Chemung Financial Corporation — Q3 2021 Form 10-Q
Business context and period. The company is a New York-based bank holding company whose subsidiaries provide banking, lending, wealth management and brokerage services. This unaudited filing covers the quarter and nine months ended September 30, 2021; income comparisons are year over year, while balance-sheet comparisons are primarily against December 31, 2020. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $16.8 | $15.9 | $48.7 | $46.5 |
| Non-interest income | $6.0 | $5.3 | $18.1 | $15.2 |
| Non-interest expense | $14.1 | $13.4 | $41.3 | $40.3 |
| Provision (credit) for loan losses | $0.4 | $0.7 | $(0.1) | $4.0 |
| Net income | $6.6 | $5.7 | $20.0 | $14.0 |
| Diluted EPS | $1.42 | $1.19 | $4.26 | $2.90 |
- Profitability and margins: Q3 net income rose 16.4%; nine-month net income rose 42.4%. Q3 return on average assets was 1.09% and return on average equity was 12.68%. Fully taxable-equivalent net interest margin was 2.88% for Q3 and 2.83% year to date, down from 3.20% and 3.33%, respectively, in 2020.
- Balance sheet: Total assets were $2.418 billion, up 6.1% from year-end 2020. Loans were $1.517 billion, down 1.3%; deposits were $2.174 billion, up 6.7%. Cash and cash equivalents were $61.7 million, down from $108.5 million.
- Funding and liquidity: Loans-to-deposits were 69.77%. Management described liquidity as strong; available FHLBNY borrowing capacity was $187.3 million, with another $68.0 million of available unsecured lines. Of $761.5 million in available-for-sale securities, $553.1 million was unpledged.
- Debt and capital: Long-term finance lease obligations were $3.7 million; the filing reports no drawn funds on the cited unsecured credit lines. Bank capital ratios were 13.55% total risk-based, 12.30% Tier 1 risk-based, 12.30% common equity Tier 1, and 7.65% Tier 1 leverage; the Bank was categorized as well capitalized. Total equity to assets was 8.53%.
- Cash flow: For the first nine months, operating cash flow was $26.6 million, investing cash outflow was $204.7 million, and financing cash inflow was $131.3 million; cash declined $46.8 million. Investing outflows primarily reflected securities purchases.
Material changes and operating drivers
- Q3 net interest income increased 6.1%, supported mainly by higher taxable-securities income and lower interest expense. A $0.5 million mortgage-backed-security prepayment penalty contributed to securities income. The lower net interest margin reflects reduced asset yields despite lower funding costs.
- Non-interest income increased 11.8% in Q3 and 19.4% year to date. Growth included wealth-management fees, debit-card interchange and CFS fees. Loan-sale gains declined year over year. Nine-month other income included a real-estate tax refund and a gain on property associated with a prior branch closure; wealth-management fees also benefited from new relationships and stronger equity markets.
- Expenses rose 5.5% in Q3 and 2.4% year to date. Management cited higher data-processing, employee-benefit and FDIC-insurance costs, as well as lower pandemic-period spending in 2020.
- The allowance for loan losses was $20.9 million, or 1.38% of loans, versus $24.6 million and 1.60% a year earlier. The 2021 nine-month provision was a $53,000 credit, compared with $4.0 million of provision in 2020, which included pandemic-related reserves. Net recoveries were $69,000 in 2021 versus $2.9 million of net charge-offs in 2020.
- Non-performing loans were $8.4 million, or 0.56% of loans, compared with $10.0 million, or 0.65%, at year-end 2020. TDR balances increased to $10.8 million from $6.7 million; $5.1 million were non-accrual. Commercial real-estate-related borrowers represented 45.5% of total loans.
- Available-for-sale securities increased to $761.5 million, while their fair value was reduced by rising rates; accumulated other comprehensive loss reached $7.1 million from $2.4 million of income at year-end. Management said the unrealized losses were primarily rate-related, not credit-related, and did not consider the securities other-than-temporarily impaired.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects COVID-19 and related economic and policy developments to continue affecting results, but said the future impact on revenues, earnings, credit reserves, capital and liquidity remains uncertain. It anticipated future portfolio loan growth in commercial mortgages and commercial and industrial loans, particularly in Western New York.
- COVID-19 modifications had fallen to 11 loans totaling $3.0 million at September 30; the filing separately reports forbearances at 0.20% of loans. PPP lending ended for new loans in May 2021. Outstanding PPP loans were $68.1 million and are government-guaranteed; forgiveness and fee recognition affected balances and interest income.
- Key risks include credit deterioration, particularly if borrowers or collateral values weaken; interest-rate sensitivity; competition and economic conditions; regulatory and cybersecurity risks; and COVID-related disruption. The company estimated that an immediate 100-basis-point rate decrease would reduce next-12-month net interest income by 7.33%, while a 200-basis-point increase would raise it by 7.52%.
- The company is pursuing recovery of the remaining $3.7 million, plus expenses, from a $4.2 million loan-participation interest tied to alleged fraud and a lawsuit against Pioneer Bank; it had recovered $0.5 million in April 2020. Management reported no other pending proceedings expected to materially harm results or liquidity.
- Management expected a one-time cumulative-effect allowance adjustment when it adopts CECL on January 1, 2023. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the lower net interest margin persists and how securities reinvestment yields and deposit costs evolve.
- Credit quality and reserve adequacy, including the larger TDR balance, commercial real-estate exposure and remaining pandemic-sensitive borrowers.
- The trajectory of unrealized securities losses, their effect on equity and regulatory capital, and sensitivity to further rate movements.
- How PPP forgiveness, remaining PPP balances and related fee recognition affect loan growth and reported interest income.
- Progress and potential recovery in the Pioneer Bank litigation, and any eventual financial impact.
- The amount of the CECL adoption adjustment and the effect of the continuing expense increases on operating efficiency.