Chemung Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The company provides community banking and wealth-management services through Chemung Canal Trust Company and related subsidiaries, primarily in New York.
Key financial results
Unless otherwise stated, amounts are in millions of dollars. Comparisons are with Q1 2021 for income-statement and cash-flow measures, and December 31, 2021 for balance-sheet measures.
- Revenue and earnings: Net interest income was $16.7 million, up 5.6%; non-interest income was $5.7 million, up 0.7%. Net income was $6.9 million, up 5.2%, and diluted EPS was $1.46 versus $1.39.
- Interest margin: Net interest margin on a fully taxable-equivalent basis was 2.87%, compared with 2.86%. Management attributed stronger net interest income primarily to higher taxable-securities income and lower deposit interest expense.
- Expenses and profitability: Non-interest expense rose 9.8% to $14.7 million, led by compensation, other expenses, and data processing. Adjusted efficiency ratio was 65.32% versus 61.64% (non-GAAP). Return on average assets was 1.14%; return on average equity was 13.68%.
- Credit provision: The company recorded a $1.1 million provision credit, compared with a $0.3 million credit in Q1 2021. Management released $1.2 million of COVID-related allowance, partly offset by provisioning for loan growth. Net recoveries were $48,000.
- Loans and credit quality: Loans, net of deferred fees, grew 3.2% to $1.567 billion. The allowance was $19.9 million, or 1.27% of loans (1.29% excluding PPP loans). Non-performing loans were $7.7 million, 0.49% of loans, down from $8.1 million and 0.54% at year-end.
- Liquidity and funding: Deposits increased 4.4% to $2.250 billion; cash and cash equivalents were $65.5 million. The company reported $200.2 million of unused FHLB borrowing capacity and $68.0 million in available unsecured lines. It repaid $14.6 million of year-end overnight FHLB advances; period-end FHLB overnight advances were zero.
- Cash flow: Operating activities provided $6.0 million; investing activities used $45.0 million, mainly reflecting loan growth and securities activity; financing activities provided $77.5 million, primarily from deposit growth. Cash increased $38.5 million during the quarter.
- Capital and securities: Shareholders’ equity fell to $185.5 million from $211.5 million, and the equity-to-assets ratio declined to 7.50% from 8.74%. The principal driver was a $31.1 million after-tax other comprehensive loss, mainly unrealized losses on available-for-sale securities as interest rates rose. The Bank remained classified as well capitalized; its total risk-based capital ratio was 13.17%.
Material changes and management commentary
- Loan growth was concentrated in commercial mortgages, up $47.2 million; commercial mortgages represented 49.0% of loans. Real-estate-related commercial lending was 47.7% of total loans.
- Available-for-sale securities declined to $746.3 million from $792.0 million, reflecting paydowns and a $43.3 million fair-value decline, partly offset by purchases. Management attributed unrealized losses mainly to interest rates, not credit quality, and said it did not intend to sell the securities or expect to be required to sell them before recovery.
- Management said liquidity was strong and all 31 branches were open with normal hours. It anticipated future portfolio-loan growth in commercial mortgages and commercial and industrial lending, particularly in the Western New York market. The filing provides no specific earnings or revenue guidance.
- Assets under management or administration were $2.230 billion, down 4.1% from year-end, which management attributed to capital-market price declines.
Risks, contingencies, and unusual items
- Key disclosed risks include interest-rate exposure, credit quality, economic and inflationary conditions, cybersecurity, competition, regulation, and COVID-19 effects. Management’s interest-rate model estimated that an immediate 200-basis-point increase would raise next-12-month net interest income by 8.36%; a 100-basis-point decrease would reduce it by 6.31%. These are modeled estimates, not forecasts.
- The allowance remains sensitive to economic assumptions, collateral values, and borrower performance. Management stated it could require additional provisions if conditions deteriorate. No COVID-related loan forbearances remained at March 31, 2022; the allowance still included $1.2 million of COVID-related reserves.
- A lawsuit against Pioneer Bank seeks recovery of the remaining $3.7 million, plus accumulated expenses, on a participation in a commercial credit facility involving alleged fraud. The company reported no other pending proceedings it believed could materially affect results or liquidity.
- Management recorded an additional reserve for restitution related to previously disclosed consumer-compliance matters; the filing excerpt does not provide a clear value for that reserve.
- The company expects to adopt CECL on January 1, 2023 and anticipates a one-time cumulative-effect adjustment to the allowance; the filing does not quantify it. Management expected ASU 2022-01 to have no significant impact.
Important facts for investors to verify
- Whether commercial real-estate and other loan concentrations, criticized loans, and the allowance remain appropriate as economic and interest-rate conditions change.
- How unrealized securities losses, deposit pricing and mix, and market-rate changes affect tangible capital, net interest margin, and liquidity.
- The amount and outcome of the consumer-compliance restitution reserve and the recovery prospects for the Pioneer Bank litigation claim.
- The timing and size of the CECL transition adjustment, and subsequent trends in operating expenses and the efficiency ratio.