Chemung Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results. The company provides banking and wealth-management services through Chemung Canal Trust Company and subsidiaries.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $15.1 million | $15.0 million | $30.3 million | $29.9 million |
| Non-interest income | $5.1 million | $5.3 million | $10.0 million | $10.8 million |
| Non-interest expense | $13.8 million | $15.0 million | $27.3 million | $29.1 million |
| Provision for loan losses | $0.15 million | $2.36 million | $1.24 million | $3.07 million |
| Net income | $5.0 million | $2.5 million | $9.4 million | $7.0 million |
| Diluted EPS | $1.02 | $0.52 | $1.94 | $1.44 |
- Q2 net income rose 97.1% year over year; first-half net income rose 35.6%. Management attributed the gains mainly to lower loan-loss provisions and non-interest expenses, with modestly higher net interest income.
- Q2 return on average assets was 1.15% (0.59% prior year) and return on average equity was 11.51% (6.70%). First-half figures were 1.09% and 11.18%, respectively.
- Fully taxable-equivalent net interest margin was 3.69%, down from 3.73% in Q2 2018; first-half margin was 3.69%, versus 3.74%. Deposit pricing pressure contributed: the Q2 cost of interest-bearing deposits increased to 0.57% from 0.24%.
Financial position, cash flow and capital
- At June 30, total assets were $1.753 billion, loans net of allowance were $1.269 billion, deposits were $1.541 billion, and shareholders’ equity was $178.4 million. Total assets were nearly unchanged from year-end 2018; loans and deposits declined 1.8% each.
- Cash and cash equivalents were $116.5 million, down $13.5 million from year-end. First-half operating cash flow was $13.4 million, investing cash flow was positive $3.6 million, and financing cash flow was negative $30.4 million, principally reflecting deposit outflows. Cash decreased $13.5 million overall.
- Loans-to-deposits were 83.60%. The company reported access to $157 million of FHLBNY borrowing capacity and $58 million of available unsecured lines at quarter-end. Borrowings were $4.2 million, primarily finance-lease obligations; operating lease liabilities were $8.3 million.
- The Bank was categorized as well capitalized. Its June 30 ratios included 13.19% total risk-based capital, 11.94% Tier 1 risk-based capital and 8.94% Tier 1 leverage. Total equity to assets was 10.18%, up from 9.40% at year-end.
Material changes and items to monitor
- Credit quality weakened: Nonperforming loans increased to $19.5 million, or 1.51% of loans, from $12.3 million, or 0.93%, at year-end. Management linked the increase mainly to two commercial mortgage relationships. Nonperforming assets were $19.7 million, or 1.12% of assets. The allowance was $19.7 million, equal to 1.53% of loans and 100.77% of nonperforming loans.
- Impaired loans rose to $16.7 million from $8.7 million at year-end, mainly because of impaired commercial mortgages, including loans to one borrower identified at $3.4 million and $5.0 million. Net charge-offs were $0.5 million in the first half, compared with $4.6 million in 2018; the prior-year figure included a $3.6 million charge-off to one commercial borrower.
- Non-interest income declined, in part because the first half of 2018 included a $0.4 million New York sales-tax refund. Q2 2018 expenses also included a $0.989 million legal accrual related to the Fane settlement; the Bank had agreed to pay $3.3 million in that settlement.
- Deposits fell $28.1 million from year-end, including a $32.4 million decline in non-interest-bearing demand balances and $32.9 million decline in money-market accounts, partly offset by $27.6 million growth in time deposits from promotional pricing. Management cited commercial deposit outflows.
- The company adopted lease-accounting guidance in January 2019, recording approximately $8.6 million of operating lease assets and liabilities. Management said adoption did not materially affect earnings or cash flows.
Outlook, risks and contingencies
- No quantitative earnings or financial guidance was provided. Management said it anticipates future loan growth in commercial mortgages and commercial and industrial lending, particularly in the Capital Bank division; portfolio loans nevertheless declined in the first half.
- The company expects CECL adoption to increase its allowance for loan losses. It was running incurred-loss and CECL models concurrently; a proposed effective-date delay was under evaluation.
- Management identifies interest-rate risk as its most significant market risk. Its model estimated that an immediate 200-basis-point rate decrease would reduce next-12-month net interest income by 12.84%, while a 200-basis-point increase would raise it by 7.86%; both were within the stated 15% policy limit.
- Key stated risks include economic and interest-rate changes, borrower credit risk, competition, regulatory changes and managing growth. Management reported no pending legal, arbitration or regulatory proceeding expected to materially harm results or liquidity, and no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Developments in the two commercial mortgage relationships and the trend in nonperforming and impaired loans, collateral values, charge-offs and reserve coverage.
- Whether commercial deposit outflows continue and whether promotional time deposits increase funding costs or affect liquidity.
- How net interest margin responds to deposit repricing and interest-rate movements, given rising deposit costs and the disclosed rate sensitivity.
- The eventual CECL implementation date and quantified effect on the allowance, earnings and capital.
- How much of earnings improvement reflects ongoing operations versus comparison with the 2018 commercial-loan charge-off and Fane settlement expense.