Chemung Financial Corporation — Q3 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2019. The company provides banking and wealth-management services, primarily through Chemung Canal Trust Company and its Capital Bank division.
Financial results and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $15.1 million | $15.1 million | $45.4 million | $45.0 million |
| Provision for loan losses | $4.4 million | $0.3 million | $5.7 million | $3.4 million |
| Non-interest income | $5.0 million | $7.4 million | $15.0 million | $18.2 million |
| Non-interest expense | $13.5 million | $13.4 million | $40.8 million | $42.6 million |
| Net income | $2.0 million | $6.9 million | $11.4 million | $13.9 million |
| Diluted EPS | $0.40 | $1.43 | $2.34 | $2.88 |
- Q3 return on average assets was 0.44% and return on average equity was 4.29%; for the nine-month period, the respective figures were 0.87% and 8.76%.
- Fully taxable-equivalent net interest margin was 3.63% in Q3 and 3.67% for nine months, versus 3.71% and 3.73% in the comparable 2018 periods. Deposit funding costs rose, weighing on the margin.
- Operating cash flow was $21.8 million for the first nine months, compared with $20.1 million in 2018. Cash and cash equivalents were $146.3 million at quarter-end, up from $130.0 million at December 31, 2018.
- At September 30, total assets were $1.794 billion, deposits $1.577 billion, and shareholders’ equity $182.0 million. Total deposits grew 0.5% from year-end; loans before allowance declined 0.4% to $1.307 billion.
- Total reported borrowings were limited; the balance-sheet finance lease obligation was $4.1 million. Operating lease liabilities of $8.1 million were recognized following adoption of the new lease standard.
- Equity was 10.15% of assets; the Bank’s total risk-based capital ratio was 13.09%, and management reported the Bank was well capitalized. The allowance for loan losses was $23.9 million, or 1.83% of loans.
Material changes and notable items
- Q3 net income fell 71.8% year over year; nine-month net income declined 17.9%. The major Q3 drivers were a $4.2 million provision-related impairment on a commercial credit and lower non-interest income.
- The credit impairment related to a participating interest in a commercial loan and was attributed by management to potentially fraudulent activity. The filing also reports increased non-performing loans: $23.5 million, or 1.80% of loans, versus $12.3 million, or 0.93%, at year-end 2018. Management cited two commercial mortgage relationships and one commercial participation loan as major contributors.
- Non-interest income declined largely because Q3 2018 included a substantial fair-value gain on Visa Class B shares that were subsequently sold. Nine-month 2019 non-interest income also lacked the prior-year New York sales-tax refund and included losses on sales of OREO properties.
- Net charge-offs were $0.7 million for nine months, down from $4.9 million in 2018, when large commercial loans to one borrower were charged off. TDRs totaled $9.3 million; $8.4 million were on non-accrual status.
- Accumulated other comprehensive loss improved by $8.1 million since year-end, mainly reflecting higher fair value of available-for-sale securities. This contributed to higher reported equity.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or revenue guidance. Management anticipates future loan growth primarily in commercial mortgages and commercial and industrial lending, particularly in the Capital Bank division.
- Management says the allowance is adequate but notes that deterioration in economic conditions, historical losses, collateral values, or borrower credit quality could require additional provisions. Commercial real estate-related lending represented 44.5% of total loans.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rate decline would reduce projected 12-month net interest income by 13.13%, within the company’s 15% policy limit, but reduce the modeled market value of capital by 17.30%, above its 15% policy guideline. A 200-basis-point increase was estimated to raise net interest income by 9.41%.
- The company expects CECL adoption in January 2023 and anticipates an increase in its allowance for loan losses; implementation work was underway.
- Off-balance-sheet commitments included $45.8 million of commitments to make loans, $220.0 million of unused credit lines, and $15.6 million of standby letters of credit. The company reported no pending legal, arbitration, or regulatory proceeding it believed could materially harm results or liquidity.
- Available liquidity included up to $154.2 million of FHLBNY borrowing capacity and $58.0 million in unused unsecured lines of credit. The filing states operating cash, available balances, and borrowing capacity are sufficient for operating liquidity needs.
Most important facts for investors to verify
- Progress and recoverability of the $4.2 million commercial-credit impairment, including any further losses or credit-quality deterioration.
- Whether non-performing loans and TDRs stabilize or continue to rise, and the adequacy of specific and general loan-loss reserves.
- Deposit pricing and mix, funding costs, and the effect on net interest margin as rates and promotional time deposits change.
- Whether planned commercial lending growth can offset portfolio runoff without increasing credit concentration or risk.
- CECL implementation timing, assumptions, and estimated effect on the allowance and capital when adopted.