrial lending, with emphasis on the Capital Bank division. Forward-looking statements are subject to economic, interest-rate, credit, competition and regulatory uncertainties.
- Interest-rate sensitivity: Management estimated that an immediate 200-basis-point rate decline or increase would reduce next-12-month net interest income by 11.80% or 10.01%, respectively. A 300-basis-point increase was estimated to reduce it by 15.03%. These are modeled sensitivities, not forecasts.
- Credit and concentration risks: Commercial real estate and business loans totaled $699.7 million, or 59.9% of loans; real estate-related borrowers represented 40.6% of total loans. The allowance was $14.26 million, or 1.22% of loans, versus nonperforming loans of $12.23 million. Management warns that economic deterioration, collateral declines or losses exceeding estimates could require additional provisions.
- Legal settlement: WMG litigation settlements totaled $12.1 million; $7.9 million of insurance proceeds offset the payments in 2015. The related $4.25 million expense was recorded in 2014. The company said no other pending proceeding was expected to materially affect results or liquidity.
- Subsequent events: The company planned to vacate its Ithaca Commons branch in Q2 2016; the branch had $20.6 million of deposits at year-end, and approximately $450,000 of accelerated depreciation and moving costs were expected in the first half of 2016. In February 2016, it sold Treasury notes for a $908,000 gain and used the proceeds to reduce FHLB overnight advances.
- Other exposures: Commitments, unused credit lines and standby letters of credit create off-balance-sheet credit and liquidity exposure; total listed commitments were $171.6 million, excluding specified consumer and home-equity lines. The filing identifies regulatory change, technology and cybersecurity, competition, and dependence on Bank dividends as risks.
Important facts for investors to verify
- Whether the increase in nonperforming loans and nonaccrual TDRs (to $4.4 million from $1.0 million) leads to higher charge-offs or loan-loss provisions.
- The quality and sustainability of deposit growth, especially municipal, CDARS/ICS and other rate-sensitive balances, and the effect of seasonal deposit movements on liquidity.
- Whether commercial real estate concentration and commercial loan growth remain within the company’s stated credit limits and are supported by adequate collateral and allowance estimates.
- Whether net interest margin pressure, modeled interest-rate sensitivity and securities valuation changes affect future earnings and capital.
- The actual costs and deposit retention following the Ithaca Commons branch closure, and the final outcome of the WMG settlement and insurance recovery.
- The filing reports audited financial statements and effective internal control over financial reporting; Crowe Horwath LLP gave unqualified audit opinions.