Chemung Financial Corporation — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019; references to fourth-quarter results are for the quarter ended December 31, 2019. Chemung Financial is a community banking and financial-services holding company operating mainly in New York and Pennsylvania through Chemung Canal Trust Company, wealth management, and other subsidiaries. It reported 33 branches and $1.788 billion in total assets at year-end.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $60.6 million | $60.5 million |
| Net interest margin, fully taxable equivalent | 3.64% | 3.72% |
| Non-interest income | $20.1 million | $23.1 million |
| Provision for loan losses | $5.9 million | $3.2 million |
| Non-interest expense | $55.7 million | $56.8 million |
| Net income / diluted EPS | $15.6 million / $3.21 | $19.6 million / $4.06 |
| Return on average assets / equity | 0.88% / 8.86% | 1.14% / 12.76% |
| Operating cash flow | $26.4 million | $27.8 million |
- Fourth quarter: net income was $4.2 million and diluted EPS was $0.87, versus $5.7 million and $1.18 in fourth-quarter 2018. The 2019 quarter’s loan-loss provision was $0.3 million.
- Balance sheet: assets rose 1.9% to $1.788 billion; loans were nearly flat at $1.309 billion; deposits increased 0.2% to $1.572 billion. Shareholders’ equity grew 10.7% to $182.6 million.
- Credit quality: allowance for loan losses rose to $23.5 million, or 1.79% of loans, from $18.9 million, or 1.44%. Non-performing loans increased to $18.0 million (1.38% of loans) from $12.3 million (0.93%); net charge-offs fell to $1.4 million from $5.4 million.
- Liquidity and debt: cash and cash equivalents were $121.9 million. No FHLBNY advances or repurchase-agreement borrowings were outstanding at year-end; the balance sheet included $4.1 million of long-term capital-lease obligations. Available borrowing capacity included up to $141.8 million from FHLBNY and $58 million in unsecured lines of credit.
- Capital and shareholder returns: the Bank was classified as well capitalized. Its total risk-based capital ratio was 13.45%, Tier 1 risk-based ratio 12.19%, and leverage ratio 8.98%. Dividends were $1.04 per share for the year; no shares were repurchased under the announced plan.
- Cash flows: investing activities used $32.7 million and financing activities used $1.8 million; cash declined $8.1 million for the year. The filing describes investment-security purchases as a major investing cash-flow driver.
Material changes versus prior year
- Net income declined 20.5%, primarily because non-interest income fell $3.0 million and loan-loss provision expense rose $2.8 million. Higher net interest income and lower operating expenses partly offset these pressures.
- Higher deposit pricing contributed to a 55.2% increase in interest expense, while net interest margin narrowed eight basis points. Average interest-earning assets increased $35.9 million.
- Non-interest income fell largely because 2018 included a $2.1 million increase in the fair value of Visa Class B shares and a one-time sales-tax refund. Wealth-management fees increased modestly.
- Non-performing loans rose mainly due to impaired commercial exposures, including a commercial real-estate loan and a loan participation. Commercial and agricultural loans plus commercial mortgages totaled $879.1 million, about 67% of loans; real-estate-related borrowers represented 45.0% of total loans.
- Adoption of lease accounting in 2019 added operating lease right-of-use assets and liabilities; the company said the adoption did not materially affect earnings or cash flows.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management describes continued emphasis on relationship banking, stable deposits, and commercial lending growth, particularly in the Capital Bank division.
- The largest disclosed unusual credit event involved a $4.2 million participation in an approximately $36 million commercial credit facility whose borrower defaulted following alleged fraud. The company recorded a specific impairment and, on February 4, 2020, sued the lead bank, seeking recovery of $4.2 million plus additional damages. The outcome and recovery are uncertain.
- Other material risks include commercial real-estate and business-loan concentrations, indirect auto-loan credit exposure, interest-rate sensitivity, competition for deposits, operational and cybersecurity risks, and potential economic deterioration in its markets. LIBOR was expected to cease in its then-current form after 2021; the company was assessing replacement rates.
- Management anticipated that adoption of the expected-credit-loss (CECL) standard would increase the allowance; implementation timing was under review following a regulatory delay. The filing identifies no material pending legal proceedings other than the matters described, while also disclosing a previously reserved lease dispute and its 2018 settlement of $3.3 million.
- Subsequent to year-end, the Bank announced closure of its Towanda, Pennsylvania branch effective April 30, 2020. The independent auditor, Crowe LLP, issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress and recoverability of the $4.2 million fraudulent-credit participation, including litigation developments and any additional loss exposure.
- Whether elevated non-performing loans, impaired commercial credits, and the 1.79% allowance adequately reflect credit risk in the concentrated commercial portfolio.
- Trends in deposit costs, net interest margin, and funding mix as deposits reprice and competitive conditions change.
- Actual CECL adoption date and quantified effect on the allowance, earnings, and regulatory capital.
- Availability and terms of contingent liquidity, including FHLBNY capacity, unsecured lines, and the stability of public and reciprocal deposits.