Chemung Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 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 and position
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are in millions.
| Metric | Q3 2022 / Sept. 30, 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $19.0 million | Up 12.8% from Q3 2021 |
| Net interest margin, fully taxable equivalent | 3.08% | 2.88% in Q3 2021 |
| Net income; diluted EPS | $6.5 million; $1.37 | Down 2.9%; $6.6 million and $1.42 in Q3 2021 |
| Nine-month net income; diluted EPS | $21.3 million; $4.55 | Up 6.9%; $20.0 million and $4.26 in 2021 |
| Total assets | $2,551.4 million | Up 5.5% from Dec. 31, 2021 |
| Loans, net of deferred fees | $1,742.8 million | Up 14.8% from Dec. 31, 2021 |
| Deposits | $2,332.5 million | Up 8.2% from Dec. 31, 2021 |
| Cash and cash equivalents | $42.4 million | Up from $27.0 million at Dec. 31, 2021 |
| Shareholders’ equity | $155.5 million; 6.10% of assets | Down from $211.5 million and 8.74% at Dec. 31, 2021 |
- Q3 non-interest income was $5.0 million, down 15.6%; non-interest expense was $14.6 million, up 3.4%. Q3 pre-provision income was $9.4 million.
- For the nine months, operating cash flow was $32.7 million, investing cash outflow $175.6 million, and financing cash inflow $158.3 million. Cash increased $15.4 million to $42.4 million.
- Available-for-sale securities were $640.4 million, down $151.7 million since year-end. Their fair value included $103.0 million of gross unrealized losses, which management attributed primarily to higher interest rates rather than credit deterioration. The securities-related after-tax loss contributed to accumulated other comprehensive loss of $79.9 million.
- The allowance for loan losses was $18.6 million, or 1.07% of loans, versus $21.0 million, or 1.38%, at year-end. Nonperforming loans were $8.3 million, 0.48% of loans; net charge-offs for the first nine months were $0.8 million.
- The Bank reported regulatory capital ratios above well-capitalized thresholds: total capital 12.05%, Tier 1 risk-based capital 11.05%, common equity Tier 1 11.05%, and Tier 1 leverage 8.03%.
Material changes versus comparable periods
- Higher loan balances and yields supported interest income and net interest margin. Rising rates also increased deposit costs: Q3 deposit interest expense rose to $1.8 million from $0.8 million, and the average cost of interest-bearing deposits increased to 0.47% from 0.21%.
- Q3 earnings eased despite higher net interest income, reflecting increased loan-loss provision and expenses and lower non-interest income. Lower wealth-management fees, mortgage-sale gains, debit-card interchange revenue and equity-investment valuation changes weighed on fee income.
- Nine-month earnings improved, mainly on higher net interest income and a loan-loss provision credit, partly offset by lower non-interest income and higher expenses.
- Loan growth was concentrated in commercial mortgages and indirect consumer lending. Commercial real estate-related loans represented 48.8% of total loans, up from 45.1% at year-end.
- Equity fell primarily because of the decline in fair value of available-for-sale securities. The company said the securities losses were rate-related and it did not intend, nor expect to be required, to sell them before recovery.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects future portfolio-loan growth to remain concentrated in commercial mortgages and commercial and industrial loans, particularly in Western New York.
- Management described liquidity as strong: $42.4 million of cash, $481.7 million of unpledged available-for-sale securities, $203.5 million of FHLBNY borrowing capacity and $68.0 million of available unsecured credit lines. Brokered deposits increased; CDARS/ICS balances were $430.8 million, including $119.7 million of one-way brokered deposits.
- CECL adoption was scheduled for January 1, 2023. Management expected the new methodology to increase the allowance for credit losses, potentially materially, and expected a one-time cumulative adjustment to retained earnings. The estimate was still being refined.
- Interest-rate sensitivity estimates indicated that an immediate 100-basis-point decrease could reduce next-12-month net interest income by 3.36%, while an immediate 200-basis-point increase could increase it by 5.23%; both were within company policy limits.
- Risks identified include interest-rate and credit risk, inflation and economic conditions, cybersecurity, competition, regulatory changes and managing growth. Management stated that risk factors were not materially changed from the 2021 Form 10-K.
- The company continues to pursue recovery of the remaining $3.7 million, plus expenses, from a disputed commercial-loan participation in litigation against Pioneer Bank. Management said it knew of no other pending proceedings expected to materially affect financial results or liquidity.
- The company released the final $1.2 million of its pandemic-related allowance in Q3; cumulative releases were $4.3 million, with $0.5 million utilized.
Most important facts for investors to verify
- Resolve the filing’s Q3 provision-for-loan-losses inconsistency: the income statement reports a $1.255 million provision expense, while MD&A describes a $1.3 million credit. The reported financial statements show an expense.
- Confirm the Q3 earnings comparison: reported net income fell from $6.646 million to $6.453 million, although one MD&A sentence says net income increased.
- Track deposit pricing and mix, including the growth and cost of time and brokered deposits, against ongoing loan growth.
- Assess the impact of securities valuation losses on tangible equity and capital, while distinguishing unrealized rate-driven losses from credit losses.
- Monitor CECL adoption, the eventual allowance increase and retained-earnings adjustment, as well as commercial real estate concentrations, credit quality and the unresolved litigation recovery.