Chemung Financial Corporation — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018. Chemung Financial provides community banking, lending, wealth management, brokerage and related financial services, principally through Chemung Canal Trust Company and its subsidiaries.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net interest income | $15.17 million | $14.90 million | +1.8% |
| Provision for loan losses | $1.09 million | $0.71 million | +$0.38 million |
| Non-interest income | $4.93 million | $5.48 million | -10.0% |
| Non-interest expense | $13.50 million | $14.17 million | -4.7% |
| Net income | $4.47 million | $4.44 million | +0.7% |
| Basic and diluted EPS | $0.92 | $0.92 | Unchanged |
| Operating cash flow | $7.24 million | $6.98 million | +$0.26 million |
- Fully taxable equivalent net interest margin was 3.71%, down from 3.75%. Interest-earning asset yield rose, but the cost of interest-bearing liabilities rose faster.
- Annualized return on average assets was 1.03% versus 1.06%; return on average equity was 10.83% versus 11.96%. Adjusted efficiency ratio improved to 66.04% from 68.21%.
- At March 31, 2019, total assets were $1.770 billion, deposits $1.567 billion, and shareholders’ equity $171.5 million. Total equity was 9.69% of assets; tangible equity to tangible assets was 8.50%.
- Cash and cash equivalents were $125.8 million. Deposits were down $2.7 million from year-end 2018; loans, net of deferred fees, fell $12.9 million to $1.299 billion. The allowance for loan losses was $19.7 million, or 1.52% of loans.
- Borrowings were $4.25 million, consisting of finance lease obligations; operating lease liabilities were $8.40 million. The company reported access to $117.0 million of FHLBNY borrowing capacity and $28.0 million of available unsecured credit lines. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.81%.
- Cash flows were $7.24 million provided by operations, $7.52 million used in investing, and $3.89 million used in financing; cash declined $4.16 million during the quarter.
Material changes versus the prior comparable period
- Net interest income rose $0.27 million as higher loan and interest-earning-deposit income more than offset increased deposit interest expense. Deposit interest expense increased $0.96 million, while total interest expense rose 94.8%.
- Non-interest income declined $0.55 million. The comparison was affected by a $0.4 million New York State sales-tax refund received in Q1 2018 and a shift from gains to losses on sales of other real estate owned in Q1 2019.
- Lower non-interest expenses, down $0.67 million, partly offset higher credit costs. Net income increased only modestly and EPS was unchanged.
- Non-performing loans rose to $15.1 million, or 1.16% of loans, from $12.3 million, or 0.93%, at year-end. Management attributed most of the increase to one $3.4 million commercial relationship. The quarter included a $1.9 million provision related to that relationship; net charge-offs were $0.29 million, down from $0.48 million.
- Available-for-sale securities increased $24.5 million to $266.7 million, largely reflecting purchases. Improved securities valuations reduced accumulated other comprehensive loss by $2.6 million.
Outlook, commentary, risks and unusual items
- Management said it expects future portfolio loan growth to be concentrated in commercial mortgages and commercial and industrial loans, particularly in the Capital Bank division. The filing does not provide quantitative earnings or revenue guidance.
- Management described liquidity resources as sufficient for operating needs. It identified interest-rate risk as the most significant market risk. A modeled immediate 200-basis-point rate decrease would reduce estimated next-12-month net interest income by 13.01%; a 200-basis-point increase would raise it by 8.02%. The modeled decrease in the market value of capital was 15.38%, slightly above the company’s stated 15% policy guideline.
- The allowance for loan losses is a critical estimate; management noted that weaker economic conditions, worsening loss experience, or lower collateral values could require additional provisions. Real estate-related commercial loans were 46.3% of total loans.
- The company anticipated that adoption of the expected-credit-loss (CECL) standard on January 1, 2020 would increase its allowance; the amount was not specified. Adoption of lease accounting in January 2019 added approximately $8.6 million of right-of-use assets and lease liabilities and did not materially affect earnings or cash flows.
- The filing reported no pending legal, arbitration, or regulatory proceedings believed likely to have a material adverse effect, and no material changes to the risk factors in the 2018 Form 10-K. Management concluded disclosure controls were effective and reported no materially affecting change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $3.4 million commercial relationship remains adequately reserved and whether non-performing loans or specific impairments continue to increase.
- Whether loan runoff persists, and whether the expected commercial lending growth offsets declines in indirect consumer and other loan portfolios.
- How deposit pricing, commercial deposit flows and promotional time-deposit funding affect funding costs and net interest margin.
- The realized impact and implementation assumptions for CECL, including the eventual allowance increase.
- Interest-rate sensitivity, particularly the modeled capital-value decline slightly beyond the stated policy guideline, and changes in securities valuations.
- Whether the reported low borrowing balance, available credit facilities and deposit base continue to support liquidity and capital needs.