Chemung Financial Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 14, 2014. This is an annual report, not a standalone fourth-quarter filing. The company is a New York bank holding company operating through Chemung Canal Trust Company and CFS Group, with community banking and wealth management businesses.
Financial performance and condition
| Metric | FY 2013 / Dec. 31, 2013 | Comparison |
|---|---|---|
| Net income; diluted EPS | $8.7 million; $1.87 | Down 20.8% from $11.0 million and $2.38 in 2012 |
| Net interest income; net interest margin | $46.6 million; 3.85% | Income down 0.5%; margin declined from 4.07% |
| Interest and dividend income | $50.7 million | Down from $52.1 million |
| Other operating income | $18.1 million | Up from $17.2 million |
| Provision for loan losses | $2.8 million | Up from $0.8 million |
| Other operating expenses | $49.4 million | Up 5.6%; included $1.4 million of branch-acquisition costs |
| Return on average assets / equity | 0.67% / 6.50% | Down from 0.88% / 8.41% |
| Total assets; loans | $1.476 billion; $995.9 million | Assets up 18.3%; loans up 11.5% |
| Deposits; shareholders’ equity | $1.263 billion; $138.6 million | Deposits up 20.9%; equity up 5.7% |
| Cash and cash equivalents | $51.6 million | Up $11.4 million during the year |
Cash from operations was $23.0 million. Investing activities used $46.5 million, principally reflecting securities purchases and loan growth; financing activities provided $34.9 million. Year-end borrowings comprised $32.7 million under repurchase agreements and $25.2 million of FHLB advances. The loans-to-deposits ratio was 78.83%. The company reported $73.1 million of available FHLB borrowing capacity and $28.0 million of available unsecured credit lines.
Regulatory capital remained above minimums: consolidated total risk-based capital was 12.10%, Tier 1 risk-based capital 10.57%, and Tier 1 leverage 8.08%. The Bank was categorized as well capitalized. The allowance for loan losses was $12.8 million, or 1.28% of loans; nonperforming assets were 0.61% of total assets.
Material changes versus 2012
- In November 2013, the Bank acquired six Bank of America branches, adding approximately $177.7 million of deposits and $1.2 million of loans. The acquisition contributed to year-end balance-sheet growth and included $1.4 million of pretax acquisition costs and a $470,000 bargain-purchase gain.
- Loan growth was led by commercial lending and consumer loans. Commercial real estate and business loans totaled $519 million, or 52.1% of total loans; real-estate-related commercial borrowers represented 31.1% of loans.
- Higher loan-loss provisioning, acquisition costs, and margin compression drove lower earnings. Average asset yields fell faster than funding costs; net interest margin declined 22 basis points.
- Nonperforming assets rose to $9.1 million from $6.6 million, and nonperforming loans increased to $8.5 million from $6.0 million. The allowance coverage of nonperforming loans was 150.1%, versus 173.0%.
- Demand and money-market accounts increased to 65.5% of deposits from 60.7%. AOCI improved by $3.0 million, and tangible book value per share increased 5.5% to $23.63.
For Q4 2013, net income was $1.5 million, or $0.32 per share, compared with $2.1 million, or $0.46, in Q4 2012. Quarterly provision for loan losses was $1.0 million versus $74,000 a year earlier.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or revenue guidance was provided. Management said future portfolio loan growth was expected principally in commercial mortgages and indirect consumer loans, and described cautious investment of excess cash amid low rates.
- Management identified interest-rate risk, credit quality, competition, economic conditions, acquisition integration, regulatory change, and technology and security risks. A modeled immediate 200-basis-point rate decrease or increase was estimated to reduce next-12-month net interest income by 10.29% or 8.71%, respectively, within the company’s 15% policy limit.
- Commercial and agricultural lending carries heightened credit risk. The company increased the allowance after establishing $0.9 million of additional specific reserves on three commercial loans; net charge-offs rose to $0.4 million from $0.2 million.
- Control weakness: Management and the auditor identified a material weakness in controls for identifying and evaluating troubled debt restructurings (TDRs). The weakness did not result in a 2013 financial-statement misstatement, but management concluded internal control over financial reporting and disclosure controls were not effective at year-end. Remediation, including added controls, guidance, and staff training, was underway; effectiveness was to be tested in 2014. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements.
- Two pending trust-account proceedings assert claims of $9.6 million and $24.1 million, plus unspecified legal fees, alleging imprudent investment diversification. The Bank disputes the claims; no loss was accrued because management did not consider a loss probable or reasonably estimable.
- The company sold one trust-preferred CDO in Q4 and reported a $29,000 impairment charge for 2013. It expected to record approximately $0.5 million of other income in Q1 2014 from liquidation of the remaining CDO.
- Annual dividends declared were $1.04 per share. Bank dividends to the parent are subject to regulatory restrictions; approximately $8.5 million was available for payment without prior approval at year-end.
Important facts for investors to verify
- Progress and auditor assessment of remediation of the TDR-identification material weakness.
- Whether elevated provisions, nonperforming loans, impaired loans, and commercial real-estate exposure lead to further credit costs.
- Post-acquisition deposit retention, branch integration costs, and the acquired branches’ contribution to earnings.
- Net interest margin and capital sensitivity as rates change, including implementation of Basel III capital requirements.
- Developments in the two trust litigation matters and any resulting accrual or financial exposure.
- Actual realization and timing of the expected $0.5 million CDO liquidation income in Q1 2014.