Chemung Financial Corporation — Q2 2020 Form 10-Q
Business context and period. Regional bank holding company providing commercial, residential and consumer lending, deposit, wealth-management and related financial services. This unaudited filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $15.6; up 3.2% | $15.1 in Q2 2019 |
| Net interest margin, fully taxable equivalent | 3.26% | 3.69% in Q2 2019 |
| Net income / diluted EPS | $5.8 / $1.20 | $5.0 / $1.02 in Q2 2019 |
| Six-month net income / diluted EPS | $8.3 / $1.71 | $9.4 / $1.94 in H1 2019 |
| Non-interest income / expense, Q2 | $5.1 / $13.2 | $5.1 / $13.8 in Q2 2019 |
| Total assets / loans, net of allowance | $2,050.9 / $1,473.9 | Assets $1,787.8 / loans $1,285.7 at Dec. 31, 2019 |
| Deposits | $1,811.3 | $1,572.1 at Dec. 31, 2019 |
| Allowance for loan losses | $24.1; 1.61% of loans | $23.5; 1.79% at Dec. 31, 2019 |
| Non-performing loans / assets | $17.3 / $17.6; 1.15% of loans / 0.86% of assets | $18.0 / $18.5; 1.38% / 1.04% at Dec. 31, 2019 |
| Cash and cash equivalents | $155.2 | $121.9 at Dec. 31, 2019 |
| Shareholders’ equity / equity-to-assets | $194.6 / 9.49% | $182.6 / 10.22% at Dec. 31, 2019 |
- Q2 provision for loan losses was $0.3 million versus $0.2 million a year earlier. Six-month provision was $3.3 million versus $1.2 million. Q2 net charge-offs were $2.4 million versus $0.2 million, primarily reflecting a partial commercial-loan charge-off.
- Six-month operating cash flow was $14.3 million; investing cash outflow was $215.0 million, mainly reflecting loan growth and securities purchases; financing cash inflow was $233.9 million, largely from deposit growth. Cash increased $33.3 million.
- Reported borrowings were limited; the balance sheet showed a $4.0 million long-term finance lease obligation. The Bank also reported $124.9 million of unused FHLB borrowing capacity and $68.0 million of available unsecured lines.
- At June 30, the Bank’s capital ratios included total capital of 13.74%, Tier 1 risk-based capital of 12.49%, and Tier 1 leverage of 8.43%. Management said the Bank was well-capitalized under prompt corrective action rules.
Material changes and management commentary
- Q2 earnings rose 17.0% year over year, mainly as lower deposit funding costs lifted net interest income and lower expenses more than offset higher credit provision and taxes. For the first half, earnings fell 12.0%, primarily because of higher loan-loss provision and lower non-interest income.
- Interest expense fell sharply following Federal Reserve rate cuts, but asset yields also declined. The Q2 fully taxable equivalent margin contracted 43 basis points from a year earlier.
- Loans grew 14.4% from year-end, including $186.9 million of Paycheck Protection Program loans. Deposits increased 15.2%, partly due to PPP-related funds and stimulus payments. Commercial and agricultural loans grew $165.2 million.
- Management increased COVID-19-related qualitative allowance factors; it cited an additional $1.8 million added to the allowance in Q2 and a $4.5 million increase in projected loss estimates during the first half in response to the pandemic.
- COVID-19 loan modifications under the CARES Act totaled 1,168 loans and $241.6 million by June 30; 593 loans totaling $185.8 million remained modified. Separately, PPP funding totaled $186.9 million across 1,167 loans. The Bank also received $66.4 million through the PPPLF and repaid it on May 28, 2020.
- Management identified $245.1 million, or 27.9%, of commercial loans excluding PPP as in highly impacted industries. Management expected pandemic effects to continue into the second half of 2020 and potentially beyond, while noting the effects on earnings, credit losses, capital and liquidity remained uncertain.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it anticipated future loan growth primarily in commercial mortgages and commercial and industrial loans, and described liquidity as strong.
- Key risks include further deterioration in borrower finances, unemployment and collateral values; increased delinquencies, foreclosures and credit provisions; low interest rates compressing margins; weaker wealth-management fees; and heightened remote-work cybersecurity and third-party service risks.
- COVID-related forbearance may increase: management noted New York legislation could extend certain primary-residence forbearance periods. The filing reported 29 of 32 offices reopened to normal business hours as of filing.
- The company continued a share-repurchase authorization of up to 250,000 shares. It repurchased 120,490 shares in the first half at an average cost of $27.12; 129,510 shares of authority remained at June 30. A $50 million shelf registration became effective May 7.
- The Bank’s $4.2 million participation in a commercial credit facility involving alleged fraud was the subject of litigation against the lead bank; Chemung received $461,309 in April 2020. Management said it knew of no other pending proceedings expected to materially affect results or liquidity.
- Management identified macroeconomic decline as a goodwill impairment triggering event, but concluded mitigating factors did not warrant an interim quantitative test; it continued to monitor assumptions. No impairment charge was reported.
Important facts for investors to verify
- Whether COVID-19 modified loans remain current after deferral periods, and how modifications, delinquencies and charge-offs evolve.
- Whether allowance levels adequately reflect the $245.1 million highly impacted commercial exposure and broader economic uncertainty.
- Whether margin pressure persists as asset yields reset, and whether deposit costs can decline further.
- How quickly PPP balances, pandemic-related deposit inflows and loan growth normalize, and the resulting effect on liquidity and earnings.
- Progress and potential recovery in the $4.2 million participation-credit lawsuit, and the remaining share-repurchase activity and capital impact.