Business context and reporting period
Chemung Financial Corporation is a New York-based bank holding company providing commercial, residential and consumer banking, wealth management and related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. Comparisons below are year over year unless otherwise noted; balance-sheet changes are versus December 31, 2019. Amounts are in U.S. dollars.
Financial performance and condition
- Third-quarter earnings: Net income was $5.7 million, or $1.19 per diluted share, versus $2.0 million, or $0.40 per share. Return on average assets was 1.08% and return on average equity was 11.56%.
- Year-to-date earnings: Nine-month net income was $14.0 million, or $2.90 per share, up from $11.4 million, or $2.34 per share. Return on average assets was 0.95% and return on average equity was 9.74%.
- Revenue, margins and expenses: Third-quarter net interest income rose 4.8% to $15.9 million; non-interest income rose 7.7% to $5.3 million; and non-interest expense declined 1.2% to $13.4 million. Fully taxable-equivalent net interest margin was 3.20%, down from 3.63%. For the nine months, net interest income increased 2.4% to $46.5 million, non-interest income increased 1.2% to $15.2 million, and non-interest expense fell 1.2% to $40.3 million; net interest margin was 3.33% versus 3.67%.
- Credit costs and quality: Third-quarter provision for loan losses was $0.7 million, compared with $4.4 million in the prior-year quarter. Nine-month provision was $4.0 million versus $5.7 million; management said it included $4.5 million of increased projected-loss estimates in response to COVID-19. Nine-month net charge-offs rose to $2.9 million from $0.7 million, including a partial commercial-loan charge-off. At September 30, the allowance was $24.6 million, or 1.60% of loans; non-performing loans were $15.7 million, or 1.02% of loans, versus $18.0 million and 1.38% at year-end.
- Balance sheet and funding: Total assets were $2.165 billion, up 21.1% from year-end. Loans were $1.538 billion, up 17.5%, including $189.8 million of PPP loans; deposits were $1.924 billion, up 22.4%. Cash and cash equivalents were $149.9 million. Available-for-sale securities totaled $396.3 million, of which $216.3 million was unpledged. Management reported $97.1 million of available FHLB borrowing capacity and $68.0 million of available unsecured credit lines.
- Debt, liquidity and cash flow: Borrowings were modest; liabilities included $245,000 of FHLB overnight advances and a $3.9 million finance-lease obligation. Operating-lease liabilities were $7.6 million. For the first nine months, operating cash flow was $20.0 million, investing cash outflow was $336.1 million and financing cash inflow was $344.1 million, leaving cash up $28.0 million from year-end. Management described liquidity as strong.
- Capital and shareholder returns: Shareholders’ equity was $197.0 million. The equity-to-assets ratio was 9.10%, down from 10.22% at year-end, while book value per share rose to $41.51 from $37.35. The Bank was classified as well capitalized; its total risk-based capital ratio was 13.51% and Tier 1 leverage ratio was 8.12%. The company declared $0.26 per share for the quarter. It repurchased 184,360 shares for $5.1 million through September 30; the filing reports the 250,000-share program was completed on October 30 at an average cost of $29.40 per share.
Material changes and management commentary
- Quarterly earnings improved substantially, primarily because of higher net interest and non-interest income, lower expenses and a much smaller provision than in the third quarter of 2019. The prior-year provision included a $4.2 million specific impairment on a commercial-credit participation.
- Lower deposit costs supported net interest income, but the decline in asset yields exceeded the decline in funding costs, compressing net interest margin. Management attributed growth in loan balances partly to PPP lending and increased residential mortgage originations; loan growth was concentrated in commercial and agricultural lending, commercial mortgages and residential mortgages.
- COVID-19 forbearances declined from a peak of 15.77% of loans on May 31 to 2.98% at September 30. The filing reports 74 COVID-related modified loans totaling $45.9 million remained in modified status; separately, 1,125 loans with balances of $233.6 million had received modifications under CARES Act relief. Highly impacted industries represented $248.4 million, or 27.4%, of the commercial portfolio excluding PPP loans. PPP loans were SBA-guaranteed.
- Management said the pandemic’s effects on future earnings, credit losses, capital and liquidity remain uncertain. It anticipated future loan growth in commercial mortgages and commercial and industrial loans, but provided no specific earnings or financial guidance. Management also said it did not identify operational or financial-reporting disruptions from the pandemic.
Risks, contingencies and unusual items
- COVID-19 may weaken borrowers, collateral values and guarantors, increase delinquencies and loan-loss provisions, and reduce demand, wealth-management revenue and net interest margin. Remote work also raises cybersecurity and third-party service risks. Management noted uncertainty around the duration and economic effects of the pandemic.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point rate decrease would reduce next-12-month net interest income by 6.03%; a 200-basis-point increase would raise it by 11.97%. Both estimates were within company policy limits.
- The Bank is pursuing Pioneer Bank over a $4.2 million participation in a commercial credit that defaulted after alleged fraud. The company reported receiving $461,309 from Pioneer in April 2020; the filing does not establish the final recovery or outcome of the litigation.
- Management identified deteriorating macroeconomic conditions as a goodwill impairment trigger, but concluded mitigating factors did not warrant an interim quantitative test. No impairment charge was recorded.
- The filing states there were no other pending legal, arbitration or regulatory proceedings believed likely to materially affect results or liquidity.
Important facts for investors to verify
- Whether COVID-related modifications remain current and whether delinquencies, criticized loans, charge-offs or required credit reserves rise as relief periods end.
- How the $189.8 million PPP portfolio is forgiven or repaid, and the sustainability of associated fee income and loan growth.
- Whether deposit growth persists and how excess liquidity, securities purchases and lower market rates affect net interest margin and earnings.
- The timing and amount of any further recovery in the Pioneer Bank litigation, and the outcome of the company’s annual goodwill impairment assessment.
- The effect of the completed share repurchase program on capital, liquidity and per-share results, alongside the company’s ability to maintain its dividend under changing conditions.