Chemung Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with Q1 2020; balance-sheet comparisons are with December 31, 2020. Chemung Financial provides banking, lending, wealth-management and related services, primarily through Chemung Canal Trust Company and CFS.
Financial performance and condition
- Earnings: Net income was $6.53 million, up 162% from $2.49 million; diluted EPS was $1.39 versus $0.51. Return on average assets was 1.12%, and return on average equity was 13.24%.
- Revenue and margins: Net interest income increased 4.8% to $15.79 million. Fully taxable-equivalent net interest margin fell to 2.86% from 3.55%. Non-interest income rose 18.8% to $5.62 million, led by higher wealth-management fees, debit-card interchange, mortgage-sale gains and equity-investment valuation changes. Non-interest expense declined 2.9% to $13.35 million.
- Credit costs: The company recorded a $259,000 provision credit, compared with a $3.05 million provision in Q1 2020. Net recoveries were $244,000. The allowance for loan losses was $20.9 million, or 1.32% of loans, at quarter-end.
- Cash flow and liquidity: Operating cash flow was $8.21 million; investing cash use was $130.41 million, largely reflecting securities purchases and loan growth; financing cash flow was $170.66 million, primarily from deposit growth. Cash and cash equivalents ended at $157.0 million. Management characterized liquidity as strong; $463.6 million of available-for-sale securities were unpledged, with $81.2 million of unused FHLBNY borrowing capacity and $68.0 million of available unsecured lines.
- Balance sheet and funding: Total assets were $2.44 billion, up 7.2% from year-end; loans, net of deferred fees, were $1.58 billion, up 2.9%; deposits were $2.21 billion, up 8.5%. Long-term finance lease obligations were $3.8 million; the filing reports no material conventional borrowing balance. Loans-to-deposits were 71.52%.
- Capital and shareholder returns: Shareholders’ equity was $194.8 million, down $4.9 million; the total-equity-to-assets ratio declined to 7.97% from 8.76%. The Bank was categorized as well capitalized; its total risk-based capital ratio was 13.46%. The quarterly dividend declared was $0.26 per share. The company repurchased 20,625 shares for approximately $0.7 million under a new authorization of up to 250,000 shares.
Material changes versus comparable periods
- Net income increased primarily because of higher net interest and non-interest income, lower expenses, and the swing from a large prior-year credit provision to a modest provision credit. The Q1 2020 provision included a $2.7 million pandemic-related reserve.
- Lower deposit costs helped net interest income, but asset yields fell faster: the yield on interest-earning assets declined 83 basis points year over year, while the cost of interest-bearing liabilities fell 21 basis points. This compressed net interest margin.
- Non-interest income benefited from stronger WMG fees and mortgage-sale gains; deposit service charges fell, mainly because of lower overdraft and NSF fees.
- Quarter-end AOCI moved from positive $2.4 million at year-end to negative $7.8 million, principally reflecting a decline in the fair value of available-for-sale securities as interest rates rose. Equity decreased despite quarterly earnings.
Outlook, risks, contingencies and unusual items
- No specific earnings or margin guidance was provided. Management expects loan growth to continue mainly in commercial real estate and commercial and industrial lending, including its Western New York market, but says the pandemic’s effects on future revenue, earnings, credit reserves, capital and liquidity remain uncertain.
- COVID-19 loan forbearances declined from a peak of 15.77% of loans in May 2020 to 1.66% at March 31, 2021: 38 loans totaling $26.3 million remained modified. Separately, recorded TDRs were $8.3 million, including $5.7 million on non-accrual. PPP balances were $186.1 million; second-round applications funded through March 31 totaled $69.4 million.
- Key risks include pandemic-related borrower stress and collateral-value declines, higher future credit provisions, interest-rate changes affecting margins and securities values, competition, regulatory changes, cybersecurity and reliance on third-party providers. An immediate 100-basis-point rate decrease was estimated to reduce next-12-month net interest income by 6.91%; a 200-basis-point increase was estimated to raise it by 10.57%.
- The company continues litigation against Pioneer Bank concerning a participation in a commercial credit facility that defaulted amid alleged fraud. It had recovered $0.5 million of its $4.2 million participation by April 2020 and was pursuing the remaining $3.7 million plus expenses. Management disclosed no other pending matters expected to materially affect results or liquidity.
- A subsequent event: regulatory approvals to open a full-service branch in Clarence, New York, were received April 2, 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether margin pressure persists as interest rates and deposit pricing change, and how substantial deposit growth affects funding costs.
- Whether the allowance remains adequate as COVID-related modifications expire; monitor non-accrual TDRs, criticized loans, PPP forgiveness and subsequent credit performance.
- The impact of higher rates on available-for-sale securities, AOCI, tangible equity and capital measures.
- Whether strong deposit inflows and stated borrowing capacity remain available, and whether loan growth keeps pace with funding.
- Progress and potential recovery from the Pioneer Bank lawsuit, and execution of the share-repurchase authorization and branch expansion.