Chemung Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a New York-based financial holding company whose principal operations are community banking and wealth management.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $16.1 million | $15.6 million | $31.9 million | $30.7 million |
| Non-interest income | $6.5 million | $5.1 million | $12.1 million | $9.8 million |
| Net income | $6.8 million | $5.8 million | $13.3 million | $8.3 million |
| Basic and diluted EPS | $1.45 | $1.20 | $2.84 | $1.71 |
| Net interest margin, fully taxable equivalent | 2.76% | 3.26% | 2.81% | 3.40% |
- Q2 net income rose 16.6% year over year; first-half net income increased 60.2%. Higher net interest and non-interest income and lower credit-loss provisions contributed, partly offset by higher taxes and expenses.
- Q2 non-interest income increased 27.8%; wealth-management fees, debit-card interchange and service charges improved. The company also cited a one-time refund of real-estate, sales-tax and Mastercard incentives in other income.
- Q2 non-interest expense increased 4.7%, partly reflecting lower pandemic-related spending in the prior-year period. First-half expense was up 0.8%.
- Despite higher net interest income, net interest margin declined year over year as yields on earning assets fell more than funding costs. Q2 return on average assets was 1.11% and return on average equity was 13.58%.
Financial position, liquidity and capital
- At June 30, total assets were $2.381 billion, up 4.4% from year-end 2020. Loans, net of deferred fees, were $1.558 billion, up 1.4%; deposits were $2.138 billion, up 4.9%.
- Deposit growth was concentrated in money-market, non-interest-bearing demand and savings accounts; time deposits declined. Loans-to-deposits were 72.87%.
- Cash and cash equivalents were $56.8 million, down from $108.5 million at December 31, 2020. Available-for-sale securities totaled $687.6 million, of which $467.6 million was unpledged. Additional reported capacity included $78.6 million of FHLB borrowing capacity and $68.0 million of unused unsecured credit lines.
- Management described liquidity as strong. First-half operating cash flow was $17.4 million; investing activities used $166.2 million, largely for securities purchases and loan growth; financing activities provided $97.0 million, primarily from deposit growth. Cash declined $51.7 million over the period.
- Total shareholders’ equity was $204.0 million; the equity-to-assets ratio was 8.57% and tangible equity-to-tangible assets was 7.72%. The Bank was reported as well capitalized; its total risk-based capital ratio was 13.56% and Tier 1 leverage ratio was 7.37%.
- Borrowings were limited: the reported $3.7 million balance was a finance lease obligation, down from $3.8 million at year-end. Operating lease liabilities were $7.4 million.
Credit quality, risks and unusual items
- The allowance for loan losses was $20.7 million, or 1.33% of loans, versus $20.9 million, or 1.36%, at year-end. The first-half provision was a $0.4 million credit, compared with a $3.3 million provision in 2020; first-half net recoveries were $0.2 million versus $2.7 million of net charge-offs.
- Management released $1.5 million of COVID-related provision in Q2; $2.5 million of pandemic-specific provision remained. The release was partly offset by a $1.7 million impairment of two commercial real-estate loans during the first half.
- Non-performing loans were $8.6 million, or 0.55% of loans, down from $10.0 million at year-end. However, recorded TDRs increased to $11.6 million from $6.7 million; $5.3 million of TDRs were non-accrual. COVID-related loan modifications totaled $20.5 million across 24 loans at quarter-end.
- Commercial real estate and related lending represented 42.7% of total loans, up from 40.9% at year-end. PPP loans outstanding were $139.7 million and were government-guaranteed.
- The company cited uncertainty from COVID-19, including the Delta variant, and said future effects on credit, earnings, capital and liquidity were uncertain. Interest-rate risk is material: modeled immediate rate changes showed next-12-month net interest income falling 7.23% with a 100-basis-point decline and rising 7.21% with a 200-basis-point increase.
- Unrealized losses on available-for-sale securities contributed to a $6.3 million first-half decline in accumulated other comprehensive income, attributed mainly to higher interest rates. Management did not consider the securities other-than-temporarily impaired.
- The company continues litigation against Pioneer Bank concerning a participation in a fraudulent commercial credit facility. It had recovered $0.5 million of its $4.2 million participation and was pursuing the remaining $3.7 million plus expenses. Management reported no other pending proceedings expected to materially affect results or liquidity.
- No specific earnings or financial guidance was provided. Management anticipated continued loan growth particularly in commercial mortgages and commercial and industrial lending, and cautioned that pandemic-related effects remained uncertain.
Most important facts for investors to verify
- Whether credit performance, TDR balances and pandemic-related modifications continue to improve, and whether the remaining $2.5 million pandemic provision is adequate.
- Whether commercial real-estate concentration and the impaired loans create further provisioning or charge-off risk.
- How margin trends respond to interest rates, asset yields, deposit costs and the large securities portfolio.
- How much of earnings growth is recurring versus affected by the provision release, market-sensitive wealth fees and the one-time refund in other income.
- Whether deposit growth and available borrowing capacity remain sufficient as cash balances have fallen, and whether capital remains comfortably above regulatory requirements.
- Developments in the Pioneer Bank litigation and potential recovery of the remaining claimed amount.