Chemung Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results. The company provides banking, lending, wealth-management and related financial services, primarily through Chemung Canal Trust Company and CFS.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $17.6 million | $16.1 million | $34.3 million | $31.9 million |
| Non-interest income | $5.3 million | $6.5 million | $11.0 million | $12.1 million |
| Net income | $8.0 million | $6.8 million | $14.9 million | $13.3 million |
| Diluted EPS | $1.72 | $1.45 | $3.18 | $2.84 |
| Fully taxable-equivalent net interest margin | 2.97% | 2.76% | 2.92% | 2.81% |
| Adjusted efficiency ratio | 62.17% | 60.72% | 63.72% | 61.17% |
Q2 net income rose 18.1% year over year; first-half net income rose 11.8%. Net interest income increased, while lower non-interest income and higher operating expenses partly offset the improvement. Q2 pre-provision income was $8.6 million, down 1.2% year over year. The Q2 provision was a $1.7 million credit, compared with a $0.2 million credit in Q2 2021.
Financial position, cash flow and capital
- At June 30, total assets were $2.450 billion; loans, net of deferred fees, were $1.618 billion, up 6.5% from year-end 2021. Deposits were $2.183 billion, up 1.3%.
- Cash and cash equivalents were $29.8 million. First-half operating cash flow was $17.9 million, investing cash flow was negative $70.2 million and financing cash flow was $55.1 million; cash increased $2.8 million from year-end.
- FHLBNY overnight advances were $45.9 million, versus $14.6 million at year-end. Management described liquidity as strong, citing $499.3 million of available-for-sale securities not pledged, $151.4 million of unused FHLBNY borrowing capacity and $68.0 million of available unsecured lines.
- Shareholders’ equity fell to $174.7 million from $211.5 million, mainly reflecting a $48.8 million increase in accumulated other comprehensive loss as securities’ fair values declined with rising interest rates. The equity-to-assets ratio was 7.13%, versus 8.74% at year-end; tangible equity to tangible assets was 6.30%, versus 7.91%.
- The Bank remained classified as well capitalized. At June 30, its total risk-based capital ratio was 12.88%, common equity Tier 1 ratio 11.85%, and Tier 1 leverage ratio 8.07%.
Material changes and operating developments
- Available-for-sale securities declined to $693.0 million from $792.0 million at year-end. The portfolio had $69.9 million of gross unrealized losses, largely on agency mortgage-backed securities. Management attributed the declines to interest rates, not credit quality, and reported no intent or expected requirement to sell before recovery; it did not deem the securities other-than-temporarily impaired.
- The allowance for loan losses declined to $17.5 million from $21.0 million; coverage was 1.08% of loans and 237.12% of non-performing loans. Management cited a $1.2 million COVID-related reserve release, a $1.5 million specific-reserve release following settlement of a large commercial real estate credit, credit upgrades and a lower historical-loss factor, partly offset by provision for loan growth.
- Non-performing loans were $7.4 million, or 0.46% of loans, down from $8.1 million, or 0.54%, at year-end. Net charge-offs were $0.7 million in the first half, versus net recoveries of $0.2 million in the prior-year period. No loans remained in COVID-related modified status.
- Non-interest income fell 18.1% in Q2. Lower equity-investment valuations, mortgage-sale gains, wealth-management fees and other income outweighed higher deposit service charges. Prior-year other income included a $0.5 million real-estate and sales-tax refund.
- Non-interest expense increased 3.5% in Q2 and 6.6% in the first half, driven in part by employee benefits, data processing and professional services. First-half expense included $0.1 million of additional consumer-compliance restitution and a $0.2 million related reserve.
- Wealth-management assets under management or administration were $1.992 billion, down 14.3% from year-end, attributed to capital-market declines. The company repurchased no shares in Q2; 200,816 shares remained authorized for repurchase at quarter-end.
Outlook, risks and contingencies
No formal earnings or financial guidance is provided. Management said future loan growth is expected to remain concentrated in commercial mortgages and commercial and industrial lending, particularly in the Western New York market. The company identified interest-rate and credit risk, inflation, cybersecurity, COVID-19, competition, growth-management challenges, regulatory or legal changes, and broader economic conditions as factors that could cause actual results to differ from expectations. A modeled immediate 200-basis-point rate increase was estimated to improve next-12-month net interest income by 5.83%; a 100-basis-point decrease was estimated to reduce it by 6.55%.
The company continues litigation against Pioneer Bank concerning a defaulted commercial credit participation. It had recovered $0.5 million of its $4.2 million interest and continued to seek the remaining $3.7 million plus expenses. Management reported no other pending proceedings expected to materially affect results or liquidity. CECL adoption was planned for January 1, 2023, with a one-time cumulative-effect adjustment expected; the filing does not quantify that adjustment.
Investor verification priorities
- Assess the duration and potential effects of the securities portfolio’s $69.9 million unrealized losses, including any liquidity or capital implications if sales become necessary.
- Review credit performance and reserve adequacy as loan balances grow, especially commercial real estate exposure, which represented 47.3% of total loans.
- Track funding mix: time deposits rose 44.5% from year-end, and CDARS/ICS deposits reached $388.7 million, including $47.5 million of one-way brokered deposits.
- Monitor the impact of interest-rate changes on asset yields, deposit costs, borrowing needs and modeled net interest income.
- Follow the Pioneer Bank litigation, CECL adoption and the effect of market declines on wealth-management fees and assets.