Chemung Financial (CHMG) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1: Financial Statements – Unaudited This section presents Chemung Financial Corporation's unaudited consolidated financial statements as of June 30, 2020, for the three and six-month periods then ended, including Balance Sheets, Income, Comprehensive Income, Shareholders' Equity, and Cash Flows, with accompanying notes Consolidated Balance Sheets As of June 30, 2020, total assets increased to $2.05 billion, up 14.7% from December 31, 2019, primarily driven by a 14.4% increase in net loans due to the Paycheck Protection Program (PPP), with total deposits growing by 15.2% to $1.81 billion and shareholders' equity rising by 6.5% to $194.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $2,050,921 | $1,787,827 | +14.7% | | Total cash and cash equivalents | $155,162 | $121,904 | +27.3% | | Loans, net | $1,473,868 | $1,285,741 | +14.6% | | Total Liabilities | $1,856,332 | $1,605,200 | +15.6% | | Total deposits | $1,811,256 | $1,572,138 | +15.2% | | Total Shareholders' Equity | $194,589 | $182,627 | +6.5% | Consolidated Statements of Income For the second quarter of 2020, net income increased 17.0% year-over-year to $5.8 million, or $1.20 per share, while for the six-month period, net income decreased 12.0% to $8.3 million, or $1.71 per share, primarily due to a significant increase in the provision for loan losses from $1.2 million to $3.3 million, reflecting the economic impact of COVID-19 Key Income Statement Data (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $15,591 | $15,101 | $30,653 | $30,268 | | Provision for Loan Losses | $260 | $150 | $3,310 | $1,243 | | Net Income | $5,827 | $4,981 | $8,318 | $9,449 | | Basic and Diluted EPS | $1.20 | $1.02 | $1.71 | $1.94 | Consolidated Statements of Comprehensive Income Comprehensive income for the six months ended June 30, 2020, was $16.3 million, an increase from $14.9 million in the prior-year period, driven by a significant increase in other comprehensive income, which rose to $7.9 million from $5.5 million, primarily due to higher unrealized gains on securities available for sale Comprehensive Income Summary (in thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Income | $8,318 | $9,449 | | Other Comprehensive Income | $7,941 | $5,460 | | Comprehensive Income | $16,259 | $14,909 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased from $182.6 million at the start of 2020 to $194.6 million at June 30, 2020, driven by $8.3 million in net income and $7.9 million in other comprehensive income, partially offset by $2.5 million in cash dividends and $3.3 million in common stock repurchases - Key drivers of the $12.0 million increase in shareholders' equity during the first six months of 2020 were net income of $8.3 million and other comprehensive income of $7.9 million[30] - The company repurchased 122,021 shares of common stock for $3.3 million and paid cash dividends of $2.5 million during the six months ended June 30, 2020[30] Consolidated Statements of Cash Flows For the six months ended June 30, 2020, cash and cash equivalents increased by $33.3 million, with net cash from operating activities at $14.3 million, investing activities using $215.0 million primarily for loans and securities, and financing activities providing $233.9 million driven by a significant net increase in deposits Summary of Cash Flows (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,328 | $13,372 | | Net cash (used in) provided by investing activities | ($214,995) | $3,558 | | Net cash provided by (used in) financing activities | $233,925 | ($30,442) | | Net increase (decrease) in cash | $33,258 | ($13,512) | Notes to Unaudited Consolidated Financial Statements The notes provide detailed information on accounting policies, including the impact of COVID-19 and the CARES Act, covering securities, loan portfolio, fair value, leases, and segment reporting, with the company deferring CECL implementation until January 1, 2023 - The company has elected to defer implementation of the Current Expected Credit Loss (CECL) standard until January 1, 2023, as permitted for a smaller reporting company[43] - Due to the COVID-19 pandemic, the company identified industries comprising $245.1 million (27.9% of the commercial loan portfolio) as 'highly impacted' as of June 30, 2020[54] - In response to the pandemic, the company modified 1,168 commercial and consumer loans with a total balance of $241.6 million, in conformance with Section 4013 of the CARES Act, which allows these modifications not to be treated as Troubled Debt Restructurings (TDRs)[73] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2020 financial results, highlighting a Q2 net income increase to $5.8 million, a six-month net income decline to $8.3 million due to higher loan loss provisions, and a 14.7% growth in total assets to $2.05 billion - Q2 2020 net income rose to $5.8 million ($1.20/share) from $5.0 million ($1.02/share) in Q2 2019, an increase of 17.0%[208] - Six-month 2020 net income fell to $8.3 million ($1.71/share) from $9.4 million ($1.94/share) in the prior year period, a 12.0% decrease, mainly due to a higher provision for loan losses[216] - The provision for loan losses for the first six months of 2020 was $3.3 million, a 166.3% increase from $1.2 million in the prior year, primarily due to a $4.5 million increase in projected loss estimates in response to the COVID-19 pandemic[221][244] - The company participated in the Paycheck Protection Program (PPP), funding 1,167 loans totaling $186.9 million as of June 30, 2020[188] COVID-19 Impact and Response The company implemented safety measures, including remote work and modified branch operations, with no disruption to financial reporting, actively participating in government relief programs by funding $186.9 million in PPP loans and providing loan modifications to clients, while identifying $245.1 million in commercial loans in 'highly impacted' industries COVID-19 Loan Modifications Outstanding (in millions) | Loan Type | June 30, 2020 | July 31, 2020 | | :--- | :--- | :--- | | Commercial | $167.7 | $52.8 | | Retail and Residential | $18.0 | $6.3 | - As of June 30, 2020, the company had funded 1,167 PPP loans totaling $186.9 million, impacting approximately 19,000 employees in its communities[188] - The company identified commercial loans in 'highly impacted' industries totaling $245.1 million, or 27.9% of the commercial loan portfolio (excluding PPP loans). Key sectors include Real Estate/Rental/Leasing ($180.6M), Accommodation/Food Services ($44.2M), and Arts/Entertainment/Recreation ($34.7M)[195][192] Results of Operations Analysis For Q2 2020, net interest income grew 3.2% to $15.6 million, benefiting from a 44.3% drop in interest expense as deposit costs fell, while non-interest income was flat and non-interest expense decreased 4.3% to $13.2 million, with the provision for loan losses increasing to $260,000, and for the six-month period, net interest income rose 1.3% to $30.7 million, but a $2.1 million increase in the provision for loan losses drove net income down - Q2 2020 net interest income increased by $0.5 million YoY, as a $0.7 million decrease in interest expense offset a $0.2 million decrease in interest income. The net interest margin (FTE) compressed to 3.26% from 3.69% in Q2 2019[226] - Q2 2020 non-interest income was stable at $5.1 million. A $0.5 million decline in service charges on deposit accounts was offset by a $0.5 million increase in other non-interest income (mainly from swap valuation) and a $0.3 million increase in gains on loan sales[247][250] - Q2 2020 non-interest expense fell by $0.6 million YoY, driven by lower compensation, marketing, and other operational costs, reflecting reduced spending due to the pandemic[260][262] Financial Condition Analysis Total assets grew by $263.1 million (14.7%) to $2.05 billion since year-end 2019, driven by an $188.8 million increase in total loans, including $186.9 million from the PPP, while deposits increased by $239.1 million (15.2%), asset quality improved with non-performing loans declining to $17.3 million (1.15% of total loans), and shareholders' equity increased by $12.0 million to $194.6 million - Total loans increased by $188.8 million (14.4%) since Dec 31, 2019, primarily due to a $165.2 million increase in commercial and agricultural loans, which includes $186.9 million in PPP loans[278][291] - Total deposits grew by $239.1 million (15.2%), with non-interest-bearing demand deposits increasing by $148.5 million (31.7%). This growth was partially attributed to PPP loan disbursements and government stimulus payments[314][316] Non-Performing Assets (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total non-performing loans | $17,280 | $18,008 | | Other real estate owned | $293 | $517 | | Total non-performing assets | $17,573 | $18,525 | | Ratio of non-performing loans to total loans | 1.15% | 1.38% | | Ratio of non-performing assets to total assets | 0.86% | 1.04% | - The allowance for loan losses to total loans ratio was 1.61% at June 30, 2020, compared to 1.79% at December 31, 2019[312] Capital and Liquidity The company maintains a strong liquidity position with $155.2 million in cash, $317.1 million in available-for-sale securities, and $124.9 million in unused FHLB borrowing capacity as of June 30, 2020, with all Bank capital ratios exceeding 'well-capitalized' regulatory minimums, and the company initiated a new stock repurchase program, repurchasing 120,490 shares in the first half of 2020 - The Bank's capital ratios as of June 30, 2020, remained well above regulatory requirements to be considered 'well-capitalized'. The Total Capital to Risk-Weighted Assets ratio was 13.74%[345] - The company repurchased 117,238 shares of common stock for $3.2 million during the second quarter of 2020 under its authorized repurchase program[326] - As of June 30, 2020, the company had access to $124.9 million in borrowings from the FHLBNY and $68.0 million in unsecured lines of credit with other financial institutions[332][333] Item 3: Quantitative and Qualitative Disclosures About Market Risk The Corporation identifies interest rate risk as its most significant market risk, managed by ALCO, with a 100-basis point rate decrease estimated to negatively impact net interest income by 4.92% and a 200-basis point increase having a positive 10.96% impact - Management identifies interest rate risk as the most significant market risk[372] Interest Rate Sensitivity Analysis (as of June 30, 2020) | Rate Shock Scenario | Impact on Net Interest Income (Next 12 Months) | Impact on Market Value of Equity | | :--- | :--- | :--- | | -100 basis points | -4.92% | -6.31% | | +200 basis points | +10.96% | +10.99% | Item 4: Controls and Procedures Management, including the CEO and CFO, evaluated the Corporation's disclosure controls and procedures as of June 30, 2020, concluding they were effective with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2020[381] PART II. OTHER INFORMATION Item 1: Legal Proceedings The Corporation is involved in various legal proceedings in the normal course of business, none of which are expected to have a material adverse impact on its financial results or liquidity as of June 30, 2020 - As of June 30, 2020, the Corporation is not a party to any pending legal proceedings that are expected to have a material adverse impact on its financial results or liquidity[384] Item 1A: Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by subsequent quarterly reports - No material changes to risk factors were reported from the Form 10-K for the year ended December 31, 2019[385] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2020, the Corporation repurchased 117,238 shares of common stock at an average price of $27.10 per share, with 129,510 shares remaining authorized for repurchase under the plan as of June 30, 2020 Issuer Purchases of Equity Securities (Q2 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | April 2020 | 48,432 | $28.10 | 198,316 | | May 2020 | 34,533 | $25.78 | 163,783 | | June 2020 | 34,273 | $27.01 | 129,510 | | Q2 Total | 117,238 | $27.10 | 129,510 | Item 6: Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and 13a-14(b) of the Securities Exchange Act of 1934, as well as XBRL interactive data files[392][405]